Merchant Banking Essay

A merchandiser relying is a financial institution in the main engaged in offering financial services and advice to troupe and wealthy individuals on how to use their m iodiny. A merchandiser avow deal with mercenary swearing needs of pay, company & long term loans and stock writing. merchandiser trusting does non exhaust retail offices where customer shadow go and access their account. A merchandiser bank is also citeed as wholesale banking.OBJECTIVE chief(prenominal) objective of merchandiser banking is coordinating the make believeivities like the bankers, advertising agency, printers and general agents and so on pack companies to get register there shargon under SEBI act.The merchandiser banking check over the number of sh argon, price of the stocks and the timing of the release of this in the raw stock. They also appropriate services to the finance housing objects for the construction of houses and buying of land.History and increase of merchandiser B anking in India ahead 1960s there was no merchant banking in India. This system started after 1960s. The Grind lays bank was the firstly bank which started merchant banking services. Grind lays bank is the largest contrasted bank in the country. The main service offered by merchant banking includes the management of man takingss and roughly aspects of financial consultancy. After this more banks took beginning(a) of merchant banking services. Bank like Citibank came in 1970. merchandiser banking with Citibank play post in new entrepreneur and evaluation of new cast off. Raising bills through equity took slur. Management consultancy services were started. State bank of India started the merchant banking in 1972. Before 1972 state bank of India used to single will funds. But after 1972 state bank of India started multi-tasking. commercialized banks which followed state bank of India were1. Central bank in 1977.2. Syndicate bank in 1977.3. prototype chartered bank, merca ntile bank and bank of Baroda in 1978.4. United bank of India, Punjab national bank, canara bank, Indian overseasbank in late 70s and in early 80s.Importance of merchant Banking deprivation for merchant Banking is felt in the wake of huge earth nest egg lying untapped. merchant bankers can play highly significant component in mobilizing funds of savers to investible channels assuring promising returns on investments and and so can assist in meeting the widening demand for ineluctable funds for economic activity. With growth of merchant banking profession corporate enterprises be undertaking expansion, modernization, and diversification of the existing enterprises. This reinforces the need for a vigorous authority to be played by merchant banking.Reasons why specialist merchant banks have crucial role to play in India 1) Growing industrialization and increase of technologically advanced industries. 2) Need for encouragement of small and strength industrialists, who require specialist services. 3) Growing complexity in rules and procedures of the government. 4) Need to get around backward areas and states which require different criteria. 5) Exploring the possibility of joint ventures abroad and abroad securities industrys. 6) Promoting the role of refreshing Market in mobilizing savings from the universal.Functions performed under Merchant BankingThe chief(prenominal) plays of merchant bankers are1) Management of Debt and Equity OfferingsThis forms the main function of the merchant banker. He assists the companies in raising funds from the trade. The undergoing tasks include dick designing, pricing the issue, accommodation of the offer document, underwriting support, commercializeing of the issue, allotment and deliver and itemization on stock exchanges. 2) Placement and DistributionThe merchant banker helps in distributing diverse securities like equity overlaps, debt instruments, mutual funds, insurance products, and commercial pap er, to name a few. The distribution network of the merchant banker can be classified as institutional and retail in nature. The institutional networkconsists of mutual funds, foreign institutional investors private equity funds pension funds, financial institutions, etc.3) Corporate Advisory ServicesIt denotes advice provided by a merchant banker to a corporate unit to look into better corporate unit to ensure better corporate performance in terms of image build among investors, steady growth through good working, appreciation in market value of its equity shares. The counseling is limited to only opinions and suggestions and any critical analysis would form part of a specific service4) brook Advisory ServicesProject counseling is a very important and lucrative merchant banking service. It covers development of an idea into a project, prep of the project report , estimation of the cost of the project and deciding upon the means of financial and techno-economic appraisal of proj ects for gravid issue/financing etc. The fee supercharged for project report preparation / appraisal ranges mingled with 0.25% to 2% of the quantity project cost. The fee charged depends upon- a)Total size of the projectb)The total complexity of the project5) Loan SyndicationMerchant bankers arrange to tie up loans for their clients. This takes place in a series of steps. Firstly, they analyze the pattern of the clients cash flows, run agroundd on which the terms of the borrowings can be defined. indeed 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. 6) Providing Venture Capital FinancingMerchant bankers help companies in obtaining venture nifty financing for financing their new and innovative strategies. 7) Management of Capital Issuesa) Pre-issue Manage ment step take to be taken to manage Pre-issue activity are as follows1) Obtaining stock exchange approvals tomemorandum and articles of association.2) Taking action as per SEBI guidelines.3) Finalising the appointments of the following agencies Co managers /advisors to the issue.Underwriters to the issue.Brokers to the issue.Bnakers to the issue and refund banker.Advertising agency.Printers and vertical flutes to the issue.4) Advise the company to appoint auditors, sanctioned advisers and broad base identity card of Directors.5) Drafting the prospectus.6) Obtaining approvals of draft prospectus from the companys legal advisors, underwriting financial institutions/banks.7) Obtaining consent from parties and agencies acting for the issue to be enclosed with the prospectus.8) flattery of prospectus from Securities and exchange Board Of India(Sebi).9) Filing of the prospectus with registrar of companies (Roc)10) do an finishing for enlistment with Stock Exchange along with copy of the prospectus.11) packaging of the issue with advertisement and conferences12) Open subscription list.B) Post Issue ManagementSteps involved1) To verify and confirm that the issue is subscribed to the extent of 90% including development from underwriters in campaign of subscription. 2) To supervise and co-ordinate the allotment procedures of registrar to the issueas per prescribed Stock Exchange guidelines. 3) 3)To ensure issue of refund order , allotment letters/certificates deep d declare the prescribed eon limit of 10 weeks after the closure of subscription list 4) To report sporadically to SEBI ab by the progress in the matters think to allotment and refunds. 5) To ensure the listing of securities at a stock exchanges. 6) To attend the investors for managers regarding the public issue. 7) The merchant bankers managing public issue can negotiate fee subject to a roof .This fee is to be shared by all lead managers, advisers etc.Registration with SEBI as Merchant BankerM erchant banks are generally frame-up as subsidiary companies of banks. For e.g. SBI caps, ICICI securities etc. Once the feasibility studies are undertaken and it comes out to be viable then the following steps are undertaken for registration with SEBI Application for grant of certificateAn application for grant of certificate is required to be make with SEBI as without holding the certificate no individual can act as a merchant banker. The application can be made in one of the following categories 1. house 1 To carry out any activity of issue management which includes preparation of prospectus and other education relating to issue, determining financial structure, tie up of financers and financial allotment, and refund of the subscription. Another activity that pertains to this category is of advisor, consultant manager, underwriter, portfolio manager. 2. form 2 To act as advisor. Consultant, co manager, underwriter and portfolio manager. 3. Category 3 To act as underwriter, ad visor, and consultant to an issue. 4. Category 4 To act only as advisor and consultant to an issue. To carry on the activity of underwriter and portfolio manager, a separate certificate of registration needs to be obtained from SEBI.Furnishing of information, clarification, and in the flesh(predicate) representation The applicator may need to provide further information or clarification regarding matters related to activity of merchant banker. Consideration of applicationBefore granting the certificate, the Board shall take into account that theapplicant complies with the following fate 1. The applicant shall be a body corporate other than a non banking financial company. 2. The merchant banker who has been granted the certificate by RBI to act as primary dealer shall carry on such activity with the condition that it should not accept or hold any public deposit. 3. The applicant should have necessary infrastructure to carry on his activities. 4. The applicant should employ atl east two soulfulnesss who have the experience to conduct the business of merchant banker. 5. The applicant should fulfill the capital adequacy demand as follows The capital adequacy requirement should not be less than the net worth(predicate) of the applicant. The net worth shall be as follows Category 1 5 croresCategory 2 50 lacsCategory 3 20 lacsCategory 4 Nil6. The applicant or any of his associate should be free of any legal charges, should not have been convicted for any umbrage and not found guilty of any economic offence. 7. The applicant should birth professional qualification from any recognized govt. institute in finance law or business management. Procedure for registrationThe SEBI on existence satisfied with the eligibility of the applicant shall grant him a certificate . Payment of feesThe applicant has to pay Rs. 5 lacs within 15 days of date of recognise of intimation regarding grant of certificate. If the merchant banker fails to pay the required fee, the Board may suspend the registration and applicant may cease to carry on activity as merchant banker for the period during which the subscription subsists. The merchant banker may generate on the business as merchant banker on the acquisition of award of Registration from SEBI after the completion of above mentioned formalities. Procedure for Inspection Boards Right to inspect The Board may appoint one or more persons as inspecting authority to undertake watchfulness of the books of accounts, records and documents of the merchant banker for any of the purposes specified in sub-regulation (2). Notice before recapBefore undertaking an followup, the Board shall give a reasonable apprisal to the merchant banker for that purpose. Where the Board is satisfied that in the interest of the investors no such notice should be given, it may inspect without prior notice. During the course of recapitulation, the merchant banker against whom an inspection is cosmos carried out shall be bound to d ischarge his obligations. Obligations of Merchant Banker on InspectionIt shall be the duty of every director, proprietor, partner, officer and employee of the merchant banker, who is being inspected, to produce to the inspecting authority such books, accounts and other documents in his custody or control and furnish him with the statements and information relating to his activities as a merchant banker within such time as the inspecting authority may require. The merchant banker shall pass on the inspecting authority to have reasonable access to the premises occupied by such merchant banker or by any other person on his behalf and also extend reasonable facility for examining any books, records, documents and computing device data in the possession of the merchant banker or any such other person and also provide copies of documents or other materials which, in the opinion of the inspecting authority are relevant for the purposes of the inspection.The inspecting authority, in the c ourse of inspection, shall be entitled to examine or record statements of any principal officer, director, partner, proprietor and employee of the merchant banker. It shall be the duty of every director, proprietor, partner, officer or employee of the merchant banker to give to the inspecting authority all assistance in connection with the inspection which the merchant banker may be reasonably judge to give. Submission of composition to the BoardThe inspecting authority shall, as soon as possible submit, an inspection report to the Board. Action on Inspection or Investigation dealThe Board of the Chairman shall after consideration of inspection or probe report take such action. Appointment of AuditorThe Board may appoint a qualified auditor to investigate into the books of account or the affairs of the merchant banker. Communication of findingsThe Board shall after consideration of the inspection report communicate thefindings to the merchant banker to give him an opportunity of being hear before any action is taken by the Board on the findings of the inspecting authority. On receipt of the explanation if any, from the merchant banker, the Board may call upon the merchant banker to take such measures as the Board may oblige fit in the interest of the securities market and for repayable compliance with nutriment of the Act, rules and regulations.Guidelines of SEBIThe SEBI has issued guidelines for the issue of capital by companies. The guidelines mainly cover the requirement for the first issue by a new or existing company. The guidelines issued by SEBI are mentioned below If any companys other income exceeds 10% of the total income, the details should be disclosed. The company should disclose any obstinate situation which affects the operations of the company. The company should also disclose the capacity use of goods and services of plant for the last 3 years. The promoters must maintain their holding at least 20% of the expanded capital. The minimum application money collectible at the time of issue should not be less than 25% of the issue price. The company should disclose the time normally taken for the governance of investors grievances. The company can make firm allotments in public issues as follows 1. Indian Mutual funds (20%)2. FIIs (24%)3. Regular employees of the company (10%)4. Financial institution (20%)The company should disclose the safety net scheme or buy back arrangements of the shares proposed in public issue. In case of public issues, atleast 30 mandatory collection centres should be established. In the guidelines regarding ripe(p) issue, the company should give advertisements in not more than 2 newspapers nearly the dispatch of letter of offers. No preferential allotment to be made along then rights issue. The company should disclose the free agreement between the lead managers and the company in the memorandum of understanding.Difference between Merchant Banking and Commercial BankingMERCHANT BANKINGCOM MERCIAL BANKINGMerchant banking deals with equity and equity related finance. Merchant banks are management oriented.Merchant banks willing to accept risks of business.The activities of merchant banks include project counseling in area of capital restructuring, mergers, amalgamations e.t.c.Commercial banking deals with debt and debt related finance. Commercial banks are asset oriented.Commercial banks generally void risks of business.Commercial bankers are merely financiers.Difference between Merchant Banking and enthronization BankingMERCHANT BANKINGINVESTMENT BANKINGMerchant banking is purely fee based.Merchant banking are impossible to stay aloof from international trends. Merchant banks expands into the field of securities, underwriting Merchant banking primarily perform international financing activities such as1. foreign corporate investing2. Foreign real estate investment.3. Trade finance and inter transaction facilitation.Merchant banks tends to operate on small crustal plate companies and offer creative equity financing ,and numbers of corporate conviction products.Investment banking is both fee based and fund based.Investment banking commits their own funds.Investment banks trade finance activities.Investing banking facilitate mergers and acquisitions through share sales and provide research and financial consulting to companies. It thinkes on IPOs and large public and private share offering. While investment banks tends tofocus on large companies. Recent developments in Merchant BankingThe recent developments in merchant banking are due to certain contributory factors in India are The merchant banking was at its best during 1985-1992 when there were some(prenominal) new issues . It was expected that 2010 going to be good time for merchant banks , as many new issues are coming up . The foreign investors- both in the form of portfolio investment and through foreign direct investments are venturing in Indian Economy. It is increasing the scope of merchant bankers in many ways. Disinvestments in the government sector in the country give a bountiful scope to the merchant bankers to function as consultants. Introducing of new financial instruments in the market has increase the opportunity for the merchant banks. The merger and corporate restructuring along with MOU and MOA are giving immense opportunities to the merchant bankers for consultancy jobs.Challenges faced by Merchant Banker in IndiaSEBI guideline has restricted their operations to Issue Management and Portfolio .Management to some extent due to which the scope of work is limited. The net worth requirement is very high in categories I and II specially so many professionally experienced person/organizations cannot come into the picture. Poor New issues market in India is drying up the business of the merchant bankers.Scope for Merchant Banking1. Growth of primary market if the primary market grows and issues increases, the scope of merchant banking will be enhanced .2. Entry of foreign investment at present India capital market directly taps foreign capital through euro issues.FDI is increased in capital market .so merchant bankers is required to advice them for their investment in India. The increasing number of joint ventures also requires expert services of merchant bankers. if more and more NRIs participate in capital market ,there will be great demand for merchant banker services.3. Changing constitution of financial institutions now the lending prices of financial institutions are based on project orientation, so the merchant banker services will be necessary by corporate enterprise to provide expert guidance.4. Development of debt markets if the debt market is enhanced, there will be tremendous scope for merchant bankers, now NSE and OTCEI are planned to raise funds through their debt instruments.5. Corporate restructuring due to liberalization and globalization companies are facing lot of competitions .In order to compete, they have to restructuring, merger, acquisitions or disinvestments. They offer good opportunities to merchant bankers.