MERCHANT

BANKING
Merchants?


 Merchants are businessmen who trade in
commodities that they do not produce
themselves, in order to earn profit.
Bank and banking?

A bank is a financial institution licensed by a
government.

 Its primary activities include borrowing and
lending money.
Brief history

 Merchant banks , now so called, are in fact
the original “banks”. These were invented in
the middle ages by Italian grain merchants.

 Merchant banking grew and originated in
Europe , developed by Americans, Dutch,
Scottish traders, and professionalized in
Britain.
MB ?

 Merchant banking is the financial
intermediation that matches the entities
that need capital and those have capital.


 Merchant bankers act as intermediaries

between the issuers of capital and the
ultimate investors who purchase these
securities.
Functions of MB

 Management of debt and equity offerings
 Placement and distribution
 Corporate advisory services
 Project advisory services
 Loan syndication
 Providing venture capital and mezzanine
financing
Management of debt and equity
offerings
 This forms the main function of the merchant
banker. They assist the companies in raising
funds from the market.

The main areas of work in this regard include:
 Instrument designing
 Pricing the issue
 Registration of the offer document
 Underwriting support
 Marketing of the issue
 Allotment and refund
 Listing on stock exchanges

Placement and distribution

 The merchant banker helps in distributing
various securities like equity shares, debt
instruments, mutual fund products,
insurance products, commercial paper to
name a few.
 Private placement
 Direct placement

Corporate advisory services
 MBs offer customized solutions to their clients
financial problems.

The following are the main areas in which their
advice is sought:
 Financial restructuring
 Refinancing alternatives
 Sources of funds
 Rehabilitation and turnaround management
 Design revival package (for sick units)
 Risk management

Project advisory services
 MBs help their clients in various stages of the
project undertaken by the clients.
 They assist them in conceptualizing the
project idea in the initial stage.
 Once the idea is formed, conduct feasibility
studies to examine the viability of the
proposed project.
 They also assist the client in preparing
different documents like the detailed
project report.
Loan syndication
 MBs arrange to tie up loans for their clients. This
takes place in a series of steps.
 Firstly they analyze the pattern of the client’s
cash flows, based on which the terms of
borrowings can be defined.
 Then the merchant banker prepares a detailed
loan memorandum, which is circulated to
various banks and financial institutions and they
are invited to participate in the syndicate.
 The banks then negotiate the terms of lending on
the basis of which the final allocation is done.
Providing venture capital
mezzanine financing


 MBs help companies in obtaining venture
capital financing for financing their new and
innovative strategies.
Registration of merchant bankers
with SEBI
 The applicant should be a body corporate.
 The applicant should not carry on any business other
than those connected with the securities market.
 The applicant should have necessary infrastructure like
office space, equipment, manpower etc.
 The applicant must have at least two employees with
prior experience in merchant banking
 Any associate company, group company, subsidiary or
interconnected company of the applicant should not
have been a registered merchant banker.
 The applicant should not have been involved in any
securities scam or proved guilt for any offence.
 The applicant should have a minimum net worth of Rs
5 crores.
SEBI GUIDELINES FOR MB
 Registration
 Grant of certificate
 Capital adequacy requirement
 Fee
 Code of conduct
 Registration
 Maximum number of lead managers
 Due diligence certificate
 Submission of documents
 Acquisition of shares
 Disclosure to SEBI
 Action in case of default

registration

 Merchant bankers required compulsory
registration with the SEBI to carry out their
activities.
GRANT OF CERTIFICATE
 SEBI grants certificate of registration to
applicant if it fulfills all the conditions like:
 It is a body corporate and is not a NBFC
 It has got necessary infrastructure to support
the business activity
 It has appointed at least two qualified and
experienced (in merchant banking) persons
 Its registration is in the general interest of
investors

Capital adequacy requirement


 SEBI grants recognition to only those merchant
banker who have paid up capital and free
reserve of minimum Rs 1 crore

fee

A merchant banker has to pay a registration
fee of Rs 5 lakh and renewal fees of Rs 2.5
lakh every three years from the fourth year
from the date of registration.
CODE OF CONDUCT

 Every merchant banker has to abide by the
code of conduct, so as to maintain highest
standard of integrity and fairness, quality of
services, due diligence and professional
judgment in all his dealings with the clients
and other people.
Maximum number of lead
managers
 For an issue of size less than Rs. 50 crores,
two lead managers appointed
 50 to 100 crores and 100 to 200 crores, the
maximum permissible lead managers are
three and four respectively.
 A company can appoint five and five or more
(as approved by SEBI) lead managers in case
of issue sizes between Rs 200 to Rs 400
crores respectively.
Public issue management
 Capital market

Primary market Secondary

Listing
Method

public Quantum Trading

right Cost
Settlement and clearing

private placement
definition
 The management of issues for raising funds
through various types of instruments by
companies is known as ‘issue management’.

 The function of capital issue management in
India is carried out by merchant bankers
who have the requisite professional skill and
competence.
“merchant banker”
 “any person who is engaged in the business of
issue management either by making
arrangement regarding selling, buying or
subscribing to securities as manager,
consultant , advisor or rendering corporate
advisory services to such issue management”



SEBI (merchant banker) rules and
regulations, 1992
Categories of securities issue


 Public issue
 Right issue
 Private placement
Public issue of securities


 “When capital funds are raised through the
issue of a prospectus, it is called ‘ public
issue of securities’ it is the most common
method of raising funds in the capital
market”
Right issue
 When shares are issued to the existing
shareholders on a privileged basis, it is
called as ‘ rights issue’.
 The existing shareholders have pre- emptive
right to the subscribe to the new issue of
shares.
 Rights shares are offered as additional issues
by corporate to mop up further capital
funds.
 Such shares are offered in proportion to the
capital paid – up on the shares held by them
at the time of offer.
Private placement
 When the issuing company sells securities
directly to the investors, especially
institutional investors, it takes the form of
private placement.
 In this case, no prospectus is issued, since it is
presumed that the investors have sufficient
knowledge and experience and are capable
of evaluating the risks of the investment.

Private placement
 Raising of capital via private rather than
public placement. The results is the sale of
securities to a relatively small number of
investors.
 “The sale of a security to one buyer or a few
buyers, as opposed to offering the security
to the public through a group of dealers”
 Investor involved in private placements are
usually large banks, mutual funds, insurance
companies, and pension funds.

Direct placement


 Sellinga security issue to one or several large
investors (usually institutional investors)
rather than offering it to the public through
broker – dealers.
ABOUT PUBLIC ISSUE
 Corporate may raise capital in the primary
market by way of an initial public offer,
right issues or private placement.
 IPO – initial public offer is the selling of
securities to the public in the primary
market.
 Initial public offering can be made through
the fixed price method, book building
method or both.
Book building
 Book building is essentially a process by
companies raising capital through public
offerings- both IPO or follow – on public offers
to aid price and demand discovery.
 It is a mechanism where, during the period for
which the book for the offer is open, the bids
are collected from investors at various prices,
which are within the price band specified by the
issuer.
 The process is directed towards both the
institutional as well as the retail investors.
 The issue price is determined after the bid closure
based on the demand generated in the process.

The book building process
 The issuer who is planning an offer nominates
lead merchant as book runners.
 The issuer specifies the number of securities
to be issued and the price band for the bids.
 The issuer also appoints syndicate members
with whom orders are to be placed by the
investors.
 The syndicate members input the orders into
an ‘electronic book’. This process is called
‘bidding’ and is similar to open auction.
 The book normally remains open for a period of 5
days.
 Bids have to be entered within the specified price
band.
 Bids can be revised by the bidders before the book
closes.
 On the close of the book building period, the book
runners evaluate the bids on the basis of the
demand at various price levels.
 The book runners and the issuer decide the final
price at which the securities shall be issued.
 Generally, the number of shares are fixed, the
issue size gets frozen based on the final price
per share.
 Allocation of securities is made to the successful
bidders. The rest get refund orders.
ISSUE TYPE OFFER PRICE DEMAND PAYMENT RESERVATIONS

FIXED PRICE Price at which the Demand for the 100% advance 50% of the shares
ISSUES securities are securities offered is payment is required offered are reserved
offered and would known only after to be made by the for application
be allotted is made the closure of the investors at the below Rs.1 lakh
known in advance issue. time of application. and the balance for
to the investors. higher amount
applications.

BOOK BUILDING A 20% price band Demand for the 10% 50% of shares
ISSUES is offered by the securities offered advancepayment is offered are reserved
issuer within which and at various price required to be for QIBs, 35% for
investors are is available on a made by the QIBs small investors and
allowed to bid and real time basis on along with the balance for all other
the final price is the exchange application while investors.
determined by the website during other categories of
issuer only after bidding period. investors have to
closure of the pay 100% advance
bidding. along with the
application.
Activities involved in public issue
management


 Pre - issue management
 Post – issue management

Pre – issue management
 Signing of MOU
 Obtaining appraisal note
 Optimum capital structure
 Convening meeting
 Appointment of financial intermediary
 Preparing documents
 Due diligence certificate
 Submission of collection centers
 Finalization of collection centers
 Filing with ROC
 Launching the issue
 Promoters’ contribution
 Issue closure
Post – issue management
 Finalizationof basis of allotment.
 Dispatch of shares certificates
 Advertisement.
Public company vs. private
company
 Minimum paid-up capital : a company to be
incorporated as a private company must have a
minimum paid – up capital of Rs 1,00,000
whereas a public company must have a
minimum paid – up capital of Rs 5,00,000.
 Minimum number of members : minimum number
of members required to form a private company
is 2, whereas a public company requires at least
7 members.
 Maximum number of members : maximum number
of members in a private company is restricted to
50, there is no restriction of maximum number
of members in a pubic company.

 Transferability of shares : there is complete
restriction on the transferability of the shares of
a private company through its article of
association, whereas there is no restriction on
the transferability of the shares of a public
company.
 Issue of prospectus : a private company is
prohibited from inviting the public for
subscription of its shares, i.e. private company
cannot issue prospectus, whereas a public
company is free to invite public for subscription
i.e. a public company can issue a prospectus.
 Number of directors : a private company may have
2 directors to manage the affairs of the
company, whereas a public company must have
at least 3 directors.
 Consent of directors : there is no need to give the
consent by the directors of a private company,
whereas the directors of a public company must
have file with the registrar a consent to act as
director of the company.
 Qualification shares : the directors of a private
company need not sign an undertaking to
acquire the qualification shares, whereas the
directors of a public company are required to
sign an undertaking to acquire the qualification
shares of the public company.
 Commencement of business : a private company
can commence its business immediately after its
incorporation, whereas a private company
cannot start its business until a certificate to
commencement of business is issued to it.
 Shares warrants : a private company cannot
issue share warrants against its fully paid
shares, whereas a public company can issue
share warrants against its fully paid up
shares.
 Further issue of shares : a private company
need not offer the further issue of shares to
its existing share – holders, whereas a public
company has to offer the further issue of
shares to its existing share - holders as right
shares. further issue of shares can only be
offer to the general public with the approval
of the existing share – holders in the general
meeting of the share – holders only.
 Statutory meeting : a private company has no
obligation to call the statutory meeting of
the member, whereas of public company
must call its statutory meeting and file
statutory report with the register of
companies.
 Quorum : the quorum in the case of a private
company is TWO members present
personally, whereas in the case of a public
company FIVE members must be present
personally to constitute quorum. However
the article of association may provide and
numbers more than the required under the
act.
 Managerial remuneration : total managerial
remuneration in the case of a public
company cannot exceed 11% of the net
profits, and in case of inadequate profits a
maximum of Rs 87,500 can be paid. Whereas
these restrictions do not apply on a private
company.
 Special privileges : a private company enjoys
some privileges, which are not available to a
public company.
INTERNATIONAL CAPITAL MARKET
history
 The genesis of the present international
markets can be traced back to 1960 , when
there was a real demand for high quality
dollar - denominated bonds from wealthy
Europeans (and others) who wished to hold
their assets outside their home countries or
in currencies other than their own.

 Until1970 , the international capital market
focused on debt financing and the equity
finances were raised by the corporate
entities primarily in the domestic markets.
 This was due to the restrictions on cross –
borders equity investments prevailing until
then in many countries.

MARKET CLASSIFICATION
 The markets were classified into :
 Euro markets
 American markets
 other foreign markets.

GDRs
 GDRs stands for global depository receipts.
 GDR is a negotiable instrument which
represents publicly traded local – currency
equity shares.
 GDR is any instrument in the form of a
depository receipts or certificate created by
the overseas depository bank outside India
and issued to non – resident investor against
the issue of ordinary shares or foreign
currency convertible bonds of the issuing
company.

A typical GDR is denominated in US dollars
whereas the underlying shares would be
denominated in the local currency of the
issuer.

ADRs
 ADR is a dollar denominated negotiable
certificate, it represents a non –US company
publicly traded equity.

 It was devised in the 1920 to help Americans
invest in overseas securities and to assist
non – US companies wishing to have their
stock traded in the American markets.

Thank you