MERCHANT BANKING

INTRODUCTION

What is a Merchant Bank? Financial institution that specializes in

acceptance of: • Bills of Exchange. • Hire Purchase.• Installment Buying. • International Trade Financing.• Long Term Loans. • Investment and Portfolio Management.

ADVISORY BODY

Merchant Banks also advices on:

• Acquisitions.

• Mergers.

• Takeovers.

HISTORY OF MERCHANT BANKS

• These were the original i.e.: the first banks. • Invented in the middle ages by Italian Grain

Merchants. • Main intention was financing the long trading

journeys.• Later on started providing financial assistance

for production of grains and cereals.

MERCHANT BANK V/S INVESTMENT BANK

MERCHANT BANK INVESTMENT BANK

Expand into the field of Securities underwriting.

Participate in Trade Financing activities.

Focus on Small Scale Companies and offer Creative Equity Financing, Bridge & Mezzanine Financing.

Focus on IPO’s (Initial Public Offerings), and Large Public and Private Share Offerings.

Provide service to Small and Medium Institutes.

Provide service to Larger Institutes

SERVICES OF MERCHANT BANKS

• Project Counseling. • Loan Syndication.• Issue Management. • Portfolio Management. • NRI Investment. • Advisory Service Relating

to Mergers & Acquisitions.

• Off- Shore Finance.

PROJECT COUNSELING• Includes preparation of Project Reports.

• Deciding upon the Financing Pattern.

• Appraising the Project relating to its Technical, Commercial and Financial viability.

• Includes filling up forms for obtaining funds from Financial Institutions.

LOAN SYNDICATION• Assistance is rendered

to Raise Loans for Projects, after determining Promoter’s Contribution.

• These can also be obtained from Single Institution or a Consortium.

ISSUE MANAGEMENT

Involves Marketing of Corporate Securities i.e.: Equity Shares, Preference Shares, and Debentures.

Two Main Activities in Issue Management: • Pre- Issue Activities. • Post- Issue Activities.

Underwriting of Public Issues:

• It is an Insurance to the Company which makes Public Issues.

• Raising external Resources becomes easy, if the Issues are backed by well known Underwriters.

Managers Consultants or Advisers to the Issue: • SEBI insists that all issues be managed by at

least one Authorized Merchant Banker.

• For an Issue of 100 crores a max. of Four Merchant Banks are appointed.

• They help in Listing of Shares in Stock Exchange, Completion of Formalities under Companies Act etc.

PORTFOLIO MANAGEMENT• Refers to Investment in Shares, Debentures

issued by different Companies. • Careful Blend & Combination of Assets. • Involves proper Combination of Securities in

such a manner that they give Max. Returns. • Investors are interested in Safety, Liquidity and

Profitability. • Merchant Banks help their Investors in choosing

the Shares.

NRI INVESTMENT

• NRIs have to follow lot of complicated Rules for Investing in Shares in India.

• Merchant Bankers help them in choosing the Shares.

• Also provide Expert Advice fulfilling Govt. Norms. & Regulations.

• Thus they provide more resources for Corporate Sector.

Advisory Services Relating to Mergers & Takeovers

• Merger means combination of two or more companies.

• Here one survives, while other loses its existence.

• Takeover is the purchase by one Company & acquiring controlling Interest in the Share Capital of another Company.

• Merchant Banks act as Middlemen between the ‘Offeror’ & the ‘Offeree’.

OFF-SHORE FINANCE

• Long Term Foreign Currency Loans.

• Joint Ventures Abroad.

• Financing Exports & Imports.

• Foreign Collaboration Arrangement.

MERCHANT-BANKING INSTITUTES

• Commercial Banks.• Foreign Banks like – National Grind lays Bank,

Citibank, HSBC Bank etc. • Development Banks like – ICICI, IFCI, IDBI etc. • SFC, SIDCs. • Pvt. Firms like – JM Financial & Investment

Services, DSP Financial Consultants, CEAT, Kotak Mahindra, Morgan-Stanley etc.

Merchant Banking Regulations

Certificate from SEBI is a must. There are Four Types:

• Category 1 : Act as Issue Managers.• Category 2 : Act only as Co- Managers. • Category 3 : Can’t undertake Portfolio Mgt. • Category 4 : Act merely as Consultant/

Advisor.

GUIDELINES• Authorization from SEBI is must. • Maintaining of Records like Balance Sheets, P&L

A/c, Statements of Financial Position. • Half-yearly un-audited result to be submitted to

SEBI. • Prohibition from buying Securities based on

unpublished Price Sensitive info. of their Clients.

• Appointment of a ‘Compliance Officer’.

• SEBI has the Right to send Inspecting Authority to inspect Books of Accounts, Records etc.

• Initial Authorization Fee, an Annual Fee & Renewal Fee may be collected by SEBI.

• In case of violation of the Guidelines SEBI has the power to suspend/cancel the Authorization.

PROBLEMS OF MERCHANT BANKERS

• SEBI stipulates high capital adequacy norms for authorization.

• Non co-operation of issuing companies in timely allotment of securities and refund of application of money etc.

• Is vast, but should develop adequate expertise to provide a full range of merchant banking services.

CONCLUSION

• Merchant Banks and Investment Banks sound the same but are totally different.

• Provide advice and guidance to its various clientele.

• All Indian Merchant Banks are under the check of SEBI.

• Has evolved through the ages.

THANK YOU