Financial Services: An Introduction*

Financial Services ?Financial services: ensures smooth flow of financial activities in the economy

It includes: Banking, Insurance, Stock Broking and Investment Services, as well as Business and Professional Services.

Cater the needs of Financial Institutions, Financial Markets and Financial Instruments*

Financial Services ?Financial services include the services offered by both Asset Management companies and Liability Management companies

Financial Services help to raise the required funds but also ensure their efficient deployment

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Financial Services ?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 firmsThis sector provides services such as banking, insurance, credit rating, lease financing, factoring, venture capital, mutual funds, merchant banking, stock lending, depository services, housing finance*

FEATURES OF FINANCIAL SERVICESCustomer-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

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FEATURES OF FINANCIAL SERVICES

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*

Types of financial servicesFinancial services industry classifying the financial services under three broad categoriesFee Based services

Fund Based services

Insurance Services*

Fee Based ServicesFinancial institutions operate in specialized fields to earn a substantial income by way of fees, dividend commission, discount and brokerage on operations.

Issue ManagementCorporate Advisory ServicesCredit RatingMutual FundsAssets Securitization*

Fund Based ServicesThe 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 PurchaseHosing FinanceCredit CardsVenture CapitalFactoringForfaitingBill Discounting*

Merchant Banking-An OverviewCompanies 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 OverviewMerchant 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*

MERCHANT BANKINGMerchant banking may be defined as an institution which covers a wide range of activities such as underwriting of shares, portfolio management, project counseling, insurance etcThey render all these services for a fee*

Merchant Banking-An OverviewBanking commission Report-1972NecessityDistinct from commercial BanksInvestment Management and Advisory servicesMedium and small savers

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MERCHANT BANKING :ORIGIN & GROWTHItaly: Medieval Period : With Introduction of Bills of Exchange into England,

: including all Institutions & Techniques connected with Money Market

MERCHANT BANKING :ORIGIN & GROWTH

France: In Seventeenth & Eighteenth Century as Trader or Entrepreneur

Who were investing their accumulated profits in Banking Business

MERCHANT BANKING :France:Concentrating on money exchanges locally *Remitters of Money *Merchant Broker Engaged in Bill BrokingRaising Foreign ExchangeProvision for Long term Capital for Public Borrowings

Financing Foreign TradeIssue of CapitalManaging Individual FundsUndertaking foreign Securities Business & Foreign Loan BusinessFinancing Sovereign GovtsSince end of II World War Commercial Banks in Western Europe offering MB Services, along with their usual services

MERCHANT BANKING :France:

MERCHANT BANKING IN UKIn late 18th and early 19th CenturyIndustrial Revolution in England into powerful trading zoneRich Merchants diversified towards Banking activitesAcceptance of Commercial Bills of Domestic & International Trade(Issue Houses, Acceptance Houses, Discount Houses)

MERCHANT BANKING IN USADuring 1880s & early 1900European & English Merchant Bankers were meeting financial requirement of Rail Road ProjectInternational TradeExpansion of Trade & CommerceCapital for Industrial ProjectsIssue of Securities

MERCHANT BANKING IN USALaunching of Industrial ProjectsInvestment Banking in 1920 *Corp. Securities, *Trading & Investment, *New Issues Management)Crash of 1929 and Depression restricted*Investment Banking*Commercial Banking

MERCHANT BANKING IN INDIAGrindleys Bank -1967

RBI Permitted *Mgt of Cap. Issues*Assessement of financial requirements of new Entrepreneurs*Financial Services covering Product Planning to Marketing Research*Mgt. Consultancy Services to Large & Medium size Companies

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CITI BANK-1970Assisting New & Existing EntrepreneursEvaluation of ProjectsRaising Fund through BorrowingIssue of Equity CapitalManagement Consultancy

ENTRY OF INDIAN BANKSTO MERCHANT BANKINGSBI1972ICICI BANK1973CENTRAL BANK, BANK OF INDIA, SYNDICATE BANK1977BOB,ST CHARTERED BANK,1978UBI, UCB, PNB, CANARA BANK, IOB1980IFCI1986

MERCHANT BANKERS REGULATED BYSEBI Guidelines

Companies Act,1956

Securities Contract and Regulations Act,1956

Financial Markets and Services - Kiran BinduSEBI (MB) Regulations, 1992Code of Conduct for MBObserve 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.

MERCHANT BANKING ACTIVITIES IN INDIACORPORATE COU NSELLINGPROJECT COUNSELLING/APPRAISALPRE-INVESTMENT STUDIESCREDIT SINDICATIONPROJECT FINANCINGISSUE MANAGEMENTUNDERWRITTINGPORTFOLIO MANAGEMENT

MERCHANT BANKING ACTIVITIES IN INDIAVENTURE CAPITAL FINANCINGLEASING BILLS DISCOUNTING/ACCEPTANCE OF CREDITADVISOR ON *MERGERS *AMALGAMATIONS* TAKEOVERS

MERCHANT BANKING ACTIVITIES IN INDIAARRANGING OFF-SHORE FINANCINGFIXED DEPOSIT BROKINGRELIEF OF SICK-INDUSTRIES*ASSESSMENT OF CAPITAL REQUIREMENTS*CAPITAL RESTRUCTURING*

RegulationMerchant Bankers Regulations of Securities and Exchange Board of IndiaCompany Act 1956Listing guidelines of Stock ExchangesSecurities Contracts (Regulation) Act, 1956

Formation of divisionsSubsidiaries companies

StructureCategory-Ito 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.

StructureCategory IIthat 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 IVthat is to act only as adviser or consultant to an issue.

Registration with SEBI Around 250 Merchant BankersAbolished all categories and maintained Category-ISeparate registration for underwriters and portfolio managerSegregation between fee based and Fund based activities

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.

Registration with SEBI 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 ActivitiesIssue ManagementPreparation of prospectusInformation relating to the issueDetermining financing structureTie-up of finances and final allotment and/or refund of subscriptionCorporate advisors to the issueConsultants or advisors to issue and underwriting

Terms of AuthorizationAuthorization is valid for an initial period of 3 yearsAuthorization fee, annual fee and renewal feeAll issues should be managed by at least one authorized merchant bankers, functioning as sole manager or lead managerMB expected to exercise due diligence independentlyInvolvement of MB in post-issue managementAdhere a code of conduct prescribed by SEBIMB may be cancelled or suspended for suitable durationMB regulations integrate issue management with underwriting

General Obligations and ResponsibilitiesMaintenance of books of accounts, records and documentsCopy of the balance sheet, auditors report and statement of financial positionResponsibilities of lead ManagerUnderwriting obligationSubmission of due diligence certificateInsider TradingAcquisition of shares

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.

FunctionsCorporate 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.

FunctionsProject advisory services-conceptualizing the project ideafeasibility studiesPreparing different documents like the detailed project report.

Loan syndication- Tie up loans for their clients Analyze the pattern of the clients 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.

SERVICES OF MERCHANT BANKERSPROJECT 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 promoters contribution. These loans can be obtained from a single institution or a consortium.

ISSUE MANAGEMENT :Management of issues involves marketing of corporate securities ieequity 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 CompaniesThey 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 issuesPost-issue activities:It includes collection of application forms, screening of applications, deciding allotment procedure, mailing of allotment letters, and refund orders

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..

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.

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 existenceTakeover is the purchase by one company acquiring controlling interest in the share capital of another companyMerchant banker acts as middlemen between offeror and offeree,negotiates mode of payment and gets approval from government.

OFF SHORE FINANCE :Merchant bankers help their clients in :Long term foreign currency loanJoint venture abroadFinancing exports and importsForeign collaboration arrangement

BANKS PROVIDING MERCHANT BANKING SERVICES IN INDIA

Commercial banksForeign banks like National Grindlays Bank, Citibank, HSBC bank etc..Development banks like ICICI,IFCI,IDBI etc..SFC , SIDCsPrivate 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

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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