CAIIB Super Notes: Corporate Banking: Module B: Investment Banking: Merchant Banking

CAIIB – Super-Notes © M S Ahluwalia Sirf Business

Merchant Banking

Module B: Investment Banking

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CAIIB – SUPER NOTES

Corporate Banking: Merchant Banking





Contents

Coverage: 1. Merchant banking in India

2. Introduction

3. History and origin of Merchant Banking in India

4. Merchant Bank

5. Role of Merchant Banker

6. Organisational Setup of Merchant Bankers in India

7. Main objectives of Merchant Bankers

8. Code of Conduct

9. SEBI Guidelines

10. Services of Merchant Bankers in India

11. Qualities of Merchant Bankers

12. Scope for Merchant Banking in India

13. Important Events

14. Association of Merchant Bankers in India

15. Further Readings





MERCHANT BANKING IN INDIA

1.





Merchant banking in India

• A body corporate who carries on any activity related to the

issue management, which consists of preparing prospectus

and other information relating to the issue.

• MBs in India are not allowed to conduct any business other

than that related to securities market

• No official category of investment banking





INTRODUCTION

2.





Merchant Banking

• Merchant Bank is a Financial Institution primarily engaged in

offering financial services and advice to corporations and wealthy

individuals on how to use their money

• Also includes private equity activities of banking

• According to notification of the MoF Merchant Banker is “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





HISTORY AND ORIGIN OF MERCHANT BANKING IN INDIA

3.





Merchant Banking in India

• Till 18th century moneylenders, moneychangers, village

merchants(Mahajans) and saucers performed the functions of

banks and merchant banks

• Also issued and discounted Bills of Exchange (Hundis) and bank

drafts

• Gave loans on mutual trust, on mortgage of lands, ornaments and

other property

• Jagat Sheth and Habib & Sons were a couple of Merchant Bankers

of this era





Merchant Banking in India – Post Independence

• In 1967 RBI issued the first merchant banking license to Grindlays.

• Citibank setup its MB division in 1970

• In 1972 SBI started its MB division

• Commercial Banks and foreign development finance institutions

have organized MBs through formation of division, nationalised

banks have formed subsidiary companies, and share brokers and

consultancies constituted themselves into Public Ltd co. Some have

equity stake of foreign merchant bankers.





MERCHANT BANK

4.





Importance and Need

• The developmental activity throughout the country is exerting excess demand

on the sources of funds

• Since the FIs were unable to meet the demand the companies were

constrained to approach Capital Markets

• This enthused the commercial banks, share brokers and financial consulting

firms to enter into the field of MB and share the growing capital markets

• MBs can play a significant role in mobilizing funds of savers to investible

channels assuring reasonable ROIs

• MBs with their skills, updated information and knowledge provide counseling

to corporate units w.r.t. different enactments viz. Companies Act, Income Tax

Act, FEMA and various other corporate laws and regulations





ROLE OF MERCHANT BANKER

5.





Role of Merchant Banker

• To think and devise new instruments of financing industrial

projects

• To mobilise public deposits





ORGANISATIONAL SETUP OF MERCHANT BANKERS IN INDIA

6.





Organisational Setup of Merchant Bankers in India

Institutional Base

Institutional Base

• Either an independent wing or subsidiary of a private/Central Govt./State Govt. financial institution

• Play a role on lines of govt. priorities and policies

Banker Base Banker Base

• Either an independent wing or subsidiary of a banking organisation

• Have brought professionalism in the industry

Broker Base Broker Base

• Qualified and Professionally skilled brokers

Private Base Private Base

• Origins in the private sector

• Either sole proprietorship or public limited companies





Requirements for setting up a MB Outfit

Formation of the Business Organisation Formation of the Business Organisation

Adoption of a viable business plan Adoption of a viable business plan

Registration of Merchant Banker Registration of Merchant Banker

Application for grant of certificate

Application to conform to the requirements

Furnishing of information, clarification and personal representation

Consideration of application

Grant of Certificate

Payment of fees





MAIN OBJECTIVES OF MERCHANT BANKERS

7.





Main objectives of Merchant Bankers

To carry on the business of

Merchant Banking

To carry on the business of

Merchant Banking

To create secondary market for bills and act as acceptance house

To create secondary market for bills and act as acceptance house

Setup and provide services for

venture capital technology funds

Setup and provide services for

venture capital technology funds

To provide services to Housing Finance

Schemes

To provide services to Housing Finance

Schemes

To render services like a For Ex dealer To render services like a For Ex dealer

Buying and selling, hypothecating and dealing with assets

and stock

Buying and selling, hypothecating and dealing with assets

and stock





Obligations and Responsibilities

• Should maintain proper books of accounts, records and submit half yearly/annual

financial statements to SEBI within stipulated period of time

• Should not associate with a MB not registered with SEBI

• Should not enter into any transaction on the basis of unpublished information available

to them

• Must submit himself and his records to inspection by SEBI

• Must disclose information to SEBI as and when called for

• Must abide by the code of conduct prescribed for them

• Every MB acting as lead manager must enter into an agreement with the issuer setting

out mutual rights, liabilities, obligations, relating to such issues with particular

reference to disclosures allotment, refund etc





CODE OF CONDUCT

8.





Code of Conduct

• The merchant banker must observe high integrity and fairness in all his dealings

• He shall render at all times high standards of services, exercise due diligence,

exercise independent professional judgement

• Must disclose to his clients the possible source of conflict of duties and interests

• Should not indulge in unfair practice or unfair competition with other merchant

bankers

• Should not make any exaggerated statement about his capacity or achievement

• Should endeavor to give best possible advice

• Should maintain secrecy of all confidential information

• Should not engage in creation of a false market or price rigging or manipulation





SEBI GUIDELINES

9.





SEBI Guidelines

• SECURITIES AND EXCHANGE BOARD OF INDIA (DISCLOSURE

AND INVESTOR PROTECTION) GUIDELINES, 2000

http://www.sebi.gov.in/cms/sebi_data/attachdocs/12897965

70043.pdf




http://www.sebi.gov.in/cms/sebi_data/attachdocs/1289796570043.pdf







































Investment Banks vs. Merchant Banks

Investment Banks Investment Banks

Origin in capital market activities Origin in capital market activities

Traditionally, facilitated M&A through share sales and provided research and

financial consulting to companies

Traditionally, facilitated M&A through share sales and provided research and

financial consulting to companies

Now, primarily perform Capital Market related activities for large customers

Now, primarily perform Capital Market related activities for large customers

Merchant Banks Merchant Banks

Origin in Trade Finance activities Origin in Trade Finance activities

Traditionally, performed international financing activities such as Foreign

Corporate/Real Estate investments, Trade Finance, Transactions etc.

Traditionally, performed international financing activities such as Foreign

Corporate/Real Estate investments, Trade Finance, Transactions etc.

Now, primarily perform financing activities for companies which have

outgrown VCF needs

Now, primarily perform financing activities for companies which have

outgrown VCF needs





Merchant Banks vs. Commercial Banks

Merchant Banks Merchant Banks

• Assist in raising capital in the form of equity, preference shares, syndicated loan and WC instruments

• Advisor not financer

• Do not accept chequeable deposits

• Mainly fee based services

• Closer to customers

• Undertake work related to management of equity issues

Commercial Banks Commercial Banks

• Provide funds in the form of term loan and WC

• Financing is the main business

• Chequeable deposits are a key feature

• Both fund and fee based services

• Not very close to the customers. There may be information asymmetry

• Majority business is about term lending and bank deposits





SERVICES OF MERCHANT BANKERS IN INDIA

10.





Services of Merchant Bankers in India

Business Planning Stage Business Planning Stage

• Project Feasibility Study

• Advice on Capital Structuring

Equity Raising Equity Raising

• Preparation of Prospectus and liaison with SEBI

• Pricing Decisions

• Marketing in the capacity of lead managers

• Underwriting the issue

• Post issue Management

• Assistance in ADR/GDR

Debt Raising Debt Raising

• Management of Debenture Issue

• Preparation of bankable proposal and syndication of loan

Working Capital Raising Working Capital Raising

• Assistance in arranging optimal working capital finance

Strategic Advice Strategic Advice

• Advice on mergers and acquisitions

• Corporate Structuring Advice





Services of Merchant Bankers in India

Corporate Counselling Corporate

Counselling

Project Counselling and Pre-Investment

studies

Project Counselling and Pre-Investment

studies

Credit syndication and project finance Credit syndication

and project finance Issue Management Issue Management

Underwriting Underwriting Bankers to the Issue Bankers to the Issue Portfolio

Management Portfolio

Management Venture Capital

Financing Venture Capital

Financing

Leasing Leasing

Non-Resident Investment

Counseling and Management

Non-Resident Investment

Counseling and Management

Acceptance Credit and Bill Discounting Acceptance Credit

and Bill Discounting

Advising on Mergers,

Amalgamations and take-over

Advising on Mergers,

Amalgamations and take-over

Arranging Off Shore Finance

Arranging Off Shore Finance

Fixed Deposit Broking

Fixed Deposit Broking

Relief to Sick Industries

Relief to Sick Industries





QUALITIES OF MERCHANT BANKERS

11.





Qualities of Merchant Bankers

Knowledge Knowledge Capital Market

Familiarity

Capital Market

Familiarity Liaising Ability Liaising Ability

Innovation Innovation Integrity Integrity





Problems and Hurdles

Industry Compartmentalization

Industry Compartmentalization

Malafide Practices Malafide Practices Regulations Regulations





SCOPE FOR MERCHANT BANKING IN INDIA

12.





Scope for Merchant Banking in India

India, a growing market, provides opportunities

to MBs

India, a growing market, provides opportunities

to MBs

Increased liberalization has increased their

scope

Increased liberalization has increased their

scope

Banking policies restrict scope of commercial

banks giving merchant banks more space

Banking policies restrict scope of commercial

banks giving merchant banks more space

Indian corporates prefer MBs doing the work for them instead of doing it

in-house

Indian corporates prefer MBs doing the work for them instead of doing it

in-house

Increased corporate dynamics has increased

the scope for MBs

Increased corporate dynamics has increased

the scope for MBs





IMPORTANT EVENTS

13.





Important Events

• JV between Morgan Stanley and JM Financial inked in 1997

• PNB aims profit of Rs. 7500 Crore by 2013

• ICICI bank to oversee M&As – deal signed with ICICI securities

• Birla Capital and Financial Services gets SEBI merchant

banking licence

• Nomura launches its investment banking operations in India





ASSOCIATION OF MERCHANT BANKERS IN INDIA (AMBI)

14.





Association of Merchant Bankers in India

• A professional non-profit company setup to represent the

industry

• Expected to set code of ethics and facilitate dialogue between

the industry and regulatory bodies

• Dormant at present due to lack of support from the members

and non-initiative from SEBI/government

• AMBI Website: http://www.ambi.org.in/default.asp




http://www.ambi.org.in/default.asp












FURTHER READINGS

15.





Further Readings

• http://www.sebi.gov.in/acts/Merchantbankers.pdf




http://www.sebi.gov.in/acts/Merchantbankers.pdf












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blog designer and of course an MBA and Banker from New

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Documents

CAIIB Super Notes: Corporate Banking: Module B: Investment Banking: Merchant Banking