2.Merchant Banking-unit 1

8/8/2019 2.Merchant Banking-unit 1

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Merchant BankingMerchant BankingFacultyFaculty

Harshad ThakkerHarshad Thakker


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Origin of Merchant BankingOrigin of Merchant Banking

The term Merchant Banking is originatedThe term Merchant Banking is originatedfrom the merchants doing business atfrom the merchants doing business atLondon who started financing foreign tradeLondon who started financing foreign trade

through acceptance of bills who afterwardsthrough acceptance of bills who afterwardsextended their help to the Governments ofextended their help to the Governments ofunderdeveloped countries to raise longunderdeveloped countries to raise longterm funds (finance). Later on theseterm funds (finance). Later on thesemerchants formed an Association which ismerchants formed an Association which isknown as Merchant Banking & Securitiesknown as Merchant Banking & SecuritiesHouse Association.House Association.


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Development of Merchant Banking inDevelopment of Merchant Banking in

IndiaIndia In India the concept was introduced by NationalIn India the concept was introduced by National

& Grindlays Bank in 1967 by undertaking the& Grindlays Bank in 1967 by undertaking the

management of Capital Issue, Productionmanagement of Capital Issue, Productionplanning, System design to market researchplanning, System design to market research

and Management Consultancy. In 1970 Firstand Management Consultancy. In 1970 First

National Citi Bank also started extending theNational Citi Bank also started extending the

same services followed by State Bank Of Indiasame services followed by State Bank Of Indiain 1972.in 1972.


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WHAT IS MERCHANT BANKING ?WHAT IS MERCHANT BANKING ?

Merchant Banking services are activitiesMerchant Banking services are activitiespertaining to counseling corporate clients whopertaining to counseling corporate clients whoare in need of capital about the terms andare in need of capital about the terms andconditions of the issue to raise the capital,conditions of the issue to raise the capital,

underwriting of the issue, timing of the issue,underwriting of the issue, timing of the issue,preparation of prospectus and publicity forpreparation of prospectus and publicity forgrooming the issue for the market. They maygrooming the issue for the market. They mayalso relate to the private placement of capitalalso relate to the private placement of capitaland raising of long term loans either in foreignand raising of long term loans either in foreignexchange or in rupee from the national / stateexchange or in rupee from the national / statefinancial institutions and short term workingfinancial institutions and short term workingcapital from Commercial Banks.capital from Commercial Banks.


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Importance of Merchant BankersImportance of Merchant Bankers

Merchant Bankers handle the activities relatingMerchant Bankers handle the activities relating

to the issue of fresh capital for a new companyto the issue of fresh capital for a new company

setting up an enterprise or for the existing onessetting up an enterprise or for the existing ones

which is in need of the finance for expansionwhich is in need of the finance for expansionand for diversification to other businesses.and for diversification to other businesses.

Proposals for merger and amalgamation mayProposals for merger and amalgamation may

also be handled under this activities. All thesealso be handled under this activities. All these

activities are mainly stock exchange orientedactivities are mainly stock exchange orientedactivities.activities.


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Functions of Merchant Banking:Functions of Merchant Banking:--

1.1.Promotion, Financing and SyndicationPromotion, Financing and Syndication

of Indian projects.of Indian projects.

2. Investment advisory services2. Investment advisory services 3. Investment management3. Investment management

4. Acceptance Credit4. Acceptance Credit


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PORTFOLIO MANAGEMENTPORTFOLIO MANAGEMENT

Portfolio Management for Non Residents:Portfolio Management for Non Residents: MBMBidentifies suitable arrangement of investmentidentifies suitable arrangement of investmentsuited to each individual NR which include thesuited to each individual NR which include thefollowing:following:--

1.Guidance of purchase and sale of securities1.Guidance of purchase and sale of securities

2.Handling of such transactions2.Handling of such transactions

3.Advice on market conditions3.Advice on market conditions

4.Safe custody of documents4.Safe custody of documents

5.Collection of IWs, DWs.5.Collection of IWs, DWs.

6.Services as a link between NR and RBI for6.Services as a link between NR and RBI for

obtaining necessary permission.obtaining necessary permission.


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Underwriting of a Public IssueUnderwriting of a Public Issue

Controller of Capital Issue (CCI) stipulates that all theController of Capital Issue (CCI) stipulates that all thepublic issues should be underwritten.public issues should be underwritten.

The benefits of underwriting are as follows:The benefits of underwriting are as follows:--

1.The Bank earns the commission on the commitment1.The Bank earns the commission on the commitment

given.given.

2.The Banks get these commitments sub2.The Banks get these commitments sub--underwrittenunderwritten

with the Brokers because of which the Banks liaisonwith the Brokers because of which the Banks liaison

with them improves.with them improves.

3.As a matter of right, the Bank is appointed the Banker to3.As a matter of right, the Bank is appointed the Banker to

the concerned Issue.the concerned Issue. Since, Banks do not wish to hold equity shares, they takeSince, Banks do not wish to hold equity shares, they take

due care before underwriting any issue to safeguard fromdue care before underwriting any issue to safeguard fromdevolvement.devolvement.


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BANKER TO THE ISSUEBANKER TO THE ISSUE

Bank automatically gets the assignment asBank automatically gets the assignment as

Banker to the Issue in following cases: Banker to the Issue in following cases:--

1. The Bank is a banker to the company.1. The Bank is a banker to the company.

2. It has given the underwriting commitment.2. It has given the underwriting commitment. 3. It is acting as Manager to the Issue.3. It is acting as Manager to the Issue.

Bank gets zero cost or low cost deposit till theBank gets zero cost or low cost deposit till theallotment takes place.allotment takes place.


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Guidelines of SEBI (SECURITIES & EXCHANGE BOARD OFGuidelines of SEBI (SECURITIES & EXCHANGE BOARD OF

INDIA) w.r.t. Merchant BankersINDIA) w.r.t. Merchant Bankers

M.B.s are of four types:M.B.s are of four types: Category I merchant bankers : Can act as Issue managersCategory I merchant bankers : Can act as Issue managers

Category II merchant bankers : can act only as coCategory II merchant bankers : can act only as co--managersmanagers

Category III merchant bankers : can act as coCategory III merchant bankers : can act as co--managers butmanagers butcannot undertake portfolio managementcannot undertake portfolio management

Category IV merchant bankers :can merely act as consultant orCategory IV merchant bankers :can merely act as consultant oradvisor to issue of capitaladvisor to issue of capital

CAPITALADEQUACY NORMS :CAPITALADEQUACY NORMS : Category I : Rs. 5 croresCategory I : Rs. 5 crores

Category II : Rs.50 lakhsCategory II : Rs.50 lakhs

Category III : Rs.20 lakhsCategory III : Rs.20 lakhs

Category IV : NilCategory IV : Nil


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GUIDELINES FOR MERCHANT BANKERS :GUIDELINES FOR MERCHANT BANKERS :

MERCHANT BANKING REGULATIONSMERCHANT BANKING REGULATIONS ::

-- Certificate from SEBI is a must. i.e. SEBIs authorization is aCertificate from SEBI is a must. i.e. SEBIs authorization is a

must to act as merchant bankers.must to act as merchant bankers. Authorisation criteria includeAuthorisation criteria include

Professional qualification in finance, law or business managementProfessional qualification in finance, law or business management

Infrastructure like office space, equipment and man powerInfrastructure like office space, equipment and man power

Capital adequacyCapital adequacy

Past track of record, experience, general reputation and fairness in allPast track of record, experience, general reputation and fairness in alltransactionstransactions

Every merchant banker should maintain copies of balance sheet, ProfitEvery merchant banker should maintain copies of balance sheet, Profitand loss account, statement of financial positionand loss account, statement of financial position

HalfHalf--yearly unaudited result should be submitted to SEBIyearly unaudited result should be submitted to SEBI Merchant bankers are prohibited from buying securities based on theMerchant bankers are prohibited from buying securities based on the

unpublished price sensitive information of their clientsunpublished price sensitive information of their clients


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GUIDELINES FOR MERCHANT BANKERSGUIDELINES FOR MERCHANT BANKERS

(Contd.)(Contd.)

SEBI has been vested with the power to suspend or cancelSEBI has been vested with the power to suspend or cancelthe authorisation in case ofviolation of the guidelinesthe authorisation in case ofviolation of the guidelines

Every merchant banker shall appoint a Compliance OfficerEvery merchant banker shall appoint a Compliance Officer

to monitor compliance of theA

ctto monitor compliance of theA

ct SEBI has the right to send inspecting authority to inspectSEBI has the right to send inspecting authority to inspect

books of accounts, records etc of merchant bankersbooks of accounts, records etc of merchant bankers

Inspections will be conducted by SEBI to ensure thatInspections will be conducted by SEBI to ensure thatprovisions of the regulations are properly compliedprovisions of the regulations are properly complied

An initial authorisation fee, an annual fee and renewal feeAn initial authorisation fee, an annual fee and renewal fee

may be collected by SEBImay be collected by SEBI A lead manager holding a certificate under category I shallA lead manager holding a certificate under category I shall

accept a minimum underwriting obligation of 5% of size ofaccept a minimum underwriting obligation of 5% of size ofissue or Rs.25 lakhs whichever is lessissue or Rs.25 lakhs whichever is less


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CODE OF CONDUCT FOR MERCHANT BANKERSCODE OF CONDUCT FOR MERCHANT BANKERS

-- Should make all efforts to protect the interest of investors.Should make all efforts to protect the interest of investors. -- Should maintain high standards of integrity, dignity andShould maintain high standards of integrity, dignity and

fairness in conduct of businessfairness in conduct of business

--Should fulfill all obligations in a professional and ethical mannerShould fulfill all obligations in a professional and ethical manner

--Should not discriminate among the clientsShould not discriminate among the clients

--Should ensure that prospectus, letter of offer etc.. is available toShould ensure that prospectus, letter of offer etc.. is available to

investors at the time of issueinvestors at the time of issue

--Should render best possible advice to its clients Any penal actionShould render best possible advice to its clients Any penal actiontaken by SEBI should be informed to its clientstaken by SEBI should be informed to its clients

--Should inform the board about any legal proceedings initiatedShould inform the board about any legal proceedings initiated

against itagainst it

--Should abide by the rules of Securities and Exchange Board ofIndiaShould abide by the rules of Securities and Exchange Board ofIndia

Regulations,2003 Regulations,2003

--Shall develop its own internal code of conduct for governing itsShall develop its own internal code of conduct for governing its

internal operationsinternal operations--Should ensure that any person it employs should have the capacity toShould ensure that any person it employs should have the capacity to

be a merchant bankerbe a merchant banker

--It is responsible for the act of its employees and agentsIt is responsible for the act of its employees and agents

--Should not create false marketShould not create false market


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SOME PROBLEMS OF MERCHANT BANKERSSOME PROBLEMS OF MERCHANT BANKERS

SEBI stipulates high capital adequacy normsSEBI stipulates high capital adequacy normsfor authorisation which prevents young,for authorisation which prevents young,specialised professionals into merchantspecialised professionals into merchantbanking business Non cobanking business Non co--operation of theoperation of the

issuing companies in timely allotment ofissuing companies in timely allotment ofsecurities and refund of application of moneysecurities and refund of application of moneyetc. is another problem Yet merchant bankingetc. is another problem Yet merchant bankingis vast but should develop adequate expertiseis vast but should develop adequate expertiseto provide a full range of merchant bankingto provide a full range of merchant banking

servicesservices


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THANK YOUTHANK YOU

2.Merchant Banking-unit 1

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