Merchant Banking Final Notes

7/23/2019 Merchant Banking Final Notes

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MERCHANT BANKING

1. Introduction:

According to SEBI Act:Merchant Banker means any person who is

engaged in the business of issue management either by making

arrangements regarding selling buying or subscribing to securities or

acting as manager consultant ad!iser or rendering corporate ad!isory

ser!ice in relation to such issue management" Merchant Banks are issue

houses which manage new issues of the companies in the capital market"

According to the Banking #ommission $%&'() merchant banking

institutions are to offer ser!ices like syndication of financing promotion

of pro*ects in!estment management and ad!isory ser!ices to medium and

small sa!ers and to pro!ide funds and trusts to !arious types" In fact

merchant banking implies a wider range of specialist ser!ices such as: $i)+oan syndication $ii) ,inancial and management consultancy $iii)

-ro*ect counselling $i!) -ortfolio management $!) ,ormulation of

schemes of rehabilitation $!i) .uidance on foreign trade financing $!ii)

.uidance to non/resident Indians for in!estment in India" 0he formal

merchant banking ser!ices in Indian capital market were initiated in

%&1' when 2eser!e Bank of India granted licence to 0he 3ational

.rindlays Bank to perform the ser!ices relating to issue management"

0he ,irst 3ational #ity Bank followed .rindlays Bank by opening a

4Management #onsultant 5i!ision6 in %&'7" Both these banks acted as4managers to the issues6" ,rom %&1& to %&&( merchant banks performed

the issue management acti!ities under the legislati!e framework of

#apital Issues $#ontrol) Act %&8'" 0he procedure of the managing capital

issue by a merchant banker is di!ided into pre/and post issue

management acti!ities" -resently public issue management acti!ities of

merchant bankers are regulated and monitored by SEBI through the

guidelines clarifications circulars containing instructions to merchant

bankers stock e9changes and other constituents of the capital market"

nder the #apital Issues $#ontrol) Act %&8' companies were re;uired toobtain prior appro!al from the #ontroller of #apital Issues $##I) for

raising capital" ##I6s permission was re;uired with regard to the timing

si


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nder the SEBI $Merchant Bankers) 2egulations %&&( Merchant

Bankers were recogni


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Regu#ation$ of Merchant Banking:

0he merchant banking acti!ity in India is go!erned by SEBI $Merchant

Bankers) 2egulations %&&(" 2egistration with SEBI is mandatory to

carry out the business of merchant banking in India" An applicant should

comply with the following norms: i) 0he applicant should be a corporate

body" ii) 0he applicant should not carry on any business other than those

connected with the securities market" iii) 0he applicant should ha!e

necessary infrastructure like office space e;uipment manpower etc"

i!) 0he applicant must ha!e at least two employees with prior e9periencein merchant banking" !) Any associate company group company

subsidiary or interconnected company of the applicant should not ha!e

been a registered merchant banker" !i) 0he applicant should not ha!e

been in!ol!ed in any securities scam or pro!ed guilt for any offence" !ii)

0he applicant should ha!e a minimum net worth 2s>7 million"

An ?!er!iew: %. I$ it &andator' for a &erchant (anker to regi$ter

)ith the !EBI* A" @es" =ithout holding a certificate of registration

granted by the Securities and E9change Board of India no person can actas a merchant banker" %. +ho i$ e#igi(#e to o(tain regi$tration a$ a

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&erchant (anker* A" ?nly a body corporate other than a non/banking

financial company shall be eligible to get registration as merchant banker"

%. +hat are the ,ariou$ categorie$ for )hich regi$tration can (e

o(tained* A" 0he categories for which registration may be granted are

gi!en below: #ategory I to carry on the acti!ity of issue managementand to act as ad!iser consultant manager underwriter portfolio manager"

#ategory II / to act as ad!iser consultant co/manager underwriter

portfolio manager" #ategory III / to act as underwriter ad!iser or

consultant to an issue #ategory IC to act only as ad!iser or consultant

to an issue %. +hat i$ the ca"ita# re-uire&ent for carr'ing on acti,it'

a$ &erchant (anker* A" 0he capital re;uirement depends upon the

category" 0he minimum net worth re;uirement for acting as merchant

banker is gi!en below: #ategory I 2s" > crores #ategory II 2s >7

lakhs #ategory III 2s" (7 lakhs #ategory IC 3il %. +hat i$ the"rocedure for getting regi$tration* A" An application should be

submitted to SEBI in ,orm A of the SEBI $Merchant Bankers)

2egulations &&(" SEBI shall consider the application and on being

satisfied issue a certificate of registration in ,orm B of the SEBI

$Merchant Bankers) 2egulations %&&(" %. +hat i$ the regi$tration fee

"a'a(#e to !EBI* A" 2s" > lakhs which should be paid within %> days of

date of receipt of intimation regarding grant of certificate" %. +hat i$ the

,a#idit' "eriod of certificate of regi$tration* A " 0hree years from the

date of issue" %. Ho) to rene) the certificate* A" 0hree months before

the e9piry period an application should be submitted to SEBI in ,orm A

of the SEBI $Merchant Bankers) 2egulations %&&(" SEBI shall consider

the application and on being satisfied renew certificate of registration for

a further period of D years" %. +hat i$ the rene)a# fee "a'a(#e to

!EBI* A" 2s"("> lakhs which should be paid within %> days of date of

receipt of intimation regarding renewal of certificate" %. +hat i$ the

con$e-uence of nonregi$tration or fai#ure to rene) regi$tration* A"

0he person whose registration is not current shall not carry on the acti!ity

as merchant banker from the date of e9piry of !alidity period"

/,er,ie) of current Indian Merchant Banking !cene:

In India though the e9istence of this branch of financial ser!ices can be

traced to o!er three decades in!estment banking was largely confined to

merchant banking ser!ices" In India prior to the enactment on Indian

#ompanies Act %&>1 managing agent acted as issue houses for the

securities e!aluated pro*ect reports planned capital structure and to some

e9tent pro!ided !enture capital for new firms" ,ew share broking firm

also functioned as Merchant Bankers"

0he need for the speciali


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primary market" 0he Merchant Banking ser!ices were started by foreign

banks namely the 3ational .rindlays Bank in %&1' with licence obtained

from 2BI followed by the #iti Bank in %&'7" 0he Banking commission in

its report in %&'( recommended the setting up of Merchant Banking

institutions by commercial banks and ,inancial institutions" 0his markedthe beginning of speciali


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portfolio manager and co/manager" #ategory D: 0hose merchant bankers

who can act as underwriter ad!isor and consultant" #ategory 8: 0hose

merchant bankers who can act only as ad!isor or consultant to an issue"

5ifferent types of organi


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iii" A##2A0E 2E#?25S 2E-?20I3. A35 ,I3A3#IA+

2E#?25 GEE-I3.: Merchant Bankers are re;uired by law to maintain

financial and other records that will accurately present its acti!ities and

transactions" All supporting documents including agreements in!oices

che;ue re;uests and e9pense reports are likewise re;uired to fairly andaccurately reflect the information contained therein"

3o false or misleading entries should be made in any books or records of

the MembersFAssociates for any reasonH either in its accounts or in

accounts maintained for and on behalf of clients and no fund asset or

account of the company should be established for any purpose unless it is

accurately and fairly recorded in the books and records of the company"

All errors and ad*ustments should be promptly corrected and recorded

when disco!ered" Accounting information should be prepared in

conformity with the prescribed accounting standards and generallyaccepted accounting practices" In the e!ent of the adherence causing any

hardship the MembersFAssociates could refer such situations to AMBI to

enable it to e9amine the same" 3o entries should be made which will

conceal or differently portray the essence of a transaction" 0he need for

accurate and proper recording of information is not restricted to the

accounting and financial functions of the MembersFAssociates"

MembersFAssociates are also e9pected to maintain detailed records of all

transactions correspondence meetings etc" with their clientsFprospecti!e

clients" In an e!ol!ing regulatory en!ironment the attempt should be to

lay down standards which will stand the test of time and a!oid concealing

the essence of a transaction behind the legalities of compliance

regulations"

#?3,+I#0 ?, I30E2ES0 : MembersFAssociates shall always

endea!our to a!oid conflict of interest in performance of its ser!ice as a

Merchant Banker" #onflict of interest may be actual or apparent" All

situations which leads to a conflict of interest should be a!oided" 0his

would apply in relation to other MembersFAssociates clients employees

group companies and dealings with other regulatory authorities" Before

accepting a new assignment from a prospecti!e client a merchant bankeris e9pected to conduct its own 5ue 5iligence with the prospecti!e clients6

bankers merchant bankers and other capital market intermediaries with a

!iew to arri!e at a decision whether to accept or re*ect the assignment"

!" E0I#S I3 #?35#0I3. BSI3ES :MembersFAssociates shall in

dealings with other members clients in!estors institutions the public

employees and others comply with all applicable laws rules and

regulations both in letter and in spirit" =here there appears any difficulty

in interpretation of any law rules regulation the MembersFAssociates

may refer such issues to AMBI"

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!i" -?+I0I#A+ #?302IB0I?3S A35 A#0ICI0@:

MembersFAssociates may on its absolute sole discretion make political

donations and participate in any political acti!ity that are legally

permitted" =hen e9pressing !iews on political issues the

MemberFAssociate should make it clear that the !iews e9pressed arethose of concerned MemberF Associate and not of AMBI"

!ii" #?MM3I#A0I?3: MembersFAssociates are re;uired to

communicate with the 2egulatory Authority .o!ernment departments

and Agencies -ublic etc"

0he MemberFAssociates shall communicate accurately in a manner which

would ensure that the communication is truthful and accurate" All

communication by a member to the in!estor at the instance of a client or

based on information a!ailable with the client should be made only if the

member is fully aware of the facts and contents of the matter"MembersFAssociate would acknowledge the fact that they are an

important link between the listed companies and the in!estment public"

?pinions and recommendations re;uired for from a Merchant Banker

regarding any matter within his professional scope of work may be

pro!ided by him" 0he merchant banker shall be free to charge such fees

for such professional ser!ices as he may deem fit" 3o incorrect or

misleading information should be gi!en" Information regarding ad!isable

in!estments and update on in!estments should be gi!en in a professional

manner and should not be based on any e9traneous moti!e or

consideration"

!iii" -B+I# 5IS#+?S2E A35 2E-?20I3.: 2eporting of financial

information to the in!esting stockholders the SEBI and the financial

institutions re;uires the highest standard of fairness and honesty" Much

harm can be caused due to incorrect or fraudulent or misleading

reporting" All ad!ice which suppresses or does not wholly disclose the

material nature of a transaction should be a!oided as being prohibited"

i9" 5IS-A2A.EME30 ?, #?M-E0I0?2S:

#ompetition among Merchant Bankers is increasing day after day which

is welcome as public interest is best ser!ed by free and open competition"Any acti!ity or conduct that reduces or eliminates competition in the

market place is not in the interest of the de!elopment of a !ibrant security

market and in!estors" 3o MemberFAssociate shall undertake any acti!ity

which tends to or is likely to result in any restricti!e trade practice or an

unfair trade practice" ?ne may choose not discuss fees costs

commissions etc" earnedFincurred by him with a competitor as this may

lead to an unlawful agreement to determine price or restrain competition"

owe!er a member is discouraged from entertaining client solely on the

ground of fees when matters may ha!e reached ad!anced stages ofnegotiation with other members"

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In the ordinary course of business one may re;uire information about a

competitor his clients etc" owe!er a Merchant Banker shall not ac;uire

or seek to ac;uire information through improper means such as industrial

espionage hiring an employee of the competitor etc" Should any such

instance come to light the same should be reported to the SEBI AMBI"9" MA2GE0I3. SA+ES :MembersFAssociates are encouraged to

compete in the market place solely based on merits and competiti!e

positioning" Abiding by generally accepted practices and norms of fair

competition and pro!iding clients with accurate ade;uate and prompt

information is e9pected" Business should be obtained on merits a!oiding

compromising the loyalty of a customer6s employee in an effort to make a

sale through misuse of business courtesies"

9i" 5IS#2IMI3A0I?3: 3o MemberFAssociate shall discriminate in

fa!our of or against any of its competing customers" 3o client companyshall by an agreement or otherwise be coerced into resorting to the

ser!ices of a particular Merchant Banker" =hile AMBI recogni


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Members F Associates are e9pected to incur such e9penditure as would

normally ha!e been incurred by them in the discharge of their duties"

=ithout making it mandatory in any manner Members F Associates are

encourage to confirm with clients the particulars of e9penses they would

be incurring including the nature and class of tra!el particulars regardingstay and e9pected duration etc"

9i!" .I,0S E30E20AI3ME30 ,AC?2S A35 ?0E2 I0EMS ?,

CA+E: Members F Associates shall not accept or gi!e any gift which

may deem to influence the making of any commercial decision by the

recipient of the gift" A gift may take !arious forms including money

tangible property ser!ices free of cost or at concessional rate discount

credit etc" Member F Associates are re;uired by needs of the profession to

interact with a cross section of the society" MembersFAssociates shall not

make any illegal payment either directly or indirectly to any personirrespecti!e of the reason or moti!e" E!en reasonable gifts be they

recei!ed or gi!en should be a!oided if to a reasonable obser!er it might

appear to influence a decision" -2?#2EME30 F -2#ASI3.:

AMBI may from time to time indicate minimum fees for the ser!ices to

be rendered by members in certain select areas of merchant banking

acti!ities eg" +ead ManagersFKoint ManagersF #o/Managers fees" =hile

indicating such fees AMBI shall keep in mind the cost e9pected to be

incurred in rendering such ser!ices"

3o undercutting should be resorted to in any circumstances much less in

a manner which may not be easily detected in the course of discharging

responsibilities" Similarly all deals for procuring in!estments either

short medium or long term should not be structured in a manner as not to

be in keeping with the spirit and essence of this code"

9!i" I3SI5E I3,?2MA0I?3: A Merchant Banker will be considered as

an insider in accordance with the meaning of the term as per the

Securities and E9change Board of India $Insider 0rading) 2egulations

%&&("

A MemberFAssociate shall not : Either on his behalf or on behalf of any

other person deal in securities of a company listed on any stock e9changeon the basis of any unpublished price sensiti!e information"

#ommunicate any unpublished price sensiti!e information to any person

e9cept as may be necessary to carry on the business ordinarily on or

under any lawH .i!e ad!ice suggestions recommendations to any person

to deal in securities of any company on the basis of unpublished price

sensiti!e information" 3o MembersFAssociates or any of their employees

shall indulge in insider trading" 0his may re;uire the

MembersFAssociates to obtain from its employees e9isting as well as to

be employed in their organi


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0here should be mechanism by which the MembersF Associates are in a

position to monitor the compliance" Employees should make periodic

disclosure of transactions in securities entered into by them and their

dependent relati!es" Each Merchant Banker shall fi9 its own internal limit

for transactions abo!e which it would be obligatory for the employees todisclose the same to his employers" 0he BoardFManagement #ommittee

should take note of these disclosures for proper monitoring" E!ery

MemberFAssociate shall co/operate in adopting such regulatory procedure

as AMBI may impose for ensuring that the #ode of #onduct Articles of

Association of AMBI and other regulatory mandates issued by SEBI and

AMBI from time to time are complied with both in letter and in spirit"

9!ii" 02A5E SE#2E0S: 5uring the course of employment employees

may work with inno!ati!e deri!ati!es or other tools for financial

management" 0hey may also learn !aluable information and gathermaterials relating to the business of the Member F Associate that are not

otherwise known or a!ailable outside" 0his information and materials are

of great importance in the present day highly competiti!e businessH and to

retain their !alue they must be kept confidential"

Any person taking up employment with a Member F Associate accepts a

continuing moral and legal obligation not to disclose any trade secrets to

anybody including an earlier or subse;uent employer" 0he obligation to

protect the secrets would continue e!en after ceasing employment for

any reason"

9!iii" #?M-+IA3#E 2ES-?3SIBI+I0@: E!ery MemberFAssociate is

e9pected to be responsible for the conduct of its employees and will be

reasonable for his or her compliance with this #ode of #onduct" If there

be any ;uestions of interpretation they should be directed to AMBI"

9i9" -?=E2 ?, AMBI 0? #A++ ,?2 #E20AI3 I3,?2MA0I?3:

AMBI may call for such information from members as it may feel

necessary or appropriate"

%" #urrent 5e!elopment

0he first merchant bank was set up in %&1& by .rind lays Bank" Initially

they were issue mangers looking after the issue of shares and raisingcapital for the company" But subse;uently they e9panded their acti!ities

such as working capital managementH syndication of pro*ect finance

global loans mergers capital restructuring etc" initially the merchant

banker in India was in the form of management of public issue and

pro!iding financial consultancy for foreign banks" In %&'D SBI started

the merchant banking and it was followed by I#I#I" SBI capital market

was set up in August %&L1 as a full fledged merchant banker" Between

%&'8 and %&L> the merchant banker has promoted lot of companies"

owe!er they were brought under the control of SEBI in %&&(" Recent3e,e#o"&ent$ in Merchant Banking and Cha##enge$ Ahead: 0he

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recent de!elopments in Merchant banking are due to certain contributory

factors in India" 0hey are

i" 0he Merchant Banking was at its best during %&L>/%&&( being when

there were many new issues" It is e9pected that (7%7 that it is going to be

party time for merchant banks as many new issue are coming up"ii" 0he foreign in!estors both in the form of portfolio in!estment and

through foreign direct in!estments are !enturing in Indian Economy" It is

increasing the scope of merchant bankers in many ways"

iii" 5isin!estment in the go!ernment sector in the country gi!es a big

scope to the merchant banks to function as consultants"

i!" 3ew financial instruments are introduced in the market time and

again" 0his basically pro!ides more and more opportunity to the merchant

banks"

!" 0he mergers and corporate restructuring along with M? and M?Aare gi!ing immense opportunity to the merchant bankers for consultancy

*obs"

Ho)e,er the cha##enge$ faced (' &erchant (anker$ in India are:

i" SEBI guideline has restricted their operations to Issue Management and

-ortfolio Management to some e9tent" So the scope of work is limited"

ii" In efficiency of the clients are often blamed on to the merchant banks

so they are into trouble without any fault of their own"

iii" 0he net worth re;uirement is !ery high in categories I and II specially

so many professionally e9perienced personF organi" 0he circum!ention of the syndication of loans

1" Management of the interest and di!idend etc

0hus Indian ,inancial consists of following: %" ,inancial markets ("

,inancial institutionsFintermediaries D" ,inancial assetsFinstruments

,inancial markets can be further di!ided into: %" ?rgani


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%" 2egulatory Bodies Gey regulatory bodies are : / 2BI / Securities

E9change Board of India $SEBI) / Insurance 2egulatory 5e!elopment

Authority $I25A) / .o!t" of India $5ept" of Banking Insurance

Ministry of ,inance) (" Intermediaries =hich may be : / Money Market

Intermediaries" / #apital market intermediaries4INANCIA5 !ER6ICE!:

1. Meaning7 3efinition and Conce"t:

4inancia# !er,ice$ In general all types of acti!ities which are of a

financial nature can be brought under the term financial ser!ices" In

broad sense it means mobili


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#ommission on demand draft"

.uaranteeF+etter of credit

Managing capital issue $pre/issue post issue management ser!ices)

Ad!isoryF#onsultancy ser!ices

-ro*ect preparationFappraisalFarranging finance through pro*ects from

financial institutions

Assisting in the process of getting clearances from .o!tF.o!t bodies"

Modern acti!itiesFser!ices pro!ided by financial institutions are like

ad!isory role in corporate restructuring acting as trustees for debentures

rehabilitation and restructuring sick units portfolio management of large

corporate risk management ser!ices hedging of risks guiding

management in cost minimi


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(" Meaning

D" E!olution

8" Merits

>" 5emerits"

1" 5emateriali


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%" E9plain what merchant banking is" Its functions Scope" $ -age % to >)

(" E9plain current challenges by Indian merchant bankers $ page L)

D" E9plain ,inancial ser!ices acti!ities under taken by them" $ -age %7)

#A-0E2 ( -B+I# ISSE MA3A.EME30 A35 2E.+A0I?3S

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0he *oint stock company has to issue shares to the public for getting

funds for business" 0his is done in form of shares debentures etc" 0here

is a laid down procedure for issue of shares as under

%" I-? (" -ri!ate placement D" 2ight issues method 8"Bonus shares method

>" Book building method 1" Stock option method '" Bought out method"

All the abo!e methods can be used for issue of shares by which the

companies capital shall increase"

,or doing so the companies ha!e to issue prospectus to the

public" -rospectus is a document by which the company can gi!e details

of Categorie$ of I$$ue Manager$: SEBI has classified Issue Managersinto four categories as follows:

aCategor' #: Merchant banker who I s authori


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e 3ue 3i#igence: 0he issue manager has to comply with SEBI

guidelines" 0he merchant banker will carry out acti!ities with due

diligence and furnish a 5ue 5iligence #ertificate to SEBI"

f Coordination: 0he issue manager is re;uired to coordinate with alarge number of institutions and agencies while managing an issue in

order to make it successful"

g 5iai$on )ith !EBI: 0he issue manager as a part of merchant banking

acti!ities should register with SEBI""

h 3ue 3i#igence Certificate i. !u(&i$$ion of /ffer 3ocu&ent:

2.1 u(#ic I$$ue Manage&ent

%" Signing of M?

(" ?btaining Appraisal 3ote

D" ?ptimum #apital Structure

8" #on!erting meeting

>" Appointment of ,inancial Intermediary

1" -reparing 5ocuments

'" 5ue 5iligence #ertificate $All +egal formalities ,ollowed #ertificate)

L" Submission of offer documents;.,inali


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&) Bought/out 5eals Method

2.2 Marketing of Ne) I$$ue

,or marketing of shares as per SEBI guide lines the following steps are to

be followed"%" Appro!al

(" Ma9imum +imit

D" Minimum -eriod

8" Superintendence

>" Eligibility

1" 5irector6s report

'" I-?

L" Issue at discount

R/!ECT9!

A prospectus is re;uired to be issued by a public company to the public

only when it wants to raise funds from the public in the form of shares or

debentures" In case the public company is interested in raising its funds

not from the public but from other sources it will not be re;uired to issue

a prospectus but will ha!e to deli!er to the 2egistrar of #ompanies a

4statement in lieu of prospectus6 $S+-)"A pri!ate company is not re;uired

to prepare any of the two documents"A Meaning:

A document through which public are solicited to subscribe to

the share capital of a corporate entity is called 4-rospectus4"

B3efinition:

!ection2


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financial soundness or correctness of statements and letter of

intentFindustrial license"

3ames of regional stock e9changes and other stock e9changes where

application has been made for listing of present issue"

-ro!isions of sub/section$%) of Section1LA of the #ompanies Actrelating to punishment for fictitious applications"

StatementFdeclaration about refund of the issue if minimum subscription

of &7percent is not recei!ed within &7days of closure of the issue"

5eclaration about the issue of allotment lettersFrefunds within a period

of %7weeks and interest in case of any delay in refund at the prescribed

rate"

5ate of opening and closing of the issue and date of earliest closing of

the issue" ii Ca"ita# !tructure: Information about the company6s capital

structure such as authori


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be accompanied by a memorandum containing such salient features of

prospectus as may be prescribed" 3o prospectus if

offer is made in connection with an underwriting agreement with respect

to the shares or debentures"

=here the offer of shares or debentures is not made to the public"

A(ridged ro$"ectu$:

A memorandum containing such salient features of a prospectus as may

be prescribed is called 4Abridged -rospectus6" 0he concept of abridged

prospectus was introduced by the #ompanies Act of %&LL with a !iew to

make the public issue of shares an ine9pensi!e proposition"

Genera# Infor&ation

Ca"ita# !tructure Ter&$ of I$$ue:

I$$ue articu#ar$:

Co&"an'7 Manage&ent and ro=ect

4inancia# erfor&ance

Refund$ and Intere$t

Co&"anie$ 9nder the !a&e Manage&ent

Ri$k 4actor$

I&"ortance of ro$"ectu$:

0he prospectus includes !ery important information like the historical

performance of the company in the pre!ious years the current owners of

the company the amount of shares that they are offering to the public

what they intend to do with the money after the I"-"? amongst other

things

3 3i$c#o$ure$ In ro$"ectu$: #onse;uent to the acceptance of the

recommendations of the Malegam #ommittee the following disclosures

are made mandatory by the SEBI to be made by issuing companies with

effect from 3o!ember%&&>"

%)An inde9: to the contents of the prospectus"

()-ro*ect #ost: 5etails of actual e9penditure incurred on the pro*ectwithin a period of (months of filing the prospectus with the SEBI or

2egistrar ?f #ompanies$2?#)whiche!er is later"

D) 0urno!er

8) Assets and +iabilities

>) Ma*or E9pansion

1) ,uture -ro*ections

') 5irectors Statement

ro&oter

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5efinition: 0he term 4promoterO in relation to securities offered to the

public for subscription means and includes the following:

a)0he person or persons who are in o!erall control of the company"

0he following are to be disclosed in -rospecturs

%) -romoters Shareholdings() Share -rice

D)Agreements

8)Management 5iscussion and Analysis

>)Buy/back

1) Ma*or Shareholders:

') 3o 2esponsibility Statement:

L) Nualified 3otes

&) Information about Centures -romoted

%7) 2isk ,actors%%) 0a9 Benefits

%() Basis for Issue -rice

%D) 2atios

%8) ?ther 5isclosures:

In addition to the abo!e the following also need to be disclosed:

Sale or purchase between companies in the promoter group where such

sales or purchases e9ceed %7percent of the total sales or purchases of the

issuer" Material items of income or e9penditure arising out of

transactions in the promoter group"

A forecast of the estimated profits of the financial year ending

immediately before the date of the offer document $if such information is

not already gi!en in the other document)"

A capitali1" PA prospectus which does notha!e complete particulars on the price of securities offered and the

;uantum of securities offered is known as 2ed/ herring prospectus" PSuch

a prospectus is issued where a company offers it securities through the

4book/building modeO" 2Infor&ation Me&orandu&: a3efinition:

According to Section($%&B) of the #ompanies Amendment Act of (777

4Information Memorandum Ois defined as 4a process undertaken prior to

the filing of a prospectus by which a demand for the securities proposed

to be issued by a company is elicited and the price and the terms of issue

for such securities is assessed by means of a notice circular

ad!ertisement or document"c!he#fro$"ectu$: i3efinition: 4Shelf

22


23/45

prospectus6 means a prospectus issued by any financial institution or bank

for one or more issues of the securities or class of securities specified in

that prospectus"6

nderwriting

It is the acti!ities connected with the management of the public issues ofcorporate securities !i


24/45

price is kept in the background as a rele!ant factor while settling the fair

!alue"

Nuestions of chapter (

%" =hat are different sources by which funds can be raised in K"S"# $ page

%>)

(" 5uties of merchant banker" $page %1)

D" =rite detailed note on -ublic issue management $ page %')8" E9plain !arious methods of marketing issues SEBI guidelines for the

same $page %' %L )

>" E9plain contents in -rospectors its disclosures $ page %&(7(%)

1" E9plain pre post issue acti!ities in an issue $ page (D (8)

CHATER III !ER6ICE! /44ERE3 BD MERCHANT

BANKER!

24


25/45

1 Merger:

Merger is absorption of one or more companies by a single e9isting

company" Merger is an act or process of purchasing e;uity shares of one

or more companies by a single e9isting company" Merger is a techni;ue

of business growth" It is not treated as a business combination" Merger isdone on a permanent basis" .enerally it is done between two companies"

owe!er it can also be done among more than two companies" 5uring

merger an ac;uiring company and ac;uired company comes together to

decide and e9ecute a merger agreement between them"

2 Ac-ui$ition:

Ac;uisition refers to a situation where one firm ac;uires another and the

latter ceases to e9ist" An ac;uisition occurs when one company takes

controlling interest in another firm or its legal subsidiary or selected

assets of another firm" A&a#ga&ation:

Amalgamation is the blending of two or more companies into one the

share holders of each blending company becoming substantially the

shareholders of the other company which holds blended companies"

Takeo,er:

In a takeo!er a seller4s management may oppose the ac;uisition or

merger but the buyer makes a direct bid to the seller4s shareholders to

ac;uire seller4s shares and thus gain control of the seller4s company"

0akeo!er is a market route for the ac;uisition of a company"B T'"e$ of Merger

Hori>onta# Merger

6ertica# Merger

3iagona# Merger

4or)ard Merger

Re,er$e Merger

4or)ard Triangu#ar Merger

Re,er$e Triangu#ar Merger

Cong#o&erate Merger

A Congeneric MergerNegotiated Merge

Arranged Merger

Agreed Merger

9no""o$ed Merger

3efended Merger

Co&"etiti,e Merger

Tender /ffer

25


26/45

Ad,antage$ of Merger and Ac-ui$ition:

Ad!antages

5i!ersification

.rowth through Ac;uisitions Economies of Scale

Early/mo!er Benefit0a9 Ad!antages

2egulatory #onsiderations

Si


27/45

their shares conse;uent to the re*ection of the offer made to the Board of

5irectors of the target company"

( Take /,er !trategie$:

!treet !)ee" 7

!trategic A##iance7Bear hug 7

Brand o)er

4inancing Techni-ue$ in Merger

?rdinary Shares ,inancing

5ebt and -reference Shares ,inancing5eferred -ayment -lan

0ender ?ffer

A Conce"t of Bu'(ack of !hare$: Buy/ back is an e9cellent tool for

financial reengineering" Buy/back of shares relates to the company

buying back its shares which it has issued earlier from the market" =hen

a company elects to purchase outstanding shares of its own stock it can

accomplish this through one of two ways:

0he company can tender an offer to e9isting stockholders" A tender offer

in!ites share holders to sell their stock generally at a price abo!e the

market price within a certain period of time"

ii" 0he company can purchase shares of its stock in the open market

similar to the way indi!iduals would" In this case the company would

simply pay market price"

5elisting is a process by which the name of a company is remo!ed from

the list of securities of companies which are permitted to be traded in the

stock e9changes" 5elisting disables the process of trading of shares in thestock e9changes" 0he delisting can be !oluntary delisting or compulsory

delisting"

6o#untar' 3e#i$ting:

nder !oluntary delisting a company can re;uest for delisting its shares

from one or more recogni


28/45

4or&a#itie$ for 3e#i$ting the !hare$

%" -rior appro!al from the Board of 5irectors"

ii" -rior appro!al of the share holders through a special resolution

iii" Submit an application for delisting of the shares in the prescribed

form to the recogni


29/45

Meaning of 3e(enture$:

A debenture is a medium to long/term debt format that is used by

large companies to borrow money" 5ebentures are the most common

form of long/term loans that can be taken by a company" 5ebentures are

usually loans that are re payable on a fi9ed date but some debentures areirredeemable securities"

!EBI Guide#ine$ for I$$ue of 3e(enture$:

%) Issue of ,#5s ha!ing a con!ersion period more than D1 months will

not be permissible ()-remium amount on con!ersion the con!ersion

period in stages if any shall be pre/determined and stated in the

prospectus"

D) 0he interest rate for abo!e debentures will be freely determinable by

the issuer"

8) Issue of debenture with maturity of %L months or less are e9empt fromthe re;uirement of appointing 5ebenture 0rustees or creating a 5ebenture

2edemption 2eser!e $522)"

F In other cases the names of the debenture trustees must be stated in the

prospectus and 522 will be created in accordance with guidelines laid

down by SEBI"

0 0he trust deed shall be e9ecuted within si9 months of the closure of the

issue"

Any con!ersion in part or whole of the debenture will be optional at

the hands of the debenture holder if the con!ersion takes place at or after%Lmonths from the date of allotment but before D1 months"

In case of 3#5s F-#5s credit rating is compulsory where maturity

e9ceeds %Lmonths"

; -remium amount at the time of con!ersion for the -#5 redemption

amount period of maturity yield on redemption for the -#5s F3#5s

shall be indicated in the prospectus"

1 0he discount on the non/con!ertible portion of the -#5 in case they

are traded and procedure for their purchase on spot trading basis must be

disclosed in the prospectus"11 In case the non/con!ertible portions of -#5 F3#5 are to be rolled

o!er a compulsory option should be gi!en to those debenture holders

who want to with draw and en cash from the debenture programme"

ortfo#io Manage&ent:

A portfolio refers to a collection of in!estment tools such as stocks

shares mutual funds bonds and cash and soon depending on the

in!estor4s income budget and con!enient time frame" So the art of

selecting the right in!estment policy for the indi!iduals in terms ofminimum risk and ma9imum return is called as portfolio management"


30/45

!co"e.

%" #on!ersion e!aluation of fund

(" 2egulation as per SEBID" 2BI regulations and others

8" -ortfolio strategy

>" -erformance measurement re!ision"

ortfo#io Manager:

-ortfolio Manager is a professional who manages the portfolio of anin!estor with the ob*ecti!e of profitability growth and risk minimi


31/45

3utie$ of "ortfo#io &anager

%" 2eporting

(" #ompliance

D".rowth and -erformance8" =ealth -rotection

>" iring ?utsourcing and ?!ersight

Re$"on$i(i#itie$ of "ortfo#io &anager

2esponsibilities relating to #ontract with #lients

Maintenance of Books of AccountsF2ecordsAudit of Accounts

.eneral 2esponsibilities of a -ortfolio Manager

Right$ of "ortfo#io Manager

2ight of Inspection by the Board

2ight to 2ecei!e 3otice before Inspection

!DN3ICATE!

Syndicated +oanO is a loan offered by a group of lenders $called a

syndicate) who work together to pro!ide funds for a single borrower" 0he

borrower could be a corporation a large pro*ect or so!ereignty $such as a

go!ernment)"

T'"e$ of !'ndicated #oan$:

0raditional Syndicated Bank +oans

Syndicated Bank +oan

2e!ol!ing #redit

Standby ,acility

Multi/option ,acilities $M?, )

nderwritten 5eal#lub 5eal


32/45

Best/Efforts Syndication 5eal

%ue$tion$ Cha"ter

%" E9plain mergers its types ad!antages $ page (1 (')(" E9plain meaning conse;uences of hostile merger $ page (&)

D" E9plain financing techni;ues in merger $page D7)

8" E9plain delisting its types $page D7 D%)

>" E9plain debenture issues SEBI guide lines in this regard $ page D()

1" E9plain portfolio management types registration procedure"$page

DDD8)

'" E9plain meaning of syndicate its types loans gi!en $ page D> D1)


33/45

CHATER 4INANCIA5 !ER6ICE!


34/45

in!estment institutions"

1E-ui"&ent 5ea$ing85ea$e 4inancing

2Hire urcha$e and Con$u&er Credit

Bi## 3i$counting

6enture Ca"ita#FHou$ing 4inance

0In$urance !er,ice$

4actoring

4orfaiting: ,orfaiting is a form of financing of recei!ables relating to

international trade" It is a non/recourse purchase by a banker or any other

financial institution of recei!ables arising from e9port of goods and

ser!ices"

; Mutua# 4und

1Credit Rating11Credit Card$

12Con$u&er 4inance

5EA!ING

+easing industry plays an important role in the economic de!elopment of

a country by pro!iding money incenti!es to lessee" AMeaning:

+easing is a process by which a firm can obtain the use of a certain fi9ed

assets for which it must pay a series of contractual periodic ta9

deductible payments" 0he lessee is the recei!er of the ser!ices or the

assets under the lease contract and the lessor is the owner of the assets"

+ease is of different types" 1 4inancia# 5ea$e 2 /"erationa# 5ea$e

!a#e and 5ea$e Back 5e,eraged 5ea$ing F3irect 5ea$ing 04ir$t

A&end&ent 5ea$e

R/CE!! in #ea$ing %"+ease Selection ("?rder 5eli!ery D"+ease

#ontract 8"+ease -eriod

Ad,antage$ Stable Business =ider 5istribution Sale of Supplies


35/45

Second/hand Market 0a9 BenefitsAbsorbing ?bsolescence 2isks

,illip to #apital Market Easy ,inance

Ad,antage$ to 5ea$e$

i)Efficient se of ,unds

ii)#heaper Source iii),le9ible Source i!)Enhanced Borrowing #apacity!)?ff/balance Sheet ,inancing !i)0a9 Benefits !ii),a!orable 0erms

!iii).uards Against ?bsolescence i9)A!oidance of Initial #ash ?utlay

9)Better +i;uidly

4inancia# I&"#ication$+ease transactions would ha!e accounting and financial implications for

both the lessor and the lessees as detailed below:

a 4or 5e$$ee:

i) 0a9 shield on lease rentals is a!ailable as business e9penditure

ii) 5epreciation ta9 shield is not a!ailable

iii) 0a9 shield on lease rentals represents a cash inflow

i!) 0a9 shield on depreciation represents cash outflow $cash inflow

foregone)

a 4or 5e$$or:

i) 5epreciation ta9 shield is a!ailable

ii) 0a9 shield on lease rentals is not a!ailable as business e9penditure

iii) 0a9 shield on depreciation represents cash inflow

i!) 0a9 shield on lease rentals represent a cash outflow

C) 3et sal!age !alue of an e;uipment is treated as a post/ta9 cash flow


36/45

Hire "urcha$e

ireFpurchaseisanagreementtothesaleofanassetsub*ecttothefollowingconditions:thegoodsaredeli!eredatthebeginningoftheagreementonthebasisthatth

ehirerwillpayanagreedamountinperiodicalinstalmentsmutuallyagreedupon

HafterthelastinstalmentispaidthetitleofownershipwillpasstothehirerHthehire

rcanterminatetheagreementbypayingall the balance instalments and taking

the title of the asset"

/)ner$hi"

Hire "urcha$e

0hehirerofthegoodsnotbecomesownertillthepaymentofs

pecifiedinstalments"

5ea$ing

In lease ownership restswith the lessor throughout"

Method of financing - is financing both

business and non/business

assets"

+easing is a method of

financing business assets"

3e"reciation In - depreciation and IA

can be claimed by the hirer"

In leasing depreciation and

in!estment allowances

cannot e claimed by the

lesseeTa (enefit$ ?nly the interest component

of the - installment is ta9

deductible"

0he entire leaser entails ta9

deductible e9pense"

a#,age ,a#ue 0he hirer in - being the

owner of the asset en*oys

sal!age !alue of the asset"

0he lessee not being the

owner of the asset doesn6t

en*oy the sal!age !alue of

the asset"

3e"o$it (7R deposit is re;uired in

-"

+essee is not re;uired to

make any deposit" Since it isre;uired down payment

Etent of 4inance - re;uires (7 to (>R

down payment"

In lease financing is %77R

financingMaintenance #ost of maintenance hired

assets is borne by hirer"

#ost of maintenance of the

leased asset is borne by the

lessor"


37/45

Rate of Intere$t :

0he type of interest rates popularly used in hire purchase financing is as

follows:

i Addon Rate of Intere$t ii4#at Rate of Intere$t iiiEffecti,e Rate of

Intere$t Effecti,e rate of Intere$t? Tria# rate at )hich N6 of futureH in$ta##&ent$ i$ Jero

Method$ of Intere$t Ca#cu#ation

!traight #ine &ethod 7 Effecti,e rate &ethod7 $u& of digit$ &ethod.

4actoring:

Business enterprises are always looking for selling the debtors for cash

e!en at higher interest" 0his is possible through a financial ser!ice"1Meaning: +ike securiti


38/45

iiIt impro!es the li;uidity of the e9porter "It con!erts a credit transaction

into a cash transaction"

iii) It is simple and fle9ible" It can be used to finance any e9port transaction" 0he

structure of finance can be determined according to the needs of the

e9porter importer and the forfaitor"

i!) 0he e9porter is free from many e9port credit risks such as interest rate risk

e9change rate risk political risk commercial risk etc"

!) 0he e9porter need not carry the recei!ables into his balance sheet"

Bi## di$counting is book debt financing" 0his is done by commercial

banks

1Meaning of Bi##$ 3i$counting: =hen goods are sold on credit the

recei!ables or book debts are created" 0he supplier or seller of goods

draws a bill of e9change on the buyer or debtor for the in!oice price of

the goods sold on credit" It is drawn for a short period of D to 1 months

After drawing the bill the seller hands o!er the bill to the buyer" "0his

means he binds himself liable to pay the amount on the maturity of the

bill" 3ow the bill is with the drawer" e uses the alternati!e to discount

with the bank get funds"

In$urance

Insurance is a contract between two parties" ?ne party is the insured and

the other party is the insurer" Insured is the person whose life or property

is insured with the insurer" Insurer is the insurance company to whom risk

is transferred by the insured" 0hus insurance is a contract between insurerand insured" against"

5ife In$urance includes ordinary life annuities and pensions" 0he risks

of death due to any reason both natural and unnatural are co!ered during

the policy period"


39/45

%uestions #hapter 8"

%" E9plain financial ser!ices its meaning scope $page D' )(" E9plain !arious acti!ities in financial ser!ices $ page DL)

D" E9plain leasing types process ad!antages $ page D&)

8" E9plain financial implications of leasing on lessor lessee $page 87)

>" E9plain hire purchase its difference from leasing $ page 8%)

1" E9plain factoring its scope ad!antages $ page 8( )


40/45

4INANCIA5 !ER6ICE! ART II

%" Social political economic and institutional factors create a comple9conte9t in which financial ser!ices organi) nsecured ,inance

#a'er$ in 4inance

0raders

#ommercial Banks

#redit #ard Institutions

3B,#Os

#redit nions


41/45

Middlemen

Ro#e of Con$u&er 4inance in Econo&':

%) #onsumer finance stimulates demand and consumption

() Gey is the maintenance of the critical balance between sa!ings

in!estment and borrowersO debt/ser!icing ability"D) 0he consumer are softer targets for loan pricing"

8) 0hey are more likely to borrow at higher rates a con!enience no

longer a!ailable on lending to industrial and commercial borrowers who

insist on fine loan rates"

Hou$ing 4inance

A set of all financial arrangements that are made a!ailable by ousing

,inance #ompanies $,#s) to meet the re;uirements of housing is called

4housing financeO"

T'"e$ %"#ontract system ("Sa!ings bank system D" Mortgage bank"Ma=or "#a'er$ %" 3ational housing bank ("5,# D"+I# 8"5#"

Ad,antage$ of Hou$ing 4inance: %)0he asset it finances housing is a

significant part of wealth and the fi9ed capital stock as documented in

.oldsmith6s seminal works on #omparati!e 3ational Balance Sheets

$%&L8) () ousing also represent a large proportion of most household6s

consumption" D) In much the same way housing remains mostly self/

financed by households6 e;uity in many emerging economies" ,re;uently

the only alternati!e is finance pro!ided by de!elopers through deferred

installment sales"

Credit rating: #redit rating originated in SA when Kohn Moody issued

his first rating in %&7&" -resently rating agencies e9ist in #anada

Australia Kapan G ,rance Sweden -ortugal South Gorea

-hilippines Spain and #hile" 0he history of credit rating in India is !ery

short" It started with the establishment of the #redit 2ating Information

Ser!ices of India +td" $#2ISI+) in Kanuary %&&L" In!estment information

and #redit 2ating Agency of India $II#2A) promoted by the Industrial,inance #orporation of India $I,#I)" In %&&D the #redit Analysis and

2esearch $#A2E) was established as a subsidiary of I5BI"

Ad,antage$ of credit rating

a To In,e$tor$: %) Information ser!ice () Systematic risk e!aluation D)

-rofessional competency" 8) Easy to understand >) +ow cost 1) Efficient

portfolio management

') ?ther benefits


42/45

( To i$$uer$ %"Inde9 of faith (" =ider in!estor base D" Bench mark

c To Inter&ediarie$: %" Efficient practice ("Effecti!e monitoring

d To Regu#ator$

G5/BA5 CRE3IT RATER!

MoodyOs in!estor ser!iceStandard A -oorOs corporation $s -)

5uff and -helps #redit 2ating

Kapan credit rating agency $K#2)

IB#A ltd

0homson bank watch

( Indian Credit Rater$ a) #2ISI+ b) I#2A c) #A2E

!co"e in India:

%) 2estricted to debt instruments"

() In de!eloped countries like the SA and the G e;uity shares are alsorated"

D) In present en!ironment the #2 has become an obligation" 8) 0he

corporate sector entirely depends upon public for pro*ect finance" 0he

capital market is dominated by share brokers and the other

intermediaries"

>) It is necessary for the safety of the in!estors to rate the debt

instruments in the market"

1) lf the #2 does not e9ist in the market the in!estors may fall in

dilemma and there will be chance to cheat the innocent in!estors"

4unction$ of CIBI5:

%) #IBI+ caters to both commercial and consumer segments"

() #onsumer #redit Bureau co!ers credit a!ailed by indi!iduals"

#ommercial #redit Bureau co!ers credit a!ailed by non/indi!iduals

D)Aim of #lBI+Os #ommercial #redit Bureau minimi


43/45

E,a#uating Mutua# 4und$:

1. Tre'nor Mode# -erformance measure is calculated as follows:

-M $ Ari/ A2f )FBi=here A2iA!erage rate of return for portfolio 4i6 during a period

A2fA!erage rate of return on a risk free in!estment during the period

BiSlope of portfolio " 4I6character is ticline which represents the

portfolios relati!e !olatility and its systematic risk" -M0he 0reynor

portfolio performance measure for the period" A positi!e measure shows a

superior risk ad*usted performance of a fund"

2.!har"e Mode# =illiam ," Sharpe de!eloped this model in %&11" It

measures the total risk not merely systematic risk $as in 0reynor model)"0he rele!ant performance measure is computed as follows:

-M$Ari/Arf)F3i

where 3i Standard de!iation of rate of returns for the portfolio for the

period" 0he positi!e performance measure !alue is indicati!e of good

performance"

6enture Ca"ita#

1 Meaning: 0he term !enture capital comprises of two words namely

4!enture6 and 4capital6" 0he term 4!enture6 literally means a 4course6 or

4proceeding6 the outcome of which is uncertain $i"e"in!ol!ing risk)" 0he

term capital refers to there source to start the enterprise" 0hus !enture

capital refers to capital in!estment in an risky business enterprise" Moneyis in!ested in such enterprises because these ha!e high growth potential"

A high risk capital is pro!ided by !enture capital funds in the form of

long term e;uity finance with the hope of earning a high rate of return

primarily in the form of capital gain" In fact the !enture capitalist acts as

a partner with the entrepreneur"

2 Characteri$tic$ of 6enture Ca"ita#:

%)It is basically e;uity finance"

()It is a long term in!estment in growth/oriented small or medium firms"

D)In!estment is made only in high risk pro*ects with the ob*ecti!e ofearning a high rate of return"


44/45

8) In addition to pro!iding capital !enture capital funds take an acti!e

interest in the management of the assisted firm"

>) 0he !enture capital funds ha!e a continuous in!ol!ement in business

after making the in!estment"

1) ?nce the !enture has reached the full potential the !enture capitalistsells his holdings at a high premium"

Ad,antage$ of 6enture Ca"ita# 1Bu$ine$$ Con$u#tation$

2Manage&ent Con$u#tation$

Nuestions chapter >

%" E9plain consumer finance its types players in!ol!ed $page 818')

(" =rite notes on housing finance e9plain need importance ma*or players

in!ol!ed $ page 8')

D" #redit rating types players in!ol!ed" $ page 8L)8" E9plain mutual funds importance in economic growth $ page 8&)

>" E9plain !enture capital its meaning importance $ page >7 >%)


45/45

M/3E5 %9E!TI/N!

%.1 =hat do you mean by ,actoringT E9plain ad!antages anddisad!antages of ,actoring"

%.2 E9plain the role and functions of Stock E9changes of India"%. E9plain the duties and responsibilities of portfolio manager"

%. =hat do you mean by financial ser!icesT E9plain scope and e!olution

of financial ser!ices"

%.F =hat do you mean by #onsumer ,inanceT E9plain in detail -layer in

the Market and types of consumer finance"

%.0 E9plain the players in the Indian money market" E9plain the reform in

Indian money market"

%. E9plain 5efine Merchant Banking" E9plain its scope"

E9plain the regulation of stock e9changes of India"

N"L =hat do you mean by -ublic Issue ManagementT E9plain the

Mechanism of -ublic Issue Management in detail"

N"& =hat do you mean by hostile takeo!erF mergerT State the defensi!e

tactics or strategies to a!oid hostile merger"

N"%7 =hat do you mean by forfaitingT E9plain ad!antages and

disad!antages of forfaiting"

N"%% E9plain in detail e;uity ratings and scope of #redit ratings"

N"%( E9plain ad!antages and disad!antages of !enture capital"

Documents

Merchant Banking Final Notes