intro to mbfs

8/13/2019 Intro to MBFS.

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Merchant Banking

and

Financial Services

Prof. Amit Trivedi


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Do you know who is a Merchant Banker?

According to Collins, a banker who is employedin a financial institution engaged primarily inaccepting foreign bills, advising companies on

flotations and takeovers, underwriting newissues, hire-purchase finance, making long-termloans to companies, and managing investment

portfolios, funds, and trusts, or who is involved

with this kind of business According to Oxford, a bank dealing in

commercial loans and investment


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And what do authorities think?

U.S. Federal Deposit Insurance Corporation (acronymFDIC):

"the term merchant banking is generally understood tomean negotiated private equity investment by financialinstitutions in the unregistered securities of eitherprivately or publicly held companies Bothcommercialbanks and investment banks may engage in merchantbanking activities. Historically, merchant banks'

original purpose was to facilitate and/or financeproduction and trade of commodities, hence the name"merchant". Few banks today restrict their activities tosuch a narrow scope.


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But we are most particular...

Merchant Banker is defined by SEBI as:

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, adviser or

rendering corporate advisory service inrelation to such issue management


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Let us see when and where it started

Merchant Banks were original banks invented by Italiangrain merchants in the middle ages

Jews fleeing Spanish prosecution were attracted to Italy.They could not hold land so entered trading halls of

Lombardy. Christians were strictly forbidden the sin of usury, defined

as lending at interest (Islam makes similar condemnationsof usury). The Jewish newcomers could lend to farmersagainst crops in the field, a high-risk loan at high rates

The Jewish newcomers, on the other hand, could lend tofarmers against crops in the field, a high-risk loan at whatwould have been considered usurious rates by the Church

Jewish traders undertook both finance and underwriting


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And how it grew

Financing took the form of a crop loan at the beginningof the growing season and underwriting in the form ofa guarantee of the delivery of the crop to its buyer,typically a merchant wholesaler

Merchant banking progressed from financing to owntrade settling trades for others. Merchant banks alsoheld deposits for settlement of notes written by thepeople who were still brokering the actual grain.

Slowly practice to pay interest on deposits held started

Italian market was disrupted by war and the structureof Italian states


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And how it flourished

The next generation of merchant banking started in theplains of Germany and Poland and a little later in England.The trade was still dominated by Jews. Warburg andRothschild are two such banks that still exist

18

th

century saw the rise of Protestantism, which permittedusury to many Christians. This led to many Christiansentering merchant banking sector. A few famous examplesare Barings (UK), Schroder and Bahrenberg (Germany), andHope & Co (Netherlands)

Rise of trade and industry in 19

th

century in US led to rise ofmany Merchant banks. One leading bank is JPMorgan & Co

20thcentury saw high rate of growth in trade andinvestment, which could no longer be catered by family runfirms and many corporate entered the business.


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Then it came to India

RBI issued first license to Grindlays Bank in 1967. Grind lays

focused on management of capital issues, offered diverse

financial services, from production planning and system design to

market research, to emerging class of entrepreneurs. It also

offered management consulting services to small and medium

enterprises. Citibank was the next to setup its merchant banking division in

1970. It focused on project evaluation and raising funds through

borrowing and issuing equity. Main target segment was new

entrepreneurs. SBI was the first Indian banks to start merchant banking services

in India as part of the services they offered to their clients from

1972. Initially Bank gave corporate advice and assistance to small

and medium entrepreneurs and later entered into other services.

Today SBI offers all services under merchant banking.


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I am sure you will meet one soon ...

You will surely need his services if you:

Start a new business

Raise capital/ working capital

Invest in a project Need capital to fund operations

Grow your business inorganically

Manage your investment Conform to rules and regulations and comply with

laws


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Few things where he can help.

Angel Investing, Venture Capital, Private Equity

Pre Investment studies

Project Counseling

Project Appraisal Project Finance

Credit Syndication

Issue Management and Underwriting

Mergers, Amalgamation and Takeovers

Mutual Funds (Not his duty)


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And a few more things you can ask

for

Corporate Counseling Relief to Sick Industries

Capital restructuring

Working Capital Finance

Acceptance Credit and Bill Discounting

Lease Financing

Foreign Currency Finance Fixed Deposit Broking

Portfolio Management


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Want to be next Steve Jobs...

Venture capital

Equity financing of high risk- high returnbusinesses with high growth potential

Popular with new technology/ new businesscompanies that have good growth potential

Started in US in 50s, became popular in late

60s and 70s In India, it took off post liberalization

Angle funding, seed funding, boot strapping


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Look before you leap.

Pre Investment Studies

Evaluate alternate avenues of investment

Investigate regulatory factors and environment,

raw material supply, market access Identifying the project best suited to client

strategy and strength

Helping foreign companies set up Indianoperations independently or through JV

Industry wide studies of investment possibility


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Profit-profit everywhere, which one to

reap....

Project counseling

Project counseling looks at project viability

Technical feasibility

Selecting technical consultancy organization

Advising on obtaining approvals/ permissions/licenses from relevant authorities/ government

Capital structuring and pattern of financing

Advising and assisting client in preparingfeasibility report


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All that glitters is not gold...

Project appraisal

Financial appraisal: financial viability of the project basedon investment and return cash flow profiles. Liquidityratios, NPV and IRR are commonly used techniques

Technical appraisal: technical feasibility in terms oftechnology, design, implementation, raw material access,marketable product and cost aspects

Economic appraisal: impact of project on economy andsocial/ecological impacts

Project finance Arranging finance for the appraised project through sale of

equity or debt syndication


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More the merrier.....

Credit Syndication

Raising debt for projects from Indian and Foreignlenders

Draw the financial investment plan and workingcapital requirement

Make loan application seeking finance

Selecting the banks and institutions to take

money from and managing the loandisbursement schedule

Arranging bridge finance wherever required

Legal and documentary requirements


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Going public...

Issue Management and Underwriting

Activities concerned with the management of thepublic issues

Preparation of plan and budget for issue Preparing documents and drafting prospectus

Filing and approvals

Selecting brokers, lead managers, issue houses,

advertising agencies etc Advertisement and Distribution of application

forms

Share allotment and refund

Stock exchange clearance and listing


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Size does matter...

Mergers, Amalgamations & Takeovers

Plan for growth- organic and inorganic

Identify the technology and investment partners,

joint venture associates, and targets for inorganicgrowth plans

Evaluate the plan of investment/ takeover

Conducting the takeover/ investment plan by

buying in the stakeholders Help in restructuring the operations at the

company post acquisition/ merger


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United we stand....

Mutual Funds

Financial Service that helps small investorsachieve better return in equity/debt market

Money is collected from many small investors tobuild a professionally managed corpus

Invest in equity/debt instruments as per themandate of the fund

MF help people with small funds and lack ofexpertise/time to stay invested in active/passiveinvestment portfolios


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Cant figure it out....

Corporate Counseling

Ensures that company runs at optimumperformance level

Rejuvenates old lines and ailing companies Evaluates diversification plans

Arranges approvals for rehabilitation schemes for

ailing and sick industries Modernization plans for old lines

Takeover and transfer of sick units


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Relief to Sick Industries

Identifying the cause of loss and suggest remedialmeasure

Work out investment details and return oninvestment

Prepare detailed report on future course ofaction- modernize, upsize, downsize, sell, close

Assist in obtaining approvals from BIFR, lendersand other bodies

Monitoring the implementation

Treating the terminally ill...


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Looking for balance...

Capital Restructuring

Assessing capital requirement and sources offund- equity partners/ debt

Suggesting change in D/E ratio to manage risk-return profile for the owners

Suggesting alterations in shareholding patterns totake maximum advantage of FDI/FII norms

Restructuring for sick units- capitalization of debt Capital restructuring post merger, acquisition or

takeover.


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Managing the daily chores....

Working Capital Finance

Assessing working capital requirement atdifferent times

Prepare applications for arranging workingcapital

Assisting in negotiation, documentation and

disbursement of working capital loans Advising on financing of long term sources for

long term requirement


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Speeding up the cash flow...

Acceptance Credit and Bill Discounting

Helping arrange loans for trade

Application making, applying, negotiating, anddocumentation for the client

Loan on sales order (pre-shipment credit)

before delivery of good and post shipment ofgoods (post-shipment credit)

Assisting in Bill discounting/ letter of credit


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Mutual benefit...

Lease Finance

Viability of Lease as an alternative

Choosing favorable rental structure Negotiations and documentation


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The world is my playing field...

Foreign Currency Financing

Financial and legal appraisal to set the limit of foreigninvestment permitted under law

Liaison with government, RBI and other bodies forapproval to raise overseas debt

Syndication of various guarantees, letter of credit, pre-shipment credit, post shipment credit and other creditfacilities

Arranging funds from EXIM bank and other bodies

Guidance on forward cover of exchange risk


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Every penny makes a Pound...

Fixed deposit Broking

Corporate raise fixed deposits from depositorsunder Companies (Acceptance of Deposit) Rules,1975 made under powers conferred in Sec 58Aand 642 of Companies Act, 1956

Help in all stages from estimating the issue size todesigning of documents, advertising andmarketing the issue, collection of applied money,

issue of certificate, refund of excess deposit,maintaining all records and registers for thepurpose


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Many baskets for the eggs...

Portfolio Management

Financial service that helps corporate/ HNIs/ NRIsmanage their excess funds and obtain optimumreturns for their given risk appetite

The investment has to be managed for durationand liquidity

Safe custody of security in India and overseas

Complying with legal ceilings in investment Managing investment record, tax records and

return on investment


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Crux of the matter is...

There are many financial services for different

purposes

Merchant Banker is an enabler of business

dealing with Compliance with rules and regulations (legal)

Documentations and project reports (technical)

Design and marketing of documents (marketing) Securing approvals from various stake holders

(negotiations)

Manages risk, return and helps raise capital (financial)


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Thanks

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