Module 3 Merchant Banking: Nature of Services, structure of merchant banking firms.

Financial Markets: Capital Market, Money Market, Forex Market, Linkage between the markets What is merchant banking The set of functions and services rendered by merchant banker may be termed as merchant banking. Whose is a merchant banker? According to Random house dictionary Merchant bank is an organisation that underwrites securities for corporations, advices such clients on mergers, and is involved in the ownership of commercial ventures. These organisations are some times banks which are not merchants and merchants who are not banks and sometimes houses which neither merchants nor banks. According to Charles P Kindleberger Merchant bank is the development of banking from commerce which frequently encountered with prolonged intermediary stage known in England as merchant banking. According to SEBI A merchant banker has been defined as any person who is engaged in the business of issue management either making arrangements regarding selling, buying or subscribing to securities or acting as manager, consultant, adviser or rendering corporate advisory services in relation to such issue management. Functions of Merchant Banker Corporate counselling

Project counselling Pre-investment studies Capital restructuring Credit syndication and project finance Issue management and underwriting Portfolio management Working capital finance Acceptance credit and bill discounting Mergers, amalgamations and takeovers Venture capital Lease financing Foreign currency finance

Fixed Deposit brokering

Mutual funds Relief to sick industries

Project appraisal Merchant Bankers code of conduct Integrity Quality service Fair practice Responsible statement Best Advice Secrecy True and adequate information Prospectus preparation Allotment True market Regulatory Compliance

Financial Markets According to Brigham, The place where people and organisations wanting to borrow money are brought together with those having surplus funds is called a financial market. According to Jeff Madura Financial market is a market in which the financial assets ( securities) such as stocks and bonds can be purchased or sold. MY Khan says Financial markets are centres or arrangements that provide facilities for buying and selling of financial claims and services. Location of a financial Market A financial market may or may not have a physical location. For example the BSE is physically located in the Dalal Street. Alternatively the OTCEI has no fixed place and consists of brokers throughout the country who track prices through computer and telephonic lines. Intermediary functions Transfer of resources Enhancing income Productive usage of funds

Capital formation Pricing of financial assets Types of Markets Primary Markets Secondary Markets Money Markets Capital Markets Organised Markets OTC Markets Equity Markets Debt Markets Forex Markets Financial Services Markets Primary Market Deals with issue of new securities

Facilitates fresh issue Government and corporate sector issue securities to the investor Mobilise savings for the issuer Provides fresh or additional capital to the issuer Provides a ready market for trading in securities

The volume and magnitude of transactions in this market influences the primary market transactions Enhances liquidity for a companys securities which are already issued Lowers transaction costs as finding counterparty becomes easy

Money Market A Market where short term securities are dealt

Facilities short term financing Acts as a nerve centre for a countrys banking system

Provides a mechanism for liquidity adjustment Central bank responsible for regulating and controlling the money supply in the money markets Offers low capital risk since it is short term Consists of submarkets like banks and discount houses, bill markets, bullion market Instruments are commercial papers, certificates of deposits, treasury bills, treasury bonds, repurchase agreements, euro dollars, bankers acceptances Demand for funds

Supply of funds for long terms Ideal channel for flow of funds Fosters economic growth

Helps in price fixation OTC Markets Over the counter markets

Involves a telecommunication network like internet and telephone Ex: OTCEI There is no stock exchange in physical exchange

It happens through the personal dealings and may even involve brokers Equity Markets Markets in which the equities are dealt The equity shares are dealt All the stock exchanges in India and abroad are examples

Debt Markets The markets in which all debt instruments are dealt.

The securities traded are bonds, debentures, fixed deposits The secondary markets for debt is not much developed in our country Hence debt instruments face liquidity problems in India.

Not all the branches of banks can deal, but only specified branches permitted by RBI can deal with forex transactions. They can have NCNR Accounts. Insurance services Mutual funds Hire purchase Instalment purchase Leasing Venture capital Discounting Factoring

Forfeiting Fee Based / Advisory services Merchant banking Underwriting Credit Rating

Securitization Issue management Debit cards Credit cards Book building

Smart Cards Money Market Instruments Money market instruments are defined as debt instruments with a maturity of one year or less. Money Markets serve important functions: Transfer Funds (savers to borrowers) Serves as a pricing benchmark Facilitates monetary policy by allowing the FRB to control inflation by buying and selling money market instruments

Institutions can also borrow/invest using repurchase agreements or in the repo market. Typically overnight investments Collateralized.

The Eurodollar market has continued to grow rapidly because depositors receive a higher rate of return on a dollar deposit in the Eurodollar market than in the domestic market. Multinational banks are not subject to the same regulations restricting U.S. banks and because they are willing to accept narrower spreads between the interest paid on deposits and the interest earned on loans. Eurodollars Rates London interbank bid rate (LIBID) The rate paid by banks buying funds London interbank offer rate (LIBOR) The rate offered for sale of the funds Time deposits with fixed maturities Largest short term security in the world Foreign exchange market Features Market where foreign currencies are traded

Round the clock market Global market Large volume of transactions

Participants Individuals: tourists, migrants Firms: importers and exporters Banks: short position, long position, square position Governments/ monetary authorities: market intervention International agencies: lending Two tier market: First tier: ultimate customer and banker Second tier: between banks Classification of participants Non-banking entities: business transactions and hedging

Banks: foreign exchange dealers Arbitrageurs: profit seeking from variations in rates in different markets

Speculators: profit seeking from movements in exchange rates Types of markets Spot market Forward market Derivatives markets: currency futures and options Interlink between these markets