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MERCHANT BANKING
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 has 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 resources 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 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.
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Merchant Banking in India
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Merchant Banking in India
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.
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Merchant Banking in India
ORIGIN
Merchant banking originated through the entering of London merchants in
foreign trade through acceptance of bill. Later, the merchants assisted the
Government of under developed countries in raising long – terms through
floatation of bonds in London money market. Over a period they extended
their activities to domestic business of syndication of long term and short
term finance, underwriting of new issues, acting as registrars and share
transfer agents, debenture trustees, portfolio managers, negotiating agents
for mergers, takeovers etc.
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Merchant Banking in India
Anyone considering dealing with any merchant bank should investigate the
bank and its managers before seeking their help.
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Merchant Banking in India
The basic financing structure was the advance payment for goods by
merchant bankers at a great discount to the delivery value of those goods. In
the case of Italy and then Germany, wheat was the product. The merchant
banks purchased the wheat soon after planting. They accepted the risk of
crop failure.
They profited when they sold the wheat. In most countries today, the
national government accepts the risk through government crop insurance.
As the British Empire expanded in the 18th and 19th Centuries, merchant
banks prospered in London. For instance, merchant bankers funded
Canada’s Hudson Bay Company. This period saw the rise of such merchant
banks as Schroders, Warburgs or Rothschilds. Amsterdam benefited from
the trade created by the Dutch East Indian Company. Since the 18th century,
the role of the merchant banker has been considerably broadened to include
a composite of modern day skills. Such skills are inherently entrepreneurial,
managerial, financial and transactional.
Today, North American merchant banks have taken the form of "boutiques"-
whereby, each offers its own specialized services. The hallmarks of these
merchant bank boutiques are that they typically charge fees payable in cash
and/or the client's stock for each service rendered. You can find a merchant
bank that meets any reasonable set of needs.
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Merchant Banking in India
In 1967, RBI issued its first merchant banking license to grind lays started
with management of capital issues, production planning, system design and
also market research. It provides management consulting services as well.
Citibank setup its merchant banking division in 1970. its scope includes
assisting new entrepreneur, evaluating new projects, rasing funds through
borrowing and issuing equity. Indian banks started banking services as a part
of multiple services they offered to clients from 1972. State bank of India
started the merchant banking division in 1972. In the initial years the
objective was to render corporate advice and assistance to small and
medium entrepreneurs. Merchant banking activities are organized and
undertaken in several forms. Commercial banks and foreign development
finance institutions have organized them through formation of division;
nationalized banks have formed subsidiaries companies and share brokers
and consultancies constituted themselves into public ltd. Co. or registered
themselves as private ltd. companies. Some of them have equity stake of
foreign merchant bankers.
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Merchant Banking in India
MERCHANT BANK
A large company that wishes to raise money from investors through the
stock market can hire a merchant bank to implement and underwrite the
process. The merchant bank determines the number of stocks to be issued,
the price at which the stock will be issued, and the timing of the release of
this new stock. The merchant bank files all the paperwork required with the
various market authorities, and is also frequently responsible for marketing
the new stock, though this may be a joint effort with the company and
managed by the merchant bank. For really large stock offerings, several
merchant banks may work together, with one being the lead underwriter.
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By limiting their scope to the needs of large companies, merchant banks can
focus their knowledge and be of specific use to such clients. Some merchant
banks specialize in a single area, such as underwriting or international
finance.
Many of the largest banks have both a retail division and a merchant bank
division. The divisions are generally very separate entities, as there is very
little similarity between retail banking and what goes on in a merchant bank.
Although your life is probably affected every day in some way by decisions
made in a merchant bank, most people reading this article are unlikely ever
to visit or deal directly with a merchant bank. Merchant banks operate
behind the scenes and away from the spotlight.
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Merchant Banking in India
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Merchant Banking in India
In the days ahead, merchant bankers have very significant role to play
tuning their activities to the requirements of the growth pattern of the
corporate sector, the industry and the economy as a whole which is, in
it, a challenging task and to meet these challenges merchant bankers
will have to be more vigorous and strategic in playing their role. They
will have also to adopt new ways and means in discharging their role.
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Merchant Banking in India
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
banks, ICICI started merchant banking activities in 1973 followed by IFCI
(1986) and IDBI (1991).
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Merchant Banking in India
In the recent past there has been an inflow of qualified and professionally
skilled brokers in various stock exchanges of India. These brokers undertake
merchant banking related operations also like providing investment and
portfolio management services.
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Merchant Banking in India
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
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.
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Merchant Banking in India
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
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Merchant Banking in India
The application should conform to all the requirements under the SEBI
guidelines, otherwise it may be rejected.
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: -
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• the applicant has in his employment minimum of two persons who
have the experience to conduct the business of the merchant banker
• a 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 networth
shall be as follows,
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Merchant Banking in India
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.
Every applicant eligible for grant of a certificate shall pay such fees in such
manner and within the period specified.
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exchange, and authorized dealer and to buy and sell foreign exchange
in all lawful ways in compliance with the relevant laws of India.
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6. They will invest in buying and selling of transfers, hypothecate and
deal with dispose of shares, stocks, debentures, securities and
properties of any other company.
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7. Every merchant banker who acts as lead manager must enter into an
CODE OF CONDUCT
a) The merchant banker must observe high integrity and fairness in all
his dealings.
b) He shall render at all times high standard of services, exercise due
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f) He should always Endeavour to give the best possible advise and
prompt efficient and cost effective service.
g) He should maintain the secrecy of all the confidential information
received during the course of service to his client.
h) He should not engage in the creation of a false market or price rigging
or manipulation.
GUIDELINES OF SEBI
After the obligations of the CCI, the place was occupied by a legal organ
called as “Securities and Exchange Board of India”. The issue of capital and
pricing of issues by companies has become free of prior approval. The SEBI
has issued guidelines for the issue of capital by the companies. The
guidelines broadly covers the requirement of the first issue by a new or the
first issue of a new company set up by the existing company, the first issue
by the existing private companies and public issues by the existing listing
companies. The SEBI is the most powerful organization to control and lead
both the primary market and secondary market.
The SEBI has announced the new guidelines for the disclosures by the
Companies leading to the investor protection. They are presented below:
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Merchant Banking in India
a) If any Company’s other income exceeds 10 per cent of the total
income, the details should be disclosed.
b) The Company should disclose any adverse situation which affects the
operations of the Company and occurs within one year prior to the
date filing of the offer document with the Registrar of Companies or
Stock Exchange.
c) The Company should also disclose the information regarding the
capacity utilization of the plant for the last 3 years.
d) The Promoters of the Company must maintain their holding at least at
20 per cent of the expanded capital.
e) The minimum application money payable should not be less than 25
per cent of the issue price.
f) The company should disclose the time normally taken for the disposal
of various types of investor’s grievances.
g) The Company can make firm allotments in public issues as follows:
Indian mutual funds (20%),
FIIS (24%),
Regular employees of the company (10%),
Financial institution (20%).
h) The Company should disclose the safety net scheme or buy back
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Merchant Banking in India
i) According to the guidelines, in case of the public issues, at least 30
Merchant banks and investment banks, in their purest forms, are different
kinds of financial institutions that perform different services. In practice, the
fine lines that separate the functions of merchant banks and investment
banks tend to blur. Traditional merchant banks often expand into the field of
securities underwriting, while many investment banks participate in trade
financing activities.
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Merchant Banking in India
Pure investment banks raise funds for businesses and some governments by
registering and issuing debt or equity and selling it on a market.
Traditionally, investment banks only participated in underwriting and selling
securities in large blocks. Investment banks facilitate mergers and
acquisitions through share sales and provide research and financial
consulting to companies.
Traditionally, investment banks did not deal with the general public.
Some of the activities that a pure merchant bank is involved in may include
issuing letters of credit, transferring funds internationally, trade consulting
and co-investment in projects involving trade of one form or another.
The current offering of investment banks and merchant banks varies by the
institution offering the services, but there are a few characteristics that
most companies that offer both investment and merchant banking share.
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serve properly, but are still too small to make a compelling public share
offering on a large exchange. In order to bridge the gap between venture
capital and a public offering, larger merchant banks tend to privately place
equity with other financial institutions, often taking on large portions of
ownership in companies that are believed to have strong growth potential.
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Merchant banks Commercial banks
5) Being advisors, they are closer to the Being lenders, they are more
customers and get to know risks of the cautions, assess risks in lending
transaction s properly. They work on proposal and cannot afford to be
risks shields i.e. mitigation measures grossly relationship based and
close to the customer.
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Merchant Banking in India
Business planning stage: 1)project feasibility study
2)advice on capital structuring
Equity raising: 3)preparation of prospectus and
liaison with SEBI
4)pricing decisions
5)marketing in the capacity of lead
managers
6)underwriters to the issue
7)post issue management
8)assistance in ADR/GDR
Debt raising: 9)management of debenture issue
10)preparation of bankable proposal
and syndication of loan
Working capital raising: 11)assistance in arranging optimal
capital finance
Strategic advice: 12)advice on mergers and
acquisitions
13)corporate structuring advice
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
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Merchant Banking in India
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 enthusied 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.
• Corporate Counseling
• Project Counseling And Pre-Investment Studies
• Credit Syndication And Project Finance
• Issue Management
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Merchant Banking in India
• Underwriting
• Bankers
• Portfolio Management
• Venture Capital Financing
• Leasing
• Non-Resident Investment Counseling And Management
• Acceptance Credit And Bill Discounting
• Advising On Mergers, Amalgamations And Take-Over
• Arranging Offshore Finance
• Fixed Deposit Broking
• Relief To Sick Industries
Corporate Counseling
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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.
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.
Project Counseling
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the cost of the project, appraising the project report with the financial
institutions/banks.
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.
Credit Syndication
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Merchant Banking in India
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.
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Merchant Banking in India
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.
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.
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Merchant Banking in India
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:
The merchant banker can automatically become the banker to the issue in
the following cases:
Portfolio Management
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Merchant Banking in India
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.
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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.
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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.
Leasing
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Non Resident Investment
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.
The merchant bankers also help their clients in the following areas involving
foreign currency financing:
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Management of Fixed Deposits of Companies
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Qualities of merchant bankers:-
To be a successful merchant banker, following qualities are necessary:
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its customers. Merchants bankers should take utmost care that the
information is not leaked and also not consumed for the purpose other
than for which it was disclosed to the merchant banker.
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II. Malafide practices: India corporate culture is bettering. but still many
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.
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ARTICLES:-
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Recently the association was really piqued when SEBI asked one of its
members to stop taking up further assignments without so much as giving it
any notice. AMBI feels that the member should have been given a fair
hearing and also feels that AMBI as the SRO should have been informed
about the decision. A committee has subsequently been set up by AMBI to
go into the matter. Then there was the issue of asking all merchant bankers
to furnish details of employees to SEBI. This was also demanded without
consulting/informing AMBI.
The association has already made its disappointment clear to SEBI and the
proposed dialogue is reportedly being undertaken to clear all
misunderstandings. AMBI will discuss the matter at a board meeting
scheduled for May 15.
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EXAMPLE:-
They undertake "project appraisals" with resource raising plans from Capital
Market/ Debt Markets and facilitate tie-ups with Banks / Financial
Institutions and Potential Investors.
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1. Merchant Banking
2. Commercial Banking
3. Investments
5. Underwriting
6. Loan Syndication
SPECTRUM OF SERVICES:-
3. Private Placements
4. Project Appraisals
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5. Monitoring Agency Assignments
6. IPO Funding
13. Syndication
1. Project Appraisal
2. Capital structuring
6. Underwriting
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8. Collecting Banker / Banker to an issue
Investment Criteria:-
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They provide the resources, convenience and services to meet your needs by
arranging Foreign Currency credits through:
• Commercial loans
• Syndicated loans
• Lines of Credit from Foreign Banks and Financial Institutions
• FCNR loans
• Loans from Export Credit Agencies
• Financing of Imports.
They are internationally the most Preferred Bank by Export Credit Agencies
for Guarantees in case of the Indian Clients or Projects.
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SBI being an Indian entity has no India exposure ceiling. Their Primary
focus is On Indian Clients. SBI’s seasoned Team of professionals provides
you with Insightful credit Information and helps you Maximize the Value
from the transaction.
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• Banker to the Issue/Paying Banker
• Refund Banker
• Monitoring Agency
• Debenture Trustee
• Marketing of the issue through a strong network of
QIBs/HNIEs/Corporates and Retail investor. The Bank itself is one of
the major investor in the market having a treasury of 45000 crores.
Their Software for handling the Refund Banker is one of the best systems in
the industry. Its unique features provides online payment of the instrument
by our 2470 branches in 733 centers, online status of paid instruments,
100% reconciliation at any point of time etc.
The Bank has an exclusive and specialized Capital Market Service Branch at
New Delhi for providing Merchant Banking Services to the Corporate
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CONCLUSION
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