Origin and merchant banking in India

London merchants in financing foreign trade through acceptance of bill. Merchants assisted to under developed country to rise funds in money market First merchant bank in India started by foreign bank National Grindlays bank in 1967 and City bank in 1970. Banking commission report in 1972 regarding setting up of merchant banker by commercial banks. SBI, ICICI, bank of Baroda, Canara Bank, UCO bank, Punjab National bank. Merchant banking gained prominence during 1983-84 due to the new issue boom.

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

Services of Merchant Banking

Corporate counseling ( Growth and diversification and Financing) Project counseling Capital restructuring Credit syndication and project finance Issue management and underwriting Portfolio management Working capital finance Merger, amalgamation and takeover Project appraisal Venture capital (Rockefeller 1950) Mutual funds Foreign currency finance

SEBI Code of conduct for Merchant Banking

Integrity Quality service Fair practice Responsible statement Best advice Secrecy Information Prospectus Allotment True market compliance

SEBI guidelines for Merchant Banking

All merchant bankers will require authorization by SEBI to carry out business An initial authorization fee, an annual fee and renewal fee may be collected by SEBI All issue must be managed at least by one authorized banker Each merchant banker is required to furnish to the SEBI half yearly unaudited financial results SEBI has prescribed the code of conduct to the merchant bankers.

Contd
SEBI has the power to suspend or cancel the authorization in case of violation To ensure the transference and accountability in operation of the merchant banker and protect the investors. Inspections will be conducted SEBI to ensure that provisions of the regulation are properly complied. SEBI issued further guidelines classifying the merchant bankers into four categories based on the nature and range of activities.

Categories Merchant banker/issue managers

Categories 1 : Merchant banker who is authorized to act as issue manager, adviser, consultant, underwriter and portfolio manager Categories 2 : Merchant banker who is authorized to act as adviser, consultant, underwriter and portfolio manager Categories 3 : Merchant banker who is authorized to act as adviser, consultant, underwriter. Categories 4 : Merchant banker who is authorized to act as adviser, consultant.

Issue management
Issue management involves marketing of corporate securities viz., equity share, preference shares and debentures or bonds by offsetting them to public. Merchant banks act as intermediary whose main job is to transfer capital from those who own it to those who need it. Categories of securities issue Public issue Right issue Private placement

Equity Issue/Public issue

When the capital funds are raised through the issue of prospectors, is called public issue of securities. It is most common method rising of funds.

Mechanism or process of Public issue mgt

Right issue
When the shares are issued to the existing share holder on the privileged basis, it is called as right issue.

Pre-issue activities in public issue

Signing of MOU Obtaining appraisal note Optimum capital structure Convening meeting Appointment of financial intermediary Preparing documents Due diligence certificate Submission of offer document Finalization of collection center Filling with ROC Launching the issue Promoters contribution Issue closure

Post issue activities in public issue

Finalization of basis of allotment Dispatch of share certificates Advertisement

Mechanism or process of Right issue management

Decision to rise capital funds Obtaining SEBI approval Arranging underwriting Selection of registrars, brokers, bankers, etc Arranging press and existing share holder conference Printing and announcement of right issue documents. SEBI compliance Issue Launch

Private Placement
When the issuing company sells securities directly to the investors, especially institutional investors, it takes the form of private placement.

Features of Private Placement

No Prospectus Instrument covered Issuers Investors Intermediaries Negotiation Popular instrument Market size

Importance and Advantages of private placement

Importance Capital market conditions Financial institutions resources Preferences Advantages Popular mode Quick access Secrecy influence

Book building
Book building is a process by which corporate determines the demand and the price of a proposed issue of securities through public bidding. According to the SEBI, there are two option available to a company, either 75 percent or 10 percent book-building process.

Book building Process

75 percent book-building Eligibility Earmarking securities Draft prospectus Appointment of book runner Price setting Underwriting Bank account Allotment Listing Inspection

Book building Process

100 percent Book Building Lead book runner Draft prospectus Essential disclosures Advertisement Stock brokers Bidding process Allotment process Refund Certificate Raising of capital from international market

SEBI Guidelines for public issue/Equity issue/IPO

Prospectus has to be attached with every application. Company has to highlight the risk factors in the prospectus Objective of issue and cost of project should be mentioned in the prospectus Company management, past history and present business of the firm should be highlighted in the prospectus. Justification for premium, in the case of premium is to be stated Subscription list for public issue should be kept open for a minimum of three days and a maximum of 10 working days.

Contd
The collection centers should be at least 30 which include all centers with stock exchanges. If minimum subscription of 90% has not been received, the entire amount is to be refunded to investors within 120 days The capital issue should be fully paid up within 120 days Underwriting has been made mandatory. Issues should make adequate discloser regarding the terms and conditions of redemptions, security conversion and other relevant feature of the new instruments.

SEBI guidelines for right issue

Composite issue Appointment of merchant banker Minimum subscription Preferential allotment Underwriting Right of FCD/PCD holders Over subscription not be retained Promoters contribution Disclosure in the letter of offer Advertisement in news paper Compliance report

Applicability of SEBI code of conduct

SEBI guidelines for Debenture issue

The amount of working capital debenture should not exceed 20% of the gross current assets. The debt equity ratio should not exceed 2:1. Credit rating is compulsory for all debenture. Debenture are to be redeemed after 7 years of maturity. The rate of interest decided by the company Normally debenture above 7 years can not be issued. Debenture issued to the public have been secured and registered. Debenture redemption reserve is to be set up out of profit of the company. Debenture trustee and debenture trust deed are to be finalized within six months of the public offer.

SEBI Guidelines for Book building

The option of 100% book building shall be available only to those issuer companies which propose to make an issue of and above Rs. 100 crores. It should be other than the promoters contribution and ESOPs Issuing company shall appoint category I merchant banker as a book runner and their names shall be mentioned in prospectors. Draft prospectus shall be filed with SEBI by the lead merchant Bankers Advertisement in the news paper

Contd...
The company and book runner shall determine the issue price as per bids received. Appointing Collection centers. Allotment shall be made not later than 15 days from the closure of issue A final book of demand showing the results of allocation process shall be maintained by the book runners SEBI shall have the right to carry out an inspection of the records, books and documents relating to the book building process.