Merchant Banking

Merchant Banking-An Overview

Companies raise capital by issuing securities in the market. Merchant bankers act as intermediaries b\w the issuers of capital and the ultimate investors who purchase these securities.

Merchant banking is a function that facilitates the low of capital in the market.

Definition

Ministry of Finance: 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 service in relation to such issue management

Merchant Banking in India

Grindlays Banks-1967

Management of capital issue Production planning, system design to market research Management consultancy

Citibank-1970 SBI-1972

Services rendered

Organising finance for investment in projects Assistance in financial management Acceptance of house business Raising Eurodollar loans and issue of foreign currency bonds Financing export of capital goods, hydropower Financing of hire-purchase transaction, leasing Mergers, takeovers, valuation of assets

SEBI Merchant Banking Regulation

Category I to carry on the activity of issue management and to act as adviser,consultant, manager, underwriter, portfolio manager. Category II-that is, to act as adviser, consultant, co-manager, underwriter, portfolio manager;

Category III- that is to act as underwriter, adviser, consultant to an issue;

Category IV- that is to act only as adviser or consultant to an issue.

Registration with SEBI

Around 250 Merchant Bankers Abolished all categories and maintained Category-I Separate registration for underwriters and portfolio manager Segregation between fee based and Fund based activities

Authorized Activities

Issue Management

Preparation of prospectus Information relating to the issue

Determining financing structure Tie-up of finances and final allotment and/or refund of subscription

Corporate advisors to the issue Consultants or advisors to issue and underwriting

General Obligations and Responsibilities

Maintenance of books of accounts, records and documents Copy of the balance sheet, auditors report and statement of financial position Responsibilities of lead Manager Underwriting obligation Submission of due diligence certificate Insider Trading Acquisition of shares

Main functions of a merchant banker

Management of debt and equity offeringsThis forms the main function of the merchant banker. He assists the companies in raising funds from the market. It include:

instrument designing pricing the issue registration of the offer document

underwriting support marketing of the issue allotment and refund listing on stock exchanges

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Placement and distribution- The merchant banker helps in

distributing various securities like equity shares, debt instruments, mutual fund products, fixed deposits, insurance products, commercial paper to name a few.

The distribution network of the merchant banker can be classified as institutional and retail in nature. institutional network consists of mutual funds, foreign institutional investors, private equity funds, pension funds, financial institutions etc. The size of such a network represents the wholesale reach of the merchant banker. retail network depends on networking with investors.

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Corporate advisory services- Merchant bankers offer customized solutions to their clients financial problems. The following are the main areas in which their advice is sought:

Financial structuring includes determining the right debtequity ratio and gearing ratio for the client, the appropriate capital structure theory is also framed.

Merchant bankers also explore the refinancing alternatives of the client, and evaluate cheaper sources of funds.

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Another area of advice is rehabilitation and turnaround management. In case of sick units, merchant bankers may design a revival package in coordination with banks and financial institutions.

Risk management is another area where advice from a merchant banker is sought. He advises the client on different hedging strategies and suggests the appropriate strategy.

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Project advisory services conceptualizing the project idea feasibility studies Preparing different documents like the detailed project report. Loan syndication Tie up loans for their clients Analyze the pattern of the clients cash flows Prepares a detailed loan memorandum This takes place in a series of steps. Firstly they, based on which the terms of borrowings can be defined. Then the merchant banker, which is circulated to various banks and financial institutions and they are invited to participate in the syndicate.

Thank U