Merchant banking

BY,

JOSMI AND JOSEMON

MANAGEMENT OF FINANCIAL SERVICES

ROLE OF MARCHANT BANKER

RECENT DEVELOPMENTS IN MERCHANT BANKING ESTABLISHMENTS IN INDIA

MERCHANT BANKING IN INDIA

MERCHANT BANKING REGULATIONS

CODE OF CONDUCT

TOPICS

What Is 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 etc.

They all render these service for a fee. Both commercial and investment banks

may engage in merchant banking activities.

The original purpose of merchant banks was to facilitate and/or finance production and trade of commodities and hence the name "merchant“.

As a promoter

As an advisor

As a managerial economist

As a financial and investment expert

As a manager

As a rehabilitator.

Role of Merchant Banking

He translates the ideas into ventures by providing a number of promotional services such as

a. Identification of projects

b. preparing feasibility report

c. Obtaining govt approvals

d. Raising funds for the project

As a promoter

After the project is promoted then he can act as an advisor

He can give advises for

a. Financial planning

b. Tax planning

c. Issue management

d. Credit syndication

e. Investment management

Etc. will help the entrepreneurs

He can give useful advises to the investors also

As an advisor

He guides the client on the aspects of

a. Organisational goals

b. Locational factors

c. Organisational size

d. Operational scale

e. Choice of a product and market survey

f. Cost reduction and cost analysis

g. Allocation of resources

h. Investment decisions

i. Capital management and expenditure control

j. Pricing methods

As a managerial economist

MB has to guide the corporate clients in areas

a. Financial reporting

b. Project measurement

c. Working capital management

d. Financial requirements and source of finance

e. Evaluating financial alternatives

f. Rate of return and cost of capital

As a financial and investment expert

MB acting as a manager to issue settles the fees for

a. Advocates/solicitors advice

b. Accountants certification

c. Brokers and bank charges

d. Underwriters commission

e. Advertising and publicity expenses

If proper coordination not done, the success of the issue may be rendered unassured.

As a manager

MB Play a role of rehabilitator also that is

a. At the time of acquisition,

b. mergers,

c. take over,

d. amalgamation etc

As a rehabilitator

Setting up banks subsidiaries

Reorganisation of private firms

Establishment of SUA

Security Exchange Board of India

Discount and finance house of India

Credit Rating Information Services of India

Recent developments in Merchant Banking establishments in India

In order to meet the growing demand

The MB divisions of the nationalised banks started forming independent subsidiaries

These subsidiaries offer more specialised services with professional expertise and skills

SBI Capital markets LTD was started as the 1st subsidiary of SBI on 2nd july 1986

The canara bank in 1987

Many more subsidiaries are being setup by other nationalised banks

Setting up banks subsidiaries

Expecting Tough competition is growing number of MB subsidiaries companies of nationalised banks,

Private Merchant bankers are also started reorganising their activities

Eg: JM Financial & investment consultancy LTD, LKP Merchant financing LTD

Etc are some of the private sectors firms of merchant bankers who has taken steps to reorganise their activities

Reorganisation of private firms

In order to educate and protect the interest of invertors,

To provide information about the new issues of capital market.

SUA works in co-ordination with merchant bankers and take steps for promoting the activities of capital market

Establishment of SUA ( Stockbrocker Underwriters Association)

To develop and regulate security market, investors protection and to formulate rules and guidelines for regulation of securities market the central government constituted SEBI on April 4, 1988.

The central government delegates all functions to the board or chairman.

The person dealing in security market, MB, under writers, sub-brokers, portfolio managers, mutual funds etc have to seek authorisation from the board.

Security Exchange Board of India

It was incorporated as a company under the companies act 1956

Its aim is to providing liquidity in money market as it deals mainly in commercial bills

Discount and finance house of India (DFHI)

It has been setup in 1987

Provided to help investors, merchant bankers, underwriters brokers banks and financial institutions

It rates various types of instruments like debt , equity and fixed return securities offered to the publics

It helps investors in taking investment decisions.

CRISIL

MB services in India were started only in 1967 by Grindlays Bank followed by Citi Bank in 1970.

Merchant Banking services was offered along with other traditional banking services.

SBI was first Indian bank to set up merchant banking division in 1972.

The ICICI set up its merchant banking division in 1973.

It was followed by other commercial banks like Canara Bank, Bank of Baroda, Bank Of India, Syndicate Bank, Central Bank Of India, PNB, UCO Bank etc.

Merchant Banking In India

CB and their subsidiaries

Foreign banks including National Grindlays Bank, Citi Bank, Hong Kong Bank.

All financial institutions and developments Banks (ICICI, IFCI, IDBI)

Technical consultancy organisation

Professional MB house ( VMC project technologies)

At present the MB services in our country are provided by the following types of organisation

Grindlays Bank (1967) .

City Bank ( 1970).

SBI (1972).

Other Banks – Private Banks, Foreign Banks.

Financial Institutions – Commercial Banks, Development Banks.

Growth of Merchant Banks in India

According to Securities and Exchange Board of India (Merchant Bankers) Rules, 1992, it is mandatory for a merchant banker to hold a certificate of registration granted by the Securities and Exchange Board of India,

no person can act as a merchant banker.

If a person/organisation wants to carry or undertake any of the authorised activities, has to get registered under the regulations.

To obtain the certificate of registration, one has to apply in the prescribed form and fulfill two set of norms

(a)operational capabilities and

(b)capital adequacy norms

SEBI (MB) Regulations, 1992

Category 1 : these merchant bankers can act as issue manager, advisor, consultant, under writer and portfolio manager

Category 2 : such merchant bankers can act as advisor, consultant, underwriter and portfolio manager. They cant act as issue managers of their own, but can act as co- manager

Category 3 : they are allowed to act as underwriter, advisor and consultant. they can neither undertake issue management of their own nor they act as co-manager. They cant undertake the activities of portfolio management.

Category 4 : this category can merely act as consultant or advisor to an issue of capital.

Classification of merchant bankers

SEBI has prescribed capital adequacy norms for registration of the various categories of MB. The capital adequacy is expressed in terms of minimum net worth that is capital contributed to the business plus free reserves

The following are the capital adequacy norms as laid down by SEBI

Category I : Rs.5 crores

Category II : Rs.50 lakhs

Category III : Rs.20 lakhs

Category IV : Nil

Capital adequacy norms

Observe high standards of integrity and fairness in all his dealings.

Render high standard of service, exercise due diligence, proper care, exercise independent judgment & disclose conflict of interest while providing unbiased service.

Code of Conduct for MB

Not make exaggerated statements, written or oral, to the client either about the qualification or the capability to render certain services or his achievements in regard to services rendered to other clients.

Render best possible advice to the client having regard to the clients needs and the environment and his own professional skill;

Ensure that all professional dealings are effected in a prompt, efficient and cost effective manner.

A MB shall not divulge to other clients, press or any other party any confidential information about his client, which has come to his knowledge.

Deal in securities of the client company without making disclosure to the board as required under the regulation and also to the Board of Directors of the client company.

Provide investors with true and adequate information without making any misguiding or

exaggerated claims and are aware of attendant risks before any investment decisions are made.

Ensure copies of prospectus, memorandum and related literature are made available to investors.

Fair allotment of securities and refund of application money without delay.

Investor complaints are adequately dealt with.

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 render best possible advice to its clients.

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

Should inform the Board about legal proceedings initiated against it.

Should abide by the rules of SEBI, 2003.

Should ensure that any person it employs should have the capacity to be a merchant banker.

The MB shall not generally and particularly in respect of issue of any securities be party to Creation of false marketPrice rigging or manipulationPassing of price sensitive information or take any other action which is unethical or unfair to the investors.

A MB shall abide by the provisions of the Act, rules and regulations which may be applicable and relevant to the activities carried on by the merchant banker.

Thank you