MERCHANT BANKING, ADRs

and GDRs
 MERCHANT BNKING
 A merchant bank is a financial institution which provides
capital to companies in the form of share ownership instead of
loans. A merchant bank also provides advisory on corporate
matters to the firms they lend to. In the United Kingdom, the
term "merchant bank" refers to an investment bank.
 Today, according to the 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.
 BANKS PROVIDING MERCHANT BANKING
SERVICES IN INDIA

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…
 FUNCTIONS OF MERCHANT BANKS
 Corporate Counselling
 Project Counselling
 Capital Structuring Services
 Portfolio Management
 Issue Management
 Loan / Credit Syndication
 Arranging Working Capital Finance
 Bill Discounting and Acceptance Credit
 Lease Finance
 Venture Capital
 Public Deposit
 Other Functions
CORPORATE COUNSELLING
Merchant bankers render advice to corporate enterprises from time to
time in order to improve performance and build better image among
investors and to increase the market value of its equity shares.
Counselling is provided in the form of opinions, suggestions and
detailed analysis of corporate laws as applicable to the business units.
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.
CAPITAL RESTRUCTURING SERVICE

Merchant banks render different capital restructuring services to the

corporate units depending upon the circumstances a particular unit is
facing. It may include the following services:
 Examination of capital structure to decide extent of capitalization
Helps in bonus issue procedure
Helps companies which are governed by FERA
Suggest appropriate capital structure to sick units for revival
Renders advice on merger, takeovers and amalgamation
Identify the area of diversification and suggests revised capital
structure .
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.
ISSUE MANAGEMENT
Management of issues involves marketing of corporate securities
i.e.Equity 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 issue, closing 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, share
certificates and refund orders
LOAN/ CREDIT SYNDICATION
Credit Syndication refers to obtaining of loans from single development
finance institution or a syndicate. 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:
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.
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.
WORKING CAPITAL FINANCING
The Companies are given Working Capital finance, depending upon their
earning capacities in relation to the interest rate prevailing in the market.
LEASE FINANCE
This service includes arrangement for lease finance facilities for their
customers. Leasing is an arrangement that provides a firm with the use
and control over assets without buying and owning the same.
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.
FIXED DEPOSITS
Merchant bankers assist the companies to raise finance by way of fixed
deposits from the public. However such companies should fulfill credit
rating requirements.
OTHER FUNCTIONS
Treasury Management- Management of short term fund requirements
by client companies.
 Stock broking- helping the investors through a network of service
units.
Servicing of issues- servicing the shareholders and debenture holders
in distributing dividends, debenture interest.
 Small Scale industry counselling- counseling SSI units on marketing
and finance
 Equity research and investment counseling – merchant banker plays
an important role in providing equity research and investment
counseling because the investor is not in a position to take appropriate
investment decision.
 Assistance to NRI investors - the NRI investors are brought to the
notice of the various investment opportunities in the country.
 Foreign Collaboration: Foreign collaboration arrangements are made
by the Merchant bankers.
MERCHANT BANKING REGULATIONS :
Certificate from SEBI is a must. They are of four types:
Category I merchant bankers : To carry on any activity of the issue
management, which will 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, underwriter,
portfolio manager.
Category II merchant bankers : To act as adviser, consultant, co-
manager, underwriter, portfolio manager.
Category III merchant bankers : To act as underwriter, adviser,
consultant to an issue.
Category IV merchant bankers :To act only as adviser or consultant to
an issue.
CAPITAL ADEQUACY NORMS :

Category I : Rs. 5 crores

Category II : Rs.50 lakhs

Category III : Rs.20 lakhs

Category IV : Nil
GUIDELINES FOR MERCHANT BANKERS :
SEBI’s authorization is a must to act as merchant Bankers.
Authorization criteria include
 Professional qualification in finance , law or business management
 Infrastructure like office space, equipment and man power
 Capital adequacy
 Past track of record, experience , general reputation and fairness in
all transactions

Every merchant banker should maintain copies of balance sheet ,

Profit and loss account, statement of financial position
Half-yearly unaudited result should be submitted to SEBI
Merchant bankers are prohibited from buying securities based on the
unpublished price sensitive information of their clients
SEBI has been vested with the power to suspend or cancel the
authorisation in case of violation of the guidelines
Every merchant banker shall appoint a ‘Compliance Officer‘ to
monitor compliance of the Act
SEBI has the right to send inspecting authority to inspect books of
accounts,records etc… of merchant bankers
Inspections will be conducted by SEBI to ensure that provisions of the
regulations are properly complied

An initial authorisation fee,an annual fee and renewal fee may be
collected by SEBI

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
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
Should inform the board about any legal proceedings
initiated against it
Should abide by the rules of ‘‘Securities and Exchange
Board of India Regulations,2003 “
Shall develop its own internal code of conduct for
governing its internal operations
Should ensure that any person it employs should have the
capacity to be a merchant banker
It is responsible for the act of its employees and agents
Should not create false market
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
Various Types of Issues by Indian Companies
Primarily, issues made by an Indian company can be classified as
Public, Rights, Bonus and Private Placement. While right issues by
a listed company and public issues involve a detailed procedure,
bonus issues and private placements are relatively simpler. The
classification of issues is as illustrated below:
 (a) Public issue
 (i) Initial Public offer (IPO)
 (ii) Further public offer (FPO)
 (b) Rights issue
 (c) Bonus issue
 (d) Private placement
 (i) Preferential issue
 (ii) Qualified institutional placement
(a) Public issue:
When an issue / offer of securities is made to new investors for
becoming part of shareholders’ family of the issuer it is called a public
issue. Public issue can be further classified into Initial public offer (IPO)
and Further public offer (FPO). The significant features of each type of
public issue are illustrated below:

(i)Initial public offer (IPO): When an unlisted company makes either a

fresh issue of securities or offers its existing securities for sale or both
for the first time to the public, it is called an IPO. This paves way for
listing and trading of the issuer’s securities in the Stock Exchanges.

(ii) Further public offer (FPO) or Follow on offer: When an already

listed company makes either a fresh issue of securities to the
public or an offer for sale to the public, it is called a FPO.
(b) Rights issue (RI): When an issue of securities is made by an issuer
to its shareholders existing as on a particular date fixed by the issuer (i.e.
record date), it is called an rights issue. The rights are offered in a
particular ratio to the number of securities held as on the record date.

(c) Bonus issue:

When an issuer makes an issue of securities to its existing shareholders
as on a record date, without any consideration from them, it is called a
bonus issue. The shares are issued out of the Company’s free reserve or
share premium account in a particular ratio to the number of securities
held on a record date.
(d) Private placement:
When an issuer makes an issue of securities to a select group of persons
not exceeding 49, and which is neither a rights issue nor a public issue, it
is called a private placement. Private placement of shares or convertible
securities by listed issuer can be of two types:

(i) Preferential allotment: When a listed issuer issues shares or

convertible securities, to a select group of persons in terms of
provisions of Chapter XIII of SEBI (DIP) guidelines, it is called
a preferential allotment. The issuer is required to comply with
various provisions which inter‐alia include pricing, disclosures in
the notice, lock‐in etc, in addition to the requirements specified
in the Companies Act.

(ii) Qualified institutions placement (QIP):

When a listed issuer issues equity shares or securities convertible in
to equity shares to Qualified Institutions Buyers only in terms of
provisions of Chapter XIIIA of SEBI (DIP) guidelines, it is called a QIP.
 PROCESS OF IPO
The process of initial public offering consists of several steps. Those
are discussed below:
 The investment bank and the company will first initiate the process

of deal negotiation. The main discussing issues are the money

amount that the company is going to raise, security type to be issued
and all the other details involved with the underwriting agreement.

 Once the deal gets finalized, the investment bank sets a registration
statement which will be submitted to the Securities and Exchange
Commission. That registration statement consists of information
regarding the offering and also other company informations like,
background of the management, financial statements, legal issues
etc.
Then the Securities and Exchange Commission (SEC) needs a cooling
off period during which it will examine all the submitted documents
and make sure that all information regarding the deal have been given
to them. After getting the SEC's approval, a date is going to be fixed on
which the company will offer the stock to the public.

During the above mentioned cooling off period the underwriter

publishes an initial prospectus that contains all the necessary
information regarding the company. The effective date of issuing the
stock as well as the price have not been mentioned in the prospectus,
for these are not known at this time.

Then the company and the underwriter meets to decide the price of the
stock. This decision depends highly on the current market condition.

Lastly, the stocks are sold in the market and money is raised from the
investors.
 PROCESS OF RIGHT ISSUE
Listed below complete procedure for issue of shares on rights basis:

(1) Authorised share capital. Check that there is sufficient authorised

share capital in the memorandum of association to accommodate
the increase in the subscribed share capital that will arise due to the
proposed rights issue. If the authorised share capital is inadequate,
the memorandum of association must be amended to increase it by
a suitable amount. If the articles also contain the authorised share
capital, the articles also will have to be amended.
 
 
(2) Letter of Offer. Draft a Letter of Offer. As per section 81(1)(b), a
'notice' should make the offer of rights shares. This notice is called
'Letter of Offer'. (give atleast 15 days time to shareholders for exercising
their option) It is a document sent to the shareholders of a company
offering them shares in a rights issue. No form has been prescribed of the
Letter of Offer. It should contain the following information:
(a) Brief history of the company;
(b) Nature of business carried on by the company;
(c) Highlights of the financial performance for 3 to 5 years;
(d) Management perception about the future prospects of the company;
(e) Particulars of directors, including managing and whole-time
directors;
(f) Details of the proposed rights issue;
(g) The number of shares held by a shareholder and the number of rights
shares;
(h) Terms and conditions of the present issue and mode of payment.
(3) Board's Approval. Arrange a Board meeting and pass the following
resolutions:

(a) To approve the proposal of issuing new shares on rights basis and decide
the price, total number of shares to be offered, proportion in which the
rights shares will be offered, etc;
(b) To approve a draft Letter of Offer;
(c) To fix a date as a record date (or dates of closure of the Register of
Members) for drawing up a list of members eligible to receive the offer;
(d) To approve a draft application form (for subscribing to the rights shares,
additional shares, splitting the rights renunciation);
(e) To authorize Company Secretary or other officer to send the Letter of Offer
to the members and to do such acts, deeds and things as may be
necessary to give effect to the Board's decision;
(f) To convene a general meeting for passing necessary resolutions, if any; to
fix date, time and place of the general meeting and to authorize the
Company Secretary or other officer to issue notice of the meeting.
(4) General meeting. A general meeting will be convened to pass
necessary ordinary/special resolution, if the articles require a resolution.
Ensure that the explanatory statement annexed to the notice of the
meeting fully explains the objects and reasons for the rights issue and
justification therefore.

(5) Filing of resolution. The special resolution passed at the general

meeting will be filed with the Registrar of Companies. If a resolution for
increasing the authorized share capital has been passed, requisite
registration fee will be paid at the Registrar's office.

(6) Record Date/Book Closure. Announce a record date/book closure as

decided by the Board of directors well in advance allowing at least 2 to 3
weeks for lodgement of share transfer forms so as to exercise the right to
take the rights shares. The closure of the Register of Members should be
in accordance with the provisions of section 154 of the Companies Act. 
(7) Drawing up list of members. After the record date/book closure is
over, draw up a list of members to ascertain members eligible to
subscribe to the rights shares.

(8) Dispatching Letter of Offer. Dispatch the Letter of Offer to the

members eligible to subscribe to the rights issue as per the list of
members drawn up. The Letter of Offer should be accompanied by
application form for subscription, splitting, renunciation, etc. The Letter
of Offer should be sent to the shareholders in such a manner that they get
at least 15 days time to apply.

(9) Collection and scrutiny of application forms. Within a week after

the last date for making the application, collect the application forms
received and scrutinize them in all respects. Sort the valid applications
and defective applications. Prepare a statement of allottees with all
relevant particulars.
(10) Allotment. Convene a meeting of the Board/Allotment Committee
and pass a resolution for allotment and file Return of Allotment with the
Registrar of Companies.

(11) Allotment Letter/Share Certificates. Prepare and dispatch Letters

of Allotment. Alternatively, prepare and dispatch Share Certificates to
the allottees. In any case, Share Certificates should be dispatched within
3 months from the date of allotment.

(12) Regret Letters/Refund Orders. Simultaneously, prepare and

dispatch regret letters and refund orders to the applicants to whom no
shares have been allotted.

(13) Entry in the Register of Members. Immediately after the

allotment, enter the particulars of the allottees in the Register of
Members.
 GDR
 A global depositary receipt (GDR) is a bank
certificate issued in more than one country
for shares in a foreign company. The shares are
held by a foreign branch of an international
bank. The shares trade as domestic shares but
are offered for sale globally through the
various bank branches. A GDR is a financial
instrument used by private markets to raise
capital denominated in either U.S. dollars or
euros.
 ADR
 An American depositary receipt (ADR) is
a negotiable certificate issued by a U.S. bank
representing a specified number of shares (or one
share) in a foreign stock traded on a U.S.
exchange. ADRs are denominated in U.S. dollars,
with the underlying security held by a U.S.
financial institution overseas, and holders of
ADRs realize any dividends and capital gains in
U.S. dollars, but dividend payments in euros are
converted to U.S. dollars, net of conversion
expenses and foreign taxes. ADRs are listed on
either the NYSE, AMEX or Nasdaq but they are
also sold OTC.
THANK YOU