Special Studies in Finance

7/27/2019 Special Studies in Finance

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Merchant banking


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Members:


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INTRODUCTION Refers to British Merchant banking.

Concerned with mobilising savings of

people.

DEFINITIONMERCHANT BANKING is defined as an

institution which covers a wide range of

activities such as management of

customer services, portfolio mgmt, creditsyndication, acceptance credit, counseling,

insurance etc


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ORIGIN Originated through London

merchants.

Extension of activities to domesticbusiness of syndication of long-term& short-term finance, share transferagents, debenture trustees,takeover etc.


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Merchant banking in India

Need for merchant banking was felt with rapid growth in number &size of issues made in primary market.

Merchant banking services were started by foreign banks, namelyNational Grindlays in 1967 & City bank in 1970 .

Merchant banking services were offered along with other traditional

banking services.

SBI was first Indian bank to set up Merchant banking division in

1972.


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SERVICES OF MERCHANT BANK The financial institutions in India could not meet the

demand for long-term fund required by the ever expanding

industry and trade.

Corporate sectors enterprise meet their demand through

issuing share and debenture in capital market.


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Services of Merchant Banks

Consultancy Services.

Government Consent.

Project Planning and Feasibility Study.

Raising Financial Resources.

Issue Management.


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Portfolio Management.

Advice on Expansion Programme.

Loan Syndication.

Corporate Restructuring.

Revival Packages for Sick Units.

Miscellaneous Services.


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Role of Merchant Banker s-Managers,-Consultants-Advisors

Companies are free to appoint one or more agenciesas managers to the issue.

SEBI guidelines prescribe that issue should bemanaged at least by one authorized merchantbanker.

Not more than two M.B. should be appointed as leadmanagers to a public issue.

In issue over Rs.100 Corers, maximum up to fourM.B. could be associated as managers.


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Duties & Responsibilities Of Lead Manager To enter into an agreement

Certificate of registration with SEBI

Work of issue management

Clearly defined responsibility

Minimum underwriting obligationDue care & diligence

Submitting due diligence certificates

Submit all particulars to SEBI

Suggestions or modifications Collections of the amount

Ensuring refund

Inform depository participants


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Qualities Required of Merchant Bankers Ability to analyze

Abundant knowledge

Ability to built uprelationship

Innovative approach

Integrity(left) Rashesh Shah

Chairman & CEO, Edelweiss

(right)Nimesh KampaniChairman & MD, JM Financial

(Best merchant bankers)


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1) Growth of new issues market Indian market largest emerging market

Domestic and foreign investors setting up their biz here.

Many public and private issues coming up

Growth in new issues market

Scope for M.Bs. have risen

2) Entry of FII

Indian capital market is globalised Indian Cos. are permitted to invest in euro issues. Similarly, FII

are permitted to invest in India.

Hence they need M.Bs to advise them for their investment in

India.

Scope of merchant banking


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3) Changing policy of FI Liberalisation of policies

FI would require expert services of M.Bs for project appraisal,financial management, financial restructuring etc.

Good portion of capital can be raised

through debt instruments.

Tremendous opportunities to M.Bs.

4) Development of debt market


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5) Innovations in Financial Instruments New financial instruments have come up.

M.Bs are market makers for these instruments.

Liberalisation and globalisation

Competition in corporate sector becoming intense.

Cos. reviewing their strategies, structure andfunctioning etc. leading to corporate restructuring.

Good opportunity to M.Bs to extend their area ofoperation.

6) Corporate Restructuring


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INVE$TMENTBANKING


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History

Modern banking finds its roots in Italy inthe 13th century.

The cities financed its developmentalactivities and wars through issuance ofbonds or from borrowing through public.

Worlds oldest known bank has its roots in

Italy. Its The Monte di Piet, or Monte Pioset up in 1472.


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The Need for Investment Banks

Investment banks help companies andgovernments and their agencies to raise

money by issuing and selling securities in theprimary market.

They assist public and private corporations inraising funds in the capital markets (bothequity and debt),as well as in providingstrategic and advisory services for mergers,acquisitions and other types of financialtransactions.


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Investment Banking In India SBI was the first Indian public sector bank to

set up its investment banking division in 1972. SBI Caps and IDBI Caps are two prime

examples of investment banks in India today. Currently, there are 300 investment banks

registered with SEBI. Currently, without holding a certificate of

registration

granted by the Securities and ExchangeBoard of India,no person can act as a investment banker.


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Trends in Investments in India

0

2000

4000

6000

800010000

12000

14000

16000

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Deal Value in Million

Sourcewww.livemint.com


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FRONT OFFICE

FRONT OFFICE


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Front Office Pitching to various clients and institutions

Setting the terms and conditions for any form of

deal Trading of securities on behalf of clients

In the process of market making, traders will buyand sell financial products with the goal of makingan incremental amount of money on each trade.

Sales desks communicate their clients' orders tothe appropriate trading desks, who can price andexecute trades, or structure new products that fit aspecific need.


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Research is the division which reviewscompanies and writes reports about their

prospects, often with "buy" or "sell" ratings. Structuring has been a relatively recent

division as derivatives have come intoplay, which involves creating complex

structured products which typically offermuch greater margins and returns thanunderlying cash securities.


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MIDDLE OFFICE


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Middle Office

Middle office usually consists of traders, analysts,and managers who are knowledgeable of trading

activities but usually dont engage in marketactivities themselves. ( Chinese Wall Policy)

Risk Management involves analyzing the market and credit risk that traders

are taking onto the balance sheet in conductingtheir daily trades,

setting limits on the amount of capital that theyare able to trade in order to prevent 'bad' tradeshaving a detrimental effect to a desk overall.


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Another key Middle Office role is to ensurethat the above mentioned economic risks

are captured accurately (as peragreement of commercial terms with theclient) correctly and on time (typicallywithin 30 minutes of trade execution).


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BACK OFFICE


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Back OfficeOperations involves data-checking trades

that have been conducted, ensuring that

they are not erroneous, and transactingthe required transfers.

Every major investment bank hasconsiderable amounts of in-housesoftware, created by the Technology

team, who are also responsible forComputer and Telecommunications-based support.


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Front End Process (IPO)1. Company asks for bids2. Selecting lead managers as per bids3. Prepare draft offer prospectus document for IPO.4. Road shows for the IPO5. Decide the issue date & issue price band with

the help of Issuer Company6. RHP & IPO Application Forms are printed and

posted to syndicate members; through whichthey are distributed to investors

7. InvestorBidding for the public issue8. Allocation of shares as per demand9. Stocks listed on the market


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Institutions/Individuals in IPO process

Lead managers,also known as Book Running LeadManager and Co Book Running Lead Managers.

Registrars.

Legal advisors.

Auditors.

SEBI.

Credit rating agencies.

Syndicate members.( generally banks )

Investors (Retail Individual Investor (RII), High Net worth

Individual (HNI), Non-institutional bidders, QualifiedInstitutional Bidders (QIB's).)

Advertising agencies.


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Back-end process of an IPO1) Issuer Company - IPO Process Initialization

Appoints lead manager as book runner.

Appoints registrar of the issue.

Appoints syndicate members.

2) Lead Manager's - Pre Issue Role3) SEBIProspectus Review

SEBI reviews draft offer prospectus.

Reverts it back to Lead Manager if needs clarificationor changes.

SEBI approve the draft offer prospectus, the draft offerprospectus has now become Offer Prospectus.


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4) IPO should be graded by a CRA

5) InvestorBidding for the public issue

6) Lead ManagerPrice Fixing

7) Registrar - Processing IPO Applications

8) Lead managerStock Listing

Back end process of an IPO

cont.


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Documents

Special Studies in Finance