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CAIIB Super Notes: If you are preparing for CAIIB- these are a must-have. Visit http://sirfbusiness.blogspot.com for more info.
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CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Merchant Banking
Module B: Investment Banking
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
CAIIB – SUPER NOTES
Corporate Banking: Merchant Banking
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Contents
Coverage: 1. Merchant banking in India
2. Introduction
3. History and origin of Merchant Banking in India
4. Merchant Bank
5. Role of Merchant Banker
6. Organisational Setup of Merchant Bankers in India
7. Main objectives of Merchant Bankers
8. Code of Conduct
9. SEBI Guidelines
10. Services of Merchant Bankers in India
11. Qualities of Merchant Bankers
12. Scope for Merchant Banking in India
13. Important Events
14. Association of Merchant Bankers in India
15. Further Readings
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
MERCHANT BANKING IN INDIA
1.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Merchant banking in India
• A body corporate who carries on any activity related to the
issue management, which consists of preparing prospectus
and other information relating to the issue.
• MBs in India are not allowed to conduct any business other
than that related to securities market
• No official category of investment banking
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
INTRODUCTION
2.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Merchant Banking
• Merchant Bank is a Financial Institution primarily engaged in
offering financial services and advice to corporations and wealthy
individuals on how to use their money
• Also includes private equity activities of banking
• According to notification of the MoF Merchant Banker is “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
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
HISTORY AND ORIGIN OF MERCHANT BANKING IN INDIA
3.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Merchant Banking in India
• Till 18th century moneylenders, moneychangers, village
merchants(Mahajans) and saucers performed the functions of
banks and merchant banks
• Also issued and discounted Bills of Exchange (Hundis) and bank
drafts
• Gave loans on mutual trust, on mortgage of lands, ornaments and
other property
• Jagat Sheth and Habib & Sons were a couple of Merchant Bankers
of this era
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Merchant Banking in India – Post Independence
• In 1967 RBI issued the first merchant banking license to Grindlays.
• Citibank setup its MB division in 1970
• In 1972 SBI started its MB division
• Commercial Banks and foreign development finance institutions
have organized MBs through formation of division, nationalised
banks have formed subsidiary companies, and share brokers and
consultancies constituted themselves into Public Ltd co. Some have
equity stake of foreign merchant bankers.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
MERCHANT BANK
4.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Importance and Need
• The developmental activity throughout the country is exerting excess demand
on the sources of funds
• Since the FIs were unable to meet the demand the companies were
constrained to approach Capital Markets
• This enthused the commercial banks, share brokers and financial consulting
firms to enter into the field of MB and share the growing capital markets
• MBs can play a significant role in mobilizing funds of savers to investible
channels assuring reasonable ROIs
• MBs with their skills, updated information and knowledge provide counseling
to corporate units w.r.t. different enactments viz. Companies Act, Income Tax
Act, FEMA and various other corporate laws and regulations
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
ROLE OF MERCHANT BANKER
5.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Role of Merchant Banker
• To think and devise new instruments of financing industrial
projects
• To mobilise public deposits
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
ORGANISATIONAL SETUP OF MERCHANT BANKERS IN INDIA
6.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Organisational Setup of Merchant Bankers in India
Institutional Base
Institutional Base
• Either an independent wing or subsidiary of a private/Central Govt./State Govt. financial institution
• Play a role on lines of govt. priorities and policies
Banker Base Banker Base
• Either an independent wing or subsidiary of a banking organisation
• Have brought professionalism in the industry
Broker Base Broker Base
• Qualified and Professionally skilled brokers
Private Base Private Base
• Origins in the private sector
• Either sole proprietorship or public limited companies
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Requirements for setting up a MB Outfit
Formation of the Business Organisation Formation of the Business Organisation
Adoption of a viable business plan Adoption of a viable business plan
Registration of Merchant Banker Registration of Merchant Banker
Application for grant of certificate
Application to conform to the requirements
Furnishing of information, clarification and personal representation
Consideration of application
Grant of Certificate
Payment of fees
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
MAIN OBJECTIVES OF MERCHANT BANKERS
7.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Main objectives of Merchant Bankers
To carry on the business of
Merchant Banking
To carry on the business of
Merchant Banking
To create secondary market for bills and act as acceptance house
To create secondary market for bills and act as acceptance house
Setup and provide services for
venture capital technology funds
Setup and provide services for
venture capital technology funds
To provide services to Housing Finance
Schemes
To provide services to Housing Finance
Schemes
To render services like a For Ex dealer To render services like a For Ex dealer
Buying and selling, hypothecating and dealing with assets
and stock
Buying and selling, hypothecating and dealing with assets
and stock
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Obligations and Responsibilities
• Should maintain proper books of accounts, records and submit half yearly/annual
financial statements to SEBI within stipulated period of time
• Should not associate with a MB not registered with SEBI
• Should not enter into any transaction on the basis of unpublished information available
to them
• Must submit himself and his records to inspection by SEBI
• Must disclose information to SEBI as and when called for
• Must abide by the code of conduct prescribed for them
• Every MB acting as lead manager must enter into an agreement with the issuer setting
out mutual rights, liabilities, obligations, relating to such issues with particular
reference to disclosures allotment, refund etc
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
CODE OF CONDUCT
8.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Code of Conduct
• The merchant banker must observe high integrity and fairness in all his dealings
• He shall render at all times high standards of services, exercise due diligence,
exercise independent professional judgement
• Must disclose to his clients the possible source of conflict of duties and interests
• Should not indulge in unfair practice or unfair competition with other merchant
bankers
• Should not make any exaggerated statement about his capacity or achievement
• Should endeavor to give best possible advice
• Should maintain secrecy of all confidential information
• Should not engage in creation of a false market or price rigging or manipulation
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
SEBI GUIDELINES
9.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
SEBI Guidelines
• SECURITIES AND EXCHANGE BOARD OF INDIA (DISCLOSURE
AND INVESTOR PROTECTION) GUIDELINES, 2000
http://www.sebi.gov.in/cms/sebi_data/attachdocs/12897965
70043.pdf
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Investment Banks vs. Merchant Banks
Investment Banks Investment Banks
Origin in capital market activities Origin in capital market activities
Traditionally, facilitated M&A through share sales and provided research and
financial consulting to companies
Traditionally, facilitated M&A through share sales and provided research and
financial consulting to companies
Now, primarily perform Capital Market related activities for large customers
Now, primarily perform Capital Market related activities for large customers
Merchant Banks Merchant Banks
Origin in Trade Finance activities Origin in Trade Finance activities
Traditionally, performed international financing activities such as Foreign
Corporate/Real Estate investments, Trade Finance, Transactions etc.
Traditionally, performed international financing activities such as Foreign
Corporate/Real Estate investments, Trade Finance, Transactions etc.
Now, primarily perform financing activities for companies which have
outgrown VCF needs
Now, primarily perform financing activities for companies which have
outgrown VCF needs
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Merchant Banks vs. Commercial Banks
Merchant Banks Merchant Banks
• Assist in raising capital in the form of equity, preference shares, syndicated loan and WC instruments
• Advisor not financer
• Do not accept chequeable deposits
• Mainly fee based services
• Closer to customers
• Undertake work related to management of equity issues
Commercial Banks Commercial Banks
• Provide funds in the form of term loan and WC
• Financing is the main business
• Chequeable deposits are a key feature
• Both fund and fee based services
• Not very close to the customers. There may be information asymmetry
• Majority business is about term lending and bank deposits
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
SERVICES OF MERCHANT BANKERS IN INDIA
10.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Services of Merchant Bankers in India
Business Planning Stage Business Planning Stage
• Project Feasibility Study
• Advice on Capital Structuring
Equity Raising Equity Raising
• Preparation of Prospectus and liaison with SEBI
• Pricing Decisions
• Marketing in the capacity of lead managers
• Underwriting the issue
• Post issue Management
• Assistance in ADR/GDR
Debt Raising Debt Raising
• Management of Debenture Issue
• Preparation of bankable proposal and syndication of loan
Working Capital Raising Working Capital Raising
• Assistance in arranging optimal working capital finance
Strategic Advice Strategic Advice
• Advice on mergers and acquisitions
• Corporate Structuring Advice
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Services of Merchant Bankers in India
Corporate Counselling Corporate
Counselling
Project Counselling and Pre-Investment
studies
Project Counselling and Pre-Investment
studies
Credit syndication and project finance Credit syndication
and project finance Issue Management Issue Management
Underwriting Underwriting Bankers to the Issue Bankers to the Issue Portfolio
Management Portfolio
Management Venture Capital
Financing Venture Capital
Financing
Leasing Leasing
Non-Resident Investment
Counseling and Management
Non-Resident Investment
Counseling and Management
Acceptance Credit and Bill Discounting Acceptance Credit
and Bill Discounting
Advising on Mergers,
Amalgamations and take-over
Advising on Mergers,
Amalgamations and take-over
Arranging Off Shore Finance
Arranging Off Shore Finance
Fixed Deposit Broking
Fixed Deposit Broking
Relief to Sick Industries
Relief to Sick Industries
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
QUALITIES OF MERCHANT BANKERS
11.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Qualities of Merchant Bankers
Knowledge Knowledge Capital Market
Familiarity
Capital Market
Familiarity Liaising Ability Liaising Ability
Innovation Innovation Integrity Integrity
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Problems and Hurdles
Industry Compartmentalization
Industry Compartmentalization
Malafide Practices Malafide Practices Regulations Regulations
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
SCOPE FOR MERCHANT BANKING IN INDIA
12.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Scope for Merchant Banking in India
India, a growing market, provides opportunities
to MBs
India, a growing market, provides opportunities
to MBs
Increased liberalization has increased their
scope
Increased liberalization has increased their
scope
Banking policies restrict scope of commercial
banks giving merchant banks more space
Banking policies restrict scope of commercial
banks giving merchant banks more space
Indian corporates prefer MBs doing the work for them instead of doing it
in-house
Indian corporates prefer MBs doing the work for them instead of doing it
in-house
Increased corporate dynamics has increased
the scope for MBs
Increased corporate dynamics has increased
the scope for MBs
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
IMPORTANT EVENTS
13.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Important Events
• JV between Morgan Stanley and JM Financial inked in 1997
• PNB aims profit of Rs. 7500 Crore by 2013
• ICICI bank to oversee M&As – deal signed with ICICI securities
• Birla Capital and Financial Services gets SEBI merchant
banking licence
• Nomura launches its investment banking operations in India
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
ASSOCIATION OF MERCHANT BANKERS IN INDIA (AMBI)
14.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Association of Merchant Bankers in India
• A professional non-profit company setup to represent the
industry
• Expected to set code of ethics and facilitate dialogue between
the industry and regulatory bodies
• Dormant at present due to lack of support from the members
and non-initiative from SEBI/government
• AMBI Website: http://www.ambi.org.in/default.asp
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
FURTHER READINGS
15.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Further Readings
• http://www.sebi.gov.in/acts/Merchantbankers.pdf
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Do you have any questions or queries or some feedback to give?
Just mark an email to [email protected]
CAIIB – Super-Notes © M S Ahluwalia Sirf Business For more Super-Notes: Click Here
M S Ahluwalia, amongst other things, is a visual artist, blogger,
blog designer and of course an MBA and Banker from New
Delhi, India.
To know more about him you may visit his blog-site: Estudiante De La Vida