Who is a merchant banker?

• 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 or subscribing to

securities as manager- consultant or advisor or rendering corporate

advisory services in relation to such issue management

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Is merchant banker same as banker

• Accepting deposit & lending • Corporate counseling

• Providing working capital • Project advisory services
finance
• Corporate restructuring
• Meeting short term credit
• Issue management
needs of enterprises
• Managing mergers
• Issuing cheques
&acquisition
• Availing of cash credit,
overdraft and discounting of • Loan syndication

bill of exchange • Portfolio management

• Issuing credit cards • Leasing services

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What services does he/ she offer?
• Project promotion services
• Project finance
• Issue management
• Underwriting of new issues
• Syndicating of credit
• Leasing services
• Corporate consultancy and corporate restructuring
• Merger & Acquisition
• Offshore financing
• Providing Venture capital
• Asset management
• Providing assistance for technical and financial collaboration and joint venture
• Management of and dealing in commercial paper.

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Why do we need them?

• Growing complexity in rules and procedures of the government

• Need for technologically advanced companies

• Network in multiple countries and hence access to “Globalisation”

• “Jugaad”

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How are they organised?

Institution base
Merchant bankers function as independent wing or as a subsidary of
various financial institutions. Focuses on Governmental priorities and
policies

Banker base
Subsidary or division of banking organisation. Extremely professional
and has helped parent companies to raise capital

Broker base
Investment and portfolio management services

Private base

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 Project promotion services

• Development of an idea of a project or review of the project idea/project

profile
• Preparation of project report after considering its financial ,economic and
market feasibility
• Estimation of the cost of the project
• Deciding the means of financing and the composition of various types of
securities.
• Studying the procedural aspects of project implementation.
• Provide assistance in obtaining governmental consent for implementation
of the project.

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Project Finance

• Identification of potential investment opportunities

• Capital restructuring

• Shaping the pattern of financing

• Negotiating with foreign collaborations and making all necessary

arrangement

• Amalgamation, mergers and takeovers

• Profitability study of the project and preparation of feasibility report.

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Securitization

“ Securitization is the process of pooling and repackaging of

homogenous illiquid financial assets into marketable securities that
can be sold to investors”

“Selling the Cash flow generated from the assets (either existing or
future) against the charge of the assets, by converting them into
homogenous market negotiable instruments is known as
Securitization”

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 The Procedure

Selection and pooling of assets

These assets are sold or pass through

another orgn called Special Purpose Vehicle(SPV)

The SPV then splits the pool into units/securities

sells them to the investors at large and reimburses it.

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Securitization Process

Obligor (s) Ancillary Service

Providers
Interest &
Principal Credit Enhancement,
Original Liquidity Adjustment, etc.
Loan
Sale of Assets Issue of Securities
Servicing of
Securities
Originator SPV (Assignee &
Issuer) Investors
Consideration for Subscription
assets purchased of Securities
Guarantee for
Credit Rating of Securities Timely Payment
Rating Agency Guarantor

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Structurer
What is involved in securitisation?

• Estimation of the Cash Flows

• Creation of SPV

• SPV issues securities/notes to Investors

• Investors - Proceeds of the issue of securities to SPV

• Collection and Servicing from the Obligors

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Loan/credit syndication

• Estimation of the total cost/expenditure on the project

• Preparing a financial plan to meet the total cost of the project keeping
into consideration the requirement of the promoters and their
collaborators, financial institutions ,banks, government agencies and
underwriters.
• Assisting the client in preparation of loan application for financial
assistance and monitoring the progress.
• I-bank helps in expediting legal documentation formalities listed by the
participating financial institutions and banks and help in completion of
formalities
• I-bank also helps in estimating working capital requirement and assist
client in negotiating for the sanction of appropriate facilities

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Corporate Restructuring

• Actions taken to expand or contract a firm’s basic operations or

fundamentally change its asset or financial structure

• Activities are broad, range from reorganizing business units from

product lines to divisions to take over or joint ventures etc.

• May involve taking the company private, selling attractive assets,

undertaking a major acquisition, or even liquidating the company

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Categories

Operational restructuring
Outright or partial sale of companies or product lines or to downsize by
closing unprofitable or non-strategic facilities.
– Also known as divestiture
– Remove non-core assets
– Becoming more focused on core activities

Financial (or debt) restructuring

Actions by the firm to change its total debt and equity structure, i.e.
share repurchase, adding debt or lower overall cost of capital.

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 Value creation Process

• Review corporate financial structure from the shareholders’

viewpoint.
• Increase efficiency and reduce the after-tax cost of capital through
judicious use of borrowing.
• Improve operating cash flows through focusing on wealth-creating
investment opportunities, profit improvement and overhead
reduction programs and divestiture
• Pursue finally Value-driven process using various financing
instruments and arrangements

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Management Buy out

• Involves the management team’s purchase of the bulk of the firm’s

shares
• Create a win-win situation for shareholders who receive a premium
for their stock and management who retain control.
• To avoid lawsuits, the price paid must represent a higher premium
to the current market price
• Alternatively, the target may make itself less attractive by divesting
assets the bidder wants
• Cash proceeds of the sale could fund other defenses such as share
buybacks

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 Leveraged Buy-out

• Borrowed funds are used to pay for all or most of the purchase price.

• Can be of an entire company or divisions of a company

• The tangible assets of the company are used as collateral for the loans

• Investors in LBOs are referred to as financial buyers because they are

primarily focused on relatively short- to intermediate-term financial

returns

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Primary Market

• It’s a market for new issue, it is also market for fresh capital

• Fund raising through prospectus

• The main service of the primary market are origination,

underwriting and distribution

• Investor can apply but allotment of shares is made by issuer.

• A public issue opens for limited period.

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