Date/ Time / version South Indian Regional Council for ICWAI Capital Market Analysis and Corporate LawsMERCHANT BANKERS SHORT NOTESPaper 11

South Indian Regional Council for ICWAI

CLASSIFICATION OF MERCHANT BANKERS

All Merchant Bankers must compulsorily register with SEBI, which has classified under 4 categories.Issue ManagementProspectusFinancial StructureTie up of FinancesAllotment of SecuritiesRefund of subscription

(contd..)

CLASSIFICATION OF MERCHANT BANKERS (contd..)UnderwritersAdvisoryConsultancyCo-managerPortfolio managerConsultants to issueMobilization of Foreign Funds for companies

ROLE OF MERCHANT BANKER IN PUBLIC ISSUE

Furnishing InformationMaintenance of BooksAgreement with Issuing CompanyAction by RBICode of ConductHaving high integration in dealing with clientsDisclosure of all details to the authorities concerned Avoiding making exaggerated statementsDisclosure of all the facts to its customersNot disclosing any confidential matter of the clients to third parties

SWAP

Swapping is arranged to reap the benefits arising from the fluctuations in the market Currency Market or Interest Rate Market or any other market.Swap is combination of forwards. Double coincidence of wants, requires that two parties with equal and opposite needs must come into contract with each other opposite but matching needs. Currency Swap Exchange of currenciesInterest Rate Swap Floating Rate to Fixed Rate and vice versa

LOAN SYNDICATION

When more funds are required, different financial institutions are approached for contributing working capital and long-term capital requirements. The financial institutions, joining together for providing finance is known as Credit Syndication. Credit worthiness of borrower is more represented by the merchant banker to the various members of credit syndication, also called consortium finance.Activities covered under credit syndication are:Estimating the total cost of the project of undertakenDrawing up the financing plan for the total project cost which conforms to the requirements of the promoters and their collaborators, financial institutions and banks, government agencies and underwriters (contd..)

LOAN SYNDICATION (contd..)Preparing loan application for financial assistance from term lenders / financial institutions / banks, and monitoring their progress, including pre-sanction negotiation.Selecting institution and banks for participation in financingFollow-up of term loan application with the financial institutions and banks, obtaining the approval for their respective share of participationArranging bridge loansAssisting in completion of formalities for drawing of term fianc sanctioned by institutions by expediting legal documentation formalities, drawing up agreements, etc., as prescribed by the participating financial institutions and banksAssessing working capital requirements and arranging financing

ROLE OF MERCHANT BANKER IN THE ISSUE OF PROSPECTUS

It is the duty of the lead merchant banker to ensure that the prospectus are properly made and should not contain any false information. The merchant banker will also ensure thatThe application form issued will be accompanied by abridged prospectus by the issue companyIn the abridged prospectus, application form may be linked as perforated partUnconnected matters should not be furnished in the prospectus

MANAGING PUBLIC ISSUE

No Merchant Banker is permitted to carry on business other than that in the securities market with effect from December 1997The maximum number of lead managers is related to the size of the issue. For an issue of Rs 50 Crores, 2 Lead Managers are requiredBetween Rs. 50 to Rs. 100 Crores, 3 lead managers and Rs. 100 to Rs. 200 Crores 4 Lead Managers are to be appointed5 or more Lead Managers are appointed, if the size of the issue is above Rs. 200 Crores.

RESPONSIBILITIES OF LEAD MANAGERS

Entering into an agreement with issuing company with regard to rights, liabilities and obligations. A statement has to be submitted to SEBI with regard to above facts.A lead Merchant Banker must have certificate of registration with SEBI.He should not have any of connection with the issuing company.Minimum underwriting commission can be 5% or Rs. 25 lakhs, whichever is less.

DISCLOSURE TO SEBI

His responsibility with regard to the issueAny change in the information which has been already furnishedNames of companies for which merchant banker is associated as the lead managerAny breach in the capital adequacy requirements

ACTION AGAINST MERCHANT BANKERS

Action can be taken against a merchant banker when he is found guilty of non-compliance of regulations. The defaults committed by the Merchant Banker can be categorized intoGeneral failure to submit the diligence certificate in the prescribed manner to SEBI or failure to dispatch refund orders, etc.Major Underwriting not properly taken up or when there are excess members of merchant bankers for an issue than the permissible limit.Minor consists of advertisements not being in conformity with prospectus, delay in allotment of securities, etc

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ACTION AGAINST MERCHANT BANKERS (contd..)Serious defaults unethical practice or non cooperation with SEBI.For each of these defaults, there are points and accordingly action will be taken by SEBI against the erring merchant bankers.

FURNISHING DETAILS ON CAPITAL STRUCTURE OF THE COMPANY

A merchant Banker should provide details of the capital structure of the company in the following manner:Authorized, Issued, Subscribed and Paid-up CapitalSize of the present issue including contribution by PromotersPaid-up capital after the issueShare Premium accountThe Merchant Banker should also provide details regarding lock-in-period, nature of allotment, Rights, Bonus and face value of securities and issue price of securities, etc.

THE PRICING OF INITIAL ISSUE

A listed company can freely price its equity shares through a public issue. The free pricing of equity shares is subject to the compliance and disclosure of norms as specified by SEBI. While freely pricing the initial pricing of shares, a merchant bank requires the approval of RBI.Public Rights issue can be made in any denomination according to Section 13 (4) of the Companies Act, after fulfilling the conditions laid down by SEBI. The issue of shares in any denomination is subject to the following conditions: Shares should not be issued in a decimal of rupeeExisting shares denomination should not be alteredThere should be only one denomination for the shares (contd..)

THE PRICING OF INITIAL ISSUE (contd..)

Memorandum and Articles of the company should permit for the changePeriodical disclosure to SEBI with regard to any change in the denomination of shares

ISSUE PRICE

The issue price of a companys share can be on any of the following basis Earning per share EPSP/E Ratio in comparison with the industries P/EAverage Rate of Return on Net Wroth in the last 3 yearsMinimum Return on increased Net WorthNet Asset Value method NAV

MERCHANT BANKING ORGANISATIONS IN INDIA

Can be classified under 4 categoriesMerchant Banking division of Commercial Banks both Indian and Foreign SBI Capital Market, Grindlays Bank, Citibank, etc.Sub division of Commercial Banks Can bankMerchant Banking activities of Financial Institutions ICICI, IFCI, etc.Merchant Banking by Financial Service Firms Stock Brokers or others independent companies Kotak Mahindra, Karvey Consultants, CRB Capital Market, etc.

CODE OF CONDUCT FOR MERCHANT BANKERS

Merchant Bankers have to abide by the Code of Conduct as prescribed by the SEBI:Integrity Observance of high standards of integrity and fairness in all dealings with clients and other merchant bankersQuality Service Rendering high standards of service, exercising due diligence, ensuring proper care and exercising independent professional judgment, disclosing to the clients, wherever necessary, possible sources of conflict of duties and interests, while providing unbiased services.

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CODE OF CONDUCT FOR MERCHANT BANKERS (contd..)Fair Practice Responsible Statement - Refraining from making any statement or becoming privy to any act, practice or unfair competition, which is likely to be harmful to the interest of other merchant bankers, or is likely to place other merchant bankers in a disadvantageous position in relation to the merchant banker, while competing for or executing any assignment.Best Advice Not to indulge in making any exaggerated statement, oral or written, to the client, either about the qualification or the capability to render certain services, or achievements in regard to services rendered to other clients.Secrecy Not to divulge to other clients, press or any other party, any confidential information about the client and deal in the securities of any client without disclosing to the Board, as required under the regulations.(contd..)

CODE OF CONDUCT FOR MERCHANT BANKERS (contd..)Information Making constant efforts to ensure that the investors are provided with true and adequate information, without making any misguided or exaggerated claims, in order to make them aware of the attendant risks before they undertake any investment decisions.Prospectus Making available copies of the prospectus, memorandum and related literature to the investors.Allotment Initiating adequate steps to ensure the fair allotment of securities, and refund of application money without delay.

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CODE OF CONDUCT FOR MERCHANT BANKERS (contd..)True market Not to be a party to the creation of false market, price rigging or manipulation, passing on price sensitive information to brokers, members of the stock exchanges and other players in the capital market, or take any other action which is unethical or unfair to the investors.Compliance Abiding by the provisions of the Act, Rules, and Regulations which may be applicable and relevant to the activities carried out.

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