Merchant Banking

CONTENTS :-

i. Origin ii. Definition iii. Functions iv. Role of merchant Banker v. Merchant Banking in India vi. Merchant Banking

regulations vii. Code of Conduct viii.Pre-issue obligations ix. Post –issue obligations

Merchant Banking

Merchant Banking

Service based

functions Fund based functions

Merchant Banking

Project counselling

Credit syndication

Issues management

Corporate counselling

Portfolio management

Stock broking and dealership

Joint venture abroad

Debenture trusteeship

Merchant Banking

Bill discounting

Venture capital

Bought out deals

Lease financing and hire purchase

Factoring

Underwriting

Merchant Banking

Merchant banker plays the role of :-

Promoter

Acts as a corporate advisor

Rehabilitator

Transfer agent

Paying agent

Master in all trading activities

Merchant Banking

Merchant Banking

Merchant banking in India

The formal beginning of the merchant banking services in India began in 1967 when the Reserve Bank of India provided license to the Grindlays Bank. The Grindlays Bank was engaged in capital issue management and it provided diverse financial services to the emerging section of entrepreneurs, especially those belonging to the small and medium enterprise sector.

Citibank started the merchant banking services in 1970 and the State Bank of India followed the same in 1972. After few years, the national merchant banks started collaborating with their counterparts in different countries to start their merchant banking divisions abroad.

In 1993 , there were 568 merchant bankers in our country out of which 312 were authorised by the SEBI . The number of registered merchant bankers with SEBI increased to 422 at the end of 1994. The total number of merchant bankers in all categories increased to 1163 by the end of 1997-1998 .

According to SEBI

“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 .”

Merchant Banking

Categories of Merchant Bankers

1.

Issue Manager, Adviser,

consultant, under writer and portfolio

manager.

2.

Adviser, consultant, underwriter and portfolio

manager, (Co-

Manager).

3.

Under writer, adviser and consultant.

4.

Consultant or Adviser.

Merchant Banking

Registration An agency to operate as merchant banker has

to register itself under SEBI Regulations. For registration the agency has to fulfill two sets of criteria :-

1. Operational Capabilities. 2. Capital Adequacy.

Merchant Banking

Operational Capabilities The SEBI regulations desired the merchant baker to be professional to serve investors. SEBI before granting “Certificate to operate as merchant baker” makes sure that concerned agency is competent on these parameters.

1. Merchant Bank should have necessary physical infrastructure (adequate office space, equipment and man power).

2. SEBI requires the applicant to have at least two persons who have the experience to conduct the business of merchant banker.

3. Those who are directly or indirectly concerned with merchant banker, who are already have been registered, can’t be granted registration (Associate, subsidiary interconnected or group company of the applicant).

4. SEBI requires that applicant or its main official should not be involved in any litigation connected with securities market.

Only those applicant who qualify all these points are granted registration.

Merchant Banking

In the category where in fund based activities are involved, SEBI desires them to have sufficient capital. The concept of adequate capital is expressed in terms of “NET WORTH”. Net worth means the value of capital contributed to business plus free reserves.

Category of Merchant Banker

Minimum Net worth

Category I ` 1 crore

Category II ` 50 lakhs

Category III ` 20 lakhs

Category IV Nil

CAPITAL ADEQUACY NORMS

Merchant Banking

Registration Fees

According to SEBI Amendment Regulations 1999, Every merchant banker shall pay a some of ` 5 Lakhs as registration fees at the time of grant of certificate by the Board. The fee shall be paid by the merchant banker within 15 days of receipt of intimation from the Board. Further, a merchant banker to keep registration in force shall pay renewal fee of ` 2.5 Lakhs every year from the fourth year from the date of initial registration .

Merchant Banking

Merchant Banking Activities

Authorized Activities

Issue Management Assignment

Consultant Adviser Under writer

portfolio manager

Un-Authorized Activities

Merchant Banking

Merchant bank

It provide financial services

It is a whole sale banking

It can’t perform the functions of commercial bank

It is a financing agency

It is a retail banking

It can perform the functions of merchant bank

Commercial bank

Merchant Banking

Once merchant bankers are registered to insure that they maintain high standards. Some important provisions are as under:-

1. Maintain high standards of service. 2. Exercise due diligence, ensure proper care and exercise

independent professional judgment. 3. Disclose to the clients, possible source of conflicts of

duties and interests while providing unbiased services. 4. Maintain secrecy about client. 5. Not to make misrepresentation. 6. Provide true and adequate information to investors. 7. Not to create false market or engage in price rigging.

Merchant Banking

a) Merchant banker not to associate with any business other than that of the securities

b) Maintenance of book of accounts, records, etc.

c) Submission of half –yearly results

d) Maintenance of books of accounts, records and other documents

e) Report on steps taken on auditor’s report

f) Acquisition of shares prohibited

g) Information to the board

h) Disclosures to the board

Merchant Banking

According to merchant banking regulation act , every issue should be managed by at least by one merchant banker acting as lead manager . Such lead manager is not required if

The issue is right issue The size of issue is not exceeding ` 50lakh

Size of issue Maximum no. of lead manager

Less than ` 50 crore 2

` 50 crore but less than `100crore

3

` 100crore but less than ` 200crore

4

` 200crore but less than ` 400 crore

5

` 400crore and above 5 or more agreed by SEBI

Merchant Banking

Appointment of lead merchant banker

Restriction on appointment of lead managers

Responsibilities of lead managers

Lead merchant banker not to associate with a merchant banker without registration

Underwriting obligations(5% or 25 lacs whichevr is less)

Submission of due diligence certificate

Documents to be furnished to the board

Continuance of association of lead manager with an issue

Merchant Banking

Appointment of compliance offer

Board’s right to inspect

Obligations of merchant banker on inspection by the board

Merchant Banking

Documents to be submitted Appointment of intermediaries Underwriting Offer documents to be made public Appointment of compliance officer Mandatory collection centers Final offer document Application forms Minimum application amount Listing of securities Period of subscription oversubscription

Merchant Banking

Redressal of investor grievances

Co-ordination with intermediaries

Stock invest

Underwriters

Bankers to an issue

Post- issue advertisements

Basis of allotment

Compliance with guidelines on advertisement

Merchant Banking