Merchant Banking

INTRODUCTIONRefers to British Merchant banking .

Concerned with mobilising savings of people .

DEFINITION

MERCHANT BANKING is defined as an institution which covers a wide range of activities such as management of customer services, portfolio mgmt, credit syndication, acceptance credit, counselling, insurance etc.

ORIGINOriginated through London merchants.

Extension of activities to domestic business of syndication of long-term & short-term finance, share transfer agents, debenture trustees, takeover etc.

Merchant BankingIn India?

Merchant banking in IndiaNeed for merchant banking was felt with rapid growth in number & size of issues made in primary market.

Merchant banking services were started by foreign banks, namely National Grindlays in 1967 & City bank in 1970 .

Merchant banking services were offered along with other traditional banking services.

SBI was first Indian bank to set up Merchant banking division in 1972.

DIFFERENCE BETWEEN COMMERCIAL BANKING & MERCHANT BANKINGDeals with Debt & Debt related finance.

Asset oriented.

Generally avoid risks.

Deals with Equity & Equity related finance.

Management oriented.

Willing to accepts risks.

Merchant BankingServices?

SERVICES OF MERCHANT BANKThe financial institutions in India could not meet the demand for long-term fund required by the ever expanding industry and trade.

Corporate sectors enterprise meet their demand through issuing share and debenture in capital market.

Services of Merchant Banks

Sr NoParticularsSummary1Corporate CounselingCovers the entire field of merchant banking, Ltd to giving suggestions

2Project Counseling Preparing project report for govt. approval , financial assistance

3Loan SyndicationAssistance rendered to get term loan for project, help client make appraisal, designing capital structure etc

4Issue ManagementMarketing corporate securities, intermediary in transfer of capital from one who owns to needy

5UnderwritingGuarantee given by the underwriter, make raising of external resource easy

6Managers to IssueDrafting, completion of formalities, appoint Registrar etc

7 Portfolio ManagementInvestment in different kind of securities

8Mergers and takeoversMiddlemen in setting negotiation9Off Shore FinanceHelp in areas involving foreign currency10Non- Resident InvestmentProvide help in better and smooth trade to NRIs

Merchant Banker as Managers, Consultants or AdvisorsCompanies are free to appoint one or more agencies as managers to the issue.Sebi guidelines prescribe that issue should be managed atleast by one authorised merchant banker.Not more than two M.B. should be appointed as lead managers to a public issue.In issue over Rs.100 crores, maximum upto four M.B. could be associated as managers.

Merchant Banker As lead Manager Appointment of a lead manager by a company

S. NoSize of the issueMaximum Number Of Lead Manager1.Less than Rs.50 crores22.Rs.50 crores to Rs.100 crores33.Rs.100 crores to Rs.200 crores44.Rs.200 crores to Rs.400 crores55.Above Rs.400 crores5 or more as prescribed by SEBI

Duties & Responsibilities Of LMTo enter into an agreement

Certificate of registration with SEBI

Work of issue management

Clearly defined responsibility

Minimum underwriting obligation

Due care & diligenceSubmitting due diligence certificatesSubmit all particulars to SEBISuggestions or modificationsCollections of the amount Ensuring refundInform depository participants

Qualities Required of Merchant BankersAbility to analyse Abundant knowledgeAbility to built up relationshipInnovative approachIntegrity(left) Rashesh Shah Chairman & CEO, Edelweiss (right) Nimesh Kampani Chairman & MD, JM Financial(Best merchant bankers)

CATEGORY OF MERCHANT BANKER CATEGORY 1st :- 2nd :- 3rd :- 4th :-

MINIMUM NETWORTH

1 crore 50 lacs 20 lacs NIL

The M.B.registered with SEBI classified according to the category :-

Merchant bankingProblems.?

Restriction of merchant banking activitiesSEBI guidelines have authorised merchant bankers to undertake issue related activities and made them restrict their activities or think of separating these activities from present one and float new subsidiary and enlarge the scope of its activities.

Minimum net worth of Rs.1 croreSEBI guidelines stipulate that a minimum net worth of Rs.1 crore for authorisation of merchant bankers.

Non co-operation of issuing companiesNon co-operation of the issuing companies in timely allotment of securities and refund of application money is another problem faced by merchant bankers.

MERCHANT BANKERS COMMISSION Maximum 0.5%Project appraisal feesLead Manager :- - 0.5% upto Rs.25 crores - 0.2% more in excess of Rs.25 crores

Underwriting fees Brokerage commission 1.5% Other expenses :- - Advertising - Printing - Registrars expenses - Stamp duty

Merchant bankingScope in India?

1) Growth of new issues marketIndian market largest emerging marketDomestic and foreign investors setting up their biz here.Many public and private issues coming upGrowth in new issues marketScope for M.Bs. have risen

2) Entry of FIIIndian capital market is globalised

Indian Cos. are permitted to invest in euro issues. Similarly, FII are permitted to invest in India.

Hence they need M.Bs to advise them for their invt in India.Increasing no. of JVs also require expert services of M.Bs.

3) Changing policy of FILiberalisation of policies

FI would require expert services of M.Bs for project appraisal, financial management, financial restructuring etc.

4) Development of debt marketGood portion of capital can be raised through debt instruments.

Tremendous opportunities to M.Bs.

5) Innovations in Financial InstrumentsNew financial instruments have come up.

M.Bs are market makers for these instruments.

6) Corporate RestructuringLiberalisation and globalisation

Competition in corporate sector becoming intense.

Cos. reviewing their strategies, structure and functioning etc. leading to corporate restructuring.

Good opportunity to M.Bs to extend their area of operation.

7) DisinvestmentIt means reduction of some kind of asset of a firm for achieving either financial or ethical objectives.

Motive of disinvestment is to obtain funds.

ConclusionInspite of problems popping up, merchant banking in India has vast scope to develop because of lot of domestic as well as foreign businesses booming here. Indian economy provides an amicable environment for these firms to set up, flourish and expand here.

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