Functions of Merchant Banking

1. 11MB015-
MERCHANT BANKING AND
FINANCIAL SERVICES
II MODULE

2. Greenshoe Option
• A provision contained in an underwriting agreement
that gives the underwriter the right to sell investors
more shares than originally planned by the issuer.
This would normally be done if the demand for a
security issue proves higher than expected. Legally
referred to as an over-allotment option.
• A greenshoe option can provide additional price
stability to a security issue because the underwriter
has the ability to increase supply and smooth out
price fluctuations if demand surges.
• Greenshoe options typically allow underwriters to
sell up to 15% more shares than the original number
set by the issuer, if demand conditions warrant such
action.

3. • The term “green shoe” came from the Gren
shoe manufacturing(now stride rite corp),
founded in 1919. It was the first company to
implement the green shoe clause into their
underwriting agreement.
• Full, Partial, Reverse Green Shoe Option
Benefits:
• Reduce risk for the company issuing the shares.
• Underwriter having buying power
• Share price stable

4. Price Stabilization-Green Shoe
Option
• The underwriter works as a liaison (like a dealer), finding
buyers for the shares that their client is offering.
• A price for the shares is determined by the sellers (company
owners and directors) and the buyers (underwriters and
clients).
• When the price is determined, the shares are ready to
publicly trade. The underwriter has to ensure that these
shares do not trade below the offering price.
• If the underwriter finds there is a possibility of the shares
trading below the offering price, they can exercise the green
shoe option.

5. E-IPO
• A company proposing to issue capital to public
through the on-line system of the stock
exchange for offer of securities can do so if it
complies with the requirements under
Chapter 11A of DIP Guidelines. The
appointment of various intermediaries by the
issuer includes a prerequisite that such
members/registrars have the required
facilities to accommodate such an online issue
process.

6. E-IPO Locations
• The Securities and Exchange Board of India
(Sebi) informed, the e-initial public offering (e-
IPO) facility would be implemented in two
phases, with the first phase covering 400
locations by January 1, 2013. The facility
would allow retail investors to submit bids
for IPO electronically.
• Sebi said the second phase of the programme
would be completed by March 1, 2013. It
plans to introduce the e-IPO facility for retail
investors at about 1,000 locations.

7. E-IPO mechanism
• This mechanism can be used to submit
applications supported by blocked amounts
(Asba), as well as non-Asba applications by
investors.
• Detailing the mechanism, Sebi asked stock
exchanges to provide for downloading of
application forms on their websites and broker
terminals to ensure any investor or stock
broker could download and print the forms
directly.

8. e-IPO software
• The e-IPO software facilitates online bidding
for Retail/HNI/QIB clients of the member in
different IPO’s, this software works as a single
interface to bid for different IPO’s in NSE and
BSE at one go and also do activities such as
viewing the details of upcoming IPO’s ,
transferring funds etc..

9. Features of e-IPO
• Facility to create and maintain the users and assign rights to them based
on the member’s business modulate
• Multiple users with enhanced user access and rights
• Detailed price wise demand analysis of IPOs based on the files as received
by the exchange
• Facility to bulk upload of orders for institutional clients
• Facilitates generation of bulk files online, through a single platform
• Facilitates export of bids
• Facilitates import of the bid confirmation file received from the exchange
• Multiple reports are available to end clients with report formation and
export to excel facility
• Facilitate post IPO closure activities such as allocation etc.
• Supports both Fixed Price and Book Building methods of IPO Bidding
• Facility to print the IPO forms
• Facility to print the cheque

10. Benefits e-ipo
• Comprehensive functionality coverage
• Customization / enhancements of Reports for
IPO Analysis
• Cost-effective maintenance
• Email and Mobile Alerts can be customized as
per the clients' requirements to receive emails
when a bid is placed by the client or on
his/her behalf by the member
• Clients’ demand for detailed reporting and
access to their financial snapshot at any given
point of time can be achieved

11. Private placement
• The sale of securities to a relatively small
number of select investors as a way of raising
capital. Investors involved in private
placements are usually large banks, mutual
funds, insurance companies and pension
funds. Private placement is the opposite of a
public issue, in which securities are made
available for sale on the open market.

12. Private Placement
• A method of marketing of securities whereby the issuer
makes the offer of sale to individuals and institutions privately
without the issue of a prospectus is known as Private
Placement Method‘. This is the most popular method gaining
momentum in recent times among the corporate enterprises.
• Under this method, securities are offered directly to large
buyers with the help of shares brokers. This method works in
a manner similar to the Offer for Sale Method‘ whereby
securities are first sold to intermediaries such as issues
houses, etc. They are in turn placed at higher prices to
individuals and institutions. Institutional investors play a
significant role in the realm of private placing. The expenses
relating to placement are borne by such investors.

13. Advantages of Private placement
• Less expensive
• Less troublesome for the issuer as there is not
much of stock exchange requirements
• Placement of securities suits the requirements
of small companies.
• The method is also resorted to when the stock
market is dull and the public response to the
issue is doubtful.

14. Disadvantages-Private Placement
• Concentration of securities in a few hands.
• Creating artificial scarcity for the securities
thus jacking up the prices temporarily and
misleading general public.
• Depriving the common investors of an
opportunity to subscribe to the issue, thus
affecting their confidence levels.

15. Boughtout Deals
• A method of marketing of securities of a body
corporate whereby the promoters of an
unlisted company make an outright sale of a
chunk of equity shares to a single sponsor or
the lead sponsor is known as ‗bought-out
deals‘.
• The following are the characteristics of Bought out deals
• 1. Parties : There are three parties involved in the bought-
out Deals-Promoters, Sponsor and Co-Sponsor(Merchant
banker and Investors)

16. • 2. Outright sale-outright sale of a chunk of
equity shares to a single sponsor or the lead
sponsor.
• 3. Syndicate- Sponsor forms syndicate with
other merchant bankers
• 4. Sale price -The sale price is finalized
through negotiations between the issuing
company and the purchaser.
• 5. Fund-based
• 6.Listing
• 7. OTCEI

17. BOUGHT OUT DEALS Vs. PRIVATE
PLACEMENTS

18. BENEFITS
• Speedy sale
• Freedom
• Investor protection
• Quality offer

19. LIMITATIONS
• Loss of Control
• Loss of sales
• Wrong appraisal
• Manipulation
• No accountability
• Windfall profits
• Loss to investor

20. Advertising Strategies
• SEBI GUIDELINES FOR ISSUE ADVERISEMENT
(11.10.1993)
• truthful fair and clear and do not contain
statements to mislead the investors to imitate
their judgment.
• code of advertisement
• Advertisement, means notices, brochures,
pamphlets, circulars show cards, catalogues,
boardings, placards, posters, insertions in
newspapers, pictures, films, radio/television program
or through any electronic media and would also
include the cover pages of the offer documents.

21. CODE OF ADVERTISEMENTS-
CAPITAL ISSUES
• Advertisement shall be truthful fair and clear
• Shall not be considered to be misleading- in accurate
• investors may not be well versed in legal or financial
matter
• issue advertisement shall not contain statements
which promise or guarantee an appreciation or rapid
profits
• Risk factors with the same print size.
• No advertisement shall be issued stating that the
issue has been fully subscribed or oversubscribed
during the period the issue is open for subscription.

22. • No model, celebrities, fictional characters,
landmarks or caricatures
• No slogans, expletives or non factual and
unsubstantiated titles should appear in the
issue advertisement or offer documents.
• No incentives, apart from the permissible
underwriting commission and brokerages,

23. Placement with FIIs,MFs,FIIs etc
• Government of India through Guidelines
issued on September 14, 1992 has allowed
reputed foreign Institutional Investors (FIIs)
including pension funds, mutual funds, asset
management companies, investment trusts,
nominee companies and incorporated or
institutional portfolio managers to invest in
the India capital market subject to the
condition that they register with the Securities
and Exchange Board of India and obtain RBI
approval under FERA.

24. • Portfolio investment by the FIIs are required
to allocate their total investment between
equities and debentures in the ratio of 70:30.
FII s can make purchases and sales only for
delivery.
• Listed companies have been allowed by SEBI
to make preferential allotment to registered
FIIs subject to certain conditions.

25. NRI marketing
• 1. Indian national holding Indian passports with non-
resident status (INNR),
• 2. Person of Indian origin, foreign nationals of Indian
origin, living in foreign countries including such
persons of Indian origin as is in the status of stateless,
because no foreign country has as yet accepted them
as their national and they are not Indian national
either by birth or residence, (FNIO). The term NRI also
includes companies, partnership firms, trusts,
societies and other corporate bodies called OCBs
where 60% of the equity is owned by the NRIs.

26. INVESTMENT POTENTIAL OF NRI‟s
• It is estimated that currently about 25 million
Indians living abroad would fall into the
definition of NRI. Of these about 20 million
have taken up foreign nationality (FNIOs) and
the remaining 5 million are still Indian
passport holders.
• NRIs can have three different types of bank
accounts, buy securities in the primary and
secondary markets, and do business on non-
reparable basis as well as reparable basis.

27. 0ff-Shore Issues
• Offshore relates to managing, registering,
conducting, or operating in a foreign country,
often with financial, legal and tax
benefits. Offshore Company is then a
company incorporated for the purpose of
operating outside the country of its
registration and/or the place of residence of
its directors, shareholders and beneficial
owners. Again, this is typically pursued to
realize various financial, legal or tax benefits.

28. • An offshore company is a legal entity established in
a tax haven or offshore financial center, being
protected by specific legislation which guarantees a
status of partial or full tax exemption.
• The most known type of an offshore company is the
IBC or International Business Company, which are
often found in offshore jurisdictions. Such a company
is usually required to do business with non-residents
of the jurisdiction where they are formed, in order to
remain tax exempt.

29. Issue Marketing
• Marketing the public Issue-Highly competitive
• The Steps
1. Target Market
2. Target Concentration-Maximum subscription
3. Pricing
4. Mobilising intermediaries
5. Information contents
6. Launching advertising campaign
7. Brokers' and investors’ conferences
8. Timing of the Issue

30. POST ISSUE ACTIVITIES
• Finalization of Basis of Allotment -If the
public issue is oversubscribed to the extent of
greater than five times, a SEBI nominated
public representative is required to participate
in the finalization of Basis of allotment (BoA).
• Dispatch of Share Certificates- Immediately
after finalizing the Boa, share certificates are
dispatched.
• Advertisement -basis of allotment, the
number of applications received and the date
of dispatch of share certificates and refund
orders, etc.

31. OTHER FEE BASED MANAGEMENT
• Mergers and Acquisitions (M&A) as forms of
business combination are increasingly being
used for undertaking restructuring of corporate
enterprises the world over.
• MERGERS: A type of business combination where two or more
firms amalgamate into one single firm is known as a merger. In
a merger, one or more companies may merge with an existing
company or they may combine to form a new company. In India
mergers and amalgamations are used interchangeably.
• In the wider sense, merger includes consolidation,
amalgamation, absorption and takeover.

32. Steps IN M & A
• 1. Review of Objectives
• 2. Data for analysis
• 3. Analysis of information
• 4. Fixing price
• 5. Finding merger value
• Merger-Horizontal, Vertical, Conglomerate,
congeneric merger

33. Acquisitions and Take Overs
• Take over is the case where one company
obtains control over the management of
another company. Under both acquisition and
takeover, it is possible for a company to have
effective control over another company even
by holding minority ownership.
• takeover usually takes the form of hostile‘ or
forced‘ or unwilling acquisition and acquisition
happens at the instance and the willingness of
the company management and the
shareholders.

34. HOSILE TAKEOVERS
• Where in a merger one firm acquires another
firm without the knowledge and consent of
the management of the target firm, it takes
the form of a hostile takeover‘.
• Friend Takeover

35. Arguments in favour of M&A
• Synergy argument-value of the firm is much greater
• Growth argument
• Profitability argument
• Diversification argument
• Tax benefit
• Efficient cash use
• Cash flow
• Lower borrowing cost
• Market value
• Management control
• National interest
• Stockholder interest