MERCHANT BANKING DEFINITION WHAT IS MERCHANT BANKING?

‡ A bank that specializes not in lending out its own funds, but in providing various financial services such as accepting bills arising out of trade, underwriting new issues, and providing advice on acquisitions, mergers, foreign exchange, portfolio management, etc.

‡ Known as ³accepting and issuing houses´ in the U.K. and ³investment banks´ in the U.S. EVOLUTION IN WORLD ‡ Italian states, Middle Ages ‡ Later, the center for merchant banking shifted from the Italian states to Amsterdam ‡ London, eighteenth century ‡ By the end of the eighteenth century, however, the British merchant houses had increased in size and sophistication and began specializing in trade, marketing, or finance. IN INDIA

‡ In India the merchant banking business started in 1967, when Grindlays bank established their merchant banking division ‡ 1970, Citibank ‡ 1972, State Bank of India ‡ Many other banks like Central bank, Syndicate bank, Bank of Baroda followed after it.

‡ Among development banks: - ICICI, 1973 - IFCI, 1986 - IDBI,1991 FUNCTIONS MANAGEMENT OF DEBT & EQUITY OFFERINGS

UNDERWRITING

DE IDING T E APITAL STRU TURE

ORPORATE ADVISORY

PORTFOLIO MANAGEMENT

LOAN SYNDI ATION

OFF S ORE FINAN ING MANAGEMENT OF DEBT & EQUITY OFFERINGS

‡ Assists the companies in raising funds from the market ‡ Instrument designing ‡ Pricing the issue ‡ Registration of the offer document ‡ Underwriting support ‡ Marketing of the issue ‡ Listing on stock exchanges. UNDERWRITING

‡ The procedure by which an underwriter brings a new security issue to the investing public in an offering. ‡ In such a case, the underwriter will guarantee a certain price for a certain number of securities to the party that is issuing the security (in exchange for a fee). ‡ Thus, the issuer is secure that they will raise a certain minimum from the issue, while the underwriter bears the risk of the issue. DECIDING CA ITA STRUCTURE ‡ A mix of a company's long-term debt, specific short-term debt, common equity and preferred equity.

‡ The capital structure is how a firm finances its overall operations and growth by using different sources of funds. COR ORATE ADVISORY ‡ Financial structuring ‡ Rehabilitation and Turnaround management: ‡ In case of sick units, merchant bankers may design a revival package in coordination with banks and financial institutions ‡ Advising on mergers and acquisitions. PORTFO IO MANAGEMENT

‡ Portfolio management is all about strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and many other tradeoffs encountered in the attempt to maximize return at a given appetite for risk. PROJECT ADVISORY SERVICES ‡ Help their clients in various stages of the project undertaken by the clients ‡ Initial stage: Conceptualizing the project idea ‡ Viability of the proposed project: conduct feasibility studies to examine the viability of the proposed project ‡ Report: assist the client in preparing different documents like the detailed project report. LOAN SYNDICATION

‡ Merchant bankers arrange to tie up loans for their clients ‡ Assistance is rendered to raise loans for projects after determining promoter¶s contribution. ‡ Providing venture capital: Help companies in obtaining venture capital financing for financing their new and innovative strategies. OFF- SHORE FINANCING Merchant bankers help their clients in : Long term foreign currency loan Joint venture abroad Financing exports and imports Foreign collaboration arrangement BUY-BACK OF SHARES

Buy-back arrangements of the shares proposed in any public issue shall be finalized by issuer company with the lead merchant banker in advance and disclosed in the prospectus. REGULATION REGULATION

GUIDELINES OF SEBI & COMPANIES MINISTRY OF ACT,1956 FINANCE

MERCHANT BANKS

SECUIRITIES GUIDELINES OF CONTRACTS ACT, STOCK EXCHANGES 1956 MERCHANT BANKING REGULATION

‡Certificate from SEBI is a must.They are of four types: ‡Category I merchant bankers : Can act as Issue managers Category II merchant bankers : can act only as co- managers Category III merchant bankers : can act as co- managers but cannot undertake portfolio management Category IV merchant bankers :can merely act as consultant or advisor to issue of capital CAPITAL ADEQUACY NORMS :

Category I : Rs. 5 crores

Category II : Rs.50 lakhs

Category III : Rs.20 lakhs

Category IV : Nil GUIDELINE FOR MERCHANT BANKERS * SEBI¶s authorization is a must to act as merchant bankers. Authorization criteria include:-  Professional qualification in finance, law or business management.  Infrastructure like office space, equipment and man power.  Capital adequacy.  Past track of record, experience ,general reputation and fairness in all transactions. * Every merchant banker should maintain copies of balance sheet, Profit and loss account, statement of financial position.

* Half-yearly unaudited result should be submitted to SEBI.

* Merchant bankers are prohibited from buying securities based on the unpublished price sensitive information of their clients.

* Every merchant banker shall appoint a µCompliance Officerµ to monitor compliance of the Act. * SEBI has the right to send inspecting authority to inspect books of accounts, records etc« of merchant bankers.

* Inspections will be conducted by SEBI to ensure that provisions of the regulations are properly complied.

* An initial authorization fee, an annual fee and renewal fee may be collected by SEBI. MERCHANT BANKING SCOPE IN INDIA GROWTH OF NEW ISSUES MARKET

‡ Many public and private issues coming up

‡ Growth in new issues market Scope for M.B¶s have risen ENTRY OF FII

‡ Indian capital market is globalised

‡ FII are permitted to invest in India

‡ they need M.B¶s to advise them for their investment in India.

‡ Increasing no. of JVs also require expert services of M.B¶s. DEVELOPMENT OF DEBT MARKET

‡ Good portion of capital can be raised through debt instruments. So there is tremendous opportunities for M.B¶s. CORPORATE RESTRUCTURING

‡ Due to Liberalisation and globalisation Competition in corporate sector becoming intense. ‡ Cos. reviewing their strategies, structure and functioning etc. leading to corporate restructuring. ‡ Good opportunity to M.B¶s to extend their area of operation. Reliance Power IPO Introduction to the IPO

The company had appointed Kotak Mahindra, ICICI Securities, JM Financial and Enam Financial as advisors to the IPO. UBS was also a part of the team.

SEBI had asked Reliance Power to maintain a lock-in period of five years the entire promoter's stake of 20 per cent instead of 18.6 per cent what the company mentioned in the draft prospectus.

Domestic brokerage firm SMC Global¶s vice president Rajesh Jain to rediff: It has created an unprecedented euphoria in the market. The issue would be good option for retail investors who are looking for short-term gain. Tata Corus deal : $ 12 billion

Equity contribution from Tata steel : $ 3.88 Billion

The advisors surrounding Ratan Tata during the analyst announcements were not the familiar faces of Nimesh Kampani, the head of JM Morgan Stanley, or the other traditional advisors of the Tata Group.

They were replaced by sharp-dressed suits from large global banks on Wall Street, specializing in exotic financial cocktails known as LBOs (leveraged buy-outs) ² global players like Standard Chartered, Deutsche Bank, ABN Amro and Credit Suisse. When the original Tata Steel advisory team failed to cough up all the funds required to underwrite the buy-out bid, a helping hand came from an unconventional corner. Credit Suisse, the advisor to the target, Corus, sealed the deal by stepping over to the other side and joining the banks financing the Tata.

Of 8.12 $ billion of financing, Credit Suisse provided 45 % and ABN AMRO and Deutsche provided 27.5 % each.