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Merchant Banking
Merchant Banking
in the market. Merchant bankers act as intermediaries between the issuers of capital and the ultimate investors who purchase these securities.
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
Investment Management and Advisory services d) Medium and small savers e) Manage
c)
Citibank-1970 SBI-1972
Services rendered
Organising finance for investment in projects Assistance in financial management Acceptance of house business Raising Eurodollar loans and issue of foreign currency bonds Financing export of capital goods, hydropower Financing of hire-purchase transaction, leasing Mergers, takeovers, valuation of assets
Regulation
Merchant Bankers Regulations of Securities and Exchange Board of India Company Act 1956 Listing guidelines of Stock Exchanges Securities Contracts (Regulation) Act, 1956 Formation of divisions Subsidiaries companies
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
to act as adviser, consultant, manager,
Structure
Category II
that is, to act as adviser, consultant, co-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.
Category-I Separate registration for underwriters and portfolio manager Segregation between fee based and Fund based activities
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
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
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
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:
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.
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.
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.
ISSUE MANAGEMENT : Management of issues involves marketing of corporate securities ieequity 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
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..
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.
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.
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