MERCHANT BANK UNDERWRITING

ByR.HarikaY.Rekha

RunachandParamkusa

Contents

Introduction History Merchant bank in India Underwriting

Introduction

Merchant bank is a financial institution that primarily deals with commercial banking needs of international finance, long term loan for companies provides consulting services and underwriting of stock.

It also acts as an intermediary between the issuers and the ultimate purchasers of the securities in the primary market.

It has been statutory brought with in the framework of the Securities and Exchange Board of India

Definition

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 services in relation to such issue management.

History Merchant banking started in Italy in late medieval

times Reached in France during the seventeenth century Italian merchant bankers introduces merchant

banking into England in eighteenth century European bankers developed Merchant banking

in USA In 1972, merchant banking started in South Africa

Merchant Banking in India

Foreign bank National Grindlays Bank started merchant banking in 1967

Then Citibank in 1970 and State Bank of India in 1972 started Merchant banking

Later ICICI setup its merchant banking division followed by Bank of India, Bank of Baroda etc..

Merchant banking companies are

SBI Capital Markets Ltd. Punjab National Bank Bank of Maharashtra Karur Vysya bank Ltd. ICICI Securities Ltd. Axis Bank Ltd. Reliance Securities Ltd.

Key Foreign players

Goldman Sachs(India) Securities Pvt. Ltd. Morgan Stanley India company Pvt. Ltd. Barclays Securities (India) Pvt. Ltd Bank of America Citigroup Global Markets India Pvt. Ltd.

Merchant bankers categories

• Issue Management

• Advisor• Consultant• Manager• Underwriter• Portfolio

manager

• Advisor• Consultant• Co manager• Underwriter• Portfolio

Manager

• Advisor• Consultant• Underwriter

• Advisor• Consultant

Category - 1

Category - 2

Category - 3

Category - 4

Registration with SEBI

Application for grant

certificate

Information furnishing, clarification

and personal

Application consideration

Granting the

certificate

Payment of fees

MERCHANTBANKER

PUBLIC SECTOR

COMMERCIALBANKS :- 24

FINANCIAL INSTITUTION :- 6

STATE INSTITUTION :- 4

PRIVATE SECTOR

BANKS :- 10

FINANCE & INVESTMENT :-

231

LEASING

INTERNATIONALBANKER :- 10

The M.B. Registered with SEBI classified according to the category :-

Services provided by Merchant Bank

Project counselling Loan syndication Managers to issue Underwriting Portfolio Management Advising on mergers and takeovers Offshore finance

Capital Adequacy Norms

A merchant bank will be registered by SEBI in different categories on the basis of capital adequacy norms in terms of its “Net worth” . Category Minimum amountCategory 1 5,00,00,000Category 2 50,00,000Category 3 20,00,000Category 4 NIL

Registration Fee A ‘MB’ has to pay a fee at the time of original registration Category I Rs. 10 Lakhs Category II Rs. 5 Lakhs Category III Rs. 1 Lakh Category IV Rs. 5000 The certificate of registration granted under regulations shall be valid for a period of three years from the date of its issue to the

applicant. The certificate of renewal granted under regulation 9, shall be

valid for a period of three years from the date of its issue to the applicant.

Underwriting

Underwriting is a guarantee given by the underwriters to take up whole or part of the issue of securities not subscribed by the public.

The agreement between the issuing company and the financial intermediary, called the underwriter, where by sale of certain quantum of securities is guaranteed for the issuing company, is known as underwriting agreement.

Objectives Of The Underwriting The objectives of the Underwriting are presented below: It guarantees the sale of securities at a given price. It facilitates the provision of money during the

financial crisis of the company. The Underwriter helps the new company in its

reorganization. 

Silent Features Of The Underwriting

The following are the salient features of an underwriting agreement:

The Underwriter may not be able to sell the issues in some situations. The unsold securities are distributed among the underwriters in the agreed proportion.

The offering price must be maintained for the successful distribution of the securities.The company makes a delivery of the securities to the manager and receives the payment on the closing date

Con…

At the termination of the underwriting, the manager must make the final accounting for each underwriter. He should also remit the commissions and accounts for the expenditure incurred. 

Underwriting is insurance for the new securities of the public. It is one of the methods of marketing securities. The other methods are:

Prospectus method, where the capital is raised by this method is very prevalent in India. The distribution expenses may be substantially saved.

Con…. Offer for sale, where the sales are sold largely to the

brokers/issue houses. The issue house/brokers again sell the shares to the public at a fixed price. This method saves the company the cost and the trouble of selling the shares to the public. Here a Third party takes over the responsibility.

Private placement, where the funds are raised in the primary market by selling the security issue to one investor or a small group of investors without resorting to underwriting. The cost of the issue is minimal. It is the most effective way of procuring the long term funds. There is no need to follow the statutory formalities. The offer is made to select a group of known persons.

Types of Underwriting

Firm underwriting Sub underwriting Joint underwriting Syndicate underwriting

Benefits

Adequate funds Expert advice Enhanced good will Assurance to investors Better marketing Benefits to buyers Price stability

Underwriters Another important intermediary in the new issue market

is the underwriters to the Issue of capital, who agrees to take up securities which are not fully subscribed.

Underwriters make a commitment to get the issue subscribed either by others or by themselves

Underwriters are appointed by the issuing companies in consultation with the Lead Manager or Merchant Banker to the issue.

To act as an Underwriter, a certificate of Registration must be obtained from SEBI, after payment of prescribed fee to SEBI.

Code of conduct

Make all efforts to protect the interests of investors Maintain high standards of integrity in the conduct

of business Ensure that adequate disclosures are made to the

investors to enable them make an informed decision. Clearly demarcate the responsibilities of various

intermediaries appointed by it so as to avoid any conflict in their job description.

Ensure that SEBI is promptly informed about any legal action initiated against it.

Underwriting Commission

Underwriting commission is payable on the basis by the issuer corporation on the basis of commission rates prescribed by SEBI

a) Equity shares 2.5% 2.5%b) Preference, Convertible and non convertible debenturesUp to Rs 5L 2.5% 1.5%Exceeding Rs 5L 2% 1%

On amounts in developing the underwriter

On amounts Subscribed by the public

Agreement of underwriting Depending on the type of commitment required by the issuing

company, several kinds of underwriting agreements are formed, each with its own level of risk:

Firm Commitment: Firm commitment is the most commonly used type of underwriting contract. The underwriter agrees to buy securities from the issuing corporation and pay the proceeds to the company. Any losses that occur due to unsold shares are prorated amongst the participating underwriting firms according to their proportional participation.

Agreement of underwriting

Best Efforts: Best efforts underwriting allows the firm (or underwriting syndicate) to act as agent for the issuing corporation and limits the responsibility of that firm to the shares it is able to sell. All unsold shares are absorbed by the issuer. 

Agreement of underwriting All or None: 

All or none underwriting allows the issuing corporation to contract for the sale of all shares. If any shares remain at the end of the underwriting process, the underwriting is cancelled. Underwriters cannot deceive investors by stating that all of the securities in the underwriting have been sold if it is not true.

Standby: Stand by underwriting allows an underwriting firm (or syndicate) to wait in the wings in an additional offering for any unused pre-emptive rights that are not executed by the company’s current shareholders. The underwriter will purchase the unused rights, exercise them and sell the shares.

SEBI guidelines According to the SEBI guidelines the following

factors are to be fulfilled: The minimum requirement of 90% subscription is

mandatory for each issue of capital to the public. This clause is applicable for both public and rights issue.

If the company is not able to receive the issued amount from the public subscription and accepted development from the underwriters, then the company refunds the amount.

The underwriting agreement should be filed with the stock exchanges.

·.

SEBI guidelines The registration number of the underwriter is to be

quoted in all correspondence with the SEBI, government authorities and clients.

The SEBI may issue warning letters or penalty advances by which the underwriters would be forewarned in respect of their omissions

In order to standardize the legal relationship between the issuing company and the underwriters, the SEBI has formulated the model underwriting agreement.

The total underwriting obligations under all the agreements should not exceed twenty times the network of the underwriter

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