TERM PAPER

OF

(FINANCIAL INSTITUTIONS SYSTEM)

ON

SUBMITTED BY

Mandeep Kaur

MBA- Semester 3rd

ACKNOWLEDGEMENT

I express my gratitude to ALLAH the almighty, who aided me with strength, gave me

wisdom and patience to complete this term paper.

Additionally, I thank my course instructors who believed that I could terminate this term

paper on time. Her moral guidelines, endless effort and joyful encouragement made me

successful in this term paper.

At last, I thank to my parents for their support and sacrifices during the study period.

Mandeep Kaur

CONTENT

SR. NO. TOPIC

1. INTRODUCTION TO THE TOPIC:

Underwriting, Types of underwriting

Underwriter, Types of underwriters

Role of Underwriter

2. MERCHANT BANKERS

Merchant banking

Merchant Bankers in India

Role of Merchant Bankers

3.

Article 1

Article 2

Article 3

Article 4

Article 5

Article 6

ANALYSIS OF ARTICLES:

Role of underwriter in initial public offering (IPO).

Monitoring roles of underwriters in IPO earnings management.

A time for self-promotion: underwriters play a central role in the life-insurance business, but insurers may not fully recognize their value.

Effects of underwriters, venture capital and industry on long-term initial public offering performance.

SEBI asks merchant bankers to respond to complaints directly.

Merchant Banking: past and present.

4. CONCLUSION

5. REFERENCES

INTRODUCTION TO UNDERWRITING

Underwriting is an agreement, entered by a company with a financial agency, in order to

ensure that the public will subscribe for the entire issue of shares or debentures made by the

company. The financial agency is known as the underwriter and it agrees to buy that part of

the company issues which are not subscribed to by the public in consideration of a specified

underwriting commission. The underwriting agreement, among others, must provide for the

period during which the agreement is in force, the amount of underwriting obligations, the

period within which the underwriter has to subscribe to the issue after being intimated by the

issuer, the amount of commission and details of arrangements, if any, made by the

underwriter for fulfilling the underwriting obligations. The underwriting commission may not

exceed 5 percent on shares and 2.5 percent in case of debentures.

Underwriting has become very important in recent years with the growth of the

corporate sector. It provides several BENEFITS to a company:-

It relieves the company of the risk and uncertainty of marketing the securities.

Underwriters have an intimate and specialized knowledge of the capital market. They

offer valuable advice to the issuing company in the preparation of the prospectus, time

of floatation and the price of securities, etc. They also provide publicity service to the

companies which have entered into underwriting agreements with them.

It helps in financing of new enterprises and in the expansion of the existing projects.

It builds up investors' confidence in the issue of securities.

The issuing company is assured of the availability of funds. Important projects are not

delayed for want of funds.

It facilitates the geographical dispersal of securities because generally, the

underwriters maintain contacts with investors throughout the country.

TYPES OF UNDERWRITING

Syndicate Underwriting : - is one in which, two or more agencies or underwriters

jointly underwrite an issue of securities. Such an arrangement is entered into when the

total issue is beyond the resources of one underwriter or when he does not want to

block up large amount of funds in one issue.

Sub-Underwriting :- is one in which an underwriter gets a part of the issue further

underwritten by another agency. This is done to diffuse the risk involved in

underwriting.

Firm Underwriting : - is one in which the underwriters apply for a block of securities.

Under it, the underwriters agree to take up and pay for this block of securities as

ordinary subscribers in addition to their commitment as underwriters.

UNDERWRITER

The term underwriter is used in a variety of businesses and industries, but it primarily refers

to a person or firm who is responsible for assessing and assuming financial risks on behalf of

another firm or individual. Underwriters work for investment banks and insurance

companies, but they are also individuals who are financially responsible for sponsoring

events. Essentially, underwriters receive special terms or benefits for their participation in

events or business ventures.

To act as an underwriter, a certificate of registration must be obtained from Securities and

Exchange Board of India (SEBI)   . The certificate is granted by SEBI under the Securities

and Exchanges Board of India (Underwriters) Regulations, 1993. These regulations deal

primarily with issues such as registration, capital adequacy, obligation and responsibilities of

the underwriters. Under it, an underwriter is required to enter into a valid agreement with the

issuer entity and the said agreement among other things should define the allocation of duties

and responsibilities between him and the issuer entity. These regulations have been further

amended by the Securities and Exchange Board of India (Underwriters) (Amendment)

Regulations, 2006.

ROLE OF UNDERWRITERS

The primary role of the underwriter is to purchase securities from the issuer and

resell them to investors.

Underwriters act as intermediaries between issuers and investors, providing for an

efficient of capital.

The underwriters take the risk that it will be able to resell the securities at a profit.

Perhaps the most visible and familiar element of the initial public offering process is

the underwriter. The underwriter is the organization that is actually responsible

for pricing, selling, and organizing the issue, and it may or may not provide

additional services. With direct public offerings, there is no need for an underwriter.

Selection of a good underwriter is of the utmost importance, but it's important to

understand that many underwriters are equally selective of their clients. Because an

underwriter's reputation depends on successful issues, few firms will be willing to

TYPES OF UNDERWRITERS

INSTITUTIONAL NON-INSTITUTIONAL

LIC, UTI, ICICI, IDBI

COMMERCIAL BANKS

GENERAL INSURANCE COMPANIES

BROKERS

stake their reputation on questionable companies.

 When selecting an underwriter, it's important to seek out an established company

with a good reputation and quality research coverage in your field. The decision may

also depend on the kind of agreement the underwriter is willing to make regarding the

sale of shares. For profitable and established private companies, it shouldn't be

difficult to locate an underwriter willing to make a firm commitment arrangement.

Under such an agreement, the underwriter agrees to buy all issues shares, regardless

of ability to sell them at a particular price.

 For riskier or less established companies, an underwriter may offer best efforts

arrangement for the initial public offering. A best efforts contract requires the

underwriter to buy only enough shares to fill investor demand. Under this

arrangement, the underwriter accepts no responsibility for unsold shares.

Aside from fees and sales arrangements, most underwriters are fairly similar in their

roles. An underwriter will assist in the preparation and submission of all appropriate

SEC filings, helping potential investors make informed decisions about your offering.

All underwriters are required to exercise due diligence in verifying the information

they submit, so a certain amount of investigation should be expected from any

responsible underwriter. 

In addition to SEC registration filings, the underwriter will create a preliminary

prospectus that will become a major part of the issue's marketing campaign. This

document is also referred to as the red herring, after a small red passage in the

document that states that the company is not attempting to sell shares prior to SEC

approval.

Once SEC approval is obtained, the underwriter and the corporation will embark on a

road show to gauge and attract interest from investors. While the road show does not

involve getting binding commitments from investors, it helps the underwriter

determine the best strategies for pricing and issuance. 

MERCHANT BANKERS

“Merchants are businessmen who trade in commodities that they do not produce

themselves, in order to earn profit.”

The merchant bankers are those financial intermediaries involved with the activity of

transferring capital funds to those borrowers who interested in borrowing.

They guarantee the success of issues by underwriting them.

Merchant banks are popularly known as “issuing and accepting houses”.

Unlike in the past, their activities are now primarily non-fund based (fee based).

They offer a package of financial services. The basic function of merchant banks is

marketing corporate and other services that are guaranteeing sales and distribution of

securities and also other activities such as management of customer services,

portfolio management of customer services, portfolio management ,credit

syndication , acceptance credit, counseling, insurance etc.

As per SEBI (Merchant bankers) Rules, 1992:

“Merchant bankers 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, advise or rendering corporate advisory service in relation to such

issue management.”

MERCHANT BANKING

Merchant banking activity was formally initiated into the Indian capital markets when grind

lays bank received the license from reserve bank in 1967. Grind lays started with

management of capital issues, recognized the needs of emerging class of entrepreneurs for

diverse financial services ranging from production planning and system design to

market research. Even it provides management consulting services to meet the

requirements of small and medium sector rather than large sector. Citibank setup its

merchant banking division in1970. The various tasks performed by this divisions namely

assisting new entrepreneur, evaluating new projects, raising funds through borrowing

and issuing equity. Indians banks started banking services as a part multiple services they

offer to their clients from 1972.

REGISTRATION OF MERCHANT BANKERS WITH SEBI

It is mandatory for a merchant banker to register with the SEBI. Without holding a

certificate of registration granted by the securities and exchange board of India, no

person can act as a merchant banker in India.

Only a body corporate other then a non-banking financial company shall be

eligible to get registration as merchant banker.

The applicant should not carry on any business other than those connected with the

securities market.

All applicants for merchant bankers should have qualifications in finance, law or

business management.

The applicant should have infrastructure like office space, equipment, manpower etc.

The applicant must have at least two employees with prior experience in merchant

banking.

MERCHANT BANKERS IN INDIAThere are 135 merchant bankers who are registered with sebi now in India. There are

public sector, private sector and foreign players registered with SEBI. The below are

the examples of few of the merchant bankers in each of the public, private and foreign

players.

PUBLIC SECTOR MERCHANT BANKERS

SEBI CAPITAL MERKETS LTD.

PUNJAB NATIONAL BANK.

IFCI FINANCIAL SERVICES LTD.

STATE BANK OF BIKANER AND JAIPUR.

PRIVATE SECTORS MERCHANT BANKERS:

ICICI SECURITIES LTD.

AXIS BANK LTD (FORMERLY UTI BANK LTD.)

BAJAJ CAPITAL MARKETS LTD

TATA CAPITAL MARKETS LTD.

KOTAK MAHINDRA CAPITAL COMPANY LTD.

YES BANK LTD.

ROLE OF MERCHANT BANKS

PROJECT COUNSELLING:

Project counseling includes preparation of project reports, deciding upon the

financing pattern to finance the cost of the project and appraising the project

report with the financial institutions or banks. It also includes filling up of

application forms with relevant information for obtaining funds from financial

institutions and obtaining government approval.

MANAGEMENT OF DEBT AND EQUITY OFFERINGS

This forms the main function of the merchant banker. He assists the companies

in raising 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 on

stock 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

banks act as per SEBI guidelines, the merchant banker arranges a meeting with

company representatives and advertising agents to finalize arrangements relating to

date of opening and closing of issue, registration of prospectus, launching publicity

campaign and fixing date of board meeting to approve and sign prospectus and pass

the necessary resolutions. Pricing of issues is done by the companies in consultant

with the merchant bankers.

MANAGERS, CONSULTANATS AND ADVISERS OF THE ISSUE:

The managers of the issue assist in the drafting of prospectus, application forms and

completion of formalities under the companies act, appointment of registrar for

dealing with share applications and transfer and listing of shares of the company on

the stock exchange. Companies can appoint one or more agencies as managers to the

issue.

CORPORATE ADVISORY SERVICES:

Merchant bankers offer customized solutions to the financial problems.

The following are the main areas in their advice are sought:

Financial Restructuring

Refinancing Alternatives

Sources of funds

Rehabilitation and turnaround management

Design revival package (for sick units)

Risk Management

UNDERWRITING OF PUBLIC ISSUE:

Underwriting is a guarantee given by the underwriter that in the event of under

subscription, the amount underwritten would be subscribed by him. Merchant banking

subsidiaries cannot underwrite more than 15% of any issue.

PORTFOLIO MANAGEMENT:

Portfolio refers to investment in different kinds of securities such as shares,

debentures or bonds issued by different companies and government securities.

Portfolio management refers to maintaining proper combinations of securities in a

manner that they give maximum return with minimum risk.

RESTRUCTURING STRATEGIES:

A merger is a combination of two companies into a single company where one

survives and other losses its corporate existence. A takeover is the purchase by one

company acquiring controlling interest in the share capital of another existing

company. Merchant bankers are the middlemen in setting negotiation between the

companies. Merchant bankers assist the management of the client company to

successfully restructure various activities, which include mergers and acquisitions,

management buyouts, joint ventures among others.

OFFSHORE FINANCE:

The merchant bankers help their clients in the following areas involving foreign

currency:

a) Long term foreign currency loans

b) Joint ventures abroad

c) Financing exports and imports

d) Foreign collaboration arrangements

ROLE OF MERCHANT BANKER IN A PRIMARY MARKET ISSUE

MANAGEMENT:

Merchant banker is the intermediary appointed by companies in the primary market issue. It

has to look at the entire issue management and work as the manager to the public issue.

Principal steps that merchant bankers have to perform n a bringing up a public issue

are as follows:

Vetting of prospectus

Appointment of underwriters

Appointment of bankers

Appointment of registrars

Appointments of brokers and principal brokers

Printing and dispatch of prospectus and application form

Filing of initial listing application

Promotion of the issue

Statutory Announcement

Collection of applications

Processing of applications

Establishing the liability underwriters

Allotment of shares

Listing of the issue

Costs of public issue

ROLE OF MERCHANT BANKERS IN TAKEOVERS

• Independent Person with fiduciary responsibility

• Designated person to ensure that all parties fulfill each of their OBLIGATION

within the TIMEFRAME prescribed under the Takeover Code

• Clause 24 specially lays down the General Obligations of the Merchant

Banker under the Takeover Code

WHAT DRIVES THE ROLE OF MERCHANT BANKER

• Cardinal principal of Takeover Code, which is based on:

– Principle of Equality and Opportunity to all the shareholders

– Protection of minority interest

– Fairness and Protection

• Broad role laid out includes:

– Facilitate the entire takeover process

– Confirm basis principles of takeover

– Transparency and facilitate informed decision making

– Protecting the interest of minority shareholders

ROLE IN TYPICAL TAKEOVER ASSIGNMENT

ANALYSIS OF ARTICLES

ARTICLE 1

ROLE OF UNDERWRITER IN INITIAL PUBLIC OFFERING (IPO)

http://www.grin.com/e-book/72982/the-role-of-the-underwriter-in-the-initial-public-offering-

process

In this article it is defined that a company want to raise funds through initial public offering

(IPO) it appoints an investment bank for underwriting the issue. An investment bank is also

called as merchant bank. There is no restriction to use the services of a merchant bank for

IPO. Since in an IPO a company participates for the first time, it doesn’t have complete

understanding of the rules and documentation, required to be submitted, to get a clearance

from the regulator. If the issue size is very large a syndicate of merchant banks takes up the

task of underwriting the issue. However, one merchant bank leads the other.If the issue size is

very large a syndicate of merchant banks takes up the task of underwriting the issue.

However one merchant bank leads the other.

ARTICLE 2

MONITORING ROLES OF UNDERWRITERS IN IPO

EARNINGS MANAGEMENT

http://www.fma.org/Texas/Papers/FMA_IPO_Paper_SY.pdf

This article is all about the investigation of certification and monitoring roles played by the

largely overlooked. After reading this article I analyzed that the underwriters have strong

incentives to continue providing monitoring to the firms and there is a positive relation

between underwriter regulation and post IPO firm operating performance. I find that IPOs

underwritten by lower reputation underwriters have more initial discretionary accruals and

higher initial firm values.

ARTICLE 3

A TIME FOR SELF-PROMOTION: UNDERWRITERS PLAY A CENTRAL ROLE IN THE LIFE-INSURANCE BUSINESS, BUT INSURERS MAY NOT FULLY RECOGNIZE THEIR VALUE.

http://www.thefreelibrary.com/A+time+for+selfpromotion:+underwriters+play+a+central+role+in+the+...-a0101437231

In this article it is stated that underwriting decisions impact the most critical issues of our

business. The underwriting function has taken stiff hits in the industry attempts to speed

decision making on the front end. Underwriters are also part detective. They need to be able

to detect fraud. Underwriters are also need to understand the international scene.

Underwriters create the personality of the insurance company.

ARTICLE 4

EFFECTS OF UNDERWRITERS, VENTURE CAPITAL AND INDUSTRY ON LONG-TERM INITIAL PUBLIC OFFERING PERFORMANCE

Author(s): Yewmun Yip, Yuli Su, Jiun Boon Ang

Journal: Managerial Finance

Year: 2009 

This article is all about to examine the choice of underwriters, venture capital support,

industry and their interactions have any impact o the long term performance of initial public

offerings. Under a multi factor framework, only significant underwriter and venture capital

effects are found. Short term price momentum and long term price reversal pattern is more

pronounced for IPOs that are underwritten by investment banks.

ARTICLE 5

SEBI ASKS MERCHANT BANKERS TO RESPOND TO

COMPLAINTS DIRECTLY

In this article it describes that the SEBI market regulator has asked the merchant bankers to

respond to any complaints regarding an offer document directly after independently

examining the matter before the issuer company coming out with explanations. In a

notification, SEBI advised the merchant bankers to refrain from the current practice of

forwarding issuer company' responses without comments from lead managers.

ARTICLE 6

MERCHANT BANKING: PAST AND PRESENT

http://www.allbusiness.com/sales/internet-e-commerce-merchant-bank/1046472-1.html

By Craig, Valentine V Publication: FDIC Banking Review  Date: Monday, January 1 2001 

This article begins by defining the merchant banking and provides a short history of the

merchant banking. This article also defines the private equity market in the United States,

examining that market in terms of its evolution, uses of funds and forms taken by the

investments. Currently, more than 80% of private equity investments are made by limited

partnership. Direct investment in private equity is also made. This article also defines the

commercial bank involvement in merchant banking, several very large banks holding

companies come to dominate the merchant banking, directing as much as 10 percent of their

capital to these activities. For the most part, reported earnings from these merchant banking

activities have been very good. Commercial banks are permitted to report either realized or

unrealized gains on their merchant banking portfolios.

CONCLUSION

At last I want to conclude it as the merchant banker plays a vital role in channelizing the

financial surplus of the society into productive investment avenues. Hence before selecting a

merchant banker, one must decide what the services for which he is being approached are.

Selecting the right intermediary who has the necessary skills to meet the requirements of the

client will ensure success. The underwriting is one of the functions of the merchant banking.

REFERENCES:

Bachelorarbeit, Georgi Georgiev, role of underwriter in initial public offering

(IPO) 2005, 39 Seiten

http://www.grin.com/e-book/72982/the-role-of-the-underwriter-in-the-initial-public-

offering-process

http://www.fma.org/Texas/Papers/FMA_IPO_Paper_SY.pdf

http://www.thefreelibrary.com/A+time+for+selfpromotion:

+underwriters+play+a+central+role+in+the+...-a0101437231

Yewmun Yip, Journal: Managerial Finance, effects of underwriters, venture capital

and industry on long-term initial public offering performance, 2009 

http://www.allbusiness.com/sales/internet-e-commerce-merchant-bank/1046472-

1.html

http://www.ehow.com/about_4696815_definition-of-underwriter.html