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MERCHANT BANKING & VENTURE CAPITAL

By: SHOBHIKA TYAGI MAHIMA AGGARWAL SAKSHI BANSAL BHANU NEGI

An organization that underwrites securities for corporations, advices such clients on mergers, and is involved in the ownership of commercial ventures. According to Mr. Rosenburg

The term merchant banking originated from the London who started financing foreign trade through acceptance of bills Later they helped government of under developed countries to raise long term funds Later these merchants formed an association which is now called Merchant Banking and Securities House Association In USA merchant banking was developed by the European bankers. In 1972 merchant banking practice was started in South Africa

Merchant banking is a fee based business, where the bank assumes market risk but no long-term credit risk.

Merchant Banking officially came to India through Grindlays Bank in 1967.

Few Other Institutes who joined the bandwagon:Citibank Setup its merchant banking division in India in 1970. State bank of India started the merchant banking division in 1972. Many other banks came after this like ICICI, Canara Bank, UCO bank etc.

Bank that deals mostly in international finance, long-

term loans for companies and stock underwriting. Merchant banking primarily involves financial advice and services for large corporations and wealthy individuals. Merchant banks do not provide regular banking services to the general public. Merchant banks invest their own capital in client companies & provide services for mergers and acquisitions.

A merchant bank is sometimes said to be a wholesale bank, or in the business of wholesale banking. As of today there are 135 Merchant bankers who are registered with SEBI, India. This includes Private, Public & Foreign players.

1. 2. 3. 4. 5. 6. 7. 8.

Corporate counseling. Project counseling. Working capital finance. Portfolio Management. Restructuring strategies. Credit Syndication. Lease Financing. Mutual Funds

COMMERCIAL BANKING
1. Catering needs of common man.

MERCHANT BANKING

1. Catering needs of corporate firms.

2. Anyone can open an A/c.


3. Less exposed to risk. 4. Related to secondary markets. 5. Its asset oriented.

2. It cannot be done.
3. More exposed to risk. 4. Related to Primary markets. 5. Its management oriented. 6. Plays different roles like underwriting, portfolio etc.

6. Plays the role of financers.

ADVANTAGES:
Merchant banks perform functions that cannot be carried out by businesses on their own. Merchant banks have access to traders, financial institutions, and markets that companies or individuals could not possibly reach. By using their skills and contacts, merchant banks can get the best possible deals for their clients.

DISADVANTAGES:
Merchant banks are really only for large corporate customers, or extremely wealthy smaller businesses owned by individual clients. Not all deals carried out by merchant banks meet with unqualified success. There is always risk attached to the kinds of deal that merchant banks undertake.

1. Commercial Banks: Many nationalised banks either operate separate division or have floated wholly owned subsidiaries to carry out merchant banking activities. SBI was the first bank to begin to offer these services in 1972. SBI (SBI Capital Markets ltd.), Canara Bank ( Canbank Financial Services limited), Bank of Baroda ( Bank of Baroda Fiscal Service ltd.) and some other banks are now floating wholly owned subsidies. 2. All Ina Financial Institution: 3. Private consultancy Firms: 4. Technical Consultancy Organisations.

Should have knowledge and information about the capital markets, trends in the stock exchange, psychology of the investing public, and technological and economical changes in the country. Ability to analyze and evaluate various technical, financial, and economical aspects concerning the formation of an industrial project. Safeguard the interest of the investing public. Should realize the changing environment of capital market and keep cordial relationship with the investors.

They should develop innovative capital market instruments.


Must restrict, concentrate and develop their strength.

Certificate from SEBI is a must.They are of four types:

Category I merchant bankers : Can act as Issue managers


Category II merchant bankers : can act only as co-managers Category III merchant bankers : can act as co-managers but cannot undertake portfolio management Category IV merchant bankers :can merely act as consultant or advisor to issue of capital CAPITAL ADEQUACY NORMS :

Category I

: Rs. 5 crores

Category II : Rs.50 lakhs Category III : Rs.20 lakhs Category IV : Nil

Should have qualification in finance, law or business management


Should have adequate office space, equipment and manpower At least 2 merchant bank operations qualified persons to be appointed

Should be fair in all transactions


SEBI will supervise the activities of merchant bankers.

SEBI has laid responsibility for the true disclosures and factual statements made on the prospectus and their authenticity.
SEBI has the power to suspend or cancel the authorization of merchant bankers in case of any violation of the guidelines; Should abide by the code of conduct prescribed by SEBI; For the issue over Rs. 100 crs, the number of BRLMs should be 4 to 5;

Merchant bankers should make an agreement with corporate bodies about their mutual rights, liabilities and obligations etc.

As per SEBI guidelines, Merchant Bankers are authorized to undertake only issue related activities, which restrict their scope of activities. Issuing companies do not adhere to the schedule in allotment and refund of application money.

SEBI stipulates high capital adequacy norms for authorisation.


Non co-operation of the issuing companies in timely allotment of securities and refund of application of money. Yet merchant banking is vast but should develop adequate expertise to provide a full range of merchant banking services

VENTURE CAPITAL FINANCING

Venture Capital is the fund/initial capital provided

to businesses typically at a start-up stage and many times for new/ untested ideas.
This concept was emerged during the 1970s in US

and came in India around 1987.


Venture capital funds are mutual funds.

Obtaining venture capital is substantially different

from raising debt or a loan from a lender.

High risk and return Long term investment Equity participation Participation in Management

Achieve social objective


Finance new and rapidly growing companies.

Deal origination

Screening

Evaluation

Deal structuring

Post Investment Activities and Exit

DEAL ORIGINATION
Deal Origination refers to the creation and

development of relationship. It can be created by 2 ways: Refferal System and Business Plan Competitions
Screening
Screening means to check the projects on the basis

of some broad criteria.

EVALUATION
In this the detailed evaluation of the proposal. Due to

lack of experience the entreprenuers are evaluated on the basis of their personal qualities.
Assessment of the business plan is also made to know

the possible risk and expected return from the venture.

DEAL STRUCTURING
In this the venture capitalist and the investee

company negotiate the terms of deal, i.e. the amount and form of investment.
It also includes the protective coventants and earn

out arrangements.

POST INVESTMENT ACTIVITIES AND EXIT

After the agreement is being finalized the venture capitalists assumes himself as partner and gets involved in all the activities of the organisation.

There are 3 ways to exit from benture capitalist:

Initial Public Offerings(IPOs)


Acquisition from other company Purchase of venture capitalists share from an

outsider.

Equity

Conditional loan
Income Note Participating Debenture

Convertible loans

SEED STAGE FINANCING STARTUP STAGE FINANCING

EARLY STAGE FINANCING


SECOND STAGE FINANCING LATER STAGE FINANCING

Capital is provided to prove the feasibility of the

project.
Companies who do not have ready product market,

strong management team, etc are financed.


Maturity period is generally 7 10 years Generally financing is done through equity.

Capital needed to finance the product development, initial

marketing and establishment of product facility.


Fund is provided to the newly established companies,

having acceptable business plan.


Maturity period is generally 6-8 years.

Financing is done through equity.

Finance provided to companies that have completed the

product development stage and require further funds to initiate commercial manufacturing and sales.
Provided to the companies having no sales return, poor

cash flow conditions.


Maturity period is generally 4-6 years In this stage also financing is done through equity.

Capital provided for marketing and meeting the

growing working capital needs of an enterprise


Provided to the companies having a developed

product in the market, and are generating profits.


Risk involved is low. Maturity period is 3-7 years

Capital is provided for further plant expansion,

marketing and working capital requirement.


Provided to an established organisation having

basic marketing setup.


Financing is a mix of equity and debt. Maturity period is 3-5 years.

VCF OF IDBI : Started with initial capital of 10 crore.


Assist project which promotes commercial application

of developed technology.
It assists project with maximum cost of 2.5 crore

Started in 1989 by UTI in collaboration with ICICI

for fostering industrial development.


TDICI acts as an adviser and manager of the fund. The main object is to finance greenfield ventures

Launched by IFCI in 1985 as Risk Capital

Foundation.
Converted into RCTFC in 1988 Provides risk capital and technology finance to

innovative entrepreneurs.

Launched in 1989 Second VCF in the private sector in India. Joint venture of credit capital financing institution, Asian

Development Bank, and Common Wealth Development corporation of UK.


Focuses on small export oriented units and ancilliary units.

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