Major Difference Between Merchant Banking and Investment Banking

7/30/2019 Major Difference Between Merchant Banking and Investment Banking

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Major difference between Merchant banking andInvestment Banking(433) Views

Apr 30th

by Management Duniya( No Comments )

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Sources of revenue could be [a] Fund based source & [b] Fee based source The fundbased income is that revenue gained from interest, lease rental, and as well as incomefrom capital market investments. The fee-based income is that source gained frombanking, advisory services, custodial services etc. The major difference between the

Merchant bankers and Investment Bankers is:

Merchant Banking is purely fee based.

Investment banking is both fee based and fund based.

A merchant banker can undertake only those activities, which are relating to securitiesmarket and which do not require registration / have been granted exemption fromregistration as an NBFC from RBI.

In particular a merchant Banker can undertake the following activities

Managing of public issue of securities

Underwriting connected with the public issue Management Services acting like asBook Running Lead Manager/Lead Manager for the IPOs/FPOs/Right issues/Debtissues

Managing advising on international offerings of dept / equity i.e. GDR, ADR, bondsand other

Instruments Private placements of securities

Primary or satellite dealership of GOVT securities

Corporate advisory services relate to securities market eg: takeovers acquisitions and

Disinvestments

Stocking broking

_ Advisory services for projects and Project appraisals.

_ Syndication of rupee term loans
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_ International financial advisory services.

_ Project counseling and pre investment activities

_ Undertaking Feasibility studies

_ Issuing Project reports

_ Design of capital structure

_ Mobilization of funds from NRIs

_ Foreign currency finance

_ Mergers and takeovers

_ Venture capital services

_ Buy back and public deposits

_ Refund Banker

_ Monitoring Agency

_ Debenture Trustee

Services of Merchant Banks in detail

Project Counseling:

Project counseling includes preparation of project reports, deciding upon the financingpattern to finance the cost of the project and appraising the project report with thefinancial institutions or banks. It also includes filling up of application forms withrelevant information for obtaining funds from financial institutions and obtaininggovernment approval.

Management of debt and equity offerings

This forms the main function of the merchant banker. He assists the companies inraising funds from the market. The main areas of work in this regard include:instrument designing, pricing the issue, registration of the offer document,underwriting support, and marketing of the issue, allotment and refund, listing onstock exchanges.

Issue Management:

Management of issue involves marketing of corporate securities viz. equity shares,preference shares and debentures or bonds by offering them to public. Merchant banksact as an intermediary whose main job is to transfer capital from those who own it tothose who need it. After taking action as per SEBI guidelines, the merchant banker


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arranges a meeting with company representatives and advertising agents to finalizearrangements relating to date of opening and closing of issue, registration ofprospectus, launching publicity campaign and fixing date of board meeting to approveand sign prospectus and pass the necessary resolutions. Pricing of issues is done by thecompanies in consultant with the merchant bankers.

Managers, Consultants or Advisers to the Issue:

The managers to the issue assist in the drafting of prospectus, application forms andcompletion of formalities under the Companies Act, appointment of Registrar fordealing with share applications and transfer and listing of shares of the company onthe stock exchange. Companies can appoint one or more agencies as managers to theissue.

Underwriting of Public Issue:

Underwriting is a guarantee given by the underwriter that in the event of undersubscription, the amount underwritten would be subscribed by him. Banks/Merchantbanking subsidiaries cannot underwrite more than 15% of any issue.

Portfolio Management:

Portfolio refers to investment in different kinds of securities such as shares, debenturesor bonds issued by different companies and government securities. Portfoliomanagement refers to maintaining proper combinations of securities in a manner thatthey give maximum return with minimum risk.

Restructuring strategies

A merger is a combination of two companies into a single company where one survivesand other loses its corporate existence. A takeover is the purchase by one companyacquiring controlling interest in the share capital of another existing company.Merchant bankers are the middlemen in setting negotiation between the twocompanies. Merchant bankers assist the management of the client company tosuccessfully restructure various activities, which include mergers and acquisitions,divestitures, management buyouts, joint venture among others. To help companiesachieve the objectives of these restructuring strategies, the merchant bankerparticipates in different activities at various stages which include understanding the

objectives behind the strategy (objectives could be either to obtain financial, marketing,or production benefits), and help in searching for the right partner in the strategicdecision and financial valuation of the proposal.

Off Shore Finance:

The merchant bankers help their clients in the following areas involving foreigncurrency.

(a) Long term foreign currency loans

(b) Joint Ventures abroad


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(c) Financing exports and imports

(d) Foreign collaboration arrangements

Non-resident Investment:

The services of merchant banker includes investment advisory services to NRI in termsof identification of investment opportunities, selection of securities, investmentmanagement, and operational services like purchase and sale of securities.

Loan Syndication:

Loan syndication refers to assistance rendered by merchant bankers to get mainlyterm loans for projects. Such loans may be obtained from a single development financeinstitution or a syndicate or consortium. Merchant bankers help corporate clients toraise syndicated loans from banks or financial institutions.

Corporate Counseling and advisory services:

Corporate counseling covers the entire field of merchant banking activities viz. projectcounseling, capital restructuring, public issue management, loan syndication, workingcapital, fixed deposit, lease financing acceptance credit, etc. Merchant bankers alsooffer customized solutions to their clients financial problems. Like determining theright debt-equity ratio and gearing ratio for the client; the appropriate capitalstructure theory is also framed. Merchant bankers also explore the refinancingalternatives of the client, and evaluate cheaper sources of funds. Another area of adviceis rehabilitation and turnaround management. In case of sick units, merchant bankers

may design a revival package in coordination with banks and financial institutions.Risk management is another area where advice from a merchant banker is

sought. He advises the client on different hedging strategies and suggests theappropriate strategy.

Placement and distribution

The merchant banker helps in distributing various securities like equity shares, debtinstruments, mutual fund products, fixed deposits, insurance products, commercialpaper to name a few. The distribution network of the merchant banker can be classified

as institutional and retail in nature. The institutional network consists of mutual funds,foreign institutional investors, private equity funds, pension funds, financialinstitutions etc. The size of such a network represents the wholesale reach of themerchant banker. The retail network depends on networking with investors.


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STATE BANK OF IND

State Bank of India(BSE:SBI), www.statebankofindia.com a public sector bank, is the largest bank

inIndia.[1]

SBI accounts for almost one-fifth of the nations loans.[1]

Besides personal and corporate banking, SBI is also involved in NRI (Non Resident Indian) services through itsnetwork inIndiaand overseas. The bank has 21subsidiariesand 10,186 branches. SBI was recognized as the

best bank inIndiain 2008 by The Bankermagazine ofThe Financial Times.[2]

Banks across Asia are looking to shore up their balance sheets as they prepare for a tougher business

environment amid aglobal economic downturn. SBI, which had no direct exposure to sub-prime mortgages, has

said that it would still need to raise USD $2-4 billion capital to boost its Tier-1capital adequacy ratio, but whether

it would be done through a rights issue or other means has not been finalized.[3]

Tier 1 capital is a core measure

of a bank's financial strength. It is composed of core capital, which consists primarily of equity capital and cash

reserves.

Company OverviewSBI offers banking services as well as an array of financial services which include Mutual Funds,Credit cards,

LifeInsurance, Merchant Banking, Security Trading & Primary dealership in the Money market. The Bank is

actively involved in non-profit activity called community services banking apart from its normal banking activity.

Associate banks

There are six associate banks that fall under SBI, and together these seven banks constitute the State Bank

Group. They are:

Contents

1 Company Overviewo 1.1 Joint Ventures

o 1.2 Business and Financial Metrics

o 1.3 Business Segments

1.3.1 Global Markets

1.3.2 Wholesale Banking Group

1.3.3 Mid-Corporate Group

1.3.4 National Banking Group

1.3.5 Rural Business Group

1.3.6 International Banking Group

2 Trends and Forces

o 2.1 Macro economic risk is the largest risk for

SBI, given its size, penetration and exposures in

India

o 2.2 International operations' increasing

contributions to total income expected to
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continue and boost income further

o 2.3 11,111 branches and still counting - a source

of low-cost deposits

o 2.4 Public sector banks facing stiff competition

from private sector banks

3 Competition

4 References

State Bank of Indore

State Bank of Bikaner & Jaipur

State Bank of Hyderabad

State Bank of Mysore

State Bank of Patiala State Bank of Travancore

SBI is the onlyIndianbank that figures in Fortunes top 100 banks. Its 11,000 branches and 5,600 automatic

teller machines give it a reach throughout the length and breadth of the country; its work force of 200,000 dwarfs

all other banks inIndia(its nearest competitor is Punjab National Bank, which has around 56,000

employees[4]

).[5]

It is also the second largest bank in the world, measured by the number of branches and

employees.[6]

Joint Ventures

SBI has entered into strategic agreements with banks, insurers and other companies.Insurance Australia Group

(IAG)has signed a $170 million joint venture agreement with the State Bank of India (SBI) to establish ageneralinsurancecompany inIndia.

SBI will become the first public sector bank inIndiato enter the custody services sector. State Bank of India (SBI)

and Societe Generale Securities Services (SGSS), part ofSociete Generale Group, have announced a joint

venture which will offer custody and related services inIndia. The new company, SBI SG Custodial Services, will

be based in Mumbai and offer a range of services to both foreign and domestic investors and clients, covering

custody, depository, fund administration, registration and transfer agent services. The joint venture will leverage

SBIs strength in theIndianfinancial sector.[7]

Indiais a preferred destination forprivate equity fundsinreal estate. SBI has planned to capitalize on this

opportunity by teaming up withAustralias Macquarie Groupfor a $2 billion infrastructure fund, and with an

affiliate ofUnitech Ltd, the countrys second largest publicly tradedreal estatecompany, to float aprivate

equity(PE)real estatefund.[8]

Business and Financial Metrics

First Quarter Fiscal 2011 Results[9]

During the first quarter of fiscal 2011, State Bank of India reported operating profit increased year-over-year by

66.97%. Net Profit for Q1 FY2011 increased to Rs. 2914.20 crores from Rs. 2330.37 crores in Q1 FY2010,

representing growth of 25.05%.Net interest incomeincreased by 45.35% in Q1 FY11 over Q1FY10 by 4.30%.

Interest expenses on deposits decreased by 11.85% during Q1 FY11 through strategic shedding of high cost bulk

deposits. Interest expenses have come down despite deposits increasing by 6.78%. Interest income on advancesincreased by 8.62% year-over-year driven by growth of 20.74% in advances.
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7/9

Interest earnings from Investments increased by 3.08%. Cumulativenet interest marginimproved significantly by

88 bps to 3.18% from 2.30% as at the end of June 2009. Total non interest income increased by 3.40% despite

profit on sale of investments decreasing by 75.54% (Rs.535 crores). Non interest income excluding profit on sale

of investments was up by 22.96%. Fee income increased by 29.41% year-over-year, driven by robust growth inloan processing charges, non fund based business, government business, and cross-selling.

Business SegmentsGlobal Markets

In keeping with its integrated approach to all treasury activities in various markets in different time zones

i.e.,Forex, Interest Rates, Bullion,Equityand AlternativeAssets, the Bank re-designated its Treasury Operations

into Global Markets.

Wholesale Banking Grou p

The Bank's Wholesale Banking Group consists of three Strategic Business Units: Corporate Accounts Group,

Project Finance & Leasing, and Stressed Assets Management Group. The Bank has recently launched the

"Wholesale Banking Initiative" to harness the SBI Group synergy for the benefit of the corporate customers by

providing them with a "One Stop Shop" facility for all their banking needs.[10]

Testing....................

Mid-Corporate Grou p

The Mid-Corporate Group (MCG) has been immensely successful in attracting the business of Mid-Corporate

units through relationship management and quickercreditprocessing. It is estimated that 38% of the Mid-

Corporate universe in the country is covered by the bank. The total creditportfolio (fund based) of the Group

stands at Rs 1,090.02 billion. This is more than the aggregate business handled by many of the top banks in the

country. =

National Banking Group

The Bank's National Banking Group (NBG) consists of three Business Groups: Personal Banking, Small &

Medium Enterprise (SME), and Government Banking.[10]

Rural Business Group

Rural Business Group comprises rural and semi urban branches, accounting for about 70% of the branch

network of the Bank.

Internat ional Banking Group

The Bank has a network of 84 overseas offices spread over 32 countries covering all time zones. Net Profit from

the Banks overseas operations (includingsubsidiariesand joint ventures with more than 50% shareholding)

registered a growth of 84% during the fiscal year mainly driven by significant growth of 48% in Net

CustomerCredit.

Trends and Forces

Macro economic risk is the largest risk for SBI, given its size, penetration andexposures in India

Government regulations and the country's macroeconomic policies affect SBI's expansion and liquidity the most.

Key ratios such asCash Reserve Ratio(CRR), Statutory Liquidity Ratio (SLR),Reporate and Reverse Repo rate

are all controlled by the government and affect the bank'sliquidity.
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8/9

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Source: Dun & Bradstreet Report[11]

SBI and ICICI Bank Ltd, two of the nations largest banks, have been worst hit by the Reserve Bank of Indias

(RBI)decision to increase the amount of cash they must hold with it (CRR).[12]

In 2008, RBI hiked CRR from its

long-standing value of around 6%, in steps, to 7.5%. Changes ininterest ratesadversely affectnet interest

margin the difference between the yield the bank earns onassetsand theinterest rateit pays for deposits and

other sources of funding which in turn affects earnings. As SBI works to broaden its products and services and

to increase its branch network, it will have to gain approval from theReserve Bank of Indiaand other government

agencies.

International operations' increasing contributions to total income expected tocontinue and boost income further

SBI is laying greater and greater thrust on its international operations, capitalizing on its presence in 32 countries.

Being the largest commercial bank in India, it is one of the most capable banks to cater to corporate India's

growing appetite for international mergers and acquisitions. Net profit from the banks overseas ope rations

(includingsubsidiariesand joint ventures with more than 50% shareholding) registered a growth of 84% during FY

2007-08 mainly driven by significant growth of 48% in Net CustomerCredit. The bank was ranked No. 1 in the

Asia Pacific (excluding Japan and Australia) in the mandated arranger/book runner league table for syndicated

loans by IFR Asia in 2007-08.[10]

11,111 branches and still counting - a source of low-cost depositsBank branch expansion in India is regulated byRBIand banks cannot expand their branch network

withoutRBIsapproval. As low-cost deposits are directly tied to the size of the branch network, the number of

branches a bank has, is a key success factor for any bank in India. Branch expansion is particularly a key factor

for SBI, given that SBI's profit growth is driven by core business. The operating profit increased by 54.5% year-

over-year, given a robust increase in the net interest income and a modest rise in the non-interest income. Net

profit rose by 40.2% year-over-year after accounting for a 30% increase in the tax paid .[13]

Public sector banks facing stiff competition from private sector banks

Public sector banks are facing competition from their private sector counterparts and foreign banks entering India

in all realms of financial services. While public sector banks enjoy a pre-eminent position in terms of low-cost

deposit base (also called CASA deposits in India stands for Current Accounts and Savings Account), private-

sector banks have been increasing their CASA base steadily over the years. ICICI Bank, the largest private bank

in India, has expanded its CASA market share by 218% over the period of 2003-2007. The banks CASA

deposits have grown at a CAGR of 61% over the same period, compared with a growth of 17.1% for public-sector

banks, 32.5% for private sector banks and 29% for foreign banks in India.[14]

Private sector banks, armed with usually more efficient management and employees, are employing all tricks -

branch expansion, mergers and acquisitions, and international operations - to compete with public sector banks.

Competition
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9/9

Punjab National bank - Punjab National Bank (PNB) is the second largest government-ownedcommercial

bankinIndiawith about 4,500 branches across 764 cities.[15]

This financial institution offers services in

personal and corporate banking, including industrial, agricultural, and export finance, as well as international

banking. It competes with SBI mostly in retail lending and wholesale businesses[16]

ICICI Bank (formerly Industrial Credit and Investment Corporation of India) isIndia'slargest private sectorbank and second largest overall in terms ofassets. Together with its subsidiaries,ICICI Bankoffers a

complete spectrum of financial services and products ranging fromcommercial bankingtoinvestment

banking,mutual fundtoinsurance. It is also the largest issuer ofcreditcards inIndia.

HDFC - Housing Development Finance Corporation Limited Bank Limited orHDFC Bankis the second

largest private bank inIndia, catering to the whole universe of financial services

fromcommercialtoinvestment banking,mutual fundtoinsurance.[17]

On February 25, 2008 HDFC agreed to

buy Centurion Bank of Punjab. The combined entity has the largest branch network among private banks

inIndia, a strong deposit base of around Rs 1220 billion and net advances of around Rs 890 billion.[18]

Bank of Baroda - Bank of Baroda is another private player. It has a rich countrywide network of over 2800branches. It also has significant international presence with a network of 74 offices in 25 countries .

[19]

Axis Bank - Axis Bank is India's third-largest private-sector bank after the significantly larger ICICI Bank,

and HDFC Bank.

Comparison of Competitors[20]

[21]

[22]

Total Deposits Total Advances Net profit Total Assets Branches

State Bank of India 4,355.21 3,373.36 45.41 5,665.65 10,186

ICICI Bank 2,305.10 1,958.66 31.10 3,453.12 1,400

Punjab National Bank 1, 398.60 1,990.48 20.48 1,990.48 4,500

HDFC Bank 1,007.69 634.27 15.90 1,332.51 1,412

Bank of Baroda 1,520.34 1,067.01 14.35 1,795.99 2,800
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