MERCHANT BANKING

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 feeORIGIN :The term merchant banking originated from the London who started financing foreign trade through acceptance of billsLater they helped government of under developed countries to raise long term fundsLater 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 promoter’s 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:They prepare copies of prospectus and send it to SEBI and then file them to Registrar of CompaniesThey conduct meetings with company representatives and advertising agencies to decide upon the date of opening issue, closing issue, launching publicity campaign etc..They help the companies in fixing up the prices for their issuesPost-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, up to 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 :Merger is a combination of two or more companies into a singe company where one survives and other loses its existenceTakeover is the purchase by one company acquiring controlling interest in the share capital of another companyMerchant banker acts as middlemen between offeror and offeree,negotiates mode of payment and gets approval from government.

OFF SHORE FINANCEMerchant bankers help their clients inLong term foreign currency loanJoint venture abroadFinancing exports and importsForeign collaboration arrangement

BANKS PROVIDING MERCHANT BANKING SERVICES IN INDIA

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…

MERCHANT BANKING REGULATIONSCertificate from SEBI is a must. They are of four types:Category I merchant bankers : Can act as Issue managersCategory II merchant bankers : can act only as co-managersCategory III merchant bankers : can act as co-managers but cannot undertake portfolio managementCategory IV merchant bankers :can merely act as consultant or advisor to issue of capital

CAPITAL ADEQUACY NORMS :Category I : Rs. 5 croresCategory II : Rs.50 lakhsCategory III : Rs.20 lakhsCategory IV : Nil

GUIDELINES FOR MERCHANT BANKERS :SEBI’s authorization is a must to act as merchant

bankers. Authorization 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 transactionsEvery 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

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 authorization which prevents young, specialised professionals into merchant banking businessNon co-operation of the issuing companies in timely allotment of securities and refund of application of money etc.. is another problemYet merchant banking is vast but should develop adequate expertise to provide a full range of merchant banking services