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Finance is a circulatory system of economic body of a firm. Firms create manufacturing capacities ( Men ,Machines & Materials), produce the goods or services and sell the same and realize the revenues. For this purpose, firms use the funds either by using their own funds / internal sources or they raise funds by issuing Hybrid securities, equity shares, debentures in the capital market.
Financial system Financial system of a country means a set of closely linked complex of institutions agents, practices, markets, transactions, claims and liabilities in the economy.
Thus it consists of financial institutions, financial markets, Financial instruments and the services provided by the financial institutions.
Institutions Organized Regulatory Intermediaries Non-Intermediaries Primary Secondary Banking Non-Banking Capital Market Money market Unorganized Financial Markets Financial Instruments Financial Services
Asset Mngt. Co. Liabilities Mngt. Co.
Short-term Medium-Term Long-Term
Fee-Based /Advisory services Financial services cater to needs of financial institutions. financial markets & financial instruments. .Financial services Financial services broadly fall into two categories 1. The functioning of the financial system greatly depends on the range of services and efficiency of service providers.Funds /Assets Based services 2.
Funds /Assets Based services: *Leasing *Hire purchase *Bill-Discounting * Venture capital Finance *Housing finance *Factoring .
.Fee-Based /Advisory services: Issue management Portfolio management Corporate ±counseling Loan syndication Merger & Acquisitions Capital structuring Arranging foreign collaboration.
Merchant Bankers and portfolio managers) Liabilities Management Companies ± consists of bill discounting houses and acceptance houses.Financial service providers Financial services are provided by two types of companies. mutual funds. . Assets management companies (Leasing companies.
of central govt. SEBI. financial institution. *Regulatory Bodies:.Constituents of Financial services :*Instruments :. Factors. Board of industrial and financial reconstruction. consultants and underwriters etc. Merchant Bankers. Stock Brokers.RBI.Banks.Equity. Banking and * insurance dept. Discount Houses. Debt and hybrid and exotic instruments *Market Players:. Credit rating agencies and venture capital institutions. *Specialized institutions:.They are acceptance houses. Depositories. Mutual Funds. .
and Non-Banking financing companies. µlease financing. insurance companies . Special services provided by Banking companies.Stock lending . Merchant Banking . They assure the efficient deployment of funds 3. They help to raise funds 2. Mutual funds.Functions of financial services institutions 1.depository. They extend the service up to the stage of servicing of lenders 5. parking of short term funds in the money market.factoring of debtors. factoring . . credit rating . 6. they provide services like bill discounting . housing finance Book building etc. venture capital financing. credit cards. They assist in deciding the financing-mix 4. In order to ensure the efficient management of funds .stock exchanges. Securitization of debts .
buying or subscribing to securities as manager . advisor or rendering corporate advisory service in relation to such issue management.Merchant Banking (A fee based advisory service) According to notification of ministry of finance ± A merchant banker is any person who is engaged in the business of issue management either by making arrangements regarding selling . .consultant.
Merchant banking services was started by Grindlay Bank in 1969 when it had set up Merchant Banking division for undertaking management of public issue and financial consultancy. . SBI started these services in1973and ICICI in 1974 which was followed by other commercial banks in the Country. On recommendation of Banking commission in 1972.Evolution of Merchant Banking in India In India.
SEBI and Merchant Banks The formation of SEBI in 1992 was a landmark in the evolution of Merchant banking as a professional service in the country. Merchant banking organization have to be mandatorily registered with SEBI. Registration with SEBI is required for - (a) Pre & Post capital issue related activities (b) Merger and acquisitions (c) Portfolio management (d) Debenture trustee (e) Underwriters .
.Reason: why registration is required from SEBI? To protect the interest of investors in security market To prohibit the fraudulent & unfair trade practices of the merchant Bankers.
capital restructuring. arranging the financing pattern. loan syndication. public issue management and lease financing.Importance /Services /Activities of Merchant bankers 1. project costing. 2. Corporate counseling ±For corporate and management. technical and financial viability of the project . working capital management. . Project counseling.Project report preparation on the basis of study of location and market.
Activities involved are: (a) Preparation of action plan & budget for total issue expenses (b) Drafting the prospectus (c) Getting consent letter from SEBI (d) Selecting the brokers /underwriters (e) Selecting the advertising agency for Pre& Post issue publicity (f) Coordinating with underwriters/brokers/bankers/various agencies to the issue &stock exchanges to groom the issue to ensure full subscription.It involves selling of securities /equities &preference shares/debentures or bonds.3.Management of Capital issues.Loan syndication ±It refers to a large amount of loan arranged for major project by a bank in syndication of other banks for a large corporate/ authority/ Govt. 4. dept. (g) Private placement of securities .
The success of issue is depending on the selection of right security. Managing advising on international offerings of Debt/ Equity i.5. This expert advice can be provided by merchant bankers.SEBI guidelines insist that all the issues should be managed by at least one authorized merchant banker.e. ADR. liquidity& profitability of their investments. 6. Corporate advisory services.GDR. Portfolio management -Merchant bankers keep the regular market information & economic surveys so they help in devising right mix of securities in a portfolio and help the investors to ensure their safety. Bonds and other instruments. .
or RBI. 8. technical rehabilitation of sick units *Helps in obtaining approval from board of industrial and financial reconstruction & sick industrial companies¶ act 1985. Consultancy to sick industrial units:*For financial reconstruction.7. Advisory services to mergers & Acquisition: Merchant bankers act as a middle man between two companies by safeguarding the interest of both. . He gets the approval from the financial institution of the govt.
Legal documentation and tax counseling. LeasingMerchant banking renders the services for leasing companies. advice on the optimal structuring of the transaction. 10. It allows the companies to raise capital without facing the uncertainties of the market place and Merchant bankers get attractive benefit.9. Merchant bankers buy the issue in lots and offload them in the market. . Bought-out DealsThis deal is done in 2 stages-first the companies issue shares to retail investors at a higher price then merchant bankers are offered to buy the same at some below price.
000 IV Nil To act as an advisor or consultant to an 5000 1000 5000 2000 issue .000 5.000 issue /or portfolio manager/ underwriter/ advisor Rs. 20.000 I II manager /co2.5 lakhs 1lakh 1.20 lakhs To act in the capacity of an advisor or consultant to an issue 1 lakh 25000 50.000 III Rs.000 75.5 lakhs 50. Rs.5crore To act in the capacity of lead 10. Rs.000 manager/Advisor/consultant to an issue or portfolio manager and underwriter Rs.Legal requirement for registration of various classes of merchant bankers Categories Capital requirement (Net worth) Authorized Activities Registration fees For first For 2yrs 3rd yr Rs.00. Renewal fee For first For 2yrs 3rd yr Rs.50lakhs To act in the capacity of Co-manager or consultant an 1.
TO monitor the capital adequacy requirement the SEBI may require halfyearly unaudited financial results of a merchant banker W.F.only category I merchant bankers have been permitted to work and the others were abolished by the SEBI . 5th September 1997 .E.
Lead Managers: A company which has to raise the capital appoints the lead manager. . Lead manager performs the following functions ± *Designing the instrument *Pricing the issue *Timing the issue *Marketing of issue *Preparing the offer document *Listing the allotment *Refund of application money received on shares.
2 3 4 5 5 or as agreed by SEBI .No. of lead managers: depends on the size of public Issue For issue up to 50 crores 50-100crores 100-200crores 200-400crores Above 400 crores Max. No.
Lead managers should accept a minimum underwriting obligation of 5% of the total underwriting commitment or Rs. He should furnish a statement showing his responsibilities for issue to the SEBI at least one month before opening of the issue. 25 lakhs whichever is less .Responsibilities of Lead Managers Lead managers should undertake the management of any issue only if his responsibilities are clearly defined.
Lead managers should submit all documents (prospectus Or offer letter) to SEBI at least 2 weeks before filling the draft prospectus or letter of offer with ROC or with regional stock exchanges. He remains responsible till the refund of money or allotment of securities to the subscribers . He has to ensure that modifications suggested by SEBI are incorporated. A due diligence certificate about verification & reasonableness of contents of prospectus or offer letter to an issue should be submitted by him to SEBI at least 2weeks prior to the opening of the issue.
Broker to the issue:Procedure of Appointment Only the registered members of recognized stock exchanges are appointed as brokers to the issue A profile of the project is sent to brokers to the issue Appointment is made on preference of management of issuer company While appointing the issuer company ensures (a) that the broker can cover wide geographical distribution of stock exchanges (b) Reputation of brokers to inspire confidence among the investors and (c) The track record in securing subscription to issue Company appoints the brokers at every center where stock exchanges area located .
For lining up of investors they get brokerage . They some times undertake mailing of prospectus.Role of Brokers Brokers assist merchant bankers to device strategy for success of the public issue to keep liaison between merchant bankers and stock exchange They canvass support for the issue among the investors. application form & publicity material at the instance of merchant banker.
. collection of application and allotment money. The registrar provides administrative support to the issue process. He helps the issue and collection centers in preparing the allotment and application forms.Registrar to the issue: Registration with SEBI is mandatory to take on the responsibilities as a registrar and share transfer agent . reconciliation of bank accounts with application money. He helps the lead manager in the selection of bankers. listing of issues and grievance handling.
Banker to the issue Any scheduled bank registered with SEBI can be appointed as banker There is no restriction on number of bankers to the issue Main function is to collect the application forms with money and to maintain daily report Transfers the proceeds to share application money account Forward the collected application money to registrar .
Underwriter to the issue Underwriting involves a commitment from the underwriter to subscribe to the shares of a particular company to the extent it is under subscribed by the public or existing shareholders of the corporate. net worth of rs. His total obligation at any time should not exceed 20 times of the net worth. An underwriter should have a min. A commission is paid to the underwriters on the issue price for undertaking the risk of under-subscription. 20 lakhs . .
5% 2.5% Issue amount exceeding Rs.rate of underwriting commission Nature of the issue On amounts devolving on underwriters On amounts subscribed by Public Equity /Pref.0% .5% 1.5 lakhs 2./Debentures Issue amount up to Rs. 5 lakhs 2.5% 2.Max.0% 1.
Insurance companies or corporate body fulfilling the capital adequacy requirement can be registered as debenture trustee.Debenture trustee A debenture trustee is a trustee for a trust deed which is needed for securing any issue (offer for sale or purchase) of debenture by a company /corporate body. Public financial institution. A trust deed means a deed executed by the corporate body in favour of trustees named therein for the benefit of debenture holders . .
Essential requirements for registration of debenture trustee with SEBI * The necessary infrastructure like adequate office space.2 persons with experience as debenture trustee * Any person directly /indirectly connected with applicant has not been granted registration by the SEBI * Employment of at least one person who posses the qualification in law from a govt. . equipments and man power to effectively discharge duties. * Any past experience/employment of min. recognized institution *Any of its directors /principal /officer has not been convicted for any economic offence.
The initial registration fee is Rs.Duration of registration and fees The initial registration is for a period of 3 years and is renewable before 3months following the expiry of the period of certificate.5 lakhs every 3 years.5 lakhs while the renewal 2. .
.Rights of debenture trustees The debenture trustee is entitled to inspect the registers of the company and to take copies & extract thereof and has a right to appoint a nominee director .
records and documents relating to the trusteeship function for at least 5 financial years preceding the current financial year.Obligation of debenture trustee A debenture trustee has to enter into a written agreement with the corporate body before opening of the subscription list for issue of debentures and the agreement should clearly contain that the debenture trustee has agreed to act the trustee under the trust deed for securing the issue of debentures. A debenture trustee should keep and maintain proper books of accounts. .
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