MERCHANT BANKER/LEAD MANAGERS
PROF. PARVEEN SULTANA
The primary /new issue market changed very fast after mid 80’s. the new issue market activity was regulated by the controller of capital issues under the provisions of the capital issues (control) act 1947 with the repel of the act and the consequent abolition of the office of the CCI in 1992, the protection of the interest of the investors in securities markets and promotion of the development and regulation of the markets activity become the responsibility of the SEBI. The major new issue market intermediaries are covered in sec1 to sec7 while the fraudulent and unfair trade practice regulation is described in sec8 and insider trading regulation in sec9
Merchant bankers/ Lead managers
A merchant banker means any person who is engaged in the business of issue management either by making arrangement regarding selling buying or subscribing to securities or acting as manager / consultant /advisors or rendering corporate advisory service in relation to such issue management. Issues means an offer for sale / purchase of securities by any body corporate / other person or group of person on their behalf to or from the public or from the holders of their securities through a merchant banker. Merchant bankers or lead mangers are very important in the process of capital issues and in the case of right issues not exceeding Rs 50 lakh.
Merchant banking originated through the entering of London merchants in financing foreign trade through acceptance of bill later, the merchants assisted the government of under developed countries in raising long-term funds through flotation of bonds in London money market, over a period they extended their activities to domestic business of syndication of long term and short term finance underwriting of new issues, acting as negotiating agents for mergers, take over etc. the pos war period witnessed the rapid growth of merchant banking through the innovative instrument like Eurodollar and the growth of various financial centre like Singapore, Hong kong etc.
Merchant banking in India
In India prior to the enactment of Indian companies act 1956, managing agents acted as issue houses for securities evaluated project reports planned capital structure and to some extent provided venture capital for new firms. Few share broking firms also functioned as merchant bankers. The need for specialized merchant banking service was felt in India with the rapid growth in the number and size of the issues made in the primary market. The merchant banking service were started by foreign banks, namely the national ‘Grindlays Bank’ in 1967 and the city bank in 1970. the banking commission in its report in 1972 recommended the setting up of merchant banking institution by the commercial banks and financial institutions. This marked the beginning of specialized merchant banking in India. To begin with merchant banking service were offered along with other traditional banking service. In the mid-eighties the banking regulations act was amended permitting commercial banks to offer a wide range of financial service through the subsidiary route. The state bank of India was the first Indian bank to set-up merchant banking division in 1972. Later ICICI set up its merchant banking division followed by bank of India, Bank of Baroda, Canara bank, Punjab national bank UCO bank. The merchant banking gained prominence during 1983-84 due to new issue boom.
Primary market intermediaries in India
Merchant bankers/lead managers • Registration • Obligation & responsibilities • Inspection • Action in default • Default points Underwriters •Registration •Obligation & responsibilities •Disciplinary proceedings Debenture trustees •Registration •Obligations •Inspection •Action in default
Bankers to issue •Registration •Obligation & responsibilities •Action in default
Prohibition of fraudulent and unfair trade practices relating to the securities market •Prohibition of fraudulent and unfair trade practices. •investigation
Prohibition on dealing /communication / counseling on matters relating to insider trading •Investigation •Policy on disclosure & internal disclosure for prevention of insider trading
Registrar to issue & share transfer agent •Registration •Responsibilities. •Inspection. •Action in default
Registration of merchant bankers
Compulsory registration:- merchant bankers require compulsory registration with the SEBI to carry out their activities . They fall under 4 categories. Category -1:- merchant bankers can carry on any activity related to issue management that is the preparation of prospect and other information relating to the issue determining the financial structure tie-up financiers final allotment of securities , refund of the subscription and so on. They could also act as advisors consultants managers underwriters or portfolio mangers Category -2:-They could also act as advisors consultants managers underwriters or portfolio mangers, co-writers. Category 3:- They could also act as advisors consultants managers underwriters or portfolio mangers to the issue. Category4:- they can act only as advisor or consultant to the issue. Thus only category 1 merchant bankers could act as lead managers to an issue which effect from December 9 1997 however only category 1 merchant bankers are registered by the SEBI . To carry an activities as portfolio mangers they have to obtain separate certificate of registration from the SEBI
Grant of certificate:The SEBI grants a certificate of registration on consideration of all matters that are relevant to the activities relate to the merchant banker Merchant bankers should also be a body corporate other then a nonbanking financial company however a merchant banker who has been granted registration by the RBI to act as primary dealer may carry on such activity subject to the condition that it would not accept/hold public deposit. They are expected to have the necessary infrastructure like adequate office space equipment and manpower to effectively discharge their activities. They should have employed at least two person with experience to conduct merchant banking business. Any person directly or indirectly connected with the applicant that is an associate/ subsidiary/ interconnected or group company doesn't have certificate of registration from the SEBI. They fulfill the capital adequacy requirement of a minimum net worth ( paid up capital /reserves) of Rs 5 crore. They /partners /directors /principal offices should not be involved in any litigation connected with the securities market which has an adverse effect on their business. Have recognized professional qualification in finance , law or business management and or their registration is in the interest of the investors. The applicant is fit and proper person . For determining whether an applicant / merchant banker is fit and proper person , the SEBI would take into account the criteria specified in the SEBI intermediaries regulation 2008 .
A merchant banker has to pay to SEBI’ Applicant fee of 25000 Registration Rs 10 lakh Renewal fee of Rs 5 lakh 3 years from the 4th year from the date of initial registration
Restriction on business
No merchant banker other than bank/public financial institution is permitted to carry on business other than that in the securities market . In other words he is prohibited from carrying on funds / assets based business such as leading and so on. However a merchant banker who is registered with RBI as primary dealer/satellite dealer may carry on such business as may be permitted by the RBI.
Responsibilities of lead mangers
Every lead managers has to enter into an agreement with the issuing companies setting out their mutual right liabilities and obligations relating to such issues and in particulars to disclosure allotment and refunds. A statement specific these is to be furnished to SEBI at least 1 month before the opening of the issue for subscription . A leader merchant banker cannot mange an issue if the issuing company is its associate . He can also not associate with a merchant banker who does not hold a certificate of registration with the SEBI. It necessary for the lead manger to accept a minimum underwriting obligation of 5% of the total underwriting commitment or 25 lakh, whichever is lesser. If he is unable to do so he has to make arrangements for underwriting an equal amount by a merchant banker associate with that issue under intimate to the SEBI.
Merchant Banks and Commercial Banks
There are differences in approach attitude and area of operation between commercial banks and merchant banks.
Commercial banks basically deal in debt & debt related finance and their activities are appropriately arrayed around credit proposals credit appraisal and loan sanctions. On the other hand , the area of activity of merchant bankers is equity and equity related finance . They deal with mainly funds raised through money market and capital market.
Commercial banks are asset oriented and their lending decisions are based on detailed credit analysis of loan proposal and the value of security offered against loans. They generally avoid risks. The merchant bankers are management oriented they are willing to accept risks of business. Commercial bankers are merely financiers . The activities of merchant bankers include project counseling corporate counseling in area of capital restructuring amalgamations mergers takeover etc discounting and rediscounting of short term paper in money markets managing underwriting and supporting public issues in new issue market and acting as brokers and advisors on portfolio management in stock exchange . Merchant banking activities have impact on growth stability and liquidity of money markets
Corporate counseling Project counseling Loan syndication. Issue management. Public issue through prospectus. Marketing Pricing of issues. Post issue management. Underwriting of public issue. Managers, consultants or advisers to the issue. Portfolio management. Advisory service relating to merger and takeovers. Off shore fiancé. Non-resident investment
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 mangers. Only in the case right issues not exceeding RS 50 lakh such an obligations is not necessary . The number of lead managers to be appointed by a company depends upon the size of the issue as shown below:Size of the issue Max number of lead mangers 2 3 4 5 5 or more as prescribed by SEBI Less than RS 50 crores Rs 50 crores to Rs100 crores Rs 100 crores to Rs 200 crores Rs 200 crores to Rs 400 crores Above Rs 400 crores
Duties and responsibilities of lead managers
It is the duty of every lead a manger to enter into an agreement with the issuing companies stating the details regarding their responsibilities liabilities mutual rights functions disclosures refunds allotments etc. A copy of this agreement should be submitted to the SEBI at least one month before the opening of the issuing for subscription. One merchant bankers can not have association with another merchant banker who does not hold a certificate of registration with SEBI. Lead manger can not undertake the work of issue management if the issuing company is its associate. In case there are more than one lead managers to an issue the responsibilities of each of item should be clearly defined in the agreement. A lead manger has to exercise due care and diligence in the verification of prospectus or letter of offer. In case of any suggestions or modification given by the SEBI he has to ensure that they are properly incorporated in the appropriate areas.
Duties and responsibilities of lead managers
A lead manger is under an obligation to accept a minimum underwriting obligation of 5% of total underwriting commission or 25 lakh whichever is less . If he is not able to comply with the above provision it is his duty too make managements with another merchant bankers associated with that issue to underwrite the said amount . Of course it must be duly intimate to the SEBI. In the case of development , the lead manager has to ensure the collection of the specified amount from the underwriters. Every lead mangers is responsible for ensuring timely refund of excess application money received from the applicants. It is his duty to mail the share/debenture certificate immediately on allotment or inform it to the depository participant. He has to submit due diligence certificate rating that the prospectus or letter of offer is in conformity with the documents relevant to the issue the disclosure are true fair and adequate and all legal requirements connected with the issue have been duly complied with Every lead manager has to submit all the particular of an issue, draft prospectus or letter of offer etc to the SEBI at least two weeks before the date of filling with the registrar of companies or regional stock exchange or both
Merchant Bankers commission
As determined by the finance ministry Govt of India, merchant banker are eligible to charge commissions / fee from their clients as detailed below:1.
A merchant banker can charge .5% as the maximum as commission for whole of the issue.
They can charge project appraisal fees. A lead mangers can claim a commission of 0.5% up to Rs 25 crores and 0.2% in excess of Rs 25 crore. Brokers commission 1.5%. Other expense like advertising printing registrar’s expenses stamp duty etc in connection with the issue can be reimbursed from its clients. Under commissions
Type of security
On amount devolving on underwriters 2.50
On amount subscribed by public 2.50
Equity share Preference shares/ debentures •Up to Rs 5 lakh •Excess of 5 lakh
Progress of merchant banking in india
there were 164 merchant bankers registered as on 31st march 2002, but of this 104 were actually working.
registered private public foreign total 904 40 30 164 working 60 25 19 104
PUBLIC SECTOR PRIVATE SECTOR INTERNATION AL BANKS (10)
COMMERCIAL BANKS (24) FINANCIAL INSITUTION (6) STATE INSITUTIONS (4)
BANKS (10) FINANCE AND INVESTMENT (231)
PROBLEMS OF MERCHANT BANKERS
SEBI guidelines have authorized merchant bankers to undertake issue related activities only with an exception of portfolio management these guidelines have made the merchant bankers either to restrict their activities or think of separating these activities from the present one and float new subsidiary and enlarge the scope of its activities. SEBI guidelines stipulate a minimum net worth of Rs 1 crore for authorized of merchant bankers . Small but professional and specialized merchant bankers who don't have a net worth of Rs 1 crore may have to close down their business the entry is denied to young specialized professional into merchant banking business. Non- co operation of the issuing companies in timely allotment of securities and refund of application money is another problem of merchant bankers. The guidelines have put the responsibility on the merchant bankers. They have to seek the co-operation of the issuing company to shoulder the responsibility.
Scope Merchant banking in india
3. 4. 5. 6. 7.
Growth of new issue market. Entry of foreign investors. Changing policy of financial institutions. Development of debt market. Innovations in financial investments. Corporate restructuring. Disinvestment.