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MERCHANT BANKING Merchant banking may be defined as an ‘institution which covers a wide range of activities such as underwriting of shares, portfolio management, project counseling, insurance etc…They render all these services for a fee ORIGIN : The term merchant banking originated from the London who started financing foreign trade through acceptance of bills Later they helped government of under developed countries to raise long term funds Later these merchants formed an association which is now called ”Merchant Banking and Securities House Association”
SERVICES OF MERCHANT BANKERS PROJECT COUNSELLING : It includes preparation of project reports,deciding upon the financing pattern, appraising the project relating to its technical, commercial and financial viability. It includes filling up of application forms for obtaining funds from financial institutions. LOAN SYNDICATION : Assistance is rendered to raise loans for projects after determining promoter’s contribution. These loans can be obtained from a single institution or a consortium.
ISSUE MANAGEMENT : Management of issues involves marketing of corporate securities ie… equity shares, preference shares and debentures by offering them to public. Pre-issue activities: They prepare copies of prospectus and send it to to SEBI and then file them to Registrar of Companies They conduct meetings with company representatives and advertising agencies to decide upon the date of opening issue,closing issue,launching publicity campaign etc.. They help the companies in fixing up the prices for their issues Post-issue activities: It includes collection of application forms,screening of applications,deciding allotment procedure,mailing of allotment letters,,share certficates and refund orders
UNDERWRITING OF PUBLIC ISSUES : Underwriting is an insurance to the company which makes public issues.Raising of external resources is easy for the issues backed by well known underwriters. MANAGERS,CONSULTANTS OR ADVISERS TO THE ISSUE : SEBI insist that all issues should be managed by atleast one authorised merchant banker but not more than two.For an issue of 100 crores,upto a maximum of four merchant bankers shall be appointed.They help in listing of shares in stock exchange, completion of formalities under Companies Act etc..
PORTFOLIO MANAGEMENT : Portfolio refers to investment in different kinds of securities such as shares,debenture issued by different companies.It is a combination of assets but a carefully blended asset combination. Portfolio management refers to maintaining proper combination of securities in a manner that they give maximum return Investors are interested in safety,liquidity and profitability of his investment but they cant choose the appropriate securities.So merchant bankers help their investors in choosing the shares.They conduct regular market and economic surveys.
NRI INVESTMENT : NRIs has to follow lots of complicated rules for investing in the shares in India.Merchant bankers help them in choosing the shares and offer expert advice fulfilling government regulations thus mobilising more resources for corporate sector. ADVISORY SERVICE RELATING TO MERGERS AND TAKEOVERS : Merger is a combination of two or more companies into a singe company where one survives and other loses its existence Takeover is the purchase by one company acquiring controlling interest in the share capital of another company Merchant banker acts as middlemen between offeror and offeree,negotiates mode of payment and gets approval from government.
OFF SHORE FINANCE : Merchant bankers help their clients in : Long term foreign currency loan Joint venture abroad Financing exports and imports Foreign collaboration arrangement
BANKS PROVIDING MERCHANT BANKING SERVICES IN INDIA
Commercial banks Foreign banks like National Grindlays Bank, Citibank, HSBC bank etc.. Development banks like ICICI,IFCI,IDBI etc.. SFC , SIDCs Private firms like JM Financial and Investment service , DSP Financial Consultants, Ceat Financial Services,Kotak Mahindra, VMC Project Technologies,Morgan Stanley,Jardie Fleming,Klienwort Benson etc…
MERCHANT BANKING REGULATIONS : Certificate from SEBI is a must. They are of four types: Category I merchant bankers : Can act as Issue managers Category II merchant bankers : can act only as co-managers Category III merchant bankers : can act as co-managers but cannot undertake portfolio management Category IV merchant bankers :can merely act as consultant or advisor to issue of capital CAPITAL ADEQUACY NORMS : Category I Category II : Rs. 5 crores : Rs.50 lakhs
Category III : Rs.20 lakhs Category IV : Nil
GUIDELINES FOR MERCHANT BANKERS : SEBI’s authorization is a must to act as merchant bankers.Authorisation criteria include Professional qualification in finace,law or business management Infrastructure like office space,equipment and man power Capital adequacy Past track of record,experience,general reputation and fairness in all transactions Every merchant banker should maintain copies of balance sheet,Profit and loss account,statement of financial position Half-yearly unaudited result should be submitted to SEBI Merchant bankers are prohibited from buying securities based on the
SEBI has been vested with the power to suspend or cancel the authorisation in case of violation of the guidelines Every merchant banker shall appoint a ‘Compliance Officer‘ to monitor compliance of the Act SEBI has the right to send inspecting authority to inspect books of accounts,records etc… of merchant bankers Inspections will be conducted by SEBI to ensure that provisions of the regulations are properly complied An initial authorisation fee,an annual fee and renewal fee may be collected by SEBI A lead manager holding a certificate under category I shall accept a minimum underwriting obligation of 5% of size of issue or Rs.25 lakhs whichever is less
CODE OF CONDUCT :
Should make all efforts to protect the interest of investors Should maintain high standards of integrity,dignity and fairness in conduct of business Should fulfill all obligations in a professional and ethical manner Should not discriminate among the clients Should ensure that prospectus, letter of offer etc.. is available to investors at the time of issue Should render best possible advice to its clients Any penal action taken by SEBI should be informed to its clients
Should inform the board about any legal proceedings initiated against it Should abide by the rules of ‘‘Securities and Exchange Board of India Regulations,2003 “ Shall develop its own internal code of conduct for governing its internal operations Should ensure that any person it employs should have the capacity to be a merchant banker It is responsible for the act of its employees and agents Should not create false market
SOME PROBLEMS OF MERCHANT BANKERS
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 of securities 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
CATEGORIES Category I
To carry on the activity of issue Rs.1crore management and to act as adviser, consultant, manager, underwriter, portfolio manager To act as adviser, consultant, co-manager, Rs.50 lakhs underwriter, portfolio manager.
To act as underwriter, adviser or consultant Rs. 20 lakhs to an issue.
To act only as adviser or consultant to an issue
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