MERCHANT BANKING (MB)

In London MB refers to those who carry on consultancy, leasing, portfolio Mgt, AMC, Loan syndication etc., Term is used differently in different countries In US it refers to those who are concerned with mobilizing savings of people and directing funds to business enterprises No universal definition Notification of finance Ministry defines MB as any person who is engaged in the business of issue management either making arrangements regarding selling, buying, or subscribing to the securities as manager, consultant , advisor, or rendering corporate advisory service in relation to such as Issue management.

MB IN INDIA

Prior to enactment of companies act 1956, they acted as Issue house of securities, evaluated project reports, planned capital structure, provided venture capital , share broking services etc., Need was felt on increase in number and size of issues These services started by National grindlays bank in 1967, by citibank in 1970, banking commissioon report recommended for specialized MB in india Later SBI was first Indian bank to set up in 1972, later ICICI , bank of India, BOB, Canara Bank, PNB, Uco bank Got prominence during 1983-84 due to new issue boom

MERCHANT BANKING V/S COMMERCIAL BANKING

Commercial banking deal in debt and debt related finance MB activity is equity and equity related finance, i.e raising funds through money and capital market Commercial banking is asset oriented, their decisions are based on appraisal, security for loan etc., MB is management oriented Commercial Bankers are merely financiers - MB activities include project counseling, corporate counseling , capital restructuring, M&A, etc.,

SERVICES OF MB NEED FOR LT FUNDS, ISSUE DEB AND EQUITY - PROMOTERS NEED MB

1. corporate counseling : includes,, capital restructuring, project management, public issue management, loan syndication, working capital, etc., - involves giving suggestions, opinions, to solve problems 2. Project counseling: involve preparation of Project reports, decision on financing pattern, appraising project report, project report is prepared to get govt finance, bank finance, or public issue analyzed to ensure technical, commercial and financial viability Loan syndication : refers to assistance to get term loans for projects from several banks syndicate or consortium - which bank to approach depends on industry, location and size of project cost they appraise get satisfied design capital structure adherence to govt guidelines

SERVICES OF MB ISSUE MANAGEMENT

Issue management: involves marketing of corporate securities equity, deb, pref sh., by offering to public MB is an intermediary Broadly Pre issue and post issue mgt., involves compliance of legal formalities and coordination activity Pre issue involves: a. issue through prospectus or offer for sale through pvt placement b. Marketing & underwriting c. Pricing of issue

PRE -ISSUE MANAGEMENT CONTD

Common method is public issue through prospectus Offer for sale : sale of entire shares by co at an agreed price generally below par Direct sale is called private placement to investors like lic UTI, GIC, SFC etc For Public issue MB has to coordinate with many entities like govt bodies, professionals, private agencies furnish info under cos act and sebi requirements Obtain consent from experts, bankers, solicitors, auditors etc Send Prospectus to SEBI for vetting File copy of prospectus with registrars of companies Appoint brokers for canvassing and marketing Supply mailing of literature and publicity material Hold investors conferences and do required publicity Appoint Bankers to the issue and registrars to the issue

PRE ISSUE

CONTD

Marketing : meeting with advertising agents, choose the media, TV , investors conference Fix date of opening and closing of issue Register prospectus, Launch publicity campaign reach material to brokers and prospective investors Ensure that format of application conform as prescribed by stock exchange Ensure that issue is fully underwritten mandatory - SEBI All activities are time bound and has to be attended promptly

PRICING OF ISSUES
Since SEBI 1992 capital issues free pricing of issues done in consultation with MB An existing listed co co with 5 year track record existing pvt co with 2.5 years of track record with profits can freely price the issue It is done after taking into account Net asset value, profit earning capacity and market price

POST ISSUE MANAGEMENT

Collection of application money and applications Screen, decide allotment procedure, mail allotment letters/refund orders Registrars process it submit basis of allotment to SE get certificate from auditor or co secretary that allotment is in order MB has to co ordinate and supervise these activitis

UNDERWRITING

Is a guarantee given by the underwriter that in the event of under subscription of the issue All issues should be fully underwritten Managers, consultants and advisors : assist in drafting prospectus do all other activities above Sebi guidelines says to appointment an MB Portfolio management : refers to investment and management of bunch of securities due to professional management investor is protected Advisory role in mergers and amalgamations conduct negotiation safeguard the interest of share holders approvals from govt and RBI approvals from financial institutions

SEBI AND MB

MB should have authorization from SEBI MB should have high degree of integrity and fairness in their dealings Should have professional competence, infrastructure, capital adequacy and track record MB should have Min net worth of 5 Crores Authorization is for 3 years further renewable All issues should be managed by an MB Accept at least 5% of underwriting Ensure timely refunds and allotment Adhare to code of conduct of Sebi. Send quarterly reports to SEBI indicagting details of the public issues handled

DEFAULT BY MB PENALTY POINTS

Imposes penalties for non-compliance of conditions of regn and contravention of regulations on the basis of which regn is suspended or cancelled Defaults Categories as : general b. minor c. major d. serious A. General: examples: non receipt of prospectus on filing with registrar, no interse allocation of responsibilities , due diligence not in SEBI format , failure to submit min subscription certificate B. Minor : advt or brochure not as per prospectus, exaggerated information, violation of advt rules, failure to exercise due diligence, delay in refunds, non-handling of investors grievance etc. C. Major: not taking up of mandatory underwriting , excess of lead managers than stipulated, association of unauthorized MB, D. serious: unethical practices of MB, violation of code of conduct, non co-operation with sebi