Merchant Banking
Content
Merchant Banking
Merchant Banking-An Overview
• Companies raise capital by issuing securities in the market. Merchant bankers act as intermediaries between the issuers of capital and the ultimate investors who purchase these securities.
• Merchant banking… is the financial intermediation that matches the entities that need capital and those that have capital. It is a function that facilitates the low 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 issue management”
• Banking commission Report-1972
a) Necessity b) Distinct from commercial Banks c) Investment Management and Advisory services d) Medium and small savers e) Manage
Merchant Banking in India
• Grindlays Banks-1967
Management of capital issue Production planning, system design to market research Management consultancy
• Citibank-1970 • SBI-1972
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
Regulation
• Merchant Bankers Regulations of Securities and Exchange Board of India • Company Act 1956 • Listing guidelines of Stock Exchanges • Securities Contracts (Regulation) Act, 1956 • Formation of divisions • Subsidiaries companies
Structure
• Category-I
to carry on any activity of the issue management, which will 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 subscription; and to act as adviser, consultant, manager, underwriter, portfolio manager.
Structure
• Category II
that is, to act as adviser, consultant, comanager, 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.
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 Fund based activities
Registration with SEBI
• 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 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 applicant should have a minimum net worth of Rs.5 crores
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
Terms of Authorization
• Authorization is valid for an initial period of 3 years • Authorization fee, annual fee and renewal fee • All issues should be managed by at least one authorized merchant bankers, functioning as sole manager or lead manager • MB expected to exercise due diligence independently • Involvement of MB in post-issue management • Adhere a code of conduct prescribed by SEBI • MB may be cancelled or suspended for suitable duration • MB regulations integrate issue management with underwriting
General Obligations and Responsibilities
• Maintenance of books of accounts, records and documents • Copy of the balance sheet, auditor’s report and statement of financial position • Responsibilities of lead Manager • Underwriting obligation • Submission of due diligence certificate • Insider Trading • Acquisition of shares
Main functions of a merchant banker
• Management of debt and equity offerings- This forms the main function of the merchant
banker. He assists the companies in raising funds from the market. The main areas of work in this regard include: instrument designing, pricing the issue, registration of the offer document, underwriting support, marketing of the issue, allotment and refund, listing on stock exchanges.
• Placement and distribution-
The merchant banker helps in distributing various securities like equity shares, debt instruments, mutual fund products, fixed deposits, insurance products, commercial paper to name a few. The distribution network of the merchant banker can be classified as institutional and retail in nature. The institutional network consists of mutual funds, foreign institutional investors, private equity funds, pension funds, financial institutions etc. The size of such a network represents the wholesale reach of the merchant banker. The retail
Functions
• Corporate advisory services- Merchant bankers offer •
customized solutions to their clients financial problems. The following are the main areas in which their advice is sought:
Financial structuring includes determining the right debt-
equity ratio and gearing ratio for the client, the appropriate capital structure theory is also framed.
• Merchant bankers also explore the refinancing alternatives of the client, and evaluate cheaper sources of funds. • Another area of advice is 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.
Functions
• Project advisory services conceptualizing the project idea feasibility studies
Preparing different documents like the detailed project report.
• Loan syndication Tie up loans for their clients Analyze the pattern of the client’s cash flows Prepares a detailed loan memorandum This takes place in a series of steps. Firstly they, based on which the terms of borrowings can be defined. Then the merchant banker, which is circulated to various banks and financial institutions and they are invited to participate in the syndicate.
Merchant Banking-An Overview
• Companies raise capital by issuing securities in the market. Merchant bankers act as intermediaries between the issuers of capital and the ultimate investors who purchase these securities.
• Merchant banking… is the financial intermediation that matches the entities that need capital and those that have capital. It is a function that facilitates the low 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 issue management”
• Banking commission Report-1972
a) Necessity b) Distinct from commercial Banks c) Investment Management and Advisory services d) Medium and small savers e) Manage
Merchant Banking in India
• Grindlays Banks-1967
Management of capital issue Production planning, system design to market research Management consultancy
• Citibank-1970 • SBI-1972
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
Regulation
• Merchant Bankers Regulations of Securities and Exchange Board of India • Company Act 1956 • Listing guidelines of Stock Exchanges • Securities Contracts (Regulation) Act, 1956 • Formation of divisions • Subsidiaries companies
Structure
• Category-I
to carry on any activity of the issue management, which will 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 subscription; and to act as adviser, consultant, manager, underwriter, portfolio manager.
Structure
• Category II
that is, to act as adviser, consultant, comanager, 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.
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 Fund based activities
Registration with SEBI
• 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 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 applicant should have a minimum net worth of Rs.5 crores
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
Terms of Authorization
• Authorization is valid for an initial period of 3 years • Authorization fee, annual fee and renewal fee • All issues should be managed by at least one authorized merchant bankers, functioning as sole manager or lead manager • MB expected to exercise due diligence independently • Involvement of MB in post-issue management • Adhere a code of conduct prescribed by SEBI • MB may be cancelled or suspended for suitable duration • MB regulations integrate issue management with underwriting
General Obligations and Responsibilities
• Maintenance of books of accounts, records and documents • Copy of the balance sheet, auditor’s report and statement of financial position • Responsibilities of lead Manager • Underwriting obligation • Submission of due diligence certificate • Insider Trading • Acquisition of shares
Main functions of a merchant banker
• Management of debt and equity offerings- This forms the main function of the merchant
banker. He assists the companies in raising funds from the market. The main areas of work in this regard include: instrument designing, pricing the issue, registration of the offer document, underwriting support, marketing of the issue, allotment and refund, listing on stock exchanges.
• Placement and distribution-
The merchant banker helps in distributing various securities like equity shares, debt instruments, mutual fund products, fixed deposits, insurance products, commercial paper to name a few. The distribution network of the merchant banker can be classified as institutional and retail in nature. The institutional network consists of mutual funds, foreign institutional investors, private equity funds, pension funds, financial institutions etc. The size of such a network represents the wholesale reach of the merchant banker. The retail
Functions
• Corporate advisory services- Merchant bankers offer •
customized solutions to their clients financial problems. The following are the main areas in which their advice is sought:
Financial structuring includes determining the right debt-
equity ratio and gearing ratio for the client, the appropriate capital structure theory is also framed.
• Merchant bankers also explore the refinancing alternatives of the client, and evaluate cheaper sources of funds. • Another area of advice is 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.
Functions
• Project advisory services conceptualizing the project idea feasibility studies
Preparing different documents like the detailed project report.
• Loan syndication Tie up loans for their clients Analyze the pattern of the client’s cash flows Prepares a detailed loan memorandum This takes place in a series of steps. Firstly they, based on which the terms of borrowings can be defined. Then the merchant banker, which is circulated to various banks and financial institutions and they are invited to participate in the syndicate.
