Difference between Banks & NBFCs

NBFCs are doing functions akin to that of banks, however there are a few differences: i. NBFC cannot accept demand deposits; ii. it is not a part of the payment and settlement system and as such cannot issue cheques to its customers ; and iii. deposit insurance (DICGC) facility is not available for NBFC depositors unlike in case of banks. iv. Banks are incorporated under banking companies act 1949, NBFCs are under companies act of 1956. v. NBFCs cannot issue DD like banks.

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of : loans and advances, acquisition of shares / stock / bonds / debentures / securities issued by Government / local authority / other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business stock broking companies merchant banking companies

Registration of NBFCs
In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI to commence or carry on any business of non-banking financial institution as defined in clause (a) of Section 45 I of the RBI Act, 1934.

(a) (b)

(c)
(d) (e)

(f)

However, to obviate dual regulation, certain category of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI : Venture Capital Fund / Merchant Banking companies / Stock broking companies registered with SEBI, Insurance Company holding a valid Certificate of Registration issued by IRDA Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982 Housing Finance Companies regulated by National Housing Bank (can fin homes, HDFC,LIC Housing fin, ICCI hf) Stock Broking Company Sebi (india infoline, bajaj capital, kotak securities, sharekhan ltd.,Geojit paribas,Karvy,india bulls) Merchant Banking Company Sebi

Examples of NBFCs
LIC housing finance Cholamandalam Relaince capital DHFL Sundaram finance Muthoot finance Mannapuram finance lt. Mahindra finance.

Difference between NBFCs and Merchant banks

Merchant banks generally deals with the issue of shares undertaking various responsibilities, While NBFCs are just like bankers.

Merchant Banking

 A Merchant Bank is a British term for a bank providing various financial services such as accepting bills arising out of trade, providing advice on acquisitions, mergers, foreign exchange, underwriting new issues, and portfolio management. In banking, a merchant bank is a traditional term for an Investment Bank

 In UK it is called as ISSUE HOUSES IN USA Investment banks In India- Merchant banks

Difference Between Commercial Banking & Merchant Banking: COMMERCIAL BANKING Deals with Debt & Debt related finance. Asset oriented. Generally avoid risks. Registration under banking companies act and regulated by RBI MERCHANT BANKING Deals with Equity & Equity related finance. Management oriented. Willing to accept risks. Compulsory registration with SEBI

Services of Merchant banks

1. project counselling: preparation of project reports, financing pattern to finance the cost of the project and appraising the project report with the financial institutions or banks. It also includes filling up of application forms with relevant information for obtaining funds from financial Institutions and obtaining government approval

2. Loan syndication: a group of 3-5 banks to finance the project 3. Underwriting of shares: Underwriting is a guarantee given by the underwriter that in the event of under subscription, the amount underwritten would be subscribed by him. 4. Financial restructuring: advice in rehabilitation and turnaround management in case of sick units, merchant bankers may design a revival package

 5. Manager / advisor to the issue 6. portfolio management 7. Advisory services to Mergers and Acquisitions 8. Offshore financing: Help in areas involving foreign currency 9. Non-Resident investment: Provide help in better and smooth trade to NRIs

SEBI guidelines for merchant banker

Categories of MB Requirement for granting of certificates Capital adequacy norms Code of conduct Appointment of lead merchant banker Restriction on appointment of lead merchant banker Responsibilities of LEAD mb Maintenance of books,records

 Submission of half yearly results MB are barred from undertaking activities other than related to securities market

Lead managers
Lead managers are independent financial institutions appointed by the company going public to manage the IPO. They are the main body responsible for most of the IPO processing. Companies planning for IPO (also known as Issuer Company) first approaches or appoint lead managers. Lead managers examine company documents including financial documents, documents relating to litigation like commercial disputes, patent disputes, disputes with collaborators, etc. and other materials

 Lead Managers are also known as Book Running Lead Manager(BRLM) and CoBook Running Lead Managers. Issuer Company can appoint more then one lead manager to manage big IPO's i.e. Reliance Power IPO came in Jan 2008 had 10 Book Running Lead Managers.

Functions of Lead managers

1. due diligence of companys operations/ management/ business plans/ legal etc. 2. design of Offer documents, Prospectus 3. LMs shall ensure compliance with stipulated requirements and completion of prescribed formalities with the Stock Exchanges, RoC and SEBI including finalization of Prospectus and RoC filing 4. Appointment of other intermediaries viz., Registrar(s), Printers, Advertising Agency and Bankers to the Offer

5. management of escrow accounts: Escrow account generally refers to money held by a third-party on behalf of transacting parties. Here the funds can be utilized for a specified purpose and are maintained by merchant bnkrs, These funds are not available to company till the issue is completed and allocation is made. 6. intimation of allocation and dispatch of refunds to bidders 7. finalization of trading and dispatch of certificates and demat delivery of shares.

8. LM responsible to write the Red Herring Prospectus (RHP) and get it approve by SEBI. 9. Issuer Company with the help of lead manger, appoints underwriters

Functions
The lead manager performs following:

pricing the issue.

timing the issue. marketing the issue. preparing the offer document. listing & allotment/refund.

 In brief Lead Managers responsibilities include, initiate the IPO processing, write draft herring prospectus and get it approve by SEBI, help company in selling the IPO Shares and road shows, help company in finalize the issue price, issue opening & closing dates, listing date etc.

Some of the popular lead managers in Indian Financial Market are:

DSP Merrill Lynch Ltd, ICICI Securities Ltd, Almondz Global Securities Ltd, IL & FS Investmart Securities Ltd, SBI Capital Markets Ltd, ABN AMRO Securities (India) Pvt Ltd, Deutsche Equities India Pvt Ltd, Enam Securities Pvt ltd, J P Morgan India Pvt Ltd, JM Financial Consultants Pvt Ltd, Kotak Mahindra Capital Company Ltd, Macquarie India Advisory Services Pvt Ltd, SBI Capital Markets Ltd, UBS Securities India Pvt Ltd etc.

Issue management

Issue management
The management of issues for raising funds through various types of instruments by companies is known as issue management. Issue management deals with two activities: Pre-issue management Post issue management

PRE ISSUE ACTIVITIES

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Signing of MoU bwn merchant banker and issuing co., Obtaining appraisal note Optimum Capital structure Appointment of financial intermediary Preparing documents Due diligence certificate Submission of offer doc Finalization of collection centres Application to stock exchange Filing with RoC Launching the issue Opening escrow account

SEBI guidelines for pre issue activities

1.
2. 3. 4. 5.

Due diligence Requisite fee- merchant banker to sebi Submission of Documents: Mou, inter se allocation of responsibilities, due deligence certificates, list of promoters group Appointment of Intermediaries: merchant bankers

6. Mandatory underwriters

8. Offer document made public:

within 21 days from the date of filling the draft with sebi 10. Dispatch of issue materials : to stock exchanges 11. No complaints certificate 12. Mandatory collection centres
9.

Kinds of Issues
Primary market issues can be classified as : Public Issue Rights issue preferential issues or private placement or preferential allotment

Kinds of issues
Capital raising in Primary market

Public Issue

Rights issue

Private placement

IPO

FPO

Promoters

Strategic Investors

Pricing of (IPO) Initial Public Offer

An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. This Initial Public Offering can be made through the:

Fixed price method

OR

Book Building method

OR

Combination of both

Fixed Price method

An issuer company is allowed to freely price the issue. The basis of issue price is disclosed in the offer document where the issuer discloses in detail about the qualitative and quantitative factors justifying the issue price.

Fixed Price Method-IPO

Eligibility Norms
Net tangible assets of at least Rs.3 crore in each of the preceding 3 full years of which not less than 50% is held in monetary assets. Track Record of Distributable Profit For at least 3 out of Immediately Preceding 5 Years

Book building

Book building
Book building is actually a price discovery method and demand discovery. In this method, the company doesn't fix up a particular price for the shares, but instead gives a price range, e.g. Rs 80-100. When bidding for the shares, investors have to decide at which price they would like to bid for the shares, for e.g. Rs 80, Rs 90 or Rs 100. They can bid for the shares at any price within this range. Based on the demand and supply of the shares, the final price is fixed. The lowest price (Rs 80) is known as the floor price and the highest price (Rs 100) is known as cap price. The price at which the shares are allotted is known as cut off price. The entire process begins with the selection of the lead manager, an investment banker whose job is to bring the issue to the public.
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 What is a Red Herring Prospectus? Red Herring Prospectus is a prospectus, which does not have details of either price or number of shares being offered, or the amount of issue. This means that in case price is not disclosed, the number of shares and the upper and lower price bands are disclosed.

Types of investors
There are three kinds of investors in a book-building issue. The retail individual investor (RII), the non-institutional investor (NII) and the Qualified Institutional Buyers (QIBs). RII is an investor who applies for stocks for a value of not more than Rs 100,000. Any bid exceeding this amount is considered in the NII category. NIIs are commonly referred to as high net-worth individuals. Each of these categories is allocated a certain percentage of the total issue. The total allotment to the RII category has to be at least 35% of the total issue. RIIs also have an option of applying at the cut-off price. This option is not available to other classes of investors. NIIs are to be given at least 15% of the total issue. And the QIBs are to be issued not more than 50% of the total issue. Allotment to RIIs and NIIs is made through a proportionate allotment system. The allotment to the QIBs is at the discretion of the BRLM.

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Qualified Institutional Buyers ?? (QIBs)

a) b) c) d) e) f) g) h) Public financial institution; (Section 4A of the Companies Act, 1956) Scheduled Commercial Banks; Mutual funds Foreign Institutional Investor registered with SEBI; Venture Capital Funds registered with SEBI; Foreign Venture Capital Investors registered with SEBI; State Industrial Development Corporations; Insurance Companies registered with IRDA;

Category of Bidders
Retail Individual Investor:- means an investor who applies or bids for securities of or for face value of not more than Rs 50,000/ Non-Qualified Institutional Buyer: Any investor who bids for an amount above Rs 50,000 and does not fall in the QIB category e.g HNI investors. Qualified Institutional Buyer(QIB) shall mean: a. public financial institution as defined in section 4A of the Companies Act, 1956; b. scheduled commercial banks; c. mutual funds; d. foreign institutional investor registered with SEBI; Contd.

Book-Building: Procedure
1. Merchant Banker As a Lead Book Runner 2. Drafting prospectus 3. Bid analysis 4. Appointment of Underwriters 5. Registrar to the Issue 6. Appointment of a Banker to the Issue & Opening an Escrow Account 7. Determining Cut-off Price and Allotment 8. Allotment of securities

Offer Document
In case of Fixed Price Prospectus
A legal document offering securities which includes the terms, issuer objectives or planned use of the money, historical financial statements and other information that could help an individual in deciding whether the investment is appropriate for him/her is called prospectus.

In case of Book Building Red Herring Prospectus

"Red Herring Prospectus" is a prospectus which does not have details of either price or number of shares being offered or the amount of issue. OR Prospectus Excluding Price/number of securities/ amount of issue

Final Prospectus
On the completion of bidding process, a final offer document is submitted before opening of Subscription List.

Private Placement It refers to the direct sale of newly issued securities to a small number of investors through merchant bankers. These investors are selected clients; Financial institutions Corporate Banks High net worth individuals

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Features of private placement

No prospectus issued Instruements covered eq,psh,debentures Issuers- public and private ltd Investors- LIC, GIC, SFC, UTI Intermediaries- merchant bankers, credti rating agencies Popular investments Market size as big as public issue
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Benefits private placement

Less time and cost of issue Greater flexibility Simplified procedure Easy access to capital market More stable attitude of investors

Green shoe option

A price stabilization mechanism A green shoe is a clause contained in the underwriting agreement of an initial (IPO) that allows underwriters to buy up to an additional 15% of company shares at the offering price (of the total IPO size). It is a provision, in underwriting agreement, that allows the underwriter to sell the additional shares then the original number of shares offered.

 For example, if a company decides to publicly sell 1 lakh shares, the underwriters (or "stabilizers") can exercise their green shoe option and sell 1.15 lakh shares. When the shares are priced and can be publicly traded, the underwriters can buy back 15% of the shares. This enables underwriters to stabilize fluctuating share prices by increasing or decreasing the supply of shares according to initial public demand.

Reverse Book Building

It is a price discovery mechanism for the companies who want to delist their shares or buy back shares from the shareholders. Green Shoe Option; It is also referred to as an over allotment option. It is a mechanism to provide post listing price stability to an initial public offering.

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Post issue activities

Post issue management reports Redressal of investors grievances Coordination with intermediaries Finanlization of basis of allotment Mailing of share certificates and refund orders

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Leading Merchant Bankers in India

In Public Sector: SBI Capital Markets Ltd., Merchant Banking Divisions of IDBI & IFCI, PNB Capital Services Ltd., Bank of Maharashtra, etc. In Private Sector: ABN AMRO, ICICI Bank Ltd, Axis Bank Ltd., Kotak Mahindra Capital Co., Bajaj Capital, Reliance Security Ltd., Yes bankLtd, Tata capital market ltd., JM Financial Co. and DCM Financial Services Ltd etc. Foreign Players: Goldman SACH (India) Security Pvt. Ltd., Morgan Stanley Indian co. Pvt. Ltd., Barclays Security Indian Pvt. Ltd., Bank of America, Deutsche Bank, Citi Group Global Market Indian Pvt. Ltd., Fedex Security Ltd.,