Merchant Banking Essay

A merchandiser verifying is a pecuniary institution primarily engaged in offering financial serve and advice to gild and crocked individuals on how to use their money. A merchandiser aver deal with commercial banking needs of pay, compevery & foresighted term loans and line writing. merchandiser banking does not check retail offices where customer can go and access their account. A merchant bank is also called as wholesale banking.OBJECTIVEMain objective of merchant banking is coordinating the b come outivities like the bankers, advertising agency, pr burys and lowwriters etc. Guide companies to get register there sh atomic number 18 under SEBI act.The merchant banking determine the number of sh atomic number 18, price of the stocks and the timing of the release of this in the buff stock. They also bequeath services to the finance housing schemes for the construction of houses and buying of land.History and growth of merchant Banking in IndiaBefore mid-sixties there was no merchant banking in India. This system started aft(prenominal) 1960s. The Grind lays bank was the first bank which started merchant banking services. Grind lays bank is the largest orthogonal bank in the country. The main service offered by merchant banking includes the management of world let gos and some aspects of financial consultancy. After this more(prenominal) than banks took initiative of merchant banking services. Bank like Citibank came in 1970. merchandiser banking with Citibank play role in newly entrepreneur and evaluation of new propose. Raising gold through justness took place. Management consultancy services were started. assert bank of India started the merchant banking in 1972. Before 1972 state bank of India used to only provide bills. further after 1972 state bank of India started multi-tasking. Commercial banks which followed state bank of India were1. Central bank in 1977.2. phratry bank in 1977.3. Standard chartered bank, mercantile bank and bank of Baroda in 1978.4. United bank of India, Punjab national bank, canara bank, Indian overseasbank in late 70s and in azoic 80s.Importance of Merchant BankingNeed for Merchant Banking is felt in the wake of huge usual savings lying untapped. Merchant bankers can play highly significant role in mobilizing funds of savers to investible channels assuring promising returns on enthronisations and thus can assist in meeting the output demand for inevitable funds for economic occupation. With growth of merchant banking profession in somaticd enterprises ar labour expansion, modernization, and diversification of the existing enterprises. This reinforces the need for a vigorous role to be played by merchant banking.Reasons why specialist merchant banks have crucial role to play in India 1) growth industrial enterprise and increase of technologically advanced industries. 2) Need for encouragement of small and medium industrialists, who require specialist services. 3) Growin g complexity in rules and procedures of the government. 4) Need to develop backward areas and states which require different criteria. 5) Exploring the possibility of joint ventures oversea and foreign markets. 6) Promoting the role of New Market in mobilizing savings from the national.Functions performed under Merchant BankingThe important usages of merchant bankers are1) Management of Debt and Equity OfferingsThis forms the main function of the merchant banker. He assists the companies in raising funds from the market. The undergoing tasks include instrument designing, pricing the disoblige, accommodation of the offer document, underwriting support, marketing of the issue, storage allocation and refund and listing on stock exchanges. 2) Placement and DistributionThe merchant banker helps in distributing various securities like equity shares, debt instruments, mutual funds, damages products, and commercial paper, to name a few. The distribution authorizework of the merchant banker can be classified as institutional and retail in nature. The institutional networkconsists of mutual funds, foreign institutional investors private equity funds pension funds, financial institutions, etc.3) Corporate Advisory ServicesIt denotes advice provided by a merchant banker to a corporate unit to go over better corporate unit to ensure better corporate performance in terms of image building among investors, steady growth through good working, handle in market value of its equity shares. The management is limited to only opinions and suggestions and both detailed epitome would form part of a specific service4) Project Advisory ServicesProject counseling is a very important and lucrative merchant banking service. It covers development of an idea into a scheme, preparation of the project report , estimation of the cost of the project and deciding upon the means of financial and techno-economic appraisal of projects for capital issue/ support etc. The fee charged fo r project report preparation / appraisal ranges between 0.25% to 2% of the total project cost. The fee charged depends upon- a)Total size of the projectb)The total complexity of the project5) add SyndicationMerchant bankers arrange to tie up loans for their clients. This takes place in a series of steps. Firstly, they analyze the variant of the clients cash flows, based on which the terms of the 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 so scat off the terms of lending on the basis of which the final allocation is done. 6) Providing Venture expectant FinancingMerchant bankers help companies in obtaining venture capital financing for financing their new and innovative strategies. 7) Management of Capital Issuesa) Pre-issue Management locomote required to be taken to manage Pre-issue activity are as follows 1) Obtaining stock exchange approvals tomemorandum and articles of association.2) Taking action as per SEBI signposts.3) Finalising the appointments of the spare-magazine activity agencies Co managers /advisors to the issue.Underwriters to the issue.Brokers to the issue.Bnakers to the issue and refund banker.Advertising agency.Printers and registrars to the issue.4) purpose the comp both to appoint auditors, legal advisers and broad base card of Directors.5) Drafting the course catalogue.6) Obtaining approvals of draft course catalog from the partnerships legal advisors, underwriting financial institutions/banks.7) Obtaining consent from parties and agencies acting for the issue to be enclosed with the prospectus.8) Approval of prospectus from Securities and exchange scorecard Of India(Sebi).9) Filing of the prospectus with registrar of companies (Roc)10) Making an application for enlistment with Stock metamorphose along with copy of the prospectus.11) Publicity of the issue with advertisement and conferences12) Open subscription list.B) Post Issue ManagementSteps involved1) To verify and confirm that the issue is subscribed to the extent of 90% including development from underwriters in effort of subscription. 2) To supervise and co-ordinate the allotment procedures of registrar to the issueas per prescribed Stock Exchange guidelines. 3) 3)To ensure issue of refund order , allotment letters/ awards within the prescribed time limit of 10 weeks after the closure of subscription list 4) To report periodically to SEBI about the progress in the matters related to allotment and refunds. 5) To ensure the listing of securities at a stock exchanges. 6) To attend the investors for managers regarding the public issue. 7) The merchant bankers managing public issue can negotiate fee subject to a ceiling .This fee is to be shared by all manoeuvre managers, advisers etc.readjustment with SEBI as Merchant BankerMerchant banks are generally setup as subsidiary comp anies of banks. For e.g. SBI caps, ICICI securities etc. Once the feasibility studies are undertaken and it comes out to be viable then the following steps are undertaken for registration with SEBI Application for concord of certificateAn application for grant of certificate is required to be made with SEBI as without holding the certificate no person can act as a merchant banker. The application can be made in one of the following categories 1. Category 1 To carry out any activity of issue management which includes preparation of prospectus and former(a) information relating to issue, determining financial structure, tie up of financers and financial allotment, and refund of the subscription. Another activity that pertains to this category is of advisor, consultant manager, underwriter, portfolio manager. 2. Category 2 To act as advisor. Consultant, co manager, underwriter and portfolio manager. 3. Category 3 To act as underwriter, advisor, and consultant to an issue. 4. Category 4 To act only as advisor and consultant to an issue. To carry on the activity of underwriter and portfolio manager, a separate certificate of registration needs to be obtained from SEBI.Furnishing of information, clarification, and personal representation The applier may need to provide further information or clarification regarding matters related to activity of merchant banker. Consideration of applicationBefore granting the certificate, the Board shall take into account that theapplicant complies with the following requirement 1. The applicant shall be a body corporate other than a non banking financial company. 2. The merchant banker who has been granted the certificate by RBI to act as primary dealer shall carry on such activity with the condition that it should not accept or hold any public deposit. 3. The applicant should have necessary infrastructure to carry on his activities. 4. The applicant should employ atleast two persons who have the experience to conduct the me lodic phrase of merchant banker. 5. The applicant should fulfill the capital adequacy requirement as follows The capital adequacy requirement should not be less than the net cost of the applicant. The net worth shall be as follows Category 1 5 croresCategory 2 50 lacsCategory 3 20 lacsCategory 4 Nil6. The applicant or any of his associate should be absolve of any legal charges, should not have been convicted for any offence and not found guilty of any economic offence. 7. The applicant should possess professional qualification from any recognized govt. institute in finance law or business management. Procedure for registrationThe SEBI on being satisfied with the eligibility of the applicant shall grant him a certificate . Payment of feesThe applicant has to pay Rs. 5 lacs within 15 days of time of receipt of intimation regarding grant of certificate. If the merchant banker fails to pay the required fee, the Board may suspend the registration and applicant may cease to carry on ac tivity as merchant banker for the period during which the subscription subsists. The merchant banker may commence on the business as merchant banker on the acquisition of Certificate of Registration from SEBI after the completion of above mentioned formalities. Procedure for Inspection Boards Right to inspect The Board may appoint one or more persons as inspecting indorsement to undertake recap of the books of accounts, records and documents of the merchant banker for any of the purposes specified in sub-regulation (2). Notice before inspectionBefore undertaking an inspection, the Board shall put a reasonable notice to the merchant banker for that purpose. Where the Board is satisfied that in the interest of the investors no such notice should be buckle undern, it may inspect without prior notice. During the course of inspection, the merchant banker against whom an inspection is being carried out shall be bound to discharge his obligations. Obligations of Merchant Banker on Insp ectionIt shall be the duty of every director, proprietor, partner, officeholder and employee of the merchant banker, who is being inspected, to produce to the inspecting function such books, accounts and other documents in his custody or accountant and furnish him with the statements and information relating to his activities as a merchant banker within such time as the inspecting authority may require. The merchant banker shall allow the inspecting authority to have reasonable access to the premises occupied by such merchant banker or by any other person on his behalf and also travel reasonable facility for examining any books, records, documents and computer data in the possession of the merchant banker or any such other person and also provide copies of documents or other materials which, in the opinion of the inspecting authority are relevant for the purposes of the inspection.The inspecting authority, in the course of inspection, shall be entitled to examine or record state ments of any principal officer, director, partner, proprietor and employee of the merchant banker. It shall be the duty of every director, proprietor, partner, officer or employee of the merchant banker to ordain to the inspecting authority all assistance in connection with the inspection which the merchant banker may be reasonably expected to give. Submission of Report to the BoardThe inspecting authority shall, as soon as possible submit, an inspection report to the Board. Action on Inspection or Investigation ReportThe Board of the Chairman shall after consideration of inspection or investigation report take such action. Appointment of AuditorThe Board may appoint a qualified auditor to investigate into the books of account or the affairs of the merchant banker. Communication of findingsThe Board shall after consideration of the inspection report communicate thefindings to the merchant banker to give him an chance of being heard before any action is taken by the Board on the f indings of the inspecting authority. On receipt of the explanation if any, from the merchant banker, the Board may call upon the merchant banker to take such measures as the Board may deem fit in the interest of the securities market and for due compliance with commissariat of the Act, rules and regulations.Guidelines of SEBIThe SEBI has issued guidelines for the issue of capital by companies. The guidelines mainly cover the requirement for the first issue by a new or existing company. The guidelines issued by SEBI are mentioned below If any companys other income exceeds 10% of the total income, the details should be disclosed. The company should disclose any adverse situation which affects the trading operations of the company. The company should also disclose the capacity utilization of plant for the last 3 years. The promoters must arrest their holding at least 20% of the expanded capital. The minimum application money payable at the time of issue should not be less than 25% o f the issue price. The company should disclose the time normally taken for the disposal of investors grievances. The company can make firm allotments in public issues as follows 1. Indian Mutual funds (20%)2. FIIs (24%)3. Regular employees of the company (10%)4. Financial institution (20%)The company should disclose the safety net scheme or buy back arrangements of the shares proposed in public issue. In case of public issues, atleast 30 mandatory collection centres should be established. In the guidelines regarding right issue, the company should give advertisements in not more than 2 newspapers about the dispatch of letter of offers. No preferential allotment to be made along then rights issue. The company should disclose the free agreement between the lead managers and the company in the memorandum of understanding.Difference between Merchant Banking and Commercial BankingMERCHANT BANKINGCOMMERCIAL BANKINGMerchant banking deals with equity and equity related finance. Merchant ban ks are management oriented.Merchant banks willing to accept risks of business.The activities of merchant banks include project counseling in area of capital restructuring, mergers, amalgamations e.t.c.Commercial banking deals with debt and debt related finance. Commercial banks are asset oriented.Commercial banks generally avoid risks of business.Commercial bankers are merely financiers.Difference between Merchant Banking and Investment BankingMERCHANT BANKINGINVESTMENT BANKINGMerchant banking is purely fee based.Merchant banking are impossible to delay aloof from international trends. Merchant banks expands into the field of securities, underwriting Merchant banking primarily perform international financing activities such as1. Foreign corporate investing2. Foreign real estate enthronement.3. Trade finance and inter transaction facilitation.Merchant banks tends to operate on small scale companies and offer creative equity financing ,and numbers of corporate credit products.Invest ment banking is both fee based and fund based.Investment banking commits their avouch funds.Investment banks trade finance activities.Investing banking facilitate mergers and acquisitions through share sales and provide question and financial consulting to companies. It focuses on IPOs and large public and private share offering. While investment banks tends tofocus on large companies. Recent developments in Merchant BankingThe recent developments in merchant banking are due to certain contributory factors in India are The merchant banking was at its best during 1985-1992 when there were some new issues . It was expected that 2010 going to be good time for merchant banks , as some new issues are coming up . The foreign investors- both in the form of portfolio investment and through foreign direct investments are venturing in Indian Economy. It is increasing the scope of merchant bankers in many ways. Disinvestments in the government sector in the country give a big scope to the merchant bankers to function as consultants. Introducing of new financial instruments in the market has increased the opportunity for the merchant banks. The merger and corporate restructuring along with MOU and MOA are giving immense opportunities to the merchant bankers for consultancy jobs.Challenges faced by Merchant Banker in IndiaSEBI guideline has restricted their operations to Issue Management and Portfolio .Management to some extent due to which the scope of work is limited. The net worth requirement is very high in categories I and II specially so many professionally experienced person/organizations cannot come into the picture. Poor New issues market in India is drying up the business of the merchant bankers.Scope for Merchant Banking1. Growth of primary market if the primary market grows and issues increases, the scope of merchant banking will be enhanced.2. Entry of foreign investment instanter India capital market directly taps foreign capital through euro issues.FDI is increased in capital market .so merchant bankers is required to advice them for their investment in India. The increasing number of joint ventures also requires expert services of merchant bankers. if more and more NRIs participate in capital market ,there will be great demand for merchant banker services.3. Changing policy of financial institutions now the lending prices of financial institutions are based on project orientation, so the merchant banker services will be needed by corporate enterprise to provide expert guidance.4. Development of debt markets if the debt market is enhanced, there will be tremendous scope for merchant bankers, now NSE and OTCEI are planned to raise funds through their debt instruments.5. Corporate restructuring due to liberalization and globalization companies are facing lot of competitions .In order to compete, they have to restructuring, merger, acquisitions or disinvestments. They offer good opportunities to merchant bankers.