Merchant Banking : Merchant Banking By B.K. VASHISHTHA Basics of Merchant Banking : Basics of Merchant Banking Merchant banking is relatively new concept in the area of financial services in India. It caters to the need of trade and industry by acting as intermediary, consultant , financial and liaison agency.
The expectation that the business will generate money at some time in the future to repay the amount lent or invested, plus a return to the owner of the fund, is the basis of banking. Slide 3: If the bank lends money, it is commercial banking. If the bank is agent then it brings those with money together with those who need it. It is known as investment banking, some time called as merchant banking because merchant s were the first who need this type of funding. Meaning : Meaning The dictionary meaning of merchant bank is –
“An organistion that underwrites corporate securities and advises clients on issues like corporate mergers, etc. involves in the ownership of commercial ventures.” Definition : Definition “Merchant banking means any person who is engaged in the business of issue management either by making arrangements regarding selling, buying underwriting or subscribing to the securities as underwriter, manager, consultant, advisor or rendering corporate advisory services in relation to such issue management”. Services Rendered by Merchant Banker : Services Rendered by Merchant Banker corporate counseling
Project counseling and pre-investment studies
Credit syndication and project finance
Issue management and underwriting
Working capital finance Services Rendered by Merchant Banker : Services Rendered by Merchant Banker 9.Acceptance credit and bill discounting
10. Mergers Amalgamations and takeovers
11.Ventuer capital financing
12. Lease financing
13. Foreign Currency Finance
14. Fixed deposit broking
15. Mutual funds flotation and management
16. Arrange for Rehabilitation of sick projects. Origin of merchant banking : Origin of merchant banking The concept originated from Italy during 3rd century.
The first known firms which have been involved were Riccadi of luca, Medici, Fuggier and so on.
In olden time merchant banking was also known as “accepting and issuing houses” in the U.K. and “investment banks” in the USA. Origin of merchant banking : Origin of merchant banking In fact, there was no distinction between the function of merchant banking and commercial banks until 1932. later, the Glass Steagall Act,1933, distinguished the function of merchant banking or investment banking from commercial banking. However, in 2000 Clinton Administration allowed investment banks to run the function of commercial banks in addition to their usual functions of investment banking. This was effected through an amendment in the Glass Steagall Act. Origin of merchant banking in India : Origin of merchant banking in India National Grindlays bank in India initiated merchant banking services in1969. The Citibank followed it in 9170.
The state bank of India was the first Indian commercial bank to set up a separate merchant banking division in 1973.
ICICI followed it in 1974. both these Indian merchant bankers emerged as leader in merchant banking having done significant business during the period 1974-85 in comparison to foreign banks. A number of commercial bank financial institution and other organistion are now engaged in providing merchant banking services. The merchant banks in Indian operate as issue houses rather then full-fledged merchant banks. Difference between Merchant banks and Commercial banks : Difference between Merchant banks and Commercial banks Deals with Debt & Debt related finance.
Generally avoid risks.
Deals with Equity & Equity related finance.
Willing to accepts risks. Registration of merchant bankers : Registration of merchant bankers 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 inter connected company of the applicant should not have been registered merchant banker.
The applicant should not have been involved in any securities scam or proved guilty for any offence.
The applicant should have a minimum net worth of Rs. 5 crores. Scope of merchant banking activities : Scope of merchant banking activities In channelizing the financial surplus of the general public into productive investment avenues.
To co-ordinate the activities of various intermediaries to the share issue such as the registrar, bankers, advertising agency, underwriters, broker etc.
To ensure the compliance with rules and regulations governing the securities market Function of a merchant banker : Function of a merchant banker Management of debt equity offerings
Placement and distribution
Corporate advisory services
Project advisory services
Providing ventures capital and mezzanine financing
Leasing finance Function of a merchant banker : Function of a merchant banker Bought out deals
Non resident investment
Advisory services relating to mergers and acquisition
Portfolio management Slide 16: 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 Slide 17: 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 Issue management : Issue management It refers to a management of securities offering of clients to the general public and existing shareholders on right basis. Issue managers are also known as merchant banker or lead managers.
Type of issues
Right issue, and
Private placement Public issues (eligibility norms) : Public issues (eligibility norms) 1. for unlisted companies-
Should have a pre-issue net worth of a minimum amount of Rs. 1 crore in 3 out of the preceding 5 years. Compulsorily meet the minimum nethworth level during the two immediately preceding years.
Should have a track record of distributable profits as given in section 205 of the companies act 1956 for at least 3 years In the preceding 5 year period
The issue size should not exceed an amount equal to five times its pre-issue net worth. Slide 20: 2. for listed companies-
Must have a track record of distributable profits in compliance with section 205 of the companies act 1956 for at least 3 years In the preceding 5 year period
It must have a pre-issue net worth of not less than Rs. 1 crore in 3 out of the 5 preceding years, with the minimum net worth to be met during the immediately preceding 2 years. Limit of lead managers : Limit of lead managers Registration charges : Registration charges According to SEBI the charges payable by the merchant banker are as under:
Category 1- a sum of Rs. 2.5 lakh to be paid annually for the first two year commencing from the date of initial registration and thereafter a sum of Rs. 1 lakh to keep the registration in force.
Category 2- A sum of Rs. 1.5 lakh to be paid annually for the first two year commencing from the initial registration and thereafter a sum of Rs. 50000 to keep the registration in force. Registration charges : Registration charges Category -3- A sum of Rs. 1 lakh to be paid annually for the first two year commencing from the date of initial registration and there after a sum of 25000 to keep the registration in force.
Category 4- A sum of Rs. 5000 to be paid annually for the first two year commencing from the date of initial registration and there after a sum of Rs. 1000 to keep the registration in force Summery of the SEBI guidelines on merchant banking : Summery of the SEBI guidelines on merchant banking 1. objectives of merchant banking regulation –
It regulates the rising of fund in primary market
It assures the issuer a market for rising resource at low cost, effectively and easily
It ensures a high degree of protection to the interest of the investors
It provides for the merchant banker a dynamic and competitive market with high standard of professional competence , integrity and solvency
It ensures fair efficient and flexible primary market to all involved I the process of primary issue Authorized activity : Authorized activity Issue management-
It consist of preparation of prospectus and other information relating to the ;
issue of shares and securities
Determining financing structure
Tie-up of finances
Refund of subscriptions
Managing, consultation and advising
The other authorized activities will be portfolio management services Method of authorization : Method of authorization Professional qualification finance, low or business management
Adequate office space, equipment and manpower
At least two person to be employed with experience to carry on the business of merchant banking
Previous track record, experience, general reputation and fairness in all their transactions CATEGORY OF MERCHANT BANKER : CATEGORY OF MERCHANT BANKER CATEGORY
4th :- MINIMUM NETWORTH
NIL The Merchant Banking registered with SEBI classified according to the category : The Merchant Banking registered with SEBI classified according to the category MERCHANT BANKERS COMMISSION : MERCHANT BANKERS COMMISSION Maximum 0.5%
Project appraisal fees
Lead Manager :-
- 0.5% upto Rs.25 crores
- 0.2% more in excess of Rs.25 crores Slide 30: Underwriting fees
Brokerage commission 1.5%
Other expenses :-
- Registrar’s expenses
- Stamp duty Merchant banking Scope in India : Merchant banking Scope in India 1) Growth of new issues market : 1) Growth of new issues market Indian market largest emerging market
Domestic and foreign investors setting up their biz here.
Many public and private issues coming up
Growth in new issues market
Scope for M.Bs. have risen 2) Entry of FII : 2) Entry of FII Indian capital market is globalised
Indian Cos. are permitted to invest in euro issues. Similarly, FII are permitted to invest in India.
Hence they need M.Bs to advise them for their invt in India.
Increasing no. of JVs also require expert services of M.Bs. 3) Changing policy of FI : 3) Changing policy of FI Liberalisation of policies
FI would require expert services of M.Bs for project appraisal, financial management, financial restructuring etc. 4) Development of debt market : 4) Development of debt market Good portion of capital can be raised through debt instruments.
Tremendous opportunities to M.Bs. 5) Innovations in Financial Instruments : 5) Innovations in Financial Instruments New financial instruments have come up.
M.Bs are market makers for these instruments. 6) Corporate Restructuring : 6) Corporate Restructuring Liberalisation and globalisation
Competition in corporate sector becoming intense.
Cos. reviewing their strategies, structure and functioning etc. leading to corporate restructuring.
Good opportunity to M.Bs to extend their area of operation. 7) Disinvestment : 7) Disinvestment It means reduction of some kind of asset of a firm for achieving either financial or ethical objectives.
Motive of disinvestment is to obtain funds. Conclusion : Conclusion Inspite of problems popping up, merchant banking in India has vast scope to develop because of lot of domestic as well as foreign businesses booming here. Indian economy provides an amicable environment for these firms to set up, flourish and expand here.