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8/3/2019 60130847 Merchant Banking
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MERCHANT BANKING
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Presented By
Nidhi Ashar 02
Minjal Dharamshi 07
Sagar Dharod 08
Hitesh Ganatra 13
Abhishek Sanghvi 55
Naitik Savla 60
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Contents
Origin OfMerchant Banking
Merchant Banking-An Overview
Merchant Banking in India
Services rendered
Regulation Structure
Registration with SEBI
Authorized Activities
Terms ofAuthorization
General Obligations and Responsibilities
Main functions ofa merchant banker
Services OfMerchant Bankers
Banks Providing Merchant Banking Services In India
Some Problems OfMerchant Bankers
Current Affairs
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Merchant Banking
Merchant banking may be defined as an institution which
covers a wide range ofactivities such as underwriting ofshares,
portfolio management, project counseling, insurance etcThey
render all these services for a fee
ORIGIN :
The term merchant banking originated from the London who
started financing foreign trade through acceptance ofbills
Later they helped government ofunder developed countries to
raise long term funds
Later these merchants formed an association which is now
called Merchant Banking and Securities House Association
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Merchant Banking-An Overview
Companies raise capital by issuing securities
in the market. Merchant bankers act as
intermediaries between the issuers ofcapitaland the ultimate investors who purchase
these securities.
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Merchant Banking-An Overview
Merchant banking is the financial intermediation thatmatches the entities that need capital and those that have
capital. It is a function that facilitates the flow of capital in the
market.
Ministry of Finance: Any person who is engaged in thebusiness of issue management either by making
arrangements regarding selling, buying or subscribing to
securities as manager, consultant, advisor or renderingcorporate advisory service in relation to such issue
management
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Merchant Banking-An Overview
Banking commission Report-1972
a) Necessity
b) Distinct from commercial Banksc) Investment Management and Advisory services
d) Medium and small savers
e) Manage
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Merchant Banking in India
Grindlays Banks-1967
Management ofcapital issue
Production planning, system design to marketresearch
Management consultancy
Citibank-1970
SBI-1972
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Services rendered
Organising finance for investment in projects
Assistance in financial management
Acceptance ofhouse business
Raising Eurodollar loans and issue of foreign currencybonds
Financing export ofcapital goods, hydropower
Financing ofhire-purchase transaction, leasing
Mergers, takeovers, valuation ofassets
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Regulation
Merchant Bankers Regulations ofSecurities
and Exchange Board ofIndia
Company Act 1956 Listing guidelines ofStock Exchanges
Securities Contracts (Regulation) Act, 1956
Formation ofdivisions
Subsidiaries companies
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Structure
Category-I
to carry on any activity ofthe issue management,
which will inter-alia consist ofpreparation of
prospectus and other information relating to theissue, determining financial structure, tie-up of
financiers and final allotment and refund ofthe
subscription; and
to act as adviser, consultant, manager,
underwriter, portfolio manager.
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Structure
Category II
that is, to act as adviser, consultant, co-manager,
underwriter, portfolio manager;
Category III
that is to act as underwriter, adviser, consultant to
an issue;
Category IVthat is to act only as adviser or consultant to an
issue.
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Registration with SEBI
Around 250 Merchant Bankers
Abolished all categories and maintained
Category-I Separate registration for underwriters and
portfolio manager
Segregation between
fee based and
Fundbased activities
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Registration with SEBI
Registration with SEBI is mandatory to carry out the businessofmerchant banking in India. An applicant should comply withthe following norms:
The applicant should be a body corporateThe applicant should not carry on any business other than those
connected with the securities market
The applicant should have necessary infrastructure like office space,equipment, manpower etc.
The applicant must have at least two employees with prior experience inmerchant banking
Any associate company, group company, subsidiary or interconnectedcompany ofthe applicant should not have been a registered merchantbanker
The applicant should not have been involved in any securities scam orproved guilt for any offence
The applicant should have a minimum net worth ofRs.5 crores
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Authorized Activities
Issue ManagementPreparation ofprospectus
Information relating to the issue
Determining financing structure
Tie-up offinances and final allotment and/orrefund ofsubscription
Corporate advisors to the issue Consultants or advisors to issue and
underwriting
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Terms of Authorization
Authorization is valid for an initial period of3 years
Authorization fee, annual fee and renewal fee
All issues should be managed by at least one authorized
merchant bankers, functioning as sole manager or leadmanager
MB expected to exercise due diligence independently
Involvement ofMB in post-issue management
Adhere a code ofconduct prescribed by SEBI MB may be cancelled or suspended for suitable duration
MB regulations integrate issue management withunderwriting
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General Obligations and
Responsibilities Maintenance ofbooks ofaccounts, records and
documents
Copy ofthe balance sheet, auditors report and
statement offinancial position
Responsibilities oflead Manager
Underwriting obligation
Submission ofdue diligence certificate
Insider Trading
Acquisition ofshares
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Main functions of a merchant
banker Management of debt and equity offerings- This
forms the main function ofthe merchant banker. He assists the
companies in raising funds from the market. The main areas ofwork in
this regard include: instrument designing, pricing the issue, registration ofthe offer document, underwriting support, marketing of the issue,allotment and refund, listing on stock exchanges.
Placement and distribution- The merchant banker helpsin distributing various securities like equity shares, debt instruments,
mutual fund products, fixed deposits, insurance products, commercial
paper to name a few. The distribution network ofthe merchant banker
can be classified as institutional and retail in nature.
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Functions
Corporate advisory services- Merchant bankers offer customized solutions to their clients financial
problems. The following are the main areas in which their advice issought:
Financial structuring includes determining the right debt-equity ratio and
gearing ratio for the client, the appropriate capital structure theory isalso framed.
Merchant bankers also explore the refinancing alternatives ofthe client,and evaluate cheaper sources offunds.
Another area ofadvice is rehabilitation and turnaround management. Incase ofsick units, merchant bankers may design a revival package incoordination with banks and financial institutions.
Risk managementis another area where advice from a merchant bankeris sought. He advises the client on different hedging strategies andsuggests the appropriate strategy.
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Functions
Project advisory services- conceptualizing the project idea
feasibility studies Preparing different documents like the detailed project report.
Loan syndication- Tie up loans for their clients
Analyze the pattern ofthe clients cash flows
Prepares a detailed loan memorandum This takes place in a
series ofsteps. Firstly they, based on which the terms ofborrowings can be defined. Then the merchant banker,which is circulated to various banks and financialinstitutions and they are invited to participate in thesyndicate.
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Services Of Merchant Bankers
PROJECT COUNSELLING :
It includes preparation of project reports,deciding upon the
financing pattern, appraising the project relating to its
technical, commercial and financial viability. It includes fillingup of application forms for obtaining funds from financial
institutions.
LOAN SYNDICATION :
Assistance is rendered to raise loans for projects afterdetermining promoters contribution. These loans can be
obtained from a single institution or a consortium.
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ISSUE MANAGEMENT :
Management of issues involves marketing of corporate securities
ieequity shares, preference shares and debentures by offering them
to public.
Pre-issue activities:
They prepare copies of prospectus and send it to to SEBI and then
file them to Registrar of CompaniesThey conduct meetings with company representatives and
advertising agencies to decide upon the date of opening of issue,
closing of issue, launching & publicity campaign etc..
They help the companies in fixing up the prices for their issues
Post-issue activities:
It includes collection of application forms, screening of applications,
deciding allotment procedure, mailing of allotment letters, and
refund orders
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UNDERWRITING OF PUBLIC ISSUES :
Underwriting is an insurance to the company which makes
public issues. Raising of external resources is easy for the
issues backed by well known underwriters.
MANAGERS,CONSULTANTS OR ADVISERS TO THEISSUE :
SEBI insist that all issues should be managed by atleast one
authorised merchant banker but not more than two. For an issue
of 100 crores, upto a maximum of four merchant bankers shallbe appointed. They help in listing of shares in stock exchange,
completion of formalities under Companies Act etc..
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PORTFOLIO MANAGEMENT :
Portfolio refers to investment in different kinds of securities
such as shares, debenture issued by different companies. It is
a combination of assets but a carefully blended asset
combination.
Portfolio management refers to maintaining propercombination of securities in a manner that they give
maximum return
Investors are interested in safety, liquidity and profitability of
his investment but they cant choose the appropriate
securities. So merchant bankers help their investors in
choosing the shares. They conduct regular market and
economic surveys.
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NRI INVESTMENT :
NRIs has to follow lots of complicated rules for investing in the
shares in India.M
erchant bankers help them in choosing the sharesand offer expert advice fulfilling government regulations thus
mobilising more resources for corporate sector.
ADVISORY SERVICE RELATING TO MERGERS AND
TAKEOVERS :Merger is a combination of two or more companies into a singe
company where one survives and other loses its existence
Takeover is the purchase by one company acquiring controlling
interest in the share capital of another company
Merchant banker acts as middlemen between offeror and
offeree,negotiates mode of payment and gets approval from
government.
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OFF SHORE FINANCE :
Merchant bankers help their clients in :
Long term foreign currency loan
Joint venture abroad
Financing exports and imports
Foreign collaboration arrangement
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BANKS PROVIDING MERCHANT BANKING SERVICES
IN INDIA
Commercial banks
Foreign banks like National Grindlays Bank, Citibank, HSBC
bank etc..
Development banks like ICICI,IFCI,IDBI etc..
SFC , SIDCs
Private firms like JM Financial and Investment service , DSP
Financial Consultants, Ceat Financial Services, KotakMahindra,
VMC Project Technologies, Morgan Stanley, Jardie Fleming,
Klienwort Benson etc
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SOME PROBLEMS OF MERCHANT BANKERS
SEBI stipulates high capital adequacy norms for
authorisation which prevents young, specialized
professionals into merchant banking business
Non co-operation of the issuing companies in timely
allotment of securities and refund of application of money
etc.. is another problem
Yet merchant banking is vast but should develop adequateexpertise to provide a full range of merchant banking
services
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Current Affairs
Morgan Stanley makes i-banking comeback The joint venture between JM Financial and Morgan Stanley
was inked in 1997 and formalized in 1999.
The JV had investment banking operations other than equitybroking, research, wealth management and advisory and
securities distribution operations.
Post the split, JM Financial acquired the investment banking
company together with its subsidiaries, which were engaged in
fixed income, equity broking, wealth management, advisoryand distribution businesses of$ 20 million.
. The Indian partner sold its 49% holding in JM Morgan Stanley
Securities (JMSPL), the institutional equity broking company
to Morgan Stanley for $ 445 million.
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Current Affairs
PNB aims profit of7,500crore by 2013 The country's second largest public sector lender Punjab
National Bank aims to double its profit to Rs7,500 crore in the
next four years."The bank has set a target to expand total business to
Rs10crore and earn net profit ofRs7,500 crore by 2013," said
PNB Chairman and Managing Director K C Chakrabarty, who is
charge ofDeputy Governor ofRBI.
The growth driver would be better asset liability management,thrust on recovery, focus on customers and financial inclusion,
he had said. Besides, the bank plans to open new line of
businesses in the current fiscal including merchant banking
subsidiary.
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THANK YOU