Merchant Banking
Merchant Banking
Merchant Banking
Http://topics2c.blogspot.com 1
Meaning and Concept
Http://topics2c.blogspot.com 2
Meaning and Concept
Financial Services help to raise the required funds but also ensure
their efficient deployment
Http://topics2c.blogspot.com 3
Characteristics of Financial
services
Customer-Specific: Focused, need of the customer, due regard to
cost, liquidity and maturity consideration
Http://topics2c.blogspot.com 4
Types of financial services
Http://topics2c.blogspot.com 5
Fee Based Services
Financial institutions operate in specialized fields to earn
a substantial income by way of fees, dividend
commission, discount and brokerage on operations.
Issue Management
Corporate Advisory Services
Credit Rating
Mutual Funds
Assets Securitization
Http://topics2c.blogspot.com 6
Fund Based Services
The firm raises funds through equity, debt, and deposits
and invests these funds in securities or lends to those
who are in need of capital
Http://topics2c.blogspot.com 7
Http://topics2c.blogspot.com 8
Merchant Banking-An
Overview
Companies raise capital by issuing securities
in the market. Merchant bankers act as
intermediaries between the issuers of capital
and the ultimate investors who purchase
these securities.
Http://topics2c.blogspot.com 9
Merchant Banking-An
Overview
• Merchant banking… is the financial intermediation that
matches the entities that need capital and those that have
capital. It is a function that facilitates the flow of capital in the
market.
Http://topics2c.blogspot.com 10
MERCHANT BANKING
ORIGIN :
The term merchant banking originated from the London who
started financing foreign trade through acceptance of bills
Later they helped government of under developed countries to
raise long term funds
Later these merchants formed an association which is now
called ”Merchant Banking and Securities House Association”
Http://topics2c.blogspot.com 11
Merchant Banking-An
Overview
Banking commission Report-1972
a) Necessity
b) Distinct from commercial Banks
c) Investment Management and Advisory services
d) Medium and small savers
e) Manage
Http://topics2c.blogspot.com 12
Merchant Banking in India
Grindlays Banks-1967
Management of capital issue
Production planning, system design to market
research
Management consultancy
Citibank-1970
SBI-1972
Http://topics2c.blogspot.com 13
Services rendered
Http://topics2c.blogspot.com 14
Regulation
• Formation of divisions
• Subsidiaries companies
Http://topics2c.blogspot.com 15
Structure
Category-I
to carry on any activity of the issue management,
which will inter-alia consist of preparation of
prospectus and other information relating to the
issue, determining financial structure, tie-up of
financiers and final allotment and refund of the
subscription; and
Http://topics2c.blogspot.com 16
Structure
• Category II
that is, to act as adviser, consultant, co-manager,
underwriter, portfolio manager;
• Category III
that is to act as underwriter, adviser, consultant
to an issue;
• Category IV
that is to act only as adviser or consultant to an
issue.
Http://topics2c.blogspot.com 17
Registration with SEBI
Http://topics2c.blogspot.com 18
Registration with SEBI
• Registration with SEBI is mandatory to carry out the business
of merchant banking in India. An applicant should comply
with the following norms:
The applicant should be a body corporate
The applicant should not carry on any business other than those
connected with the securities market
The applicant should have necessary infrastructure like office space,
equipment, manpower etc.
The applicant must have at least two employees with prior experience in
merchant banking
Any associate company, group company, subsidiary or interconnected
company of the applicant should not have been a registered merchant
banker
The applicant should not have been involved in any securities scam or
proved guilt for any offence
The applicant should have a minimum net worth of Rs.5 crores
Http://topics2c.blogspot.com 19
Authorized Activities
• Issue Management
Preparation of prospectus
Information relating to the issue
• Determining financing structure
• Tie-up of finances and final allotment and/or
refund of subscription
• Corporate advisors to the issue
• Consultants or advisors to issue and
underwriting
Http://topics2c.blogspot.com 20
Terms of Authorization
• Authorization is valid for an initial period of 3 years
• Authorization fee, annual fee and renewal fee
• All issues should be managed by at least one authorized
merchant bankers, functioning as sole manager or lead
manager
• MB expected to exercise due diligence independently
• Involvement of MB in post-issue management
• Adhere a code of conduct prescribed by SEBI
• MB may be cancelled or suspended for suitable duration
• MB regulations integrate issue management with
underwriting
Http://topics2c.blogspot.com 21
General Obligations and
Responsibilities
Maintenance of books of accounts, records and
documents
Copy of the balance sheet, auditor’s report and
statement of financial position
Responsibilities of lead Manager
Underwriting obligation
Submission of due diligence certificate
Insider Trading
Acquisition of shares
Http://topics2c.blogspot.com 22
Main functions of a merchant
banker
• Management of debt and equity offerings- This
forms the main function of the merchant banker. He assists the
companies in raising funds from the market. The main areas of work in
this regard include: instrument designing, pricing the issue, registration of
the offer document, underwriting support, marketing of the issue,
allotment and refund, listing on stock exchanges.
Http://topics2c.blogspot.com 23
Functions
• Corporate advisory services-
• Merchant bankers offer customized solutions to their clients financial
problems. The following are the main areas in which their advice is
sought:
Http://topics2c.blogspot.com 24
Functions
• Project advisory services-
conceptualizing the project idea
feasibility studies
Preparing different documents like the detailed project report.
• Loan syndication-
Tie up loans for their clients
Analyze the pattern of the client’s cash flows
Prepares a detailed loan memorandum This takes place in
a series of steps. Firstly they, based on which the terms of
borrowings can be defined. Then the merchant banker,
which is circulated to various banks and financial
institutions and they are invited to participate in the
syndicate.
Http://topics2c.blogspot.com 25
SERVICES OF MERCHANT BANKERS
PROJECT COUNSELLING :
It includes preparation of project reports,deciding upon the
financing pattern, appraising the project relating to its
technical, commercial and financial viability. It includes filling
up of application forms for obtaining funds from financial
institutions.
LOAN SYNDICATION :
Assistance is rendered to raise loans for projects after
determining promoter’s contribution. These loans can be
obtained from a single institution or a consortium.
Http://topics2c.blogspot.com 26
ISSUE MANAGEMENT :
Management of issues involves marketing of corporate securities
ie…equity shares, preference shares and debentures by offering
them to public.
Pre-issue activities:
They prepare copies of prospectus and send it to to SEBI and then
file them to Registrar of Companies
They conduct meetings with company representatives and
advertising agencies to decide upon the date of opening of issue,
closing of issue, launching & publicity campaign etc..
They help the companies in fixing up the prices for their issues
Post-issue activities:
It includes collection of application forms, screening of applications,
deciding allotment procedure, mailing of allotment letters, and
refund orders Http://topics2c.blogspot.com 27
UNDERWRITING OF PUBLIC ISSUES :
Underwriting is an insurance to the company which makes
public issues. Raising of external resources is easy for the
issues backed by well known underwriters.
Http://topics2c.blogspot.com 28
PORTFOLIO MANAGEMENT :
Http://topics2c.blogspot.com 31
BANKS PROVIDING MERCHANT BANKING SERVICES
IN INDIA
Commercial banks
Foreign banks like National Grindlays Bank, Citibank, HSBC
bank etc..
Development banks like ICICI,IFCI,IDBI etc..
SFC , SIDCs
Private firms like JM Financial and Investment service , DSP
Financial Consultants, Ceat Financial Services, Kotak Mahindra,
VMC Project Technologies, Morgan Stanley, Jardie Fleming,
Klienwort Benson etc…
Http://topics2c.blogspot.com 32
SOME PROBLEMS OF MERCHANT BANKERS
Http://topics2c.blogspot.com 33