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INTRODUCTION
In this competitive world, where banks and financial institutions are providing traditional services, now is a scenario where they need to retain customers by providing them some extra special services besides traditional services.
With the opening up of the economy, a number of private sector banks have joined the fray & are offering a plethora of products & services. Banking sector has made a tremendous growth in last few years. The main achievement of bank is participation in capital market through merchant banking activities. New issues coming day by day it is necessary for the regulator to create code & conduct for primary issues, secondary market, thus through merchant bankers are being allowed to enter in to capital market through
• Project management.
• Issue management
• Portfolio management service
• Counseling
• Bought out deals
• Venture financing
The main objective of this study is to learn new issue market activities procedures & to know importance of merchant bankers as sponsor of capital issues also to learn what are the duties & responsibilities of the merchant bankers as lead managers, underwriter, bankers to an issue, brokers to an issue, registrars to an issue and share transfer agents, debenture trustee, portfolio managers etc.
In today’s world of competition in the banking service & products it is essential to generate more & more income from other fund based /non fund base activities. Also looking at today’s scenario in stock market there are many public issues which have been successfully listed with the help of merchant bankers. Today it is difficult to go for public issue without the help of merchant banker.
But there is some legal requirements, rules & regulations to be followed by these bankers otherwise there can be chances of default. SEBI has made code & conduct to be followed by all the financial intermediaries including merchant bankers.
INTRODUCTION TO MERCHANT BANKING
The Indian financial system is a vast universe. This universe is regulated and supervised by two Government agencies under Ministry of Finance viz., RBI, SEBI. The economic reforms, being an integrated process, included deregulation of industry, liberalization on foreign investment, regime, restructuring and liberalization of trade, exchange rate and tax policies, partial disinvestments of Government holdings in public sector companies and financial sector reforms. Securities market in India has frown exponential as measured in terms of amount raised from market, number of stock exchanges and other intermediaries, the number of listed stocks, market capitalization, trading volumes and price indices.
Origin:-
The term Merchant Banking has its origin in the trading methods of countries in the late eighteenth and early nineteenth century when trade-taking place was financed by bill of exchange drawn by merchanting houses. As international trade grew and other lesser-known names wanted to import goods from abroad, the established merchants ‘lent their names’ to the newcomers by agreeing to accept bills of exchange on their behalf. The acceptance houses would charge a commission for this service.
The second historical of Merchant Banks was the raising of capital for foreign Government through the issue of stocks and bonds. Therefore, Merchant Banks can be accepting houses or issuing houses or both.
The term merchant banking is used differently in different countries and so there is no precise definition for it. In London, merchant banker refers to those who are members of British Merchant Banking and Securities House Association who carry on consultation, leasing, portfolio services, assets management, euro credit loan syndication etc. In America, merchant banking is concerned with mobilizing savings of people and directing the funds to business enterprise.
Dictionary meaning of ‘merchant bank’ refers to an organization that underwrites corporate securities and advises such clients on issues like corporate mergers, etc. involved in the ownership of commercial ventures. This organization may be a bank, corporate body, firm or proprietary concern.
Merchant banking although a non–banking financial activity resembles banking function. The functions of merchant banking which originated ,& grew in Europe .the word “ Merchant banking “ originated among the Dutch and was later on developed and professionalized in Britain.
The need for specialized merchant banking services was felt in India with the rapid growth in the number and size of the issue made in the primary market. The merchant banking services were started by foreign banks, namely the National Grindlays Bank in 1972 recommended the setting up of merchant banking institutions by commercial banks and financial institutions. This marked the beginning of specialized merchant banking in India.
OBJECTIVE OF DOING THIS PROJECT
As the student of BANKING AND INSURANCE, the main aim of this project is to know how merchant banks plays role in issues management,
Basic objective of doing this project is to enlarge the knowledge relating to:
How the merchant banking services originated in India?
What were the need, importance and functions of the merchant banker?
What are the different types of issues through which money is raised and what is the role of merchant banker in these issues?
What is the regulatory framework prescribed by Securities and Exchange Board of India?
What are the future scope, challenges and problems faced by merchant banker?
The main objective of doing this project is to get the knowledge regarding how this all is practically done.
SCOPE OF MERCHANT BANKER
According to the securities and exchange board of India (Merchant Bankers) Rules, 1992
“A merchant banker has been defined as any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or acting as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management.”
A set of financial institution that are engaged in providing specialist services, which generally include the acceptance of bills of exchange, corporate finance, portfolio & issue management and other banking services, are known as “ Merchant bankers “. A merchant banker may specialize in one activity, and take up other activities, which may be complementary or support to the specialized activity.
NEED & IMPORTANCE OF MERCHANT BANKING IN INDIA
1) Important reason for the growth of merchant banking has been the developmental activity throughout the country, exerting excess demand on the sources of funds for ever expanding industry and trade, thus, leaving a widening gap unabridged between the supply and demand of investible funds.
2) All India financial institutions had experienced resource constraint to meet the ever-increasing demand for funds from the corporate sector enterprises.
3) With the growing demand for funds there was pressure on capital market that enthused the commercial banks, share brokers and financial consultancy firms to enter into the field of merchant banking and share the growing capital market.
4) The need of merchant banking institutions is felt in the wake of huge public savings lying still untapped
5) Merchant banks have been procuring impressive support from capital market for the corporate sector for financing their projects. This is evidenced from the increasing amount raised from the capital market by the corporate enterprises year after year.
OBJECTIVES OF MERCHANT BANKER
Merchant Banker plays a vital role in the economic and financial development of the country. As a result of economic and financial liberalization new companies are formed and number of issues floated to raise resources from the investor community.
Considering the significance of the issue the Government of India instituted SEBI in 1990 to regulate and control various market intermediaries. SEBI issued various rules and regulations for each and every segment of the capital market. To regulate Merchant bankers, with the twin objective viz., investor protection and development of the capital market, SEBI issued rules and regulations for Merchant Bankers. Subsequent amendments also have been made to these regulations to further strengthen this segment of the securities industry. These regulations (Merchant Banking) specified that every company desires to float an issue to the public should engage Merchant Banker (Registered under these regulations with SEBI) as Lead Manager. In this context Merchant Banker gained the importance in the Indian Securities Industry.
Having given a serious and careful thought to securities industry reforms, SEBI has taken efforts seriously to boost the splendid endeavor of securities market intermediaries. As a result, Merchant Bankers came into being to look after the promotion and administration of issues. It is well known fact that without adequate professional support of Merchant Bankers the securities industry cannot prosper.
RESEARCH METHODOLOGY
The study of ALM Management is based on secondary data collection
PRIMARY DATA COLLECTION:
The sources of primary data were
The chief manager – merchant banking cell
Department Sr. manager financing & Accounting
System manager- merchant banking cell
Gathering the information from other managers and other officials of the
SECONDARY DATA COLLECTION:
Collected from books regarding, journal, and management containing relevant information about ALM and Other main sources were
Annual report of the CANARA BANK
Published report of the times of India.
RBI guidelines for MARCHANT BANKING
LIMITATIONS OF THE STUDY
Lack of awareness of generation sector of Canara bank.
Lack of time is another limiting factor the schedule period 6 weeks are not sufficient to make the study independently regarding Capital budgeting in Canara bank.
The busy schedule of the officials in the Canara bank is another limiting factor. Due to the busy schedule of officials restricted me to collect the complete information about organization.
Non-availability of confidential financial data.
The study is conducted in a short period, which was not detailed in all aspects.
REVIEW OF LITERATURE
Among the important financial intermediaries are the merchant bankers. The services of Merchant bankers have been identified in India with just issue management. It is quite common to come across reference to merchant banking and financial services as though they are distinct categories. The services provided by merchant banks depend on their inclination and resources - technical and financial.
Merchant banking, being a service-oriented industry, renders the same services in India as merchant banks in UK and other European countries. In the U.S. investment bankers cater to the needs of business enterprises carrying out merchant banking functions. Merchant banks in India carry out the following functions and services:
1. Corporate Counselling
2. Project Counselling
3. Pre-investment studies
4. Capital Restructuring
5. Credit Syndication and Project Finance
6. Issue Management and underwriting
7. Portfolio Management
8. Working Capital Finance
9. Acceptance Credit and Bill Discounting
10. Mergers, Amalgamations and takeovers
11. Venture Capital
12. Lease Financing
TYPES OF ISSUES
1) Public issues - Public issues of securities, debentures or shares are made in the primary market. The funds mobilized through primary market constitute investment. An offer to public is made through issue of prospectus or subscribed directly. Different media newspapers televisions periodicals are used for publicity. The intermediaries who organize these activities are merchant bankers. In past stock brokers used to organize public issue. Initial issues are issues of shares for the first time either after incorporation or conversion from private limited to public limited company. The initial as well as further issues may be offered for cash subscription or for consideration other than cash such as change of ownership either of physical assets or technical know-how.
Public issues can be further classified into Initial Public offerings and follow on public offerings. In a public offering, the issuer makes an offer for new investors to enter its shareholding family.
a) Initial Public Offering (IPO) is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer’s securities.
b) A follow on public offering (FPO) is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. An offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous listing obligations
Exchange issue - An exchange issue is one in which shares of one company are exchanged for another as in case of takeover and mergers. It does not add to funds of the company making the exchange although the merger may result in synergy. Another form of issue that does not result in raising new funds is the bonus issues. Bonus shares are distributed to determine proportion to existing shareholders.
3) Right issues - Right issue is the issue of new shares in which existing shareholders are given pre-emptive rights to subscribe to new issue. They are issued at a premium, which is freely determined by the company making the issue. It is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders unless they do not intend to subscribe to their entitlements.
Preferential issue - It is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital.
WHAT IS IPO (INITIAL PUBLIC OFFERING)?
The first public offer of securities by a company after its inception is known as Initial Public Offering (IPO).As a financing strategy; its main purpose is to raise funds for the company.
REASON FOR GOING PUBLIC:
1) To raise funds for financing capital expenditure needs like expansion, diversification, etc.
2) To finance increased working capital requirement.
3) As an exit route for existing investors.
4) For debt financing.
ADVANTAGES:
1) The IPO provides avenues for funding future needs of the company.
2) It provides liquidity for the existing shares.
3) The reputation and visibility of the company increases.
4) Additional incentive for employees in the form of of the company’s stocks if offered through Employees Stock Option Plans (ESOP).
5) It commands better valuation for company.
ROLE OF MERCHANT BANKER IN ISSUE MANAGEMENT
The public issue of securities is the core of merchant banking function. A one time merchant banking was constructed as the sole function. Merchant bankers were identified as issue houses
WHAT IS ISSUE MANAGEMENT?
The new issue market/activity was regulated by the controller of capital issues (CCIs) under the provisions of the capital issues (Control) Act, 1947 and the exemption orders and rules made under it. And under act, the protection of that interest of the investors in securities market and promotion of the development and regulation of the market became the responsibility of the SEBI. To tone up the operations of the new issues in the country; it has put in place rigorous measures. These cover both the major intermediaries as well as the activities. The project focus on the lead managers, underwriters, bankers to an issue, registrars and share transfer agents, debentures trustees, and portfolio managers.