Merchant Bankers Services: Unit 3

Unit 3
Merchant Bankers Services

3.1 Services of Merchant Banker
3.2 Merger and Acquisition Services
3.3 Valuation Methods in Merger and Acquisition
3.4 Financing Techniques in Merger/Acquisition
3.5 SEBI Guidelines for Buy Back of Shares
3.6 SEBI guidelines for Delisting of Shares
3.7 SEBI guidelines for Issue of Debentures
3.8 Portfolio Management Services
3.9 Credit Syndication Services
Introduction
 Merchant banks, otherwise known as investment banks, provide a range of
services to institutional and high net worth individual clients.
 These services can include stock underwriting, bond issuances, consulting
and representation pursuant to a merger or acquisition.
 Merchant banks do not provide retail banking services, such as savings or
checking accounts, to the general public.
 In addition to providing services to their clients, many merchant banks
make investments for their own accounts.
 Services offered by merchant banker include merger and acquisition
services, portfolio management services and credit syndication services.
3.1 Services of Merchant Banking Corporate
Counselling
ServicesIssue
of Management
Merchant Banking: Project Counselling
Leasing
Service of Loan Syndication
Merchant
Consultancy to Sick
Industrial Units Banking Management of
Capital Issues
Advisory Services
Corporate Advisory
to Mergers and
Services
Takeovers Portfolio
Management
3.1 Service of Merchant Banking
1) Corporate Counselling:
Corporate counselling is the beginning of the merchant banking services. Every
industrial unit either new or existing needs it. The scope of corporate counselling is
very vast.
2) Project Counselling:
This has originated from corporate counselling. It relates to project finance and
includes preparation of project reports, cost of the project, and also arranging the
financing pattern.
3) Loan Syndication:
It refers to a loan arranged by a bank for a borrower who is likely to be a large
company, a local authority, or a government department.
4) Management of Capital Issues:
Management of capital issues involves selling of securities, namely, equity shares,
preference shares, and debentures or bonds to the investors.
5) Corporate Advisory Services:
Merchant bankers set up corporate advisory service branches to render exclusive
services to their corporate customers.
3.1 Service of Merchant Banking
6) Portfolio Management:
Portfolio management refers to minimizing the risk and maximizing the returns.
Hence, the term portfolio management can be applied only to shares and debentures.
7) Advisory Services to Mergers and Takeovers:
The term merger means combination of two companies in a manner such that only
one company survives and another goes out of existence.
8) Consultancy to Sick Industrial Units:
A merchant banker guides the existing units for growth and diversification.
9) Leasing:
In lease transaction, the merchant banker renders the services that include
arrangement for lease finance facilities for leasing companies, advice on the optimal
structuring of the transaction, legal documentation and tax counseling.
10) Issue Management:
The merchant banker is the intermediary appointed by companies in the primary
market issue. It has to look at the entire issue management and work as the manager
to the public issue.
3.2 Merger and Acquisition
Concepts :
1) Merger:
Service
Merger is absorption of one or more companies by a single existing company.
Merger is an act or process of purchasing equity shares (ownership shares) of one or
more companies by a single existing company. Merger is a technique of business
growth. It is not treated as a business combination. Merger is done on a permanent
basis. Generally, it is done between two companies. However, it can also be done
among more than two companies. During merger, an acquiring company and
acquired company comes together to decide and execute a merger agreement
between them.
2) Acquisition:
Acquisition refers to a situation where one firm acquires another and the latter
ceases to exist. An acquisition occurs when one company takes controlling interest
in another firm or its legal subsidiary or selected assets of another firm. A firm that
attempts to acquire or merge with another company is called an acquiring company.
A target company is a firm that is being solicited by the acquiring company. The
assets of the dissolved firm would be owned by the acquiring firm.
A) Concepts :
3) Amalgamation:
Service
Amalgamation is the blending of two or more companies into one, the shareholders
of each blending company becoming substantially the shareholders of the other
company which holds blended companies. In an amalgamation the assets and
liabilities of the two companies are vested in one which has as its shareholders all or
substantially all the shareholders of the two companies. Amalgamations are
governed by Sections 390 to 394 and 396 of the Companies Act requiring consent of
shareholders and creditors.
4) Takeover:
In addition to the traditional mergers and acquisitions (M&A) involving two willing
parties, takeover has gained popularity beginning in the 1960’s. Shares may be
purchased from the market to acquire a controlling interest and the target company
may be maintained as a subsidiary or division or dissolved to merge. In a takeover, a
seller’s management may oppose the acquisition or merger but the buyer makes a
direct bid to the seller’s shareholders to acquire seller’s shares and thus gain control
of the seller’s company. Takeover is a market route for the acquisition of a company.
B) Types of Merger Service
Horizontal Merger A Congeneric Merger
Vertical Merger Negotiated Merge
Diagonal Merger Arranged Merger
Forward Merger
Types Agreed Merger
of
Reverse Merger Merger Unopposed Merger
Forward Triangular Defended Merger
Merger
Reverse Triangular Merger Competitive Merger
Conglomerate Merger Tender Offer

Mergers are of different types as discussed below:
1) Horizontal Merger :
Where two or more companies that compete in the same industry amalgamate, it is a
case of · ‘horizontal| merger'.
2) Vertical Merger :
A company is said to be adopting a vertical integration strategy where it seeks to
participate in other links in the value chain by remaining in the same industry by
acquiring suppliers or production technology. or acquiring sales or distribution
capacity.
3) Diagonal Merger :
A company is said to be adopting a diagonal integration strategy where it pursues an
acquisition that involves both horizontal and vertical elements.
4) Forward Merger :
In a forward merger, the shareholders of the target company exchange their shares
for the shares of the acquiring company and all of the assets and liabilities of the
target company are automatically transferred to the acquires
B) Types of Merger
5) Reverse Merger :
Service
In a reverse merger, the shareholders of the acquiring company exchange their
shares for shares of the target company. It is a case of the acquiring company
merging into the target company.
6) Forward Triangular Merger :
In a forward triangular merger, a subsidiary company is formed by the parent
company for the purpose of engaging in the merger deal. A parent company funds a
subsidiary formed for this purpose.
7) Reverse Triangular Merger :
In a reverse triangular merger, the parent company funds a subsidiary company with
stock of the parent. The shareholders of the target company exchange their stock for
the stock of the parent company, which is held by the subsidiary company.
8) Conglomerate Merger :
A company is said to be adopting a conglomerate merger strategy where it makes
acquisitions across different industries.
9) A Congeneric Merger :
It is said to take place where the companies that are getting merged are engaged in
complementary activities and not in direct competitive activities, amalgamate to
form a new company.
10) Negotiated Merger :
Where merger of two or more companies takes place after protected negotiations, it
is a case of ‘negotiated merger'. Under this type of merger, the acquiring firm
negotiates directly with the management of the target firm.
11) Arranged Merger :
Where merger of a financially sick company takes place with another sound
company as part of package of financial rehabilitation under the initiative of a
financial body, it is a case of an ‘arranged merger'.
12) Agreed Merger :
Where the directors of target firm agree to the takeover or merger, accept the offer
in respect of their own shareholding's (which might range from nil or negligible to
controlling shareholdings) and recommend other shareholders to accept the offer, it
is a case of ‘agreed takeover or merger’.
B) Types of Merger
Service
13) Unopposed Merger:
Where the directors of the target firm, while making a deal with the acquiring firm,
do not oppose the offer or recommend rejection, it is a case of ‘unopposed merger’.
14) Defended Merger:
Where the directors of a target firm decide to oppose the bid, recommending
shareholders to reject the offer and perhaps taking further defensive action, it takes
the form of a ‘defending merger’.
15) Competitive Merger:
Where a second bidder (and perhaps even a third bidder) comes into the scene with
a rival bid, it is a case of a ‘competitive merger’.
16) Tender Offer:
It is where a bid is made by an acquiring firm to acquire controlling interest in a
target firm by purchasing the shares of the target firm at a fixed price. It is a case
of ‘tender offer’.
Service
C) Advantages of Merger and Acquisition:
Diversification
Growth
Investor's
through
Perspective
Acquisitions
Better Economies of
Portfolio Scale
Better
Early-mover
Corporate
Benefit
Governance
Advantages
Creating Tax
Shareholder Advantages
Value
Regulatory
Good Price Considerations
Diversifying
Size
Risk
Synergy
3.2 Merger and Acquisition Service
1) Diversification :
Diversification, a form of inorganic growth may be achieved by buying firms
already sewing the target markets (acquisitions) or by establishing new facilities in
the target areas.
2) Growth through Acquisitions :
There are two types of entrepreneur’s viz. product-builders and empire builders.
Product-builders are concerned with growth and profitability of a firm as an
organization for the production and distribution of goods and services.
3) Economies of Scale :
When the industry reaches the maturity stage (where the growth is stagnated) or is
in recession, there is a consolidation in the industry to cut costs.
4) Early-mover Benefit :
An early mover strategy can reduce the lead time taken in establishing the facilities
and distribution channels.
5) Tax Advantages :
Some acquisitions are made with the sole intention to get a tax shield. This is more
so in the case of acquiring of sick companies where the acquirer gets the tax shield
in the form of unclaimed depreciation and carry forward of losses.
6) Regulatory Considerations :
Indian government, in a bid to protect the domestic industry, did not encourage the
formation of fully-owned subsidiaries by foreign firms.
7) Size :
In the global business, size has become one of the important parameters for
competition.
8) Synergy :
Synergy results only if two companies are worth more together than apart. lf the
cost of acquisition is larger than the potential synergies. The M&A will be obviously
unsuccessful.
9) Diversifying Risk :
Unsystematic risk can be reduced by a company by careful diversification into areas
which have good potential.
10) Good Price :
Preference for good premium than for the future earnings is one of the perspectives
of the target firm.
11) Creating Shareholder Value :
If a financial institution thinks that a merger will create shareholder value then it
will be in favour of the merger.
12) Better Corporate Governance :
Commitment and transparency in business are two important factors considered by
lenders.
13) Better Portfolio :
With the rising competition*in lending business, banks and FIs are entering in one
another‘s businesses.
14) Investor's Perspective :
Investors will move towards a company which adds to their wealth. So if the
predator company is perceived to be more professional and healthy, the investors
have no hesitation in accepting the M&A plan.
D) Procedure for Amalgamation:
Memorandum Person Copy to

Board Application to
of Association Entitled to Regional
Meeting the Court
(M/A) Apply Director
Filing of
Advertisement Notice to
Order of High Notice of the Affidavit for
of Notice of Stock
Court Meeting the
Meeting Exchange
Compliance
Reporting Of
General Formalities Sanction of
Result Of The Petition
Meeting with ROC the Scheme
Meeting
Filing with Copy of Order Allotment of

Stamp Duty
ROC to be annexed Shares
Service
D) Procedure for Amalgamation:
1) Memorandum of Association (M/A):
The Memorandum of Association must provide the power to amalgamate in its
objects clause. If M/A is silent, amendment in M/A must take place.
2) Board Meeting:
A Board Meeting shall be convened to consider and pass the following requisite
resolutions:
i. approve the draft scheme of amalgamation;
ii. to authorize filing of application to the court for directions to convene a
general meeting;
iii. to file a petition for confirmation of scheme by the High Court.
3) Application to the Court:
An application shall be made to the court for directions to convey a general meeting
by way of Judge's summons (in Form No.33) supported by an affidavit (in Form
No.34) The proposed scheme of amalgamation must be attached to such affidavit.
D) Procedure for Amalgamation:Service
4) Person Entitled to Apply:
i. U/s. 391 & 394, members of the company have right to apply to court
ii. A successor to a share of a deceased member has in the normal course to
maintain an application u/s.3 91, 395.
iii. An application can also be made by the transferee of shares.
iv. The creditor also have right to apply to court.
v. The Liquidator is also empowered to make an application to the court.
5) Copy to Regional Director:
A copy of application made to concerned H. C. shall also be sent to the R. D. of the
region. Although, such notice is supposed to be sent by the H. C., usually the
company sends it without waiting for the H. C. to send it.
6) Order of High Court:
On hearing of the summons, the H. C. shall pass the necessary orders (in Form
No.35) which shall include:
i. Time and place of the meeting,
ii. Chairman of the meeting,
iii. Fixing the quorum,
iv. Procedure to be followed in the meeting for voting by the proxy,
v. Advertisement of notice of the meeting,
vi. Time limit for the chairman to submit the report to the court regarding the result
of the meeting.
7) Notice of the Meeting:
The notice of the meeting (in Form No. 36) shall be sent to the creditors and/or all
the shareholders individually (including preference shareholders) by the chairman
so appointed by registered post enclosing
8) Advertisement of Notice of Meeting:
The notice of the meeting (in Form No.3S) shall be advertised in English and Hindi
Newspapers as the court may direct by giving not less than 21 clear days notice
before the date fixed for the meeting.
9) Notice to Stock Exchange:
In case of the listed company, 3 copies of the notice of the general meeting along
with enclosures shall be sent to the Stock Exchange where the company is listed.
10) Filing of Affidavit for the Compliance:
An affidavit not less than 7 days before the meeting shall be tiled by the Chairman
of the meeting with the Court showing that the directions regarding the issue of
notices and advertisement have been duly complied with.
11) General Meeting:
The General Meeting shall be held to pass the resolution i.e. Approving the scheme
of amalgamation by 3/4th majority e.g. if a meeting is attended by say 100 members
holding 100 shares, the scheme shall be deemed to have been approved only when it
is supported by at least 51 members holding together 750 shares amounts
themselves;
12) Reporting of Result of The Meeting:
The Chairman of the meeting shall report the result of the meeting to the court (in
Form No. 39) within the time fixed by the judge or within 7 days, as the case may
be. A copy of proceedings of the meeting shall also be sent to the concerned Stock
Exchange.
13) Formalities with ROC:
The following documents shall be tiled with ROC along-with the requisite tiling
fees:
i. Form No. 23 of Companies General Rules and Forms plus copy of
Special Resolution,
ii. Resolution approving the scheme of amalgamation,
iii. Special resolution passed for the issue of shares to persons other than
existing shareholders.
14) Petition:-
For approval of the scheme of amalgamation, a petition shall be made to the H. C.
within 7 days (in Form No. 40) of the filing of report by the chairman.
15) Sanction of the Scheme:-
The Court shall sanction the scheme (in Form No. 41) on being satisfied that:
i. The whole scheme is annexed to the notice for convening meeting. (This
provision is mandatory in nature)
ii. The scheme should have been approved by the company by means of 3/4 th
majority of the members present.
iii. The scheme should be genuine and bonafide and should not be against the
interests of the creditors, the company and the public interest.
16) Stamp Duty:
A scheme sanctioned by the court is an instrument liable to stamp duty.
17) Filing with ROC:
The following documents shall be filed with ROC within 30 days of order) A
certified true copy of Court's Order, Form No. 21 of Companies General Rules &
Forms
18) Copy of Order to be annexed:
A copy of court's order shall be annexed to every copy of the Memorandum of
Association issued after the certified copy of the order has been filed with as
aforesaid.
19) Allotment of Shares:
A Board Resolution shall be passed for the allotment of shares to the
shareholders in exchange of shares held in the transferor-company and to fix the
record date for this purpose.
E) Hostile Takeover/ Merger : Service
a) Meaning:
Normally acquisitions are made friendly, however when the process of acquisition is
unfriendly (i.e., hostile) such acquisition is referred to as `takeover'. Hostile takeover arises
when the Board of Directors of the acquiring company decide to approach the shareholders of
the target company directly through a Public Announcement (Tender Offer) to buy their shares
consequent to the rejection of the offer made to the Board of Directors of the target company.
b) Take Over Strategies:
Street Bear
Sweep Hug
Strategi
Brand
c
Power
Alliance
b) Take Over Strategies:
1) Street Sweep:
This refers to the technique where the acquiring company accumulates larger number
of shares in a target before making an open offer.
2) Bear Hug:
When the acquirer threatens the target to make an open offer, the board of Target
Company agrees to a settlement with the acquirer for change of control.
3) Strategic Alliance:
This involves disarming the acquirer by offering a partnership rather than a buyout.
The acquirer should assert control from within and takeover the target company.
4) Brand Power:
This refers to entering into an alliance with powerful brands to displace the target's
brands and as a result, buyout the weakened company.
E) Hostile Takeover/ Merger :
Service
c) Defensive Tactics/ Strategies to avoid Hostile Merger
Greenmail
White
Poison Put
Knight
White
Poison Pill
Squire
Crown Golden
Jewels Parachutes
Defensive
Tactics/
Pac-man
Divestiture Strategies to Defense
avoid Hostile
Merger
1) Divestiture :
In a divestiture the target company divests or spins off some of its businesses in the
form of an independent, subsidiary company thus reducing the attractiveness of the
existing business to the acquirer.
2) Crown Jewels :
When a target company uses the tactic of divestiture it is said to sell the crown
jewels. In some countries such as the UK, such tactic is not allowed once the deal
becomes known and is unavoidable.
3) Poison Pill:
Sometimes an acquiring company itself becomes a target when it is bidding for
another company. The tactics used by the acquiring company to make itself
unattractive to a potential bidder is called poison pills.
4) Poison Put:
In this case, the target company issue bonds that encourage holder to cash in at
higher prices. The resultant cash drainage would make the target unattractive.
5) Greenmail:
Greenmail refers to an incentive offered by management of the target company to
the potential bidder for not pursuing the takeover
6) White Knight:
In this a target company offers to be acquired by a friendly company to escape from
a hostile takeover.
7) White Squire:
This strategy is essentially the same as white knight and involves sell out of shares
to a company that is not interested in the takeover.
8) Golden Parachutes:
When a company offers heavy compensations to its managers if they get ousted due
to takeover, the company is said to offer golden parachutes.
9) Pac-man Defense:
This strategy aims at the target company making a counter bid for the acquirer
company. This would force the acquirer to defend itself and consequently may call
off its proposal for takeover.
3.3 Valuation Methods for M & A
A) Methods of Valuation of M & A :
a) Earnings Based Valuation:
Under the earnings approach, the value of the target firm is determined on the basis of
its earnings capacity. For this purpose, the expected future profits of the target firm
are considered.
1) Discounted Cash Flow/Free Cash Flow Valuation:
This methodology is used to value companies since firms are essentially collection of
projects. There are six steps involved in the valuation
Step 1: Determine Free Cash Flow:
Free cash flow to the Firm (FCFF) is the cash flow available to all investors in the
company-both shareholders and bondholders after consideration for taxes,
capital expenditure and working capital investment.
Step 2 : Estimate a suitable Discount Rate for the Acquisition:
The acquiring company can use its weighted average cost of capital based on its
target capital structure only if the acquisition will not affect the riskiness of the
acquirer.
Step 3 : Calculate the Present Value of Cash Flows:
Since the life of a going concern, by definition, is infinite, the value of the
company is,
= PV of cash flows during the forecast period + Terminal value
We can set the forecast period in such a way that the company reaches a stable
phase after that.
Step 4 : Estimate the Terminal Value:
Generally it is quite difficult to estimate Terminal Value (TV) of a company
because the end of explicit period represents a date when forecasted projections
have no more meaning. TV can be determined by using following methods:
i. On the basis of Capital Employed
ii. On the basis of Multiple Earnings
iii. On the basis of Free Cash Flow
iv. On the basis of Multiple Book Value
Step 5 : Add Present Value of Terminal Value = TV x PVIF
Step 6 : Deduct the Value of Debt and Other Obligations Assumed by the
Acquirer:
Thus, the method adopted by the analyst affects the final value placed on the
company’s equity. These four methods might give four different answers.
2) Cost to Create:
In this approach, the cost for building up the business from scratch is taken into
consideration and the purchase price is typically the cost plus a margin.
3) Capitalized Earning Method:
A common method of valuing a business is also called the Capitalization of Earnings
(or Capitalized Earnings) method. Capitalization refers to the return on investment
that is expected by an investor.
4) Chop-Shop Method:
This approach attempts to identify multi-industry companies that are undervalued and
would have more value if separated from each other.
b) Market Based Valuation:
While using the market based valuation for unlisted companies, comparable listed
companies have to be identified and their market multiples (such as market
capitalization to sales or stock price to earnings per share) are used as substitutes to
arrive at a value.
1) Market capitalization for listed companies:
Method of evaluating the market capitalization for listed companies is same as
Capitalized Earning Method except that here the basis is taken earning of similar
type of companies.
2) Market multiples of comparable companies for unlisted company:
This method is mainly concerned with the valuation of unlisted companies. In this
method various Market multiples i.e. market value of a company's equity (resulting
in Market Value of Equity Multiple) or invested capital (resulting in Market Value
of Invested Capital) are divided by a company measure (or company fundamental
financial variable) - earnings, book value or revenue of comparable listed
companies are computed.
c) Asset Based Valuation :
According to the ‘assets approach’, the value of the target firm is determined on the
basis of the value of tangible and intangible assets of the firm. Where the value is
ascertained using the book values, the values of various assets given in the latest
balance sheet of the target firm form the basis for valuation.
1) Net Adjusted Asset Value or Economic Book Value:

It is the valuation of a 'going concern' business by adjusting the value of its all assets
and liabilities to the fair market value.
2) Intangible Asset Valuation:
Acceptable methods for the valuation of identifiable intangible assets and
intellectual property fall into three broad categories.
3) Liquidation Value:
This approach is similar to the book valuation method except that the value of assets
at liquidation is used instead of the book or market value of the assets.
3.4 Financing Techniques in Merger /
Acquisition
After the value of a firm has been determined on the basis of the preceding analysis,
the next step is the choice of the method of payment to the acquired firm. The choice of
financial instruments and techniques in acquiring a firm usually has an effect on the
purchasing agreement. The payment may take the form of either cash or securities, i.e.,
ordinary shares, convertible securities, deferred payment plans and tender offers.
Debt and
Ordinary Deferred
Preference Tender
Shares Payment
Shares Offer
Financing Plan
Financing
1) Ordinary Shares Financing:

When a company is considering using ordinary shares to finance a merger, the
Relative Price-Earnings (P/E) ratios of two firms are an important consideration. For
instance, for a firm having a high P/E ratio, ordinary shares represent an ideal
method for financing mergers and acquisitions.
3.4 Financing Techniques in Merger /
Acquisition
2) Debt and Preference Shares Financing:
From the foregoing it is clear that financing of mergers and acquisitions with equity
shares is advantageous both to the acquiring firm and the acquired firm when the P/E
ratio is high. Since, however, some firms may have a relatively lower P/E ratio was
also the requirement of some investors might be different, the other types of
securities, in conjunction with/in lieu of equity shares, may be used for the purpose.
3) Deferred Payment Plan:
Under this method, the acquiring firm, besides making initial payment, also undertakes
to make additional payment in future years to the target firm in the event of the
former being able to increase earnings consequent also known as earn-out plan.
4) Tender Offer:
An alternative approach to acquire another firm is the tender offer. A tender offer, as a
method of acquiring firms, involves a bid by the acquiring firm for controlling
interest in the acquired firm. The essence of this approach is that the purchaser
approaches the shareholders of the firm rather than the management to encourage
them to sell their shares generally at a premium over the current market price.
3.5 SEBI Guidelines for Buy-back of Shares
Buy-back of shares means the repurchase of outstanding shares (repurchase) by a
company in order to reduce the number of shares on the market.
A) Concept of Buy-back of Shares:
Buy-back is an excellent tool for financial reengineering. Buy-back of shares relates
to the company buying back its shares which it has issued earlier from the market.
Buy-back of shares is nothing but reverse of issue of shares by a company. It means
the purchase of its own shares or other specified securities by a company. In case of
buy-back, a company offers to take back its shares owned by the investors at a
specified price generally determined or arrived at on the basis of the average price
of the shares in the past few months. This calculation is usually done at a premium
on the market price so as to attract more number of investors, which may vary as
per the financial prudence of the company. When a company elects to purchase
outstanding shares of its own stock- shares held by the investing public- it can
accomplish this through one of two ways:
i. The company can tender an offer to existing stockholders. A tender offer
invites shareholders to sell their stock, generally at a price above the market
price, within a certain period of time.
ii. The company can purchase shares of its stock in the open market, similar to
the way individuals would. In this case, the company would simply pay
market price.
B) SEBI Guidelines for Buy-back of Shares
1) Tender offer:
Regulation 7
Extinguishment of Security
Certificate Holders Regulation 8
(Regulation 12 (1)
(Regulation
11)
Extinguishme
nt of
Certificate Buy-back offer
Payment to Security
Procedure under
Holders (Regulation (Regulation Tender Offer
11)
12 (1)) (Regulation 9)
Escrow Account
(Regulation 10)
The various provisions for the procedure of buy-back under SEBI (Buy-back of
Securities) Regulations 1998 are as follows:
1) Tender offer
A company may buy-back its shares from its existing shareholders on
proportionate basis in accordance with the following provisions:
a) Regulation 7
The explanatory statement annexed to the notice under section 173 of the
Companies Act shall contain the following disclosures:-
i. The maximum price at which the buy-back of shares shall be made and whether
the Board of Directors of the company are being authorized at the general
meeting to determine subsequently the specific price at which the buyback may
be made at appropriate time;
ii. If the promoter intends to offer their shares

1) Tender offer
b) Regulation 8:
i. The company which has been authorized by a special resolution or a resolution passed by the Board
of Directors at its meeting shall before buy back of shares or other specified securities make a
public announcement in at least one English National Daily, one Hindi National Daily and a
Regional language daily all with wide circulation at the place where the Registered office of the
company is situated and shall contain all the material information as specified in schedule II.
ii. The public announcement shall specify a date, which shall be the 'specified date' for the purpose of
determining the names of the security holders to whom the letter of offer shall be sent.
iii.The specified date shall not be later than thirty days from the date of the public announcement.
iv. The Company shall within seven working days of the public announcement file with the Board a
draft-letter of offer containing disclosures as specified in schedule III through a merchant banker
who is not associated with the company.
v. The draft letter of offer referred to in sub regulation (4) shall be accompanied with fees specified in
schedule IV.
vi. The letter of offer shall be dispatched not earlier than twenty-one days from its submission to the
Board under sub-regulation (4).
vii.The company shall file along with the draft letter of offer, a declaration of solvency in the
prescribed form and in a manner prescribed in sub-section (6) of Section 77A of the Companies
Act.
1) Tender offer
c) Buy-back offer Procedure under Tender Offer (Regulation 9) :
i. The offer for buy back shall remain open to the members for a period not less
than fifteen days and not exceeding thirty days.
ii. The date of the opening of the offer shall not be earlier than seven days or later
than thirty days after the specified date.
iii. The letter of offer shall be sent to the security holders so as to reach the security
holders before the opening of the offer.
iv. In case the number of shares or other specified securities offered by the security
holders is more than the total number of shares or other specified securities to
be bought back by the company, the acceptances per security holder shall be
equal to the acceptances tendered by the security holders divided by the total
acceptances received and multiplied by the total number of shares or other
specified securities to be bought back.
v. The company shall complete the verifications of the offers received within
fifteen days of the closure of the offer and the shares or other specified
securities lodged shall be deemed to be accepted unless a communication of
rejection is made within fifteen days from the closure of the offer.
1) Tender offer
d) Escrow Account (Regulation 10) :
i) The company shall as and by way of security for performance of its obligations
under the regulations, on or before the opening of the offer deposit in an escrow
account such sum as specified in sub-regulation (2).
ii) The escrow amount shall be payable in the following manner,-
 If the consideration payable does not exceed Rs.100 crores - 25% of the
consideration payable;
 If the consideration payable exceeds Rs. 100 crores – 25% upto Rs. 100 crores
and 10% thereafter.
iii)The escrow account referred in sub-regulation (1) shall consist of
 Cash deposited with a scheduled commercial bank or;
 Bank guarantee in favour of the merchant banker; or
 Deposit of acceptable securities with appropriate margin, with the merchant
banker, or
 A combination of (a), (b) and (c) above.
d) Where the escrow account consists of deposit with a scheduled commercial bank,
the company shall, while opening the account, empower the merchant banker to
instruct the bank to issue a banker’s cheque or demand draft for the amount lying to
the credit of the escrow account, as provided in the regulations.
1) Tender offer:
e) Payment to Security Holders (Regulation 11) :
i. The company shall immediately after the date of closure of the offer open a
special account with a bankers to an issue registered with the Board and deposit
therein, such sum as would, together with ninety percent of the amount lying in
the escrow account make-up the entire sum due and payable as consideration for
buy-back in terms of these regulations and for this purpose, may transfer the funds
from the escrow account.
ii. The company shall within seven days of the time specified in sub-regulation (5) of
regulation 9 make payment of consideration in cash to those security holders
whose offer has been accepted or return the shares or other specified securities to
the security holders.
f) Extinguishment of Certificate (Regulation 12 (1)) :

The company shall extinguish and physically destroy the security certificates so bought
back in the presence of a Registrar to issue or the Merchant Banker and the Statutory
Auditor within fifteen days of the date of acceptance of the shares or other specified
securities. Provided that the company shall ensure that all the securities bought- back
are extinguished within seven days of the last date of completion of buy - back.
2) Buy-Back through Stock Exchange:
Regulation 15
Extinguishment
of certificates
a) Regulation 15:
A company shall buy-back its shares or other specified securities through the stock
exchange as provided hereunder;
i. The special resolution shall specify the maximum price at which the buy-back
shall be made;
ii. The buy-back of the shares or other specified securities shall not be made
from the promoters or persons in control of the company;
iii. The company shall appoint a merchant banker and make a public
announcement as referred to in Regulation 8;
iv. The public announcement shall be made at least seven days prior to the
commencement of buy-back;
b) Extinguishment of Certificates(Regulation 16) :
i. Subject to the provisions of sub-regulations (2), the provisions of regulation
12 pertaining to extinguishment of certificates shall be applicable mutatis
mutandis.
ii. The company shall complete the verification of acceptances within fifteen
days of the pay-out.
3) Buy-back through Book Building :
Regulation 17 Extinguishment
of certificates
(sec 18)
a) Regulation 17:
i) A company may buy-back its shares or other specified securities through the book-
building process as provided hereunder:
 The special resolution passed by the Board of Directors at its meeting as
referred to in Regulation 5A shall specify the maximum price at which the
buy-back shall be made.
 The company shall appoint a merchant banker and make a public
announcement as referred to in Regulation 8.
 The public announcement shall be made at least seven days prior to the
commencement of buy-back.
ii) The provisions of sub-regulation (5) of regulation 9 pertaining to verification of
acceptances and the provisions of regulation 11 pertaining to opening of special
account and payment of consideration shall be applicable mutatis mutandis.
b) Extinguishment of Certificates (Section 18) :
The provisions of regulation 12 pertaining to extinguishment of certificates shall be
applicable mutatis mutandis.
3.6 SEBI Guidelines for Delisting of Shares
Delisting is a process by which the name of a company is removed from the list of
securities of companies which are permitted to be traded in the stock exchanges.
Delisting disables the process of trading of shares in the stock exchanges. The delisting
can be voluntary delisting or compulsory delisting.
A) Voluntary Delisting:
Under voluntary delisting, a company can request for delisting its shares from one
or more recognised stock exchanges, where their shares are listed, provided that
after the proposed delisting from any one or more recognised stock exchanges, the
equity shares would remain listed on any recognised stock exchange which has
nationwide trading terminals. If after the proposed delisting, the equity shares
would not remain listed on any recognised stock exchange having nationwide
trading terminals, exit opportunity should be given to all the public shareholders,
holding the equity shares, who sought to be delisted.
a) SEBI Guidelines for Voluntary Delisting:
1) Formalities for Delisting the Shares:
The company has to complete the following formalities for delisting the shares from
any of the recognised stock exchanges:
i. Obtain prior approval from the Board of Directors.
ii. Obtain prior approval of the shareholders through a special resolution passed
through postal ballot, after disclosing all the material facts relating to the delisting.
iii. Submit an application for delisting of the shares in the prescribed form to the
recognised stock exchange/s, where the shares of the company have been listed for
approval in principle.
iv. Within one year of passing the special resolution make the final application to the
concerned recognised stock exchange/s in the form specified by the recognised
stock exchange/s.
v. An audit report covering the period of six months from the date of application
should accompany the application submitted to recognised exchange/s.
2) Application for Delisting of Shares:
An application seeking in-principle approval for delisting of shares should be disposed
of by the recognised stock exchange, within a period not exceeding thirty working
days from the date of receipt of such application complete in all respects. The
exchange may look into compliance with the following requirements:
i. Exit facility to the public holding the shares of the company
ii. Investor grievance redressal mechanism
iii. Payment of listing fee to the recognised exchanges
iv. Compliance with the terms of the listing agreements, executed with the
recognised stock exchanges, having material bearing on the interest of the
existing shareholders
v. Any litigation or action pending against the company, pertaining to its
activities in the securities market, or any other matter having a material
hearing the interests of its equity shareholders
vi. Any other relevant matter, as the recognised stock exchange may deem fit to
verify.
3) Furnish Proof:
The company is required to furnish proof of the exit opportunity available to
shareholders together with the final application to the recognised stock exchange/s.
The exit opportunity comprises the following measures required to be implemented
by the company:
i. Appointment of a merchant banker registered with SEBI, and not associated with
the promoter in any manner.
ii. An escrow account should be opened before making the public announcement, and
an amount equivalent to the estimated consideration calculated based on the floor
price and number of shares outstanding to this account should be deposited in it.
iii. The date of opening of the offer shall not be later than fifty—five working days
from the date of the public announcement, and shall remain open for a minimum
period of three working days and a maximum period of live working days during
which the public shareholders may tender their bids.
iv. The floor price quoted should he within the price range stipulated by SEBI in its
Delisting Regulations.
B) Compulsory Delisting:
Section 21A of the Security Contract (Regulation) Act, 1956, empowers a
recognised stock exchange to delist the equity shares of a listed company, after
giving a reasonable opportunity to the company to be heard. The stock exchange
should constitute a panel of experts consisting of the following persons:
i. Two directors of the recognised stock exchange (one of whom shall be a
public representative)
ii. One representative of the investors
iii. One representative of the Ministry of Corporate Affairs or Registrar of
Companies
iv. The Executive Director or Secretary of the recognised stock exchange
B) Compulsory Delisting:
a) SEBI Guidelines for Compulsory Delisting:
SEBI has introduced the following guidelines for compulsory delisting of shares
from any recognised stock exchange:
1) The recognised stock exchange shall take all reasonable steps to trace the
promoters of a company whose equity shares are proposed to be delisted, with a
view to ensuring compliance with regard to the acquisition of delisted shares.
2) The recognised stock exchange shall consider the nature and extent of the alleged
non-compliance of the company and the number and percentage of shareholders
who may be affected by such non-compliance.
3) The recognised stock exchange shall take reasonable effort to verify the status of
compliance of the company with the office of the concerned Registrar of
Companies.
4) The names of the companies, whose equity shares are (proposed to be delisted and
their promoters) shall be displayed in a separate section on the website of the
recognised stock exchange for a brief period of time.
5) The recognised stock exchange shall in appropriate cases, file prosecutions under
relevant provisions of the Securities Contracts (Regulation) Act, 1956, or any other
law for the time being in force against identifiable promoters and directors of the
company for the alleged non-compliances.
3.7 SEBI’s Guidelines for Issue of Debentures
A) Meaning of Debentures:
A debenture is a medium to long-term debt format that is used by large companies
to borrow money. Debentures are the most common form of long-term loans that
can be taken by a company. Debentures are usually loans that are repayable on a
fixed date, but some debentures are irredeemable securities (these are sometimes
called perpetual debentures). Most debentures pay a fixed rate of interest. It is
required that this interest is paid prior to dividends being paid to shareholders.
Furthermore, most debentures are secured on the borrower’s assets, although some
are not.
B) SEBI Guidelines for Issue of Debentures:
These guidelines are as follows:
1) Issue of FCDs having a conversion period more than 36 months will not be
permissible, unless conversion is made optional with “put” and “call” option
2) Premium amount on conversion, the conversion period, in stages, if any, shall be
pre-determined and stated in the prospectus.
3) The interest rate for above debentures will be freely determinable by the issuer.
4) Issue of debenture with maturity of 18 months or less are exempt from the
requirement of appointing Debenture Trustees or creating a Debenture Redemption
Reserve (DRR).
3.7 SEBI’s Guidelines for Issue of Debentures
A) Meaning of Debentures:
B) SEBI Guidelines for Issue of Debentures:
5) In other cases, the names of the debenture trustees must be stated in the prospectus
and DRR will be created in accordance with guidelines laid down by SEBI.
6) The trust deed shall be executed within six months of the closure of the issue.
7) Any conversion in part or whole of the debenture will be optional at the hands of the
debenture holder, if the conversion takes place at or after 18 months from the date
of allotment, but before 36 months.
8) In case of NCDs/ PCDs credit rating is compulsory where maturity exceeds 18
months.
9) Premium amount at the time of conversion for the PCD, redemption amount, period
of maturity, yield on redemption for the PCDs/NCDs shall be indicated in the
prospectus.
10) The discount on the non-convertible portion of the PCD in case they are traded and
procedure for their purchase on spot trading basis must be disclosed in the
prospectus.
11) In case, the non-convertible portions of PCD/NCD are to be rolled over, a
compulsory option should be given to those debenture holders who want to
withdraw and encash from the debenture programme.
A) Portfolio Management:
A portfolio refers to a collection of investment tools such as stocks, shares, mutual
funds, bonds, and cash and so on depending on the investor’s income, budget and
convenient time frame. So the art of selecting the right investment policy for the
individuals in terms of minimum risk and maximum return is called as portfolio
management.
a) Meaning:
As per definition of SEBI, Portfolio means “a collection of securities owned by an
investor”. It represents the total holdings of securities belonging to any person". It
comprises of different types of assets and securities. Portfolio management refers to
the management or administration of a portfolio of securities to protect and enhance
the value of the underlying investment. It is the management of various securities
(shares, bonds etc) and other assets (e.g. real estate), to meet specified investment
goals for the benefit of the investors. It helps to reduce risk without sacrificing
returns. It involves a proper investment decision with regards to what to buy and
sell. It involves proper money management. It is also known as Investment
Management.
b) Scope of Portfolio Management services:
Scope of
Portfolio
Management
1) Conversion and Evaluation of Fund:
The agency converts the funds into compatible portfolios on the basis of the
objectives and constraints of the investor. It continuously evaluates and makes
necessary adjustments for better results.
2) Regulation as per SEBI:

The financial services in India are expanding and experiencing a boom because the
attraction of a good return in a shorter period is very tempting for the investors.
Naturally; more and more firms are entering into this field.
3) Reserve Bank of India (RBI) and other Restrictions:

Merchant banking subsidiaries of banks and finance companies are also providing
these services to corporate clients. The investment in these cases, however, is
restricted to fixed income securities, unit and money market instruments, especially
the call money and the bill markets.
4) Portfolio Policy and Strategy:
Portfolio management with the discussion of the investor': objectives, constraints
and preferences and their relationship with the available investment opportunities.
This leads to a well defined portfolio policy and strategy statements on the
allocation of funds among various types of assets, timing of investments and
disinvestments.
5) Performance Measured and Revised:

Finally, the performance of the portfolio is measured and revisions are carried out
whenever necessary. The objective of the exercise is to build a portfolio that shows
continuous appreciation in its value by optimising the results and minimising the
risks. The clients are classified on the basis of the risk taking ability Periodically
scrips are generated to suit the different risk-averse investors.
B) Portfolio Manager:
Portfolio Manager is a professional who manages the portfolio of an investor with
the objective of profitability, growth and risk minimization.

a) Meaning:
An individual who understands the client’s financial needs and designs a suitable
investment plan as per his income and risk taking abilities is called a portfolio
manager. A portfolio manager is one who invests on behalf of the client. According
to SEBI, Any person who pursuant to a contract or arrangement with a client,
advises or directs or undertakes on behalf of the client the management or
administration of a portfolio of securities or the funds of the client, as the case may
be is a portfolio manager.
b) Types of Portfolio Manager:
There are two types of portfolio manager known as Discretionary Portfolio Manager
and Non-Discretionary Portfolio Manager.
Non-Discretionary
Discretionary Portfolio
Portfolio
Manager
Manager
1) Discretionary Portfolio Manager :

A Portfolio Manager is called a discretionary portfolio manager if he exercises or
may exercise any degree of discretion as to management of portfolio of securities or
funds of the client.
2) Non-Discretionary Portfolio Manager :

A Portfolio Manager other than a discretionary Portfolio manager is called a non-
discretionary portfolio manager. So, such a portfolio manager has to build and
manage the portfolio in accordance with the guidelines of the client.
c) Registration of Portfolio Managers:
Application for Grant of Certificate
Conformance to Requirements
Furnishing of Further Information, etc
Consideration of Application
Capital Adequacy Requirement
Procedure for Registration
Renewal of Certificate
Procedure where registration is not granted
Effect of Refusal to Grant Certificate
Payment of Fees
No Person to Act as Portfolio Manager without Certificate
Conditions for Grant or Renewal of Certificate to Portfolio Manager
Period of Validity of the Certificate

1) Application for Grant of Certificate:
An application by a portfolio manager for grant of a certificate shall be made to the
Board in ‘Fonn A'.
2) Conformance to Requirements:
Any application, which is not complete in all respects and does not conform to the
instructions specified in the form, shall be rejected by the Board.
3) Furnishing of Further Information, etc:
The Board may require the applicant to furnish further information or clarification
regarding matters relevant to his activity of a portfolio manager for the purposes of
disposal of the application.
4) Consideration of Application :
For considering the grant of certificate of registration to the applicant, the Board
shall take into account all matters which it deems relevant to the activities relating to
portfolio management.
5) Capital Adequacy Requirement:
The capital adequacy requirement referred to in clause (g) of regulation 6 shall not
be less than the net worth of fifty lacs rupees; manager.
6) Procedure for Registration:
The Board on being satisfied that the applicant fulfils the requirements specified in
Regulation 6 shall send an intimation to the applicant and on receipt of the payment
of fees as specified in Schedule II then grant a certificate in Form B.
7) Renewal of Certificate :
A portfolio manager may, three months before the expiry of the validity of the
certificate, make an application for renewal in Form A. The application for renewal,
under sub-Regulation (1) shall be dealt with in the same manner as if it were an
application for grant of a certificate made under Regulation 3.
8) Procedure where registration is not granted:
Any applicant of who is aggrieved by the decision of the Board may apply within a
period of thirty days from the date of receipt of such intimation, to the Board for
reconsideration of its decision.
9) Effect of Refusal to Grant Certificate :
Any portfolio manager whose application for a certificate has been refused by the
Board shall, on and from the date of the receipt of the communication under sub-
regulation (2) of Regulation 10, cease to carry on any activity as portfolio manager.
10) Payment of Fees:
Every applicant eligible for grant of a certificate shall pay the required fees in such a
manner and within the period as specified in Schedule ll. Where a portfolio manager
fails to pay the fees as provided Schedule ll.
11) No Person to Act as Portfolio Manager without Certificate:
No person shall carry on any activity as a portfolio manager unless he holds a
certificate granted by the Board under these regulations provided that such person.
12) Conditions for Grant or Renewal of Certificate to Portfolio Manager:
The Board may grant or renew a certificate to a portfolio manager subject to the
following conditions:
i. The portfolio manager in case of any change in its status and constitution,
shall obtain the prior permission of the Board to carry on its activities
ii. He shall pay the amount of fees for registration or renewal, as the case may
be, in the manner provided in the regulations -
13) Period of Validity of the Certificate:
The certificate of registration or its renewal, as the case may be, shall be valid for a
period of three years from the date of its issue to the portfolio manager.
d) Duties of Portfolio Manager:
Reporting
Hiring,
Outsourcing
Complianc
and Oversight e
Growth and
Wealth
Performanc
Protection e:
d) Duties of Portfolio Manager:
1) Reporting:
Portfolio managers must ensure their funds' reporting requirements are met. Funds are designed
with different strategies and objectives and have different risks, policies and expenses.
2) Compliance:
Portfolio managers must also ensure their funds operate in accordance with regulations outlined
by authorities, such as the Securities and Exchange Commission. Regulations can cover aspects
of the fund's business from getting clients to handling redemptions.
3) Growth and Performance:
People turn to funds because they want growth. Portfolio managers can only deliver it by
putting clients' money to work, so they have to decide where to invest.
4) Wealth Protection:
Portfolio managers have a responsibility to protect investors' money. Prudent investors are
aware that funds must take some risks to deliver growth but they do not expect reckless
behavior.
5) Hiring, Outsourcing and Oversight:
With so many duties, fund managers need help. Many hire and oversee staffs and some
outsource certain duties to other professionals and firms. This allows the managers to pass
along tasks such as negotiating with brokers, attracting capital or issuing proxies and annual
reports.
c) Responsibilities of Portfolio Manager:
Portfolio manager has general responsibilities and relating to Contract with Clients.
These are as follows:
relating to Contract
Responsibilities
with Clients
General
Responsibilities of a
Portfolio Manager
Responsibilities
of Portfolio
manager
Accounts
Audit of
Accounts/Records
Books of
Maintenance of
Portfolio manager has general responsibilities and relating to Contract with Clients.
These are as follows:
1) Responsibilities relating to Contract with Clients :
i. The portfolio manager shall, before taking up an assignment of management of funds or
portfolio of securities on behalf of a client, enter into an agreement in writing with such client
clearly defining the inter se relationship and setting out their mutual rights, liabilities and
obligations relating to the management of funds or portfolio of securities containing the details
as specified in Schedule IV.
ii. The portfolio manager shall charge an agreed fee from the client for rendering portfolio
management services without guaranteeing or assuring, either directly or indirectly any return
and such fee shall be independent of the return to the client and shall not be on a return-sharing
basis.
iii. The portfolio manager shall not pledge or give on loan securities held on behalf of clients to a
third person without obtaining a written permission from his client'.
iv. The portfolio manager shall provide to the client, the Disclosure Document as specified in
Schedule V, along with a certificate in Form C as specified in Schedule I , at least two days
prior to entering into an agreement with the client as referred to in sub- regulation (1).
v. The contents of the Disclosure Document shall be certified by an independent chartered
accountant.
2) General Responsibilities of a Portfolio Manager :
i. The discretionary portfolio manager shall individually and independently manage the funds
of each client in accordance with the needs of the client in a manner which does not take
character of a Mutual Fund, whereas the nondiscretionary portfolio manager shall manage
the funds in accordance with the directions of the client.
ii. The portfolio manager shall not accept from the client, funds or securities worth less than
five lacs rupees.
iii. The portfolio manager shall act in a fiduciary capacity with regard to the client's funds.
iv. The portfolio manager shall keep the funds of all clients in a separate account to be
maintained by it in a Scheduled Commercial Bank.
v. The portfolio manager shall transact in securities within the limitation placed by the client
himself with regard to dealing in securities under the provisions of the Reserve Bank of India
Act, 1934 (2 of 1934);
vi. The portfolio manager shall not derive any direct or indirect benefit out of the client's funds
or securities.
vii. The portfolio manager shall not borrow funds or securities on behalf of the client.
viii. The portfolio manager shall not lend securities held on behalf of clients to a third person
except as provided under these regulations.
ix. The portfolio manager shall ensure proper and timely handling of complaints from his clients
and take prompt action
3) Maintenance of Books of Accounts/Records :
Every portfolio manager must keep and maintain the following books of accounts,
records and documents.
i. A copy of balance sheet at the end of each accounting period;
ii. A copy of the profit and loss account for each accounting period;
iii. A copy of the auditor’s report on the accounts for each accounting period;
iv. A statement of financial position; and
v. Records in support of every investment transaction or recommendation, which
indicate the data, facts and opinion leading to that investment decision.,
4) Audit of Accounts:
The portfolio manager- is required to maintain separate client-wise accounts. The funds
received front the clients, investments or disinvestment and all the credits to the
account of the client like interest, dividend, bonus or any other beneficial interest
received on investments and debits, for expenses, if any. have to be properly
accounted for and details properly reflected in the client`s account.
d) Rights of Portfolio Manager: Right of Inspection by the Right to Receive Notice
Board before Inspection
These rights are as follows:
1) Right of Inspection by the Board:
The Board may appoint one or more persons as inspecting authority to undertake the
inspection of the books of account, records and documents of the Portfolio Manager
for any of the purposes as follows, namely;
i. To ensure that the books of account are being maintained in the manner required;
ii. That the provisions of the Act, rules and regulations are being complied with;
iii. To investigate into the complaints received from investors,‘ other portfolio
managers or any other person on any matter having a bearing on the activities of
the Portfolio Manager; and
iv. To investigate suo-moto in the interest of securities business or investors’ interest
into the affairs of the Portfolio Manager.
2) Right to Receive Notice before Inspection:
Before undertaking an inspection under Regulation 24, the Board shall give a
reasonable notice to the Portfolio Manager, for that purpose. Notwithstanding
anything contained in the regulation, where the Board is satisfied that in the interest
of the investors no such notice should be given, it may by an order in writing direct
that the inspection of the affairs of the Portfolio Manager be taken up without such
notice.
C) Content of Agreement between Client and Portfolio Manager:
Appointme Scope of Functions,
Functions,
Obligations,
Obligations, Duties
Duties
nt Services and
and Responsibilities
Responsibilities
Period of Risk Investment

Investment Objectives
and
Objectives
and Guidelines
Guidelines such
such
Agreement Factors as
as the
the Following
Following
Change
Change In
In the
Maintenance the
Conditions of Accounts
Quantum
Quantum of Funds
to
of Funds
to be
be Managed
Managed
Terms of Access to
Billing Fees Information
Liability of
Portfolio
Liability of Death or
Manager Client Disability
Settlement
Settlement of
of
Grievances/Disputes
Grievances/Disputes Governing
and
and Provision
Provision for
for
Law Assignment
Arbitration
Arbitration
1) Appointment :
It content appointment of Portfolio Manager.
2) Scope of Services :
Scope of services to be provided by the Portfolio Manager subject to the activities
permitted under SEBI (Portfolio Managers) Regulations, 1993, viz. advisory,
investment management, custody of securities and keeping track of corporate
benefits associated with the securities.
3) Functions, Obligations, Duties and Responsibilities :
All above (as discretionary and nondiscretionary to be given separately) with
specific provisions regarding instructions for nondiscretionary portfolio manager,
inter alia:
i. Terms in compliance with the Act, SEBI (Portfolio Managers)Regulations, 1993,
rules, regulations, guidelines made under the Act and any other
laws/rules/regulations/guidelines etc.
ii. Providing reports to clients
iii.Maintenance of client-wise transactions and related books of accounts
iv.Provisions regarding audit of accounts as required under the SEBI (Portfolio
Managers) Regulations, 1993
v. Settlement of accounts and procedure therefore, including the provisions for
payment on maturity or early termination of the contract.
4) Investment Objectives and Guidelines such as the Following:
i. Types of securities in which investment would be made specifying restrictions, if
any
ii. Particulars regarding amount, period of management. repayment or withdrawal
iii. Taxation aspects such as Tax Deducted at Source, etc. if any
iv. Condition that the portfolio manager shall not lend the securities of the client
unless authorized by him in writing
5) Risk Factors :
A detailed statement of risks associated with each type of investment including the
standard risks associated with each type of investment risk factors specific to the
scheme as well as that attendant to specific investment policies and objectives of the
scheme are to be mentioned.
6) Period of Agreement :
It content minimum period if any and provision for renewal if any.
7) Conditions :
Conditions, under which agreement may be altered, terminated and implications
thereof such as settlement of amounts invested, repayment obligations, etc.
8) Maintenance of Accounts :
Maintenance of accounts separately in the name of the client as is necessary to
account for the assets and any additions, income, receipts and disbursements in
connection therewith, as provided under SEBI (Portfolio Managers) Regulations,
1993.
9) Change In the Quantum of Funds to be Managed :
The conditions under which the client may withdraw cash or securities from the
portfolio account or bring in additional cash to be managed as per the terms and
conditions that apply. The portfolio manager shall not change any terms of the
agreement without prior consent of the client.
10) Access to Information :
(Subject to the provisions of SEBI (Portfolio Managers) Regulations1993)
provisions enabling the client to get the books of accounts of the portfolio manager
relating to his transactions audited by a chartered accountant appointed by him and
permitting the client an access to relevant and material documents of portfolio
manager.
11) Terms of Fees :
The quantum and manner of payment of fees and charges for each activity for which
services are rendered by the portfolio manager directly or indirectly (where such
service is outsourced) such as investment management, advisory, transfer,
registration and transaction costs with specific references to brokerage costs,
custody charges, cost related to furnishing regular communication, account
statement, miscellaneous expenses (individual expenses in excess of 5 percent to be
indicated separately), etc.
12) Billing:
It means periodicity of billing, whether payment to be made in advance manner of
payment of fees, whether setting off against the account, etc. type of documents
evidencing receipt of payment of fees.
13) Liability of Portfolio Manager :
Liability of Portfolio Manager in connection with recommendations made, to cover
errors of judgment, negligence, willful misfeasance in connection with discharge of
duties, acts of other intermediaries, brokers, custodians, etc.

14) Liability of Client :
It means restricting the liability of the client to the extent of his investment.
15) Death or Disability
Death or Disability providing for continuation/termination of the agreement in the
event of client‘s death/disability, succession, nomination, representation, etc. to be
incorporated.
16) Assignment :
It includes conditions for `assignment of the agreement by client.
17) Governing Law :
The law/jurisdiction of country/State which governs the agreement are to be stated.
18) Settlement of Grievances/Disputes and Provision for Arbitration :
Provisions to cover protection of act done in good faith, risks and losses, redressal
of grievances, dispute resolution mechanism, reference for arbitration and the
situations under which such rights may arise may be made.
D) Reports to be furnished by Portfolio Manager:
a) Reports to be Furnished to the Clients :
The portfolio manager should furnish a periodical report to the client, as agreed in
the contract, but not exceeding a period of six months, (and as and when required by
the client) containing the following details:
1) The composition and the value of the portfolio, description of security, number of
securities, value of each security held in the portfolio, cash balance and aggregate
value of the portfolio as on the date of report;
2) Transactions undertaken during the period of report, including the date of
transaction and details of purchases and sales;
3) Beneficial interest received during that period in respect of interest, dividend,
bonus shares, rights shares and debentures;
b) Disclosures to the SEBI :
A portfolio manager must disclose the following information to the SEBI, as and
when required.
1. Particulars regarding the management of a portfolio;
2. Any change in the information or particulars previously furnished,
which have a bearing on the certificate granted to him;
3. Names of the clients whose portfolio he has managed and
4. Particulars relating to the capital adequacy requirement.
E) Code of Conduct (Regulation 13):
These are following:
Integrity Client’s Benefit
Quick Deployment
Best Services
Standard Service
Code of Not a Party
Conduc
No Unfair Competition
t
(Regula Not Using Insider Information
No Exaggerated Statement tion 13)
Disclosure of Interest
Client’s Interest
No Disclosure Adherence to Act

These are following:
1) Integrity :
A Portfolio Manager shall, in the conduct of his business, observe high standards of
integrity and fairness in all his dealings with his clients and other Portfolio Managers.
2) Quick Deployment :
The money received by a portfolio manager from a client for an investment purpose
‘should be deployed by the portfolio manager as soon as possible for that purpose and
money due and payable to a client should be paid forthwith.
3) Standard Service :
A Portfolio Manager shall render at all times high standards of service, exercise due
diligence, ensure proper care and exercise independent professional judgement
4) No Unfair Competition :
A Portfolio Manager shall not make any statement or become privy to any act,
practice or unfair competition which is likely to be harmful to the interests of other
Portfolio Managers or is likely to place such other Portfolio Managers in a
disadvantageous position in relation to the Portfolio Manager himself] while
competing for or executing any assignment.
5) No Exaggerated Statement :
A Portfolio Manager shall not make any exaggerated statement, whether oral or
written to the client either about the qualification or the capability to render certain
services or his achievements in regard to services rendered to other clients.
6) Client’s Interest :
At the time of entering into a contract, the portfolio manager shall obtain in writing
from the client, his interest in various corporate bodies which enables him to obtain
unpublished price-sensitive information of the body corporate.
7) No Disclosure :
A Portfolio Manager shall not disclose to any clients, or press any confidential
information about his client which has come to his knowledge.
8) Client’s Benefit :
The portfolio manager shall where necessary and in the interest ofthe client take
adequate steps for registration of the transfer of the clients’ securities and for claiming
and receiving dividends, interest payments and other rights accruing to the client.
9) Best Services :
A Portfolio Manager shall endeavour to:
i. Ensure that the investors are provided with true and adequate information
without making any misguiding or exaggerated claims and are made aware of
attendant risks before any investment decision is taken by them.
ii. Render the best possible advice to the client having regard to the client‘s needs
and the environment and his own professional skills. .
iii.Ensure that all professional dealings are effected in a prompt. efficient and cost
effective manner.
10) Not a Party :
A Portfolio Manager shall not be a party to the following:
i. Creation of false market in securities
ii. Price rigging or manipulation of securities
iii. Passing of price sensitive information to brokers, members of the stock
exchanges and any other intermediaries in the capital market or take any other
action which is prejudicial to the interest of the investors.
11) Not Using Insider Information :
No Portfolio manager or any of its directors, partners or manager shall either on their
respective accounts or through their associates or family members, relatives enter into
any transaction in securities of companies on the basis of unpublished price sensitive
information obtained by them during the course of any professional assignment.
12) Disclosure of Interest :
A Portfolio Manager or any of his employees shall not render, directly or indirectly
any investment advice about any security in the publicly accessible media whether
real-time or non-real-time, unless a disclosure of his long or short position in the said
security has been made while rendering such advice.
13) Adherence to Act :
The portfolio manager shall abide by the Act and the Rules, Regulations made there
under and the Guidelines/Schemes issued by the Board. The portfolio manager shall
comply with the model code of conduct specified in the SEBI (Prohibition of Insider
Trading) Regulations, 1992.
3.9 Credit/ Loan Syndication Services
A) Credit/ Loan Syndication:

'Syndicated Loan' is a loan offered by a group of lenders (called a syndicate) who
work together to provide funds for a single borrower. The borrower could be a
corporation, a large project, or sovereignty (such as a government).
a) Meaning of Credit/ Loan Syndication:

Loan syndication or credit syndication refers to the services rendered by the merchant
bankers in arranging and procuring credit from financial institution , banks, other
lending and investment organization for financing the client’s project cost or meeting
working capital requirements Loan syndication is more or less similar to consortium
financing. But this work is taken up by the merchant banker as a lead manager.
A very large loan in which a group of banks work together to provide funds for one
borrower. In other words, group of banks sharing a loan. There is usually one lead
bank that takes a small percentage of the loan and syndicates the rest to other banks.
b) Types of Syndicated loans:
Types of
Syndicated
Best-Efforts loans
Syndication
Deal
Traditional
Club Deal Syndicated
Bank Loans
Underwritte Syndicated
n Deal: Bank Loan
Multi-option
Revolving
Facilities
Credit
(MOF )
Standby
Facility
1) Traditional Syndicated Bank Loans (floating rate ):
Traditional syndicated bank loans are based on a variable rate but with a fixed
maturity, drawn once, and repayments made to an agreed schedule. A period of grace
is often included.
2) Syndicated Bank Loan ( fixed rate ):
Syndicated fixed-rate bank loans are very similar to traditional loans, but the interest
rate remains fixed throughout the term of the loan.
3) Revolving Credit:
Revolving credits have similar characteristics to syndicated bank loans but permit the
borrower to draw the loan (or part of it) and make repayments at his or her discretion,
or to an agreed programme, throughout the term of the loan.
4) Standby Facility:
Traditional syndicated Euro-credits usually require the borrower to draw down the
loan within a set time period. A standby facility allows the borrower to delay taking
the loan until he or she wishes to do so. A contingency fee has to be paid until the loan
is drawn and interest starts to be charged.
5) Multi-option Facilities ( M OF ):
Syndicated loans with MOF are simple to operate and cheap to obtain. The facilities
that are provided tend to be much more complex than traditional syndicated loans, but
can be tailored to suit the individual borrower’s requirements.
6) Underwritten Deal:
The underwritten deal is one of the most widely available types of syndicated loans in
Europe. Under this arrangement, the lead agent or underwriter guarantees and
syndicates the entire loan.
7) Club Deal:
This type of syndication usually entails a smaller amount, typically between Rs.25 and
Rs.150 million.
8) Best-Efforts Syndication Deal:
Of all the types of syndicated loans, the best-efforts syndication is the most commonly
used in the United States. Under this arrangement, the lead agent does not commit or
guarantee the entire amount of the loan. Any undersubscribed portion of the loan will
be filled up by taking advantage of the changes in market conditions.
B) Credit Syndicated Services:
Ascertaining
Pre-disbursement
Promoter Details
Compliance
Ascertainment of
Cost Details
Arrangement of
Loan Sanction
Comparison of Cost
Details
Project Appraisal
Identification of
Funding Sources
Making Application
Ascertainment of
Furnishing Loan Details
Beneficiary Details
1) Ascertaining Promoter Details:
This is the fundamental credit syndication service extended by merchant bankers,
whereby attempts are nude to gain an understanding about the promoters, who are
involved in the launch and running of the project. Information is collected about the
promoters, their knowledge, reputation, creditworthiness, experience in trade or
industry and relevance of such experience to the proposed project, their
entrepreneurial and managerial skills and competence, etc
2) Ascertainment of Cost Details:
Here, the merchant banker investigates about the project for which finance is to be
arranged. Details about the project are collected with the help of information given by
the consultant in the project report. Merchant banks make an estimate of the capital
cost of the project.
3) Comparison of Cost Details:
Another important function undertaken by merchant bankers is the comparison of the
details of costs with the benchmarks available in the same industry. Other aspects such
as the geographical area, size or scale of operation, etc. are also used for comparison.
4) Identification of Funding Sources:
Identifying appropriate source of capital required for financing the project is another
function of a merchant banker in his credit syndication services. Many factors
determine the choice of capital funding source.
5) Ascertainment of Loan Details:
Merchant bankers ascertain details of criteria followed by the term-lending institutions
to entertain projects for granting assistance. The objective is to pave way for the
expeditious and favourable consideration of the loan application by the development
finance institutions.
6) Furnishing Beneficiary Details:
An important function of credit syndication is furnishing of information relating to the
borrower-beneficiary to the financial institution.
7) Making Application:
The merchant banker files the duly filled-in application in a manner as desired by the
term-lending institution While presenting the application, it is incumbent on the part
of the merchant banker to ensure that all the required formalities have been complied
with For instance, it is important that necessary sanction is obtained from the
Government for the proposed project.
8) Project Appraisal:
As part of credit syndication services, the merchant banker arranges for appraisal of
the project by sufficiently interacting with the officials of the development financial
institutions.
9) Arrangement of Loan Sanction:
It is the function of n merchant banker to obtain the letter of intent/sanction from the
lending institution/bank. The lending agency informs the merchant banker about the
sanction of loan by the sanctioning authority.
10) Pre-disbursement Compliance:
This function is aimed at merchant bankers assisting the borrowing unit in the drawal
of the loan amount from the financial institution. This is done with additional
compliance of formalities of provision of information and documentation.
C) Institutional Lender of Syndicated Loans:
Loan syndication relates to assistance rendered by merchant bankers to get term loans
for the projects. Such loans are obtained from a single development finance institution
and in case of large term loans from a syndicate or consortium. Merchant banks also
help corporate clients to raise syndicated loans from commercial banksAmong
institutional lenders the following institutions are considered as the main suppliers of
the long and medium term funds with which the merchant bankers contact, liaison and
arrange loans working for and on behalf of their clients.
All State All Co Mutu

India al
India Leve
level
mm Funds
Fina l
Inves erci and
ncial Fina Ventu
tmen al re
Instit ncial t Capit
ution Bodi Instit ban al
s es ution ks Funds
C) Institutional Lender of Syndicated Loans:
a) All India Financial Institutions:
1) Industrial Finance Corporation of India (IFCI)
2) Industrial Development Bank of India (IDBI)
3) Industrial Credit and Investment Corporation of India Ltd (ICICI)
b) State Level Financial Bodies:
4) State Financial Corporations (SFCs)
5) State Industrial Development Corporations (SIDCs)
6) State Industrial and Investment Corporations (SHCs)
c) All India level Investment Institution:
7) Life Insurance Corporation of India (LIC)
8) Unit Trust of India (UTI)
9) General Insurance Corporation of India (GIC) and its subsidiary
companies.
d) Commercial banks:
Commercial banks join in consortium loan being provided by the above institutions.
E )Mutual Funds and Venture Capital Funds:
These funds generally invest in equity but mutual funds contribute to the issues of
Debentures/Bonds on private placement basis as well as subscribe to public issues.
D) Procedure of Syndicate Loan:
Stages in Syndication:
Broadly there are three stages in syndication, viz., Pre-mandate phase, Placing the loan
and disbursement and post-closure stage.
Placing the
Pre-Mandate
Loan and
Stage
Disbursement
P
os
t-
C
lo
s
u
re
St
a
g
e
D) Procedure of Syndicate Loan:
1) Pre-Mandate Stage :
This is the initiated by the prospective borrower. It may liaise with a single bank or it
may invite competitor’s bids from a number of banks. The borrower has to mandate
the lead bank, and the underwriting bank, if desired.
2) Placing the Loan and Disbursement:

At this stage, the lead bank can start to sell the loan in the marketplace i.e.
to prospective participating banks. this means that the lead bank needs to prepare an
information memorandum, prepare a term sheet, prepare legal documentation,
approach selected banks and invite participation.
3) Post-Closure Stage:
This is monitoring and follow-up phase. It has many times done through an escrow
account. Escrow account is the account in which the borrower has to deposit it’s
revenues and the agent ensures that the loan repayment is given due priority
before payments to any other parties.
E) Project Appraisal:
Project Appraisal
Promoter'
Commerc Manageri
Technical Ecological Financial Financial s Economic
ial al
Appraisal Appraisal Appraisal Tools Contribut Appraisal
Appraisal Appraisal
ion
1) Technical Appraisal :
Technical appraisal involves the assessment of technical and engineering soundness of
the project. While carrying out the technical appraisal of a project, aspects such as
competence of the experts preparing design of facilities and specifications; purchase
arrangements of equipments; supervision of construction and installation; ability of
consultants and their costs for services, are looked into.
2) Ecological Appraisal :
Regarding the ecological aspects of the project, the merchant banker ensures that the
borrowing company has taken all possible steps for preventing air, water and soil
pollution arising out of the industrial project proposed to be undertaken.
3) Financial Appraisal :
Financial appraisal involves analyzing the financial viability of the project under
consideration. Analysis of the need for fixed capital and working capital is also carried
out.
4) Financial Tools :
The merchant banker the following tools of for appraising the financial efficacy of the
project so as to determine the soundness of the proposed project:
a) Break-even analysis A
b) Ratio analysis covering debt-equity ratio, current ratio, profitability ratio, output
investment ratio, fixed assets coverage ratio, profit to sales, return on
capitalization, return on investment, return on equity
c) Debt service coverage ratio, servicing of debt and shareholders
d) Capital expenditure evaluation by both discounted and non—discounted cash
flow techniques
e) Uncertainty or risk analysis/sensitivity analysis
5) Promoter's Contribution :
Promoter’s contribution for establishment and running of a project is vital. The
important sources of promoters` contribution in the case of newly established
companies include own equity, managed equity from special funds such as Risk
Capital venture Capital Funds or Seed Capital from IDBI through SFCs, SIDCs, etc.
and foreign equity, deposits contributed by promoters, etc.
6) Economic Appraisal :
Economic appraisal of the project involves making an analysis of the expected
contribution of the project to the particular sector, besides its contribution to the
development of the national economy. Particular attention is paid to the project’s
usefulness in terms of best possible utilization of scarce resources.
7) Commercial Appraisal :
Commercial appraisal involves t.he determination of commercial viability of the
project in terms of arrangements for buying, transporting and marketing the product.
8) Managerial Appraisal :
Managerial appraisal is concerned with the evaluation of effectiveness and efficiency
of the managerial personnel who are vested with the responsibility of organizing the
available resources of the project.
F)Documentation and Security:
a) Documentation of Syndicate Loans:
Documentation of Syndicate Loans:
Syndicated
Mandate Information
Term Sheet Memorandum
Loan Fee Letters
Letter Agreement
The type of documents to be prepared and executed by the merchant banker will be as
per the requirements of the lead financial institution.
1) Mandate Letter:
The borrower appoints the Arranger via a Mandate Letter (sometimes also called a
Commitment Letter). The content of the Mandate Letter varies according to whether
the Arranger is mandated to use its "best efforts" to arrange the required facility or if
the Arranger is agreeing to "underwrite" the required facility.
2) Term Sheet:
The Mandate Letter will usually be signed with a Term Sheet attached to it. The Term
Sheet is used to set out the terms of the proposed financing prior to full
documentation. It sets out the parties involved, their expected roles and many key
commercial terms (for example, the type of facilities, the facility amounts, the pricing,
the term of the loan and the covenant package that will be put in place).
3) Information Memorandum:
Typically prepared by both the Arranger and the borrower and sent out by the
Arranger to potential syndicate members. The Arranger assists the borrower in writing
the information memorandum on the basis of information provided by the borrower
during the due diligence process.
4) Syndicated Loan Agreement:

The Loan Agreement sets out the detailed terms and conditions on which the Facility is
made available to the borrower.
5) Fee Letters:
In addition to paying interest on the Loan and any related bank expenses, the borrower
must pay fees to those banks in the syndicate who have performed additional work or
taken on greater responsibility in the loan process, primarily the Arranger, the Agent
and the Security Trustee.
b) security of Syndicate Loan:
The merchant banker provides the following details with regard to the security for the
loan:
1) First mortgage and charge of all immovable properties both present and future of the
borrower company in the form as may be indicated by lenders which are equitable
mortgage by deposit of title deeds.
2) First charge by way of hypothecation (i) of all movables such as stocks of raw
material, semi-finished and finished goods, consumable stores and such other
movables as may be agreed to by the lead institution for securing the borrowings for
working capital requirements in the ordinary course of the business, and (ii) on
specific items of machinery as permitted by the lender purchased and/or to be
purchased by the client company under the deferred payment facilities granted to the
client company.
b) security of Syndicate Loan:
The merchant banker provides the following details with regard to the security for the
loan:
3) Security for badge loan
4) Security for interim loan '
5) Substantive security where the loan amount is being secured in terms of the loan
agreement by first charge on the company's immovable and movable assets, present
and fixture. .
6) Personal guarantee where the borrowing is being secured by irrevocable and
unconditional personal guarantee from its promoters/directors in favour of the
lending institutions.

Merchant Bankers Services: Unit 3

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Merchant Bankers Services: Unit 3

Uploaded by

Copyright:

Available Formats

Unit 3

Merchant Bankers Services

Vertical Merger Negotiated Merge

Diagonal Merger Arranged Merger

Conglomerate Merger Tender Offer

Memorandum Person Copy to

Filing with Copy of Order Allotment of

1) Net Adjusted Asset Value or Economic Book Value:

1) Ordinary Shares Financing:

B) SEBI Guidelines for Buy-back of Shares

f) Extinguishment of Certificate (Regulation 12 (1)) :

2) Regulation as per SEBI:

3) Reserve Bank of India (RBI) and other Restrictions:

5) Performance Measured and Revised:

1) Discretionary Portfolio Manager :

2) Non-Discretionary Portfolio Manager :

Furnishing of Further Information, etc

Capital Adequacy Requirement

Procedure for Registration

Procedure where registration is not granted

Effect of Refusal to Grant Certificate

No Person to Act as Portfolio Manager without Certificate

Conditions for Grant or Renewal of Certificate to Portfolio Manager

Period of Validity of the Certificate

Period of Risk Investment

C) Content of Agreement between Client and Portfolio Manager:

Integrity Client’s Benefit

No Disclosure Adherence to Act

A) Credit/ Loan Syndication:

a) Meaning of Credit/ Loan Syndication:

All State All Co Mutu

2) Placing the Loan and Disbursement:

Documentation of Syndicate Loans:

4) Syndicated Loan Agreement:

You might also like