Merchant Banking

Group Members
Udita Paliwal - 2645
Anjul Pratap Singh - 2640
Ganesh Mehta - 2627
Vaibhav Gupta - 2649

About Merchant Banking

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.

Contd.
A merchant bank is sometimes said to be a wholesale bank, or
in the business of wholesale banking.
Its because merchant banks tend to deal primarily with other
merchant banks and other large financial institutions.
As of today there are 135 Merchant bankers who are registered
with SEBI, India.
This includes Private, Public & Foreign players.

Merchant Banking: Origin

Merchant Banking came into existence in 17th & 18th century
in Italy & France.
Merchant banking in the modern era started from London;
Merchants started to finance the foreign trade through
acceptance of bill.
Merchant Banking officially came to India through Grindlays
Bank in 1967.
Recognized the requirements of upcoming class of
Entrepreneurs for diverse financial services.

Services:

Corporate counseling.
Project counseling.
Working capital finance.
Restructuring strategies.
Credit Syndication.
Lease Financing.
Some Other Services.

Services contd.
Corporate Counseling:
Set of activities undertaken for efficient running of an
enterprise.
Identifying areas of growth & diversification.
Guiding clients on aspects like locational factors,
organizational size, investment decision, choice of product.

Contd.
Project counseling:
Its a part of corporate counseling & deals with analysis of
project viability .
Comprises of preparation of project report & deciding finance
pattern for cost of project.
Filling up of application form with significant information for
obtaining funds.

Services contd.
Working Capital Finance:
Meeting the day-to-day expenses of an enterprise is working
capital finance.
Assessment of working capital requirements.
Preparing necessary application to negotiation for sanction of
appropriate credit facilities.

Restructuring Strategies.
Deals with Mergers & Acquisitions.
Its a specialized service of Merchant bankers wherein they act
as middle-men in negotiating between two companies.
Offers expert evaluation regarding identification organizations
with matching characteristics.
Obtaining approvals from various authorities.

Services contd.
Credit Syndication:
Relates to activities connected with credit procurement &
project financing.
Estimates total cost of the project
Drawing up of financial plan which conforms requirements of
promoters & their collaborators.
Selecting institutions for participation for financing.

Lease Financing.

Its an important alternative source of financing a capital

outlay.
Involves letting out assets on lease for use by the lessee for a
particular period of time.
Providing advice on viability of leasing & choice of favorable
rental structure.

Other Services:

Relief to Sick Industries:

Rejuvenating old lines & ailing units by appraising
technology, process etc.
Evolving rehabilitation packages acceptable to financial
institutions/banks.
Exploring possibilities of mergers & acqusitions.

Difference b/w Commercial & Merchant banks

Merchant Banking
Commercial Banking
Catering needs of common
man.
Anyone can open an A/c.
Less exposed to risk.
Related to secondary markets.
Its asset oriented.
Plays the role of financers.

Catering needs of corporate

firms.
It cannot be done.
More exposed to risk.
Related to Primary markets.
Its management oriented.
Plays different roles like
underwriting, advisory etc.

Merchant Banking
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 success.
There is always risk attached to the
kinds of deal that merchant banks
undertake.

Need For Regulation

The regulation would assure for the issuer market for raising
resources at low cost, effectively and easily, ensure high
degree of protection of investors interest.
The regulations provide merchant bankers a dynamic and
competitive market with the high standard of professional
competence, dignity, integrity and solvency.
The regulations promote a primary market, which is fair,
efficient, and flexible, and inspire confidence.

Major terms and conditions of

authorization.
All merchant bankers must have a minimum net worth of Rs.1
Crore.
Authorization will be for a initial period of three years.
All issues should be managed by at least one authorized
merchant banker, functioning as the sole manager on the lead
manager.
The specific responsibilities of each lead manager must be
submitted to SEBI prior to the issue.

Contd..
Lead managers/merchant bankers would be responsible for
ensuring timely refunds and allotment of securities to the
investors.
SEBI shall prepare and prescribe a code of conduct for
merchant bankers which they should adhere to.
Merchant bankers have to segregate their business from other
activities and they cannot take up any fund-based business.
SEBI may suspend/cancel the authorization of merchant
bankers for a suitable duration in case of isolations of the
terms of authorization.

Institutes offering Merchant Banking

Public Sector

SBI capital markets ltd

Punjab national bank
Bank of Maharashtra
Karur Vysya bank ltd
State Bank of Bikaner and
Jaipur.
IFCI financial services ltd.

Private Sector

ICICI Securities Ltd

Axis Bank Ltd
Bajaj Capital Ltd
Reliance Securities Limited
Kotak Mahindra Capital
Company Ltd
Yes Bank Ltd

Key Foreign Players

Goldman Sachs (India) Securities Pvt. Ltd.

Morgan Stanley India Company Pvt. Ltd.
Barclays Securities (India) Pvt. Ltd.
Bank Of America
Citigroup Global Markets India Pvt. Ltd.

DSP Merrill Lynch Ltd.

CASE STUDY 1

Role of a Merchant Banker

in Underwriting: Facebook
IPO

Facebook IPO
Facebookheld itsinitial public
offer(IPO)on May 18, 2012. The IPO
was one of the biggest in technology,
and the biggest in Internet history,
with a peak market capitalization of
over $104 billion.

Background
Facebook's founder and chief executiveMark
Zuckerberghad for years been unwilling to take the
company public, and he resisted a number of buyout
offers after Facebook's founding.
The company did, however, accept private
investments from companies--often technology firms.
When the number of shareholders crossed the 500
threshold, Facebook had to take the company public.
Zuckerberg retains control over the company, despite
its being a public entity.

What actually happened

In early May, the company was aiming
for a valuation somewhere from $28 to
$35 per share ($77 billion to $96
billion).
On May 14, it raised the targets from
$34 to $38 per share.
Ultimatelyunderwriterssettled on a
price of $38 per share, at the top of its
target range.

Contd..
This price valued the company at $104 billion,
the largest valuation to date for a newly
public company.
On May 16, two days before the IPO,
Facebook announced that it would sell 25%
more shares than originally planned due to
high demand.
This meant the stock would debut with 421
million shares.
Morgan Stanley was in the underwriting role.

What after the IPO

Reasons for failure: Flaw in the

Valuation
ItsPE ratiowas 85, despite a decline in
both earnings and revenue in the first
quarter of 2012.
Facebook had been heavily overvalued
because of an illiquid private market,
where trades of stock were minimal
and thus pricing unstable.
They had issued too many shares.

CASE STUDY 2

Investmen
t Advisory

Just Dial
Just Dial promoterswill sell shares in an
Initial Public Offer from 20th to 22nd
May 2013. They will sell1.75 crore
(17.5 million) sharesat a price band
of470 to 543. The IPO size isRs. 822 cr.
to Rs. 950 cr.
Retail investors get adiscount of Rs.
47from the discovered price. This means
investors putting in less than Rs. 2,00,000.

Why to Invest?
The company has 475 cr. of cash
With 22 cr. in their current account and
over Rs. 450 cr. in fixed income mutual
funds.
They seem to generate about 100 cr.
from operations every year.
At Rs. 470 per share, the company is
valued at a P/E of 49 at the lower end
of the pricing band. Overvalued?

Overvalued?
Valuation is high but the internet has
seen higher growth. There arent
many great companies out there
JustDial is a good and well known
player. They have cash, so they
might be able to disrupt the market.
There is potential.

Safety Net
Retail investors that apply for less than
200,000 rupees worth shares get a
safety net; the three promoter brothers
of Mani, Ramani and Krishnan will
guarantee the retail decided price for
six months. Remember that retail gets a
discount of Rs. 47 from the price
decided. Q4 2013 and Q1 2014, and
likely also Q2 2014. Enough time to exit.

Forecasting
In 2013, they are likely to make
arevenue of 350 cr. This is 36%
higher than the259 cr. in FY 2012.
However,net profitby the same
extrapolation is63 cr.,only25%
higherthan the 51 cr. in 2012. At a
P/E of more than 40, this is a slightly
high.

IPO Day 1 (Timing the

purchase)
50% Takers on 1st
Day

JustDial IPO Fully Subscribed

While institutions bid for more than
10 times their allocation, retail
investors who pitched for less than
200K worth have bid for 3.3x their
quota.
HNIs bit this up 22x. They Value the
company.

Valuation Today

Verdict
JustDial, has its current price atRs.
762, a 43.77% increasefrom the
issue price of Rs. 530. The gains are
even larger for retail investors who
got the shares at Rs.483, a Rs. 47
discount they gain 57.7% in
about 100 days.
CFAT 28.04 Cr. from 21.37. A 31%
rise.

CASE STUDY 3

Bridge Loans
A short-termloanthat is used until a person or
company secures permanent financing or
removes an existing obligation.
This type of financing allows the user to meet
current obligations by providing immediate cash
flow. The loans are short-term (up to one year)
with relatively high interest rates and are backed
by some form of collateral such as real estate or
inventory.
Also known as "interim financing", "gap financing"
or a "swing loan".

TATA - JLR
Tata Motors acquired JLR for USD 2.3bn.
Tata Motors UK raised USD 3bn by way of bridge
loans.
Raised through a syndicate of banks, to be repaid
in 15 months.
Lead advisors: JP Morgan and Citigroup
Underwritten by a consortium of eight banks.
Interest rate linked to LIBOR.
1. First six months: LIBOR + 0.85%
2. Next three months: LIBOR + 1.2%
3. Rest of the period: LIBOR + 1.5%
Average in terms of weighted cost of bridge
finance: 5.5%

Initial Plan to re-finance the Bridge loan

1. Raise USD 1.8bn through three simultaneous but
unlinked rights issues. Overseas floatation of
following securities: USD 550 mn through equity shares
USD 500 mn through A Equity shares carrying
differential voting rights.
USD 750 mn through five year 0.5% convertible
preference shares (later shelved).
2. USD 500 mn through issue of securities in foreign
markets (later shelved).
3. Remaining USD 700 mn through debt on the books of
JLR.