intro to mbfs
TRANSCRIPT
-
8/13/2019 Intro to MBFS.
1/30
Merchant Banking
and
Financial Services
Prof. Amit Trivedi
-
8/13/2019 Intro to MBFS.
2/30
Do you know who is a Merchant Banker?
According to Collins, a banker who is employedin a financial institution engaged primarily inaccepting foreign bills, advising companies on
flotations and takeovers, underwriting newissues, hire-purchase finance, making long-termloans to companies, and managing investment
portfolios, funds, and trusts, or who is involved
with this kind of business According to Oxford, a bank dealing in
commercial loans and investment
-
8/13/2019 Intro to MBFS.
3/30
And what do authorities think?
U.S. Federal Deposit Insurance Corporation (acronymFDIC):
"the term merchant banking is generally understood tomean negotiated private equity investment by financialinstitutions in the unregistered securities of eitherprivately or publicly held companies Bothcommercialbanks and investment banks may engage in merchantbanking activities. Historically, merchant banks'
original purpose was to facilitate and/or financeproduction and trade of commodities, hence the name"merchant". Few banks today restrict their activities tosuch a narrow scope.
-
8/13/2019 Intro to MBFS.
4/30
But we are most particular...
Merchant Banker is defined by SEBI as:
merchant banker means any person who is
engaged in the business of issue management
either by making arrangements regarding
selling, buying or subscribing to securities or
acting as manager, consultant, adviser or
rendering corporate advisory service inrelation to such issue management
-
8/13/2019 Intro to MBFS.
5/30
Let us see when and where it started
Merchant Banks were original banks invented by Italiangrain merchants in the middle ages
Jews fleeing Spanish prosecution were attracted to Italy.They could not hold land so entered trading halls of
Lombardy. Christians were strictly forbidden the sin of usury, defined
as lending at interest (Islam makes similar condemnationsof usury). The Jewish newcomers could lend to farmersagainst crops in the field, a high-risk loan at high rates
The Jewish newcomers, on the other hand, could lend tofarmers against crops in the field, a high-risk loan at whatwould have been considered usurious rates by the Church
Jewish traders undertook both finance and underwriting
-
8/13/2019 Intro to MBFS.
6/30
And how it grew
Financing took the form of a crop loan at the beginningof the growing season and underwriting in the form ofa guarantee of the delivery of the crop to its buyer,typically a merchant wholesaler
Merchant banking progressed from financing to owntrade settling trades for others. Merchant banks alsoheld deposits for settlement of notes written by thepeople who were still brokering the actual grain.
Slowly practice to pay interest on deposits held started
Italian market was disrupted by war and the structureof Italian states
-
8/13/2019 Intro to MBFS.
7/30
And how it flourished
The next generation of merchant banking started in theplains of Germany and Poland and a little later in England.The trade was still dominated by Jews. Warburg andRothschild are two such banks that still exist
18
th
century saw the rise of Protestantism, which permittedusury to many Christians. This led to many Christiansentering merchant banking sector. A few famous examplesare Barings (UK), Schroder and Bahrenberg (Germany), andHope & Co (Netherlands)
Rise of trade and industry in 19
th
century in US led to rise ofmany Merchant banks. One leading bank is JPMorgan & Co
20thcentury saw high rate of growth in trade andinvestment, which could no longer be catered by family runfirms and many corporate entered the business.
-
8/13/2019 Intro to MBFS.
8/30
Then it came to India
RBI issued first license to Grindlays Bank in 1967. Grind lays
focused on management of capital issues, offered diverse
financial services, from production planning and system design to
market research, to emerging class of entrepreneurs. It also
offered management consulting services to small and medium
enterprises. Citibank was the next to setup its merchant banking division in
1970. It focused on project evaluation and raising funds through
borrowing and issuing equity. Main target segment was new
entrepreneurs. SBI was the first Indian banks to start merchant banking services
in India as part of the services they offered to their clients from
1972. Initially Bank gave corporate advice and assistance to small
and medium entrepreneurs and later entered into other services.
Today SBI offers all services under merchant banking.
-
8/13/2019 Intro to MBFS.
9/30
I am sure you will meet one soon ...
You will surely need his services if you:
Start a new business
Raise capital/ working capital
Invest in a project Need capital to fund operations
Grow your business inorganically
Manage your investment Conform to rules and regulations and comply with
laws
-
8/13/2019 Intro to MBFS.
10/30
Few things where he can help.
Angel Investing, Venture Capital, Private Equity
Pre Investment studies
Project Counseling
Project Appraisal Project Finance
Credit Syndication
Issue Management and Underwriting
Mergers, Amalgamation and Takeovers
Mutual Funds (Not his duty)
-
8/13/2019 Intro to MBFS.
11/30
And a few more things you can ask
for
Corporate Counseling Relief to Sick Industries
Capital restructuring
Working Capital Finance
Acceptance Credit and Bill Discounting
Lease Financing
Foreign Currency Finance Fixed Deposit Broking
Portfolio Management
-
8/13/2019 Intro to MBFS.
12/30
Want to be next Steve Jobs...
Venture capital
Equity financing of high risk- high returnbusinesses with high growth potential
Popular with new technology/ new businesscompanies that have good growth potential
Started in US in 50s, became popular in late
60s and 70s In India, it took off post liberalization
Angle funding, seed funding, boot strapping
-
8/13/2019 Intro to MBFS.
13/30
Look before you leap.
Pre Investment Studies
Evaluate alternate avenues of investment
Investigate regulatory factors and environment,
raw material supply, market access Identifying the project best suited to client
strategy and strength
Helping foreign companies set up Indianoperations independently or through JV
Industry wide studies of investment possibility
-
8/13/2019 Intro to MBFS.
14/30
Profit-profit everywhere, which one to
reap....
Project counseling
Project counseling looks at project viability
Technical feasibility
Selecting technical consultancy organization
Advising on obtaining approvals/ permissions/licenses from relevant authorities/ government
Capital structuring and pattern of financing
Advising and assisting client in preparingfeasibility report
-
8/13/2019 Intro to MBFS.
15/30
All that glitters is not gold...
Project appraisal
Financial appraisal: financial viability of the project basedon investment and return cash flow profiles. Liquidityratios, NPV and IRR are commonly used techniques
Technical appraisal: technical feasibility in terms oftechnology, design, implementation, raw material access,marketable product and cost aspects
Economic appraisal: impact of project on economy andsocial/ecological impacts
Project finance Arranging finance for the appraised project through sale of
equity or debt syndication
-
8/13/2019 Intro to MBFS.
16/30
More the merrier.....
Credit Syndication
Raising debt for projects from Indian and Foreignlenders
Draw the financial investment plan and workingcapital requirement
Make loan application seeking finance
Selecting the banks and institutions to take
money from and managing the loandisbursement schedule
Arranging bridge finance wherever required
Legal and documentary requirements
-
8/13/2019 Intro to MBFS.
17/30
Going public...
Issue Management and Underwriting
Activities concerned with the management of thepublic issues
Preparation of plan and budget for issue Preparing documents and drafting prospectus
Filing and approvals
Selecting brokers, lead managers, issue houses,
advertising agencies etc Advertisement and Distribution of application
forms
Share allotment and refund
Stock exchange clearance and listing
-
8/13/2019 Intro to MBFS.
18/30
Size does matter...
Mergers, Amalgamations & Takeovers
Plan for growth- organic and inorganic
Identify the technology and investment partners,
joint venture associates, and targets for inorganicgrowth plans
Evaluate the plan of investment/ takeover
Conducting the takeover/ investment plan by
buying in the stakeholders Help in restructuring the operations at the
company post acquisition/ merger
-
8/13/2019 Intro to MBFS.
19/30
United we stand....
Mutual Funds
Financial Service that helps small investorsachieve better return in equity/debt market
Money is collected from many small investors tobuild a professionally managed corpus
Invest in equity/debt instruments as per themandate of the fund
MF help people with small funds and lack ofexpertise/time to stay invested in active/passiveinvestment portfolios
-
8/13/2019 Intro to MBFS.
20/30
Cant figure it out....
Corporate Counseling
Ensures that company runs at optimumperformance level
Rejuvenates old lines and ailing companies Evaluates diversification plans
Arranges approvals for rehabilitation schemes for
ailing and sick industries Modernization plans for old lines
Takeover and transfer of sick units
-
8/13/2019 Intro to MBFS.
21/30
Relief to Sick Industries
Identifying the cause of loss and suggest remedialmeasure
Work out investment details and return oninvestment
Prepare detailed report on future course ofaction- modernize, upsize, downsize, sell, close
Assist in obtaining approvals from BIFR, lendersand other bodies
Monitoring the implementation
Treating the terminally ill...
-
8/13/2019 Intro to MBFS.
22/30
Looking for balance...
Capital Restructuring
Assessing capital requirement and sources offund- equity partners/ debt
Suggesting change in D/E ratio to manage risk-return profile for the owners
Suggesting alterations in shareholding patterns totake maximum advantage of FDI/FII norms
Restructuring for sick units- capitalization of debt Capital restructuring post merger, acquisition or
takeover.
-
8/13/2019 Intro to MBFS.
23/30
Managing the daily chores....
Working Capital Finance
Assessing working capital requirement atdifferent times
Prepare applications for arranging workingcapital
Assisting in negotiation, documentation and
disbursement of working capital loans Advising on financing of long term sources for
long term requirement
-
8/13/2019 Intro to MBFS.
24/30
Speeding up the cash flow...
Acceptance Credit and Bill Discounting
Helping arrange loans for trade
Application making, applying, negotiating, anddocumentation for the client
Loan on sales order (pre-shipment credit)
before delivery of good and post shipment ofgoods (post-shipment credit)
Assisting in Bill discounting/ letter of credit
-
8/13/2019 Intro to MBFS.
25/30
Mutual benefit...
Lease Finance
Viability of Lease as an alternative
Choosing favorable rental structure Negotiations and documentation
-
8/13/2019 Intro to MBFS.
26/30
The world is my playing field...
Foreign Currency Financing
Financial and legal appraisal to set the limit of foreigninvestment permitted under law
Liaison with government, RBI and other bodies forapproval to raise overseas debt
Syndication of various guarantees, letter of credit, pre-shipment credit, post shipment credit and other creditfacilities
Arranging funds from EXIM bank and other bodies
Guidance on forward cover of exchange risk
-
8/13/2019 Intro to MBFS.
27/30
Every penny makes a Pound...
Fixed deposit Broking
Corporate raise fixed deposits from depositorsunder Companies (Acceptance of Deposit) Rules,1975 made under powers conferred in Sec 58Aand 642 of Companies Act, 1956
Help in all stages from estimating the issue size todesigning of documents, advertising andmarketing the issue, collection of applied money,
issue of certificate, refund of excess deposit,maintaining all records and registers for thepurpose
-
8/13/2019 Intro to MBFS.
28/30
Many baskets for the eggs...
Portfolio Management
Financial service that helps corporate/ HNIs/ NRIsmanage their excess funds and obtain optimumreturns for their given risk appetite
The investment has to be managed for durationand liquidity
Safe custody of security in India and overseas
Complying with legal ceilings in investment Managing investment record, tax records and
return on investment
-
8/13/2019 Intro to MBFS.
29/30
Crux of the matter is...
There are many financial services for different
purposes
Merchant Banker is an enabler of business
dealing with Compliance with rules and regulations (legal)
Documentations and project reports (technical)
Design and marketing of documents (marketing) Securing approvals from various stake holders
(negotiations)
Manages risk, return and helps raise capital (financial)
-
8/13/2019 Intro to MBFS.
30/30
Thanks