MERCHANT BANKING

MERCHANT BANKING1/24/2012Prof. Nijumon K John, Christ University, Bangalore1Meaning of Merchant BankIn banking, a merchant bank is a financial institution primarily engaged in offering financial services and advice to corporations and wealthy individuals on how to use their money.

1/24/2012Prof. Nijumon K John, Christ University, Bangalore2Back groundMerchant bank is a traditional term for an Investment Bank.

1/24/2012Prof. Nijumon K John, Christ University, Bangalore3HistoryMerchant banks, now so called, are in fact the original "banks".

These were invented in the Middle Ages by Italian grain merchants1/24/2012Prof. Nijumon K John, Christ University, Bangalore4In INDIAOriginated by setting up of merchant banking division of Grindlays Bank in 1969 followed by other foreign banksSBI in 1973ICICI Ltd in 1974 1/24/2012Prof. Nijumon K John, Christ University, Bangalore5General servicesIssue Management Services to act as Book Running Lead Manager/Lead Manager for the IPOs/FPOs/Right issues/Debt issuesProject appraisalCorporate Advisory ServicesUnderwriting of equity issuesBanker to the Issue/Paying BankerRefund BankerMonitoring Agency

1/24/2012Prof. Nijumon K John, Christ University, Bangalore6 Mergers and AcquisitionsBuy Back AssignmentsShare ValuationsSyndicationDebenture TrusteeMarketing of the issue through a strong network of QIBs/HNIs/Corporates and Retail investor

1/24/2012Prof. Nijumon K John, Christ University, Bangalore7Worlds leading Merchant bankers* ABN Amro * Commerzbank (Dresdner Kleinwort) * Banco Santander (Santander Global Banking & Markets) * Bank of America (Banc of America Securities) * BNP Paribas * Bank of Montreal (BMO Capital Markets) * Barclays (Barclays Capital) * BBH (Brown Brothers Harriman) * Calyon * CIBC (CIBC World Markets) * Citigroup * Credit Suisse * Daiwa Securities * Deutsche Bank * Eurohypo * Fortis Bank * Goldman Sachs

1/24/2012Prof. Nijumon K John, Christ University, Bangalore8* HSBC (HSBC Global Banking and Markets) * ING Group * JPMorgan Chase (JPMorgan Securities, Inc.) * Kaupthing Bank * KBC Bank (KBC Financial Products) * KeyCorp (KeyBanc Capital Markets) * Kotak Mahindra Bank (Kotak Mahindra Investment Banking) * Landsbanki * Lehman Brothers[1] * Lloyds TSB Group Plc (Wholesale and International Banking) * Macquarie Bank * Mizuho Financial Group (Mizuho Corporate Bank) * Monte dei Paschi di Siena (MPS Finance) * Morgan Stanley * National Australia Bank (nabCapital)

1/24/2012Prof. Nijumon K John, Christ University, Bangalore9* Natixis * Nomura Securities Co., Ltd. (Nomura Securities Co.) * Rabobank * Royal Bank of Scotland Group (RBS Global Banking & Markets) * Royal Bank of Canada (RBC Capital Markets) * Scotiabank (Scotia Capital) * Socit Gnrale (SG CIB) * Standard Chartered Bank * State Street Global Advisors * Toronto-Dominion Bank (TD Securities) * UBS AG * Unicredit (Unicredit Group) * USAA * Wachovia (Wachovia Securities) * Wells Fargo (Wells Fargo Securities)

1/24/2012Prof. Nijumon K John, Christ University, Bangalore10Services of merchant banksProject counseling- Includes preparation of project reports, deciding upon the financing pattern, appraising the project relating to its technical, commercial and financial viability. Also includes forwarding of application for obtaining funds from financial institutions.1/24/2012Prof. Nijumon K John, Christ University, Bangalore11Loan syndication- Assistance is rendered to raise loans for projects after determining promoters contribution. This will be obtained from a single institution or a consortium.1/24/2012Prof. Nijumon K John, Christ University, Bangalore12Issue Management ServicesThe issue of securities is the core of merchant banking function. At a time Merchant bankers were identified as issue houses.

1/24/2012Prof. Nijumon K John, Christ University, Bangalore13The issue function may be broadly divided into Pre-issue management and Post-issue management.

1/24/2012Prof. Nijumon K John, Christ University, Bangalore14Pre issue activitiesPrepare copies of prospectus and send it to SEBI and then file them to RoC.Conduct meetings with company representatives and advertising agencies to decide upon the date of opening issue, closing issue, launching publicity campaign etc.Help the companies in fixing up the prices for their issues.1/24/2012Prof. Nijumon K John, Christ University, Bangalore15Post issue activitiesCollection of application forms, screening of forms, deciding allotment procedures, mailing of allotment letters, share certificates and refund orders etc.1/24/2012Prof. Nijumon K John, Christ University, Bangalore16Underwriting of public issueIt is an insurance to the company which makes the public issue.1/24/2012Prof. Nijumon K John, Christ University, Bangalore17Managers to the issueSEBI insists that all issues should be managed by atleast one authorised merchant banker but not more than two.Managers to the issue appointed by the company to manage the public issue

1/24/2012Prof. Nijumon K John, Christ University, Bangalore18DutiesDrafting the prospectusPreparing the budget of expenses related to the issueSuggesting the appropriate timings of the issueAssisting in marketing the public issueAdvising the company in the appointment of underwriters, bankers to the issue, advertising agents etc.Directing the various agencies involved in the issue

1/24/2012Prof. Nijumon K John, Christ University, Bangalore19Portfolio managementPortfolio refers to investment in different kinds of securities. Portfolio management refers to maintaining proper combination of securities in a manner that they give maximum return. Merchant bankers help their investors in choosing the securities. They conduct market surveys.1/24/2012Prof. Nijumon K John, Christ University, Bangalore20NRI InvestmentMerchant bankers help NRIs in choosing the securities and offer expert advice fulfilling the government regulations1/24/2012Prof. Nijumon K John, Christ University, Bangalore21Corporate advisory servicesDetermining the right debt-equity ratio and gearing ratio for the client.Refinancing alternatives of the client, and evaluating cheaper sources of fundsRehabilitation and turnaround management1/24/2012Prof. Nijumon K John, Christ University, Bangalore22Project advisory servicesAssist in conceptualising the project idea in the initial stageConduct feasibility studies to examine the viability of the proposed project.Assist the client in preparing different documents like the detailed project report. 1/24/2012Prof. Nijumon K John, Christ University, Bangalore23Providing venture capital Merchant bankers help companies in obtaining venture capital financing for financing their new and innovative strategies1/24/2012Prof. Nijumon K John, Christ University, Bangalore24Advisory services related to M&AMerger is a combination of two or more companies into a single company where one survives and other loses its identity.Take over is the purchase by one company acquiring controlling power in share capital of another company.Merchant banker acts as middlemen between offeror and offeree, negotiates mode of payment and gets approval from government.1/24/2012Prof. Nijumon K John, Christ University, Bangalore25Offshore financeMerchant bankers help their clients inLong term foreign currency loanJoint venture abroadFinancing exports and importsForeign collaboration arrangement1/24/2012Prof. Nijumon K John, Christ University, Bangalore26Merchant banking regulationsCertificate from SEBI is a must. They are of four typesCategory 1 merchant bankers: can act as issue managersCategory 2: can act only as co-managersCategory 3: can act as co-managers but cannot undertake portfolio managementCategory 4: can merely act as consultant or advisor to issue of capital

1/24/2012Prof. Nijumon K John, Christ University, Bangalore27Capital adequacy normsCategory 1: Rs.5 CrCategory 2: Rs.50 lacsCategory 3: Rs.20 lacsCategory 4: Nil1/24/2012Prof. Nijumon K John, Christ University, Bangalore28SEBI GUIDELINES ON MERCHANT BANKERSREGISTRATION OF MERCHANT BANKERSApplication for grant of certificateAn application by a person for grant of a certificate shall be made to the Board inForm A.The application under sub- regulation (1) shall be made for any one of the followingcategories of the merchant banker namely:-Category I, that is --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;andto act as adviser, consultant, manager, underwriter, portfolio manager.Category II, that is -- to act as adviser, consultant, co-manager, underwriter, portfolio 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.

1/24/2012Prof. Nijumon K John, Christ University, Bangalore29An applicant should comply with the following normsThe 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

1/24/2012Prof. Nijumon K John, Christ University, Bangalore30Any 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

1/24/2012Prof. Nijumon K John, Christ University, Bangalore31Merchant banks and Commercial banksCommercial banks basically deal in debt and debt related finance. On the other hand, the area of activity of merchant bankers is equity and equity related finance.Commercial banks are asset oriented and generally avoid risks. The merchant bankers are management oriented and they are willing to accept risks of business.Commercial banks are merely financiers. Merchant banking activities have impact on growth, stability and liquidity of capital market and money markets.1/24/2012Prof. Nijumon K John, Christ University, Bangalore32Merchant Bankers CommissionCan charge 0.5% as the maximum as commission for whole of the issueCan charge project appraisal feesAs a lead manager they can claim a commission of 0.5% upto Rs.25 Cr and 0.2% in excess of Rs.25 CrUnderwriting commissionEquity shares 2.5%Preference shares/debentures (a) upto 5 lacs 2.5 % and 1.5% (b) excess of 5 lacs2% and 1%Brokerage commission 1.5%Other expenses like advertising, printing, stamp duty etc. in connection with the issue can be reimbursed from its clients1/24/2012Prof. Nijumon K John, Christ University, Bangalore33Merchant bankers in the market making processAppointment of market makerAny member of the stock exchange, along with one merchant banker registered with SEBI can act as a market maker. Company where the paid up capital is Rs.3 Cr but not more than Rs.5 Cr and having commercial operation for less than two years should appoint a market maker. The market maker provide two way quotes for a minimum period of 18 months from the first trading day.

1/24/2012Prof. Nijumon K John, Christ University, Bangalore34Progress of merchant banking in IndiaSBI & ICICI Ltd started merchant banking activities in early 1970s.Commercial banks set up their subsidiaries to perform merchant banking operations in 1980sIn addition, a number of large broking firms and financial consultants also entered into merchant bankingBy the end of 1980s there were 33 merchant bankers

1/24/2012Prof. Nijumon K John, Christ University, Bangalore35Number of merchant bankers increased to 115 by end of 1992 and 300 by 1994Further a large number of reputed foreign merchant bankers are operating in IndiaMerchant bankers in India can be classified as:Public sector: Commercial banks & Financial institutionsPrivate sectorInternational banks

1/24/2012Prof. Nijumon K John, Christ University, Bangalore36Problems of merchant bankersSEBI guidelines authorises merchant bankers to undertake activities with some exceptions. SEBI guidelines stipulate for minimum net worth requirement. The entry is denied to young and specialised professionals into this businessNon-co-operation of the issuing companies in timely allotment of securities and refund of application money is another problem of merchant bankers.1/24/2012Prof. Nijumon K John, Christ University, Bangalore37Scope for merchant banking in IndiaGrowth of new issue market the number of capital issues has increased from 516 in 1991-92 to 1211 in 2005-06.Entry of foreign investors and increase in NRI investmentIncreasing number of joint ventures abroad by Indian companiesChanging policy of financial institutions- from security orientation to project orientationInnovations in financial instruments market makersCorporate restructuringDisinvestment

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