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Merchant Banking & Venture Capital

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A Merchant Bank is a financial institution or an organization that underwrites corporate securities & advices such clients on issues like corporate mergers etc, involved in the

ownership of commercial ventures.

in simple words

It is a bank which arranges loans to companies, deals in international finance, buys and sells shares and launches new companies on the stock

exchange, but does not provide normal banking services to the general public.

also known as a Investment Bank/Accepting and Issuing House

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• Originally Merchant Banking business was started in Italy and France and then came into existence in the U.K., and the U.S.A.

• The Grindlays Bank initiated the merchant banking activity in India (1969).

• The main services offered included the management of Public Issues and Financial Consultancy.

•City Bank introduced its merchant banking division in 1970.

• Later SBI started merchant Banking in 1973 followed by ICICI in 1974 and both these banks emerged as leaders in merchant banking having done significant business during 1974-1985.

• The early growth of merchant banking in country is assigned to FERA, 1973

the beginning…

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• To reduce pressure on capital market due to growing demand for funds.

• Advise the investors of the incentives available in the form of tax reliefs, other statutory relaxations, good return on investment & capital appreciation in such investment

• Help industry and trade to raise funds, and the investors to invest their saved money in sound and healthy concerns with confidence and expectation for higher yields.

• Make available finance for business enterprise acting as intermediaries between them raising demand for funds & the supplies of funds besides rendering various other services.

? Merchant Banking

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FUND BASED NON-FUND BASED

Which actually gets funds or money in the organization e.g. secured loan, equity shares, etc.

Which only assure the supply of fund but does not get fund in real terms. e.g. letter of credit.

1) Equity/preference shares, bonds, debentures and new capital issues.

2) Dealing in money market instruments.

3) Equipment leasing/ Hire Purchase.4) Dealing in secondary market

operations.5) Inter-corporate placement of funds.6) Venture capital/ fund.

1) Capital issue related activities & private placement of equity.

2) Loan/ Credit/ Fund syndication.3) Portfolio management.4) Trusteeship mgt.5) Mergers & Acquisitions.6) Liaison & Broking. 7) Capital Restructuring8) Corporate and Project Counselling.

Merchant Banking Activities

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• Planning the total issue process in terms of timing, issue size, types of securities, issue price, terms and conditions of issue etc.

• Drafting the prospectus and its vetting with SEBI.• To help the company in appointment of bankers, brokers, underwriters, advertisers etc.• Holding and conducting investors conferences, brokers conferences on behalf of the

company.• Deciding about the closure of the subscription list on the basis of daily reports from the

collecting bankers.• To finalize the allotment basis in consultation with the regional stock exchange, where the

securities will be listed.• To arrange for debentures trustee in case of debenture issue.• To arrange and/or provide for credit rating services, private placements etc.• To assist the company in getting the security listed at the stock exchange.• Stock broking in the securities.

Functions of merchant banker

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The merchant banking activity in India is governed by SEBI (Merchant Bankers) Regulations, 1992. Registration with SEBI is mandatory to carry out the business of merchant banking in India. An applicant should comply with the following norms:

i) The applicant should be a corporate body.

ii) The applicant should not carry on any business other than those connected with the securities market.

iii) The applicant should have necessary infrastructure like office space, equipment, manpower, etc.

iv) The applicant must have at least two employees with prior experience in merchant banking.

v) Any associate company, group company, subsidiary or interconnected company of the applicant should not have been a registered merchant banker.

vi) The applicant should not have been involved in any securities scam or proved guilt for any offence.

Regulatory Framework

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Categorization

• Category I : to act as lead manager and carry on any activity of the issue management, including 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 & to act as adviser ,consultant, co-manager, underwriter, portfolio manager.

• Category II : to act as adviser ,consultant, co-manager, underwriter, portfolio manager

• Category III : to act as underwriter , adviser and consultant to an issue

• Category IV : to act only as advisor or consultant to an issue

SEBI Merchant Banking Regulations

Net worth: 1crores, 50 Lakhs, 20 Lakhs, NIL

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• Observe high standards of integrity and fairness in all his dealings.

• Render high standard of service, proper care, exercise independent judgment & disclose conflict of interest while providing unbiased service.

• Not make any statement or become privy to any act, practice or unfair competition, likely to harm the interest of other MB.

• Not make exaggerated statements, written or oral, to the client either about the qualification or the capability to render certain services or his achievements in regard to services rendered to other clients.

• Render best possible advice to the client having regard to the clients needs and the environment and his own professional skill.

• A MB shall not divulge to other clients, press or any other party any confidential information about his client, which has come to his knowledge.

Code of Conduct

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• Provide investors with true and adequate information without making any misguiding

• Ensure that all professional dealings are effected in a prompt, efficient and cost effective manner.

• Exaggerated claims and are aware of attendant risks before any investment decisions are made.

• Ensure copies of prospectus, memorandum and related literature are made available to investors.

• Fair allotment of securities and refund of application money without delay.

• Investor complaints are adequately dealt with.

Continued…

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• The last two major firms on Wall Street were Goldman Sachs and Morgan Stanley until both banks elected to convert to traditional banking institutions on September 22, 2008, as part of a response to the U.S. financial crisis.

• Kotak Investment Bank: India's premier Investment Bank . A subsidiary of Kotak Mahindra Bank Ltd. Best Investment Bank in India by Finance Asia for 2008, 2007 and 2006.

• Punjab National Bank: Punjab National Bank, India’s one of the Leading Nationalized Bank is registered with SEBI as Category – I Merchant Banker for providing all the major Merchant Banking services. The Bank has an exclusive and specialized Capital Market Service Branch at New Delhi for providing Merchant Banking Services to the Corporate.

• Indbank: Indbank Merchant Banking Services Limited (1989) as a subsidiary of Indian Bank Indbank is a Category 1 Merchant Banker registered with SEBI undertaking assignments.

• Canara Bank: Canara Bank is also one of the leading Merchant Bankers in India.

• Others: SBI Capital market ltd, ICICI securities Ltd, IDBI capital markets ltd etc.

Examples

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Pratik Jain

Thank You !