Merchant
Banking
Merchant banking
According to SEBI, “Merchant banker means a
person who is engaged in the business of issue
management, either by making arrangements
regarding selling or by subscribing to
securities as managers, consultants, advisor or
rendering corporate advisory services in
relation to issue management.”
Merchant Banking Regulation
No organization can act as a ‘merchant
banker’ without obtaining a certificate of
registration from the SEBI.
To obtain the certificate of registration, one
had to apply in the prescribed form and
fulfill two sets of norms
(i) Operational capabilities and
(ii) Capital adequacy norms.
Merchant Banking
Classification of Merchant
Bankers by SEBI
1. Category I - can act as issue manager, which will, inter
alia, consist of preparation of prospectus and other
information relating to the issue, determining financial
structure, tie up of financiers and final allotment and
refund of the subscriptions; and advisor, consultant,
underwriter and portfolio manager.
2. Category II:- advisor, consultant, underwriter and
portfolio manager.
3. Category III :- underwriter, advisor and consultant only.
Merchant Banking
Capital Adequacy Norms
The capital adequacy is expressed in terms of minimum net
worth, i.e., capital contributed to the business plus free
reserves.
Category of Merchant Bankers Minimum Net Worth
Category I Rs.5 crores
Category II Rs.50 lakhs
Category III Rs.20 lakhs
Category IV Nil
Merchant Banking
Initial Licence fees
Category I- Rs. 2.5 lakhs for the Ist and 2nd yr
and 1 lakh for the third yr.
Category II- Rs. 1.5 lakh for the 1&2nd yr and
Rs.50,000 for the 3rd yr.
Category III- Rs. 1 lakh for the 1 & 2nd yr. and
Rs.25,000 for the 3rd yr.
Category IV- Rs. 5,000 for the 1 &2nd yr and
Rs.1,000 for the 3rd yr.
Merchant Banking
Registration of Merchant Bankers
Registration with SEBI is mandatory to carry out the business
Of merchant banking in India. An applicant should comply
with the following norms:
The applicant should be a body corporate
The applicant should not carry on any business other than those connected with
the securities market
The applicant should have necessary infrastructure like office space, equipment,
manpower etc.
The applicant must have at least two employees with prior experience in
merchant banking
Merchant Banking
Contd…
Any associate company, group company, subsidiary or interconnected
company of the applicant should not have been a registered merchant
banker
The applicant should not have been involved in any securities scam or
proved guilt for any offence
The capital adequacy requirement referred to in clause (d) of
regulation 6 shall be a net worth of not less than five crore rupees.
The certificate of registration granted under regulation 8 and its
renewal granted under regulation 9, shall be valid for a period of three
years from the date of its issue to the applicant.]
Merchant Banking
Merchant banking
functions…?
Functions of merchant Banking
Management of equity & debt offerings
Assisting in raising finance
a. instrument designing
b. Preparation of a plan and budget to estimate total expenditure of the issue
c. Preparation of Controller of Capital Issues application
d. Appointment of Registrars, brokers and bankers to the issue
e. Selection of issue house
f. pricing the issue
g. Drafting of prospectus and indentures
h. registration of the offer document
i. underwriting support
j. marketing of the issue
k. allotment and refund
l. listing on stock exchanges.
Functions of merchant Banking
Placement and distribution -
Equity shares
Debt instruments
Mutual fund products
Fixed deposits
Insurance products
commercial paper
Functions of merchant Banking
Corporate advisory services
Financial structuring
determining the right debt-equity ratio gearing ratio
the appropriate capital structure theory is also framed
financing alternatives of the client, and evaluate
cheaper sources of funds
Rehabilitation and turnaround management
revival package for sick unit
Risk management
hedging strategies and suggests the appropriate
strategy.
Functions of merchant Banking
Project advisory services-
conceptualizing the project idea
feasibility studies to examine the viability of
the proposed project
preparing different documents like the
detailed project report.
Functions of merchant Banking
Loan syndication
analyse the pattern of the client’s cash flows
Deciding terms of borrowings
detailed loan memorandum inviting banks to
participate in the syndicate
negotiate the terms of lending
final allocation is done.
Functions of merchant Banking
Restructuring Strategies
Acquisition
Mergers
Management buyout
Joint ventures
Valuations
Functions of merchant Banking
Portfolio management
The sale and purchase of securities
Investing and purchase of securities
Investing and managing fixed deposits
Trust funds, pension funds and investments
and their review
Safe custody of securities in India and
overseas
Reinvesting the returns collected from
investments in some profitable avenues
Functions of merchant Banking
Leasing services
Financing for acquiring leased assets
Venture capital
Providing capital to new entrepreneurs
Equity financing
How merchant bank makes money??
Fees and commission for issue management
i. 0.5% of public issue upto Rs. 25 crores.
ii. 0.2% for more than Rs 25 crores
Fees for advising corporate financial structuring
Fees for loan syndication
i. 1% of loan amount
Fees for consulting on rehabilitation and turnaround management
Fees for advising risk management
How merchant bank makes money??
Earning from proprietary investments
Fess for project advisory services
i. 0.25% to 2% of the project cost
Underwriting commission
i. 2.5 % in case of equity shares
ii. 1.5% in case of debentures
Other charges [for acting as lead banker, analyzing projects and
financials]
Merchant banking
Scope in India…?
1) Growth of new issues market
Indian market largest emerging market
Domestic and foreign investors setting up
their biz here.
Many public and private issues coming
up
Growth in new issues market
Scope for M.Bs. have risen
2) Entry of FII
Indian capital market is globalised
Indian Cos. are permitted to invest in euro issues.
Similarly, FII are permitted to invest in India.
Hence they need M.Bs to advise them for their invt in
India.
Increasing no. of JVs also require expert services of
M.Bs.
3) Changing policy of FI
Liberalisation of policies
FIwould require expert services of M.Bs
for project appraisal, financial
management, financial restructuring etc.
4) Development of debt market
Good portion of
capital can be raised
through debt
instruments.
Tremendous
opportunities to M.Bs.
5) Innovations in Financial Instruments
New financial
instruments have
come up.
M.Bs are market
makers for these
instruments.
6) Corporate Restructuring
Liberalisation and globalisation
Competition in corporate sector becoming
intense.
Cos.reviewing their strategies, structure and
functioning etc. leading to corporate
restructuring.
Good opportunity to M.Bs to extend their area
of operation.
7) Disinvestment
It means reduction of
some kind of asset of a
firm for achieving either
financial or ethical
objectives.
Most of the State and
Central Government
owned PSUs are going
for disinvestment
Conclusion
Inspite of problems popping up, merchant
banking in India has vast scope to
develop because of lot of domestic as
well as foreign businesses booming here.
Indian economy provides an amicable
environment for these firms to set up,
flourish and expand here.
Any questions???????
Thank you………
