Professional Documents
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Financial Sercies Management
Financial Sercies Management
DEFINITION:
In banking, a merchant bank is a financial institution primarily engaged in
offering financial services and advice to corporations and wealthy
individuals on how to use their money. The term can also be used to
describe the private equity activities of banking.
According to Cox, D. merchant banking is defined as, merchant banks are
the financial institutions providing specialist services which generally
include the acceptance of bills of exchange, corporate finance, portfolio
management and other banking services.
The Notification of the Ministry of Finance defines a merchant banker as,
any person who is engaged in the business of issue management either
by making arrangements regarding selling, buying or subscribing to
securities as manager, consultant, advisor or rendering corporate
advisory service in relation to such issue management.
In short, merchant bankers assist in raising capital and advice on related
issues.
in
corporations
by
the
banks.
bank
and
its
managers
before
seeking
their
help.
banking practices evolved from the financing structure of the Silk Road
Trading that predates the Roman Empire.
The basic financing structure was the advance payment for goods by
merchant bankers at a great discount to the delivery value of those goods. In
the case of Italy and then Germany, wheat was the product. The merchant
banks purchased the wheat soon after planting. They accepted the risk of
crop failure.
They profited when they sold the wheat. In most countries today, the
national government accepts the risk through government crop insurance.
As the British Empire expanded in the 18th and 19th Centuries, merchant
banks prospered in London. For instance, merchant bankers funded
Canadas Hudson Bay Company. This period saw the rise of such merchant
banks as Schroders, Warburgs or Rothschilds. Amsterdam benefited from
the trade created by the Dutch East Indian Company. Since the 18th century,
the role of the merchant banker has been considerably broadened to include
a composite of modern day skills. Such skills are inherently entrepreneurial,
managerial,
financial
and
transactional.
Today, North American merchant banks have taken the form of "boutiques"whereby, each offers its own specialized services. The hallmarks of these
merchant bank boutiques are that they typically charge fees payable in cash
and/or the client's stock for each service rendered. You can find a merchant
bank that meets any reasonable set of needs.
Merchant Bank
A merchant bank deals with the commercial banking needs of international
finance, long term company loans, and stock underwriting. A merchant bank
does not have retail offices where one can go and open a savings or
checking account. A merchant bank is sometimes said to be a wholesale
bank, or in the business of wholesale banking. This is because merchant
banks tend to deal primarily with other merchant banks and other large
financial institutions.
The most familiar role of the merchant bank is stock underwriting.
A large company that wishes to raise money from investors through the
stock market can hire a merchant bank to implement and underwrite the
process. The merchant bank determines the number of stocks to be issued,
the price at which the stock will be issued, and the timing of the release of
this new stock. The merchant bank files all the paperwork required with the
various market authorities, and is also frequently responsible for marketing
the new stock, though this may be a joint effort with the company and
managed by the merchant bank. For really large stock offerings, several
merchant banks may work together, with one being the lead underwriter.
By limiting their scope to the needs of large companies, merchant banks can
focus their knowledge and be of specific use to such clients. Some merchant
banks specialize in a single area, such as underwriting or international
finance.
Many of the largest banks have both a retail division and a merchant bank
division. The divisions are generally very separate entities, as there is very
little similarity between retail banking and what goes on in a merchant bank.
Although your life is probably affected every day in some way by decisions
made in a merchant bank, most people reading this article are unlikely ever
to visit or deal directly with a merchant bank. Merchant banks operate
behind the scenes and away from the spotlight.
gap
under
supply
and
demand
of
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help in meeting the widening demand for investible funds for economic
activity.
for
establishing
new
enterprises,
undertaking
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12
13
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Indian Overseas Bank in late 70s and early 80s. Among the development
banks, ICICI started merchant banking activities in 1973 followed by IFCI
(1986) and IDBI (1991).
private/Central
Governments/State
Governments
financial
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16
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Category I, that is
(i) to carry on any activity of the issue management, which will inter-alia
consist of preparation of prospectus and other information relating to the
issue, determining financial structure, tie-up of financiers and final allotment
and refund of the subscription; and
(ii) to act as adviser, consultant, manager, underwriter, portfolio manager.
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of
information,
clarification
and
personal
representation
The Board may require the applicant to furnish further information or
clarification regarding matters relevant to the activity of a merchant banker
for the purpose of disposal of the application. The applicant or its principal
officer may appear before the Board for personal representation.
d. Consideration of application
The Board shall take into account for considering the grant of a certificate,
all matters, which are relevant to the activities relating to merchant banker
and in particular the applicant complies with the following requirements,
namely:
the merchant banker who has been granted registration by the Reserve
Bank of India to act as a Primary or Satellite dealer may carry on such
activity subject to the condition that it shall not accept or hold public
deposit
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The capital adequacy requirement should not be less than the net worth of
the person making the application for grant of registration. The networth
shall be as follows,
Category
Category I
Category II
Category III
Category IV
Minimum Amount
Rs. 5, 00, 00, 000
Rs. 50, 00, 000
Rs. 20, 00, 000
Nil
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Code of Conduct
According to the 13 Regulation of the SEBI of 1992 (Merchant
bankers), every merchant banker should comply with following codes of
conduct. They are:
a) The merchant banker must observe high integrity and fairness in all
his dealings.
b) He shall render at all times high standard of services, exercise due
diligence, exercise independent professional judgement.
c) If necessary, he must disclose to his clients the possible source of
conflict of duties and interests.
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Guidelines of SEBI
After the obligations of the CCI, the place was occupied by a legal organ
called as Securities and Exchange Board of India. The issue of capital and
pricing of issues by companies has become free of prior approval. The SEBI
has issued guidelines for the issue of capital by the companies. The
guidelines broadly covers the requirement of the first issue by a new or the
first issue of a new company set up by the existing company, the first issue
by the existing private companies and public issues by the existing listing
companies. The SEBI is the most powerful organization to control and lead
both the primary market and secondary market.
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The SEBI has announced the new guidelines for the disclosures by the
Companies leading to the investor protection. They are presented
below:
a) If any Companys other income exceeds 10 per cent of the total
income, the details should be disclosed.
b) The Company should disclose any adverse situation which affects the
operations of the Company and occurs within one year prior to the
date filing of the offer document with the Registrar of Companies or
Stock Exchange.
c) The Company should also disclose the information regarding the
capacity utilization of the plant for the last 3 years.
d) The Promoters of the Company must maintain their holding at least at
20 per cent of the expanded capital.
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h) The Company should disclose the safety net scheme or buy back
arrangements of the shares proposed in public issue. This scheme is
applicable to a limited number of 500 shares per allottee and the offer
should be valid for a period of at least 6 months from the date of
dispatch of securities.
i) According to the guidelines, in case of the public issues, at least 30
mandatory collection centres should be established.
j) According to the SEBI guidelines regarding rights issue, the
Company should give advertisements in not less than two newspapers about the dispatch of letters of offer. No preferential allotment
may be made along with any rights issue.
k) The Company should also disclose about the fee agreed between the
lead managers and the Company in the memorandum of
understanding.
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and large public and private share offerings. Merchant banks tend to operate
on small-scale companies and offer creative equity financing, bridge
financing, mezzanine financing and a number of corporate credit products.
While investment banks tend to focus on larger companies, merchant banks
offer their services to companies that are too big for venture capital firms to
serve properly, but are still too small to make a compelling public share
offering on a large exchange. In order to bridge the gap between venture
capital and a public offering, larger merchant banks tend to privately place
equity with other financial institutions, often taking on large portions of
ownership in companies that are believed to have strong growth potential.
Merchant banks still offer trade financing products to their clients.
Investment banks rarely offer trade financing because most investment
banking clients have already outgrown the need for trade financing and the
various credit products linked to it.
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Merchant banks
Commercial banks
feature.
Mainly fund based business
5) Being advisors, they are closer to the Being lenders, they are more
customers and get to know risks of the cautions, assess risks in lending
transaction s properly. They work on proposal and cannot afford to be
risks shields i.e. mitigation measures
banks
majority
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Equity raising:
Debt raising:
Strategic advice:
capital finance
12)advice
on
mergers
and
acquisitions
13)corporate structuring advice
the capital market services for meeting the long-term fund requirements
through capital issues of equity and debentures. The growing demand for
funds from capital market has enthusied many organizations to enter into the
field of merchant banking for managing the public issues.
The need of merchant banker is also felt in the wake of huge untapped
public savings as merchant bankers can play a highly significant role in
mobilizing funds from savers to invest in channels assuring promising return
on investments and thus narrow down the gap between demand for and
supply of investible funds.
Merchant bankers not only provide advisory services to corporate
enterprises but also advise the investors of the incentives available in
the form of tax relief and other statutory obligations. Thus, the
merchant bankers help industry and trade to raise funds, and the
investors to invest their saved money in sound and healthy concerns
with confidence, safety and expectation of higher yields.
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5. Underwriting
6. Bankers
7. Portfolio Management
8. Venture Capital Financing
9. Leasing
10.Non-Resident Investment Counseling And Management
11.Acceptance Credit And Bill Discounting
12.Advising On Mergers, Amalgamations And Take-Over
13.Arranging Offshore Finance
14.Fixed Deposit Broking
15.Relief To Sick Industries
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Project Counseling
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Credit Syndication
Once the client company has decided about the project proposed to be
undertaken, the next step is looking for the sources wherefrom the funds
could be procured to implement the project.
Merchant banker has to locate the sources of funds and comply the
formalities required to procure the funds. This service rendered by the
merchant banker in arranging and procuring credit from financial
institutions, banks and other lending and investment organizations for
financing the clients' project cost or meeting working capital requirement is
referred to as loan syndication or credit syndication.
Credit syndication in case of domestic borrowings is with the institutional
lenders and banks. Long and medium term funds are obtained from the All
India Financial Institutions like IFCI, IDBI etc., state level financial bodies
like SFC, SIDC etc., commercial banks, mutual funds etc. Short-term funds
are also required by the firm for purchase of raw materials, payment of
wages, salaries etc. Sources of financing these short term requirements or
working capital needs can be from internal sources like internal accruals
from working or operations and short term loans from friends and relatives;
or from external sources like short term borrowings from banks etc.
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Portfolio Management
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Qualities of merchant bankers:To be a successful merchant banker, following qualities are necessary:
1. Knowledge: Thorough understanding of technical issues related to
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its customers. Merchants bankers should take utmost care that the
information is not leaked and also not consumed for the purpose other
than for which it was disclosed to the merchant banker.
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Problems and hurdles:Not many but some problems are faced by Indian merchant bankers.
I.
III.
Regulations: though regulations are much better now, there is still scope
for further improvement. Merchant bankers can be made more accountable
and responsible. Professional qualification focused on merchant banking is
not available. Industry is not well organized and all the players do not play
the same tune. This is specifically evident in comparison with insurance
industry and mutual funds industry.
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Scope for merchant banking in India:Scope for merchant banking depends upon size of the market,
restriction-liberation,
banking
policies,
corporate
culture,
and
corporate dynamics.
1.
India is one of the largest emerging markets. Obviously, public issues, FDI,
debt raising are on rise. Lots of new and green fried projects are happening.
Merchant bankers have lots space to contribute.
2. Restrictions-liberalization: more liberal the market is, more the
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Progress of Merchant Banking in India:Upto 1970, there were only two foreign banks which performed
merchant banking operations in the country. SBI was the first Indian
commercial bank and ICICI the first financial institution to take up the
activities in 1972 and 1973 respectively. As a result of buoyancy in the
capital market in 1980s some commercial banks set up their subsidiaries
to operate exclusively in merchant banking industry. In addition, a number
of large stock broking firms and financial consultants also entered into
business. Thus, by the end of the end of 1980s there were 33 merchant
bankers belonging to three major segments viz., commercial banks, all
India financial institutions, and private firms. Merchant banking
functions of these institutions was related only to management of new
capital issues.
Merchant banking industry which remained almost stagnant and
stereotyped for over two decades, witnessed an astonishing growth after the
process of economic reforms and deregulation of Indian economy in 1991.
The number of merchant banks increased to 115 by the end of 1992-93 300
by the end of 1993-94 and 501 by the end of August, 1994. all merchant
bankers registered with SEBI under four different categories include 50
commercial banks, 6 all Indian financial institutions ICICI, IFCI, IDBI,
IRBI, Tourism Finance corporation of India, infrastructure Leasing and
Financial Services Ltd. and private merchant bankers.
In addition to Indian Merchant Bankers, a large number of reputed
international Merchant Bankers like Merrill Lynch, Morgan Stanley,
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CURRENT AFFAIRS
RBI allows cash withdrawal from merchant banker terminals
Besides ATMs, customers can now also withdraw cash up to Rs1000 from
terminals at different merchant establishments, the Reserve Bank. As a
further step towards enhancing the customer convenience in using the plastic
money, it has been decided to permit cash withdrawals at POS (point of
sale) terminals. To start with, this facility will be available for all debit cards
issued in India, up to Rs1000 per day," RBI said in a statement issued here.
The use of debit cards at POS terminals at different merchant establishments
has been steadily increasing, it said. This facility is available only against
debit
cards
issued
in
India.
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other than equity broking, research, wealth management and advisory and
securities distribution operations. Post the split, JM Financial acquired the
investment banking company together with its subsidiaries, which were
engaged in fixed income, equity broking, wealth management, advisory and
distribution businesses of $ 20 million. The Indian partner sold its 49%
holding in JM Morgan Stanley Securities (JMSPL), the institutional equity
broking company to Morgan Stanley for $ 445 million.
Bulge bracket investment banking major, Morgan Stanley has re-entered
investment banking business on its own, after parting ways with JM
Financial its former Indian partner.
PNB aims profit of 7,500crore by 2013
The country's second largest public sector lender Punjab National Bank aims
to double its profit to Rs7,500 crore in the next four years.
"The bank has set a target to expand total business to Rs10crore and earn net
profit of Rs7,500 crore by 2013," said PNB Chairman and Managing
Director K C Chakrabarty, who is charge of Deputy Governor of RBI.
The growth driver would be better asset liability management, thrust on
recovery, focus on customers and financial inclusion, he had said. Besides,
the bank plans to open new line of businesses in the current fiscal including
merchant
banking
subsidiary.
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ICICI bank and its merchant banking arm, ICICI Securities (I-Sec), have
entered into an agreement, whereby all M&A deals will be done out of
ICICI Bank. The agreement goes on to define an M&A deal as one which
involves
change
in
management
control.
This arrangement replaces the earlier practice of both I-Sec and ICICI Bank
working together on M&A deals. Since a predominant number of people,
who wish to be advised on M&A, also look for acquisition finance, it was
decided that the business should be housed in the bank, I-Sec MD Madhabi
Puri Buch told ET. Now, if a corporate is seeking a sell mandate or a buy
mandate, where the transfer of controlling interest takes place, the deal will
be
done
by
ICICI
Bank.
ICICI Bank had initially entered the investment banking space in 2006. Over
the past couple of years, both the bank and its subsidiary have been vying
for deals. The new deal has taken into effect between both the entities from
April 1.
Birla Capital and Financial Services gets SEBI merchant banking
license
Birla Capital & Financial Services Ltd has been granted a merchant-banking
license by the Securities and Exchange Board of India. The license will
enable the company to offer a wide range of on-shore investment banking
advisory
and
underwriting
services
in
the
Indian
market.
The company, which is a part of the Yash Birla conglomerate, will initially
concentrate on regulated services like initial public offerings, takeover,
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The recent slowdown in the primary market has impacted not only investors
but merchant bankers as well, as there has been a significant decline of
nearly 60 per cent in their percentage fees so far this year.
"There is a clear drop in the merchant banking fees to Rs 216crore in
comparison to Rs. 771crore for the calendar year 2007, indicating a drop of
57.9 per cent on annualized basis," Nexgen Capitals, the merchant-banking
arm
of
brokerage
firm
SMC
Global
Securities.
Merchant bankers are those who advise the issuer about the public offer and
manage
the
issue.
The average percentage fees has declined to 1.21 per cent so far this year
from
2.24
per
cent
in
2007,
the
report
added.
Reliance Power IPO of Rs 11,563 crore during this year with the merchant
banking fee of Rs 50.6 crore, amounting to 0.44 per cent of the issue size
had a great bearing on this trend.
Nomura launches its investing banking operations in India
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India.
banking
teams.
By integrating the former Lehman Brothers India franchise and obtaining its
merchant banking licence and stock exchange memberships, Nomura India
said in a statement it has significantly expanded its capabilities in India
through a wide range of onshore financial solutions spanning securities
brokerage, securities underwriting and advisory services.
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dialogue
is
reportedly
misunderstandings.
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being
undertaken
to
clear
all
EXAMPLE:-
bodies
and
corporate
sector.
Capital
Market"
related
assignments.
They undertake "project appraisals" with resource raising plans from Capital
Market/ Debt Markets and facilitate tie-ups with Banks / Financial
Institutions
and
Potential
Investors.
issues
both
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retail
&
HNIs.
SPECTRUM OF SERVICES:1.
2.
3.
Private Placements
4.
Project Appraisals
5.
6.
IPO Funding
7.
8.
9.
10.
11.
12.
Share Valuations
13.
Syndication
Project Appraisal
2.
Capital structuring
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4.
5.
6.
Underwriting
7.
8.
9.
10.
Refund Bankers
11.
12.
Debenture Trusteeship
Investment Criteria:A wide range of later stage opportunities are considered. Targeted
companies include the following characteristics:
1. Having weathered the start-up process and established a core business
model that is sustainable;
2. Proven management team;
3. If not already profitable, visibility to profitability within a 12-month
period;
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Commercial loans
Syndicated loans
Lines of Credit from Foreign Banks and Financial Institutions
FCNR loans
Loans from Export Credit Agencies
Financing of Imports.
They are internationally the most Preferred Bank by Export Credit Agencies
for Guarantees in case of the Indian Clients or Projects.
SBI being an Indian entity has no India exposure ceiling. Their Primary
focus is On Indian Clients. SBIs seasoned Team of professionals provides
you with Insightful credit Information and helps you Maximize the Value
from the transaction.
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Debenture Trustee
Marketing
of
the
issue
through
strong
network
of
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CONCLUSION
The merchant banker plays a vital role in channelising the financial
surplus of the society into productive investment avenues. Hence before
selecting a merchant banker, one must decide, the services for which he is
being approached. Selecting the right intermediary who has the necessary
skills to meet the requirements of the client will ensure success.
It can be said that this project helped me to understand every details
about Merchant Banking and in future how its going to get emerged in the
Indian economy. Hence, Merchant Banking can be considered as essential
financial body in Indian financial system.
Market development is predicted on a sound, fair and transparent
regulatory framework. To sustain the growth of the market and crystallize
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