Merchant Banking in India

Merchant Banking in India and QIP

PROJECT REPORTON

Merchant Banking In India And QIP

FOR ARYAMAN FINANCIAL SERVICES LIMITED (AFSL)

BY

HIREN .H. JASOLIA

Submitted in partial fulfillment of requirements for award of Degree of

Master in Management Studies by University of Mumbai

ATHARVA INSTITUTE OF MANAGEMENT STUDIES

Marve Road, Charkop Naka, Malad(W), Mumbai 400 095

1


DECLARATION

I hereby declare that the Project titled “ Merchant Banking in India And

QIP ” submitted as a part of the study of Master of Management Studies

(MMS) is my original work. The Project has not formed the basis for the

award of any other degree, diploma, associate ship, fellowship or any other

similar titles.

Place: Mumbai Hiren.H.Jasolia

Date:1/7/2010 (Name of Student)

2


CERTIFICATE

This is to certify that Hiren Jasolia has completed the Project “Merchant Banking in India and QIP” under the guidance of Prof. Sujata Pandey in partial fulfillment of the requirements for the award of Master of Management Studies Degree for the academic period 2009-11.

Signature of the Guide Signature of the Director

Place: Mumbai

Date:

3


ACKNOWLEDGEMENTS

I take this opportunity to express my gratitude and extend my thanks to all those help and guidance made this endeavor successful.

I express my sincere thanks to ARYAMAN FINANCIAL SERVICES LIMITED (AFSL); Mr.D.S.Sharma, Executive Director; Mr. Shripal Shah, Executive Director, Mr.Ankit Doshi, Executive MBD-Company Project Guide.

I extend my sincere thank to Shri Sunil Rane, Executive President, Atharva Education Trust; Shri N. S. Rajan, Dean, and Dr. P.P. Joshi, Director, Atharva Institute of Management Studies, for providing me the opportunity to work on this Project. I also thank my Project Guide, Prof. Sujata Pandey, for giving her support and guidance in successful completion of the Project.

I cannot end this page without thanking my family for their encouragement and support while undertaking this Project.

4


INDEX

Sr. No Topic Pg. No1. Acknowledgement2. Executive Summary3. Objective 8-94. Company Profile 10-115. Introduction- Merchant Banking in India 126. The Growth of Merchant Banking in India 13-157. Requirements for Setting up a Merchant Banking

Outfit16

8. Guidelines of SEBI 17-189. The Difference Between Merchant Banks and

Commercial Banks19-20

10. Services of Merchant Bankers in India 21-2211. Problems and Hurdles 2312. What is Qualified Institutions Placement? 24-2513. SEBI- ICDR Regulations, 2009 26-3014. Why was it introduced 3115. Who can participate in QIP Issue 3216. Disclosures in Placement Document 3317. Benefits of QIP’s 34-3518. Analysis 36-3719. Conclusion on QIP 3820. Recommendations 3921. Bibliography 40-5122. 52-5323. 5424. 55-5625. 57

5


Executive Summary

The Indian economy is currently in a transition period and the second fastest

growing economy of the world after China. In this era of globalization,

service sector’s growth and contribution to the nations GDP has been

phenomenal since the last couple of years. Amongst all these, the Merchant

Banking services has grown from a sapling into a mighty tree and has

secured for itself its rightful place in the financial sector. It is a flourishing

services today as more entrepreneurs wanting to list their companies.

It can be said that this project helped me to understand every details about

Merchant Banking and in future how it’s going to get emerged in the Indian

economy. Hence, Merchant Banking can be considered as essential financial

body in Indian financial system.

In my internship at Aryaman Financial Services Limited, I was instructed to

make database of QIP Issues of Companies from the day the first QIP was

launched. Aryaman Financial Services Limited has never played a role in

being a Merchant Banker to a QIP Issue. Before undertaking this work I had

to go through SEBI, ICDR Regulations, 2009.This helped me to understand

QIP in much better way.

After completing my Database, I analyzed Database and was able to get

findings which I have expressed with Pie Charts and Bar Diagrams.

6


Objective

The Objective of the report is to understand every detail about

Merchant Banking And QIP. My objective in internship was to

prepare database of QIP Issue. On basis of database, I had to draw

some findings which would be useful for the management team of

Aryaman Financial Services Limited for future purposes.

Aryaman Financial Services Limited has till date not acted as

Merchant Banker for a QIP Issue. So I was collecting every details

of QIP Issue which can be useful for the Company in future

whenever they undertake to act as Merchant Banker to a QIP Issue.

7


ARYAMAN FINANCIAL SERVICES LIMITED (AFSL) -

COMPANY PROFILE

Aryaman Financial Services Limited a Professional Merchant Banking

House of Mumbai has been accredited by the Securities Exchange Board of

India (SEBI) under CATEGORY I to undertake corporate consultancy for

Public Issues Management as Lead Managers to Public Issues. It is a

Company backed by eminent professionals of a successful track record of

over a decade in corporate consultancy. The Company commenced its

operations in 1994.

The activities can be broadly classified as:-

Corporate Strategy Formulation for growth through diversification,

expansion by identifying latent potential.

Single window expert consultancy to entrepreneurs to implement the

project ideas.

Strategy for capital structuring of Debt, Equity and for entering into

capital market and finance syndication.

Private Placement of Equity with FIs /Banks/ Foreign Banks / FIIs

Syndication of loans with FIs/Banks including swaps.

Infrastructure Project Financing and Joint Venture co-ordination for

the same.

Monitoring market making of the scrip – once quoted.

Fixing up market premia, approvals and promotion of premium issues.

Comprehensive Project Appraisal and Feasibility Studies.

8


MERCHANT BANKING IN INDIA

Introduction

Financial services are an important component of financial system. The

smooth functioning of financial system depends upon the range of financial

services extended by the providers. Financial services in India have

witnessed remarkable changes in the recent past after the implementation of

“Liberalization, privatization and globalization”.

Funds are tapped from the capital market to finance various mega industrial

projects. In attracting public savings, Merchant Bankers play a vital role as

specialized agencies. The resource raising functions remains to be the

primary business of a Merchant Banker. The primary market holds the key

to rapid capital formation, growth in industrial productions and exports.

There has to be accountability to the end use of funds raised from the

market. The increase in the number of issues and amount raised has

increased the number of Merchant Bankers. Therefore, the field became

highly competitive market where it requires a specialized skill in handling

the situation. The Merchant Bankers have a social responsibility to in

building an industrial structure in India.

Merchant Bankers assist corporate in raising capital. They assist in issue of

shares, syndicating loans, public issue of debentures. They do not provide

funds.They only assist. They also actively arrange working capital, appraisal

projects scrutinize & persuade merger proposals.

9


Definition

In banking, a Merchant Bank is a financial institution primarily

engaged in offering financial services and advice to corporations and

wealthy individuals on how to use their money. The term can also be

used to describe the private equity activities of banking. Merchant

Banker" could be defined as "An organisation that acts as an

intermediary between the issuers and the ultimate purchasers of

securities in the primary security market“.

Merchant Banker has been defined under the Securities & Exchange

Board of India (Merchant Bankers) Rules, 1992 as "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".

In short, Merchant Bankers assist in raising capital and advice on related

issues.

10

http://en.wikipedia.org/wiki/Private_equity

http://en.wikipedia.org/wiki/Bank


The Growth of Merchant Banking In India

Formal merchant activity in India was originated in 1969 with the Merchant

Banking division setup by the Grindlays Bank, the largest foreign bank in

the country. The main service offered at that time to the corporate

enterprises by the Merchant Banks included the management of public

issues and some aspects of financial consultancy. Following Grindlays

Bank, Citibank set up its Merchant Banking division in 1970.The division

took up the task of assisting new entrepreneurs and existing units in the

evaluation of new projects and raising funds through borrowing and equity

issues. Management consultancy services were also offered. Merchant

Bankers are permitted to carry on activities of primary dealers in

government securities. Consequent to the recommendations of Banking

Commission in 1972, that Indian banks should offer Merchant Banking

services as part of the multiple services they could provide their clients,

State Bank of India started the Merchant Banking Division in 1972. In

the initial years the SBI’s objective was to render corporate advice and

assistance to small and medium entrepreneurs.

The commercial banks that followed State Bank of India were Central

Bank of India, Bank of India and Syndicate Bank in 1977.Bank of Baroda,

Standard Chartered Bank and Mercantile Bank in 1978 and United Bank of

India, United Commercial Bank, Punjab National Bank, Canara Bank and

Indian Overseas Bank in late ‘70s and early ‘80s. Among the development

11


banks, ICICI started Merchant Banking activities in 1973 followed by IFCI

(1986) and IDBI (1991).

Upto 1970, there were only two foreign banks which performed

Merchant Banking operations in the country. SBI was the first Indian

commercial bank and ICICI the first financial institution to take up the

activities in 1972 and 1973 respectively. As a result of buoyancy in the

capital market in 1980’s some commercial banks set – up their subsidiaries

to operate exclusively in Merchant Banking industry. In addition, a number

of large stock broking firms and financial consultants also entered into

business. Thus, by the end of the end of 1980’s there were 33 Merchant

Bankers belonging to three major segments viz., commercial banks, all

India financial institutions, and private firms.

Merchant Banking industry which remained almost stagnant and

stereotyped for over two decades, witnessed an astonishing growth after the

process of economic reforms and deregulation of Indian economy in 1991.

The number of Merchant Banks increased to 115 by the end of 1992-93 300

by the end of 1993-94 and 501 by the end of August, 1994. all Merchant

Bankers registered with SEBI under four different categories include 50

commercial banks, 6 all Indian financial institutions – ICICI, IFCI, IDBI,

IRBI, Tourism Finance corporation of India, infrastructure Leasing and

Financial Services Ltd. and Private Merchant Bankers.

In addition to Indian Merchant Bankers, a large number of reputed

international Merchant Bankers like Merrill Lynch, Morgan Stanley,

Goldman Sachs, Jardie Fleming Kleinwort Benson etc. are operating in India

under authorization of SEBI.

12


Requirements for setting up a merchant banking outfit

1. Formation of the Business Organization.

SEBI act, 1992 does not prescribe any specific form of business

organization to carry on the activities as Merchant Banker. However, the

types of organizations are listed below:

a. Sole proprietorship.

b. Partnership firm.

c. Hindu Undivided Family (HUF).

d. Corporate Enterprises.

e. Co-operative Society.

Generally it is preferred that the Merchant Banking outfit be a registered

company. Merchant Banks are generally setup as subsidiary companies of

banks (Public or Private). For example, SBI caps, ICICI Securities etc.

2. Adoption of a viable business plan.

All the basic tests required to find out whether the business to be undertaken

is viable or not are also applicable to a Merchant Banking setup. Capital

adequacy, profitability, growth opportunities and current market size are

some of the factors which need to be looked into.

13


3. Registration of Merchant Bankers.

a. Application for grant of certificate.

An application for grant of a certificate needs to be made to SEBI.

The application can be made for any one of the following categories of the

Merchant Banker namely:-

Category I, that is –

(i) to carry on any activity of the issue management, which will inter-alia

consist of 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; and

(ii) to act as adviser, consultant, manager, underwriter, portfolio manager.

Category II, that is, to act as adviser, consultant, co- manager,

underwriter, portfolio manager;

Category III, that is to act as underwriter, adviser, consultant to an

issue;

Category IV, that is to act only as adviser or consultant to an issue.

To carry on the activity as underwriter or portfolio manager a separate

certificate of registration needs to be obtained from SEBI.

14


b. Application to conform to the requirements.

The application should conform to all the requirements under the SEBI

guidelines, otherwise it may be rejected.

c. Furnishing of information, clarification and personal

representation.

The Board may require the applicant to furnish further information or

clarification regarding matters relevant to the activity of a Merchant Banker

for the purpose of disposal of the application. The applicant or its principal

officer may appear before the Board for personal representation.

d. Consideration of application.

The Board shall take into account for considering the grant of a certificate,

all matters, which are relevant to the activities relating to Merchant Banker

and in particular the applicant complies with the following requirements,

namely: -

the applicant shall be a body corporate other than a non- banking

financial company.

the Merchant Banker who has been granted registration by the

Reserve Bank of India to act as a Primary or Satellite dealer may carry on

such activity subject to the condition that it shall not accept or hold public

deposit.

15


the applicant has the necessary infrastructure like adequate office

space, equipments, and manpower to effectively discharge his activities.

the applicant has in his employment minimum of two persons who

have the experience to conduct the business of the Merchant Banker.

person directly or indirectly connected with the applicant has not been

granted registration by the Board;

the applicant fulfils the capital adequacy requirement is as follows:

The capital adequacy requirement should not be less than the net worth of

the person making the application for grant of registration. The net worth

shall be as follows,

Category Minimum Amount

Category I Rs. 5, 00, 00, 000

Category II Rs. 50, 00, 000

Category III Rs. 20, 00, 000

Category IV Nil

the applicant, his partner, director or principal officer is not involved

in any litigation connected with the securities market which has an adverse

bearing on the business of the applicant and have not at any time been

convicted for any offence involving moral turpitude or has been found guilty

of any economic offence.

the applicant has the professional qualification from an institution

recognized by the Government in finance, law or business management.

grant of certificate to the applicant is in the interest of investors.

16


e. Procedure for Registration.

The Board on being satisfied that the applicant is eligible shall grant a

certificate. On the grant of a certificate the applicant shall be liable to pay

the fees as prescribed.

f. Payment of fees and the consequences of failure to pay fees.

Every applicant eligible for grant of a certificate shall pay such fees in such

manner and within the period specified.

Where a Merchant Banker fails to pay the Annual fees as provided in

Schedule II, the Board may suspend the registration certificate, whereupon

the Merchant Banker shall cease to carry on any activity as a Merchant

Banker for the period during which the suspension subsists.

The Merchant Bank can commence business on acquisition of a Certificate

of Registration from the SEBI after completion of the above mentioned

formalities.

17


Guidelines of SEBI

(1) The issuer shall appoint one or more merchant bankers, at least one of

whom shall be a lead merchant banker and shall also appoint other

intermediaries, in consultation with the lead merchant banker, to carry out

the obligations relating to the issue.

(2) The issuer shall, in consultation with the lead merchant banker, appoint

only those intermediaries which are registered with the Board.

(3) Where the issue is managed by more than one merchant banker, the

rights, obligations and responsibilities, relating inter alia to disclosures,

allotment, refund and underwriting obligations, if any, of each merchant

banker shall be predetermined and disclosed in the offer document as

specified in Schedule I.

(4) The lead merchant banker shall, only after independently assessing the

capability of other intermediaries to carry out their obligations, advise the

issuer on their appointment.

(5) The issuer shall enter into an agreement with the lead merchant banker in

the format specified in Schedule II and with other intermediaries as required

under the respective regulations applicable to the intermediary concerned:

Provided that such agreements may include such other clauses as the issuer

and the intermediary may deem fit without diminishing or limiting in any

18


way the liabilities and obligations of the merchant bankers, other

intermediaries and the issuer under the Act, the Companies Act, 1956, the

Securities Contracts (Regulation) Act, 1956, the Depositories Act, 1996 and

the rules and regulations made there under or any statutory modification or

statutory enactment thereof: Provided further that in case of ASBA process,

the issuer shall take cognisance of the deemed agreement of the issuer with

Self Certified Syndicate Banks.

(6) An issuer shall, in case of an issue made through the book building

process, appoint syndicate members and in the case of any other issue,

appoint bankers to issue, at all mandatory collection centres as specified in

Schedule III and such other collection centres as it may deem fit.

(7) The issuer shall appoint a registrar which has connectivity with all the

depositories:

Provided that if issuer itself is a registrar to an issue registered with the

Board, then another registrar to an issue shall be appointed as registrar to the

issue:

Explanation: For the purpose of this regulation, in case of a book built issue,

the lead merchant banker appointed by the issuer shall act as the lead book

runner

19


Difference between Merchant Banks and Commercial Banks

Merchant Banks Commercial Banks

1) Assist in raising capital in the form of

equity, preference shares, and syndicated

loan working capital instruments.

Provide funds in the form of

term loan and working capital.

2) Advisor not financer. Financing is the main business.

3) Do not accept chequable deposits. Demand deposits are the key

feature.

4) Mainly fees based business. Mainly fund based business

5) Being advisors, they are closer to the

customers and get to know risks of the

transaction s properly. They work on

risks shields i.e. mitigation measures

Being lenders, they are more

cautions, assess risks in lending

proposal and cannot afford to be

grossly relationship based and

close to the customer.

6) Most of work they get is about

management of equity issues in the

capacity of lead manager, underwriter,

piercing of issue, book running, and

liaisoning with SEBI.

Commercial banks majority

business is of terms lending and

bank deposits.

20


SERVICES PROVIDED BY MERCHANT BANKS: (in detail)

The development activity through the country had exerted excess demand on

the sources of funds by the ever expanding industry and trade which could

not be met by the All India Financial Institutions. In these circumstances, the

corporate sector enterprises had the only alternative to avail themselves of

the capital market services for meeting the long-term fund requirements

through capital issues of equity and debentures. The growing demand for

funds from capital market has enthused many organizations to enter into the

field of Merchant Banking for managing the public issues.

The need of Merchant Banker is also felt in the wake of huge untapped

public savings as Merchant Bankers can play a highly significant role in

mobilizing funds from savers to invest in channels assuring promising return

on investments and thus narrow down the gap between demand for and

supply of investible funds.

Merchant Bankers not only provide advisory services to corporate

enterprises but also advise the investors of the incentives available in the

form of tax relief and other statutory obligations. Thus, the Merchant

Bankers help industry and trade to raise funds, and the investors to

invest their saved money in sound and healthy concerns with

confidence, safety and expectation of higher yields.

21


Broadly a Merchant Banker can provide the following services:

1. Corporate Counseling

2. Project Counseling And Pre-Investment Studies

3. Credit Syndication And Project Finance

4. Issue Management

5. Underwriting

6. Bankers

7. Portfolio Management

8. Venture Capital Financing

9. Leasing

10.Non-Resident Investment Counseling And Management

11.Acceptance Credit And Bill Discounting

12.Advising On Mergers, Amalgamations And Take-Over

13.Arranging Offshore Finance

14.Fixed Deposit Broking

15.Relief To Sick Industries

22


Let’s take a brief look at each of these functions:

Corporate Counseling

It includes a whole range of financial services provided by a Merchant

Banker to a corporate unit a view to ensure better performance, maintain

steady growth and create a better image among investors.

It covers the entire field of Merchant Banking activities i.e., project

counseling, capital restructuring, portfolio management and the full range of

financial engineering including venture capital, public issue management,

loan syndication, working capital, fixed deposits, lease financing, acceptance

credit, etc. However, the scope of corporate counseling is limited to

suggestions and opinions leaving to the client to take corrective actions for

solving its corporate problems.

A Merchant Banker finds out the problems of enterprise, which shall include

organizational goals for the enterprise, size of the organization and

operational scales, choice of a product, pricing, etc, and suggests ways and

means to solve those problems.

23


Project Counseling

Project Counseling is an important Merchant Banking service which

includes preparation of project reports, deciding upon the financing pattern

to finance the cost of the project, appraising the project report with the

financial institutions/banks.

Project Reports are prepared to obtain government approval of the project,

for procuring financial assistance from financial institutions and banks, for

ensuring market for the proposed product, for planning public issues, etc.

Financing the project cost is an important aspect of Project Counseling. The

two sources of funds available to finance the project cost are internal sources

of funds (or owners' funds) which includes promoter's contribution and

retained earnings; and external sources of funds which refers to the

borrowed funds in the form of loans from banks, private investors and

financial institutions and in the form of debentures from the public.

Merchant Banker has to decide the financing mix of the internal and external

sources of funds keeping in view the rules, regulations and norms prescribed

by the government or followed by the term lending financial institutions.

While rendering Project Counseling services, the merchant banker has to

ensure that the application forms for obtaining the funds from financial

institutions are filled in with relevant and appropriate information and before

submitting the application, the merchant banker has to appraise the project

24


considering the various aspects as to the type of the project, location,

technical, commercial and financial viability of the project.

Credit Syndication

Once the client company has decided about the project proposed to be

undertaken, the next step is looking for the sources wherefrom the funds

could be procured to implement the project.

Merchant Banker has to locate the sources of funds and comply the

formalities required to procure the funds. This service rendered by the

merchant Banker in arranging and procuring credit from financial

institutions, banks and other lending and investment organizations for

financing the clients' project cost or meeting working capital requirement is

referred to as Loan Syndication or Credit Syndication.

Credit Syndication in case of domestic borrowings is with the institutional

lenders and banks. Long and medium term funds are obtained from the All

India Financial Institutions like IFCI, IDBI etc., state level financial bodies

like SFC, SIDC etc., commercial banks, mutual funds etc. Short-term funds

are also required by the firm for purchase of raw materials, payment of

wages, salaries etc. Sources of financing these short term requirements or

working capital needs can be from internal sources like internal accruals

from working or operations and short term loans from friends and relatives;

or from external sources like short term borrowings from banks etc.

25


Issue Management and Underwriting

Management of capital issues is a professional service rendered by the

skilled and experienced Merchant Bankers. Previously, the managing agents

for a particular corporate used to manage public issues. The abolition of the

managing agency system, the growth in the public limited companies in

number and size, the imposition of new rules and regulations regarding the

public issue of securities made it necessary for Merchant Bankers to play a

definite role in the management of public issues.

Public issue management involves marketing of corporate securities by

offering the securities to the public, procuring private subscription to the

securities and offering securities to existing shareholders of the company.

As a manager to the public issue, the Merchant Banker, before the public

issue has to obtain the consent of the stock exchanges to the memorandum

and articles of association, appoint other managers, bankers, underwriters,

brokers etc. , advice the company to appoint auditors, solicitors and board of

directors, draft the prospectus and obtain consent from the companies legal

advisors, board of directors and other concerned parties, file the prospectus

with registrar, make an application for enlistment with stock exchanges and

finally advertise for the issue.

A Merchant Bankers post issue activities include final allotment and/or

refund of subscription amount, calculation of underwriters liability in case of

26


under subscription and complying the necessary statutory requirements for

listing of securities on the stock exchange.

Under writing of public issue

A fully underwritten public issue spells confidence to the investing public,

which ensures a good response to the issue. Keeping this in view companies,

which float a public issue usually, desire a full underwriting of the issue.

Underwriting is only the guarantee given by the underwriter that in the event

of under subscription, the amount underwritten would be subscribed in

proportion by the underwriter. An underwriter of the issue gets the following

benefits:

It earns a commission of the commitment given.

It earns the right to be appointed as bankers of that issue.

It expands its clientele by underwriting more and more issues.

Bankers to the Issue

The Merchant Banker can automatically become the banker to the issue in

the following cases:

The bank is a broker to the company

It has given underwriting commitments.

It acts as a manger to the issue

27


The function of a banker to the issue is to accept application forms

from the public together with subscription money and transfer them to the

account of the controlling branch.

Portfolio Management

Portfolio refers to investment in different types of marketable securities or

investment papers like shared, debentures and debenture stocks, bonds etc.

from different companies or institutions held by individuals firm or

corporate units.

Portfolio management refers to managing efficiently the investment in the

securities held by professionals to others.

Merchant Bankers take up management of a portfolio of securities on behalf

of their clients, providing special services with a view to ensure maximum

return by such investments with a minimum risk of loss of return on the

money invested in securities.

A Merchant Banker while performing the services of portfolio management

has to enquire of the investment needs of the client, the tax bracket, ability to

bare risk, liquidity requirements, etc. they should study the economic

environment affecting the capital market, study the securities market and

identify blue chip companies in which money can be invested. They should

keep record of latest amendment in government guidelines, stock exchange

regulations, RBI regulations, etc.

28


Advisory Services Relating To Mergers and Takeovers

A Merger is defined as a combination of two or more companies into a

single company where one services and other looses their corporate

existence. A merger is also defied as an amalgamation wherein the

shareholders of the combining companies become substantially the

shareholders of the company formed.

A Takeover is referred to as an acquisition, which is the purchase, by one

company of a controlling interest in the share capital of another existing

company.

Merchant Bankers are the middlemen settling negotiations between the

offered and the offeror. Their role is specific and specialized in handling the

Mergers and Takeover assignments. Being a professional expert, the

Merchant Banker is apt to safeguard the interest of the shareholders in both

the companies and as such his assistance is useful for both the companies,

i.e. the acquirer as well as the acquired company.

Based on the purpose of business objective, the search of the acquirer

company will start for a merger partner company. If the objective of merger

is growth oriented i.e. seeking expansion in production and market

segments, utilization of existing companies or optimum utilization of

resources, then the acquirer company will select a business related company

as a merger partner.

29


If the objective is diversification in production line or business activities,

then it will select a non-related company as a merger partner.

Once the merger partner is proposed the Merchant Banker has to appraise

the Merger/Takeover proposal with respect to financial viability and

technical feasibility. He has to negotiate with the parties and decide the

purchase consideration and mode of payment. He has to comply with the

legal formalities like getting approval from the Government/ RBI; drafting

the scheme of amalgamation; getting approval of company Board, financial

institution, high court if required; arranging for the meeting etc.

Venture Capital Financing

Financing an emerging high-risk project is called venture capital financing.

Many Merchant Bankers are entering into this area by also financing viable

upcoming projects. The financing is by subscription to the equity capital,

while repayment is by selling the equity through stock market when the

shares are listed.

Leasing

Is there another lucrative area of financing where Merchant Bankers are

turning? Leasing is a viable source of financing while acquiring capital

assets. The services include arrangement for lease finance facilities for

leasing companies, legal; documents and tax consultancy.

30


Non Resident Investment

To attract NRI investments in the primary and secondary markets, the

Merchant Bankers provide investment advisory services to the NRIs in terms

of identification of investment opportunities, selection of securities, portfolio

management, etc. they also take care of operational details like purchase and

sale of securities securing the necessary clearance from RBI under FERA for

repatriation of dividends and interest, etc.

Acceptance Credit and Bill Discounting

Though Merchant Bankers world over specialize in acceptance credit and

bill discounting, these services are not currently provided by Merchant

Bankers in India the principal reasoning being the lack of an active market

for commercial bills.

Arranging Offshore Finance

The Merchant Bankers also help their clients in the following areas

involving foreign currency financing:

1. Financing Of Exports and Imports.

2. Long Term Foreign Currency Loans.

3. Joint Ventures Abroad.

4. Foreign Collaboration Arrangements.

31


The assistance rendered as in the case of financial services covers appraisals,

negotiations, compliance with procedural and legal aspects etc.

Management of Fixed Deposits of Companies

Recently, Merchant Bankers have begun to structure and mobilize fixed

deposits for their corporate clients. They take care of the procedural and

legal aspects, and also mange the collection and subsequent servicing of the

deposits. Advice with regard to the amount to be raised, interest charges,

terms of deposits and other related issues are also offered to the client.

Relief to Sick Industries

The services offered by Merchant Bankers to sick industries can be

summarized as follows:

1. Assessment of capital requirements and counseling on capital

restructuring;

2. Appraisal of technological, environmental, financial and other factors

causing sickness;

3. Preparations of programs and packages for rehabilitation of sick units;

4. Providing necessary assistance where the rehabilitation package

involves mergers or amalgamation;

5. Obtaining necessary approval for implementation the rehabilitation

package from the statutory authorities;

6. Monitoring the implementation of the scheme of rehabilitation.

32


Problems and Hurdles

Not many but some problems are faced by Indian Merchant Bankers.

I. Industry compartmentalization : Company which is in Merchant Banking

business would have expertise in underwriting, hire purchase, leasing, and

portfolio management, money-lending. But RBI does not permit Merchant

Banking firms to get into these activities. So the same promoters have to setup

different companies for different purposes. Management cost increases and

expertise pooling i.e. multiple use of same talent is not possible.

II. Malafide practices: India corporate culture is improving but still many

corporate have excessively friendly approach. Favored allotment of shares,

tampering with project appraisal report to bankers is common. Corporate

like to use Merchant Bankers for malafide intentions. This gives growth to

more boutique fly-by-day firms. Giant professional or multinational

Merchant Bankers are cautions in their approach to Indian market.

III. Regulations: though regulations are much better now, there is still scope

for further improvement. Merchant Bankers can be made more accountable

and responsible. Professional qualification focused on Merchant Banking is

not available. Industry is not well organized and all the players do not play

the same tune. This is specifically evident in comparison with insurance

industry and mutual funds industry.

33


CONCLUSION

The Merchant Banker plays a vital role in channelising the financial

surplus of the society into productive investment avenues. Hence before

selecting a Merchant Banker, one must decide, the services for which he is

being approached. Selecting the right intermediary who has the necessary

skills to meet the requirements of the client will ensure success.

It can be said that this project helped me to understand every details

about Merchant Banking and in future how it’s going to get emerged in the

Indian economy. Hence, Merchant Banking can be considered as essential

financial body in Indian financial system.

Market development is predicted on a sound, fair and transparent

regulatory framework. To sustain the growth of the market and crystallize

the growing awareness and interest into a committed, discerning and

growing awareness and interest into an essential to remove the trading

malpractice and structural inadequacies prevailing in the market, and

provide the investors an organized, well regulated market.

34


What is Qualified Institutional Placement (QIP)?

There are broadly two ways by which companies can raise capital from the

markets viz. debt and equity. Whereas issuing debt instruments only adds to

the financial burden of the company, the equity option brings investment in

company by making investors partners in the business. Companies intending

to raise capital via the equity route have various ways of doing so which

include Initial Public Offering (IPO), Follow-on Public Offering

(FPO),Rights Issue, Preferential Issue of Shares or through listing in foreign

bourses through American Depository Receipts (ADRs) and Global

Depository Receipts (GDRs).

QIP is the latest addition to the already existing modes of equity

participation. QIP is a capital raising means, whereby a listed company can

issue equity shares, fully and partly convertible debentures, or any securities

other than warrants which are convertible into or exchangeable with equity

shares to Qualified Institutional Buyers (QIBs).

QIP permits listed companies to collect funds from domestic markets

without the need for submitting any pre-issue filings to market regulator,

Securities and Exchange Board of India (SEBI). Instead of trying to raise

cash from public at large, the companies adopt this route to get funds from a

few large investors called Qualified Institutional Buyers. Apart from

preferential allotment, this is the only other speedy method of private

placement for companies to raise money and a good way for funds /

institutions to pick up stakes in a company.

35


SEBI – ICDR REGULATIONS, 2009

CHAPTER VIII

QUALIFIED INSTITUTIONS PLACEMENT

Applicability.

80. The provisions of this Chapter shall apply to a qualified institutions

placement made by a listed issuer.

Definitions.

81. For the purpose of this Chapter:

(a) “eligible securities” include equity shares, non-convertible debt

instruments along with warrants and convertible securities other than

warrants;

(b) “qualified institutions placement” means allotment of eligible securities

by a listed issuer to qualified institutional buyers on private placement basis

in terms of these regulations;

(c) "relevant date" means:

(i) in case of allotment of equity shares, the date of the meeting in which the

board of directors of the issuer or the committee of directors duly authorized

by the board of directors of the issuer decides to open the proposed issue;

36


(ii) in case of allotment of eligible convertible securities, either the date of

the meeting in which the board of directors of the issuer or the committee of

directors duly authorised by the board of directors of the issuer decides to

open the issue of such convertible securities or the date on which the holders

of such convertible securities become entitled to apply for the equity shares.

Conditions for qualified institutions placement.

82. A listed issuer may make qualified institutions placement if it satisfies

the following conditions:

(a) a special resolution approving the qualified institutions placement has

been passed by its shareholders;

(b) the equity shares of the same class, which are proposed to be allotted

through qualified institutions placement or pursuant to conversion or

exchange of eligible securities offered through qualified institutions

placement, have been listed on a recognized stock exchange having nation

wide trading terminal for a period of at least one year prior to the date of

issuance of notice to its shareholders for convening the meeting to pass the

special resolution:

Provided that where an issuer, being a transferee company in a scheme of

merger, de-merger, amalgamation or arrangement sanctioned by a High

Court under sections 391 to 394 of the Companies Act, 1956, makes

qualified institutions placement, the period for which the equity shares of the

same class of the transferor company were listed on a stock exchange having

37


nation wide trading terminals shall also be considered for the purpose of

computation of the period of one year.

(c) it is in compliance with the requirement of minimum public

shareholding specified in the listing agreement with the stock exchange;

(d) In the special resolution, it shall be, among other relevant matters,

specified that the allotment is proposed to be made through qualified

institutions placement and the relevant date referred to in sub-clause (ii) of

clause (c) of regulation 81 shall also be specified.

Explanation: For the purpose of clause (b), “equity shares of the same class”

shall have the same meaning as assigned to them in Explanation to sub-rule

(4) of rule 19 of the Securities Contracts(Regulation) Rules, 1957.

Appointment of merchant banker.

83.

(1) A qualified institutions placement shall be managed by merchant

banker(s) registered with the Board who shall exercise due diligence.

(2) The merchant banker shall, while seeking in-principle approval for

listing of the eligible securities issued under qualified institutions placement,

furnish to each stock exchange on which the same class of equity shares of

the issuer are listed, a due diligence certificate stating that the eligible

securities are being issued under qualified institutions placement and that the

issuer complies with requirements of this Chapter.

38


Placement Document:

84.

(1) The qualified institutions placement shall be made on the basis of a

placement document which shall contain all material information, including

those specified in Schedule XVIII.

(2) The placement document shall be serially numbered and copies shall be

circulated only to select investors.

(3) The issuer shall, while seeking in-principle approval from the recognized

stock exchange, furnish a copy of the placement document, a certificate

confirming compliance with the provisions of this Chapter along with any

other documents required by the stock exchange.

(4) The placement document shall also be placed on the website of the

concerned stock exchange and of the issuer with a disclaimer to the effect

that it is in connection with a qualified institutions placement and that no

offer is being made to the public or to any other category of investors.

(5) A copy of the placement document shall be filed with the Board for its

record within thirty days of the allotment of eligible securities.

39


Pricing.

85.

(1) The qualified institutions placement shall be made at a price not less than

the average of the weekly high and low of the closing prices of the equity

shares of the same class quoted on the stock exchange during the two weeks

preceding the relevant date.

(2) Where eligible securities are convertible into or exchangeable with

equity shares of the issuer, the issuer shall determine the price of such equity

shares allotted pursuant to such conversion or exchange taking the relevant

date as decided and disclosed by it while passing the special resolution.

(3) The issuer shall not allot partly paid up eligible securities:

Provided that in case of allotment of non convertible debt instruments along

with warrants, the allottees may pay the full consideration or part thereof

payable with respect to warrants, at the time of allotment of such warrants:

Provided further that on allotment of equity shares on exercise of options

attached to warrants, such equity shares shall be fully paid up.

(4) The prices determined for qualified institutions placement shall be

subject to appropriate adjustments if the issuer:

(a) makes an issue of equity shares by way of capitalization of profits or

reserves, other than by way of a dividend on shares;

(b) makes a rights issue of equity shares;

40


(c) consolidates its outstanding equity shares into a smaller number of

shares;

(d) divides its outstanding equity shares including by way of stock split;

(e) re-classifies any of its equity shares into other securities of the issuer;

(f) is involved in such other similar events or circumstances, which in the

opinion of the concerned stock exchange, requires adjustments.

Explanation: For the purpose of sub-regulation (1), the term “stock

exchange” means any of the recognized stock exchanges in which the equity

shares of the same class of the issuer are listed and in which the highest

trading volume in such equity shares has been recorded during the two

weeks immediately preceding the relevant date.

Restrictions on allotment.

86.

(1) Allotment under the qualified institutions placement shall be made

subject to the following conditions:

(a) Minimum of ten per cent. of eligible securities shall be allotted to

mutual funds:

Provided that if the mutual funds do not subscribe to said minimum

percentage or any part thereof, such minimum portion or part thereof may be

allotted to other qualified institutional buyers;

41


(b) No allotment shall be made, either directly or indirectly, to any qualified

institutional buyer who is a promoter or any person related to promoters of

the issuer:

Provided that a qualified institutional buyer who does not hold any shares in

the issuer and who has acquired the said rights in the capacity of a lender

shall not be deemed to be a person related to promoters.

(2) In a qualified institutions placement of non-convertible debt instrument

along with warrants, an investor can subscribe to the combined offering of

non- convertible debt instruments with warrants or to the individual

securities, that is, either non- convertible debt instruments or warrants.

(3) The applicants in qualified institutions placement shall not withdraw

their bids after the closure of the issue.

Explanation: For the purpose of clause (b) of sub-regulation (1), a qualified

institutional buyer who has any of the following rights shall be deemed to be

a person related to the promoters of the issuer:

(a) rights under a shareholders’ agreement or voting agreement entered into

with promoters or persons related to the promoters;

(b) veto rights; or

(c) right to appoint any nominee director on the board of the issuer.

42


Minimum number of allottees.

87.

(1) The minimum number of allottees for each placement of eligible

securities made under qualified institutions placement shall not be less than:

(a) two, where the issue size is less than or equal to two hundred and fifty

crore rupees;

(b) five, where the issue size is greater than two hundred and fifty crore

rupees:

Provided that no single allottee shall be allotted more than fifty per cent. of

the issue size.

(2) The qualified institutional buyers belonging to the same group or who

are under same control shall be deemed to be a single allottee.

Explanation: For the purpose of sub-regulation (2), the expression “qualified

institutional buyers belonging to the same group” shall have the same

meaning as derived from sub-section (11) of section 372 of the Companies

Act, 1956;

Validity of the special resolution.

88.

(1) Allotment pursuant to the special resolution referred to in clause (a) of

regulation 82 shall be completed within a period of twelve months from the

date of passing of the resolution.

43


(2) The issuer shall not make subsequent qualified institutions placement

until expiry of six months from the date of the prior qualified institutions

placement made pursuant to one or more special resolutions.

Restrictions on amount raised.

89. The aggregate of the proposed qualified institutions placement and all

previous qualified institutions placements made by the issuer in the same

financial year shall not exceed five times the net worth of the issuer as per

the audited balance sheet of the previous financial year.

Tenure.

90. The tenure of the convertible or exchangeable eligible securities issued

through qualified institutions placement shall not exceed sixty months from

the date of allotment.

Transferability of eligible securities.

91. The eligible securities allotted under qualified institutions placement

shall not be sold by the allottee for a period of one year from the date of

allotment, except on a recognized stock exchange.

44


Why was it introduced?

The Securities and Exchange Board of India (SEBI) introduced the QIP

process in 2006, to prevent listed companies in India from developing an

excessive dependence on foreign capital.

The complications associated with raising capital in the domestic markets

had led many companies to look at tapping the overseas markets via Foreign

Currency Convertible Bonds (FCCB) and Global Depository Receipts

(GDR) to fulfil their needs. To keep a check on this process and to give a

push to the domestic markets, QIPs were launched.

Prior to the innovation of the qualified institutional placement, there was

concern from Indian market regulators and authorities that Indian companies

were accessing international funding via issuing securities, such as

American depository receipts (ADRs), in outside markets. The

complications associated with raising capital in the domestic markets had led

many companies to look at tapping the overseas markets. This was seen as

an undesirable export of the domestic equity market, so the QIP guidelines

were introduced to encourage Indian companies to raise funds domestically

instead of tapping overseas market.

45


Who can participate in the QIP issue? Only QIBs, who are not promoters of issuer or related to the promoters of

issuer, are eligible for allotment of the securities via this route. QIBs are

generally large institutional investors like banks, insurance firms, mutual

funds and foreign institutional investors who have the expertise and financial

muscle to evaluate market offerings and invest large amounts in capital

market. SEBI has given an extensive list on who are eligible to qualify as

QIB.

Qualified Buyer includes

• a public financial institution as defined in section 4A of the Companies

Act, 1956;

• a scheduled commercial bank;

• a mutual fund registered with the Board;

• a foreign institutional investor and sub-account registered with SEBI,

other than a sub-account which is a foreign corporate or foreign individual;

• a multilateral and bilateral development financial institution;

• a venture capital fund registered with SEBI;

• a foreign venture capital investor registered with SEBI;

• a state industrial development corporation;

• an insurance company registered with the Insurance Regulatory and

Development Authority (IRDA);

• a provident fund with minimum corpus of 25 crore;

• a pension fund with minimum corpus of 25 crore;

46


• National Investment Fund set up by resolution no. F. No. 2/3/2005-DDII

dated November 23, 2005 of Government of India published in the Gazette

of India.

Unlike private placement via the preferential allotment wherein the

securities can be issued to promoters or their relatives, in QIP allotment the

DIP Guidelines clearly provide that the securities cannot be issued to QIBs

who are either promoters or related to the promoters.

The DIP Guidelines also clarifies that a QIB who has all or any of the

following rights shall be deemed to be related to the promoter(s):

• rights under the shareholders agreement or listing agreement entered into

with

promoters or persons related to promoters;

• veto rights;

• right to appoint nominee directors on the Board of the issuer company.

47


Benefits of QIPs

Raising funds by means of issuing securities to QIBs provides multi-fold

benefits to the issuer companies, investors and economy as a whole.

Following is the list of advantages of QIPs as compared to other means of

fund raising:

1. Time Saving : QIPs can be raised within shorter span of time as

compared to FPO or Right Issue which are time consuming

procedures. Even compared to preferential allotment which can even

take as much as three months, this is a speedier method of private

placement where capital raising can be done in as soon as a week.

2. Simplified Procedure : QIP scores over others methods as there are

fewer formalities and requirements as regards rules and regulations

and it does not have to undergo the elaborate procedural requirements

of fund raising such as the submission of pre-issue filings to SEBI or

converting the accounts to International Financial Reporting

Standards and the like. Except the 10% reservation for mutual funds,

companies can issue securities to QIBs on discretionary basis.

3. Valuation : Barring the SEBI norms regarding floor price the

valuation of the issue is decided between the issuer and the buyers and

there is no third party interference. This also is another reason for its

popularity.

48


4. Lock-in : It provides an opportunity to investors to buy non-locking

shares since they have an exit option on the stock exchange and do not

have to wait for a minimum period of 1year.

5. Lower Cost of Capital : QIP route is more cost effective in

comparison to other modes which prove to be costly. The cost

differential vis-à-vis ADR/GDR in terms of legal fees, listing charges

is huge. In a QIP the company has to pay an incremental fee to the

stock exchange.

6. Retail Investors : In view of the SEBI mandate to issue 10% of the

issue to mutual funds QIP also gives the retail investors a practical

and efficient means to further diversify their portfolios.

49


ANALYSIS

During my internship at Aryaman Financial Services, a growing Merchant

Bank, I had prepared QIP Database for 126 Companies.

While preparing the database, there were some interesting facts which were

observed. These observations are put forth in the form of following

diagrams:

1. No. of QIP’s from different sectors

Major Qip’s were from Real Estate, Infrastructure and Construction

50


2. Domestic Legal Advisor for QIP

Amarchand & Mangaldas & Suresh A. Shroff & Co. enjoyed dominance and

was able to bagged 37%

51


3.International Legal Advisor for QIP

Jones Day and Dorsey & Whitney had a share of 83%.

4.QIP’s having Global Co-Ordinator

52


5.Pre-Issue Networth of Co. which came up with QIP)(In Crores)

6. Issue Size of equity share

(In Crores)

53


Conclusion

One of the key concerns in QIP is that unlike the rights issues, it dilutes the

stake of existing shareholders. Hence QIP are made by companies with

significant promoter holding and promoters with low stakes are reluctant to

adopt this route as a further dilution could mean risking its management

control of the company. However in difficult times like the current

environment where FCCBs and ECBs are not feasible, this option as and

interim measure can still prove to be beneficial as it gives the company’s

business the much needed capital to bail out and sustain itself.

Now, when the global capital market is struggling for revival, QIP is

ensuring a turnaround by giving the much need financial impetus to the

Indian real estate and infrastructure business while also giving investment

opportunities to the cash rich QIBs who have been waiting on the sidelines

over the last six months to enter the potential-rich Indian real estate market.

But the QIBs are selective as they look at growth prospects of the companies

and so companies with strong fundamentals, sound corporate governance

and good underlying assets have better ability to tap the QIP market.

54


Recommendations for

Aryaman Financial Services Limited

The Company commenced its operations in 1994. Aryaman Financial

Services Limited has established itself as a leading private sector Merchant

Banking house of repute by successfully managing various public issues,

mobilizing resources for the corporate sector and has remained in the

forefront in the Indian Capital Market.

In year 2007-2008 , this Company was takeover By Mr. Shripal Shah. It

will take some time for him to develop corporate links. The business is

going well and is increasing every year. For increasing business, just a point

that I could think of is that Aryaman should hire better staff as in better

human resource management and expand its business.. It's not that Aryaman

does not get business or is not known amongst people, but I think they do

not have that much capability or human resource to spin up their work and

undertake more projects. They should hire more experienced people with

prior experience in field of Merchant Banking. The Company incurs

significant cost on getting Legal Advisory Services. This cost can be cut

short by employing a Company Secretary. Having an employee with

knowledge about legal aspects will lead to less dependence on outside Legal

Advisors and will increase the speed of work. In this way, Company can

handle more clients and in more effective manner.

55


Bibliography

A. Government Sources

1. Reserve Bank of India (www.rbi.gov.in).2. SEBI (ICDR) Regulations, 2009.3. IBEF (www.ibef.org.in).

B. Economic and Financial Journals and Magazines

1. Money Outlook.2. Business Week.

C. Commercial Publication

1. Bloomberg.2. NSE Fact book

D. On – Line Data Bases

1. www.bseindia.com .2. www.nseindia.com .

56

http://www.nseindia.com/

http://www.bseindia.com/

Merchant Banking in India

Documents

Transcript of Merchant Banking in India