merchant banking an overview

7/29/2019 Merchant Banking An overview

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MERCHANT BANKING


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Investment Banking is an American Synonym of MerchantBanking;

Merchants used to attend to extending of loans andarranging finance for trade purposes;

As the time passed the banking assumed more importance

and the merchants switched over to banking activities,hence the term merchant Banking took placed.

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Merchant banking is a non-banking financial activity

similar to banking;

Merchant banking is a fee based business, where the

bank assumes market risk but no long-term credit risk.

These are financial institutions providing valuable

solutions such as:-

Acceptance of bills of exchange;

Corporate finance;

Portfolio management;

Other non-banking services.

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An organization that underwrites securities forcorporations, advices such clients on mergers, and isinvolved in the ownership of commercial ventures.

According to Mr.Rosenburg

Any person who is engaged in the business of issuemanagement either by making arrangements regarding

selling, buying or subscribing to the securities as manager;consultant adviser; or one rendering corporate advisoryservices in relation to such activities in the management.

According to MOF,India

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In Britain started in the 13th century when a few private firmsengaged themselves in foreign trade and finance.

Based on the British model Dutch and Scottish traders startedmerchant banking.

In USA merchant banking was developed by the Europeanbankers.

West Germany developed close link with the commercial banksthus offering variety of services to customers.

In 1972 merchant banking practice was started in South Africa

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In 1857, the chartered mercantile bank of india started itsoperations.

During the 19th century, the foreign bankers operated in Indiathrough the popular agency house called East India House.

National Grindlays Bank opened its branch in 1967.

SBI floated its merchant banking division in 1972.

Some of the banks which started Merchant banking are Centralbank of India, BOI, syndicate bank, BOB, Standard chartered

bank, ICICI, IFCI and IDBI etc.1/20/2013 6


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Importance of Merchant

Banking

1)Need for Merchant Banking is felt in the wake

of huge public savings lying untapped.

2)Merchant bankers can play highly significant role

in mobilizing funds of savers to investible

channels.

3)assuring promising returns on investments and thus

can assist in meeting the widening demand for

investible funds for economic activity.

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Issue Management Services to act as Book Running

Lead Manager/Lead Manager for

the IPOs/FPOs/Right issues/Debt issues

Project appraisal;

Corporate Advisory Services;

Underwriting of equity issues;

Banker to the Issue/Paying Banker;

Refund Banker;

Monitoring Agency;

Debenture Trustee;

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To act as a merchant banker, a person or firm should holda certificate granted by the regulator- the securities andexchange board of India. SEBI regulations provide for 4categories of Merchant Bankers;

Category I: It Will take up activities associated with issuemanagement.

Category II: Allowed to carry the roles of advisor,

consultant, co-manager, underwriter and portfoliomanager;

Category III: Allowed to act as underwriter, advisor, and

consultant; and

Category IV: Only allowed to act as advisor or consultant.1/20/2013 9


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Category I : Rs. 5 crores

Category II : Rs.50 lakhs

Category III : Rs.20 lakhs

Category IV : Nil

CAPITAL ADEQUACY NORMS :


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Corporate counseling;

Project Counseling;

Loan syndication;Management of capital issues;

Advisory services to mergers and takeovers;

Consultancy to sick industrial units;

Corporate Advisory services;

Portfolio management;

Leasing; and

Issue Management.

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Design and vetting of prospectus;

Nature of instrument;

Pricing of the issue;

Appointment of underwriters;

Appointment of bankers;

Appointment of registrars;

Appointment of brokers and principal brokers.

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Should have knowledge and information about thecapital markets, trends in the stock exchange,

psychology of the investing public, and technologicaland economical changes in the country;

Ability to analyze and evaluate various technical,financial, and economical aspects concerning theformation of an industrial project;

Safeguard the interest of the investing public. Integrityand maintenance of high professional standards arenecessary for the success;

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Should realize the changing environment of capital market

and keep cordial relationship with the investors;

They should develop innovative capital market instruments

for satisfying the changing needs of investors;

Must restrict, concentrate and develop their strength tokeep costs under control.

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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;

Allotment of shares;

Listing of the issue;

Cost of public issue.

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As per SEBI guidelines, Merchant Bankers are authorizedto undertake only issue related activities, which restricttheir scope of activities.

Issuing companies do not adhere to the schedule inallotment and refund of application money thereby creatingtrouble for the image of these bankers at the investors.

Yet merchant banking is vast but should develop adequate

expertise to provide a full range of merchant bankingservices

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SEBI stipulates high capital adequacy norms for authorisation

which prevents young,specialised professionals into merchant

banking business

Non co-operation of the issuing companies in timely allotment ofsecurities and refund of application of money etc.. is another

problem

Yet merchant banking is vast but should develop adequate

expertise to provide a full range of merchant banking services


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Should have qualification in finance, law or businessmanagement;

Should have adequate office space, equipment and

manpower;

At least 2 merchant bank operations qualified persons to beappointed;

Should be fair in all transactions;

SEBI will supervise the activities of merchant bankers.

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SEBI has laid responsibility on merchant banks for the truedisclosures and factual statements made on the prospectus andthe authenticity of such statements;

SEBI has the power to suspend or cancel the authorization ofmerchant bankers in case of any violation of the guidelines;

Merchant bankers should send quarterly reports on the publicissue and rights issue on hand, the names of the companies,size of the issue, and other details;

Should abide by the code of conduct prescribed by SEBI;

For the issue over Rs. 100 crs, the number of BRLMs shouldbe 4 to 5;

Merchant bankers should make an agreement with corporatebodies about their mutual rights, liabilities and obligations etc.

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Growth of primary market;

Entry of foreign investors;

Changing policy of financial institutions;

Development of debt market;

Corporate restructuring.

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Examples of Merchant Banking


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The BRLMs shall ensure

compliance with stipulated

requirements and completion of

prescribed formalities with the

Stock Exchanges, RoC and SEBI

including finalization Prospectus

and RoC filing.

merchant banking an overview

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