Merchant banking


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Merchant banking

  2. 2. 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” 2
  3. 3. SCOPE AND 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 . 3
  4. 4.  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 to SEBI and then file them to Registrar of Companies They 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 issues Post-issue activities: It includes collection of application forms, screening of applications,deciding allotment procedure, mailing of allotment letters, share certficates and refund orders 4
  5. 5. 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 atleast one authorised 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.. 5
  6. 6.  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 mobilising 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 existence Takeover is the purchase by one company acquiring controlling interest in the share capital of another company Merchant banker acts as middlemen between offeror and offeree, negotiates mode of payment and gets approval from government. 6
  7. 7. BANKS PROVIDING MERCHANT BANKING SERVICES IN INDIA Commercial banks Foreign banks like 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 etc… 7
  8. 8.  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 8
  9. 9. Portfolio Corporate management.counselling Capital Project structuring counselling . 9
  10. 10. Function of Merchant banking1.Corporate Counselling:-The service is, usually,provided free of charge to a corporate unit.Merchant banking render advise to corporate enterprises from time to time in order to improve performance and build better image/reputation among investors and to increase the market value of its equity shares.Counselling is privided in the form of opinions, suggestions and detailed analysis of corporate laws as applicable. 10
  11. 11. 2.Project Counselling :-Project counselling broadly covers the study of the project and providing advisory services on the project viability and procedural steps to be followed for its implementation.It covers the following aspects.(i) Development of an idea of a project or review of project idea/project profile.(ii)Preparation of project report after considering its financial,economic and market feasibility.(iii)Estimation of the cost of the project.(iv)Deciding the means of financial and the composition of various types of securities.(v)Studing the procedural aspects of project implementation.(vi)Provide assistance in obaining govt consent for implementation of the project. 11
  12. 12. 3.Capital Restructuring Services:-Merchant banks render different capital restructuring services to the corporate units depending upon the circumstances a particular unit is facing. 12
  13. 13. 4.Portfolio Management:-Merchant banks offer services not only to the companies issuing the securities but also to the investors. They advise their clients, mostly institutional investors, regarding investment decisions as to the quantam of amount of security and the type of security in which to invest. Merchant banks render necessary services to the investors by advising on the optimum investment mix. 13
  14. 14. 5. Issue Management:-The function of a merchant banker had been mainly confined to the management of new public issues of corporate securities by the newly formed companies (further issues) and foreign companies in dilution of equity as a required under FERA.In this capacity , the merchant banks usually acts as a sponsor of issues. They obtain consent of the controller of capital issues(CCI) now, SEBI and provide a number of other services to ensure success in the marketing of securities. 14
  15. 15. 6. Loan/Credit Syndication:-Merchant bankers provide specialised services in preparation of project, loan applications for raising short term as well as long- term credit from various banks and financial institutions for financing the project or meeting the working capital requirements. Management 8/e - Chapter 3 15
  16. 16. 7.Arranging Working Capital Finance: -Bank activity but used to be a part of the commercial banks function .Some banks like Canra Bank,Centrel Bank of India have started including working capital finance as one of the Merchant banking service area.Finance for working capital is provided usually for new ventures or for existing companies throuh issue of debentures. Management 8/e - Chapter 3 16
  17. 17. 8.Lease Finance:-Many merchant banking also provide leasing and finance facilities to their customers .Leasing is an arrangement that provide a firm with the use and control over assets without buying and owing the same.Its is a form of renting assets. Lease is a control between the owner of the asset(lessor) and the user of the called the lessee Management 8/e - Chapter 3 17
  18. 18. 9.Venture Capital:-Many merchant bankers verture capital funds to assist the entrepreneure who lack capital to be risked.Capilal funds may be provided products technology –oriented or start –up funds. Venture capital has emerged as a new merchant banking activity. It is a form of equity financing especially designed for funding high risk and high reward projects. Management 8/e - Chapter 3 18
  19. 19. 10.Public Deposits:-Merchant banking also companies in raising finance by way of public deposits. Management 8/e - Chapter 3 19