Merchant Banking JIT

7/31/2019 Merchant Banking JIT

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MERCHANT BANKING

BY

VENKATACHALAM.GASST.PROF/FINANCE

1G.Venkatachalam.M.Com, MBA,M.Phil.,(Ph.D)


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MERCHANT BANKING

Merchant banking may be defined as an institution which covers awide 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 2G.Venkatachalam.M.Com, MBA,M.Phil.,(Ph.D)


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Merchant Banking-An Overview

Merchant banking is the financial intermediation thatmatches the entities that need capital and those that have

capital. It is a function that facilitates the flow of capital in the

market.

Ministry of Finance: Any person who is engaged in the

business of issue management either by making

arrangements regarding selling, buying or subscribing to

securities as manager, consultant, advisor or rendering

corporate advisory service in relation to such issuemanagement



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Merchant Banking-An Overview

Banking commission Report-1972

a) Necessity

b) Distinct from commercial Banks

c) Investment Management and Advisory services

d) Medium and small savers

e) Manage



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Merchant Banking in India

Grind lays Banks-1967

Management of capital issue

Production planning, system design to market

research

Management consultancy

Citibank-1970

SBI-1972



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G.Venkatachalam.M.Com, MBA,M.Phil.,(Ph.D)

Emerging Areas.

Private placements with NRIs and FIIs.

Brought out deals.

Market Making

OTC

NSE

ForexFinancial engineering- M&As, capital

restructuring.

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Qualities of a good MB

Leadership

Aggressive action

Co-operative and friendliness

Contacts

Attitude towards problem solving

Inquisitiveness for new skills, informationand knowledge

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General Obligations and

Responsibilities

Maintenance of books of accounts, records and

documents

Copy of the balance sheet, auditors report and

statement of financial position

Responsibilities of lead Manager

Underwriting obligation

Submission of due diligence certificate

Insider Trading Acquisition of shares



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SERVICES /FUNCTIONS 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 determiningpromoters contribution. These loans can be obtained from a single

institution or a consortium.



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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 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 allotmentletters,,share certficates and refund orders11G.Venkatachalam.M.Com, MBA,

M.Phil.,(Ph.D)


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UNDERWRITING OF PUBLIC ISSUES :

Underwriting is an insurance to the company which makes public

issues.Raising of external resources is easy for the issues backedby 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..



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PORTFOLIO MANAGEMENT :

Portfolio refers to investment in different kinds of securities such

as shares,debenture issued by different companies.It is acombination 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.



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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 thusmobilising 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.



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OFF SHORE FINANCE :

Merchant bankers help their clients in :

Long term foreign currency loan

Joint venture abroad

Financing exports and imports

Foreign collaboration arrangement



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Managers to the issue or Merchant

Bankers

Advise on the capital structure, instrument ofissue.

Pricing

Assessing and appraisal of project report.

Appointment of bankers, underwriters,brokers, registrars, printers and advertisementagents.

Holding brokers-Underwriters,

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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



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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



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Registration with SEBI

Around 250 Merchant Bankers

Abolished all categories and maintained

Category-I

Separate registration for underwriters and

portfolio manager

Segregation between fee based and Fundbased activities



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Registration with SEBI Registration with SEBI is mandatory to carry out the

business of merchant banking in India. An applicantshould comply with the following norms:The applicant should be a body corporate

The applicant should not carry on any business other thanthose connected with the securities market

The applicant should have necessary infrastructure like officespace, equipment, manpower etc.

The applicant must have at least two employees with priorexperience in merchant banking

Any associate company, group company, subsidiary orinterconnected company of the applicant should not have beena registered merchant banker

The applicant should not have been involved in any securitiesscam or proved guilt for any offence

The applicant should have a minimum net worth of Rs.5 crores20G.Venkatachalam.M.Com, MBA,M.Phil.,(Ph.D)


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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


MERCHANT BANKING REGULATIONS


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MERCHANT BANKING REGULATIONS :

Certificate from SEBI is a must.They are of four types:

Category I merchant bankers : Can act as Issue managers

Category II merchant bankers : can act only as co-managers

Category III merchant bankers : can act as co-managers but cannot

undertake portfolio management

Category IV merchant bankers :can merely act as consultant or

advisor to issue of capital

CAPITAL ADEQUACY NORMS :

Category I : Rs. 5 crores

Category II : Rs.50 lakhs

Category III : Rs.20 lakhs

Category IV : Nil 22G.Venkatachalam.M.Com, MBA,M.Phil.,(Ph.D)

GUIDELINES FOR MERCHANT BANKERS


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GUIDELINES FOR MERCHANT BANKERS :

SEBIs authorization is a must to act as merchant

bankers.Authorisation criteria include

Professional qualification in finace,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 clients23G.Venkatachalam.M.Com, MBA,M.Phil.,(Ph.D)


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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 theregulations 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 24G.Venkatachalam.M.Com, MBA,M.Phil.,(Ph.D)


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CODE OF CONDUCT :

Should make all efforts to protect the interest of investorsShould 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



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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 operationsShould 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



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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

27G.Venkatachalam.M.Com, MBA,M Phil (Ph D)

Merchant Banking JIT

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