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Merch - Banking & CR - Rating
Merch - Banking & CR - Rating
Merchant bank is an institution which provides services to corporate such as flotation of new venture and companies, preparation, planning and execution of new project, consultancy and advice in technical, financial and managerial field, restructuring of business, mergers and acquisitions etc.
Issue Management
A major function of merchant bankers It involves following functions in respect of issue through prospectus.
Obtaining approval for the issue from SEBI Arranging underwriting Drafting prospectus and obtaining clearance from stock exchange, auditors, ROC etc Drafting other documents like application form, newspaper advt.etc
Other functions of MB
Pre investment studies
Feasibility study in a specific area Study for joint ventures by foreign companies in India Advice on Govt. regulatory factors
Project Finance
Estimating and deciding pattern of financing Arranging for the finance Legal assistance
Credit Rating
Rating is an opinion on the future ability of the issuer to make timely payment of principal and interest on a specific security It is process of assigning value to credit instrument by estimating the solvency to repay debt and expressing them through pre determined symbols
Features of CR
It is done by specialized institutions It can be for both equity and debt Whole organization is not graded It does reflect issuer's strength CR may be different for different instrument issued by the same company It is done on the request of the company issuing the instrument
Features contd.
It is done on the basis of the information provided by the organization CR agency also find out some information independently Factors like operating efficiency, market position, industry risk, track record, profitability, liquidity, assets quality etc are taken into account for rating
Features contd.
After rating is assigned it can be monitored by CR agency over entire life of the instrument and rating can be changed or suspended It is not a recommendation to buy or hold the security No guarantee for the accuracy of the information on which rating is based
Objectives of CR
To provide superior and low cost information to investor for investment decision It imposes discipline on the borrower It helps regulatory authority, merchant bankers, brokers etc It is a marketing tool for the issuer It encourage better information disclosure and accounting standard
Operating efficiency
Production process, cost structure
Legal position
Statutory process, filing of returns
Earning protection
Profitability ratio, projected earning
Financial Flexibility
Alternative financial plan
Assets quality
Credit management, composition of assets and risk analysis
Interest sensitivity
Exposure to interest rate change, hedging policy
Other ratings
Between AAA and D following ratings are found ( Moody and S&P )
Aaa / AAA Aa / AA A/A Baa / BBB Ba / BB B/B Caa / CCC Ca / CC C/C D
Political Risk
History of peaceful democratic development Transparency of political institutions Developed civil institutions
Monetary Policy
Monetary management by Central Bank Inflation control Net foreign assets of banking sector
External Liquidity
Current account deficit Balance of Payment Position