Professional Documents
Culture Documents
Merchant Banking
Merchant Banking
Introduction
Merchant banking activity was formally initiated into the Indian capital Markets when Grind lays bank received the license from Reserve Bank in 1967. Grind lays started with management of capital issues, recognized the needs of emerging class of entrepreneurs for diverse financial services ranging from production planning and system design to market research. Even it provides management consulting services to meet the requirements of small and medium sector rather than large sector. Citibank Setup its merchant banking division in 1970. The various tasks performed by this divisions namely assisting new entrepreneur, evaluating new projects, raising funds through borrowing and issuing equity. Indian banks Started banking Services as a part of multiple services they offer to their clients from 1972. State bank of India started the merchant banking division in 1972. In the Initial years the SBIs objective was to render corporate advice And Assistance to small and medium entrepreneurs. Merchant banking activities is OF course organized and undertaken in several forms. Commercial banks and foreign development finance institutions have organized them through formation divisions, nationalized banks have formed subsidiaries companies and share brokers and consultancies constituted themselves into public limited companies or registered themselves as private limited companies. Some merchant banking outfits have entered into collaboration with merchant bankers abroad with several branches.
Definition
Merchant bank deals mostly in (but is not limited to) international finance, long-term loans for companies and underwriting. Merchant banks do not provide regular banking services to the general public. An activity that includes corporate finance activities, such as advice on complex dinancings, merger and acquisition advice (international or domestic), and at times direct equity investments in corporations by the banks. An organization that underwrites securities for corporation, advices. Such clients on mergers and is involved in the ownership of commercial ventures . According to Mr.Rosenburg Any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to the securities as manager; consultant advisor; or one rendering corporate advisory services in relation of such activities in the management . According to MOF, India
the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India. Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other infrastructure had improved. Indians had established small banks, most of which served particular ethnic and religious communities. The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock banks were generally under capitalized and lacked the experience and maturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon to observe, "In respect of banking it seems we are behind the times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments." The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India. The fervour of Swadeshi movement lead to establishing of many private banks in Dakshina Kannada and Udupi district which were unified earlier and known by the name South Canara ( South Kanara ) district. Four nationalised banks started in this district and also a
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leading private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking". During the First World War (1914-1918) through the end of the Second World War (1939-1945), and two years thereafter until the independence of India were challenging for Indian banking. The years of the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed between 1913 and 1918 as indicated in the following table: Years Number of banks Authorised capital Paid-up Capital that failed (Rs. Lakhs) (Rs. Lakhs) 274 35
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109 5 4 25
56 231
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The Reserve Bank of India, India's central banking authority, was nationalized on January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b).[Reference www.rbi.org.in] In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India." The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.
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in these matters in a package form. A merchant banker with their skills updated information and knowledge provide this service to the corporate units and advice them on such requirement to be complied with for raising funds from the capital market under different enactment viz. companies act, income tax act, foreign exchange regulation act, securities contracts corporate laws and regulations. Merchant bank advice the investors of the incentives available in the form of tax relief, other statutory relaxation, good return on investment and capital appreciation in such investment to motivate them to invest their savings securities of the corporate sector. Thus merchant banks help industries and trade to rise and the investors to invest their saved money in sound and healthy concern with confidence, safety and expectation for higher yields. Finance is the backbone of business activities. Merchant banker make available finance for business enterprises acting as intermediaries between them raising demand for funds and the supplies of funds besides rendering various other services. The following are some of the reasons why specialist merchant bank have a crucial role to play in India. Growing complexity in rules and procedures of the government. Growing industrialization and increase of technologically advanced industries. Need for encouragement of small and medium industrialists, who require specialist services. Need to develop backward areas and states which require different criteria. Exploring the possibility of joint ventures abroad and foreign market. Promoting the role of new issue market in mobilizing saving from. Where merchant banks function as an independent wing or as subsidiary of various private/central governments/ state government financial institution. Most of the financial institution in India is in public sector and therefore such setup plays a role on the lines of governmental priorities and policies.
Merchant Bankers helps corporate to raise money from capital market through the issue of shares, debentures, bonds etc. They are designated as managers to the issue. Their main business is to attract public money to capital issue. They also help the companies to determine the capital structure. The pricing of the issue esp. in the public issue is very important. The pricing has to be such that: Investors will be attracted to invest at that price and get suitable returns. And the Company at the same time should get the premium they are looking for, as larger the premium lesser is the requirement for borrowed funds. All issues should be managed by at least one merchant banker functioning as the lead merchant banker. Provided that, in an issue of offer of rights to the existing members with or without the right of renunciation the amount of the issue of the body corporate does not exceed rupees fifty lakhs, the appointment of a lead merchant banker shall not be essential. No merchant banker, other than a bank
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or a public financial institution, who has been granted a certificate of registration under these regulations, shall after June 30th, 1998 carry on any business other than that in the securities market.
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c] Broker Base:In the recent past there has been an inflow of Qualified and professionally skilled brokers in various Stock Exchanges of India.
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These brokers undertake merchant banking related operating also like providing investment and portfolio management services. d] Private Base:These merchant banking firms are originated in private sectors. These organization are the outcome of opportunities and scope in merchant banking business and they are providing skill oriented specialized services to their clients. Some foreign merchant bankers are also entering either in dependently or through some collaboration with their Indian counterparts. Private sectors merchant banking firms have come up either as sole proprietorship, partnership, private limited or public limited companies. Many of these firms were in existence for quite some times before they added a new activity in the form of merchant banking services by opening new division on the lines of commercial banks and All India Financial Institution (AIFI).
They also provide services to the finance housing schemes for the construction of houses and buying of land. They render the services like foreign exchange dealer, money exchange, and authorized dealer and to buy and sell foreign exchange in all lawful ways in compliance with the relevant laws of India. They will invest in buying and selling of transfer , hypothecate and deal with dispose of shares, stocks, debentures, securities and properties of any other company.
A merchant banker has always to endeavor to (1) render the best possible advice to the clients having regard to the clients needs and the requirements and his own professional skill; and (2) ensure that all professional dealings are effected in a prompt, efficient and cost effective manner. He should not (1) divulge to other clients, press or any other party any confidential information about his client which has come to his knowledge; and (2) deal in securities of any client company without making disclosure to the SEBI as required under the regulations and also the board of directors of the client company. He should endeavor to ensure that (1) the investors are provided with true and adequate information without making any misguided or exaggerated claims and are made aware of attendant risks before any investment decision is taken by them: (2) copies of prospectus, memorandum and related literature are made available to the investors; (3) adequate steps are taken for the fair allotment of share application and transfers, listing of securities arrangement of underwriting/sub-underwriting, placing of issues, selection of brokers, bankers to the issue, publicity and advertising agents, printers, etc. In view of the overwhelming importance of merchant bankers in the process of capital issues, it is now mandatory that all public issues should be managed by merchant banker(s) functioning as the lead manager(s). In the case of right issues not exceeding Rs 50 lakh, such appointments may not be necessary. The salient features of the SEBI framework of their operations are summarized in this article. Registration: Compulsory Registration: Merchant bankers are compulsory registered with the SEBI to carry out their activities. They fall in four categories. Category I merchant bankers carry on any activity relating to issue management, i.e. preparation of prospectus and other information relating to the issue, determining financial structure, tieup of financiers and final allotment of securities and refund of the
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subscription. They can also act as advisor, consultant, manager, underwriter or portfolio manager. Category II merchant bankers can act as advisor, consultant co-manager, underwriter, portfolio manager. Category III merchant bankers can act as an underwriter, advisor and consultant to an issue. Thus, only Category I merchant bankers can act as lead managers to an issue. Capital Adequacy Requirement: A merchant banker is granted recognition by the SEBI in different categories on the basis of capital adequacy norms in terms of its net worth comprising of paid-up capital and free reserves. The minimum net worth requirements for each category is: Rs 5 crore (Category I), Rs 0.5 crore (Category II), Rs 0.2 crore (Category III) and for Category IV nil. Apart from minimum capital requirement, the merchant bankers are expected to have the necessary infrastructure like adequate office space, equipment and manpower to effectively discharge their activities. They should employ at least two persons with experience to conduct merchant banking business; they should not be involved in any litigation connected with the securities market, have professional qualification in finance, law or business management and, finally their registration is in the interest of the investors.
Code of Conduct:
1.A Merchant Banker shall make all efforts to protect the interests of investors. 2.A Merchant Banker shall maintain high standards of integrity, dignity and fairness in the conduct of its business. 3.A Merchant Banker shall fulfill its obligations in a prompt, ethical, and professional manner.
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4.A Merchant Banker shall at all times exercise due diligence, ensure proper care and exercise independent professional judgment. 5.A Merchant Banker shall endeavor to ensure thata.Inquiries from investors are adequately dealt with; b.Grievances of investors are redressed in a timely and appropriate manner; c.Where a complaint is not remedied promptly, the investor is advised of any further steps which may be available to the investor under the regulatory system. 6.A Merchant Banker shall ensure that adequate disclosures are made to the investors in a timelymanner in accordance with the applicable regulations and guidelines so as to enable them to makea balanced and informed decision. 7.A Merchant Banker shall endeavor to ensure that the investors are provided with true andadequate information without making any misleading or exaggerated claims or anymisrepresentation and are made aware of the attendant risks before taking any investmentdecision. 8.A Merchant Banker shall endeavor to ensure that copies of the prospectus, offer document, letterof offer or any other related literature is made available to the investors at the time of issue or the offer. 9.A Merchant Banker shall not discriminate amongst its clients, save and except on ethical and commercial considerations. 10. A Merchant Banker shall not make any statement, either oral or written, which wouldmisrepresent the services that the Merchant Banker is capable of performing for any client or hasrendered to any client. 11.A Merchant Banker shall avoid conflict of interest and make adequate disclosure of its interest. 12. A Merchant Banker shall put in place a mechanism to resolve any conflict of interest situationthat may arise in the conduct of its
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business or where any conflict of interest arises, shall takereasonable steps to resolve the same in an equitable manner. 13. A Merchant Banker shall make appropriate disclosure to the client of its possible source orpotential areas of conflict of duties and interest while acting as Merchant Banker which wouldimpair its ability to render fair, objective and unbiased services. 14.A Merchant Banker shall always endeavor to render the best possible advice to the clients having regard to their needs. 15.A Merchant Banker shall not divulge to anybody either orally or in writing, directly or indirectly,any confidential information about its clients which has come to its knowledge, without takingprior permission of its clients, except where such disclosures are required to be made incompliance with any law for the time being in force. 16.A Merchant Banker shall ensure that any change in registration status / any penal action taken bythe Board or any material change in the Merchant Banker s financial status, which may adverselyaffect the interests of clients / investors is promptly informed to the clients and any businessremaining outstanding is transferred to another registered intermediary in accordance with anyinstructions of the affected clients. 17.A Merchant Banker shall not indulge in any unfair competition, such as weaning away the clientson assurance of higher premium or advantageous offer price or which is likely to harm theinterests of other Merchant Bankers or investors or is likely to place such other Merchant Bankersin a disadvantageous position while competing for or executing any assignment. 18.A Merchant Banker shall maintain arms length relationship between its merchant banking activity and any other activity. 19. A Merchant Banker shall have internal control procedures and financial and operationalcapabilities which can be reasonably expected to protect its operations, its clients, investors andother
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registered entities from financial loss arising from theft, fraud, and other dishonest acts,professional misconduct or omissions. 20. A Merchant Banker shall not make untrue statement or suppress any material fact in any documents, reports or information furnished to the Board. 21. A Merchant Banker shall maintain an appropriate level of knowledge and competence and abideby the provisions of the Act, regulations made there under, circulars and guidelines, which maybe applicable and relevant to the activities carried on by it. The merchant banker shall alsocomply with the award of the Ombudsman passed under Securities and Exchange Board of India(Ombudsman) Regulations, 2003. 22. A Merchant Banker shall ensure that the Board is promptly informed about any action, legalproceedings etc., initiated against it in respect of material breach or non compliance by it, of anylaw, rules, regulations, directions of the Board or of any other regulatory body. 23. (a) A Merchant Banker or any of its employees shall not render, directly or indirectly, anyinvestment advice about any security in any publicly accessible media, whether real-time or nonreal-time, unless a disclosure of his interest including a long or short position, in the said security has been made, while rendering such advice. (b) In the event of an employee of the Merchant Banker rendering such advice, the merchantbanker shall ensure that such employee shall also disclose the interests, if any, of himself, hisdependent family members and the employer merchant banker, including their long or shortposition in the said security, while rendering such advice. 24. A Merchant Banker shall demarcate the responsibilities of the various intermediaries appointed by it clearly so as to avoid any conflict or confusion in their job description.
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25. A Merchant Banker shall provide adequate freedom and powers to its compliance officer for the effective discharge of the compliance officer s duties. 26. A Merchant Banker shall develop its own internal code of conduct for governing its internaloperations and laying down its standards of appropriate conduct for its employees and officers incarrying out their duties. Such a code may extend to the maintenance of professional excellenceand standards, integrity, confidentiality, objectivity, avoidance or resolution of conflict ofinterests, disclosure of shareholdings and interests etc. 27. A Merchant Banker shall ensure that good corporate policies and corporate governance are in place. 28.A Merchant Banker shall ensure that any person it employs or appoints to conduct business is fitand proper and otherwise qualified to act in the capacity so employed or appointed (includinghaving relevant professional training or experience) 29. A Merchant Banker shall ensure that it has adequate resources to supervise diligently and doessupervise diligently persons employed or appointed by it in the conduct of its business, in respectof dealings in securities market. 30.A Merchant Banker shall be responsible for the acts or omissions of its employees and agents in respect of the conduct of its business. 31. A Merchant Banker shall ensure that the senior management, particularly decision makers have access to all relevant information about the business on a timely basis. 32.A Merchant Banker shall not be a party to or instrumental for a.Creation of false market; b.Price rigging or manipulation or; c.Passing of unpublished price sensitive information in respect of securities which arelisted and proposed to be listed in any stock exchange to any person or intermediary inthe securities market.
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Guidelines of SEBI:
After the obligations of the CCI, the place was occupied by a legal organ called as Securities and Exchange Board of India . The issue of capital and pricing of issues by companies has become free of prior approval. The SEBI has issued guidelines for the issue of capital by the companies. The guideline broadly covers the requirement of the first issue of a new company set up by the existing company, the first issue by the existing private company and public issue by the existing listing companies. The SEBI is the most powerful organization to control and lead both the primary market and secondary market. The SEBI has announced the new guidelines for the disclosures by the companies leading to the investor protection. They are presented below: a) If any company s other income exceeds 10 per cent of the total income, the details should be disclosed. b) The company should disclose any adverse situation which affects the operations of the company and occurs within one year prior to date filing of the offer document with the register of companies or stock exchange. c) The company should also disclose the information regarding the capacity utilization of the plant for the last 3 years. d) The promoters of the company must maintain their holding at least at 20 per cent of the expanded capital. e) The minimum application money payable should not be less than 25 per cent of the issue price. f) The company should disclose the time normally taken for the disposal of various types of investor s grievances.
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g) The company can make firm allotments in public issues as follows. Indian mutual funds (20%), FIIS (24%), Regular employees of the company (10%) Financial institution (20%) h) The company should disclose the safety net scheme or buy back arrangements of the shares proposed in public issue. This scheme is applicable to a limited number of 500 shares per allottee and the offer should be valid for a period of at least 6 months from the date of dispatch of securities. i) According to the guidelines, in case of the public issues, at least 30 mandatory collection canters should be established. j) According to the SEBI guidelines regarding rights issue, the company should give advertisement in not less than two newspapers about the dispatch of letter of offer. No preferential allotment may be made along with any rights issue. k) The company should also disclose about the fee agreed between the lead manager and the company in the memorandum of understanding.
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few characteristics that most companies that offer both investment and merchant banking share. As a general rule, investment banks focus on initial public offerings (IPOs) and large public and private share offerings. Merchant banks tend to operate on small-scale companies and offer creative equity financing,bridge financing, mezzanine financing and a number of corporate credit products. While investment banks tend to focus on larger companies, merchant banks offer their services to companies that are too big for venture capital firms to serve properly, but are still too small to make a compelling public share offering on a large exchange. In order to bridge the gap between venture capital and a public offering, larger merchant banks tend to privately place equity with other financial institutions, often taking on large portions of ownership in companies that are believed to have strong growth potential. Merchant banks still offer trade financing products to their clients. Investment banks rarely offer trade financing because most investment banking clients have already outgrown the need for trade financing and the various credit products linked to it.
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The main purpose of any bank is to make money. To this end, all banks, both commercial and merchant, provide loans and financial services. The main difference between a commercial bank and a retail bank is the type of clientele it primarily serves. Commercial banks, sometimes referred to as retail banks, tend to focus on the community, i.e., the needs of individuals and small businesses. Merchant banks, also called investment banks, tend to focus on the needs of large corporations.
Function
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When one thinks of a commercial bank, one thinks of such services as checking and savings accounts, loans, credit cards, and lines of credit to businesses and individuals. Commercial banks sell investments, such as certificates of deposit, and provide brokerage services to individuals for buying and selling stocks. Retirement plans, college savings programs and financial planning services are also offered by commercial banks. Merchant banks act as financial consultants to large companies. These banks offer advice to companies seeking to become larger by means of mergers or acquisitions. Rather than making loans, merchant banks often invest their own money into their customers' businesses, back stock transactions and manage large amounts of money for their customers.
Commercial banks earn revenue by making auto loans, issuing mortgages, and by providing small business and home improvement loans. When you take out a loan, the interest you pay on the money is income for the bank. In addition, fees on your checking account, ATM charges and safety deposit box rental all contribute to a commercial banks' bottom line. By contrast, a merchant bank makes much of its profit from fees it charges its large customers for the services it provides. Often, these
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banks invest large amounts of capital into growing private companies, then benefit by selling their stake once the company's value has been maximized.
A commercial bank has an impact on the economy of the local area it serves. Money that is loaned by the bank is spent by consumers for cars, homes and other items that increase business in the community. Commercial banks provide loans to individuals, as well as nearby small- and medium-sized businesses that use the money for expansion and job creation. Merchant banks have an impact on the value of the large corporations they provide services to, which affects the national economy and stock prices.
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Equity raising:
Debt raising:
Strategic advice:
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a. Identification of potential investment avenues. b. A general view of the project ideas or project profiles. c. Advising on procedural aspects of project implementation d. Reviewing the technical feasibility of the project e. Assisting in the selection of TCO s (Technical Consultancy Organizations) for preparing project reports f. Assisting in the preparation of project report g. Assisting in obtaining approvals , licenses, grants, foreign collaboration etc., from government h. Capital structuring i. Arranging and negotiating foreign collaborations, amalgamations, mergers and takeovers. j. Assisting clients in preparing applications for financial assistance to various national and state level institutions banks etc., k. Providing assistance to entrepreneurs coming to India in seeking approvals from the Government of India. (iii)Capital Structure: Here the Capital Structure is worked out i.e., the capital required, raising of the capital, debt-equity ratio, issue of shares and debentures, working capital, fixed capital requirements, etc., (iv)Portfolio Management: It refers to the effective management of Securities i.e., the merchant banker helps the investor in matters pertaining to investment decisions. Taxation and inflation are taken into account while
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advising on investment in different securities. The merchant banker also undertakes the function of buying and selling of securities on behalf of their client companies. Investments are done in such a way that it ensures maximum returns and minimum risks. (v) Issue Management: Management of issues refers to effective marketing of corporate securities viz., equity shares, preference shares and debentures or bonds by offering them to public. Merchant banks act as intermediary whose main job is to transfer capital from those who own it to those who need it. The issue function may be broadly divided in to pre issue and post issue management. a. Issue through prospectus, offer for sale and private placement. b. Marketing and underwriting. c. Pricing of issues. (vi) Credit Syndication: Credit Syndication refers to obtaining of loans from single development finance institution or a syndicate or consortium. Merchant Banks help corporate clients to raise syndicated loans from commercials banks. Merchant banks helps in identifying which financial institution should be approached for term loans. The merchant bankers follow certain steps before assisting the clients approach the appropriate financial institutions. a. Merchant banker first makes an appraisal of the project to satisfy that it is viable b. He ensures that the project adheres to the guidelines for financing industrial projects.
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c. It helps in designing capital structure, determining the promoter s contribution and arriving at a figure of approximate amount of term loan to be raised. d. After verifications of the project, the Merchant Banker arranges for a preliminary meeting with financial institution. e. If the financial institution agrees to consider the proposal, the application is filled and submitted along with other documents. (vii) Working Capital: The Companies are given Working Capital finance, depending upon their earning capacities in relation to the interest rate prevailing in the market. (viii)Venture Capital: Venture Capital is a kind of capital requirement which carries more risks and hence only few institutions come forward to finance. The merchant banker looks in to the technical competency of the entrepreneur for venture capital finance. (ix)Fixed Deposit: Merchant bankers assist the companies to raise finance by way of fixed deposits from the public. However such companies should fulfill credit rating requirements.
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