Merchant Banking

INTRODUCTION Refers to British

Merchant banking .

Concerned with mobilising savings of people .

DEFINITION

MERCHANT BANKING is defined as “an institution which covers a wide range of activities such as management of customer services, portfolio mgmt, credit syndication, acceptance credit, counselling, insurance etc.

ORIGIN Originated through

London merchants.

Extension of activities to domestic business of syndication of long-term & short-term finance, share transfer agents, debenture trustees, takeover etc.

Merchant Banking

In India…?

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, namely National 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.

DIFFERENCE BETWEEN COMMERCIAL BANKING & MERCHANT BANKING Deals with Debt &

Debt related finance.

Asset oriented.

Generally avoid risks.

Deals with Equity & Equity related finance.

Management oriented.

Willing to accepts risks.

Merchant Banking

Services…?

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.

Sr No

Particulars Summary

1 Corporate Counseling

Covers the entire field of merchant banking, Ltd to giving suggestions

2 Project Counseling

Preparing project report for govt. approval , financial assistance

Services of Merchant Banks

3 Loan Syndication

Assistance rendered to get term loan for project, help client make appraisal, designing capital structure etc

4 Issue Management

Marketing corporate securities, intermediary in transfer of capital from one who owns to needy

5 Underwriting Guarantee given by the underwriter, make raising of external resource easy

6 Managers to Issue

Drafting, completion of formalities, appoint Registrar etc

7 Portfolio Management

Investment in different kind of securities

8 Mergers and takeovers

Middlemen in setting negotiation

9 Off Shore Finance

Help in areas involving foreign currency

10

Non- Resident Investment

Provide help in better and smooth trade to NRIs

Merchant Banker as Managers, Consultants or Advisors Companies are free to appoint one or more

agencies as managers to the issue. Sebi guidelines prescribe that issue should

be managed atleast by one authorised merchant banker.

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

In issue over Rs.100 crores, maximum upto four M.B. could be associated as managers.

Merchant Banker As lead Manager

Appointment of a lead manager by a company

S. No

Size of the issue Maximum Number Of

Lead Manager

1. Less than Rs.50 crores 2

2. Rs.50 crores to Rs.100 crores 3

3. Rs.100 crores to Rs.200 crores 4

4. Rs.200 crores to Rs.400 crores 5

5. Above Rs.400 crores 5 or more as prescribed by

SEBI

Duties & Responsibilities Of LM

To enter into an agreement

Certificate of registration with SEBI

Work of issue management

Clearly defined responsibility

Minimum underwriting obligation

Due care & diligence Submitting due diligence

certificates Submit all particulars to SEBI Suggestions or modifications Collections of the amount Ensuring refund Inform depository participants

Qualities Required of Merchant Bankers

Ability to analyse Abundant

knowledge Ability to built up

relationship Innovative

approach Integrity

(left) Rashesh ShahChairman & CEO, Edelweiss

(right) Nimesh Kampani

Chairman & MD, JM Financial

(Best merchant bankers)

CATEGORY OF MERCHANT BANKER CATEGORY 1st :-

2nd :-

3rd :-

4th :-

MINIMUM NETWORTH

1 crore 50 lacs 20 lacs NIL

The M.B.registered with SEBI classified according to the category :-

MERCHANTBANKER

PUBLIC SECTOR PRIVATE SECTOR

COMMERCIALBANKS :- 24

INTERNATIONALBANKER :- 10

FINANCIAL INSTITUTION :- 6

STATE INSTITUTION :- 4

BANKS :- 10

FINANCE & INVESTMENT :- 231

LEASING

Merchant banking

Problems….?

Restriction of merchant banking activities

SEBI guidelines have authorised merchant bankers to undertake issue related activities and made them restrict their activities or think of separating these activities from present one and float new subsidiary and enlarge the scope of its activities.

Minimum net worth of Rs.1 crore SEBI guidelines

stipulate that a minimum net worth of Rs.1 crore for authorisation of merchant bankers.

Non co-operation of issuing companies

Non co-operation of the issuing companies in timely allotment of securities and refund of application money is another problem faced by merchant bankers.

MERCHANT BANKERS COMMISSION Maximum 0.5% Project appraisal fees Lead Manager :- - 0.5% upto Rs.25 crores - 0.2% more in excess of

Rs.25 crores

Underwriting fees Brokerage commission 1.5% Other expenses :- - Advertising - Printing - Registrar’s expenses - Stamp duty

Merchant banking

Scope in India…?

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 invt in India.

Increasing no. of JVs also require expert services of M.Bs.

3) Changing policy of FI

Liberalisation of policies

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

4) Development of debt market Good portion of

capital can be raised through debt instruments.

Tremendous opportunities to M.Bs.

5) Innovations in Financial Instruments

New financial instruments have come up.

M.Bs are market makers for these instruments.

6) Corporate Restructuring Liberalisation and globalisation

Competition in corporate sector becoming intense.

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

Good opportunity to M.Bs to extend their area of operation.

7) Disinvestment It means reduction of

some kind of asset of a firm for achieving either financial or ethical objectives.

Motive of disinvestment is to obtain funds.

Conclusion Inspite of problems popping up,

merchant banking in India has vast scope to develop because of lot of domestic as well as foreign businesses booming here. Indian economy provides an amicable environment for these firms to set up, flourish and expand here.

Thank you...