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Ke y Notes, MBFS 2010 Module 3

Merchant Banking
Meaning
(G&D 245)

Any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to the securities as manager, consultant, advisor or rendering corporate advisory services in relation to such issue management.

Services of Merchant Banking
• • • • • • • • • • Corporate counseling Project counseling Loan syndication Issue management Underwriting of public issue

(G&D 247)

Managers, consultants or advisers to the issue Portfolio management Advisory services relating to mergers and takeovers Off share finance Non resident investment
(G&D 257)

SEBI guidelines for Merchant Banking
• • • •

All merchant bankers will require authorization by SEBI to carry out business An initial authorization fee, an annual fee and renewal fee may be collected by SEBI All issue must be managed at least by one authorized banker Each merchant banker is required to furnish to the SEBI half yearly unaudited financial results Page 1

Deepak D, Lecturer, RNSIT

MBFS 2010 • • • • SEBI has prescribed the code of conduct for the each merchant banker SEBI has the power to suspend or cancel the authorization in case of violation To ensure the transference and accountability in operation of the merchant banker and protect the investors. Merchant banks act as intermediary whose main job is to transfer capital from those who own it to those who need it. Lecturer. RNSIT Page 2 . Pre and post issue activities Pre-issue activities • • • • • • Obtaining appraisal note Optimum capital structure Convening meeting (MB&FS GURU 36) Appointment of financial intermediary Preparing documents Due diligence certificate Deepak D.Ke y Notes. Issue management (MB&FS GURU 32) Issue management involves marketing of corporate securities viz. preference shares and debentures or bonds by offsetting them to public.. equity share. Inspections will be conducted SEBI to ensure that provisions of the regulation are properly complied.

Ke y Notes. it is called ‘ public issue of securities’. Deepak D. MBFS 2010 • • • • • • Submission of offer document Finalization of collection center Filling with RoC Launching the issue Promoters contribution Issue closure Post-issue activities • • • (MB&FS GURU 36) Finalization of basis of allotment Dispatch of share certificates Advertisement Equity Issue (MB&FS GURU 34) When the capital funds are raised through the issue of prospectors. It is most common method rising of funds. Lecturer. RNSIT Page 3 .

bankers. foreign institutional investors and financial institution Underwriting has been made mandatory The collection center and collection agencies Issue by way of bonus and right issue. etc  Arranging press and investors conference  Printing and publicity of public issue documents. Lecturer. Page 4 Deepak D. MBFS 2010 Mechanism or process of equity or public issue  Decision to rise capital funds  Obtaining SEBI approval  Arranging underwriting  Preparation and finalize of prospectors  Selection of registrars. brokers.  SEBI compliance  Issue Launch (MB&FS GURU 34) SEBI guidelines for Equity issue or public issue • • • • • • • • • • Disclosure to be made in the prospectus Company profile Pricing of issue Promoters contribution Issue of convertible debenture and credit rating Proportionate allotment of shares (G&D 169) Firm allotment to mutual funds.Ke y Notes. RNSIT .

it is called as ‘right issue’. brokers. RNSIT . MBFS 2010 Right issue (MB&FS GURU 35) When the shares are issued to the existing share holder on the privileged basis. Mechanism or process of right issue  Decision to rise capital funds  Obtaining SEBI approval  Arranging underwriting (MB&FS GURU 35)  Selection of registrars.  SEBI compliance  Issue Launch SEBI guidelines for Right issue (G&D 172) • • • • Composite issue Appointment of merchant banker Minimum subscription Preferential allotment Page 5 Deepak D.Ke y Notes. bankers. Lecturer. etc  Arranging press and existing share holder conference  Printing and announcement of right issue documents.

The rate of interest decided by the company Normally debenture above 7 years can not be issued. Credit rating is compulsory for all debenture. it takes the form of private placement. Debenture trustee and debenture trust deed are to be finalized within six months of the public offer. MBFS 2010 • • • • • • • Underwriting Right of FCD/PCD holders Over subscription not be retained Promoters contribution Disclosure in the letter of offer Advertisement in news paper Compliance report SEBI guidelines for Debenture issue • • • • • • • • • (G&D 179) The amount of working capital debenture should not exceed 20% of the gross current assets. Lecturer. Private placement obviously commands an advantage over the public issue on the following grounds (MB&FS GURU 35) Deepak D.Ke y Notes. RNSIT Page 6 . Debenture are to be redeemed after 7 years of maturity. The debt equity ratio should not exceed 2:1. Private Placement (MB&FS GURU 35) When the issuing company sells securities directly to the investors. Debenture redemption reserve is to be set up out of profit of the company. especially institutional investors. Debenture issued to the public have been secured and registered.

It is a method of marketing the shares of a company where by the price of the securities will be decided on the basis of “Bid” received from the prospective shareholders by the lead merchant bankers Book Building method (Process) • • • • • • • • • • (MB&FS GURU 45) Appointment of book – runners Drafting prospectus Circulating draft prospectus Maintaining offer records Intimation about aggregate orders Bid analysis Mandatory underwriting Filling with ROC Bank accounts Collection of completed applications Deepak D. RNSIT Page 7 .Ke y Notes. According to the SEBI. there are two option available to a company. Lecturer. either 75 percent or 10 percent book-building process. MBFS 2010 • • • • • • Speed and confidentiality of issue Access to capital market more quickly than a public issue Less expensive method of raising capital Advantageous to small companies as cost can be reduced Not influenced by the prevailing bull or bear phase of the stock market More stable attitude of institutional investors Book building (MB&FS GURU 45) Book building is a process by which corporate determines the demand and the price of a proposed issue of securities through public bidding.

MBFS 2010 • Allotment of securities SEBI guidelines on book building • • • • • • • • • (G&D 181) The option 100% BB available only those issue company which proposed capital above 100 crores BB shall be the portion other than the promoters contribution etc.. shall determine the issue price based on Bid Allotment of securities A final allocation process shall be maintained by the book runners SEBI shall have the right to carry out the inspection of the records relating to the BB process (MB&FS GURU 114) Global depository receipts (GDR) Global depository receipts or certificate is created by the overseas depository bank outside india denominated on dollar and issued to non resident investors against the issue of ordinary shares of issuing company.Ke y Notes. make advertisement on the news papers The book runners and the co.. Lecturer. RNSIT . issue co.. Issuing company shall appoint category one merchant bankers as book runners (s) their name shall be mentioned in the prospectus Draft prospectus shall be filed with SEBI by lead merchant bankers After observation by SEBI. In simple wards it means a negotiable instrument denominated in US dallors Steps in GDR issue • • • • • • • (MB&FS GURU 45) Convening board meeting Appointment of syndicate member Due Diligence Oversea listing Indian listing Preparing offer circular Offer analysis Page 8 Deepak D.

Differences between Global depository and American depository Global depository receipts Listed in Europe and American stock exchange or both Global low govern it It is less stringent when compared to American depository receipts It is comparatively less liquid to American depository receipts It is less powerful American depository receipts Listed in American stock exchange only American low govern it It is less stringent when compared to Global depository receipts More liquidity It is a powerful as it is traded in united states markets. Lecturer. RNSIT . normally a US bank or depository in lieu of shares of the foreign company. which are actually held by the depository. MBFS 2010 • • • • • Deciding the timing Issue closure GDR allotment Investors information Report to government (MB&FS GURU 110-115) American depository receipts (ADR) ADR are negotiable receipts issued to investors by an authorized depository.Ke y Notes. Intermediatories in issue management • • • • • • • • Merchant Bankers Registrar to the issue Bankers to the issue Underwriters to the issue Brokers to the issue Auditors Legal advisers Advertising agencies Page 9 Deepak D.

RNSIT Page 10 . underwriter and portfolio manager Categories 2 : Merchant banker who is authorized to act as adviser. consultant. consultant. MBFS 2010 • printers (G&D 259-260) Categories of Merchant bankers/ issue managers • • • • Categories 1 : Merchant banker who is authorized to act as issue manager. adviser. underwriter. consultant. underwriter and portfolio manager Categories 3 : Merchant banker who is authorized to act as adviser.(36) Deepak D. consultant. Lecturer.Ke y Notes. Categories 4 : Merchant banker who is authorized to act as adviser.