Merchant Banking and Financial Services

Prof. Amit Trivedi

Do you know who is a Merchant Banker?

According to Collins, a banker who is employed in a financial institution engaged primarily in accepting foreign bills, advising companies on flotations and takeovers, underwriting new issues, hire-purchase finance, making long-term loans to companies, and managing investment portfolios, funds, and trusts, or who is involved with this kind of business According to Oxford, a bank dealing in commercial loans and investment

And what do authorities think?

U.S. Federal Deposit Insurance Corporation (acronym FDIC): "the term merchant banking is generally understood to mean negotiated private equity investment by financial institutions in the unregistered securities of either privately or publicly held companies Both commercial banks and investment banks may engage in merchant banking activities. Historically, merchant banks' original purpose was to facilitate and/or finance production and trade of commodities, hence the name "merchant". Few banks today restrict their activities to such a narrow scope.

But we are most particular...

Merchant Banker is defined by SEBI as: merchant banker means any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or acting as manager, consultant, adviser or rendering corporate advisory service in relation to such issue management

Let us see when and where it started

Merchant Banks were original banks invented by Italian grain merchants in the middle ages Jews fleeing Spanish prosecution were attracted to Italy. They could not hold land so entered trading halls of Lombardy. Christians were strictly forbidden the sin of usury, defined as lending at interest (Islam makes similar condemnations of usury). The Jewish newcomers could lend to farmers against crops in the field, a high-risk loan at high rates The Jewish newcomers, on the other hand, could lend to farmers against crops in the field, a high-risk loan at what would have been considered usurious rates by the Church Jewish traders undertook both finance and underwriting

And how it grew

Financing took the form of a crop loan at the beginning of the growing season and underwriting in the form of a guarantee of the delivery of the crop to its buyer, typically a merchant wholesaler Merchant banking progressed from financing to own trade settling trades for others. Merchant banks also held deposits for settlement of notes written by the people who were still brokering the actual grain. Slowly practice to pay interest on deposits held started Italian market was disrupted by war and the structure of Italian states

And how it flourished

The next generation of merchant banking started in the plains of Germany and Poland and a little later in England. The trade was still dominated by Jews. Warburg and Rothschild are two such banks that still exist 18th century saw the rise of Protestantism, which permitted usury to many Christians. This led to many Christians entering merchant banking sector. A few famous examples are Barings (UK), Schroder and Bahrenberg (Germany), and Hope & Co (Netherlands) Rise of trade and industry in 19th century in US led to rise of many Merchant banks. One leading bank is JPMorgan & Co 20th century saw high rate of growth in trade and investment, which could no longer be catered by family run firms and many corporate entered the business.

Then it came to India

RBI issued first license to Grindlays Bank in 1967. Grind lays focused on management of capital issues, offered diverse financial services, from production planning and system design to market research, to emerging class of entrepreneurs. It also offered management consulting services to small and medium enterprises. Citibank was the next to setup its merchant banking division in 1970. It focused on project evaluation and raising funds through borrowing and issuing equity. Main target segment was new entrepreneurs. SBI was the first Indian banks to start merchant banking services in India as part of the services they offered to their clients from 1972. Initially Bank gave corporate advice and assistance to small and medium entrepreneurs and later entered into other services. Today SBI offers all services under merchant banking.

I am sure you will meet one soon ...

You will surely need his services if you:
Start a new business Raise capital/ working capital Invest in a project Need capital to fund operations Grow your business inorganically Manage your investment Conform to rules and regulations and comply with laws

Few things where he can help.

Angel Investing, Venture Capital, Private Equity Pre Investment studies Project Counseling Project Appraisal Project Finance Credit Syndication Issue Management and Underwriting Mergers, Amalgamation and Takeovers Mutual Funds (Not his duty)

And a few more things you can ask for

Corporate Counseling Relief to Sick Industries Capital restructuring Working Capital Finance Acceptance Credit and Bill Discounting Lease Financing Foreign Currency Finance Fixed Deposit Broking Portfolio Management

Want to be next Steve Jobs...

Venture capital
Equity financing of high risk- high return businesses with high growth potential Popular with new technology/ new business companies that have good growth potential Started in US in 50s, became popular in late 60s and 70s In India, it took off post liberalization Angle funding, seed funding, boot strapping

Look before you leap.

Pre Investment Studies
Evaluate alternate avenues of investment Investigate regulatory factors and environment, raw material supply, market access Identifying the project best suited to client strategy and strength Helping foreign companies set up Indian operations independently or through JV Industry wide studies of investment possibility

Profit-profit everywhere, which one to reap....

Project counseling
Project counseling looks at project viability Technical feasibility Selecting technical consultancy organization Advising on obtaining approvals/ permissions/ licenses from relevant authorities/ government Capital structuring and pattern of financing Advising and assisting client in preparing feasibility report

All that glitters is not gold...

Project appraisal Financial appraisal: financial viability of the project based on investment and return cash flow profiles. Liquidity ratios, NPV and IRR are commonly used techniques Technical appraisal: technical feasibility in terms of technology, design, implementation, raw material access, marketable product and cost aspects Economic appraisal: impact of project on economy and social/ecological impacts

Project finance
Arranging finance for the appraised project through sale of equity or debt syndication

More the merrier.....

Credit Syndication Raising debt for projects from Indian and Foreign lenders Draw the financial investment plan and working capital requirement Make loan application seeking finance Selecting the banks and institutions to take money from and managing the loan disbursement schedule Arranging bridge finance wherever required Legal and documentary requirements

Going public...
Issue Management and Underwriting Activities concerned with the management of the public issues Preparation of plan and budget for issue Preparing documents and drafting prospectus Filing and approvals Selecting brokers, lead managers, issue houses, advertising agencies etc Advertisement and Distribution of application forms Share allotment and refund Stock exchange clearance and listing

Size does matter...

Mergers, Amalgamations & Takeovers Plan for growth- organic and inorganic Identify the technology and investment partners, joint venture associates, and targets for inorganic growth plans Evaluate the plan of investment/ takeover Conducting the takeover/ investment plan by buying in the stakeholders Help in restructuring the operations at the company post acquisition/ merger

United we stand....
Mutual Funds
Financial Service that helps small investors achieve better return in equity/debt market Money is collected from many small investors to build a professionally managed corpus Invest in equity/debt instruments as per the mandate of the fund MF help people with small funds and lack of expertise/time to stay invested in active/passive investment portfolios

Cant figure it out....

Corporate Counseling
Ensures that company runs at optimum performance level Rejuvenates old lines and ailing companies Evaluates diversification plans Arranges approvals for rehabilitation schemes for ailing and sick industries Modernization plans for old lines Takeover and transfer of sick units

Treating the terminally ill...

Relief to Sick Industries
Identifying the cause of loss and suggest remedial measure Work out investment details and return on investment Prepare detailed report on future course of action- modernize, upsize, downsize, sell, close Assist in obtaining approvals from BIFR, lenders and other bodies Monitoring the implementation

Looking for balance...

Capital Restructuring
Assessing capital requirement and sources of fund- equity partners/ debt Suggesting change in D/E ratio to manage riskreturn profile for the owners Suggesting alterations in shareholding patterns to take maximum advantage of FDI/FII norms Restructuring for sick units- capitalization of debt Capital restructuring post merger, acquisition or takeover.

Managing the daily chores....

Working Capital Finance
Assessing working capital requirement at different times Prepare applications for arranging working capital Assisting in negotiation, documentation and disbursement of working capital loans Advising on financing of long term sources for long term requirement

Speeding up the cash flow...

Acceptance Credit and Bill Discounting
Helping arrange loans for trade Application making, applying, negotiating, and documentation for the client Loan on sales order (pre-shipment credit) before delivery of good and post shipment of goods (post-shipment credit) Assisting in Bill discounting/ letter of credit

Mutual benefit...
Lease Finance
Viability of Lease as an alternative Choosing favorable rental structure Negotiations and documentation

The world is my playing field...

Foreign Currency Financing Financial and legal appraisal to set the limit of foreign investment permitted under law Liaison with government, RBI and other bodies for approval to raise overseas debt Syndication of various guarantees, letter of credit, preshipment credit, post shipment credit and other credit facilities Arranging funds from EXIM bank and other bodies Guidance on forward cover of exchange risk

Every penny makes a Pound...

Fixed deposit Broking
Corporate raise fixed deposits from depositors under Companies (Acceptance of Deposit) Rules, 1975 made under powers conferred in Sec 58A and 642 of Companies Act, 1956 Help in all stages from estimating the issue size to designing of documents, advertising and marketing the issue, collection of applied money, issue of certificate, refund of excess deposit, maintaining all records and registers for the purpose

Many baskets for the eggs...

Portfolio Management
Financial service that helps corporate/ HNIs/ NRIs manage their excess funds and obtain optimum returns for their given risk appetite The investment has to be managed for duration and liquidity Safe custody of security in India and overseas Complying with legal ceilings in investment Managing investment record, tax records and return on investment

Crux of the matter is...

There are many financial services for different purposes Merchant Banker is an enabler of business dealing with
Compliance with rules and regulations (legal) Documentations and project reports (technical) Design and marketing of documents (marketing) Securing approvals from various stake holders (negotiations) Manages risk, return and helps raise capital (financial)

Thanks