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Unformatted text preview: ORIGIN OF (EVOLUTION) MERCHANT BANKING In banking a merchant bank is a traditional term for an investment bank. The so called merchant banks, were in fact the original `banks'. These were invented in the middle ages by Italian grain merchants. Merchant bankers were individuals or banking houses whose major objective was to provide capital for commodity traders, cargo owners, and buying, selling and shipping of goods. They carried out their lending operations from a bench, which in Italian term was known as `banco'. Thus the merchant banking came into existence. Later on, the centre of merchant banking operations was shifted from Italy to Amsterdam and thereafter to London. INTRODUCTION
Section 2(e) of SEBI Act, 1992 defines merchant banker as `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, adviser or rendering corporate advisory service in relation to such issue management'. Merchant Banks - Concept There is no statutory or any authoritative definition for the term Merchant Banking. For many, it just means management of capital issues of companies. Some confuse this with investment banking and an issue house. Yet another group of persons mean it to what a merchant banker does. In this situation, let us try to settle for a workable definition of this term. Merchant banking... is the financial intermediation that matches the entities that need capital and those that have capital. It is a function that facilitates the low of capital in the market. Characteristics
A merchant bank should contain the following eleven characteristics: High proportion of decision makers as a percentage of total staff. Quick decision process. High density of information. Intense contact with the environment. Loose organizational structure. Concentration of short and medium term engagements. Emphasis on fee and commission income. Innovative instead of repetitive operations. Sophisticated services on a national and international level. Low rate of profit distribution. High liquidity ratio. Banking and Finance - Overview
Financial Services Commercial Bank Private banking Investment Banks Bank cards Credit card machine services and networks Investment Services Asset Management Hedge Fund Managers Custody services Insurance Insurance Brokerage Insurance Underwriting Reinsurance Advisory Services Stock brokers (private client services) and discount brokers MERCHANT BANKING Vs COMMERCIAL BANKING Commercial banking and merchant banking both involve the provision of financial services and advice. Merchant banking, however, often focuses on investing a depositor's assets in a finance portfolio and managing these investments. Merchant banks are commonly called investment banks in the United States. Apart from investing and managing the assets of wealthy clients, merchant banks also offer counsel and advice to large corporations Commercial banking is also sometimes defined as the provision of banking services such as Merchant Banking Vs Investment Banking There is a thin difference between these two
An investment banker does the following Selling issues of securities of companies Underwriting functions Helps in mergers and acquisitions Investment advises Finding buyers for private placement Dealing in securities Hence, similarities between MB and IB. Generally, investment advises and dealing in securities are not performed by MB Merchant Banking in India Grindlays Banks-1967 Management of capital issue Production planning, system design to market research Management consultancy Citibank-1970 SBI-1972 SEBI Merchant Banking Regulations
Categorization Category I to act as lead manager and carry on any activity of the issue management, including preparation of prospectus and other information relating to the issue, determining financial structure, tie up of financiers and final allotment and refund and refund of the subscription and to act as a adviser ,consultant, manager, underwriter, portfolio manager Category II : to act as adviser ,consultant, co-manager, underwriter, portfolio manager Category III : to act as underwriter , adviser and consultant to an issue Category IV : to act only as advisor or consultant to an issue Ranking of Merchant Banking in India:
Merchant Banker ICICI Securities IDBI SBI Caps DPS IFCI Bank of Baroda Jardine Fleming JM Finance ENAM PNB Caps OE 4.0 4.2 4.4. 6.1 6.1 6.7 5.8 6.0 6.3 6.8 FSS 4.0 3.2 3.9 5.7 5.7 6.5 6.2 6.5 6.8 6.8 QPS 4.2 4.5 4.6. 6.0 6.0 6.7 5.9 5.5 6.4 6.7 QM 3.8 4.0 6.7 6.0 6.0 6.6 5.0 5.9 6.3 6.8 INN 4.3 4.8 5.2 5.3 6.3 6.8 5.5 5.4 6.2 6.8 Note: OE: Overall Excellence; FSS: Financial Soundness ; QPS: Quality Product/Service; QM: Quality Management; INN: Innovativeness. Capital Adequacy Requirement SEBI has prescribed the following net worth requirements for merchant bankers. The total paid up capital and free reserves is considered as net worth Category Minimum Amount of Net Worth I Rs 5,00,00,000 II Rs 5,00,000 III Rs 20,00,000 IV Rs Nil REGULATORY FRAMEWORK The merchant banking activity in India is governed by SEBI (Merchant Bankers)
i) The applicant should be a corporate body. The merchant banking activity in India is governed by SEBI (Merchant Bankers) Regulations, 1992. Registration with SEBI is mandatory to carry out the business of merchant banking in India. An applicant should comply with the following norms: ii) The applicant should not carry on any business other than those connected with the securities market. iii) The applicant should have necessary infrastructure like office space, equipment, manpower, etc. iv) The applicant must have at least two employees with prior experience in merchant banking. v) Any associate company, group company, subsidiary or interconnected company of the applicant should not have been a registered merchant banker. vi) The applicant should not have been involved in any securities scam or proved guilt for any offence. vii) The applicant should have a minimum net worth Rs50 million. FAQ Q. Is it mandatory for a merchant banker to register with the SEBI? Q. Who is eligible to obtain registration as a merchant banker? A Q. What are the various categories for which registration can be obtained? Q. What is the capital requirement for carrying on activity as merchant banker? Q. What is the procedure for getting registration? Q. What is the registration fee payable to SEBI? Q. What is the validity period of certificate of registration? Q. How to renew the certificate? Q. What is the renewal fee payable to SEBI? Q. What is the consequence of non-registration or failure to renew registration? Services of merchant bankers The services provided by merchant bankers includes management of mutual funds, public issues, trusts, securities and international funds. It involves dealing with the corporate clients and advising them on various issues like- mergers, acquisitions, public issues, etc. Functions of merchant bankers include: i) Management of debt and equity offerings. This 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 issue, registration of the offer document, underwriting support, marketing of the issue, allotment and refund and listing on stock exchanges. ii) Placement and Distribution. The merchant banker helps in distributing various securities like equity shares, debt instruments, mutual funds, insurance products, and commercial paper, to name a few. The distribution network of the merchant banker can be classified as institutional and retail in nature. The institutional network consists of mutual funds, foreign institutional investors, private equity funds pension funds, financial institutions, etc. iii) Corporate advisory services. Merchant bankers offer customized solutions to their clients' financial problems. Financial structuring includes determining the right debt-equity ratio and the framing of appropriate capital structure theory. iv) Project advisory services. Merchant bankers 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, they conduct feasibility studies to examine the viability of the proposed project. v) Loan Syndication. Merchant bankers 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 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 then negotiate the terms of lending on the basis of which the final allocation is done. vi) Providing venture capital financing. Merchant bankers help companies in obtaining venture capital financing for financing their new and innovative strategies Scope of merchant banking in India Merchant banking activities help in channelizing the financial surplus of the general public into productive investment avenues. They help to coordinate the activities of various intermediaries to the share issue such as the registrar, bankers, advertising agency, printers, underwriters, brokers, etc. and to ensure the compliance with rules and regulations governing the securities market. This being the era where mergers and acquisitions are hot, the scope of merchant banking has grown to a large extent. OUTLOOK MONEY NEWS Best Merchant BankerWinner SBI Capital Markets The investment banking subsidiary of State Bank of India, SBI Caps is an old player in the capital market, going back to the pre-liberalisation days of 1986. Starting off with merchant banking and project appraisals, it soon expanded its range of activities. It got a boost in 1997 when Asian Development Bank acquired a 13.8 per cent stake. SBI Caps offers services in the broad areas of mergers and acquisitions, project advisory, structural finance, and capital markets. In M&A, for instance, it offers advice on privatisation, business valuation, and restructuring. In the capital markets, it handles public and rights offers, private placements and buybacks, while `project advisory' involves handling core sectors such as power and telecom. It has also been exploring new avenues like securitisation. We evaluated SBI Caps purely on the performance of its merchant banking division, restricted to the public offerings it handled between July 2003 and June 2004. SBI Caps has not disgraced its lineage, beating the likes of ICICI Securities and Kotak Mahindra to the top spot.Merchant banks were ranked on parameters like number and quality of issues handled, and post-IPO returns to investors. Another factor was the number of IPOs whose stock prices dipped below offer price vis-a-vis the number of IPOs the merchant bank handled: the lesser this percentage, the higher the score. Runner-up Kotak Mahindra CapitalIt may have lost out to SBI Caps in the awards stakes but it's not without reason that Kotak Mahindra Capital had the mandate to manage 13 equity issues (against SBI Caps' 8) in the year to 30 June 2004among them several high-profile ones too, such as the ONGC, Biocon, and Infosys ADR offerings. It garnered Rs 19,643 crore from 20 issues between July 2001 and June 2004, which is a measure of its pedigree. However, one of the critical counts on which Kotak lost out to SBI Caps was the average post-listing returns from the issues it had managed. CANARA BANK Canara Bank is also one of the leading Merchant Bankers in India, offering specialised services to Banks, PSUs, State owned Corporations, Local Statutory bodies and corporate sector. We are SEBI registered Category I Merchant Banker / Underwriter to carry on Issue Management (Public / Rights / Private Placement Issues), Underwriting, Consultancy and Corporate Advisory Services etc. We also hold SEBI registration Certificate to act as "Bankers to an Issue" with network of exclusive Capital Market Service Branches to handle "Capital Market" related assignments. We undertake "project appraisals" with resource raising plans from Capital Market/ Debt Markets and facilitate tie-ups with Banks / Financial Institutions and Potential Investors. Our uniqueness is extending services under single window concept covering the following areas: Merchant Banking As leading Merchant Bankers in India, we have associated with issues ranging from Rs.1 crore to Rs.1500 crores, involving various types of industries, banks, statutory Bodies etc. and have an edge in handling Private Placement issues both retail & HNIs. SPECTRUM OF SERVICES : Equity Issue (Public/Rights) Management Debt Issue Management Private Placements Project Appraisals Monitoring Agency Assignments IPO Funding Security Trustee Services Agriculture Consultancy Services Corporate Advisory Services Mergers and Acquisitions Share Valuations Buy Back Assignments ISSUE MANAGEMENT SERVICES : Project Appraisal Preparation of offer document Exchange / ROC etc., Underwriting Capital structuring Formalities with SEBI / Stock Promotion /Marketing of Issues Post Issue Collecting Banker / Banker to an issue Management Refund Bankers Payments Handling of Dividend Warrant/Interest Warrant Debenture Trusteeship ...
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- Spring '10