Merchant Banking

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Information about Merchant Banking
Education

Published on April 19, 2010

Author: aSGuest43070

Source: authorstream.com

Slide 1: Financial Services: An Introduction 1 Meaning and Concept : Meaning and Concept Financial services are services that ensure the smooth flow of financial activities in the economy It including banking, insurance, stock broking and investment services as well as business and professional services. Cater the need of financial institutions, financial markets and financial instruments Financial services include the services offered by both Asset Management companies and Liability Management companies 2 Meaning and Concept : Meaning and Concept Financial Services help to raise the required funds but also ensure their efficient deployment To ensure an efficient management of funds, services such as bill discounting, factoring of debtors, parking of short term funds in money market, e-commerce and securitization of debts are provided by financial service firms This sector provides services such as banking, insurance, credit rating, lease financing, factoring, venture capital, mutual funds, merchant banking, stock lending, depository services, housing finance 3 Characteristics of Financial services : Characteristics of Financial services Customer-Specific: Focused, need of the customer, due regard to cost, liquidity and maturity consideration Intangibility: Quality and innovativeness of their services to build up their credibility Concomitant: Production of new and innovative financial services and supplying of these services are to be performed simultaneously Tendency to Perish: Proper synchronization of demand and supply People based services: People incentive and hence its subjected to variability of performance or quality of service Market Dynamics: Constantly redefined and refined taking into consideration of various dynamics in financial services 4 Types of financial services : Types of financial services Financial services industry classifying the financial services under three broad categories Fee Based services Fund Based services Insurance Services 5 Fee Based Services : Fee Based Services Financial institutions operate in specialized fields to earn a substantial income by way of fees, dividend commission, discount and brokerage on operations. Issue Management Corporate Advisory Services Credit Rating Mutual Funds Assets Securitization 6 Fund Based Services : Fund Based Services The firm raises funds through equity, debt, and deposits and invests these funds in securities or lends to those who are in need of capital Leasing and Hire Purchase Hosing Finance Credit Cards Venture Capital Factoring Forfaiting Bill Discounting 7 Merchant Banking : Merchant Banking Merchant Banking-An Overview : Merchant Banking-An Overview Companies raise capital by issuing securities in the market. Merchant bankers act as intermediaries between the issuers of capital and the ultimate investors who purchase these securities. Merchant Banking-An Overview : Merchant Banking-An Overview Merchant banking… is the financial intermediation that matches the entities that need capital and those that have capital. It is a function that facilitates the flow of capital in the market. Ministry of Finance: “Any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management” Slide 11: 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 render all these services for a fee ORIGIN : 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” Merchant Banking-An Overview : Merchant Banking-An Overview Banking commission Report-1972 Necessity Distinct from commercial Banks Investment Management and Advisory services Medium and small savers Manage Merchant Banking in India : Merchant Banking in India Grindlays Banks-1967 Management of capital issue Production planning, system design to market research Management consultancy Citibank-1970 SBI-1972 Services rendered : Services rendered Organising finance for investment in projects Assistance in financial management Acceptance of house business Raising Eurodollar loans and issue of foreign currency bonds Financing export of capital goods, hydropower Financing of hire-purchase transaction, leasing Mergers, takeovers, valuation of assets Regulation : Regulation Merchant Bankers Regulations of Securities and Exchange Board of India Company Act 1956 Listing guidelines of Stock Exchanges Securities Contracts (Regulation) Act, 1956 Formation of divisions Subsidiaries companies Structure : Structure Category-I to carry on any activity of the issue management, 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 subscription; and to act as adviser, consultant, manager, underwriter, portfolio manager. Structure : Structure Category II that is, to act as adviser, consultant, co-manager, underwriter, portfolio manager; Category III that is to act as underwriter, adviser, consultant to an issue; Category IV that is to act only as adviser or consultant to an issue. Registration with SEBI : Registration with SEBI Around 250 Merchant Bankers Abolished all categories and maintained Category-I Separate registration for underwriters and portfolio manager Segregation between fee based and Fund based activities Registration with SEBI : Registration with SEBI 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 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 applicant should have a minimum net worth of Rs.5 crores Authorized Activities : Authorized Activities Issue Management Preparation of prospectus Information relating to the issue Determining financing structure Tie-up of finances and final allotment and/or refund of subscription Corporate advisors to the issue Consultants or advisors to issue and underwriting Terms of Authorization : Terms of Authorization Authorization is valid for an initial period of 3 years Authorization fee, annual fee and renewal fee All issues should be managed by at least one authorized merchant bankers, functioning as sole manager or lead manager MB expected to exercise due diligence independently Involvement of MB in post-issue management Adhere a code of conduct prescribed by SEBI MB may be cancelled or suspended for suitable duration MB regulations integrate issue management with underwriting General Obligations and Responsibilities : General Obligations and Responsibilities Maintenance of books of accounts, records and documents Copy of the balance sheet, auditor’s report and statement of financial position Responsibilities of lead Manager Underwriting obligation Submission of due diligence certificate Insider Trading Acquisition of shares Main functions of a merchant banker : Main functions of a merchant banker Management of debt and equity offerings- This forms the main function of the merchant banker. He assists the companies in raising funds from the market. The main areas of work in this regard include: instrument designing, pricing the issue, registration of the offer document, underwriting support, marketing of the issue, allotment and refund, listing on stock exchanges. Placement and distribution- The merchant banker helps in distributing various securities like equity shares, debt instruments, mutual fund products, fixed deposits, insurance products, commercial paper to name a few. The distribution network of the merchant banker can be classified as institutional and retail in nature. Functions : Functions Corporate advisory services- Merchant bankers offer customized solutions to their clients financial problems. The following are the main areas in which their advice is sought: Financial structuring includes determining the right debt-equity ratio and gearing ratio for the client, the appropriate capital structure theory is also framed. Merchant bankers also explore the refinancing alternatives of the client, and evaluate cheaper sources of funds. Another area of advice is rehabilitation and turnaround management. In case of sick units, merchant bankers may design a revival package in coordination with banks and financial institutions. Risk management is another area where advice from a merchant banker is sought. He advises the client on different hedging strategies and suggests the appropriate strategy. Functions : Functions Project advisory services- conceptualizing the project idea feasibility studies Preparing different documents like the detailed project report. Loan syndication- Tie up loans for their clients Analyze the pattern of the client’s cash flows Prepares a detailed loan memorandum This takes place in a series of steps. Firstly they, based on which the terms of borrowings can be defined. Then the merchant banker, which is circulated to various banks and financial institutions and they are invited to participate in the syndicate. Slide 26: 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. LOAN SYNDICATION : Assistance is rendered to raise loans for projects after determining promoter’s contribution. These loans can be obtained from a single institution or a consortium. Slide 27: ISSUE MANAGEMENT : Management of issues involves marketing of corporate securities ie…equity shares, preference shares and debentures by offering them to public. Pre-issue activities: They prepare copies of prospectus and send it to to SEBI and then file them to Registrar of Companies They conduct meetings with company representatives and advertising agencies to decide upon the date of opening of issue, closing of issue, launching & publicity campaign etc.. They help the companies in fixing up the prices for their issues Post-issue activities: It includes collection of application forms, screening of applications, deciding allotment procedure, mailing of allotment letters, and refund orders Slide 28: 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 : SEBI insist that all issues should be managed by atleast one authorised merchant banker but not more than two. For an issue of 100 crores, upto a maximum of four merchant bankers shall be appointed. They help in listing of shares in stock exchange, completion of formalities under Companies Act etc.. Slide 29: 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 Investors are interested in safety, liquidity and profitability of his investment but they cant choose the appropriate securities. So merchant bankers help their investors in choosing the shares. They conduct regular market and economic surveys. Slide 30: 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 Takeover is the purchase by one company acquiring controlling interest in the share capital of another company Merchant banker acts as middlemen between offeror and offeree,negotiates mode of payment and gets approval from government. Slide 31: OFF SHORE FINANCE : Merchant bankers help their clients in : Long term foreign currency loan Joint venture abroad Financing exports and imports Foreign collaboration arrangement Slide 32: 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.. SFC , SIDCs Private firms like JM Financial and Investment service , DSP Financial Consultants, Ceat Financial Services, Kotak Mahindra, VMC Project Technologies, Morgan Stanley, Jardie Fleming, Klienwort Benson etc… Slide 33: SOME 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

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