The financial services sector is an important constituent of the financial system and plays a significant role in the realm of economic development of a country. Merchant Banking is a prominent component of the financial sector of our country.
Revise Lecture 31 • Merchant Banking Merchant Banking – An Overview • • The financial services sector is an important constituent of the financial system and plays a significant role in the realm of economic development of a country Merchant Banking is a prominent component of the financial sector of our Merchant Banking – An Overview • In the U.S., investment bankers cater to the needs of business enterprises carrying out merchant banking functions The main functions of merchant banking are the following; Corporate counselling Project counselling Pre-investment studies Merchant Banking – An Overview Capital restructuring Credit syndication and project finance Issue management and underwriting Portfolio management Working capital finance Acceptance creat and bill discounting 10 Mergers, Amalgamations and takeovers Merchant Banking – An Overview 11 Venture capital 12 Lease financing 13 Foreign currency finance 14 Fixed deposit broking 15 Mutual funds 16 Relief to sick industries 17 Project appraisal • Categories of Securities Issue Public Issue Management • • • Corporate enterprise use several sources for raising funds from the capital market Issue of securities constitutes an important mode of raising such finances Security issues takes the following forms; Public issue Right issue Public Issue Management Public issue of securities: • • • When capital funds are raised through the issue of a prospectus, it is called ‘public issue of securities’ It is the most common method of raising funds in the capital market A security issue may take place either at par, or at a premium or at a discount Public Issue Management Public issue of securities: • • The prospectus has to disclose all the essential facts about the company to the prospective purchasers of the shares SECP insists on the adequacy of disclosure of information that should serve as the basis for investors to make a decision about the investment of their money 10 Marketing of New Issues Right Issue Method: • • Where the shares of an existing company are offered to its existing shareholders, it takes the form of ‘rights issue’ Under this method, the existing company issues shares to its existing shareholders in proportion to the number of shares already held by them 40 Marketing of New Issues Right Issue Method: Advantages: • • Economy: Rights issue constitutes the most economical method of raising fresh capital, as it involves no underwriting and brokerage costs Further, the expenses by way of advertisement and administration, etc are less 41 Marketing of New Issues Right Issue Method: Drawbacks: Restrictive: The facility of rights issue is available only to existing companies and not to new companies 42 Marketing of New Issues Bonus Issues method: • • Where the accumulated reserves and surplus of profits of a company are converted into paid up capital, it takes the form of issue of ‘bonus shares’ It merely implies capitalization of existing reserves and surplus of a company 43 Marketing of New Issues Bonus Issues method: • Advantage: It saves the company enormously of the hassles of capital issue The issue is free 44 Marketing of New Issues Book-building Method: A method of marketing the shares of a company whereby the quantum and the price of the securities to be issued will be decided on the basis of the ‘bids’ received from the prospective shareholders by the lead merchant bankers is known as ‘bookbuilding method’ 45 Marketing of New Issues Book-building Method: • • Under the book-building method, share prices are determined on the basis of real demand for the shares at various price levels in the market For discovering the price at which issue should be made, bids are invited from prospectus investors from which the demand at various price level is noted 46 The merchant bankers undertake full Marketing of New Issues Book-building Method: Advantages: Reduction in the duration between allotment and listing Reliable allotment procedure Quick listing in stock exchange possible No price manipulation as the price is determined on the basis of the bids 47 received Marketing of New Issues Stock Option or Employee Stock Option Scheme (ESOP): • • A method of marketing the securities of a company whereby its employees are encouraged to take up shares and subscribe to it is known as ‘stock option It is a voluntary scheme on the part of the company to encourage employees participation in the company 48 Marketing of New Issues Stock Option or Employee Stock Option Scheme (ESOP): • • The scheme also offers an incentive to the employees to stay in the company The scheme is particularly useful in the case of companies whose business activity is dominantly based on the talent of the employees, as in the case of software industry 49 Marketing of New Issues Bought-out Deals: A method of marketing of securities of a body corporate whereby the promoters of an unlisted company make an outright sale of a chunk of equity shares to a single sponsor or the lead sponsor is known as ‘bought-out deals’ 50 Marketing of New Issues Bought-out Deals: Features: • Parties: There are three parties involved in the bought-out deals They are promoters of the company, sponsors and co-sponsors who are generally merchant bankers and investors 51 Marketing of New Issues Bought-out Deals: Features: Outright sale: • Under this arrangement, there is an outright sale of a chunk of equity shares to a single sponsor or lead sponsor Sale price: • The sale price is finalized through negotiations between the issuing company 52 and the purchaser, the sale being Marketing of New Issues Bought-out Deals: Features: Fund –based: • Bought-out deals are in the nature of fundbased activity where the funds of the merchant bankers get locked in for at least the prescribed minimum period 53 Marketing of New Issues Bought-out Deals: Features: Listing: • The investor- sponsor make a profit, when at future date, the shares get listed and higher prices prevail Listing generally takes place at a time when the company is performing well in terms of higher profits and larger cash generations from projects 54 ... carrying out merchant banking functions The main functions of merchant banking are the following; Corporate counselling Project counselling Pre-investment studies Merchant Banking – An Overview...• Merchant Banking Merchant Banking – An Overview • • The financial services sector is an important constituent of the financial system and plays a significant role... syndication and project finance Issue management and underwriting Portfolio management Working capital finance Acceptance creat and bill discounting 10 Mergers, Amalgamations and takeovers Merchant Banking