Merchant Banking

Merchant Banking:

Merchant Banking

Merchant Banking :

Merchant Banking 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

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Merchant banking… an organisation that underwrites corporate securities and advises clients on issues like corporate mergers, etc involved in the ownership of commercial ventures. 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”

Main functions of a merchant banker :

Main functions of a merchant banker Management of debt and equity offerings- As sists the companies in raising funds from the market. Placement and distribution- H elps in distributing various securities like equity shares, debt instruments, mutual fund products, fixed deposits, insurance products, commercial paper, etc. Corporate advisory services- Merchant bankers offer customized solutions to their clients financial problems. Financial structuring includes determining the right debt-equity ratio and gearing ratio for the client. Explore the refinancing alternatives of the client, and evaluate cheaper sources of funds. R ehabilitation and turnaround management . Risk management

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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 which is circulated to various banks and financial institutions and they are invited to participate in the syndicate. Bought out deals The entire security is bought in lots. It is done with an intention of offloading them later in the market. Non-resident Investment Advisory service for identification of investment opportunity, selection of securities, portfolio management, etc to attract NRI investment. Advisory Services relating to Mergers and Acquisitions

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Portfolio Management Identify potential targets of takeovers appraise merger/takeover proposals to negotiate with interested parties to determine the purchase consideration & appropriate exchange ratio to assist in matters related to procedural and legal aspects to obtaining necessary approvals

Issue Management:

Issue Management Management of issues involves marketing of corporate securities i.e equity shares, preference shares and debentures by offering them to public. Pre-issue activities: They prepare copies of prospectus and send it 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 of issue, closing of 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 allotment letters, and refund orders

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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

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GUIDELINES FOR MERCHANT BANKERS : SEBI’s 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 clients

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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 the regulations 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

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CODE OF CONDUCT : Should make all efforts to protect the interest of investors Should 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 operations Should 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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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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SOME PROBLEMS OF MERCHANT BANKERS SEBI stipulates high capital adequacy norms for authorization 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