Merchant banking guidelines
- 1. MERCHANT BANKS’ GUIDELINES PREPARED BY: MD TAHER AHMED ROLL NO:08 COURSE CODE: MC- 404(FM) TH
- 2. MERCHANT BANKING Merchant banking may be defined as an ‘institution which covers a wide range of activities such as underwriting of shares, portfolio management, project counseling, insurance, credit syndication etc…They render all these services for a fee. ORIGIN: The term merchant banking originated from the London who started financing foreign trade through acceptance of bills Later they helped government of under developed countries to raise long term funds Later these merchants formed an association which is now called “Merchant Banking and Securities House Association”
- 3. Contd.. Merchant banking is a non-banking financial activity similar to banking; Merchant banking is a fee based business, where the bank assumes market risk but no long-term credit risk. These are financial institutions providing valuable solutions such as:- ● Acceptance of bills of exchange; ● Corporate finance; ● Portfolio management; ● Other non-banking services.
- 4. Merchant Banking in India Need for merchant banking was felt with rapid growth in number & size of issues made in primary market. Merchant banking services were started by foreign banks, namely National Grindlays in 1967 & City bank in 1970 . Merchant banking services were offered along with other traditional banking services. SBI was first Indian bank to set up Merchant banking division in 1972.
- 5. DIFFERENCE BETWEEN MERCHANT BANKS & COMMERCIAL BANKS: COMMERCIAL BANKS Deal in debt & debt related finance Asset oriented Avoid risks Mere financiers MERCHANT BANKS Deal in equity & equity-related finance Management oriented Willing to take risks Their activities include project counselling, corporate counselling, issue management, loan syndication, underwriting etc.
- 6. SL No Particulars Summary 1 Corporate Counseling Covers the entire field of merchant banking, limited to giving suggestions 2 Project Counseling Preparing project report for govt. approval , financial assistance Services of Merchant Banks
- 7. 3 Loan Syndication Assistance rendered to get term loan for project, help client make appraisal, designing capital structure etc 4 Issue Management Marketing corporate securities, intermediary in transfer of capital from one who owns to needy 5 Underwriting Guarantee given by the underwriter, make raising of external resource easy 6 Managers to Issue Drafting, completion of formalities, appoint Registrar etc
- 8. 7 Portfolio Management Helping the investors in making investment in different kind of securities 8 Mergers and takeovers Middlemen in setting negotiation 9 Off Shore Finance Help in areas involving foreign currency 10 Non- Resident Investment Provide help in better and smooth trade to NRIs
- 9. REGULATIONS OF MERCHANT BANKING: The merchant banking activity in India is governed by SEBI (Merchant Bankers) Regulations, 1992. Registration with SEBI is mandatory to carry out the business of merchant banking in India. An applicant should comply with the following norms: i) The applicant should be a corporate body. ii) The applicant should not carry on any business other than those connected with the securities market. iii) The applicant should have necessary infrastructure like office space, equipment, manpower, etc. iv) The applicant must have at least two employees with prior experience in merchant banking. v) Any associate company, group company, subsidiary or interconnected company of the applicant should not have been a registered merchant banker. vi) The applicant should not have been involved in any securities scam or proved guilt for any offence. vii) The applicant should have a minimum net worth Rs. 5 Crores
- 10. CATEGORIES OF MERCHANT BANKS: The categories for which registration may be granted are given below: • Category I – they are allowed to carry on the activity of issue management and to act as adviser, consultant, manager, underwriter, portfolio manager. • Category II –they are allowed to act as adviser, consultant, co-manager, underwriter, portfolio manager. • Category III –they are permitted to act as underwriter, adviser or consultant to an issue. • Category IV – they can act only as adviser or consultant to an issue. CAPITAL ADEQUACY NORMS: Category I : Rs. 5 crores Category II : Rs.50 lakhs Category III : Rs.20 lakhs Category IV : Nil Note: With effect from December 9, 1997, different categories of merchant bankers were abolished and only Category-I merchant bankers are registered by the SEBI.
- 11. RESTRICTION ON APPOINTMENT OF LEAD MANAGERS: The regulations state that the number of lead merchant bankers (issue manager to the issue) may not exceed in the case of any issue of – Size of the issue No. of Lead Managers (a) Less than Rs. 50 crore Two (b) Rs. 50 crore but less than Rs. 100 crore Three (c) Rs. Rs. 100 crore but less than Rs. 200 crore Four (d) Rs. 200 crore but less than Rs. 400 crore Five (e) Above Rs. 400 crore Five or more as may be agreed by the board. This restriction on the number of lead managers for an issue was omitted by an amendment in regulations on April 19, 2006.
- 12. CODE OF CONDUCT: The code of conduct stipulates that in the performance of duties, merchant banker should: (1) act in an ethical manner, (2) inform the client that he is obliged to comply with the code of conduct, (3) render high standard of service and exercise due diligence, (4)not to indulge in unfair practices, (5)not to make misrepresentations, (6)give best advice, (7) not to divulge confidential information about the clients, (8) endeavor to ensure that true and adequate information is provided to investors. Finally merchant bankers have to deal adequately with complaints from investors. Merchant bankers should not be a party in respect of issue of securities, creation of false market, price rigging or manipulation or pass price sensitive information, to abide by all rules, regulations, guidelines, resolutions issued by the Government of India and SEBI from time to time.
- 13. MERCHANT BANKERS’ COMMISSION: As determined by the Finance Ministry, GoI, merchant bankers are eligible to charge commission/fee from their clients as detailed below: ≈ A merchant banker can charge 0.5% as the maximum commission for whole of the issue. ≈ They can charge project appraisal fees. ≈ A Lead Manager can claim a commission of 0.5% up to Rs.25 crore and 0.2% in excess of Rs. 25 crore. ≈ Underwriting commission. ≈ Brokerage commission 1.5%. ≈ Other expenses like advertising, printing, Registrar’s expenses, stamp duty etc., in connection with the issue can be reimbursed from its clients.
- 14. GUIDELINES FOR MERCHANT BANKERS 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 SEBI has been vested with the power to suspend or cancel the authorization in case of violation of the guidelines Every merchant banker shall appoint a ‘Compliance Officer’ 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 A lead manager holding a certificate under category I shall accept a minimum underwriting obligation of 5% of size of issue or Rs.25 lakhs whichever is less
- 15. SEBI GUIDELINES FOR MERCHANT BANKERS REGARDING ISSUES: For each issue managed by an M.B, the matters to be disclosed mandatorily on their website are: Three years track record of companies whose IPOs/FPOs were managed by them. Issue size Extent of over/under subscription The shareholding of QIBs at the end of each of the three subsequent years Financials of the company for three years EPS and Price-Earning multiple at the end of each of the financial year Post-listing vis-à-vis the peer as well as the industry average The extent of trading of shares whether thin or active
- 16. The M.B. Registered with SEBI classified according to the category :- MERCHANT BANKER PUBLIC SECTOR COMMERCIAL BANKS :- 24 FINANCIAL INSTITUTION :- 6 STATE INSTITUTION :- 4 PRIVATE SECTOR BANKS :- 10 FINANCE & INVESTMENT :- 231 LEASING INTERNATIONAL BANKER :- 10
- 17. CONCLUSION: Merchant Banking is difficult to define. The function of Merchant Bankers varies from country to country. Merchant banks are known as “Accepting and issuing houses” in UK and as “Investment banks” in USA In India merchant bankers are allowed to undertake only those activities which are related to securities market including issue management activities and are prohibited from carrying on fund based activities other than those related exclusively to the capital market. This reduces the scope of merchant banking in India.