What Is Merchant Banking?

A merchant bank deals with the commercial banking needs of

international finance, long term company loans, and stock underwriting

UNDERWRITING OF CORPORATE SHARES & DEBENTURES 1. The statutory provision contained in Section 19(2) & (3) of the Banking Regulation Act, 1949 regarding holding of shares in any company as pledgee / mortgagee or absolute owner, should be strictly adhered to. 2. The banks have to ensure that underwriting commitments should comply with the ceiling prescribed for the banks exposure to the capital markets. 3. Ensure that the portfolio is diversified 4. Sub-underwriting 5. Carefully evaluate the proposals 6. Banks should not underwrite issue of Commercial Paper by any Company or Primary Dealers 7. Banks should not extend Revolving Underwriting Facility to short term Floating 8. Rate Notes/Bonds or debentures issued by corporate entities. 9. An annual review covering the underwriting operations taken up during the year, with company-wise details of such operations, the shares/debentures devolved on the banks, the loss (or expected) from unloading the devolved shares/debentures indicating the facevalue and market value thereof, the commission earned, etc. may be placed before their Boards of Directors within 2 months of the close of the fiscal year. 10. Banks/Merchant banking subsidiaries of banks undertaking underwriting activities are also required to comply with the guidelines contained in the SEBI (Underwriters) Rules and Regulations, 1993, and those issued from time to time. UNDERWRITING OF BONDS OF PUBLIC SECTOR UNDERTAKINGS 1. Banks should subject the proposals for underwriting to proper scrutiny having regard to all the relevant factors and accept such commitments only on well-reasoned commercial considerations with the approval of the appropriate authority. 2. The banks should formulate their own internal guidelines as approved by their Boards of Directors on investments in and underwriting of PSU bonds, including norms to ensure that excessive investment in any single PSU is avoided. 3. Banks should undertake an annual review of the underwriting operations relating to bonds of the public sector undertakings, with PSU-wise details of such operations, bonds devolved on the banks, the loss (or expected loss) from unloading the devolved bonds indicating the face-value and market value thereof, the commission earned, etc. and place the same before their Boards of Directors within two months from the close of the fiscal year.

GUIDELINES FOR SAFETY NET SCHEMES 1. Under such schemes, large exposures are assumed by way of commitments to buy the relative securities from the original investors at any time during a stipulated period at a price determined at the time of issue, irrespective of the prevailing market price. 2. In some cases, such schemes were offered without any request from the company whose issues are supported under the schemes. 3. Apparently, there was no undertaking in such cases from the issuers to buy the securities. There is also no income commensurate with the risk of loss built into these schemes, as the investor will take recourse to the facilities offered under the schemes only when the market value of the securities falls below the pre-determined price. TERMS AND CONDITIONS FOR MARKETING MUTUAL FUND 1. 2. 3. 4. Banks should only act as an agent of the customers. Banks should not acquire units of mutual funds from the secondary market. Banks cannot buy back units of mutual funds from their customers. Proposal to extend any credit facility to individuals against the security of units of mutual funds. 5. Banks holding custody of mutual fund units on behalf of their customers. PRIMARY DEALERS IN INDIA 1. 2. 3. 4. 5. 6. 7. 8. 9. ABN AMRO BANK KOTAK MAHINDRA BANK BANK OF BARODA HDFC BANK LTD HSBC BANK LTD JP MORGAN CHASE BANK CITI BANK LTD CANARA BANK CORPORATION BANK LTD

POST-2011, BANK BOOKS TO CARRY REAL NUMBERS 1. Bank will have to value assets on current rather than on historic cost. 2. Banks will have to adopt the international financial reporting standards (IFRS) by 2011. 3. State bank of India has already taken the initiative to shift from the current Indian standard of accounting to IFRS

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. 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 low of capital in the market. Scope of merchant banking activities Merchant banking activity helps:

In channelising the financial surplus of the general public into productive investment avenues To coordinate the activities of various intermediaries to the share issue such as the registrar, bankers, advertising agency, printers, underwriters, brokers etc. To ensure the compliance with rules and regulations governing the securities market

Functions of a merchant banker The following comprise the 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. Placement and distribution- The merchant banker helps in distributing various securities like equity shares, debt instruments, mutual fund products, fixed deposits, insurance products, commercial paper to name a few. The distribution network of the merchant banker can be classified as institutional and retail in nature. The institutional network consists of mutual funds, foreign institutional investors, private equity funds, pension funds, financial institutions etc. The size of such a network represents the wholesale reach of the merchant banker. The retail network depends on networking with investors. Corporate advisory services- Merchant bankers offer customised solutions to their clients financial problems. The following are the main areas in which their advice is sought: Financial structuring includes determining the right debt-equity ratio and gearing ratio for the client, the appropriate capital structure theory is also framed. Merchant bankers also explore the refinancing alternatives of the client, and evaluate cheaper sources of funds. Another area of advice is rehabilitation and turnaround management. In case of sick units, merchant bankers may design a revival package in coordination with banks and financial institutions. Risk management is another area where advice from a merchant banker is sought. He advises the client on different hedging strategies and suggests the appropriate strategy.

Project advisory services- Merchant bankers help their clients in various stages of the project undertaken by the clients. They assist them in conceptualising the project idea in the initial stage. Once the idea is formed, they conduct feasibility studies to examine the viability of the proposed project. They also assist the client in preparing different documents like the detailed project report. Loan syndication- Merchant bankers arrange to tie up loans for their clients. This takes place in a series of steps. Firstly they analyse the pattern of the clients cash flows, based on which the terms of borrowings can be defined. Then the merchant banker prepares a detailed loan memorandum, which is circulated to various banks and financial institutions and they are invited to participate in the syndicate. The banks then negotiate the terms of lending on the basis of which the final allocation is done. Providing venture capital and mezzanine financing- Merchant bankers help companies in obtaining venture capital financing for financing their new and innovative strategies.

Registration of merchant bankers 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

Merchant Banking Presentation Transcript

1. MERCHANT BANKING 2. MERCHANT BANKING Merchant banking may be defined as an institution which covers a wide range of activities such as underwriting of shares, portfolio management, project counseling, insurance etcThey render all these services for a fee 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 3. 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 promoters contribution. These loans can be obtained from a single institution or a consortium. 4. o ISSUE MANAGEMENT : o Management of issues involves marketing of corporate securities ieequity shares, preference shares and debentures by offering them to public. o Pre-issue activities: o They prepare copies of prospectus and send it to to SEBI and then file them to Registrar of Companies o They conduct meetings with company representatives and advertising agencies to decide upon the date of opening issue,closing issue,launching publicity campaign etc.. o They help the companies in fixing up the prices for their issues o Post-issue activities: o It includes collection of application forms,screening of applications,deciding allotment procedure,mailing of allotment letters,,share certficates and refund orders 5. 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. MANAGERS,CONSULTANTS OR ADVISERS TO THE ISSUE : SEBI insist that all issues should be managed by atleast one authorised merchant banker but not more than two.For an issue of 100 crores,upto a maximum of four merchant bankers shall be appointed.They help in listing of shares in stock exchange, completion of formalities under Companies Act etc.. 6. PORTFOLIO MANAGEMENT : Portfolio refers to investment in different kinds of securities such as shares,debenture issued by different companies.It is a combination of assets but a carefully blended asset combination. Portfolio management refers to maintaining proper combination of securities in a manner that they give maximum return Investors are interested in safety,liquidity and profitability of his investment but they cant choose the appropriate securities.So merchant bankers help their investors in choosing the shares.They conduct regular market and economic surveys.

7. NRI INVESTMENT : NRIs has to follow lots of complicated rules for investing in the shares in India.Merchant bankers help them in choosing the shares and offer expert advice fulfilling government regulations thus mobilising more resources for corporate sector. ADVISORY SERVICE RELATING TO MERGERS AND TAKEOVERS : Merger is a combination of two or more companies into a singe company where one survives and other loses its existence Takeover is the purchase by one company acquiring controlling interest in the share capital of another company Merchant banker acts as middlemen between offeror and offeree,negotiates mode of payment and gets approval from government. 8. o OFF SHORE FINANCE : o Merchant bankers help their clients in : o Long term foreign currency loan o Joint venture abroad o Financing exports and imports o Foreign collaboration arrangement 9. o BANKS PROVIDING MERCHANT BANKING SERVICES IN INDIA o Commercial banks o Foreign banks like National Grindlays Bank, Citibank, HSBC bank etc.. o Development banks like ICICI,IFCI,IDBI etc.. o SFC , SIDCs o 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 10. MERCHANT BANKING REGULATIONS : Certificate from SEBI is a must.They are of four types: Category I merchant bankers : Can act as Issue managers Category II merchant bankers : can act only as co-managers Category III merchant bankers : can act as co-managers but cannot undertake portfolio management Category IV merchant bankers :can merely act as consultant or advisor to issue of capital CAPITAL ADEQUACY NORMS : Category I : Rs. 5 crores Category II : Rs.50 lakhs Category III : Rs.20 lakhs Category IV : Nil 11. o GUIDELINES FOR MERCHANT BANKERS : o SEBIs authorization is a must to act as merchant bankers.Authorisation criteria include o Professional qualification in finace,law or business management o Infrastructure like office space,equipment and man power o Capital adequacy o Past track of record,experience,general reputation and fairness in all o transactions o Every merchant banker should maintain copies of balance sheet,Profit and loss account,statement of financial position o Half-yearly unaudited result should be submitted to SEBI o Merchant bankers are prohibited from buying securities based on the unpublished price sensitive information of their clients

12. o SEBI has been vested with the power to suspend or cancel the authorisation in case of violation of the guidelines o Every merchant banker shall appoint a Compliance Officer to monitor compliance of the Act o SEBI has the right to send inspecting authority to inspect books of accounts,records etc of merchant bankers o Inspections will be conducted by SEBI to ensure that provisions of the regulations are properly complied o An initial authorisation fee,an annual fee and renewal fee may be collected by SEBI o A lead manager holding a certificate under category I shall accept a minimum underwriting obligation of 5% of size of issue or Rs.25 lakhs whichever is less 13. CODE OF CONDUCT : Should make all efforts to protect the interest of investors Should maintain high standards of integrity,dignity and fairness in conduct of business Should fulfill all obligations in a professional and ethical manner Should not discriminate among the clients Should ensure that prospectus, letter of offer etc.. is available to investors at the time of issue Should render best possible advice to its clients Any penal action taken by SEBI should be informed to its clients 14. o Should inform the board about any legal proceedings initiated against it o Should abide by the rules of Securities and Exchange Board of India Regulations,2003 o Shall develop its own internal code of conduct for governing its internal operations o Should ensure that any person it employs should have the capacity to be a merchant banker o It is responsible for the act of its employees and agents o Should not create false market 15. SOME PROBLEMS OF MERCHANT BANKERS SEBI stipulates high capital adequacy norms for authorisation which prevents young,specialised professionals into merchant banking business Non co-operation of the issuing companies in timely allotment of securities and refund of application of money etc.. is another problem Yet merchant banking is vast but should develop adequate expertise to provide a full range of merchant banking services