The main functions of merchant banking are the following; Corporate counselling, project counselling, pre-investment studies, capital restructuring, credit syndication and project finance, issue management and underwriting, portfolio management, working capital finance, acceptance creat and bill discounting.
Revise Lecture 30 • 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, 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 • 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 • Public Issue Management Public Issue Management • • The management of securities of the corporate sector offered to the public on a regular basis, and existing shareholders on a rights basis, is known as ‘public issue management’ Issue management is an important function of merchant bankers and lead managers 10 Public Issue Management Activities involved in public issue management: 10 Filing with RoC 11 Launching the issue 12 Promoter’s contribution 13 Issue closure 37 Lecture 31 • Marketing of new issues 38 Marketing of New Issues Methods of marketing securities: • Following are the various methods being adopted by corporate entities for marketing the securities in the New Issues Market; Pure prospectus method Offer for sale method Private placement method 39 Marketing of New Issues Methods of marketing securities: Initial public offers (IPOs) method Right issue method Bonus issue method Book-building method Stock option method Bought-out deals method 40 Marketing of New Issues Pure prospectus method: • • The method whereby a corporate enterprise mops up capital funds from the general public by means of an issue of a prospectus, is called ‘pure prospectus method’ It is the most popular method of making public issue of securities by corporate enterprises 41 Marketing of New Issues Pure prospectus method: Advantages: • The pure prospectus method of marketing the securities serves as an excellent mode of disclosure of all the information pertaining to the issue The method promotes confidence of investors through transparency and non-discriminatory basis of allotment 42 Marketing of New Issues Pure prospectus method: Drawbacks: High issue costs Time consuming 43 Marketing of New Issues Offer for Sale method: • • Where the marketing of securities takes place through intermediaries, such as issue houses, stockbrokers and others, it is a case of ‘Offer for Sale Method’ Under this method, the sale of securities takes place in two stages 44 Marketing of New Issues Offer for Sale method: • • First stage, the issuer company makes an en-block sale of securities to intermediaries such as the issue houses and share brokers at an agreed price Second stage, the securities are re-sold to ultimate investors at a market-related price The difference between the purchase price and the issue price 45 constitutes ‘profit’ for the intermediaries Marketing of New Issues Offer for Sale method: Advantage: • The biggest advantage of this method is that it saves the issuing company the hassles involved in selling the shares to the public directly through prospectus Drawback: • This method is, however, expensive for 46 of the investor as it involves the offer Marketing of New Issues Private Placement Method: • A method of marketing of securities whereby the issuer makes the offer of sale to individuals and institutions privately without the issue of a prospectus is known as ‘Private Placement Method’ 47 Marketing of New Issues Private Placement Method: Advantages: Less expensive as various types of costs associated with the issue are borne by the issue houses and other intermediaries Placement of securities suits the requirements of small companies 48 Marketing of New Issues Private Placement Method: Disadvantages: Concentration of securities in a few hands Depriving the common investors of an opportunity to subscribe to the issue, thus affecting their confidence level 49 Marketing of New Issues Initial Public Offer (IPO) Method: • • The public issue made by a corporate entity for the first time in its life is called ‘Initial Public Offer’ (IPO) Under this method of marketing, securities are issued to successful applicants on the basis of the orders placed by them, through their brokers 50 Marketing of New Issues Initial Public Offer (IPO) Method: • The job of selling the stock is entrusted to a popular intermediary, the underwriter Advantage: The biggest advantage of this method of marketing of securities is that there is no need for the investors to part with the money even before the shares are allotted in his favor 51 ... 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 –. .. country Merchant Banking is a prominent component of the financial sector of our Merchant Banking – An Overview • • Merchant banking, although a nonbanking financial activity, resembles banking. .. 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