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Merchant Banks
Merchant Banks
NBFCs are doing functions akin to that of banks, however there are a few differences: i. NBFC cannot accept demand deposits; ii. it is not a part of the payment and settlement system and as such cannot issue cheques to its customers ; and iii. deposit insurance (DICGC) facility is not available for NBFC depositors unlike in case of banks. iv. Banks are incorporated under banking companies act 1949, NBFCs are under companies act of 1956. v. NBFCs cannot issue DD like banks.
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of : loans and advances, acquisition of shares / stock / bonds / debentures / securities issued by Government / local authority / other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business stock broking companies merchant banking companies
Registration of NBFCs
In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI to commence or carry on any business of non-banking financial institution as defined in clause (a) of Section 45 I of the RBI Act, 1934.
(a) (b)
(c)
(d) (e)
(f)
However, to obviate dual regulation, certain category of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI : Venture Capital Fund / Merchant Banking companies / Stock broking companies registered with SEBI, Insurance Company holding a valid Certificate of Registration issued by IRDA Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982 Housing Finance Companies regulated by National Housing Bank (can fin homes, HDFC,LIC Housing fin, ICCI hf) Stock Broking Company Sebi (india infoline, bajaj capital, kotak securities, sharekhan ltd.,Geojit paribas,Karvy,india bulls) Merchant Banking Company Sebi
Examples of NBFCs
LIC housing finance Cholamandalam Relaince capital DHFL Sundaram finance Muthoot finance Mannapuram finance lt. Mahindra finance.
Merchant Banking
A Merchant Bank is a British term for a bank providing various financial services such as accepting bills arising out of trade, providing advice on acquisitions, mergers, foreign exchange, underwriting new issues, and portfolio management. In banking, a merchant bank is a traditional term for an Investment Bank
Difference Between Commercial Banking & Merchant Banking: COMMERCIAL BANKING Deals with Debt & Debt related finance. Asset oriented. Generally avoid risks. Registration under banking companies act and regulated by RBI MERCHANT BANKING Deals with Equity & Equity related finance. Management oriented. Willing to accept risks. Compulsory registration with SEBI
2. Loan syndication: a group of 3-5 banks to finance the project 3. Underwriting of shares: Underwriting is a guarantee given by the underwriter that in the event of under subscription, the amount underwritten would be subscribed by him. 4. Financial restructuring: advice in rehabilitation and turnaround management in case of sick units, merchant bankers may design a revival package
5. Manager / advisor to the issue 6. portfolio management 7. Advisory services to Mergers and Acquisitions 8. Offshore financing: Help in areas involving foreign currency 9. Non-Resident investment: Provide help in better and smooth trade to NRIs
Categories of MB Requirement for granting of certificates Capital adequacy norms Code of conduct Appointment of lead merchant banker Restriction on appointment of lead merchant banker Responsibilities of LEAD mb Maintenance of books,records
Submission of half yearly results MB are barred from undertaking activities other than related to securities market
Lead managers
Lead managers are independent financial institutions appointed by the company going public to manage the IPO. They are the main body responsible for most of the IPO processing. Companies planning for IPO (also known as Issuer Company) first approaches or appoint lead managers. Lead managers examine company documents including financial documents, documents relating to litigation like commercial disputes, patent disputes, disputes with collaborators, etc. and other materials
Lead Managers are also known as Book Running Lead Manager(BRLM) and CoBook Running Lead Managers. Issuer Company can appoint more then one lead manager to manage big IPO's i.e. Reliance Power IPO came in Jan 2008 had 10 Book Running Lead Managers.
5. management of escrow accounts: Escrow account generally refers to money held by a third-party on behalf of transacting parties. Here the funds can be utilized for a specified purpose and are maintained by merchant bnkrs, These funds are not available to company till the issue is completed and allocation is made. 6. intimation of allocation and dispatch of refunds to bidders 7. finalization of trading and dispatch of certificates and demat delivery of shares.
8. LM responsible to write the Red Herring Prospectus (RHP) and get it approve by SEBI. 9. Issuer Company with the help of lead manger, appoints underwriters
Functions
The lead manager performs following:
In brief Lead Managers responsibilities include, initiate the IPO processing, write draft herring prospectus and get it approve by SEBI, help company in selling the IPO Shares and road shows, help company in finalize the issue price, issue opening & closing dates, listing date etc.
Issue management
Issue management
The management of issues for raising funds through various types of instruments by companies is known as issue management. Issue management deals with two activities: Pre-issue management Post issue management
Signing of MoU bwn merchant banker and issuing co., Obtaining appraisal note Optimum Capital structure Appointment of financial intermediary Preparing documents Due diligence certificate Submission of offer doc Finalization of collection centres Application to stock exchange Filing with RoC Launching the issue Opening escrow account
Due diligence Requisite fee- merchant banker to sebi Submission of Documents: Mou, inter se allocation of responsibilities, due deligence certificates, list of promoters group Appointment of Intermediaries: merchant bankers
6. Mandatory underwriters
within 21 days from the date of filling the draft with sebi 10. Dispatch of issue materials : to stock exchanges 11. No complaints certificate 12. Mandatory collection centres
9.
Kinds of Issues
Primary market issues can be classified as : Public Issue Rights issue preferential issues or private placement or preferential allotment
Kinds of issues
Capital raising in Primary market
Public Issue
Rights issue
Private placement
IPO
FPO
Promoters
Strategic Investors
OR
OR
Combination of both
Book building
Book building
Book building is actually a price discovery method and demand discovery. In this method, the company doesn't fix up a particular price for the shares, but instead gives a price range, e.g. Rs 80-100. When bidding for the shares, investors have to decide at which price they would like to bid for the shares, for e.g. Rs 80, Rs 90 or Rs 100. They can bid for the shares at any price within this range. Based on the demand and supply of the shares, the final price is fixed. The lowest price (Rs 80) is known as the floor price and the highest price (Rs 100) is known as cap price. The price at which the shares are allotted is known as cut off price. The entire process begins with the selection of the lead manager, an investment banker whose job is to bring the issue to the public.
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What is a Red Herring Prospectus? Red Herring Prospectus is a prospectus, which does not have details of either price or number of shares being offered, or the amount of issue. This means that in case price is not disclosed, the number of shares and the upper and lower price bands are disclosed.
Types of investors
There are three kinds of investors in a book-building issue. The retail individual investor (RII), the non-institutional investor (NII) and the Qualified Institutional Buyers (QIBs). RII is an investor who applies for stocks for a value of not more than Rs 100,000. Any bid exceeding this amount is considered in the NII category. NIIs are commonly referred to as high net-worth individuals. Each of these categories is allocated a certain percentage of the total issue. The total allotment to the RII category has to be at least 35% of the total issue. RIIs also have an option of applying at the cut-off price. This option is not available to other classes of investors. NIIs are to be given at least 15% of the total issue. And the QIBs are to be issued not more than 50% of the total issue. Allotment to RIIs and NIIs is made through a proportionate allotment system. The allotment to the QIBs is at the discretion of the BRLM.
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Category of Bidders
Retail Individual Investor:- means an investor who applies or bids for securities of or for face value of not more than Rs 50,000/ Non-Qualified Institutional Buyer: Any investor who bids for an amount above Rs 50,000 and does not fall in the QIB category e.g HNI investors. Qualified Institutional Buyer(QIB) shall mean: a. public financial institution as defined in section 4A of the Companies Act, 1956; b. scheduled commercial banks; c. mutual funds; d. foreign institutional investor registered with SEBI; Contd.
Book-Building: Procedure
1. Merchant Banker As a Lead Book Runner 2. Drafting prospectus 3. Bid analysis 4. Appointment of Underwriters 5. Registrar to the Issue 6. Appointment of a Banker to the Issue & Opening an Escrow Account 7. Determining Cut-off Price and Allotment 8. Allotment of securities
Offer Document
In case of Fixed Price Prospectus
A legal document offering securities which includes the terms, issuer objectives or planned use of the money, historical financial statements and other information that could help an individual in deciding whether the investment is appropriate for him/her is called prospectus.
Final Prospectus
On the completion of bidding process, a final offer document is submitted before opening of Subscription List.
Private Placement It refers to the direct sale of newly issued securities to a small number of investors through merchant bankers. These investors are selected clients; Financial institutions Corporate Banks High net worth individuals
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For example, if a company decides to publicly sell 1 lakh shares, the underwriters (or "stabilizers") can exercise their green shoe option and sell 1.15 lakh shares. When the shares are priced and can be publicly traded, the underwriters can buy back 15% of the shares. This enables underwriters to stabilize fluctuating share prices by increasing or decreasing the supply of shares according to initial public demand.
It is a price discovery mechanism for the companies who want to delist their shares or buy back shares from the shareholders. Green Shoe Option; It is also referred to as an over allotment option. It is a mechanism to provide post listing price stability to an initial public offering.
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