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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 28 • 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 • Merchant Banking provides specialist services including portfolio management, project financing and counselling, issue management and underwriting, mergers, acquisitions, venture capital financing, leasing and so on Merchant Banking – An Overview • • Merchant banking, although a nonbanking financial activity, resembles banking function The function of merchant banking which originated, and grew in Europe, was enriched by American patronage, and these services are now being provided throughout the world by both banking and non-banking institutions Merchant Banking – An Overview • The word ‘Merchant Banking’ originated among the Dutch and the Scottish traders, and was later on developed and professionalized in Britain Merchant Banking – An Overview • • A set of financial institutions that are engaged in providing specialist services, which generally include the issue and underwriting, project financing, mergers, acquisitions, venture capital financing, acceptance of bills of exchange and other banking services, are known as ‘merchant bankers’ A merchant banker may specialize in one activity and take up other activities, which 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 10 Public Issue Management Arranging for press conferences and the investors conferences Coordinating printing, publicity and other work in order to get everything ready at the time of the public issue Complying with SECP guidelines after the issue is over by sending various reports as required by the authorities 16 Lecture 29 17 • Categories of Securities Issue 18 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 19 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 20 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 21 Public Issue Management Right issue: • • • When shares are issued to the existing shareholding of a company on a privileged basis, it is called as ‘Rights Issue’ The existing shareholders have a preemptive right to subscribe to the new issue of shares Rights shares are offered as additional issues by corporates to mop up 22 further Public Issue Management Private placement: • • When the issuing company sells securities directly to the investors, especially institutional investors, it takes the form of private placement In this case, no prospectus is issued, since it is presumed that the investors have sufficient knowledge and experience and are capable of evaluating the risks of the 23 investment Public Issue Management Public issue of securities: • • • Private placement covers shares, preference shares and debentures The role of financial intermediary, such as merchant bankers and lead managers, assumes greater significance in private placement They involve themselves in the task of preparing an offer memorandum24and Public Issue Management Public issue of securities: Private placement obviously commands an advantage over the public issue on the following grounds; Speed and confidentiality of issue Access to capital market more quickly than a public issue which may take months to one year Time taken by private placement is just to 25 months Public Issue Management Public issue of securities: Less expensive method of raising capital because of fewer compliance procedures Advantageous to small companies which cannot afford a public issue because of the expense involved Ideally suited to companies which need only relatively limited amount of capital funds 26 • Issue Manager 27 Public Issue Management Issue Manager • • Any financial institution / intermediary which can carry out the activities connected with issue management, is registered with SECP, and can follow its regulations and guidelines, is capable of venturing into issue management Issue management is an important activity for merchant bankers 28 Public Issue Management Issue Manager (Requirements) The Issue manager needs to satisfy the following requirements before being allowed by the SECP to carry out various issue management activities; Adequate and necessary infrastructure such as adequate office space, equipments and manpower to effectively discharge activities 29 Public Issue Management Issue Manager (Requirements) Minimum number of two persons needed, who are professionally qualified in Law, Finance or Banking management and have the experience to conduct the business of the merchant banker Fulfilling the capital adequacy requirements, i.e a minimum net worth of Rs crores 30 ... by both banking and non -banking institutions Merchant Banking – An Overview • The word Merchant Banking originated among the Dutch and the Scottish traders, and was later on developed and professionalized... financing and counselling, issue management and underwriting, mergers, acquisitions, venture capital financing, leasing and so on Merchant Banking – An Overview • • Merchant banking, although a nonbanking... bills of exchange and other banking services, are known as merchant bankers’ A merchant banker may specialize in one activity and take up other activities, which Merchant Banking – An Overview •