INVESTMENT BANKING FINANCIAL SERVICES Chepter2 InvestmentMerchant Banking Investment
INVESTMENT BANKING & FINANCIAL SERVICES Chepter-2 Investment/Merchant Banking
Investment Banking Investment banking do not accept deposits and grant the loan. Investment banks provide financial advisory services. Along with providing investment and financial services, investment banks have business like venture capital and stock broking. The main investment banks in India are Kotak Mahindra Capital Company, SBI Capital Markets Ltd. , ICICI Securities Ltd. etc. Merchant banking services is related with issue management. In other words merchant banks manage new issues of companies in the capital market. Investment banks may replace merchant bankers in India.
Functions and Services of Investment Banks Provide services as merchant banking, underwriting and book running. Help the private sector corporates in issuing securities. Help the companies in fund raising through Initial Public Offer (IPO), Qualified Institutional Placement and Preferential Allotments. Provide advisory corporate service related to project finance and export credit finance. Provide advice and guidance related to merger and acquisition. Recent development of investment banks provide full services such as merchant banking, underwriting, asset management business, securities business, book running, investment advisory etc. On the basis of above mentioned provided services, it can be said that investment banking may gradually replace merchant banking in India.
Functions and Services of Investment Banks
Investment Banking in India Investment banking is referred as ‘issuing house’ or ‘merchant banking’. The term “investment banking” has the US origin, whereas the term “merchant banking” is famous in countries such as UK and India. Investment banking, primarily refers to the business of raising capital for companies There was no investment banking/merchant banking system in Indian banking system before 1970. The first merchant banking activities started in India by the Grindlays Bank by opening merchant banking division. After Grindlays bank, Citi bank and Chartered bank started to undertake the activities which were known as merchant banking. The main service rendered by these banks was management of issue.
Investment Banking in India SBI Capital market Ltd. was established as a subsidiary of State Bank of India in 1986. However SBI started merchant banking services in 1973. Then Can Bank financial services ltd. was incorporated as subsidiary of Canara Bank. PNB Capital Services Ltd. was promoted by Punjab National Bank. Thus commercial banks set up subsidiaries to undertake merchant banking activities. Private merchant bankers have also started recognizing their activities in this field e. g. J. M. Financial and Investment Consultancy Ltd, 20 th century finance corporation Ltd.
Investment Banking in India Merchant bankers in India have also started their voluntary association in the form of professional body known as “Association of merchant bankers. ” This association is playing important role in regulating the activities of merchant banking through self-regulations. Kotak Investment Banking is full service investment bank in India. The major investment banks in India render their services to clients are: 1. Fund raising services and 2. Advisory services. Activities of investment banking/merchant banking are under the regulation of SEBI.
Investment Banking in India Investment banking facilitates the entire process of issue management. The major investment banks render core services along with allied services under the SEBI Regulations. Services are offered by the expert staff. Investment banking offer services to the issuer in critical circumstances as a professional advisor, when the Indian companies come up with mega issues. At present, it is necessary for investment banking to render quality type guidance and advice to their clients with ethical manner. For this, adequate expert and qualified staff is necessary. Indian desiring to invest abroad depend upon investment bank/merchant bankers for valuable guidance.
RECENT DEVELOPMENTS 1. Establishment of merchant banking division of the nationalized bank i. e. independent subsidiaries to render specialized services. For example, SBI Capital market Ltd, Can bank financial services Ltd. 2. Private merchant bankers who have taken effective steps to reorganize their activities. 3. SEBI (Merchant Banker) Regulations 1992 and SEBI (Intermediaries) Regulations 2008. Merchant bankers, underwriters, portfolio managers, brokers etc. required certificate of registration from SEBI. 4. The stockbroker underwriters Association was established to act in co-ordination with merchant bankers. 5. Establishment of Credit Rating Information Services of India Ltd. (CRISIL) to provide help to merchant bankers, investors and financial institutions.
CHALLENGES AHEAD 1. There are different categories of merchant banker. It means regulatory frame work of SEBI does not allow to perform all merchant banking functions within one legal entity. For example, merchant banker requires stock exchange membership apart from registration with SEBI. Only category-I allow the merchant banker to act as lead manager. So merchant banker in India has to follow conglomerate structure to perform different business activities. 2. The net worth requirement is very high in categories I and II. 3. Merchant bankers need to plan for new strategies for growth and for development of long term relationship with clients. For this quality type advice and assistance to client is essential. 4. Merchant banker has to act in an ethical manner and to render high standard of services to the client. 5. Merchant bankers face with challenge of attracting Non Resident Indian (NRI) Investment into India. 6. SEBI guideline has restricted the operations to issue management and portfolio management to some extend, as a result the scope of work becomes limited.
CHALLENGES AHEAD 7. Sometime inefficiency of the clients are often blamed on the merchant bankers, as a result merchant bankers are into trouble without any fault. 8. There is always risk attached to the kinds of deal that merchant banker undertake. 9. Merchant bankers has to face global financial crisis. For example, global financial crisis of 2008 saw the collapse of several prominent investment bankers. 10. Creating challenges and opportunities for the investment banking in the year to come. 11. Merchant banker has to face the challenge to reduce cost. Merchant banker face the significant pressure to reduce cost. 12. Merchant banker is required to utilize their client’s knowledge to grow client’s returns. 13. The traditional and inflexible infrastructures (Physical as well as technical) restricts growth of merchant banker in the current digital age. 14. Merchant banker has to face the disruption in capital and money market such as foreign exchange is reshaping.
INSTITUTIONAL STRUCTURE OF INVESTMENT BANKING
INSTITUTIONAL STRUCTURE OF INVESTMENT BANKING Investment bank is split into : 1. The front office deals with investment banking and management, sales and trading, private equity investment. 2. The middle office deals with the risk management, finance and compliance. 3. The back office deals with transactions, operation and technology.
INSTITUTIONAL STRUCTURE OF INVESTMENT BANKING The Indian investment banking has a heterogeneous institutional structure due to following reasons : 1. The Indian regulatory frame work does not permit all merchant banking functions to be performed by one corporate entity due to different categories of merchant banking. As a result investment banks have to adopt conglomerate structure. For example, only category-I merchant banker is allowed to act as a merchant banker. In short regulations do not allow all investment/merchant banking functions to be performed by single entity. 2. Investment banks which are incorporated under a separate statute are regulated by the provisions laid down by respective statute. 3. Securities business can be carried out in a different company after obtaining stock exchange membership along with the SEBI registration.
INSTITUTIONAL STRUCTURE OF INVESTMENT BANKING 4. Merchant banker other than bank and financial institution, who obtains the license from SEBI to act as merchant banker is not permitted to carry out any business other than merchant banking activities. 5. Stock broking business has to be separated into a different company. 6. Several big investment banks like SBI, Kotak Mahindra , Citi bank, IDBI etc. offer almost all of the investment banking activities permitted in the India.
MERCHANT BANKING
MERCHANT BANKING Merchant banker means “A person who is engaged in the business of issue management, either by making arrangements regarding selling, buying or subscribing to securities or acting as a manager, consultant or advisor or rendering corporate advisory services in relation to such issue management. ” Merchant banks manage new issues of companies in the capital market. It is now mandatory to appoint a merchant banker in the case of process of public issues. Merchant banker is a person who is engaged in the business of issue management.
CATEGORIES OF MERCHANT BANKER
FUNCTIONS OF MERCHANT BANKING 1. Raising Finance for Clients : Merchant Banking helps its clients to raise finance through issue of shares, debentures, bank loans, etc. It helps its clients to raise finance from the domestic and international market. This finance is used for starting a new business or project or for modernization or expansion of the business. 2. Broker in Stock Exchange : Merchant bankers act as brokers in the stock exchange. They buy and sell shares on behalf of their clients. They conduct research on equity shares. They also advise their clients about which shares to buy, when to buy, how much to buy and when to sell. Large brokers, Mutual Fund, Venture capital companies and Investment Banks offer merchant banking services. 3. Project Management : Merchant bankers help their clients in the many ways. For e. g. Advising about location of a project, preparing a project report, conducting feasibility studies, making a plan for financing the project, finding out sources of finance, advising about concessions and incentives from the government. 4. Advice on Expansion and Modernization : Merchant bankers give advice for expansion and modernization of the business units. They give expert advice on mergers and amalgamations, acquisition and takeovers, diversification of business, foreign collaborations and joint-ventures, technology up-gradation, etc.
FUNCTIONS OF MERCHANT BANKING 5. Managing Public Issue of Companies : Merchant bank advice and manage the public issue of companies. They provide following services: Ø Advise on the timing of the public issue. Ø Advise on the size and price of the issue. Ø Acting as manager to the issue, and helping in accepting applications and allotment of securities. Ø Help in appointing underwriters and brokers to the issue. Ø Listing of shares on the stock exchange, etc. 6. Handling Government Consent for Industrial Projects : A businessman has to get government permission for starting of the project. Similarly, a company requires permission for expansion or modernization activities. For this, many formalities have to be completed. Merchant banks do all this work for their clients.
FUNCTIONS OF MERCHANT BANKING 7. Special Assistance to Small Companies and Entrepreneurs : Merchant banks advise small companies about business opportunities, government policies, incentives and concessions available. It also helps them to take advantage of these opportunities, concessions, etc. 8. Services to Public Sector Units : Merchant banks offer many services to public sector units and public utilities. They help in raising long-term capital, marketing of securities, foreign collaborations and arranging long-term finance from term lending institutions. 9. Revival of Sick Industrial Units : Merchant banks help to revive (cure) sick industrial units. It negotiates with different agencies like banks, term lending institutions, and BIFR (Board for Industrial and Financial Reconstruction). It also plans and executes the full revival package. 10. Portfolio Management : A merchant bank manages the portfolios (investments) of its clients. This makes investments safe, liquid and profitable for the client. It offers expert guidance to its clients for taking investment decisions
FUNCTIONS OF MERCHANT BANKING 11. Corporate Restructuring : It includes mergers or acquisitions of existing business units, sale of existing unit or disinvestment. This requires proper negotiations, preparation of documents and completion of legal formalities. Merchant bankers offer all these services to their clients. 12. Money Market Operation : Merchant bankers deal with and underwrite shortterm money market instruments, such as: Government Bonds. Certificate of deposit issued by banks and financial institutions. Commercial paper issued by large corporate firms. Treasury bills issued by the Government (Here in India by RBI).
SEBI REGULATIONS FOR MERCHANT BANKERS 1. The applicant (merchant banker) should be a body corporate other than a nonbanking financial company. Provided that merchant banker, who has granted registration certificate by Reserve Bank of India to act as primary dealer can carry on such activity subject to the conditions. Under the primary dealer system, primary dealer can play role in primary market and secondary market in the government securities. 2. Applicant should satisfy a prescribed capital adequacy norm in terms of its net worth. Net worth means paid up capital and reserve should not be less than five crore rupees. 3. The applicant has the necessary infrastructure like adequate office space, equipment and manpower to effectively discharge his activities. 4. The applicant should have minimum two person in his manpower who must have experience to conduct the business of merchant banking.
SEBI REGULATIONS FOR MERCHANT BANKERS 5. Any person directly or indirectly, (Any person means; associate, subsidiary, interconnected group company) connected with the applicant, SEBI will not grant the certificate of registration. Applicant does not have a certificate of registration from SEBI. 6. Applicant or his partner or director or principal officer should not be involved in any litigation (legal action) connected with the securities market. 7. Applicant has the professional knowledge and qualification in finance, law or business management. 8. Registration is in the interest of investors. Grant of certificate to the applicant is in the interest of investors. 9. Applicant should be fit and proper person as per the criteria specified by SEBI.
RESPONSIBILITIES OF LEAD MANAGERS The Lead merchant banker or lead managers plays an important role for IPO (Initial Public Offer), FPO (Follow-on-Public Offer), Right Issue, Private Placement etc. 1. Enter into agreement with the issuer: Every lead merchant bankers have to enter into an agreement with issuing company about their rights and liabilities. Rights relating to the issue mainly disclosures and responsibilities relating to disclosure, allotment and refund are not clearly defined in such agreement, lead manager should not agree to manage issue. The statement providing details of responsibilities is to be furnished by lead managers to SEBI within defined period. No lead manager shall agree to manage issue unless his responsibilities relating to the issue are defined.
RESPONSIBILITIES OF LEAD MANAGERS 2. Underwriting: The lead manager shall under take to accept a minimum underwriting obligation of 5% of the total underwriting commitment or Rs. 25 lakhs, but whichever is less. Relevant particular in respect of underwriting issue should incorporated in the offer document. 3. Disclosure to the SEBI: Merchant banker has to disclose to the SEBI as and when required with respect to: I. A responsibilities of the merchant banker with regard to the management of issue II. Any change in information of particular which was furnished at the time of the certificate granted III. The names of the companies whose issues, in the past or at present have managed IV. Breach of the capital adequate requirement V. Particulars related to his activities as a manager, underwriter, consultant or adviser to an issue.
RESPONSIBILITIES OF LEAD MANAGERS 4. Prohibited from acquiring securities: A merchant banker or it’s directors or partner or principal officer prohibited from acquiring securities of company on the basis of obtained unpublished price, whose issue is managed by him. The relevant particulars of any acquisition of securities of a company whose issue is being managed by him should provide to SEBI within 15 days from the date of such transaction. 5. Appoint a compliance officer: For monitoring the compliance of rules and regulations, instructions, guidelines issued by SEBI, every merchant banker should appoint a compliance officer who would be responsible for monitoring the compliance of the act and for redressal of investors.
RESPONSIBILITIES OF LEAD MANAGERS 6. Not to associate: A lead merchant banker shall not be associated with any issue, if merchant banker who is without registration i. e. not holding a certificate. 7. Continuance of association of lead manager with an issue: The lead manager undertaking the responsibility for refunds or allotment of securities in respect of any issue shall continue to be associated with the issue till the subscribers have received the shares or debenture certificates or refund of excess application money. Under the SEBI intermediaries regulation, a merchant banker is liable for action, who contravenes the rules and regulations or the provisions of SEBI.
RESTRICTION ON APPOINTMENT OF LEAD MANAGERS The Appointment of number of lead merchant banker is on the basis of size of issue.
THANK YOU
- Slides: 30