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Setting up an Investment
Bank as a Subsidiary/JV
By-Rizwan Ansari
Potential
Number of SMEs
India- 5crore
Kerala- 2 lakh
Small and Medium enterprises (SMEs) employ more than 40% of India’s
workforce yet they contribute only 17% to the GDP
Data of rated SMEs has been gathered from SEBI registered rating agencies
• CRISIL
• ONICRA (Onida Individual credit rating agency of India)
• SMERA
• Brickwork
Supply chain
inefficiencies
Increasing
domestic and
global
competition
Working
capital
shortage
Uncertain
market
scenario
Technological
Obsolescence
Problems faced by SMEs
Manufacturing Enterprises- Investment in Plant & Machinery
Description INR
Micro Enterprises Upto Rs 25 Lakh
Small Enterprises Above Rs 25 Lakh & upto Rs 5 crore
Medium Enterprises Above Rs 5 crore & upto Rs 10 crore
Service Enterprises- Investment in Equipments
Description INR
Micro Enterprises Upto Rs 10 Lakh
Small Enterprises Above Rs 10 Lakh & upto Rs 2 crore
Medium Enterprises Above Rs 2 crore & upto Rs 5 crore
According to MSME Act 2006, SMEs are classified in the following ways:
-BSE and NSE had launched SME exchanges BSESME and NSE Emerge
respectively for the SMEs to trade exclusively on these exchanges in 2012.
-The benefits of trading on these exchanges is
Easy access to capital
Enhanced Visibility &
Prestige
Enables
liquidity for
Shareholders
Employee
Incentives
Encourages
Growth
Moving to the
main exchange
SME Exchanges and Benefits
Kerala TamilNadu AndhraPradesh Karnataka Total
CRISILSMEs 47 134 67 47 295
NSIC-CRISILMSEs 34 337 - - 371
Brickwork-SMERated - 17 12 92 121
NSIC-BrickworkRated - 12 6 5 23
Brickwork-MSERated 2 121 60 87 270
18 185 - - 203
33 128 58 104 323
134 934 203 335 1606
439 - - -
573 934 203 335 2045
SMERA
Total
ONICRA
RATINGAGENCY
CRISIL
Brickwork
UnratedSMEs(Ref-VCS)
RatedSMEs
Potential
Competitor Analysis
The following are the findings when looking towards competitor analysis:
• A merchant bank needs to be a SEBI registered Category 1 merchant bank
• More than just an Investment bank
• Aryaman Financial Services Pvt Ltd first Merchant bank to manage an SME IPO in the
country
• Small team of people in each merchant banks
• Most of the Investment Banks are located in Mumbai
• Hem Securities Pvt Ltd has managed the most number of SME IPOs in a year (10)
• IPO expenses are being reimbursed by many states now most notably Rajasthan and
Gujarat
• Keynote Corporate Services Limited has been the lead manager for various SMEs
listed on NSE Emerge
As of now, no SME from Kerala has been listed either on BSE SME or
NSE Emerge.
This actually limits the capacity of SMEs in the state to expand and raise
more capital.
Also, most of the SMEs which have been listed till now have been
associated with an Investment Bank mostly from Mumbai.
There is no investment bank from South India which has done an IPO
for companies across the country leave alone SMEs.
So, there is a tremendous scope in order for SMEs from Kerala to go for
listing on BSESME or NSE Emerge and a merchant bank from any of
these states might just add a feel good factor to these SMEs by being
their lead manager.
Conclusions from Competitor Analysis
Target Clientele
• CRISIL Criteria (Example)
CRISIL SME Rating Scale
CRISIL SME Rating Definition
SME 1 Highest
SME 2 High
SME 3 Above Average
SME 4 Average
SME 5 Below Average
SME 6 Inadequate
SME 7 Poor
SME 8 Default
NSIC-CRISIL Rating Scale
NSIC-CRISIL Rating Matrix Financial Strength
High Moderate Low
Performance
Capability
Highest SE 1A SE 1B SE 1C
High SE 2A SE 2B SE 2C
Moderate SE 3A SE 3B SE 3C
Weak SE 4A SE 4B SE 4C
Poor SE 5A SE 5B SE 5C
Kerala Tamil Nadu Andhra Pradesh Karnataka Total
CRISIL SMEs 47 134 67 47 295
NSIC-CRISIL MSEs 34 337 - - 371
Brickwork-SME Rated - 17 12 92 121
NSIC-Brickwork Rated - 12 6 5 23
Brickwork-MSE Rated 2 121 60 87 270
18 185 - - 203
33 128 58 104 323
134 934 203 335 1606
439 - - -
573 934 203 335 2045
Kerala Tamil Nadu Andhra Pradesh Karnataka Total
CRISIL SMEs 35 110 53 43 241
NSIC-CRISIL MSEs 25 257 - - 282
Brickwork-SME Rated - 14 12 81 107
NSIC-Brickwork Rated - 9 0 3 12
Brickwork-MSE Rated 1 106 50 77 234
13 116 - - 129
17 42 8 17 84
91 654 123 221 1089
439 - - -
530 654 123 221 1528Total
Potential
Rated SMEs
Rated SMEs
TargetClientele
RATING AGENCY
CRISIL
Brickwork
ONICRA
SMERA
SMERA
Total
ONICRA
RATING AGENCY
CRISIL
Brickwork
Unrated SMEs(Ref- VCS)
Unrated SMEs(Ref- VCS)
Target Clientele
Target Clientele Results
• 91 out of the 134 potential SMEs in Kerala have more than average
financial strength and performance capability.
• Out of a pool of 1606 potential SMEs for 4 states our target clientele
comes down to 1089 small and medium enterprises.
• 70% of our potential SMEs turn out to be our esteemed target base.
Processes
Eligibility criteria for SMEs on BSESME & NSE Emerge
Criteria BSE Requirements NSE Requirements
Incorporation Companies Act 1956 or Companies Act 2013 Companies Act 1956 or Companies Act 2013
Post-Issue Paid up capital (Face
Value)
Minimum ₨ 3 crores
Maximum ₨ 25 crores
Minimum No requirement
Maximum ₨ 25 crores
Tangible Net worth Minimum ₨ 3 crores No requirement
Net Tangible assets Minimum ₨ 3 crores No requirement
Profit track record Distributable net profit for 2 out of 3 financial years or net worth
of minimum ₨ 5 crores
Track record of at least 3 years, positive cash accruals
for at least 2 financial years and a positive net worth
Other Listing Conditions Website, Demat trading, Shall not have been referred to BIFR
and shall not have a winding up petition
Shall not have been referred to BIFR, shall not have a
winding up petition and no disciplinary action faced
for 3 years
Initial Cost
The costs involved will majorly comprise of
• Licensing cost (application fee, initial and final registration), compensation to be
paid to employees
• Annual fee
• Office rental (considering Mumbai as the location)
• Communication, Systems support (hardware and software)
• Travel expenses
• Administrative
• Overhead expenses
The income will be from either IPO (underwriting) or any other consultancy
charge which could be M&A, Private equity, Financial advisory, etc.
CEO
Analyst/Sr.
Analyst
Business
Development
Manager-1
Business
Development
Manager-2
Compliance
Officer
Hierarchical Level
Risks & Opportunities
Risks:
• Being the first merchant bank from South India will pose new
and dynamic challenges
• We will not have anyone to take their expertise from
regarding getting into Investment banking as far as Southern
India is considered
• Lack of Opportunities or openness among SMEs to grow
ahead and expand in South India
• Huge Initial Capital required just to obtain the requisite
Category-1 merchant banking license
• Too many competitors even in the SME space as listed in
competitors analysis
• Investment Banking would require huge efforts in business
development, considering no SME from Kerala has been
listed till now
Opportunities:
• To become the first Investment bank from South India and set
an example for others
• To help SMEs grow at a faster pace than usual and thereby
make Kerala’s Industrial units compete on a national as well
as global scale
• To diversify business and enter into unchartered territory
• To make huge profits considering that an IPO of an SME can
give a Merchant bank anything in the range of ₨ 40 lakhs- ₨
1.4 crores and more
• Grow bigger by getting other Non SME firms listed on the
exchanges
• Provide a direction to small enterprises by assisting them in
M&A, financial advisory and others
• There are many conglomerates like Essar Group which started
as an SME and have made it big, so there lies an opportunity
for SMEs in Kerala
Conclusion
• It is time for these enterprises to jump at the opportunity thrown by BSE SME or NSE
Emerge.
• At a time when SEBI and government has relaxed the norms for getting listed on the
exchanges, the SMEs will look forward to get in more capital to expand their business and
go to the unchartered territories.
• An opportunity for new investment banks which are ready to do an IPO of a lower issue
size.
• Also, considering that there are no SMEs listed as of now from Kerala on the SME exchange
despite the fact that Kerala has nearly 2 lakh SMEs, there lies a market which we can tap
into and make substantial profit.
• Even considering the expenses on a higher scale the Investment bank still manages to break
even in 4 years nearly.
• It is high time we jump the ship and carve out a sea of opportunities which have been lying
unblemished for years.
• KITCO is an established name in India with a great reputation and it won’t be difficult for
them to make a mark as an Investment Bank.

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Setting up an Investment Bank

  • 1. Setting up an Investment Bank as a Subsidiary/JV By-Rizwan Ansari
  • 2. Potential Number of SMEs India- 5crore Kerala- 2 lakh Small and Medium enterprises (SMEs) employ more than 40% of India’s workforce yet they contribute only 17% to the GDP Data of rated SMEs has been gathered from SEBI registered rating agencies • CRISIL • ONICRA (Onida Individual credit rating agency of India) • SMERA • Brickwork
  • 4. Manufacturing Enterprises- Investment in Plant & Machinery Description INR Micro Enterprises Upto Rs 25 Lakh Small Enterprises Above Rs 25 Lakh & upto Rs 5 crore Medium Enterprises Above Rs 5 crore & upto Rs 10 crore Service Enterprises- Investment in Equipments Description INR Micro Enterprises Upto Rs 10 Lakh Small Enterprises Above Rs 10 Lakh & upto Rs 2 crore Medium Enterprises Above Rs 2 crore & upto Rs 5 crore According to MSME Act 2006, SMEs are classified in the following ways:
  • 5. -BSE and NSE had launched SME exchanges BSESME and NSE Emerge respectively for the SMEs to trade exclusively on these exchanges in 2012. -The benefits of trading on these exchanges is Easy access to capital Enhanced Visibility & Prestige Enables liquidity for Shareholders Employee Incentives Encourages Growth Moving to the main exchange SME Exchanges and Benefits
  • 6. Kerala TamilNadu AndhraPradesh Karnataka Total CRISILSMEs 47 134 67 47 295 NSIC-CRISILMSEs 34 337 - - 371 Brickwork-SMERated - 17 12 92 121 NSIC-BrickworkRated - 12 6 5 23 Brickwork-MSERated 2 121 60 87 270 18 185 - - 203 33 128 58 104 323 134 934 203 335 1606 439 - - - 573 934 203 335 2045 SMERA Total ONICRA RATINGAGENCY CRISIL Brickwork UnratedSMEs(Ref-VCS) RatedSMEs Potential
  • 7. Competitor Analysis The following are the findings when looking towards competitor analysis: • A merchant bank needs to be a SEBI registered Category 1 merchant bank • More than just an Investment bank • Aryaman Financial Services Pvt Ltd first Merchant bank to manage an SME IPO in the country • Small team of people in each merchant banks • Most of the Investment Banks are located in Mumbai • Hem Securities Pvt Ltd has managed the most number of SME IPOs in a year (10) • IPO expenses are being reimbursed by many states now most notably Rajasthan and Gujarat • Keynote Corporate Services Limited has been the lead manager for various SMEs listed on NSE Emerge
  • 8. As of now, no SME from Kerala has been listed either on BSE SME or NSE Emerge. This actually limits the capacity of SMEs in the state to expand and raise more capital. Also, most of the SMEs which have been listed till now have been associated with an Investment Bank mostly from Mumbai. There is no investment bank from South India which has done an IPO for companies across the country leave alone SMEs. So, there is a tremendous scope in order for SMEs from Kerala to go for listing on BSESME or NSE Emerge and a merchant bank from any of these states might just add a feel good factor to these SMEs by being their lead manager. Conclusions from Competitor Analysis
  • 9. Target Clientele • CRISIL Criteria (Example) CRISIL SME Rating Scale CRISIL SME Rating Definition SME 1 Highest SME 2 High SME 3 Above Average SME 4 Average SME 5 Below Average SME 6 Inadequate SME 7 Poor SME 8 Default
  • 10. NSIC-CRISIL Rating Scale NSIC-CRISIL Rating Matrix Financial Strength High Moderate Low Performance Capability Highest SE 1A SE 1B SE 1C High SE 2A SE 2B SE 2C Moderate SE 3A SE 3B SE 3C Weak SE 4A SE 4B SE 4C Poor SE 5A SE 5B SE 5C
  • 11. Kerala Tamil Nadu Andhra Pradesh Karnataka Total CRISIL SMEs 47 134 67 47 295 NSIC-CRISIL MSEs 34 337 - - 371 Brickwork-SME Rated - 17 12 92 121 NSIC-Brickwork Rated - 12 6 5 23 Brickwork-MSE Rated 2 121 60 87 270 18 185 - - 203 33 128 58 104 323 134 934 203 335 1606 439 - - - 573 934 203 335 2045 Kerala Tamil Nadu Andhra Pradesh Karnataka Total CRISIL SMEs 35 110 53 43 241 NSIC-CRISIL MSEs 25 257 - - 282 Brickwork-SME Rated - 14 12 81 107 NSIC-Brickwork Rated - 9 0 3 12 Brickwork-MSE Rated 1 106 50 77 234 13 116 - - 129 17 42 8 17 84 91 654 123 221 1089 439 - - - 530 654 123 221 1528Total Potential Rated SMEs Rated SMEs TargetClientele RATING AGENCY CRISIL Brickwork ONICRA SMERA SMERA Total ONICRA RATING AGENCY CRISIL Brickwork Unrated SMEs(Ref- VCS) Unrated SMEs(Ref- VCS) Target Clientele
  • 12. Target Clientele Results • 91 out of the 134 potential SMEs in Kerala have more than average financial strength and performance capability. • Out of a pool of 1606 potential SMEs for 4 states our target clientele comes down to 1089 small and medium enterprises. • 70% of our potential SMEs turn out to be our esteemed target base.
  • 13. Processes Eligibility criteria for SMEs on BSESME & NSE Emerge Criteria BSE Requirements NSE Requirements Incorporation Companies Act 1956 or Companies Act 2013 Companies Act 1956 or Companies Act 2013 Post-Issue Paid up capital (Face Value) Minimum ₨ 3 crores Maximum ₨ 25 crores Minimum No requirement Maximum ₨ 25 crores Tangible Net worth Minimum ₨ 3 crores No requirement Net Tangible assets Minimum ₨ 3 crores No requirement Profit track record Distributable net profit for 2 out of 3 financial years or net worth of minimum ₨ 5 crores Track record of at least 3 years, positive cash accruals for at least 2 financial years and a positive net worth Other Listing Conditions Website, Demat trading, Shall not have been referred to BIFR and shall not have a winding up petition Shall not have been referred to BIFR, shall not have a winding up petition and no disciplinary action faced for 3 years
  • 14. Initial Cost The costs involved will majorly comprise of • Licensing cost (application fee, initial and final registration), compensation to be paid to employees • Annual fee • Office rental (considering Mumbai as the location) • Communication, Systems support (hardware and software) • Travel expenses • Administrative • Overhead expenses The income will be from either IPO (underwriting) or any other consultancy charge which could be M&A, Private equity, Financial advisory, etc.
  • 16. Risks & Opportunities Risks: • Being the first merchant bank from South India will pose new and dynamic challenges • We will not have anyone to take their expertise from regarding getting into Investment banking as far as Southern India is considered • Lack of Opportunities or openness among SMEs to grow ahead and expand in South India • Huge Initial Capital required just to obtain the requisite Category-1 merchant banking license • Too many competitors even in the SME space as listed in competitors analysis • Investment Banking would require huge efforts in business development, considering no SME from Kerala has been listed till now Opportunities: • To become the first Investment bank from South India and set an example for others • To help SMEs grow at a faster pace than usual and thereby make Kerala’s Industrial units compete on a national as well as global scale • To diversify business and enter into unchartered territory • To make huge profits considering that an IPO of an SME can give a Merchant bank anything in the range of ₨ 40 lakhs- ₨ 1.4 crores and more • Grow bigger by getting other Non SME firms listed on the exchanges • Provide a direction to small enterprises by assisting them in M&A, financial advisory and others • There are many conglomerates like Essar Group which started as an SME and have made it big, so there lies an opportunity for SMEs in Kerala
  • 17. Conclusion • It is time for these enterprises to jump at the opportunity thrown by BSE SME or NSE Emerge. • At a time when SEBI and government has relaxed the norms for getting listed on the exchanges, the SMEs will look forward to get in more capital to expand their business and go to the unchartered territories. • An opportunity for new investment banks which are ready to do an IPO of a lower issue size. • Also, considering that there are no SMEs listed as of now from Kerala on the SME exchange despite the fact that Kerala has nearly 2 lakh SMEs, there lies a market which we can tap into and make substantial profit. • Even considering the expenses on a higher scale the Investment bank still manages to break even in 4 years nearly. • It is high time we jump the ship and carve out a sea of opportunities which have been lying unblemished for years. • KITCO is an established name in India with a great reputation and it won’t be difficult for them to make a mark as an Investment Bank.