Origin and merchant banking in India

London merchants in financing foreign trade through acceptance of bill. Merchants assisted to under developed country to rise funds in money market First merchant bank in India started by foreign bank National Grindlays bank in 1967 and City bank in 1970. Banking commission report in 1972

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Merchant Banking
Any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to the securities or acting as manager, consultant, advisor or rendering corporate advisory services in relation to such issue management.

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Services of Merchant Banking

Corporate counseling ( Growth and diversification and Financing) Project counseling Capital restructuring Credit syndication and project finance Issue management and underwriting Portfolio management

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SEBI Code of conduct for Merchant Banking

Integrity Quality service Fair practice Responsible statement Best advice Secrecy Information Prospectus

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SEBI guidelines for Merchant Banking

All merchant bankers will require authorization by SEBI to carry out business An initial authorization fee, an annual fee and renewal fee may be collected by SEBI All issue must be managed at least by one authorized banker

Each merchant banker is required to 4/22/12 furnish to the SEBI half yearly

Categories Merchant banker/issue managers

Categories 1 : Merchant banker who is authorized to act as issue manager, adviser, consultant, underwriter and portfolio manager Categories 2 : Merchant banker who is authorized to act as adviser, consultant, underwriter and portfolio manager

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Issue management
Issue management involves marketing of corporate securities viz., equity share, preference shares and debentures or bonds by offsetting them to public. Merchant banks act as intermediary whose main job is to transfer capital from those who own it to those who need it.
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Equity Issue/Public issue

When the capital funds are raised through the issue of prospectors, is called public issue of securities. It is most common method rising of funds.

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Mechanism or process of Public issue management

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Right issue
When the shares are issued to the existing share holder on the privileged basis, it is called as right issue.

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Pre-issue activities in public issue

Signing of MoU (Company and Merchant Banker-role and respon) Obtaining appraisal note (proposed capital Outlay and sources) Optimum capital structure(max share wealth and min Ko) Convening meeting

Appointment of financial intermediary (underwriter, registrar 4/22/12

Post issue activities in public issue

Finalization of basis of allotment (Public representative for 5 times public issue and 2 times right issue) Dispatch of share certificates Advertisement (number of applications, date of dispatch and refund order)

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Mechanism or process of Right issue management

Decision to rise capital funds Obtaining SEBI approval Arranging underwriting Selection of registrars, brokers, bankers, etc Arranging press and existing share holder conference

Printing and announcement of right 4/22/12 issue documents.

Private Placement
When the securities issuing company sells

directly to the investors, especially institutional investors, it takes the form of private placement.

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Features of Private Placement

No Prospectus Instrument covered (Equity, Kp and Kd) Issuers Investors (FI, LIC, General Insurance, pension) Intermediaries (Credit rating, financial adviser) Negotiation (ICICI Trustees)

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Importance and Advantages of private placement

Importance

Capital market conditions Financial institutions resources Preferences (Promoter, Management and business)

Advantages
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Book building

Book building is a process by which corporate determines the demand and the price of a proposed issue of securities through public bidding. According to the SEBI, there are two option available to a company, either 75 percent or 100 percent bookbuilding process.
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Book building Process

75 percent book-building

Eligibility Earmarking securities (Mark and Keep it separate) Draft prospectus(Except price) Appointment of book runner Price setting

Underwriting 4/22/12

Book building Process

100 percent Book Building (25 crores)

Lead book runner Draft prospectus Essential disclosures Advertisement Stock brokers

Bidding process 4/22/12

SEBI Guidelines for public issue/Equity issue/IPO

Prospectus has to be attached with every application. Company has to highlight the risk factors in the prospectus Objective of issue and cost of project should be mentioned in the prospectus

Company management, past history and present business of the firm 4/22/12 should be highlighted in the

SEBI guidelines for right issue

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Composite issue( different price) Appointment of merchant banker(More than 50 l) Minimum subscription (90%, 128 days, 15% interest) Preferential allotment (No prefe Allotment) Underwriting Right of FCD/PCD holders (12 months)

SEBI guidelines for Debenture issue

The amount of working capital debenture should not exceed 20% of the gross current assets. The debt equity ratio should not exceed 2:1. Credit rating is compulsory for all debenture. Debenture are to be redeemed after 7 from the date of allotment. The rate of interest decided by the 4/22/12

SEBI Guidelines for Book building

The option of 100% book building shall be available only to those issuer companies which propose to make an issue of and above Rs. 100 crores. It should be other than the promoters contribution and ESOPs Issuing company shall appoint category I merchant banker as a book runner and their names shall be 4/22/12 mentioned in prospectors.

Depository Receipts
A depository Receipts is a type of negotiable financial security that is traded on a local stock exchange but represents a security, usually in the form of equity that is issued by a foreign publicly-listed company,. The DR, which is a physical certificate, allows investors to hold shares in equity of other countries.
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Global depository receipts (GDR)

Global depository receipts or certificate is created by the overseas depository bank outside India denominated on dollar and issued to non resident investors against the issue of ordinary shares of issuing company. In simple wards it means a 4/22/12 negotiable instrument denominated in

American depository receipts (ADR)

ADR are negotiable receipts issued to investors by an authorized depository, normally a US bank or depository in lieu of shares of the foreign company, which are actually held by the depository.

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Differences between Global depository and American Global depository receipts American depositorydepository receipts
Listed in Europe and American stock exchange or both Global low govern it It is less stringent when compared to American depository receipts It is comparatively less liquid to American depository receipts It is less powerful
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Listed in American stock exchange only American low govern it It is less stringent when compared to Global depository receipts More liquidity

It is a powerful as it is traded in united states markets.

Depository Receipts - Issue Process

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Steps in GDR Issue (Indian Firm)

Convening board meeting Appointment of syndicate members Constitution of task force Overseas listing Indian listing Preparing offer circular Offer analysis Deciding on the timing

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Structure of Merchant Banker

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