ROLE OF MERCHANT

BANKER IN

APPRAISAL OF PROJECTS
 PROJECT APPRAISAL

Project appraisal is the Systematic and

comprehensive review of the economic,
environmental, financial, social, technical and
other such aspects of a project to determine if
it will meet its objectives.
 PROJECT APPRAISAL
• Merchant bankers usually carry out the
project analysis for every proposal.
• The investment proposal may be for setting
up a new unit.
• It may be an expansion of an existing unit. It
aims at improving the existing facilities.
 PROJECT APPRAISAL
Project selection

Project analysis
Project appraisal

Financial Technical Economical ManagementEnvironment Commercial

 Financial Appraisal
• financial viability of the entire project .

• cost of project includes the land and sight

development, building, plant and machinery,
technical know-how fees, pre-operative
expenses, contingency expenses etc
 Technical Appraisal
• it is the systematic gathering and analysis of
the data.
• The availability of the raw materials, power,
sanitary and sewerage services,
transportation facility, skilled man power,
engineering facilities, maintenance, local
people etc.
 Economic Appraisal

• development of the sector.

• industrial development, social development,

maximizing the growth of employment, etc.
 Management Appraisal

• Ability to plan, implement and operate the entire

project effectively.

• The past record of the promoters is to be appraised

to clarify their ability in handling the projects.
 Environment Appraisal

• The factors include the water, air, land, sound,

geographical location etc.
 Commercial Appraisal
• Future demand of the supply, effectiveness of the selling
arrangement, latest information .

• The appraisal involves the assessment of the current market

scenario which enables the project to get adequate demand.

• Estimation, distribution and advertisement scenario to be

considered into.
 APPOINTMENT OF

MERCHANT BANKER

AND OTHER INTERMEDIARIES

 PREPARATION OF PROSPECTUS
• It is defined a document through which public
are solicited to subscribe to the share capital
of a corporate entity.
• Its purpose is invite the public for the
subscription/purchase of any securities of a
company.
 PROSPECTUS FOR PUBLIC OFFER
• Regular prospectus
• Abridged prospectus
• Prospectus for rights issue
• Disclosures in prospectus
• Disclosures in abridged prospectus and letter
of offer
 REGULAR PROSPECTUS
PART I
• General Information - about the company
• Capital Structure - authorized, issued, subscribed
• Terms of the issue - mode of payment , rights of instruments
holders etc.,
• Particulars of the issue - project cost , means of financing
etc.,
• Company, Management and project - promoters for the
project, location of the project etc.,
 REGULAR PROSPECTUS
• Disclosures of public issues made by the Company
giving information about type of issue, amount of issue,
date of closure of issue, etc.,

• Disclosure of Outstanding Litigation

Criminal Prosecution and Defaults

• Perception of Risk factors-

difficulty in marketing the products, availability of raw
materials etc.,
 PART II

 General Information

 Financial Information like Auditor‘s Report,

Chartered Accountant‘s Report etc.,

 Statutory and Other Information

 PART III
• Declaration i.e., by the directors that all the
relevant provisions of the companies Act,
1956 and guidelines issued by the
Government have been complied with.
• Application with prospectus
 ABRIDGED PROSPECTUS

• The concept of abridged prospectus was

introduced by the Companies (amendment)
Act of 1988 to make the public issue of shares
an inexpensive proposition.

• A memorandum containing the salient

features of a prospectus as prescribed is called
as Abridged Prospectus.
 ABRIDGED PROSPECTUS
• General information
• Capital structure
• Terms of issue
• Issue particulars
• Company , mgnt and project
• Financial performance
• Refunds and interest
• Risk factors
 PROSPECTUS FOR RIGHT ISSUE
• Shares are offered to the existing
shareholders, company is not required to
issue a prospectus.
 DISCLOSURES IN PROSPECTUS
• The following disclosures are mandatory by the SEBI with effect from Nov 1995.
• Project cost
• Turnover
• Assets and liabilities
• Major expansion
• Future projections
• Directors statement
• Promoter definition
• Promoter group definition
• Promoters shareholdings
• Share prices
• Agreements
 DISCLOSURES IN PROSPECTUS
• Management discussion and analysis
• Buy – back
• Major shareholders
• No responsibility statement
• Information about ventures promoted
• Risk factors
• Tax benefits
• Basis for issue price
• Ratios
 ADVERTISING CONSULTANTS

• Following are the guidelines applicable to the lead

merchant banker who shall ensure due compliance
by the issuer company:
• Factual and truthful
• Clear and concise
• Promise of profits
• Mode of advertising
• Financial data
• Risk factors
 ADVERTISING CONSULTANTS
• Issue date
• Product advertisement
• Subscription
• Issue closure
• Incentives
• Reservation
• Undertaking
• Availability of copies.
 Role of the Registrar
• the registrar role is to issue and the collection
centers in preparing

• application forms
• collection of applications
• the allotment
• and allotment money,
• reconciliation of bank accounts with application
money,
• listing of issues
• grievance handling.
 BANKERS TO THE ISSUE
• Any scheduled bank registered with SEBI can
be appointed as the banker to the issue.
• no restrictions on the number of bankers to
the issue.
• collection of application forms with money.
• It maintains a daily report.
• collected money with the application forms
submitted to the registrar
 UNDERWRITERS TO THE ISSUE
• An intermediary between an issuer of a
security and the investing public usually an
investment bank.
• An underwriter works closely with the issuing
body to determine the offering price of the
securities buys them from the issuer and sells
them to investors..
 Maximum Rate of Underwriting Commission

Nature of Issue On amounts developing on underwriters On amounts

subscribed
by public Shares(Equity & Preference)
and Debentures 2.5% 2.5%

Issue amount up to Rs.5 lakhs 2.5% 1.5%

Issue amount exceeding Rs. 5 lakhs 2.0% 1.0%

TYPES OF UNDERWRITERS
 Non Banking Financial Company
• loans and advances,
• acquisition of
shares/stock/bonds/debentures/securities
issued by government or local authority or
other securities of like marketable nature,
• leasing, hire-purchase, insurance business,
chit business,
 Syndicate underwriting
• Temporary group of underwriters and
investment banks formed for marketing of a
new bond or share (stock) issue that is too
large for any single entity to handle.
• It is dissolved after completion of the sale of
the securities. Also called underwriting group.
 BENEFITS / FUNCTIONS OF UNDERWRITING
MECHANISMS

• Adequate funds
• Expert advise
• Enhanced goodwill
• Assurance to investors
• Better marketing
• Benefits to buyers
• Benefits to stock market
 UNDERWRITING AGENCIES
• The Indian capital market is dominated by
several underwriting agencies such as private
firms, banks and financial Institutions, etc.
• Private Agencies
• Investment companies
• Commercial Banks
• Development Finance Institutions
 OBSTACLES
• Underwriters in India face several debilitating
conditions that constitute obstacle to their
progress. Some of the hardships faced by them
are as follows:
• Chaotic capital market
• Slow industrialization
• Managing agency system
• Bashful investors
• Lack of specialized institutions
• Unsuccessful corporate
 SEBI GUIDELINES
• SEBI has issued detailed guidelines regulating
underwriting as financial service. Following
are the important guidelines:
• Optional
• No .of underwriters
• Registration
• Obligations
• Sub underwriting
• Underwriting commission
 BROKERS TO THE ISSUE
• The appointment of brokers is not compulsory
and the companies are free to appoint any
number of brokers.
• The brokerage rate applicable to all types of
public issue of industrial securities is fixed at 1.5
percent, whether the issue is underwritten or
not .
 MEMBERS OF BROKERS
• Remisiers – These people are also known as 'half-commission'
men.
is an agent of a stockbroking company and receives a commission for each
transaction handled (as compared with a paid dealer's representative,
who is a direct employee of a stock broking company and whose
remuneration structure is based on a fixed monthly salary).
Kuala Lumpur Stock Exchange (or Bursa Malaysia) and the
Singapore Stock Exchange.

• Authorized clerk - These people are also known as 'Member

Assistants' and they are the authorized representatives or assistants of
members.
 MEMBERS OF BROKERS
• Brokers and Jobbers - Jobbers are those security merchants
that deal in shares, debentures at an independent level. Their job is
to purchase and sell securities at their own level and get the
maximum profit. Jobbers cannot deal on the behalf of public and
are barred from taking commissions. At least two prices are often
quoted by jobbers. One is at which they want to sell securities and
the other is at which they want to buy them.
• The London stock exchange has two types of members known as
jobbers and brokers. Every member has to declare in the beginning
of every year whether they will be acting as jobbers or brokers.
Once a declaration is made it cannot be altered
 MEMBERS OF BROKERS
• Tarawaniwalas - While commission brokers act on behalf of the
outside investors or other members, the Taravaniwalas deal on their own
account
• They resemble 'jobbers' on the London Stock exchange and the
'specialists' on the new York Stock Exchange.
• They trade in and out of the market for a small difference in price and
thereby provide the necessary liquidity and continuity of market in
securities.
• They often encroach upon the field of brokers and manipulate the prices
of securities against the broker unfavorable to them.
• These and other abuses of taravaniwalas are regulated now under the
provisions of the Securities Contracts (Regulation) Act.
 MEMBERS OF BROKERS
• Dealers
• Budliwalas - These people are the financiers
on the securities market. They lend cash to
the market by taking delivery of securities on
the due date at the end of clearing for those
who wish to carry over their purchases
 REQUIREMENTS FOR BROKERS

• Written tests
• Financial background
• Infrastructure
• Code of conduct
• Information
• Penalty for violation
 MARKETING OF NEW ISSUES
• marketing of the issue of securities by the
lead manager:
• Target market
• Target concentration - to assess the maximum number of
subscriptions that can be expected from the market.
• Pricing
• Mobilizing intermediaries - underwriter, broker/sub-broker,
fund arranger.
• Information contents
• Launching advertisement campaign
• Brokers‟ and investors‟ conferences – lead manager
 Methods
• The following are the various methods of marketing the
securities.
• Pure Prospectus Method
• Offer for Sale Method
• Private Placement Method
• Initial Public Offers Method
• Rights Issue Method
• Bonus Issue Method
• Book-building Method
• Stock Option Method and
• Bought-out Deals Method
 OFFER FOR SALE
• securities takes place through intermediaries,
such as issue houses, stockbrokers and others
• Two stages
• the first stage -the issuer company makes an en-block sale
of securities to intermediaries such as the issue houses and
share brokers at an agreed price.
• second stage - the securities are re-sold to ultimate
investors at a market-related price.
• profit‘ for the intermediaries – issue price and market price
 OFFER FOR SALE

• to meet out expenses such as underwriting

commission, prospectus cost, advertisement
expenses.
 PRIVATE PLACEMENT
• marketing of securities whereby the issuer
makes the offer of sale to individuals and
institutions privately without the issue of a
prospectus.
• securities are first sold to intermediaries such
as issues houses.
• They are in turn placed at higher prices to
individuals and institutions.
 INTIAL PUBLIC OFFER (IPO)
• The public issue made by a corporate entity for the first time
in its life is called Initial Public Offer‘ (IPO).
• Marketing securities are issued to successful applicants on
the basis of the orders placed by them, through their brokers.

Stocks
released
Issuing
Underwriter Public
company

Price determination
 PRIVATE PLACEMENT
• Private placements may typically consist of
stocks, shares of common stock or preferred
stock or other forms of membership
interests, warrants or promissory notes
(including convertible promissory notes), and
purchasers are often institutional investors
such as banks, insurance companies or
pension funds.
• In the United States, although these
placements are subject to the
Securities Act of 1933, the securities offered
do not have to be registered with the
Securities and Exchange Commission if the
issuance of the securities conforms to an
exemption from registrations as set forth in
the Securities Act of 1933 and SEC rules
promulgated there under.
• Most private placements are offered under
the Rules know as Regulation D.
 INTIAL PUBLIC OFFER (IPO)
• The public issue made by a corporate entity for the first time
in its life is called Initial Public Offer‘ (IPO).
• Marketing securities are issued to successful applicants on
the basis of the orders placed by them, through their brokers.

Stocks
released
Issuing
Underwriter Public
company

Price determination
 INTIAL PUBLIC OFFER (IPO)
STEPS OF MARKETING SECURITIES
• Order
• Share allocation
• The client
• Primary issue account
• Certificates
 BOOK BUILDING
• marketing the shares of a company whereby the quantum and
the price of the securities to be issued will be decided on the
basis of the bids‘ received from the prospective shareholders by
the lead merchant bankers is known as book-building method.

Investors Bid price Issuing

company
Lead MB

Public
 BOOK BUILDING PROCESS
As per SEBI guidelines
Appointment of book-runners
 appointment by issuing co. from the lead merchant bankers
 syndicate for book building
 Syndicate member by NSE& OTCEI
 The name of the book-runner is to be mentioned in the draft prospectus
submitted to SEBI.

Drafting prospectus


Circulating draft prospectus

 BOOK BUILDING PROCESS
Maintaining offer records – SEBI
• Book runner has to maintain records name, number of securities, type,
price

Intimation about aggregate orders - intimate to the

book runner by the institute investors and underwriters

Bid analysis An appropriate final price is arrived at after a careful

evaluation of demands at various prices and the quantity.

Mandatory underwriting an issue is made through book-

building route, it is mandatory that the portion of the issue offered to the
public be underwritten
 BOOK BUILDING PROCESS
• Filling with ROC Registrar of Companies within two days
• Bank accounts – two separate accounts , one for private
placement and other for public subscription.

• Collection of completed applications

from institutional buyers with application money one day before the issue
issues to the public.
Allotment of securities – to private placement and public
 BOOK BUILDING PROCESS
• Payment schedule and listing – 11 th
day of issue
closure date
• Under-subscription under-subscription is to be permitted
from the placement portion‘ category subject to the condition that
preference is given to the individual investors.
 GREEN – SHOE OPTION

• The term "green shoe" came from the Green

Shoe Manufacturing Company (now called
Stride Rite Corporation), founded in 1919.
• It was the first company to implement the
green shoe clause into their underwriting
agreement.
• In a company prospectus, the legal term for the
green shoe is "over-allotment option", because in
addition to the shares originally offered, shares are
set aside for underwriters.
 GREEN – SHOE OPTION
• The underwriter works as a liaison (like a
dealer), finding buyers for the shares that
their client is offering.
• A price for the shares is determined by the
sellers (company owners and directors) and
the buyers (underwriters and clients).
 BOUGHT OUT DEALS

• A bought out deal is a process offering

securities to public through sponsor (a bank,
financial institution, or an individual.

• The Securities and Exchange Board of India

mandates that only private companies can
choose this method of issuing securities
 PLACEMENT WITH FIS, MFS, FIIS

• All Financial Institutions

• Export Credit Guarantee Corporation (ECGC)

• Export Import Bank (Exim Bank)

• Industrial Credit and Investment Corporation

of India (ICICI)
• Industrial Credit and Investment Corporation
of India Ventures (ICICI Ventures)

• Industrial Development Bank of India (IDBI)

• Industrial Finance Corporation of India (IFCI)

• Industrial Investment Bank of India (IIBI)

• Infrastructure Development Finance Company

(IDFC)

• Investment by Insurance Companies

• National Bank of Agriculture and Rural Develo

pment (NABARD)
• National Small Industries Corporation (NSIC)
• Non-Banking Financial Company (NBFC)
• North Eastern Development Finance Corporati
on (NEDFi)

• Risk Capital and Technology Finance (RCTF)

• Small Industries Development Bank of India (SI
DBI)
• State Industrial Development Corporations (SI
DCs)

• Tourism Finance Corporation of India (TFCI)

• Unit Trust of India (UTI)

 ISSUE MARKETING

• Following are the various methods being adopted by

corporate entities for marketing the securities in the
New Issues Market.
• Pure prospectus method
• Offer for sale
• Private placement
• Initial public offerings
• Right Issue method
• Bonus Issue methods
• Book – building Method
• Stock option method and
• Bought out Deals methods
• Over the counter placement
• Tender method
 ADVERTISING STRATEGIES

• Bigger and well established companies having reputed

promoters with a track record and professional management
could secure easily oversubscription multifold.
• Medium and small sized projects and relatively new and first
generation promoters face stiff competition. Adequate pre-
issue planning and proper marketing strategy have become
absolutely necessary.
• Investors have become extremely choosy and shy of the
majority of new issues.
 POST – ISSUE ACTIVITIES

• Principles of allotment
• Formalities associated with Listing
 Principles of allotment

• After the closure of the subscription list, the

merchant banker should inform with in 3 days of the
closure, whether 90% of the amount has been
subscribed or not.
• If it is not subscribed up to 90% then the underwriters
should bring the shortfall amount with in 60 days. In
case of over – subscription, the shares should be
allotted on a pro –rata basis and the excess amount
should be refunded with the interest to the share
holders with in 30 days from the date of closure.
Formalities associated with Listing
• The SEBI lists certain rules and regulations to
be followed by the issuing company.
• These rules and regulations are laid down to
protect the interests of investors.
• The issuing company should disclose to the
public its profit and loss account, balance
sheet, information relating to bonus and right
issue and any other relevant information.
 OFF – SHORE ISSUES

• An offshore bank is a bank located outside the country of

residence of the depositor, typically in a low tax jurisdiction
(or tax haven) that provides financial and legal advantages

• greater privacy ( a principle born with the 1934 Swiss Banking

Act)

• low or no taxation (i.e. tax havens)

• easy access to deposits (at least in terms of regulation)

• protection against local political or financial instability

• offshore banks are located in island
• Swiss banks and those of other landlocked
nations such as Luxembourg and Andorra.

• underground economy and organized crime,

via tax evasion and money laundering