Merchant Bank Underwriting

1. By
R.Harika
Y.Rekha
Runachand
Paramkusa

2.  Introduction
 History
 Merchant bank in India
 Underwriting

3.  Merchant bank is a financial institution that
primarily deals with commercial banking needs of
international finance, long term loan for companies
provides consulting services and underwriting of
stock.
 It also acts as an intermediary between the issuers
and the ultimate purchasers of the securities in the
primary market.
 It has been statutory brought with in the framework
of the Securities and Exchange Board of India

4.  Any person who is engaged in the business of issue
management either by making arrangements
regarding selling, buying or subscribing to
securities as manager consultant, advisor or
rendering corporate advisory services in relation to
such issue management.

5.  Merchant banking started in Italy in late
medieval times
 Reached in France during the seventeenth
century
 Italian merchant bankers introduces merchant
banking into England in eighteenth century
 European bankers developed Merchant
banking in USA
 In 1972, merchant banking started in South
Africa

6.  Foreign bank National Grindlays Bank started
merchant banking in 1967
 Then Citibank in 1970 and State Bank of India in
1972 started Merchant banking
 Later ICICI setup its merchant banking division
followed by Bank of India, Bank of Baroda etc..

7.  SBI Capital Markets Ltd.
 Punjab National Bank
 Bank of Maharashtra
 Karur Vysya bank Ltd.
 ICICI Securities Ltd.
 Axis Bank Ltd.
 Reliance Securities Ltd.

8.  Goldman Sachs(India) Securities Pvt. Ltd.
 Morgan Stanley India company Pvt. Ltd.
 Barclays Securities (India) Pvt. Ltd
 Bank of America
 Citigroup Global Markets India Pvt. Ltd.

9. • Issue
Management
• Advisor
• Consultant
• Manager
• Underwriter
• Portfolio
manager
• Advisor
• Consultant
• Co manager
• Underwriter
• Portfolio
Manager
• Advisor
• Consultant
• Underwriter
• Advisor
• Consultant
Category - 1 Category - 2 Category - 3 Category - 4

10. Application
for grant
certificate
Information
furnishing,
clarification
and
personal
Application
consideration
Granting
the
certificate
Payment
of fees

11. MERCHANT
BANKER
PUBLIC
SECTOR
COMMERCIAL
BANKS :- 24
FINANCIAL
INSTITUTION :- 6
STATE
INSTITUTION :- 4
PRIVATE
SECTOR
BANKS :- 10
FINANCE &
INVESTMENT :-
231
LEASING
INTERNATIONAL
BANKER :- 10
The M.B. Registered with SEBI
classified according to the category :-

12.  Project counselling
 Loan syndication
 Managers to issue
 Underwriting
 Portfolio Management
 Advising on mergers and takeovers
 Offshore finance

13. A merchant bank will be registered by SEBI in different
categories on the basis of capital adequacy norms in
terms of its “Net worth” .
Category Minimum amount
Category 1 5,00,00,000
Category 2 50,00,000
Category 3 20,00,000
Category 4 NIL

14.  A ‘MB’ has to pay a fee at the time of original
registration
 Category I Rs. 10 Lakhs
 Category II Rs. 5 Lakhs
 Category III Rs. 1 Lakh
 Category IV Rs. 5000
 The certificate of registration granted under
regulations shall be
valid for a period of three years from the date of
its issue to the applicant.
 The certificate of renewal granted under regulation
9, shall be valid for a period of three years from the
date of its issue to the applicant.

15.  Underwriting is a guarantee given by the
underwriters to take up whole or part of the issue of
securities not subscribed by the public.
 The agreement between the issuing company and
the financial intermediary, called the underwriter,
where by sale of certain quantum of securities is
guaranteed for the issuing company, is known as
underwriting agreement.

16. The objectives of the Underwriting are presented
below:
 It guarantees the sale of securities at a given price.
 It facilitates the provision of money during the
financial crisis of the company.
 The Underwriter helps the new company in its
reorganization.


17.  The following are the salient features of an underwriting
agreement:
 The Underwriter may not be able to sell the issues in
some situations. The unsold securities are distributed
among the underwriters in the agreed proportion.
 The offering price must be maintained for the successful
distribution of the securities.
The company makes a delivery of the securities to the
manager and receives the payment on the closing date

18.  At the termination of the underwriting, the manager
must make the final accounting for each underwriter.
He should also remit the commissions and accounts
for the expenditure incurred.
 Underwriting is insurance for the new securities of
the public. It is one of the methods of marketing
securities. The other methods are:
 Prospectus method, where the capital is raised by this
method is very prevalent in India. The distribution
expenses may be substantially saved.

19.  Offer for sale, where the sales are sold largely to the
brokers/issue houses. The issue house/brokers again
sell the shares to the public at a fixed price. This
method saves the company the cost and the trouble
of selling the shares to the public. Here a Third
party takes over the responsibility.
 Private placement, where the funds are raised in the
primary market by selling the security issue to one
investor or a small group of investors without
resorting to underwriting. The cost of the issue is
minimal. It is the most effective way of procuring
the long term funds. There is no need to follow the
statutory formalities. The offer is made to select a
group of known persons.

20.  Firm underwriting
 Sub underwriting
 Joint underwriting
 Syndicate underwriting

21.  Adequate funds
 Expert advice
 Enhanced good will
 Assurance to investors
 Better marketing
 Benefits to buyers
 Price stability

22.  Another important intermediary in the new issue
market is the underwriters to the Issue of capital,
who agrees to take up securities which are not fully
subscribed.
 Underwriters make a commitment to get the issue
subscribed either by others or by themselves
 Underwriters are appointed by the issuing
companies in consultation with the Lead Manager or
Merchant Banker to the issue.
 To act as an Underwriter, a certificate of
Registration must be obtained from SEBI, after
payment of prescribed fee to SEBI.

23.  Make all efforts to protect the interests of investors
 Maintain high standards of integrity in the conduct
of business
 Ensure that adequate disclosures are made to the
investors to enable them make an informed decision.
 Clearly demarcate the responsibilities of various
intermediaries appointed by it so as to avoid any
conflict in their job description.
 Ensure that SEBI is promptly informed about any
legal action initiated against it.

24.  Underwriting commission is payable on the basis by
the issuer corporation on the basis of commission
rates prescribed by SEBI
a) Equity shares 2.5% 2.5%
b) Preference,
Convertible and non
convertible
debentures
Up to Rs 5L 2.5% 1.5%
Exceeding Rs 5L 2% 1%
On amounts in
developing the
underwriter
On amounts
Subscribed by the
public

25.  Depending on the type of commitment required by
the issuing company, several kinds of underwriting
agreements are formed, each with its own level of
risk:
 Firm Commitment:
Firm commitment is the most commonly used type
of underwriting contract. The underwriter agrees to
buy securities from the issuing corporation and pay
the proceeds to the company. Any losses that occur
due to unsold shares are prorated amongst the
participating underwriting firms according to their
proportional participation.

26.  Best Efforts:
Best efforts underwriting allows the firm (or
underwriting syndicate) to act as agent for the
issuing corporation and limits the responsibility of
that firm to the shares it is able to sell. All unsold
shares are absorbed by the issuer.

27.  All or None:
All or none underwriting allows the issuing
corporation to contract for the sale of all shares. If
any shares remain at the end of the underwriting
process, the underwriting is cancelled. Underwriters
cannot deceive investors by stating that all of the
securities in the underwriting have been sold if it is
not true.
 Standby:
Stand by underwriting allows an underwriting firm
(or syndicate) to wait in the wings in an additional
offering for any unused pre-emptive rights that are
not executed by the company’s current shareholders.
The underwriter will purchase the unused rights,
exercise them and sell the shares.

28.  According to the SEBI guidelines the following
factors are to be fulfilled:
 The minimum requirement of 90% subscription is
mandatory for each issue of capital to the public.
This clause is applicable for both public and rights
issue.
 If the company is not able to receive the issued
amount from the public subscription and accepted
development from the underwriters, then the
company refunds the amount.
 The underwriting agreement should be filed with the
stock exchanges.

29.  The registration number of the underwriter is to be
quoted in all correspondence with the SEBI,
government authorities and clients.
 The SEBI may issue warning letters or penalty
advances by which the underwriters would be
forewarned in respect of their omissions
 In order to standardize the legal relationship
between the issuing company and the underwriters,
the SEBI has formulated the model underwriting
agreement.
 The total underwriting obligations under all the
agreements should not exceed twenty times the
network of the underwriter

30. http://www.ukessays.co.uk/essays/finance/role-of-underwriters-and-
merchant-bankers.php