MERCHANT BANKING AND FINANCIAL SERVICES

Chapter 1
INTRODUCTION TO FINANCIAL SYSTEM & FINANCIAL SERVICES

Chapter Outline

Understand the Meaning & Objectives of Financial System. Significance of Financial System. Understanding the Components of Financial System. Understand the Problems in Financial Services. Understand the term Merchant Banking & its origin. Various services offered by merchant banking. Structure of Merchant Banking

Financial System

Financial system is a system to canalize the funds from the surplus units to the deficit Units.

Objectives of Financial System

1. Accelerating the growth of economic development. 2. Encouraging rapid industrialization 3. Acting as an agent to various economic factors such as industry, agricultural sector, Government etc. 4. Accelerating rural development 5. Providing necessary financial support to industry 6. Financing housing and small scale industries

Indian Financial System

Indian Financial system consists of four parts: 1) Financial Institutions 2) Financial markets 3) Financial Instruments 4) Financial Services

Financial Institutions
They are responsible for transferring funds from investors to companies in need of those funds. They are divided into regulatory, intermediaries, non- intermediaries and others. They deal only in financial assets like deposits, securities, etc. They collect fund from those units having savings.

Financial Markets
It is a mechanism that allows people to buy and sell financial

securities (such as stocks and bonds), commodities (such as precious metals, agricultural goods), and other items of value at low transaction costs and at prices that reflect the true prices. There are two segments of financial market. They are money
market and capital market. Money market is concerned with shortterm funds or claims. Money market provides working capital

Capital market deals with those financial assets, which have maturity period of more than a year. It is the market for long term

funds
Another classification could be primary and secondary markets. Primary market deals with new issues. The secondary market deals with outstanding securities.
Primary markets by issuing new securities mobilise the savings directly. Secondary markets provide liquidity to the securities.

Financial Instruments

The products, which are traded in a financial market, are called financial assets or financial instruments. Therefore, there is a variety of securities in the financial markets. Financial assets represent a claim on the repayment of principal at a future date.

Financial Services

Financial services include the services offered by both types of companies- Asset Management Companies and Liability Management Companies. It refers to the services provided by the finance industry It refers to providing services through various credit instruments, financial products and services.

FUNCTIONS OF FINANCIAL SERVICES

Financial services firms not only help to raise the required funds but also assure the efficient deployment of funds. They assist in deciding the financing mix. They extend their service up to the stage of servicing of lenders.

They provide services like bill discounting, factoring of debtors, parking of short-term funds in the money market, e-commerce, Securitisation of debts, etc. in order to ensure an efficient management of funds. Financial services firms provide some specialised services like credit rating, venture capital financing, lease financing, factoring, mutual funds, merchant banking, stock lending, depository, credit cards, housing finance, book building, etc.

FEATURES OF FINANCIAL SERVICES

It is a customer-intensive industry. Financial services are intangible in nature. Production and supply of financial services must be performed simultaneously. Marketing of financial service is people intensive. Financial services firms should always be proactive in visualizing in advance what the market wants, or reactive to the needs and wants of customers. They must always be changing to the tune of the market.

Merchant banking

Merchant banking may be defined as an institution which covers a wide range of activities such as underwriting of shares, portfolio management, project counseling, insurance etcThey render all these services for a fee

Origin Of Merchant Banking

The term merchant banking originated from the London who started financing foreign trade through acceptance of bills Later they helped government of under developed countries to raise long term funds Later these merchants formed an association which is now called Merchant Banking and Securities House Association

Difference
Commercial Banks

Merchant Banks

They deal in Debt & Debt related Finance They deal in Debt Market They are asset oriented i.e they extend loans based on value of security given against loans They are Risk Averse Activities are limited

They deal in Equity & equity related finance They deal in Money Market & Capital Market They are Management oriented. They are Risk Takers Activities are diverse

SERVICES OF MERCHANT BANKERS

PROJECT COUNSELLING :It includes preparation of project reports, deciding upon the financing pattern, appraising the project relating to its technical, commercial and financial viability. It includes filling up of application forms for obtaining funds from financial institutions.

SERVICES OF MERCHANT BANKERS

Corporate Counselling : It involves giving suggestions, opinions, advising the corporate and help them take actions to solve their problems.

LOAN SYNDICATION

Assistance is rendered to raise loans for projects after determining promoters contribution. These loans can be obtained from a single institution or a consortium.

ISSUE MANAGEMENT
Management of issues involves marketing of corporate securities ieequity shares, preference shares and debentures by offering them to public. Issue Management is divided into two 1) Pre Issue Management 2) Post Issue Management

Pre Issue Management

Draft and Issue of Prospectus Marketing Pricing of Issues

Post Issue Management

Collection of Application Forms Screening of Applications Deciding on Allotment Mailing of Allotment Letters Share certificates Refund of Money

UNDERWRITING OF PUBLIC ISSUES

Underwriting is an insurance to the company which makes public issues. Raising of external resources is easy for the issues backed by well known underwriters.

MANAGERS,CONSULTANTS OR ADVISERS TO THE ISSUE

The Managers to the issue assist in drafting of prospectus, application forms and completion of formalities under companies act , transfer and listing of shares of the company

PORTFOLIO MANAGEMENT

Portfolio refers to investment in different kinds of securities such as shares , debenture issued by different companies . It is a combination of assets but a carefully blended asset combination. Portfolio management refers to maintaining proper combination of securities in a manner that they give maximum return

NRI INVESTMENT

NRIs has to follow lots of complicated rules for investing in the shares in India. Merchant bankers help them in choosing the shares and offer expert advice fulfilling government regulations thus mobilising more resources for corporate sector.

ADVISORY SERVICE RELATING TO MERGERS AND TAKEOVERS

Merger is a combination of two or more companies into a singe company where one survives and other loses its existence . Ex Reliance Industries Ltd merging with Reliance Petroleum (RPL) Takeover is the purchase by one company acquiring controlling interest in the share capital of another company . Ex Vodafone took over Hutchison-Essar in India

OFF SHORE FINANCE

Merchant bankers help their clients in :

Long term foreign currency loan

Financing exports and imports Foreign collaboration arrangement

BANKS PROVIDING MERCHANT BANKING SERVICES IN INDIA

Commercial banks
Foreign banks like National Grindlays Bank, Citibank, HSBC bank etc.. Development banks like ICICI,IFCI,IDBI etc.. Private firms like JM Financial and Investment service , DSP Financial Consultants, Ceat Financial Services, Kotak Mahindra, VMC Project Technologies , Morgan Stanley.

SEBI REGULATIONS

Certificate from SEBI is a must. It is mandatory for them to be registered with SEBI Need an Authorisation from SEBI to carry out the business

Criteria of Authorizations

Professional qualification in Finance, law or Business Management Proper infrastructure like adequate office, equipments and manpower Employment of 2 persons who have experience to conduct business of merchant bankers. Past track record, experience, reputation & fairness in all transactions Capital Adequacy

SEBI REGULATIONS

Category I Merchant bankers : Can act as Issue managers(Prospectus,Allotment,Refund,Finan cial structure) Category II Merchant bankers : Can act only as comanagers(Advisor,Consultant,Underwriter, portfolio manager)
Category III Merchant bankers : Can act as comanagers but cannot undertake portfolio management Category IV Merchant bankers: They can merely act as consultant or advisor to issue of

CAPITAL ADEQUACY NORMS

Category I

: Rs. 5 crores

Category II : Rs.50 lakhs

Category III : Rs.20 lakhs Category IV : Nil

Merchant Bankers as Lead Managers

S.No
1

Size of the Issue

Maximum Number of Lead Managers

Less than Rs 50 Crores 2

2
3

Rs 50 Crores-Rs 100 Crores

Rs 100 Crores-Rs 200 Crores Rs 200 Crores-Rs 400 Crores Above Rs 400 Crores

3
4

5 or more as prescribed by SEBI

Duties of Lead Managers

Lead Manager has to enter into agreement with the company regarding their responsibilities,liabilities,functions Lead Manager cannot be associated with another lead manager who is not registered with SEBI He cannot take Issue management if the issuing company is its associate. He has to verify the prospectus of the issue He has to submit Due Diligence certificate

Duties of Lead Managers

The lead manager has to ensure the collection of specified amount from the underwriters. He is responsible for timely refund of money to investors who have not been allotted the securities. To mail the share certificate immediately to investors on allotment.

GUIDELINES FOR MERCHANT BANKERS

An initial authorization fee and renewal fee can be collected by SEBI All issues should be managed by at least 1 Lead Manager Merchant banker has to submit to SEBI half yearly unaudited financial results to monitor the capital adequacy. Each merchant banker should follow the code of conduct prescribed by SEBI

GUIDELINES FOR MERCHANT BANKERS

Every merchant banker should maintain copies of balance sheet, Profit and loss account,statement of financial position Half-yearly unaudited result should be submitted to SEBI Merchant bankers are prohibited from buying securities based on the unpublished price sensitive information of their clients

SEBI AUTHORITY

SEBI has been vested with the power to suspend or cancel the authorisation in case of violation of the guidelines Every merchant banker shall appoint a Compliance Officer to monitor compliance of the Act SEBI has the right to send inspecting authority to inspect books of accounts, records etc of merchant bankers Inspections will be conducted by SEBI to ensure that provisions of the regulations are properly complied

CODE OF CONDUCT

Should make all efforts to protect the interest of investors Should maintain high standards of integrity,dignity and fairness in conduct of business Should fulfill all obligations in a professional and ethical manner

Should not discriminate among the clients

Should ensure that prospectus, letter of offer etc.. is available to investors at the time of issue

Should render best possible advice to its clients

Any penal action taken by SEBI should be informed to its clients

CODE OF CONDUCT

Should inform the board about any legal proceedings initiated against it Should abide by the rules of Securities and Exchange Board of India Regulations,2003 Shall develop its own internal code of conduct for governing its internal operations Should ensure that any person it employs should have the capacity to be a merchant banker It is responsible for the act of its employees and agents Should not create false market

PROBLEMS OF MERCHANT BANKERS

SEBI stipulates high capital adequacy norms for authorisation which prevents young,specialised professionals into merchant banking business Non co-operation of the issuing companies in timely allotment of securities and refund of application of money etc.. is another problem Yet merchant banking is vast but should develop adequate expertise to provide a full range of merchant banking services