Merchant Banking

Merchant Banking
• A person who is engaged in the business of issue
management, either by making arrangements
regarding selling, buying subscribing to securities or
acting as a manager, consultant or advisor or
rendering corporate-advisory services in relation to
such issue management - SEBI
• Mandatory to appoint a merchant banker in case of
public issues, right issues, open offers and buy-backs
• MB require compulsory registration with the SEBI
 Eligibility For Registration 
• Incorporated as a body corporate.
• Should possess appropriate infrastructure in the form of adequate office space,
equipment, and manpower to undertake business activities and to discharge their
activities and services effectively
• Shall have a minimum of two persons, who would be working under the applicant,
and have an experience in the field of merchant banking activities
• Should fulfill the minimum capital adequacy requirement (net worth of a min.
of INR 5 Cr.)
• The applicant, his partner, director, or his principal officer shall not at any time
been:
i. involved in any litigation connected with the stock exchange which has an
adverse impact on the business of the applicant
ii. convicted in respect of an offence, where the same is found guilty of moral
turpitude or as an economic offender;
• The applicant is required to have professional qualification in the field of finance,
law or business management and the same must have been granted by any
institution being recognized by Government of India.
 PROCESS OF REGISTRATION
1. The Applicant has to make an application in respect of
grant of Registration as Merchant Banker to SEBI.
2. A non-refundable application fee of Rupees fifty thousand
is to be paid.
3. The applicant has to furnish further information /
clarification as required by SEBI for disposal of application.
4. After making full inquiry within the application made for
grant of Certificate of Registration and on being satisfied
that the applicant is eligible, SEBI grants a certificate of
registration
5. The merchant Banker shall pay a fee upon the grant of
Certificate of Registration to act as Merchant Banker
(Initial Registration INR 20 L; Permanent Registration INR 9
L every 3 years)
 Services
1. Corporate Counseling 9. Acceptance Credit and Bill
2. Project Counseling Discounting
10. Mergers, Amalgamations
3. Pre-investment Studies
and Takeovers
4. Capital Restructuring 11. Venture capital
5. Credit Syndication and 12. Lease Financing
Project Finance 13. Foreign Currency Finance
6. Issue Management and 14. Brokering Fixed Deposit
underwriting 15. Mutual Funds
7. Portfolio Management 16. Relief to Sick Industries
8. Working capital finance 17. Project Appraisal
 Underwriting
• The underwriter agrees to buy that part of the company
issues which are not subscribed to by the public in
consideration of a specified underwriting commission.
• The underwriting agreement, among others, must
provide for the period during which the agreement is in
force, the amount of underwriting obligations, the period
within which the underwriter has to subscribe to the
issue after being intimated by the issuer, the amount of
commission and details of arrangements, if any, made by
the underwriter for fulfilling the underwriting
obligations.
• The underwriting commission may not exceed 5 percent
on shares and 2.5 percent in case of debentures.
 Types of Underwriting

Firm Underwriting: - is one in which the underwriters apply for a

block of securities. Under it, the underwriters agree to take up and
pay for this block of securities as ordinary subscribers in addition to
their commitment as underwriters.

Syndicate Underwriting: - is one in which, two or more agencies

or underwriters jointly underwrite an issue of securities. Such an
arrangement is entered into when the total issue is beyond the
resources of one underwriter or when he does not want to block up
large amount of funds in one issue.

Sub-Underwriting:- is one in which an underwriter gets a part of

the issue further underwritten by another agency. This is done to
diffuse the risk involved in underwriting.
Role of Underwriters

The primary role of the underwriter is to purchase securities from

the issuer and resell them to investors.
Underwriters act as intermediaries between issuers and investors,
providing for an efficient of capital.
The underwriters take the risk that it will be able to resell the
securities at a profit. Perhaps the most visible and familiar element of
the initial public offering process is the underwriter. The
underwriter is the organization that is actually responsible for
pricing, selling, and organizing the issue, and it may or may not
provide additional services.
 Buyback of shares

• Minimum risk investment

• Promoters may increase their shareholdings
• Achieve target capital structure
• Manage panic share price fall
• Signalling management confidence
• Exit route for investors in case of illiquied scrips
 Role of MB in Buyback of shares
The MB has to ensure that
• The company is able to implement the offer
• The provision relating to the escrow account has been made;
• Firm arrangements for monies for the payment to fulfill such obligations under
the offer are in place;
• The public announcement of buy-back is made & the letter of offer has been
filed in terms of the Regulations;
• The merchant banker should provide to SEBI, the due diligence certificate
which should accompany a draft letter of offer;
• The merchant banker should ensure that the contents of the public
announcement of an offer as well as the letter of offer are true, fair &
adequate & quoting the source wherever necessary.
• The merchant banker should ensure compliance with Section 77A & Section
77B of the Companies Act, & any other applicable laws or rules as necessary
• Upon fulfillment of all obligations by the company under the Regulations, the
merchant banker should inform the bank with whom the escrow or special
amount has been deposited to release the balance amount to the company &
send a final report to SEBI in the specified form, within 15 days from the date
of closure of the buy-back offer.
 Role of MB in M&A
• Arranging for negotiations
• Offering expert valuation
• Undertaking management audits to identify strengths and
weaknesses
• Conducting exploratory studies to locate opportunities
• Identifying organization with matching characteristics
• Obtaining approvals
• Monitoring the implementation
• Assisting in legal compliance
• Advising on capital reorganisation
 “Delisting" of securities
• The term "delisting" of securities means permanent removal of securities of a listed
company from a stock exchange.
• As a consequence of delisting, the securities of that company would no longer be
traded at that stock exchange.
• Compulsory delisting refers to permanent removal of securities of a listed company
from a stock exchange as a penalizing measure at the behest of the stock exchange
for not making submissions/comply with various requirements set out in the Listing
agreement within the time frames prescribed.
• In voluntary delisting, a listed company decides on its own to permanently remove
its securities from a stock exchange.
• The promoters are required to appoint a merchant banker registered with the SEBI
and such other intermediaries as are considered necessary for carrying out the
delisting process.  
• The merchant banker is required to ensure compliance with the provisions of
Delisting Regulations .  
• The merchant banker appointed by the Board to conduct due diligence and issue
the Merchant Banker Report may also act as the manager to the delisting offer.  
• If the promoter is appointing a merchant banker, such merchant banker cannot be
an associate of the promoter. 
 Role of Merchant Banker in ESOP

• The company shall appoint a registered Merchant Banker for

the implementation of ESOP.
• The appointment of a merchant banker would be applicable
to all ESOP /ESPS Schemes where grants have been made /
shares have been allotted on or after 30.06.2003.
• Ensure that ESOP scheme is in compliance with SEBI (ESOP &
ESPS) Guidelines 1999 and that all the disclosure
requirements mandated therein have been complied with.
• Certify the contents of Schedule V and Schedule VI filed with
stock exchanges by countersigning.
 Code of Conduct
1. Integrity
2. Quality service
3. Fair Price
4. Responsible Statement
5. Best Advice
6. Secrecy
7. Information
8. Prospectus
9. Fair Allotment
10.True market
11.Compliance
 General Obligations
1. Submission of offer document
2. Underwriting
3. Compliance obligations
a) Association of resource personnel (in case of oversubscription)
b) Redressal of investor grievances
c) Submission of post issue monitoring reports
d) Issue of NOC (by SEBI)
e) Registration of MB
f) Reporting requirements (half yearly reporting)
g) Impositions of penalty points
 Pre-Issue Obligations
1. Exercise due diligence
2. Submission of documents
a) Memorandum of Understanding (MOU)
b) Due diligence certificate
c) Certificates signed by professionals (CA/CS) – List of
promoter group and their transactions during IPO
3. Appointment of intermediaries
d) MB
e) Registrar to the issue
4. Underwriting
5. Offer document to be made public
6. Dispatch of issue material – to stock exchanges, brokers, bankers,
investor associations etc.
7. No complaints certificate – after 21 days
8. Mandatory collection centres
9. Authorized collection agents
10. Advertisement for rights issues – min. 7 days before
11. Appointment of compliance officer
12 Abridged prospectus
13. Agreement with depositories
 Post Issue Obligations
1. Post-issue monitoring report
2. Redressal of investor greivance
3. Coordination with intermediaries
4. Underwriting
5. Post issue advertisements
6. Basis of allotment
7. Reservation for small individual applicants
 Registration of MB
• Issued by SEBI subject to following conditions
a) In case of any change in its status and
constitution, prior permission should be
obtained
b) Payment of fees for registration or renewal
c) Redressal of grievances of investors within
one month of the receipt of complaint and
SEBI informed
You have joined Goldman Sachs (GS) as an Intern
in the Investment Banking vertical. Evaluate the
upcoming LIC IPO and present in the next board
meeting.
Key dimensions of the LIC IPO
Its uniqueness
SWOT
Role of GS in the IPO