Merchant Banking

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MERCHANT BANKING
Dr. Divya Asst. Professor USMS, GGSIPU

Merchant Banking

Merchant Banking

According to SEBI, ³Merchant banker means a person who is engaged in the business of issue management, either by making arrangements regarding selling or by subscribing to securities as managers, consultants, advisor or rendering corporate advisory services in relation to issue management.´

Merchant Banking

ORIGIN OF MERCHANT BANKING



Merchant banking originated through entering of London merchants in financing foreign trade through acceptance of bills. Later these merchants assisted bills. govt. govt. in raising long term funds through flotation of bonds. bonds. Later on they extended their activities to syndication of long term/short term finance, underwriting, acting as registrars, debenture trustees, portfolio managers, negotiating agents for mergers and takeovers. Thus the institution of merchant takeovers. bankers came to stay. stay.
Merchant Banking

MERCHANT BANKING IN INDIA




 

In India prior to enactment of Indian Companies Act 1956 managing agency houses were issue houses for securities. Few share broking firms securities. also functioned as merchant bankers. bankers. The need for merchant bankers was felt when number of issues in primary market were increasing. Merchant banking services were started by foreign increasing. banks ±National Grindlays and City bank in 1967, the banking commission 1967, in its report 1972 recommended that commercial banks and financial institutions should start their merchant banking wing. This marked wing. specialised merchant banking divisions. divisions. In 1972, SBI Merchant banking division started. 1972, started. SBI was the first and then ICICI, Bank of India, Bank of Baroda,Canara bank, PNB, UCO bank followed. The merchant banking gained followed. prominence during 1983-84 due to new issues boom. 1983boom.

Merchant Banking

Contd«
At present merchant banking services in our country are Provided by:  Commercial banks and their subsidiaries  Foreign banks including National Grindlays banks, Citi bank, Hongkong bank etc.  All India Financial Institutions and Development bank such as ICICI, IFCI, IDBI.  State level Financial Institutions such as State Industrial Development Corporations and State Financial Corporations.  Private Financial Consultancy Firms and Brokers such as J.M. Financial and Investment services Ltd., DSP Financial consultants  Technical consultancy organization.
Merchant Banking

Factors Responsible for the Growth
     

Globalization of Indian Economy Competition Changing Customer Demographics Technology Improvements Government Reforms Revolution in Banking Sector

Merchant Banking

The Main Functions of a Merchant Banker
y y y y  y y   

Corporate Advisory Services Project Counselling Capital Restructuring services Issue Management Portfolio Management Loan Syndication Underwriting Leasing Services Venture Capital Services Public Deposits
Merchant Banking

Corporate Advisory Services
Merchant bankers offer customized solutions to their clients financial problems. The main areas in which their advice is sought include Financial structuring, refinancing alternatives of the client, rehabilitation and turnaround management.  In case of sick units, merchant bankers may design a revival package in coordination with banks and financial institutions.  Risk management is another area where advice from a merchant banker is sought. He advises the client on different hedging strategies and suggests the appropriate strategy.


Merchant Banking

Project Counselling


Merchant bankers help their clients in various stages of the project undertaken by the clients. They assist them in Conceptualizing the project idea in the initial stage. Once the idea is formed, they conduct feasibility studies to examine the viability of the proposed project. They alsoassist the client in preparing different documents like the detailed project report.
0.25% to 2% of the project cost is charged as fees.



Merchant Banking

Corporate Restructuring
 Helps

in mergers, takeover advice, identifying areas of diversification, redesigning capital structure.

Merchant Banking

Issue Management
Under Issue management services provided include:  Preparation of the application  Preparation of a plan and budget to estimate total expenditure of the issue  Preparation of Controller of Capital Issues application  Appointment of Registrars, brokers and bankers to the issue  Selection of issue house  Compliance of listing requirements of stocks exchanges  Merchant banker advises the client whether to go for a fresh issue or additional issue or bonus issue or right issue of equity or preference or both.  Drafting prospectus  Filing of prospectus to registrar.  Opening and closing subscription list  Allotment and refund procedure  Actual listing of securities FeesFees- 0.5% of amount of public issue upto Rs. 25 crores. Merchant Banking 0.2% of amount of public issue more than Rs 25 crores.

Portfolio Management
Merchant banks advise their clients regarding investment decisions as to the quantum of amount of security and the type of security in which to invest. Merchant banks provide portfolio management services in the form of:  The sale and purchase of securities  Investing and purchase of securities  Investing and managing fixed deposits  Trust funds, pension funds and investments and their review  Safe custody of securities in India and overseas  Reinvesting the returns collected from investments in some profitable avenues. Merchant Banking

Loan Syndication
Merchant bankers arrange to tie up loans for their clients. This takes place in a series of steps.  Firstly they analyze the pattern of the client¶s cash flows, based on which the terms of borrowings can be defined.  Preparing loan application  Then the merchant banker prepares a detailed loan memorandum, which is circulated to various banks and financial institutions and they are invited to participate in the syndicate.  The banks then negotiate the terms of lending on the basis of  which the final allocation is done.  Legal Documentation  Fees ± 1% of the loan amount
Merchant Banking

Underwriting
 Except

category IV merchant bankers everyone can perform underwriting role.  Fees 2.5 % in case of equity shares  1.5% in case of debentures

Merchant Banking

Leasing Services
Merchant bankers also provide leasing and finance facilities to their customers. Lease is a contract between the owner of the asset (lessor) and user of the asset called the lessee, whereby the lessor gives the right to use the asset to the lessee over an agreed period of time for a consideration called the lease rental. Merchant bankers assist their clients by providing finance for the acquisition of asset taken on lease.

Merchant Banking

Venture Capital Services
Many merchant bankers maintain venture capital funds to assist the entrepreneurs who lack capital to be risked. Capital funds may be provided for unproven ideas, products technology oriented or start-up funds. It is a form of equity financing startespecially designed for funding high risk and high reward projects.

Merchant Banking

Public Deposits
Merchant bankers also help companies in raising finance by way of public deposits.

Merchant Banking

Merchant Banking Regulation
SEBI (Merchant Bankers) Regulation Act, 1992 defines a µmerchant banker¶ as ³ 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.  No organization can act as a µmerchant banker¶ without obtaining a certificate of registration from the SEBI.  To obtain the certificate of registration, one had to apply in the prescribed form and fulfill two sets of norms (i) Operational capabilities and (ii) Capital adequacy norms.

Merchant Banking

Classification of Merchant Bankers
The SEBI has classified µmerchant bankers¶ under four categories for the purpose of registration: 1. Category I Merchant Bankers:- can act as issue manager, which will, Bankers:inter alia, 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 subscriptions; and advisor, consultant, underwriter and portfolio manager. 2. Category II Merchant Bankers:- can act as advisor, consultant, Bankers:underwriter and portfolio manager. 3. Category III Merchant Bankers:- can act as underwriter, advisor and Bankers:consultant only. 4. Category IV Merchant Bankers:- can merely act as consultant or Bankers:advisor to an issue of capital.

Merchant Banking

Capital Adequacy Norms
The capital adequacy is expressed in terms of minimum net worth, i.e., capital contributed to the business plus free reserves. Capital Adequacy Norms Category of Merchant Bankers Minimum Net Worth Category I Category II Category III Category IV Rs.5 crores Rs.50 lakhs Rs.20 lakhs Nil
Merchant Banking

Initial Licence fees
 Category

II- Rs. 2.5 lakhs for the Ist and 2nd yr and 1 lakh for the third yr.  Category II- Rs. 1.5 lakh for the 1&2nd yr IIand Rs.50,000 for the 3rd yr.  Category III- Rs. 1 lakh for the 1 & 2nd yr. IIIand Rs.25,000 for the 3rd yr.  Category IV- Rs. 5,000 for the 1 &2nd yr IVand Rs.1,000 for the 3rd yr.
Merchant Banking

Registration of Merchant Bankers
Registration with SEBI is mandatory to carry out the business Of merchant banking in India. An applicant should comply with the following norms:  The 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

Merchant Banking

Contd«


 





Any 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 The capital adequacy requirement referred to in clause (d) of regulation 6 shall be a net worth of not less than five crore rupees. Explanation: For the purposes of this regulation, ³net worth´ means the sum of paidup capital and free reserves of the applicant at the time of making application under subsub-regulation (1) of regulation 3.] 3.] The certificate of registration granted under regulation 8 Merchant Banking and its renewal granted under regulation 9, shall be valid for a period of three years from the date of its issueto the

MERCHANT BANKERS AS LEAD MANAGERS




As per SEBI guidelines it is mandatory that all public issues should be managed by merchant bankers in the capacity of lead managers. Only in case of rights issue not exceeding 50 lakhs such an obligation is not necessary. The number of lead managers depends on size of the issue.  Less than 50 crores²2, crores²  50 to 100 crores - 3,  100 to 200 crores - 4,  200 crores to 400 crores- 5, crores above 500 crores ±5 or more as prescribed by the SEBI. Duties and responsibilities of lead managers ±  1) ageement with issuing company- which is to be submitted to SEBI at companyleast one month before the issue opens.  2) every merchant banker must have registration of SEBI  3) lead manager cannot undertake work if the company is its associate.
Merchant Banking

Duties and responsibilities of lead managers
 





   

4) if more than one lead managers then responsibilities of each must be clearly defined in the agreement 5) the lead manager is under obligation to accept minimum underwriting obligation of 5 % of the issue or 25 lakhs whichever is less. 6) lead manager has to give due diligence certificate that prospectus or letter of offer is in conformity with documents relevant to issue, disclosures are true,fair, adequate and all legal requirements all duly complied with.. 7) every lead manager has to submit all particulars of issue, prospectus to the SEBI at least two weeks before the date of filing with the registrar of companies or regional stock exchange or both 8) any suggestions made by SEBI must be properly incorporated 9) in case of development the lead manager has to ensure that underwriters contribute the amount of their liability 10) every lead manger is responsible for timely refund of any excess application money 11) it is his duty to mail; share/debenture certificate immediately on Merchant Banking allotment or inform it to the depository participant .

CODE OF CONDUCT FOR MERCHANT BANKERS


   





A merchant banker shall make all efforts to protect the interests of investors. A merchant banker shall maintain high standards of integrity, dignity and fairness in the conduct of its business. A merchant banker shall fulfil its obligations in a prompt, ethical, and professional manner. A merchant banker shall at all times exercise due diligence, ensure proper care and exercise independent professional judgment. A merchant banker shall endeavour to ensure that² that² (a) inquiries from investors are adequately dealt with; (b) grievances of investors are redressed in a timely and appropriate manner; (c) where a complaint is not remedied promptly, the investor is advised of any further steps which may be available to the investor under the regulatory system. A merchant banker shall ensure that adequate disclosures are made to the investors in a timely manner in accordance with the applicable regulations and guidelines so as to enable them to make a balanced and informed decision. A merchant banker shall endeavour to ensure that the investors are provided with true and adequate information without making any misleading or exaggerated claims or any misrepresentation and are made aware of the attendant risks before taking any investment decision. Merchant Banking

CODE OF CONDUCT FOR MERCHANT BANKERS
  

  

A merchant banker shall endeavour to ensure that copies of the prospectus, offer document, letter of offer or any other related literature is made available to the investors at the time of issue or the offer. A merchant banker shall not discriminate amongst its clients. A merchant banker shall not make any statement, either oral or written, which would misrepresent the services that the merchant banker is capable of performing for any client or has rendered to any client. A merchant banker shall avoid conflict of interest and make adequate disclosure of its interest. A merchant banker shall always endeavour to render the best possible advice to the clients having regard to their needs. A merchant banker shall not indulge in any unfair competition, such as weaning away the clients on assurance of higher premium or advantageous offer price or which is likely to harm the interests of other merchant bankers or investors or is likely to place such other merchant bankers in a disadvantageous position while competing for or executing any assignment.
Merchant Banking

CODE OF CONDUCT FOR MERCHANT BANKERS
 



 

A merchant banker shall maintain arms length relationship between its merchant banking activity and any other activity. A merchant banker shall have internal control procedures and financial and operational capabilities which can be reasonably expected to protect its operations, its clients, investors and other registered entities from financial loss arising from theft, fraud, and other dishonest acts, professional misconduct or omissions. A merchant banker shall ensure that the Board is promptly informed about any action, legal proceedings, etc., initiated against it in respect of material breach or nonnoncompliance by it, of any law, rules, regulations, directions of the Board or of any other regulatory body. A merchant banker shall provide adequate freedom and powers to its compliance officer for the effective discharge of the compliance officer¶s duties. A merchant banker shall develop its own internal code of conduct for governing its internal operations and laying down its standards of appropriate conduct for its employees and officers in carrying out their duties. Such a code may extend to the maintenance of professional excellence and standards, integrity, confidentiality, objectivity, avoidance or resolution of conflict of interests, disclosure of shareholdings and interests, etc.
Merchant Banking

Thank You

Merchant Banking

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