Fee based and fund based services provided by banks

Ms Chandrima Das

Fee based services Vs Fund Based services

The former is provided in exchange for a fee. The latter is the normal service of the bank like deposits and advances . Commercial banks cannot rely fully upon the interest income of Fund Based services so ,fee Based services. These services don't involve any outlay of funds as in Fund Based . Also risk is less for these services . In Fee based ,banks utilize the customers fund as per their instruction or by using their own expertise.

Types of fee based services

Fund remittance/Transfer services Intra Bank transfer of funds  Transfer from one account to another branch of same customers of same branch.  Transfer from one account to another different customers account of same branch.  Inter Bank transfer of funds  Transfer of funds from one customers account at bank A to another customers account at bank B ,both bank located at the same place/city.  Transfer of funds from one bank to other located at different cities.(outstation)  Transfer of funds from one bank to other located at different countries are subject to foreign exchange regulations.

Types of fee based services

Fund remittance/Transfer services Demand draft- Is a negotiable instruments payable to certain person or to thereof ,drawn by one branch of a bank on another branch of same bank or specified branch of another bank . Letter of credit and guarantees Irrevocable LC- That cannot be revoked/cancelled/amended at any time without prior notification to the beneficiary.  Revocable LC- Just opposite of the above .  Revolving LC Fixed LC provides for a fixed amount for the total amount of bills to be negotiated there under.

Types of fee based services

Letter of credit and guarantees Financial guarantees- These purely secures the monetary obligations as per the terms of guarantee.Issued by banks on behalf of customers obviating the need to dep[osit cash security

MERCHANT BANKING
Merchant banking may be defined as an institution which covers a wide range of activities such as underwriting of shares, portfolio management, project counseling, insurance etc They render all these services for a fee ORIGIN : The term merchant banking originated from the London who started financing foreign trade through acceptance of bills Later they helped government of under developed countries to raise long term funds Later these merchants formed an association which is now called Merchant Banking and Securities House Association

SERVICES OF MERCHANT BANKERS

PROJECT COUNSELLING : It includes preparation of project reports, deciding upon the financing pattern, appraising the project relating to its technical, commercial and financial viability. It includes filling up of application forms for obtaining funds from financial institutions. LOAN SYNDICATION : Assistance is rendered to raise loans for projects after determining promoters contribution. These loans can be obtained from a single institution or a consortium.

ISSUE MANAGEMENT
Management of issues involves marketing of corporate securities ie.equity shares, preference shares and debentures by offering them to public. Pre-issue activities: a. They prepare copies of prospectus and send it to SEBI and then file them to Registrar of Companies . b. They conduct meetings with company representatives and advertising agencies to decide upon the date of opening issue, closing issue, launching publicity campaign etc. c. They help the companies in fixing up the prices for their issues Post-issue activities: It includes collection of application forms, screening of applications, deciding allotment procedure, mailing of allotment letters, share certificates and refund orders

UNDERWRITING OF PUBLIC ISSUES

Underwriting is an insurance to the company which makes public issues. Raising of external resources is easy for the issues backed by well known underwriters. MANAGERS,CONSULTANTS OR ADVISERS TO THE ISSUE : SEBI insist that all issues should be managed by at least one authorized merchant banker but not more than two. For an issue of 100 crores,upto a maximum of four merchant bankers shall be appointed. They help in listing of shares in stock exchange, completion of formalities under Companies Act etc..

PORTFOLIO MANAGEMENT
Portfolio refers to investment in different kinds of securities such as shares, debenture issued by different companies. It is a combination of assets but a carefully blended asset combination. Portfolio management refers to maintaining proper combination of securities in a manner that they give maximum return. Investors are interested in safety, liquidity and profitability of his investment but they cant choose the appropriate securities. So merchant bankers help their investors in choosing the shares. They conduct regular market and economic surveys

NRI INVESTMENT
NRIs has to follow lots of complicated rules for investing in the shares in India. Merchant bankers help them in choosing the shares and offer expert advice fulfilling government regulations thus mobilizing more resources for corporate sector. ADVISORY SERVICE RELATING TO MERGERS AND TAKEOVERS : a Merger is a combination of two or more companies into a singe company where one survives and other loses its existence . b. Takeover is the purchase by one company acquiring controlling interest in the share capital of another company . c.Merchant banker acts as middlemen between offeror and offeree,negotiates mode of payment and gets approval from government.

 OFF SHORE FINANCE : Merchant bankers help their clients in : Long term foreign currency loan Joint venture abroad Financing exports and imports Foreign collaboration arrangement

 Commercial banks Foreign banks like National Grindlays Bank, Citibank, HSBC bank etc. Development banks like ICICI,IFCI,IDBI etc. SFC , SIDCs Private firms like JM Financial and Investment service , DSP Financial Consultants, Ceat Financial Services,Kotak Mahindra, VMC Project Technologies, Morgan Stanley,Jardie Fleming,Klienwort Benson etc.

BANKS PROVIDING MERCHANT BANKING SERVICES IN INDIA

MERCHANT BANKING REGULATIONS

: Certificate from SEBI is a must. They are of four types: Category I merchant bankers : Can act as Issue managers Category II merchant bankers : can act only as co-managers Category III merchant bankers : can act as co-managers but cannot undertake portfolio management Category IV merchant bankers :can merely act as consultant or advisor to issue of capital CAPITAL ADEQUACY NORMS : Category I : Rs. 5 crores Category II : Rs.50 lakhs Category III : Rs.20 lakhs Category IV : Nil

GUIDELINES FOR MERCHANT BANKERS

: SEBIs authorization is a must to act as merchant bankers.Authorisation criteria include Professional qualification in finance, law or business management. Infrastructure like office space, equipment and man power. Capital adequacy. Past track of record,experience,general reputation and fairness in all transactions.  Every merchant banker should maintain copies of balance sheet, Profit and loss account, statement of financial position .  Half-yearly unaudited result should be submitted to SEBI .  Merchant bankers are prohibited from buying securities based on the unpublished price sensitive information of their clients

 SEBI has been vested with the power to suspend or cancel the authorization in case of violation of the guidelines. Every merchant banker shall appoint a Compliance Officer to monitor compliance of the Act. SEBI has the right to send inspecting authority to inspect books of accounts, records etc of merchant bankers. Inspections will be conducted by SEBI to ensure that provisions of the regulations are properly complied. An initial authorization fee, an annual fee and renewal fee may be collected by SEBI. A lead manager holding a certificate under category I shall accept a minimum underwriting obligation of 5% of size of issue or Rs.25 lakhs whichever is less

CODE OF CONDUCT
Should make all efforts to protect the interest of investors. Should maintain high standards of integrity,dignity and fairness in conduct of business. Should fulfill all obligations in a professional and ethical manner. Should not discriminate among the clients. Should ensure that prospectus, letter of offer etc.. is available to investors at the time of issue. Should render best possible advice to its clients. Any penal action taken by SEBI should be informed to its clients

CODE OF CONDUCT
Should inform the board about any legal proceedings initiated against it. Should abide by the rules of Securities and Exchange Board of India Regulations,2003 . Shall develop its own internal code of conduct for governing its internal operations. Should ensure that any person it employs should have the capacity to be a merchant banker. It is responsible for the act of its employees and agents . Should not create false market

SOME PROBLEMS OF MERCHANT BANKERS

SEBI stipulates high capital adequacy norms for authorisation which prevents young,specialised professionals into merchant banking business. Non co-operation of the issuing companies in timely allotment of securities and refund of application of money etc. is another problem. Yet merchant banking is vast but should develop adequate expertise to provide a full range of merchant banking services