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Merchant Banking andFinancial Services

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The first merchant bank was set up in 1969 by Grindlays Bank.

Initially they were issue mangers looking after the issueof shares and raising capital for the company .

But subsequently they expanded their activities such as

Working capital management;Syndication of project finance,

Global loans,Mergers,Capital restructuring, etc.,

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Initially the merchant banker in India was in the form ofmanagement of public issue and providing financialconsultancy for foreign banks.

In 1973, SBI started the merchant banking and it wasfollowed by ICICI.

SBI capital market was set up in August 1986 as a fullfledged merchant banker. Between 1974 and 1985, the

merchant banker has promoted lot of companies.However they were brought under the control of SEBI in1992.

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Merchant Bank - Introduction

A merchant bank is a financial institution thatengages in underwriting and business loans, cateringprimarily to the needs of large enterprises and high net

worth individuals.

In the British market, the term merchant bank refers toan investment bank.

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Merchant Bank

An organisation that acts as an intermediarybetween the issuers and the ultimate purchasers ofsecurities in the primary security market .

“ A Merchant Banking is an institution that helps thecompanies to raise capital. It is an organization thatunderwrites corporate securities, provide advisoryservices to its clients”.

“It is an organization that underwrites corporatesecurities and advices its clients on issues likecorporate mergers, etc involved in ownership of

commercial ventures”.

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Merchant Banker Definition – SEBI

According to Securities and Exchange Board ofIndia (Merchant Banker) rules, 1992,

“ A merchant banker has been defined asany person who is engaged in the business ofissue management either by makingarrangements regarding selling, buying or

subscribing to securities or acting as manager,consultant, adviser or rendering corporateadvisory services in relation to such issuemanagement”

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Functions of Merchant Banking

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• Corporate Counselling Services

• Project Counselling Services

• Pre – Investment Studies

• Capital Restructuring services

• Credit Syndication Services

• Issue Management and underwriting services

• Portfolio Management Services

• Working Capital Financing Services

• Acceptance Credit and Bill Discounting Services

• Mergers and Acquisitions services

• Venture Financing Services

• Lease Financing Services

• Project Appraisal Services

• Foreign Currency Financing Services

• Relief to sick companies

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Services contd.

Corporate Counseling:

Set of activities undertaken for efficient running of an

enterprise.

Identifying areas of growth & diversification.

Guiding clients on aspects like locational factors,

organizational size, investment decision, choice of product.

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Contd.

Project counseling:

It’s a part of corporate counseling & deals with analysis of

project viability .

Comprises of preparation of project report & deciding finance

pattern for cost of project.

Filling up of application form with significant information for

obtaining funds.

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Services contd.

Working Capital Finance:

Meeting the day-to-day expenses of an enterprise is working

capital finance.

Assessment of working capital requirements.

Preparing necessary application to negotiation for sanction of

appropriate credit facilities.

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Portfolio Management. Making decisions for the investment of cash resources of a

corporate enterprise in marketable securities.

Decides quantum, timing & type of security to be bought.

Help in achieving maximum return with minimum risk by

proper combination of securities.

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Restructuring Strategies. Deals with Mergers & Acquisitions.

It’s a specialized service of Merchant bankers wherein they act

as middle-men in negotiating between two companies.

Offers expert evaluation regarding identification organizations

with matching characteristics.

Obtaining approvals from various authorities.

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Services contd. Credit Syndication:

Relates to activities connected with credit procurement &

project financing.

Estimates total cost of the project

Drawing up of financial plan which conforms requirements

of promoters & their collaborators.

Selecting institutions for participation for financing.

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Lease Financing.

It’s an important alternative source of financing a capital

outlay.

Involves letting out assets on lease for use by the lessee for a

particular period of time.

Providing advice on viability of leasing & choice of favorable

rental structure.

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Other Services:

Relief to Sick Industries:

Rejuvenating old lines & ailing units by appraisingtechnology, process etc.

Evolving rehabilitation packages acceptable to financial

institutions/banks.

Exploring possibilities of mergers & acquisitions.

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Other Services contd. Mutual Funds:

It’s collective investment scheme that pools money from

several investors & channels them into productive investments.

Investing money in diversified portfolio of shares &

debentures.

Assuring Investors return in terms of capital appreciation.

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Difference b/w Commercial & Merchant banks

Commercial Banking Catering needs of common man.

Anyone can open an A/c.

Less exposed to risk.

Related to secondary markets.

Plays the role of financers.

Merchant Banking Catering needs of corporate

firms.

It cannot be done. More exposed to risk.

Related to Primary markets.

Plays different roles like

underwriting, portfolio etc.

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Merchant Banking Advantages:

Merchant banks perform functions that

cannot be carried out by businesses on

their own.

Merchant banks have access to

traders, financial institutions, and

markets that companies or individuals

could not possibly reach.

By using their skills and contacts,

merchant banks can get the best possible deals for their clients.

Disadvantages:

Merchant banks are really only for

large corporate customers, orextremely wealthy smaller

businesses owned by individual

clients.

Not all deals carried out by

merchant banks meet with

unqualified success.

There is always risk attached to the

kinds of deal that merchant banks

undertake.

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Institutes offering Merchant Banking Public Sector

SBI capital markets ltd

Punjab national bank

Bank of Maharashtra Karur Vysya bank ltd

State Bank of Bikaner and Jaipur.

IFCI financial services ltd.

Private Sector ICICI Securities Ltd

Axis Bank Ltd

Bajaj Capital Ltd Reliance Securities Limited

Kotak Mahindra CapitalCompany Ltd

Yes Bank Ltd

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Key Foreign PlayersGoldman Sachs (India) Securities Pvt. Ltd.

Morgan Stanley India Company Pvt. Ltd.

Barclays Securities (India) Pvt. Ltd.

Bank Of America

Citigroup Global Markets India Pvt. Ltd.

DSP Merrill Lynch Ltd.

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INDIAN FINANCIAL SYSTEM

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Meaning

A system that aims at establishing and providing aregular, efficient and cost effective linkage betweendepositors and investors is known as “Financial System”.

Seekers of Funds

(mainly businessfirm and

government)

Suppliers of funds(mainly

households)

Flow of funds(Saving)

Flow of financialServices

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Features of Financial System

It provide linkage between depositors and investors.

It facilitate expansion of financial market

It promotes efficient allocation of financial resources

It influences both quality and the pace of economicdevelopment.

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An overview of Indian Financial System:

Financial Financial Financial Financial

Markets Institution Instruments Services

Financial Markets:It is a place where financial assets are created or

transferred.

(i)Money Market

(ii) Capital Market

(iii) Government Securities Market

(iv) Foreign Exchange Market.

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(i)Money Market:

The money market is a wholesale debt marketfor low-risk, highly-liquid, short-term instrument.

I t consists of following sub-markets:1. Call money market

2. Bill market.

3. Short-term government securities.4. Collateral loan market.

(ii)Capital Market:

=> The capital market is designed to finance the long-term investments.

=> The capital market deals with new issue andtransfer of existing securities.

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Capital Market inIndia

Governmentsecurity (Gill-edged market)

Industrialsecuritymarket

New issues market

and

Old issue market

Developmentfinancial

Institution

IFCI

ICICI

SFC’s

IDBI

IIBI

UTI

FinancialIntermediaries

Merchant banks

Mutual funds

Leasing companies

Venture capitalist

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(iii) Government Securities Market

It is a market where government securities aretraded.

(iv) Foreign Exchange Market:

Purchase and sale of national currencies.

The Forex market deals with the multicurrency requirements, which are met by the exchange ofcurrencies. Depending on the exchange rate that is

applicable, the transfer of funds takes place in thismarket. This is one of the most developed andintegrated market across the globe.

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Most Traded Currencies

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Financial Institution:

=> Institution that provide credit and creditrelated services are called “financial institution”.

=> Financial institutions are theintermediaries who facilitates smoothfunctioning of the financial system by making

investors and borrowers meet. They mobilizesavings of the surplus units and allocate them inproductive activities promising a better rate of return.

Functions:

=> Collecting deposits and lending loan to trade.

Examples: NABARD, EXIM bank, IDBI, etc.,

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Scheduled

bank

Commercialbank

Public sector(27)

Nationalizedbanks (19)

State bank ofIndia & its

associates (8)

Private sector(30)

Foreignbanks (40)

RegionalRural banks

(196)

Co-operativebank

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Characteristics of Financial Institutions

1. Saving Mobilized

2. Participants

3. Dealers

4. Generators

5. Regulation

6. Types

7. Special institutions

Fi i l S i

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Financial Services:

=> It is concerned with the design and deliveryof advice and financial products to individual and

businesses.

=> This service is regulated by SEBI, RBI,Government of India. It comprise of various functions

and services that provide by the financial institutions ina financial system.

Services are:

Leasing, Hire Purchasing, Factoring, Forfeiting,Mutual Fund, Bill discounting, Credit cards,underwriting, Brokerage, Portfolio Management,Housing Finance, etc.,

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Financial Instrument:

Financial instrument in the Indian financial system

may be categorized into(i)Money market instrument:

=> Treasury Bill

=> Bill of Exchange.

=> Commercial paper

=> Certificate of deposits

(ii) Capital market instrument:

=> Equity shares

=> Preference Shares.

=> Different type of debentures.

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Legal and RegulatoryFramework of Merchant

Bankers

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Number of regulative measures are brought by theSEBI for the efficient functioning of the merchant

bankers in India.

Objective:

To have regulated markets and pave way for thedevelopment of capital market in India.

The measures were introduced by the SEBI inthe year 1992 and the measures were revised by

SEBI in 1997.

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SEBI has brought a number of regulative measures for thepurpose of disciplinary functions of merchant banks.

SEBI Regulations:

1. Application for Grant for Certificates

2. Conformance to requirements3. Furnishing of information4. Granting licence – considerations5. Capital adequacy requirements

6. Procedure for registration7. Renewal of certificate8. Procedure where registration is not granted9. Effect of refusal to grant certificate10.Payment of fees

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SEBI Regulations on merchant bankers

With effect from 9th December, 1997, an application canbe made only for carrying on the activities mentioned in

category I.

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Category I To carry on any activity of the issue managementincludes preparation of prospectus, determining

financial structure, tie-up for franchisers, finalallotment, refund of the subscription and to act asadviser, consultant, manager, underwriter, portfoliomanager etc.

Category II To act as adviser, consultant, co-manager, underwriter,portfolio manager

Category III To act as underwriter, adviser, consultant to an issue.

Category IV To act only as adviser or consultant to an issue

I. Registration of Merchant Bankers A. Application for Grant of Certificate

An application by a person for grant of a certificate shall be made to theBoard in Form A. The application shall be made for any one of the followingcategories :

With effect from 9th December, 1997, an application can be made only forcarrying on the activities mentioned in category I.

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An applicant carry on the activity asUNDERWRITER only if he obtain separatecertificate of registration under provisions of SEBI(Underwriters) Regulations 1993, and

As a PORTFOLIO MANAGER – obtains separatecertificate under the provisions of SEBI (PortfolioManager, Regulations, 1993

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B. Conformance to Requirements:

Subject to the provisions of the regulations, any application,which not complete in all respects and does not conform to the

instructions specified in the form, shall be rejected.C. Furnishing of Information:

The Board may require the applicant to furnish furtherinformation or clarification regarding matter relevant to theactivity of a merchant banker for the purpose of disposal of the

application.D. Consideration of Application:

The Board shall take into account for considering the grant of acertificate , applicant complies with the following requirements:

That the applicant shall be a body corporate That the applicant has the necessary infrastructure

Employment minimum of two persons who have the experienceto conduct the business of the merchant banker

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That the applicant fulfils the capital adequacy requirement asspecified

That the applicant, his partner, director or principal officer is notinvolved in any litigation connected with the securities market .

That the applicant, his partner, director or principal officer has not atany time been convicted for any offence

That the applicant has the professional qualification

That the applicant is a fit and proper person

That the grant of certificate to the applicant is in the interest ofinvestors.

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E. Capital Adequacy Requirement

According to the regulations, the capital requirement shall not beless than the net worth of the person making the application forgrant of registration. The net worth are as follows

Category Minimum Amount Category I Rs.5,00,00,000

Category II Rs.50,00,000

Category III Rs.20,00,000

Category IV Nil

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F. Procedure for Registration:

The Board on being satisfied that the applicant is eligible shall grant a certificate in Form B. On the grant of a certificate theapplicant shall be liable to pay the fees in accordance withSchedule II.

G. Renewal of Certificate:

Three months before expiry of the period of certificate, themerchant banker, may if he so desired, make an application for

renewal in Form A. The application for renewal shall be dealtwith in the same manner as if it were a fresh application for grantof a certificate.

.

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H. Procedure where Registration is not Granted

Where an application for grant of a certificate underregulation 3 or of renewal under regulation 9, does not satisfythe criteria set out in regulation 6, the board may reject theapplication after giving an opportunity of being heard.

The refusal to grant registration shall be communicatedby the Board within thirty days of such refusal to the applicantstating therein the grounds on which the application has beenrejected.

Any applicant may, apply within a period of thirty daysfrom the date of receipt of such intimation to the Board forreconsideration for its decision.

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I. Effect of Refusal to Grant Certificate:

Any merchant banker whose application for a certificatehas been refused by the Board can cease to carry on anyactivity as merchant banker.

J. Payment of Fees:

Every applicant eligible for grant of a certificate shall paysuch fees in such manner and within the period specified in

Schedule II. Where a merchant banker fails to any annual fees as the Board may suspend the registration certificate .

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SEBI Guidelines

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Operational Guidelines

SEBI has pronounced the following guidelines for

merchant bankers 1. Submission of offer document :

The offer documents of issue size up to Rs. 20 croresshall be filed by lead merchant bankers with the concerned

regional office of the Board under the jurisdiction of which theregistered office of the issuer company falls.

The lead merchant banker shall make available 10 copiesof the draft offer document to the Board and 25 copies tothe stock exchange(s) where the issue is proposed to be listed.

The lead merchant banker and the Stock Exchange(s)may charge a reasonable charge for providing a copy of thedraft offer document.

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The lead merchant banker shall also submit to the Board todraft offer document on a computer floppy in the formatspecified in Schedule XXIII. The Lead Merchant Banker shall

submit two copies of the printed copy of the final offer document todealing offices of the Board within three days of filing offerdocument with Registrar of companies/concerned StockExchange(s) as the case may be.

Wherever offer documents (for public/rights issues, takeovers

or for any other purpose) are filed with any Department/Office of theBoard, the following details ―certified as correct shall be givenby the lead merchant banker in the forwarding letters:a. Registration number

b. Date of registration/Renewal of registration

c. Date of expiry of registrationd. If applied for renewal, date of application

e. Any communication from the Board prohibiting them from acting asa merchant banker

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f. Any inquiry/investigation being conducted by the Board

g. Period up to which registration/renewal fees has been paidh. Whether any promoter/group and/or associate company of

the issuer company is associated with securities-relatedbusiness and registered with SEBI

i. If any one or more of these persons/entities are registered withSEBI, their respective registration numbers

j. If registration has expired, reasons for non-renewal

k. Details of any enquiry/investigation conducted by SEBI at any

timel. Penalty imposed by SEBI

m. Outstanding fees payable to SEBI by these entities, if any

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2. Advance Dispatch of issue Offer Documents:

Lead merchant bankers shall ensure that whenever there is

a reservation for NRIs, 10 copies of the prospectus together with 1000 application forms are dispatched in advance of the issueopening date, directly along with a letter addressed in person to

Adviser (NRI), Indian Investment Centre, Jeevan Vihar BuildingSansad Marg, New Delhi. Twenty copies of the prospectus andapplication forms shall be dispatched in advance of the issueopening date to the various Investors Associations.

3. Underwriting

While selecting underwriters and finalizing underwritingarrangement, lead merchant bankers shall ensure that theunderwriters do not overexpose themselves so that it becomesdifficult to fulfill their underwriting commitments.

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4. Compliance obligations

The merchant banker shall ensure compliance with the followingpost-issue obligations

a. Involving public for finalization of allotment:

In case of over-subscription in public issues, a Boardnominated public representative shall be associated in theprocess of finalization of the basis of allotment. Honorarium at aminimum of Rs.500/- per day, plus normal conveyance charges

shall be paid to them.

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b. High priority for Redressal of investor grievancesThe merchant bankers shall assign high priority to

investor grievances, and take all preventive steps tominimize the number of complaints. The lead merchant

banker shall set up a proper grievance monitoring andredressal system in co-ordination with the issuers and theRegistrars to Issue.

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c. Submission of post issue monitoring reports

The concerned lead merchant banker shall submit, in

duplicate, the Post Issue Monitoring Reports specified in Clause7.2 of Chapter VII of these Guidelines, within 3 working daysfrom the due dates to the regional offices/head given in schedule

XXII.

d. Submission of No objection Certificate (NOC)In accordance with the Listing Agreement of the Stock

Exchanges, the issuer companies shall deposit 1% of the amountof securities offered to the public

These securities can be related by the concerned StockExchange only after obtaining an NOC from the Board

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e. Renewal of Registration of merchant bankers

Application for renewal of Certificate of Registrationshall be made by the merchant bankers according toRegulation 9 of SEBI Rules and Regulations, 1992 in the form

A of the FORM A of the SEBI Merchant Bankers Rules andRegulations.

While filing the renewal application for the certificate of

registration as merchant banker, it shall provide a statementhighlighting the changes that have taken place in theinformation .

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f. Reporting requirements

In terms of Regulation 28 of SEBI (Merchant BankersRegulation) 1992, the merchant bankers shall send a half yearly report, in the format specified in Schedule XXVII,relating to their merchant banking activities.

g. Impositions of penalty pointsPenalty points may be imposed on the merchant

banker for violation of any of the provisions for operationalguidelines.

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Guidelines on Advertisement

1. Factual and truthful

An issue advertisement shall be truthful, fair and clear,and shall not contain any statement that is untrue ormisleading. Any advertisement reproducing, or purporting toreproduce, any information contained in an offer document shallreproduce such information in full and disclose all relevant facts

2. Clear and concise

An advertisement shall be set forth in a clear, concise andunderstandable language. Extensive use of technical, legalterminology or complex language and the inclusion of excessivedetails, which may distract the investor, shall be avoided.

3. Promise or profits

An issue advertisement shall not contain statements which promise or guarantee rapid increase in profits.

4. Mode of advertising

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g

No models, celebrities, fictional characters,landmarks, caricatures or the likes shall be displayed on or formpart of the offer documents or issue advertisements. Issue

advertisements shall not appear in the form of crawlers ontelevision.

5. Financial data

If any advertisement carries any financial data, it shall

also contain data for the past three years and shall includeparticulars relating to sales, gross profit, not profit, share capital,reserves, earnings per share, dividends, and book values.

6. Risk factors

All issue advertisements carried in the print media such as

newspapers, magazines, brochures or, pamphlets shall containhighlights relating to any issue, besides containing detailedinformation on the risk factors.

The print size of highlights and risk factors in issue

advertisements shall not be less than point 7 size.

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7. Issue date

No corporate advertisement of issuer company shall beissued after 21 days of filing of the offer document with the Boarduntil the closure of the issue, unless the risk factors which arerequired to be mentioned in the offer document, are mentionedin the advertisement.

8. Product advertisement

No product advertisement of the company shallcontain any reference, directly or indirectly, to theperformance of the company during the period.

9. Subscription

No advertisement shall be issued stating that the issue hasbeen fully subscribed or oversubscribed during the period theissue is open for subscription

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10. Issue closure

No announcement regarding closure of the issue shall be madeexcept on the closing date.

11. Shall contain no offer of Incentives

No incentives, apart from the permissible underwritingcommission and brokerage, shall be offered through advertisements toanyone associated with marketing the issue.

12. Shall specify about ReservationIn case there is a reservation for NRIs, the issue advertisement

shall specify the same, and also indicate the place in India from wherethe individual NRI applicant can procure application forms.

13. Undertaking from issuer company An undertaking has to be obtained from the issuer as part of the

MOU between the lead merchant banker and the issue company to theeffect that the issuer company shall not directly or indirectly release

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14. Availability of copies

Ensure the availability of copies of all issue related

materials with the lead merchant banker, at least until theallotment is completed.

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Following are the SEBI regulations onMerchant Banking

1. Registration of Merchant Banker’s 2. Responsibilities of Merchant Banker’s 3. Procedure for Inspection4. Procdure for Action in case default

5. Amendments to SEBI (Merchant Bankers)Regulations 1992

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Registration of Merchant Banker’s

1. Categories of Merchant Bankers2. Requirements for Granting of Certificate3. Capital Adequacy requirements

4. Procedure for Registration5. Renewal of Certificate

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Guidelines on Advertisement

1. Factual and truthful2. Clear and Concise3. Promise or profits4. Mode of advertising5. Financial data

6. Risk factors7. Issue data8. Product advertisement9. Subscription

10. Shall contain no offer of Incentives11. Shall specify about Reservation12. Undertaking of issuer company13. Availability of Copies

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Responsibilities of Merchant Banker’s

1. Code of Conduct2. Maintenance of Books of Accounts, Records etc3. Submission of Half yearly results4. Appointment of Lead Merchant Bankers5. Restriction on Appointment of Lead Merchant Bankers6. Responsibilities of Lead Merchant Bankers7. Underwriting Obligations8. Appointment of Compliance officers

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Procedure for inspection

1. SEBI’s Right to Inspect the books of accounts byappointing one or persons

2. Notice before Inspection3. Submission of reports to the SEBI4. Action on Inspection or Investigation report5. Appointment of Auditors

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Procedure for Action in Case of Default

1. Suspension of Registration: A penalty of suspensionof registration of a merchant banker may be imposed

where,a. the merchant banker violates the provisions of the

Act, rules or regulations.b. Furnishes wrong or false informationc. Does not submit periodical reportsd. Fails to pay fees

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2. Cancellation of Registration:

3. Show – Case Notice and order: within 3o days MB want to reply to SEBI

4. Effect of Suspension and cancellation

5. Publication of Order of Suspension

Suspension shall be published in at least two daily

newspaper by SEBI

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Amendment to SEBI (Merchant Banker) Regulations

1992

1. The Applicant should be fit and proper person

2. MB Seek Separate Registration for its underwritingand portfolio management activities

3. The applicant should be corporate body other thannon – banking finance company

4. They do not accept/ hold public deposits