Session 7 - Investment Banking.pptx

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By:Prof. Vani Dhawan


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What is Merchant Banking ?

Merchant Banking may be defined as an institution which covers a wide range of activities.

Merchant Banking generally, do the operations that provide the support,knowledge and resources to individuals & organizations for starting, expandingand sustaining their business & investments.

They all render these services for a fee.

According to the SEBI (Merchant Bankers) Rules, 1992,

Any person who is engaged in the business of issuemanagement either by making arrangements regarding selling, buying orsubscribing to securities or acting as manager, consultant, advisor or renderingcorporate advisory services in relation to such issue management.


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Merchant Banking is what merchant bankers do.

A merchant banker is one who is a critical link

between a company raising fund and the investors.

The merchant banker may be in the form of a bank,a company, firm or even a proprietary concern.

Merchant Banker understands the requirements of the business concern and arranges finance with thehelp of financial institutions, banks, stock exchangesand money market.


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Merchant Banking in India

Need for merchant banking was felt with rapid growth in number andsize of issues made in primary market.Merchant Banking services started by foreign banks, namely NationalGrind lays in 1969 followed by Citi Bank in 1970.

Merchant Banking services was offered along with other traditionalbanking services.State Bank of India was first Indian bank to set up merchant bankingdivision in 1972.Later, the ICICIset up its merchant banking division in 1973.

It was followed by other commercial banks like Canara Bank, Bank of Baroda, Bank Of India, Syndicate Bank, Central Bank Of India, PNB, UCOBank etc.


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Some Public Sector MerchantBankers::

SBI Capital Markets Ltd.Punjab National Bank.Bank of Maharashtra.IFCI Financial Services Ltd.Karur Vysya Bank Ltd.State Bank of Bikaner andJaipur.

Some Private Sector MerchantBankers::

ICICI Securities Ltd.Axis Bank Ltd (Formerly UTIBank Ltd).Bajaj Capital Ltd.Tata Capital Markets Ltd.Reliance Securities Limited.Kotak Mahindra CapitalCompany Ltd.Yes Bank Ltd.


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Cont.

Some Foreign Players in Merchant Banking::

Goldman Sachs (India) Securities Pvt. Ltd.Morgan Stanley India Company Pvt. Ltd.Barclays Securities (India) Pvt. Ltd.Bank Of America.Deutsche Equities India Private Limited.

Citigroup Global Markets India Pvt. Ltd.DSP Merrill Lynch Ltd.FEDEX Securities Ltd.


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Difference between Commercial Banking andMerchant Banking

1. Commercial banks uphold savingsaccounts of individuals, providesloans and mortgages to individualsor small-scale businesses.

Merchant banks operate as fiscalconsultants and advisor to large-scale companies.

2. Commercial banking is generallyaccessible to anyone forelementary banking needs &requirements.

Merchant banking is concernedto hand out primarily largecorporations and very wealthypersons.

3. Commercial banks generally avoidsrisks.

Merchant Banks are willing totake the risks.

4. Plays the role of financers. Plays the roles like underwriter,portfolio etc.


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1. CorporateCounseling

It gives advise to the corporate unit to ensure bettercorporate performance in terms of image buildingamong investors, steady growth through good workingand appreciation in market value of its equity shares.

2. Project Counseling It involves technical advice to entrepreneurs to variousaspects like project profile, project selection, projectimplementation and project evaluation etc. Alsopreparing project report for govt. approval andfinancial assistance.

3. Pre-InvestmentStudies

Helps the clients to check and evaluate alternativeavenues of capital investment in terms of growth andprofit prospects for long run.


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4. Capital RestructuringServices

Examine the capital structure of the clients and tosuggest various strategies to widen and restructurethe capital base, diversify the operations andimplement different schemes in the business.

5. Credit or LoanSyndication

To procure credit and project financing , aimed atIndian and foreign currency loans from banks andfinancial institutions are collectively.

6. Issue Managementand Underwriting

These activities are concerned with the managementof the public issues of corporate securities i.e; equityshares, preference shares, and debentures and bonds.

7. Portfolio Management Decisions relating to the investment of the cashresources of the corporate enterprise in marketablesecurities .

Cont


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8. Working CapitalFinance

To access the day to day requirements of the businessenterprise and do the necessary formalities for the sanctionof appropriate credit facilities.

9. Merger andAcquisition To provide specialized services who arranges for negotiatingacquisition and mergers after careful examination of allaspects like financial statements, articles of association,rules and guidance of trade chambers etc.

10. Mutual Funds To mobiles the savings of investors for the purpose of

channelizing them into productive investments of a widevariety of corporate and other securities.

11. Fixed DepositBrokering

Drafting of advertisements for inviting deposits and try toraise in the form of deposits from the public loans fromshareholders.

Cont


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12. Relief to SickIndustries

Rejuvenating old lines and ailing units by appraisingtheir technology and process, assessing theirrequirements and restructuring their capital base.

13. Project Appraisal The evaluation of the industrial projects in terms of alternative technology, raw materials, productioncapacity and the location of the plant.

Financial Appraisal,Technical Appraisal, andEconomic Appraisal.

Cont


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Merchant Banking Rules & Regulations

According to SEBI (Merchant Bankers)Rules, 1992, it is mandatory for amerchant banker to hold a certificate of registration granted by the

Securities and Exchange Board of India, otherwise no person can act asa merchant banker.To obtain the certificate of registration, one has to apply in theprescribed form and fulfill two set of norms (a) operational capabilitiesand (b) capital adequacy norms.


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Merchant Banker as a Managers,

Consultants or AdvisorsCompanies are free to appoint one or more agencies as managers tothe issue.

SEBI guidelines prescribe that issue should be managed at least byone authorized merchant banker.

Not more than two merchant bankers should be appointed as leadmanagers to a public issue.

In issue over Rs. 100 crores, maximum up to four merchant bankercould be associated as managers


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Merchant Banker as a Lead Manager

Companies can appoint lead managers on the basis of :

Sr. No. Size of the Issue Maximum number of Lead Managers

1 Less than Rs. 50 crores 2

2 Rs. 50 crores to Rs. 100 crores 3

3 Rs. 100 crores to Rs. 200 crores 44 Rs. 200 crores to Rs. 400 crores 5

5 Above Rs. 400 crores 5 or more asprescribed by SEBI


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Classification of Merchant Banking

Category I Merchant Bankers:can act as issue manager, for the preparation of prospectus and otherrelated information and also act advisor, consultant, underwriter andportfolio manager.

Category II Merchant Bankers:can act as advisor, consultant, co- manager, underwriter and portfoliomanager.

Category III Merchant Bankers:can act as underwriter, advisor or consultant only.

Category IV Merchant Bankers:can merely act as consultant or advisor to an issue of capital.


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Capital Adequacy Norms

Type of Merchant Banker Minimum Net Worth

Category I Rs. 5 crores

Category II Rs, 50 lakhs

Category III Rs. 20 lakhs

Category IV Nil

The minimum net worth requirement for acting as merchantbanker is given below:


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Obligations and Responsibilities

Merchant bankers are not to associate with any business other thanthat of the securities market.

Maintenance of book of accounts, records, etc. Every merchantbanker shall keep and maintain the following books of accounts,records and documents namely:

a copy of balance sheet at the end of each accounting period.a copy of profit and loss account for that period.

a copy of auditors report on the accounts of that period.a statement of financial position.


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Integrity.Quality Service.

Fair Practice.

Responsible Statement.Best Advice.Secrecy.Information.

Prospectus.Allotment.

True Market.Compliance.

MerchantBankers Code of

Conduct


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Suspension of Registration

The certificate of registration issued to a merchant bank may besuspended when:

The merchant bank violates the provisions of the SEBI Act.The merchant bank fails to furnishes wrong and falseinformation, as required by SEBI.The merchant bank fails to maintain the capital adequacy

requirement, orThe merchant banker fails to pay the prescribed fees.


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Cancellation of Registration

The certificate of registration issued to a merchant bank may becancelled when:

The merchant bank indulges in deliberate manipulation orcornering activities affecting the securities market and theinvestors interests.The merchant bank is guilty of fraud or is convicted of a criminaloffence, or

The financial position of a merchant bank deteriorates to suchan extent that in continuance as a merchant bank is not in theinterest of the investors.


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Defaults and Penalties

If the merchant bank violates any of the provisions of the SEBIregulations, penalty points may be imposed.

The defaulters are classified into four categories :- general, minor,major & serious.

A merchant banker whom penalty points four or more are imposedmay be restrained from filling any offer document or associating ormanaging any issue for a certain period.

The board may initiate action against any merchant bank underrelevant SEBI regulations, whether any penalty point is imposed or

not.


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Pre Issue Obligations

(A) Documents to be submitted- The lead manager shall submitfollowing documents to SEBI:

MOU between merchant banker and issuer company.Due diligence certificate by lead merchant banker.

Certificate signed by the company secretary or company accountantin case of listed companies making further issue of capital.A list of persons who constitute the promoters group and their

individual shareholdings.Draft prospectus in computer floppy in prescribed format.

Ten copies of draft offer document.The issuer shall submit an undertaking to the Board within 24 hoursof the transaction.


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Cont..

(B) Appointment of Intermediaries -

Appointment of merchant bankers.Appointment of co managers.

Appointment of other intermediaries.

(C) Underwriting

The lead manager shall satisfy themselves about the ability of theunderwriters and incorporate the statement in the offer documentthat the underwriters assets are adequate to meet theirunderwriting obligations.


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Cont..

(D) Offer documents to be made public

The draft offer document filed with the Board shall be made publicfor a period of 21 days from the date of filing the offer document.The lead merchant banker shall also fill the draft offer document withthe stock exchange where the securities are proposed to be listedand make it available to the public.

(E) Appointment of compliance officer

An issuer company shall appoint a compliance officer who have directlink with the Board with regard to compliance with various laws,rules, regulations and other directives issued by the Board.


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Cont..

(F) Mandatory Collection centres-The minimum number of collection centres for issue of capital shall be (i)four metropolitan cities situated at Mumbai, Delhi, Calcutta andChennai; (ii) all such centres where the stock exchanges are located in

the region in which registered office of the company is situated.

(G) Final offer document-The lead manager shall certify that all amendments, suggestions orobservation made by SEBI have been carried out. He has to furnish a newdue diligence certificate. Final prospectus is to be submitted withRegistrar of Companies and the offer document with regional stockexchange. A computer floppy of final prospectus offer shall be submittedto SEBI.


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Cont.. (H) Application forms-

Application form must be accompanied by abridged prospectus that isshorter version of the prospectus and contains all the salient features of a prospectus.

Disclaimer clause of SEBI should be printed in bold.Highlights and risk factor should be given same prominence.The form shall contain provision for mentioning name and address of bank and account number of the applicant.

(I) Minimum application amount-Minimum application money to be paid along with application shall notbe less than 25% of issue price.Application for shares or debentures should be for such a number thatthe total amount payable is not less than Rs.2000.


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Cont.. (J) Listing of securities-

The securities offered to public shall be listed in a stock exchange. In casethese are not listed, entire application money becomes refundable.

(K) Period of subscription-Subscription for public issues shall be kept open at least 3 working daysand not more than 10 working days. In case of an infrastructurecompany, it may be kept open for 21 working days.

(L) Oversubscription-The quantum of issue trough a rights or a public issue, shall not exceedthe amount specified in the prospectus of offer, however anoversubscription to the extent of 10% of the net offer to public ispermissible.


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Post Issue Obligations

(A) Post issue monitoring reports -3 day post issue monitoring report.78 day post issue monitoring report.

(B) Redressal of investor grievances.

(C) Co-ordination with interdemeries-The lead manager shall maintain a close co-ordination with the

Registrars, and arrange to depute its officers of various intermediaries ata regular intervals.

(D) Stock Invest.(E) Underwriters.


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Cont.. (F) Bankers to issue-

The post issue lead merchant banker shall ensure that the moneypursuant to the issue and kept in a separate bank.

(G) Post issue Advertisements- It gives details relating to over-subscription, basis of allotment, number

and value of subscription received etc.

(H) Basis of Allotment-

The executive director or managing director of the stock exchanges, leadmerchant banker and the registrar of the issue shall ensure that the basisof allotment is finalized in fair and proper manner.

(D) Other Responsibilities.(E) Certificate regarding realization of stock invests.


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Meaning of Issue Management

Issue Management is the proactive process of anticipating, identifying,evaluating and responding to public policy issues that affect organizations relationships with their publics.

It includes various kinds of issue of securities:

Public Issue,Rights Issue, and

Offer for Sale.


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Issue of Share to Public - Going Public

Going public occurs when equity owners offer and sell part of the company tothe public.The capital infusion provides financial resources and a relatively liquidinvestment vehicle.

The entrepreneur must carefully evaluate the pros and cons of going publicbefore initiating the process.


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IPO Details - Just Dial Limited

Incorporated in 1996, Just dial Limited is popular local search serviceprovider in India. Just Dials search services are available to users throughInternet, mobile Internet, telephone and text (SMS).It provides reliable information about local businesses, products and

services to the users in over 2000 cities in India. They have more than 300million customers using Just Dial Services.

Objects of the Issue:

Achieve the benefits of listing the Equity Shares on the Stock ExchangesandCarry out the sale of 17,497,458 Equity Shares.


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Cont.

Issue Details:

Issue Open : May 20, 2013 - May 22, 2013 Issue Type : 100% Book Build Issue IPO Issue Size : 17,497,458 Equity Shares Issue Size : Rs. 822.38 - 950.11 Crore Face Value : Rs. 10 Per Equity Share Issue Price : Rs. 470 - Rs. 543 Per Equity Share Market Lot : 25 Shares

Minimum Order Quantity : 25 Shares Listing At : BSE, NSE, MCX-SX


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Cont.

Just Dial IPO GradingCRISIL has assigned a IPO Grade 5/5 to the IPO of Just Dial Ltd.This grade indicates that the fundamentals of the Just Dial IPO are'strong' relative to the other listed equity securities in India. CRISILassigns IPO grading on a scale of 5 to 1, with Grade 5 indicatingstrong fundamentals and Grade 1 indicating poor fundamentals.

Subscription Detail for Day 3 (Closing Day)

Qualified Institutional Buyers : 10.10 Times.Non Institutional Investors: 22.34 Times.Retail Individual Investors : 3.53 Times.

Total: 11.63 Times


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Cont.

Just Dial IPO Listing Date

Listing Date: Wednesday, June 05, 2013BSE Scrip Code: 535648

NSE Symbol: JUSTDIALListing In: 'B' Group of SecuritiesSector: IT Enabled ServicesISIN:INE599M01018Issue Price: Rs. 530.00 Per Equity Share

Face Value: Rs. 10.00 Per Equity Share

Todays Share Price of Just Dial is Rs. 728/-


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Steps in an IPO Process:

Selection of Investment Bank:-Step 1: Preparation of Registration Statement

Step 2: Getting the Prospectus Ready

Step 3: The Road showStep 4: SEBI Approval & Go AheadStep 5: Deciding On Price Band & Share Number either by FixedPrice or Book Building Issue.

Step 6: Available to Public for Purchase.Step 7: Issue Price Determination & Share Allotment.Step 8: Listing & Refund.


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Capital Structuring

The term capital structure is used to represent the proportionaterelationship between debt and equity.A healthy proportion of equity capital, as opposed to debt capital, in acompany's capital structure is an indication of financial fitness.

The various means of financing represent the financial structure of anenterprise. The left-hand side of the balance sheet (liabilities plus equity)represents the financial structure of a company.

Definition : Capital Structure is the mix of financial securities used tofinance the firm. The value of a firm is defined to be the sum of the valueof the firms debt and the firms equity.

V = B + S


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Questions while Making the FinancingDecision

How should the investment project be financed?Does the way in which the investment projects are financedmatter?

How does financing affect the shareholders risk, return andvalue?Does there exist an optimum financing mix in terms of themaximum value to the firms shareholders?

Can the optimum financing mix be determined in practice for acompany?What factors in practice should a company consider in designingits financing policy?


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Features of an Appropriate Capital Structure

Return - With appropriate capital structure of the company it should givemaximum return to the shareholders.Risk - It involves the minimum risk of financial insolvency. The use of excessivedebt threatens the solvency of the company. Since use of debt adds to the riskof the company and shareholders, it should be used cautiously with equity.Flexibility - The company should be able to change the proportion of debt andequity in the capital structure, if required depending on changing conditions.The capital structure should be flexible to meet the changing conditions.Capacity - The company should have capacity to pay the fixed periodic charges(e,g., interest) and the installments of principal sum. The debt capacity of thecompany should not be exceeded.Control - The capital structure should not involve loss of control of theshareholders. If there is too much debt then shareholders are likely to losecontrol to debenture holders.


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Buy Back of Shares

Buy back of shares means reducing the total number of shares from the market.Buy back of shares can be understood as the process by which a company buys itsshare back from its shareholder .It leads to reduction in share capital of a company as opposed to issue of shareswhich results in an increase in the share capital.

A buyback allows companies to invest in themselves. By reducing the number of shares outstanding on the market, buybacks increase the proportion of shares acompany owns. Buybacks can be carried out in two ways:

Shareholders may be presented with a tender offer whereby they have theoption to submit (or tender) a portion or all of their shares within a certaintime frame and at a premium to the current market price. This premiumcompensates investors for tendering their shares rather than holding on tothem.Companies buy back shares on the open market over an extended period of time.


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Rationale behind buyback of shares

There are various reasons for a company to buy back its shares from the market.These are

The management thinks that the companys shares are undervalued in themarket and they expect the company to perform much better than the value

currently perceived by the market.The promoters want to increase their control over the company. So, they go forbuy back of shares to increase their equity holding in the company.If the company wants to leave a particular country or want to close thecompany, it goes for buy back of shares.To improve earnings per share.To improve return on capital & return on net worth.To provide additional exit route to shareholders when share are under-valued.To enhance consolidation of stake in the Company.To return surplus cash to shareholders.


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Recent News.

JSPL to buyback shares worth up to Rs 1,000 croreThe company said that it will buy back 8.7% of its paid upcapital

30 th August, 2013 in Business Standard


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Session 7 - Investment Banking.pptx

Documents

Transcript of Session 7 - Investment Banking.pptx