Download VTU (Visvesvaraya Technological University) MBA 3rd Semester (Third Semester) 16MBAFM302-Financial Services FS Notes Unit 1 Important Lecture Notes (MBA Study Material Notes)
Investment Banking and Financial Services
16 MBA FM 302
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
Preparation of Prospectus
Is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company
Content of Prospectus:
?General information about the company
?Capital structure of the company
?Terms of the present issue
?Dates of opening and closing of the issue
?Name, address, functions and remuneration of Directors
?Auditors report with name and address of the auditors
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
Preparation of Prospectus
Is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company
Content of Prospectus:
?General information about the company
?Capital structure of the company
?Terms of the present issue
?Dates of opening and closing of the issue
?Name, address, functions and remuneration of Directors
?Auditors report with name and address of the auditors
Intermediaries to the issue
? Merchant Bankers to the issue or book running lead managers (BRLM).
? Registrar to the issue
? Bankers to the issue
? Underwriters to the issue
? Brokers
? Advertising agencies
? Printers
Pre-issue obligations ? SEBI guidelines
?Due Diligence
? Payment of requisite fees
? Submission of documents
? MOU
? Inter-se allocation of responsibilities
? Due Diligence Certificate
? Certificate in case of further issue by Listed companies
? Undertaking
? List of promoters group
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
Preparation of Prospectus
Is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company
Content of Prospectus:
?General information about the company
?Capital structure of the company
?Terms of the present issue
?Dates of opening and closing of the issue
?Name, address, functions and remuneration of Directors
?Auditors report with name and address of the auditors
Intermediaries to the issue
? Merchant Bankers to the issue or book running lead managers (BRLM).
? Registrar to the issue
? Bankers to the issue
? Underwriters to the issue
? Brokers
? Advertising agencies
? Printers
Pre-issue obligations ? SEBI guidelines
?Due Diligence
? Payment of requisite fees
? Submission of documents
? MOU
? Inter-se allocation of responsibilities
? Due Diligence Certificate
? Certificate in case of further issue by Listed companies
? Undertaking
? List of promoters group
Pre-issue obligations ? SEBI Guidelines
? Appointment of Intermediaries
?Merchant bankers
?Co-managers
?Other intermediaries
? Underwriting
? Offer document made public
? Dispatch of issue material
? No complaints certificate
? Mandatory collection centers
? Authorised collection agents
? Advertisement for rights post-issue
? Appointment of compliance office
? Abridged prospectus
? Agreement with depositories
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
Preparation of Prospectus
Is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company
Content of Prospectus:
?General information about the company
?Capital structure of the company
?Terms of the present issue
?Dates of opening and closing of the issue
?Name, address, functions and remuneration of Directors
?Auditors report with name and address of the auditors
Intermediaries to the issue
? Merchant Bankers to the issue or book running lead managers (BRLM).
? Registrar to the issue
? Bankers to the issue
? Underwriters to the issue
? Brokers
? Advertising agencies
? Printers
Pre-issue obligations ? SEBI guidelines
?Due Diligence
? Payment of requisite fees
? Submission of documents
? MOU
? Inter-se allocation of responsibilities
? Due Diligence Certificate
? Certificate in case of further issue by Listed companies
? Undertaking
? List of promoters group
Pre-issue obligations ? SEBI Guidelines
? Appointment of Intermediaries
?Merchant bankers
?Co-managers
?Other intermediaries
? Underwriting
? Offer document made public
? Dispatch of issue material
? No complaints certificate
? Mandatory collection centers
? Authorised collection agents
? Advertisement for rights post-issue
? Appointment of compliance office
? Abridged prospectus
? Agreement with depositories
Post - issue Management
Steps involved:
? To verify and confirm that the issue is subscribed to the extent of
90% including underwriters obligation
? To supervise and co-ordinate allotment procedure by the registrar as
per Stock Exchange guidelines
? To ensure issue of refund order, allotment letters within the prescribed
time limit of 10 weeks after the closure of the subscription list.
? To report periodically to SEBI about progress in allotment and
refunds.
? To ensure listing of securities at the stock exchange
? To attend the investors grievances about the public issue.
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
Preparation of Prospectus
Is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company
Content of Prospectus:
?General information about the company
?Capital structure of the company
?Terms of the present issue
?Dates of opening and closing of the issue
?Name, address, functions and remuneration of Directors
?Auditors report with name and address of the auditors
Intermediaries to the issue
? Merchant Bankers to the issue or book running lead managers (BRLM).
? Registrar to the issue
? Bankers to the issue
? Underwriters to the issue
? Brokers
? Advertising agencies
? Printers
Pre-issue obligations ? SEBI guidelines
?Due Diligence
? Payment of requisite fees
? Submission of documents
? MOU
? Inter-se allocation of responsibilities
? Due Diligence Certificate
? Certificate in case of further issue by Listed companies
? Undertaking
? List of promoters group
Pre-issue obligations ? SEBI Guidelines
? Appointment of Intermediaries
?Merchant bankers
?Co-managers
?Other intermediaries
? Underwriting
? Offer document made public
? Dispatch of issue material
? No complaints certificate
? Mandatory collection centers
? Authorised collection agents
? Advertisement for rights post-issue
? Appointment of compliance office
? Abridged prospectus
? Agreement with depositories
Post - issue Management
Steps involved:
? To verify and confirm that the issue is subscribed to the extent of
90% including underwriters obligation
? To supervise and co-ordinate allotment procedure by the registrar as
per Stock Exchange guidelines
? To ensure issue of refund order, allotment letters within the prescribed
time limit of 10 weeks after the closure of the subscription list.
? To report periodically to SEBI about progress in allotment and
refunds.
? To ensure listing of securities at the stock exchange
? To attend the investors grievances about the public issue.
Post-issue obligations - SEBI guidelines
? Post-issue monitoring reports
?To be submitted third day from the date of allocation in the book-built
portion or one day prior to the opening of the fixed price portion,
whichever is earlier. It is 3days from the date of closure of the issue in all
other cases.
? Final post-issue report within 78 days from the date of closure of the
subscription in case of book building and public issue, but 50 days in case
of rights issue.
? Redressal of investors grievances
? Co-ordination with intermediaries
?Stock invest
?Underwriters
?Bankers to an issue
? Finalising the basis of allotment
? Dispatch of Share certificate
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
Preparation of Prospectus
Is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company
Content of Prospectus:
?General information about the company
?Capital structure of the company
?Terms of the present issue
?Dates of opening and closing of the issue
?Name, address, functions and remuneration of Directors
?Auditors report with name and address of the auditors
Intermediaries to the issue
? Merchant Bankers to the issue or book running lead managers (BRLM).
? Registrar to the issue
? Bankers to the issue
? Underwriters to the issue
? Brokers
? Advertising agencies
? Printers
Pre-issue obligations ? SEBI guidelines
?Due Diligence
? Payment of requisite fees
? Submission of documents
? MOU
? Inter-se allocation of responsibilities
? Due Diligence Certificate
? Certificate in case of further issue by Listed companies
? Undertaking
? List of promoters group
Pre-issue obligations ? SEBI Guidelines
? Appointment of Intermediaries
?Merchant bankers
?Co-managers
?Other intermediaries
? Underwriting
? Offer document made public
? Dispatch of issue material
? No complaints certificate
? Mandatory collection centers
? Authorised collection agents
? Advertisement for rights post-issue
? Appointment of compliance office
? Abridged prospectus
? Agreement with depositories
Post - issue Management
Steps involved:
? To verify and confirm that the issue is subscribed to the extent of
90% including underwriters obligation
? To supervise and co-ordinate allotment procedure by the registrar as
per Stock Exchange guidelines
? To ensure issue of refund order, allotment letters within the prescribed
time limit of 10 weeks after the closure of the subscription list.
? To report periodically to SEBI about progress in allotment and
refunds.
? To ensure listing of securities at the stock exchange
? To attend the investors grievances about the public issue.
Post-issue obligations - SEBI guidelines
? Post-issue monitoring reports
?To be submitted third day from the date of allocation in the book-built
portion or one day prior to the opening of the fixed price portion,
whichever is earlier. It is 3days from the date of closure of the issue in all
other cases.
? Final post-issue report within 78 days from the date of closure of the
subscription in case of book building and public issue, but 50 days in case
of rights issue.
? Redressal of investors grievances
? Co-ordination with intermediaries
?Stock invest
?Underwriters
?Bankers to an issue
? Finalising the basis of allotment
? Dispatch of Share certificate
Changing Landscape of Investment Banking
? Till 2007 Investment banking business was very profitable
? As a result of the sub-prime mortgage crisis in US investment banks collapsed.
? Several acquisitions took place in 2008.
? Impact was felt by the Indian Investment banks.
? Growth rate of Indian economy also slowed down.
? Indian Investment banks were forced to design new strategies for survival and growth.
? Several important trends have emerged:
? Faster growth opportunities for countries.
? To maintain sustained earnings growth, firms pursue a strategy by diversifying and
balancing revenue streams.
? Investment banks pursue balance sheet de-risk and diverse funding
? Regulatory compliance and high standards of governance have become an integral
part of the business.
? Investment banks were expanding the products and services geographically to become
financial supermarkets to the world.
? Investment banks rely on advanced technologies in the front office to enable high
speed, high-frequency trading, as well as fast and accurate analytics for client
services.
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
Preparation of Prospectus
Is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company
Content of Prospectus:
?General information about the company
?Capital structure of the company
?Terms of the present issue
?Dates of opening and closing of the issue
?Name, address, functions and remuneration of Directors
?Auditors report with name and address of the auditors
Intermediaries to the issue
? Merchant Bankers to the issue or book running lead managers (BRLM).
? Registrar to the issue
? Bankers to the issue
? Underwriters to the issue
? Brokers
? Advertising agencies
? Printers
Pre-issue obligations ? SEBI guidelines
?Due Diligence
? Payment of requisite fees
? Submission of documents
? MOU
? Inter-se allocation of responsibilities
? Due Diligence Certificate
? Certificate in case of further issue by Listed companies
? Undertaking
? List of promoters group
Pre-issue obligations ? SEBI Guidelines
? Appointment of Intermediaries
?Merchant bankers
?Co-managers
?Other intermediaries
? Underwriting
? Offer document made public
? Dispatch of issue material
? No complaints certificate
? Mandatory collection centers
? Authorised collection agents
? Advertisement for rights post-issue
? Appointment of compliance office
? Abridged prospectus
? Agreement with depositories
Post - issue Management
Steps involved:
? To verify and confirm that the issue is subscribed to the extent of
90% including underwriters obligation
? To supervise and co-ordinate allotment procedure by the registrar as
per Stock Exchange guidelines
? To ensure issue of refund order, allotment letters within the prescribed
time limit of 10 weeks after the closure of the subscription list.
? To report periodically to SEBI about progress in allotment and
refunds.
? To ensure listing of securities at the stock exchange
? To attend the investors grievances about the public issue.
Post-issue obligations - SEBI guidelines
? Post-issue monitoring reports
?To be submitted third day from the date of allocation in the book-built
portion or one day prior to the opening of the fixed price portion,
whichever is earlier. It is 3days from the date of closure of the issue in all
other cases.
? Final post-issue report within 78 days from the date of closure of the
subscription in case of book building and public issue, but 50 days in case
of rights issue.
? Redressal of investors grievances
? Co-ordination with intermediaries
?Stock invest
?Underwriters
?Bankers to an issue
? Finalising the basis of allotment
? Dispatch of Share certificate
Changing Landscape of Investment Banking
? Till 2007 Investment banking business was very profitable
? As a result of the sub-prime mortgage crisis in US investment banks collapsed.
? Several acquisitions took place in 2008.
? Impact was felt by the Indian Investment banks.
? Growth rate of Indian economy also slowed down.
? Indian Investment banks were forced to design new strategies for survival and growth.
? Several important trends have emerged:
? Faster growth opportunities for countries.
? To maintain sustained earnings growth, firms pursue a strategy by diversifying and
balancing revenue streams.
? Investment banks pursue balance sheet de-risk and diverse funding
? Regulatory compliance and high standards of governance have become an integral
part of the business.
? Investment banks were expanding the products and services geographically to become
financial supermarkets to the world.
? Investment banks rely on advanced technologies in the front office to enable high
speed, high-frequency trading, as well as fast and accurate analytics for client
services.
Securities and Exchange Board of India (SEBI)
? Established in 1988.
? Upgraded as a statutory board in 1992.
? Securities and Exchange Board of India Act was passed on 30
th
January 1992.
? Objectives of SEBI:
? To protect the interest of investors in securities
? To promote the development of the securities market
? To regulate the securities market
? Functions of SEBI:
? To register and regulate the workings of stock brokers
? To register and regulate the bankers to an issue
? To control and regulate securities market
? To exercise the powers under securities contracts Act
? To regulate the working of mutual funds
? To control fraudulent and unfair trade practices relating to securities market
? To control investment business
? To regulate issue of securities
? To regulate takeovers
? To regulate insider-trading in securities.
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
Preparation of Prospectus
Is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company
Content of Prospectus:
?General information about the company
?Capital structure of the company
?Terms of the present issue
?Dates of opening and closing of the issue
?Name, address, functions and remuneration of Directors
?Auditors report with name and address of the auditors
Intermediaries to the issue
? Merchant Bankers to the issue or book running lead managers (BRLM).
? Registrar to the issue
? Bankers to the issue
? Underwriters to the issue
? Brokers
? Advertising agencies
? Printers
Pre-issue obligations ? SEBI guidelines
?Due Diligence
? Payment of requisite fees
? Submission of documents
? MOU
? Inter-se allocation of responsibilities
? Due Diligence Certificate
? Certificate in case of further issue by Listed companies
? Undertaking
? List of promoters group
Pre-issue obligations ? SEBI Guidelines
? Appointment of Intermediaries
?Merchant bankers
?Co-managers
?Other intermediaries
? Underwriting
? Offer document made public
? Dispatch of issue material
? No complaints certificate
? Mandatory collection centers
? Authorised collection agents
? Advertisement for rights post-issue
? Appointment of compliance office
? Abridged prospectus
? Agreement with depositories
Post - issue Management
Steps involved:
? To verify and confirm that the issue is subscribed to the extent of
90% including underwriters obligation
? To supervise and co-ordinate allotment procedure by the registrar as
per Stock Exchange guidelines
? To ensure issue of refund order, allotment letters within the prescribed
time limit of 10 weeks after the closure of the subscription list.
? To report periodically to SEBI about progress in allotment and
refunds.
? To ensure listing of securities at the stock exchange
? To attend the investors grievances about the public issue.
Post-issue obligations - SEBI guidelines
? Post-issue monitoring reports
?To be submitted third day from the date of allocation in the book-built
portion or one day prior to the opening of the fixed price portion,
whichever is earlier. It is 3days from the date of closure of the issue in all
other cases.
? Final post-issue report within 78 days from the date of closure of the
subscription in case of book building and public issue, but 50 days in case
of rights issue.
? Redressal of investors grievances
? Co-ordination with intermediaries
?Stock invest
?Underwriters
?Bankers to an issue
? Finalising the basis of allotment
? Dispatch of Share certificate
Changing Landscape of Investment Banking
? Till 2007 Investment banking business was very profitable
? As a result of the sub-prime mortgage crisis in US investment banks collapsed.
? Several acquisitions took place in 2008.
? Impact was felt by the Indian Investment banks.
? Growth rate of Indian economy also slowed down.
? Indian Investment banks were forced to design new strategies for survival and growth.
? Several important trends have emerged:
? Faster growth opportunities for countries.
? To maintain sustained earnings growth, firms pursue a strategy by diversifying and
balancing revenue streams.
? Investment banks pursue balance sheet de-risk and diverse funding
? Regulatory compliance and high standards of governance have become an integral
part of the business.
? Investment banks were expanding the products and services geographically to become
financial supermarkets to the world.
? Investment banks rely on advanced technologies in the front office to enable high
speed, high-frequency trading, as well as fast and accurate analytics for client
services.
Securities and Exchange Board of India (SEBI)
? Established in 1988.
? Upgraded as a statutory board in 1992.
? Securities and Exchange Board of India Act was passed on 30
th
January 1992.
? Objectives of SEBI:
? To protect the interest of investors in securities
? To promote the development of the securities market
? To regulate the securities market
? Functions of SEBI:
? To register and regulate the workings of stock brokers
? To register and regulate the bankers to an issue
? To control and regulate securities market
? To exercise the powers under securities contracts Act
? To regulate the working of mutual funds
? To control fraudulent and unfair trade practices relating to securities market
? To control investment business
? To regulate issue of securities
? To regulate takeovers
? To regulate insider-trading in securities.
SEBI Regulations for Merchant bankers
? SEBI regulates capital markets in India.
? SEBI regulations on merchant banking:
1. Registration of merchant bankers
2. Responsibilities of merchant bankers
3. Code of conduct for merchant bankers
4. Procedure for inspection
5. Procedure for action in case of default
6. Amendments to SEBI (Merchant bankers) Regulations, 1992.
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
Preparation of Prospectus
Is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company
Content of Prospectus:
?General information about the company
?Capital structure of the company
?Terms of the present issue
?Dates of opening and closing of the issue
?Name, address, functions and remuneration of Directors
?Auditors report with name and address of the auditors
Intermediaries to the issue
? Merchant Bankers to the issue or book running lead managers (BRLM).
? Registrar to the issue
? Bankers to the issue
? Underwriters to the issue
? Brokers
? Advertising agencies
? Printers
Pre-issue obligations ? SEBI guidelines
?Due Diligence
? Payment of requisite fees
? Submission of documents
? MOU
? Inter-se allocation of responsibilities
? Due Diligence Certificate
? Certificate in case of further issue by Listed companies
? Undertaking
? List of promoters group
Pre-issue obligations ? SEBI Guidelines
? Appointment of Intermediaries
?Merchant bankers
?Co-managers
?Other intermediaries
? Underwriting
? Offer document made public
? Dispatch of issue material
? No complaints certificate
? Mandatory collection centers
? Authorised collection agents
? Advertisement for rights post-issue
? Appointment of compliance office
? Abridged prospectus
? Agreement with depositories
Post - issue Management
Steps involved:
? To verify and confirm that the issue is subscribed to the extent of
90% including underwriters obligation
? To supervise and co-ordinate allotment procedure by the registrar as
per Stock Exchange guidelines
? To ensure issue of refund order, allotment letters within the prescribed
time limit of 10 weeks after the closure of the subscription list.
? To report periodically to SEBI about progress in allotment and
refunds.
? To ensure listing of securities at the stock exchange
? To attend the investors grievances about the public issue.
Post-issue obligations - SEBI guidelines
? Post-issue monitoring reports
?To be submitted third day from the date of allocation in the book-built
portion or one day prior to the opening of the fixed price portion,
whichever is earlier. It is 3days from the date of closure of the issue in all
other cases.
? Final post-issue report within 78 days from the date of closure of the
subscription in case of book building and public issue, but 50 days in case
of rights issue.
? Redressal of investors grievances
? Co-ordination with intermediaries
?Stock invest
?Underwriters
?Bankers to an issue
? Finalising the basis of allotment
? Dispatch of Share certificate
Changing Landscape of Investment Banking
? Till 2007 Investment banking business was very profitable
? As a result of the sub-prime mortgage crisis in US investment banks collapsed.
? Several acquisitions took place in 2008.
? Impact was felt by the Indian Investment banks.
? Growth rate of Indian economy also slowed down.
? Indian Investment banks were forced to design new strategies for survival and growth.
? Several important trends have emerged:
? Faster growth opportunities for countries.
? To maintain sustained earnings growth, firms pursue a strategy by diversifying and
balancing revenue streams.
? Investment banks pursue balance sheet de-risk and diverse funding
? Regulatory compliance and high standards of governance have become an integral
part of the business.
? Investment banks were expanding the products and services geographically to become
financial supermarkets to the world.
? Investment banks rely on advanced technologies in the front office to enable high
speed, high-frequency trading, as well as fast and accurate analytics for client
services.
Securities and Exchange Board of India (SEBI)
? Established in 1988.
? Upgraded as a statutory board in 1992.
? Securities and Exchange Board of India Act was passed on 30
th
January 1992.
? Objectives of SEBI:
? To protect the interest of investors in securities
? To promote the development of the securities market
? To regulate the securities market
? Functions of SEBI:
? To register and regulate the workings of stock brokers
? To register and regulate the bankers to an issue
? To control and regulate securities market
? To exercise the powers under securities contracts Act
? To regulate the working of mutual funds
? To control fraudulent and unfair trade practices relating to securities market
? To control investment business
? To regulate issue of securities
? To regulate takeovers
? To regulate insider-trading in securities.
SEBI Regulations for Merchant bankers
? SEBI regulates capital markets in India.
? SEBI regulations on merchant banking:
1. Registration of merchant bankers
2. Responsibilities of merchant bankers
3. Code of conduct for merchant bankers
4. Procedure for inspection
5. Procedure for action in case of default
6. Amendments to SEBI (Merchant bankers) Regulations, 1992.
1. Registration of Merchant bankers
? Categories of Merchant Bankers
? Category ? I
?Any activity under issue management including preparation of prospectus,
determination of financial structure, issue, allotment, refund of subscription
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
? Category ? II
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
?Category - III
?To act as underwriter, adviser, and consultant to an issue
?Category ? IV
?To act only as advisor or consultant to an issue.
? Category II, III, IV were abolished through an amendment, dated December 9,
1997 to the SEBI Merchant Bankers Regulation, 1992. Since then only
category I exist.
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
Preparation of Prospectus
Is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company
Content of Prospectus:
?General information about the company
?Capital structure of the company
?Terms of the present issue
?Dates of opening and closing of the issue
?Name, address, functions and remuneration of Directors
?Auditors report with name and address of the auditors
Intermediaries to the issue
? Merchant Bankers to the issue or book running lead managers (BRLM).
? Registrar to the issue
? Bankers to the issue
? Underwriters to the issue
? Brokers
? Advertising agencies
? Printers
Pre-issue obligations ? SEBI guidelines
?Due Diligence
? Payment of requisite fees
? Submission of documents
? MOU
? Inter-se allocation of responsibilities
? Due Diligence Certificate
? Certificate in case of further issue by Listed companies
? Undertaking
? List of promoters group
Pre-issue obligations ? SEBI Guidelines
? Appointment of Intermediaries
?Merchant bankers
?Co-managers
?Other intermediaries
? Underwriting
? Offer document made public
? Dispatch of issue material
? No complaints certificate
? Mandatory collection centers
? Authorised collection agents
? Advertisement for rights post-issue
? Appointment of compliance office
? Abridged prospectus
? Agreement with depositories
Post - issue Management
Steps involved:
? To verify and confirm that the issue is subscribed to the extent of
90% including underwriters obligation
? To supervise and co-ordinate allotment procedure by the registrar as
per Stock Exchange guidelines
? To ensure issue of refund order, allotment letters within the prescribed
time limit of 10 weeks after the closure of the subscription list.
? To report periodically to SEBI about progress in allotment and
refunds.
? To ensure listing of securities at the stock exchange
? To attend the investors grievances about the public issue.
Post-issue obligations - SEBI guidelines
? Post-issue monitoring reports
?To be submitted third day from the date of allocation in the book-built
portion or one day prior to the opening of the fixed price portion,
whichever is earlier. It is 3days from the date of closure of the issue in all
other cases.
? Final post-issue report within 78 days from the date of closure of the
subscription in case of book building and public issue, but 50 days in case
of rights issue.
? Redressal of investors grievances
? Co-ordination with intermediaries
?Stock invest
?Underwriters
?Bankers to an issue
? Finalising the basis of allotment
? Dispatch of Share certificate
Changing Landscape of Investment Banking
? Till 2007 Investment banking business was very profitable
? As a result of the sub-prime mortgage crisis in US investment banks collapsed.
? Several acquisitions took place in 2008.
? Impact was felt by the Indian Investment banks.
? Growth rate of Indian economy also slowed down.
? Indian Investment banks were forced to design new strategies for survival and growth.
? Several important trends have emerged:
? Faster growth opportunities for countries.
? To maintain sustained earnings growth, firms pursue a strategy by diversifying and
balancing revenue streams.
? Investment banks pursue balance sheet de-risk and diverse funding
? Regulatory compliance and high standards of governance have become an integral
part of the business.
? Investment banks were expanding the products and services geographically to become
financial supermarkets to the world.
? Investment banks rely on advanced technologies in the front office to enable high
speed, high-frequency trading, as well as fast and accurate analytics for client
services.
Securities and Exchange Board of India (SEBI)
? Established in 1988.
? Upgraded as a statutory board in 1992.
? Securities and Exchange Board of India Act was passed on 30
th
January 1992.
? Objectives of SEBI:
? To protect the interest of investors in securities
? To promote the development of the securities market
? To regulate the securities market
? Functions of SEBI:
? To register and regulate the workings of stock brokers
? To register and regulate the bankers to an issue
? To control and regulate securities market
? To exercise the powers under securities contracts Act
? To regulate the working of mutual funds
? To control fraudulent and unfair trade practices relating to securities market
? To control investment business
? To regulate issue of securities
? To regulate takeovers
? To regulate insider-trading in securities.
SEBI Regulations for Merchant bankers
? SEBI regulates capital markets in India.
? SEBI regulations on merchant banking:
1. Registration of merchant bankers
2. Responsibilities of merchant bankers
3. Code of conduct for merchant bankers
4. Procedure for inspection
5. Procedure for action in case of default
6. Amendments to SEBI (Merchant bankers) Regulations, 1992.
1. Registration of Merchant bankers
? Categories of Merchant Bankers
? Category ? I
?Any activity under issue management including preparation of prospectus,
determination of financial structure, issue, allotment, refund of subscription
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
? Category ? II
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
?Category - III
?To act as underwriter, adviser, and consultant to an issue
?Category ? IV
?To act only as advisor or consultant to an issue.
? Category II, III, IV were abolished through an amendment, dated December 9,
1997 to the SEBI Merchant Bankers Regulation, 1992. Since then only
category I exist.
? Requirement for granting the certificate
? Shall be a body corporate other than an NBFC
? Has the necessary infrastructure to effectively discharge his
activities
? Should have minimum two experienced employees to conduct the
business
? Should fulfill the capital adequacy requirement as specified
? His partner, director or principal officer should not be involved in
any litigation connected with the securities market which has an
adverse bearing on the business of the applicant
? His partner, director or principal officer has not been convicted
for any offence or been found guilty of any economic offence.
? Should have the professional qualification from an institution
recognised by the government in finance, law or business
management
? Should be a fit and proper person.
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
Preparation of Prospectus
Is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company
Content of Prospectus:
?General information about the company
?Capital structure of the company
?Terms of the present issue
?Dates of opening and closing of the issue
?Name, address, functions and remuneration of Directors
?Auditors report with name and address of the auditors
Intermediaries to the issue
? Merchant Bankers to the issue or book running lead managers (BRLM).
? Registrar to the issue
? Bankers to the issue
? Underwriters to the issue
? Brokers
? Advertising agencies
? Printers
Pre-issue obligations ? SEBI guidelines
?Due Diligence
? Payment of requisite fees
? Submission of documents
? MOU
? Inter-se allocation of responsibilities
? Due Diligence Certificate
? Certificate in case of further issue by Listed companies
? Undertaking
? List of promoters group
Pre-issue obligations ? SEBI Guidelines
? Appointment of Intermediaries
?Merchant bankers
?Co-managers
?Other intermediaries
? Underwriting
? Offer document made public
? Dispatch of issue material
? No complaints certificate
? Mandatory collection centers
? Authorised collection agents
? Advertisement for rights post-issue
? Appointment of compliance office
? Abridged prospectus
? Agreement with depositories
Post - issue Management
Steps involved:
? To verify and confirm that the issue is subscribed to the extent of
90% including underwriters obligation
? To supervise and co-ordinate allotment procedure by the registrar as
per Stock Exchange guidelines
? To ensure issue of refund order, allotment letters within the prescribed
time limit of 10 weeks after the closure of the subscription list.
? To report periodically to SEBI about progress in allotment and
refunds.
? To ensure listing of securities at the stock exchange
? To attend the investors grievances about the public issue.
Post-issue obligations - SEBI guidelines
? Post-issue monitoring reports
?To be submitted third day from the date of allocation in the book-built
portion or one day prior to the opening of the fixed price portion,
whichever is earlier. It is 3days from the date of closure of the issue in all
other cases.
? Final post-issue report within 78 days from the date of closure of the
subscription in case of book building and public issue, but 50 days in case
of rights issue.
? Redressal of investors grievances
? Co-ordination with intermediaries
?Stock invest
?Underwriters
?Bankers to an issue
? Finalising the basis of allotment
? Dispatch of Share certificate
Changing Landscape of Investment Banking
? Till 2007 Investment banking business was very profitable
? As a result of the sub-prime mortgage crisis in US investment banks collapsed.
? Several acquisitions took place in 2008.
? Impact was felt by the Indian Investment banks.
? Growth rate of Indian economy also slowed down.
? Indian Investment banks were forced to design new strategies for survival and growth.
? Several important trends have emerged:
? Faster growth opportunities for countries.
? To maintain sustained earnings growth, firms pursue a strategy by diversifying and
balancing revenue streams.
? Investment banks pursue balance sheet de-risk and diverse funding
? Regulatory compliance and high standards of governance have become an integral
part of the business.
? Investment banks were expanding the products and services geographically to become
financial supermarkets to the world.
? Investment banks rely on advanced technologies in the front office to enable high
speed, high-frequency trading, as well as fast and accurate analytics for client
services.
Securities and Exchange Board of India (SEBI)
? Established in 1988.
? Upgraded as a statutory board in 1992.
? Securities and Exchange Board of India Act was passed on 30
th
January 1992.
? Objectives of SEBI:
? To protect the interest of investors in securities
? To promote the development of the securities market
? To regulate the securities market
? Functions of SEBI:
? To register and regulate the workings of stock brokers
? To register and regulate the bankers to an issue
? To control and regulate securities market
? To exercise the powers under securities contracts Act
? To regulate the working of mutual funds
? To control fraudulent and unfair trade practices relating to securities market
? To control investment business
? To regulate issue of securities
? To regulate takeovers
? To regulate insider-trading in securities.
SEBI Regulations for Merchant bankers
? SEBI regulates capital markets in India.
? SEBI regulations on merchant banking:
1. Registration of merchant bankers
2. Responsibilities of merchant bankers
3. Code of conduct for merchant bankers
4. Procedure for inspection
5. Procedure for action in case of default
6. Amendments to SEBI (Merchant bankers) Regulations, 1992.
1. Registration of Merchant bankers
? Categories of Merchant Bankers
? Category ? I
?Any activity under issue management including preparation of prospectus,
determination of financial structure, issue, allotment, refund of subscription
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
? Category ? II
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
?Category - III
?To act as underwriter, adviser, and consultant to an issue
?Category ? IV
?To act only as advisor or consultant to an issue.
? Category II, III, IV were abolished through an amendment, dated December 9,
1997 to the SEBI Merchant Bankers Regulation, 1992. Since then only
category I exist.
? Requirement for granting the certificate
? Shall be a body corporate other than an NBFC
? Has the necessary infrastructure to effectively discharge his
activities
? Should have minimum two experienced employees to conduct the
business
? Should fulfill the capital adequacy requirement as specified
? His partner, director or principal officer should not be involved in
any litigation connected with the securities market which has an
adverse bearing on the business of the applicant
? His partner, director or principal officer has not been convicted
for any offence or been found guilty of any economic offence.
? Should have the professional qualification from an institution
recognised by the government in finance, law or business
management
? Should be a fit and proper person.
? Capital Adequacy Requirements (CAR)
? CAR shall not be less than net worth of the person making the application
for grant of registration.
? Net worth not less than Rs Five crores
? Procedure for registration
? Application must be submitted to SEBI in form A and SEBI will
issue certificate of registration in form B. Application fee Rs. 50,000
? On grant of certificate the applicant shall be liable to pay the fees in
accordance with schedule II
? Rs 20,00,000 for initial registration.
? Renewal of certificate
? Certificate of initial registration remains valid for 5 years.
? For renewal, apply in form A three months before the expiry of
certificate
? Renewal application is to be treated similar as a fresh application
? After the verification of application SEBI will grant certificate in
form B
? Applicant is liable to pay the fees of Rs. 9,00,000 for permanent
registration
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
Preparation of Prospectus
Is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company
Content of Prospectus:
?General information about the company
?Capital structure of the company
?Terms of the present issue
?Dates of opening and closing of the issue
?Name, address, functions and remuneration of Directors
?Auditors report with name and address of the auditors
Intermediaries to the issue
? Merchant Bankers to the issue or book running lead managers (BRLM).
? Registrar to the issue
? Bankers to the issue
? Underwriters to the issue
? Brokers
? Advertising agencies
? Printers
Pre-issue obligations ? SEBI guidelines
?Due Diligence
? Payment of requisite fees
? Submission of documents
? MOU
? Inter-se allocation of responsibilities
? Due Diligence Certificate
? Certificate in case of further issue by Listed companies
? Undertaking
? List of promoters group
Pre-issue obligations ? SEBI Guidelines
? Appointment of Intermediaries
?Merchant bankers
?Co-managers
?Other intermediaries
? Underwriting
? Offer document made public
? Dispatch of issue material
? No complaints certificate
? Mandatory collection centers
? Authorised collection agents
? Advertisement for rights post-issue
? Appointment of compliance office
? Abridged prospectus
? Agreement with depositories
Post - issue Management
Steps involved:
? To verify and confirm that the issue is subscribed to the extent of
90% including underwriters obligation
? To supervise and co-ordinate allotment procedure by the registrar as
per Stock Exchange guidelines
? To ensure issue of refund order, allotment letters within the prescribed
time limit of 10 weeks after the closure of the subscription list.
? To report periodically to SEBI about progress in allotment and
refunds.
? To ensure listing of securities at the stock exchange
? To attend the investors grievances about the public issue.
Post-issue obligations - SEBI guidelines
? Post-issue monitoring reports
?To be submitted third day from the date of allocation in the book-built
portion or one day prior to the opening of the fixed price portion,
whichever is earlier. It is 3days from the date of closure of the issue in all
other cases.
? Final post-issue report within 78 days from the date of closure of the
subscription in case of book building and public issue, but 50 days in case
of rights issue.
? Redressal of investors grievances
? Co-ordination with intermediaries
?Stock invest
?Underwriters
?Bankers to an issue
? Finalising the basis of allotment
? Dispatch of Share certificate
Changing Landscape of Investment Banking
? Till 2007 Investment banking business was very profitable
? As a result of the sub-prime mortgage crisis in US investment banks collapsed.
? Several acquisitions took place in 2008.
? Impact was felt by the Indian Investment banks.
? Growth rate of Indian economy also slowed down.
? Indian Investment banks were forced to design new strategies for survival and growth.
? Several important trends have emerged:
? Faster growth opportunities for countries.
? To maintain sustained earnings growth, firms pursue a strategy by diversifying and
balancing revenue streams.
? Investment banks pursue balance sheet de-risk and diverse funding
? Regulatory compliance and high standards of governance have become an integral
part of the business.
? Investment banks were expanding the products and services geographically to become
financial supermarkets to the world.
? Investment banks rely on advanced technologies in the front office to enable high
speed, high-frequency trading, as well as fast and accurate analytics for client
services.
Securities and Exchange Board of India (SEBI)
? Established in 1988.
? Upgraded as a statutory board in 1992.
? Securities and Exchange Board of India Act was passed on 30
th
January 1992.
? Objectives of SEBI:
? To protect the interest of investors in securities
? To promote the development of the securities market
? To regulate the securities market
? Functions of SEBI:
? To register and regulate the workings of stock brokers
? To register and regulate the bankers to an issue
? To control and regulate securities market
? To exercise the powers under securities contracts Act
? To regulate the working of mutual funds
? To control fraudulent and unfair trade practices relating to securities market
? To control investment business
? To regulate issue of securities
? To regulate takeovers
? To regulate insider-trading in securities.
SEBI Regulations for Merchant bankers
? SEBI regulates capital markets in India.
? SEBI regulations on merchant banking:
1. Registration of merchant bankers
2. Responsibilities of merchant bankers
3. Code of conduct for merchant bankers
4. Procedure for inspection
5. Procedure for action in case of default
6. Amendments to SEBI (Merchant bankers) Regulations, 1992.
1. Registration of Merchant bankers
? Categories of Merchant Bankers
? Category ? I
?Any activity under issue management including preparation of prospectus,
determination of financial structure, issue, allotment, refund of subscription
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
? Category ? II
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
?Category - III
?To act as underwriter, adviser, and consultant to an issue
?Category ? IV
?To act only as advisor or consultant to an issue.
? Category II, III, IV were abolished through an amendment, dated December 9,
1997 to the SEBI Merchant Bankers Regulation, 1992. Since then only
category I exist.
? Requirement for granting the certificate
? Shall be a body corporate other than an NBFC
? Has the necessary infrastructure to effectively discharge his
activities
? Should have minimum two experienced employees to conduct the
business
? Should fulfill the capital adequacy requirement as specified
? His partner, director or principal officer should not be involved in
any litigation connected with the securities market which has an
adverse bearing on the business of the applicant
? His partner, director or principal officer has not been convicted
for any offence or been found guilty of any economic offence.
? Should have the professional qualification from an institution
recognised by the government in finance, law or business
management
? Should be a fit and proper person.
? Capital Adequacy Requirements (CAR)
? CAR shall not be less than net worth of the person making the application
for grant of registration.
? Net worth not less than Rs Five crores
? Procedure for registration
? Application must be submitted to SEBI in form A and SEBI will
issue certificate of registration in form B. Application fee Rs. 50,000
? On grant of certificate the applicant shall be liable to pay the fees in
accordance with schedule II
? Rs 20,00,000 for initial registration.
? Renewal of certificate
? Certificate of initial registration remains valid for 5 years.
? For renewal, apply in form A three months before the expiry of
certificate
? Renewal application is to be treated similar as a fresh application
? After the verification of application SEBI will grant certificate in
form B
? Applicant is liable to pay the fees of Rs. 9,00,000 for permanent
registration
2. Responsibilities of merchant banker
? Code of conduct ? As per schedule III no merchant banker, other than a bank
or a public financial institution and primary dealer as per RBI can engage in any
activity other than securities market.
? Maintenance of books of accounts ? copy of B/S, P&L account, auditors
report and a statement of financial position. Information to SEBI where these
documents are maintained and furnish such documents when required by SEBI.
? Submission of half yearly results ? furnish to SEBI half yearly unaudited
financial results with a view to monitor the capital adequacy of merchant banker.
? Appointment of lead merchant bankers ? Every issue must have one lead
merchant banker. Lead merchant banker must sign an agreement with the issuer
setting out their mutual rights, liabilities and obligations regarding the issue,
allotment and refund.
?Restriction on appointment of lead merchant banker -
Issue size of less than 50 crore - 2 merchant banker
????? Rs. 50-100 crore - 3???????
?????.Rs 100-200 crore - 4???????
?????..Rs. 200-400 crore - 5??????..
??? more than Rs500 crore - 5 or more ???. as agreed by SEBI
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
Preparation of Prospectus
Is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company
Content of Prospectus:
?General information about the company
?Capital structure of the company
?Terms of the present issue
?Dates of opening and closing of the issue
?Name, address, functions and remuneration of Directors
?Auditors report with name and address of the auditors
Intermediaries to the issue
? Merchant Bankers to the issue or book running lead managers (BRLM).
? Registrar to the issue
? Bankers to the issue
? Underwriters to the issue
? Brokers
? Advertising agencies
? Printers
Pre-issue obligations ? SEBI guidelines
?Due Diligence
? Payment of requisite fees
? Submission of documents
? MOU
? Inter-se allocation of responsibilities
? Due Diligence Certificate
? Certificate in case of further issue by Listed companies
? Undertaking
? List of promoters group
Pre-issue obligations ? SEBI Guidelines
? Appointment of Intermediaries
?Merchant bankers
?Co-managers
?Other intermediaries
? Underwriting
? Offer document made public
? Dispatch of issue material
? No complaints certificate
? Mandatory collection centers
? Authorised collection agents
? Advertisement for rights post-issue
? Appointment of compliance office
? Abridged prospectus
? Agreement with depositories
Post - issue Management
Steps involved:
? To verify and confirm that the issue is subscribed to the extent of
90% including underwriters obligation
? To supervise and co-ordinate allotment procedure by the registrar as
per Stock Exchange guidelines
? To ensure issue of refund order, allotment letters within the prescribed
time limit of 10 weeks after the closure of the subscription list.
? To report periodically to SEBI about progress in allotment and
refunds.
? To ensure listing of securities at the stock exchange
? To attend the investors grievances about the public issue.
Post-issue obligations - SEBI guidelines
? Post-issue monitoring reports
?To be submitted third day from the date of allocation in the book-built
portion or one day prior to the opening of the fixed price portion,
whichever is earlier. It is 3days from the date of closure of the issue in all
other cases.
? Final post-issue report within 78 days from the date of closure of the
subscription in case of book building and public issue, but 50 days in case
of rights issue.
? Redressal of investors grievances
? Co-ordination with intermediaries
?Stock invest
?Underwriters
?Bankers to an issue
? Finalising the basis of allotment
? Dispatch of Share certificate
Changing Landscape of Investment Banking
? Till 2007 Investment banking business was very profitable
? As a result of the sub-prime mortgage crisis in US investment banks collapsed.
? Several acquisitions took place in 2008.
? Impact was felt by the Indian Investment banks.
? Growth rate of Indian economy also slowed down.
? Indian Investment banks were forced to design new strategies for survival and growth.
? Several important trends have emerged:
? Faster growth opportunities for countries.
? To maintain sustained earnings growth, firms pursue a strategy by diversifying and
balancing revenue streams.
? Investment banks pursue balance sheet de-risk and diverse funding
? Regulatory compliance and high standards of governance have become an integral
part of the business.
? Investment banks were expanding the products and services geographically to become
financial supermarkets to the world.
? Investment banks rely on advanced technologies in the front office to enable high
speed, high-frequency trading, as well as fast and accurate analytics for client
services.
Securities and Exchange Board of India (SEBI)
? Established in 1988.
? Upgraded as a statutory board in 1992.
? Securities and Exchange Board of India Act was passed on 30
th
January 1992.
? Objectives of SEBI:
? To protect the interest of investors in securities
? To promote the development of the securities market
? To regulate the securities market
? Functions of SEBI:
? To register and regulate the workings of stock brokers
? To register and regulate the bankers to an issue
? To control and regulate securities market
? To exercise the powers under securities contracts Act
? To regulate the working of mutual funds
? To control fraudulent and unfair trade practices relating to securities market
? To control investment business
? To regulate issue of securities
? To regulate takeovers
? To regulate insider-trading in securities.
SEBI Regulations for Merchant bankers
? SEBI regulates capital markets in India.
? SEBI regulations on merchant banking:
1. Registration of merchant bankers
2. Responsibilities of merchant bankers
3. Code of conduct for merchant bankers
4. Procedure for inspection
5. Procedure for action in case of default
6. Amendments to SEBI (Merchant bankers) Regulations, 1992.
1. Registration of Merchant bankers
? Categories of Merchant Bankers
? Category ? I
?Any activity under issue management including preparation of prospectus,
determination of financial structure, issue, allotment, refund of subscription
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
? Category ? II
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
?Category - III
?To act as underwriter, adviser, and consultant to an issue
?Category ? IV
?To act only as advisor or consultant to an issue.
? Category II, III, IV were abolished through an amendment, dated December 9,
1997 to the SEBI Merchant Bankers Regulation, 1992. Since then only
category I exist.
? Requirement for granting the certificate
? Shall be a body corporate other than an NBFC
? Has the necessary infrastructure to effectively discharge his
activities
? Should have minimum two experienced employees to conduct the
business
? Should fulfill the capital adequacy requirement as specified
? His partner, director or principal officer should not be involved in
any litigation connected with the securities market which has an
adverse bearing on the business of the applicant
? His partner, director or principal officer has not been convicted
for any offence or been found guilty of any economic offence.
? Should have the professional qualification from an institution
recognised by the government in finance, law or business
management
? Should be a fit and proper person.
? Capital Adequacy Requirements (CAR)
? CAR shall not be less than net worth of the person making the application
for grant of registration.
? Net worth not less than Rs Five crores
? Procedure for registration
? Application must be submitted to SEBI in form A and SEBI will
issue certificate of registration in form B. Application fee Rs. 50,000
? On grant of certificate the applicant shall be liable to pay the fees in
accordance with schedule II
? Rs 20,00,000 for initial registration.
? Renewal of certificate
? Certificate of initial registration remains valid for 5 years.
? For renewal, apply in form A three months before the expiry of
certificate
? Renewal application is to be treated similar as a fresh application
? After the verification of application SEBI will grant certificate in
form B
? Applicant is liable to pay the fees of Rs. 9,00,000 for permanent
registration
2. Responsibilities of merchant banker
? Code of conduct ? As per schedule III no merchant banker, other than a bank
or a public financial institution and primary dealer as per RBI can engage in any
activity other than securities market.
? Maintenance of books of accounts ? copy of B/S, P&L account, auditors
report and a statement of financial position. Information to SEBI where these
documents are maintained and furnish such documents when required by SEBI.
? Submission of half yearly results ? furnish to SEBI half yearly unaudited
financial results with a view to monitor the capital adequacy of merchant banker.
? Appointment of lead merchant bankers ? Every issue must have one lead
merchant banker. Lead merchant banker must sign an agreement with the issuer
setting out their mutual rights, liabilities and obligations regarding the issue,
allotment and refund.
?Restriction on appointment of lead merchant banker -
Issue size of less than 50 crore - 2 merchant banker
????? Rs. 50-100 crore - 3???????
?????.Rs 100-200 crore - 4???????
?????..Rs. 200-400 crore - 5??????..
??? more than Rs500 crore - 5 or more ???. as agreed by SEBI
Responsibilities of lead merchant banker ? Lead manager should not
agree to manage an issue unless his roles and responsibilities particularly
relating to disclosures, allotment and refund are clearly defined and a statement
is submitted to SEBI at least a month prior to opening of the issue.
- In case of more than one lead merchant banker responsibilities must be clearly
demarcated.
-No lead merchant banker should agree to manage an issue if the body corporate
is an associate of the lead merchant banker.
Underwriting Obligations ? Every lead merchant banker must take at least
5 per cent of total underwriting commitment or Rs 25 lakh whichever is less. If
it is unable to do so then it must make an arrangement with another merchant
banker to the same issue and keep SEBI informed.
Appointment of Compliance officers ? Every merchant banker must
appoint a compliance officer who will monitor compliance to the Act and all
other relevant rules and regulations.
- He shall report to SEBI any non-compliance observed and ensure that
deficiencies observed by SEBI in draft prospectus do not recur.
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
Preparation of Prospectus
Is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company
Content of Prospectus:
?General information about the company
?Capital structure of the company
?Terms of the present issue
?Dates of opening and closing of the issue
?Name, address, functions and remuneration of Directors
?Auditors report with name and address of the auditors
Intermediaries to the issue
? Merchant Bankers to the issue or book running lead managers (BRLM).
? Registrar to the issue
? Bankers to the issue
? Underwriters to the issue
? Brokers
? Advertising agencies
? Printers
Pre-issue obligations ? SEBI guidelines
?Due Diligence
? Payment of requisite fees
? Submission of documents
? MOU
? Inter-se allocation of responsibilities
? Due Diligence Certificate
? Certificate in case of further issue by Listed companies
? Undertaking
? List of promoters group
Pre-issue obligations ? SEBI Guidelines
? Appointment of Intermediaries
?Merchant bankers
?Co-managers
?Other intermediaries
? Underwriting
? Offer document made public
? Dispatch of issue material
? No complaints certificate
? Mandatory collection centers
? Authorised collection agents
? Advertisement for rights post-issue
? Appointment of compliance office
? Abridged prospectus
? Agreement with depositories
Post - issue Management
Steps involved:
? To verify and confirm that the issue is subscribed to the extent of
90% including underwriters obligation
? To supervise and co-ordinate allotment procedure by the registrar as
per Stock Exchange guidelines
? To ensure issue of refund order, allotment letters within the prescribed
time limit of 10 weeks after the closure of the subscription list.
? To report periodically to SEBI about progress in allotment and
refunds.
? To ensure listing of securities at the stock exchange
? To attend the investors grievances about the public issue.
Post-issue obligations - SEBI guidelines
? Post-issue monitoring reports
?To be submitted third day from the date of allocation in the book-built
portion or one day prior to the opening of the fixed price portion,
whichever is earlier. It is 3days from the date of closure of the issue in all
other cases.
? Final post-issue report within 78 days from the date of closure of the
subscription in case of book building and public issue, but 50 days in case
of rights issue.
? Redressal of investors grievances
? Co-ordination with intermediaries
?Stock invest
?Underwriters
?Bankers to an issue
? Finalising the basis of allotment
? Dispatch of Share certificate
Changing Landscape of Investment Banking
? Till 2007 Investment banking business was very profitable
? As a result of the sub-prime mortgage crisis in US investment banks collapsed.
? Several acquisitions took place in 2008.
? Impact was felt by the Indian Investment banks.
? Growth rate of Indian economy also slowed down.
? Indian Investment banks were forced to design new strategies for survival and growth.
? Several important trends have emerged:
? Faster growth opportunities for countries.
? To maintain sustained earnings growth, firms pursue a strategy by diversifying and
balancing revenue streams.
? Investment banks pursue balance sheet de-risk and diverse funding
? Regulatory compliance and high standards of governance have become an integral
part of the business.
? Investment banks were expanding the products and services geographically to become
financial supermarkets to the world.
? Investment banks rely on advanced technologies in the front office to enable high
speed, high-frequency trading, as well as fast and accurate analytics for client
services.
Securities and Exchange Board of India (SEBI)
? Established in 1988.
? Upgraded as a statutory board in 1992.
? Securities and Exchange Board of India Act was passed on 30
th
January 1992.
? Objectives of SEBI:
? To protect the interest of investors in securities
? To promote the development of the securities market
? To regulate the securities market
? Functions of SEBI:
? To register and regulate the workings of stock brokers
? To register and regulate the bankers to an issue
? To control and regulate securities market
? To exercise the powers under securities contracts Act
? To regulate the working of mutual funds
? To control fraudulent and unfair trade practices relating to securities market
? To control investment business
? To regulate issue of securities
? To regulate takeovers
? To regulate insider-trading in securities.
SEBI Regulations for Merchant bankers
? SEBI regulates capital markets in India.
? SEBI regulations on merchant banking:
1. Registration of merchant bankers
2. Responsibilities of merchant bankers
3. Code of conduct for merchant bankers
4. Procedure for inspection
5. Procedure for action in case of default
6. Amendments to SEBI (Merchant bankers) Regulations, 1992.
1. Registration of Merchant bankers
? Categories of Merchant Bankers
? Category ? I
?Any activity under issue management including preparation of prospectus,
determination of financial structure, issue, allotment, refund of subscription
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
? Category ? II
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
?Category - III
?To act as underwriter, adviser, and consultant to an issue
?Category ? IV
?To act only as advisor or consultant to an issue.
? Category II, III, IV were abolished through an amendment, dated December 9,
1997 to the SEBI Merchant Bankers Regulation, 1992. Since then only
category I exist.
? Requirement for granting the certificate
? Shall be a body corporate other than an NBFC
? Has the necessary infrastructure to effectively discharge his
activities
? Should have minimum two experienced employees to conduct the
business
? Should fulfill the capital adequacy requirement as specified
? His partner, director or principal officer should not be involved in
any litigation connected with the securities market which has an
adverse bearing on the business of the applicant
? His partner, director or principal officer has not been convicted
for any offence or been found guilty of any economic offence.
? Should have the professional qualification from an institution
recognised by the government in finance, law or business
management
? Should be a fit and proper person.
? Capital Adequacy Requirements (CAR)
? CAR shall not be less than net worth of the person making the application
for grant of registration.
? Net worth not less than Rs Five crores
? Procedure for registration
? Application must be submitted to SEBI in form A and SEBI will
issue certificate of registration in form B. Application fee Rs. 50,000
? On grant of certificate the applicant shall be liable to pay the fees in
accordance with schedule II
? Rs 20,00,000 for initial registration.
? Renewal of certificate
? Certificate of initial registration remains valid for 5 years.
? For renewal, apply in form A three months before the expiry of
certificate
? Renewal application is to be treated similar as a fresh application
? After the verification of application SEBI will grant certificate in
form B
? Applicant is liable to pay the fees of Rs. 9,00,000 for permanent
registration
2. Responsibilities of merchant banker
? Code of conduct ? As per schedule III no merchant banker, other than a bank
or a public financial institution and primary dealer as per RBI can engage in any
activity other than securities market.
? Maintenance of books of accounts ? copy of B/S, P&L account, auditors
report and a statement of financial position. Information to SEBI where these
documents are maintained and furnish such documents when required by SEBI.
? Submission of half yearly results ? furnish to SEBI half yearly unaudited
financial results with a view to monitor the capital adequacy of merchant banker.
? Appointment of lead merchant bankers ? Every issue must have one lead
merchant banker. Lead merchant banker must sign an agreement with the issuer
setting out their mutual rights, liabilities and obligations regarding the issue,
allotment and refund.
?Restriction on appointment of lead merchant banker -
Issue size of less than 50 crore - 2 merchant banker
????? Rs. 50-100 crore - 3???????
?????.Rs 100-200 crore - 4???????
?????..Rs. 200-400 crore - 5??????..
??? more than Rs500 crore - 5 or more ???. as agreed by SEBI
Responsibilities of lead merchant banker ? Lead manager should not
agree to manage an issue unless his roles and responsibilities particularly
relating to disclosures, allotment and refund are clearly defined and a statement
is submitted to SEBI at least a month prior to opening of the issue.
- In case of more than one lead merchant banker responsibilities must be clearly
demarcated.
-No lead merchant banker should agree to manage an issue if the body corporate
is an associate of the lead merchant banker.
Underwriting Obligations ? Every lead merchant banker must take at least
5 per cent of total underwriting commitment or Rs 25 lakh whichever is less. If
it is unable to do so then it must make an arrangement with another merchant
banker to the same issue and keep SEBI informed.
Appointment of Compliance officers ? Every merchant banker must
appoint a compliance officer who will monitor compliance to the Act and all
other relevant rules and regulations.
- He shall report to SEBI any non-compliance observed and ensure that
deficiencies observed by SEBI in draft prospectus do not recur.
3.Code of conduct for Merchant bankers
? Regulatory/Statutory compliance
? Confidentiality
? Accurate record keeping
? Conflict of interest
? Ethics in conducting business
? Public Disclosure and Reporting
? Gifts, entertainment and favours etc
? Inside information
? Trade secrets
? Compliance responsibility
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
Preparation of Prospectus
Is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company
Content of Prospectus:
?General information about the company
?Capital structure of the company
?Terms of the present issue
?Dates of opening and closing of the issue
?Name, address, functions and remuneration of Directors
?Auditors report with name and address of the auditors
Intermediaries to the issue
? Merchant Bankers to the issue or book running lead managers (BRLM).
? Registrar to the issue
? Bankers to the issue
? Underwriters to the issue
? Brokers
? Advertising agencies
? Printers
Pre-issue obligations ? SEBI guidelines
?Due Diligence
? Payment of requisite fees
? Submission of documents
? MOU
? Inter-se allocation of responsibilities
? Due Diligence Certificate
? Certificate in case of further issue by Listed companies
? Undertaking
? List of promoters group
Pre-issue obligations ? SEBI Guidelines
? Appointment of Intermediaries
?Merchant bankers
?Co-managers
?Other intermediaries
? Underwriting
? Offer document made public
? Dispatch of issue material
? No complaints certificate
? Mandatory collection centers
? Authorised collection agents
? Advertisement for rights post-issue
? Appointment of compliance office
? Abridged prospectus
? Agreement with depositories
Post - issue Management
Steps involved:
? To verify and confirm that the issue is subscribed to the extent of
90% including underwriters obligation
? To supervise and co-ordinate allotment procedure by the registrar as
per Stock Exchange guidelines
? To ensure issue of refund order, allotment letters within the prescribed
time limit of 10 weeks after the closure of the subscription list.
? To report periodically to SEBI about progress in allotment and
refunds.
? To ensure listing of securities at the stock exchange
? To attend the investors grievances about the public issue.
Post-issue obligations - SEBI guidelines
? Post-issue monitoring reports
?To be submitted third day from the date of allocation in the book-built
portion or one day prior to the opening of the fixed price portion,
whichever is earlier. It is 3days from the date of closure of the issue in all
other cases.
? Final post-issue report within 78 days from the date of closure of the
subscription in case of book building and public issue, but 50 days in case
of rights issue.
? Redressal of investors grievances
? Co-ordination with intermediaries
?Stock invest
?Underwriters
?Bankers to an issue
? Finalising the basis of allotment
? Dispatch of Share certificate
Changing Landscape of Investment Banking
? Till 2007 Investment banking business was very profitable
? As a result of the sub-prime mortgage crisis in US investment banks collapsed.
? Several acquisitions took place in 2008.
? Impact was felt by the Indian Investment banks.
? Growth rate of Indian economy also slowed down.
? Indian Investment banks were forced to design new strategies for survival and growth.
? Several important trends have emerged:
? Faster growth opportunities for countries.
? To maintain sustained earnings growth, firms pursue a strategy by diversifying and
balancing revenue streams.
? Investment banks pursue balance sheet de-risk and diverse funding
? Regulatory compliance and high standards of governance have become an integral
part of the business.
? Investment banks were expanding the products and services geographically to become
financial supermarkets to the world.
? Investment banks rely on advanced technologies in the front office to enable high
speed, high-frequency trading, as well as fast and accurate analytics for client
services.
Securities and Exchange Board of India (SEBI)
? Established in 1988.
? Upgraded as a statutory board in 1992.
? Securities and Exchange Board of India Act was passed on 30
th
January 1992.
? Objectives of SEBI:
? To protect the interest of investors in securities
? To promote the development of the securities market
? To regulate the securities market
? Functions of SEBI:
? To register and regulate the workings of stock brokers
? To register and regulate the bankers to an issue
? To control and regulate securities market
? To exercise the powers under securities contracts Act
? To regulate the working of mutual funds
? To control fraudulent and unfair trade practices relating to securities market
? To control investment business
? To regulate issue of securities
? To regulate takeovers
? To regulate insider-trading in securities.
SEBI Regulations for Merchant bankers
? SEBI regulates capital markets in India.
? SEBI regulations on merchant banking:
1. Registration of merchant bankers
2. Responsibilities of merchant bankers
3. Code of conduct for merchant bankers
4. Procedure for inspection
5. Procedure for action in case of default
6. Amendments to SEBI (Merchant bankers) Regulations, 1992.
1. Registration of Merchant bankers
? Categories of Merchant Bankers
? Category ? I
?Any activity under issue management including preparation of prospectus,
determination of financial structure, issue, allotment, refund of subscription
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
? Category ? II
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
?Category - III
?To act as underwriter, adviser, and consultant to an issue
?Category ? IV
?To act only as advisor or consultant to an issue.
? Category II, III, IV were abolished through an amendment, dated December 9,
1997 to the SEBI Merchant Bankers Regulation, 1992. Since then only
category I exist.
? Requirement for granting the certificate
? Shall be a body corporate other than an NBFC
? Has the necessary infrastructure to effectively discharge his
activities
? Should have minimum two experienced employees to conduct the
business
? Should fulfill the capital adequacy requirement as specified
? His partner, director or principal officer should not be involved in
any litigation connected with the securities market which has an
adverse bearing on the business of the applicant
? His partner, director or principal officer has not been convicted
for any offence or been found guilty of any economic offence.
? Should have the professional qualification from an institution
recognised by the government in finance, law or business
management
? Should be a fit and proper person.
? Capital Adequacy Requirements (CAR)
? CAR shall not be less than net worth of the person making the application
for grant of registration.
? Net worth not less than Rs Five crores
? Procedure for registration
? Application must be submitted to SEBI in form A and SEBI will
issue certificate of registration in form B. Application fee Rs. 50,000
? On grant of certificate the applicant shall be liable to pay the fees in
accordance with schedule II
? Rs 20,00,000 for initial registration.
? Renewal of certificate
? Certificate of initial registration remains valid for 5 years.
? For renewal, apply in form A three months before the expiry of
certificate
? Renewal application is to be treated similar as a fresh application
? After the verification of application SEBI will grant certificate in
form B
? Applicant is liable to pay the fees of Rs. 9,00,000 for permanent
registration
2. Responsibilities of merchant banker
? Code of conduct ? As per schedule III no merchant banker, other than a bank
or a public financial institution and primary dealer as per RBI can engage in any
activity other than securities market.
? Maintenance of books of accounts ? copy of B/S, P&L account, auditors
report and a statement of financial position. Information to SEBI where these
documents are maintained and furnish such documents when required by SEBI.
? Submission of half yearly results ? furnish to SEBI half yearly unaudited
financial results with a view to monitor the capital adequacy of merchant banker.
? Appointment of lead merchant bankers ? Every issue must have one lead
merchant banker. Lead merchant banker must sign an agreement with the issuer
setting out their mutual rights, liabilities and obligations regarding the issue,
allotment and refund.
?Restriction on appointment of lead merchant banker -
Issue size of less than 50 crore - 2 merchant banker
????? Rs. 50-100 crore - 3???????
?????.Rs 100-200 crore - 4???????
?????..Rs. 200-400 crore - 5??????..
??? more than Rs500 crore - 5 or more ???. as agreed by SEBI
Responsibilities of lead merchant banker ? Lead manager should not
agree to manage an issue unless his roles and responsibilities particularly
relating to disclosures, allotment and refund are clearly defined and a statement
is submitted to SEBI at least a month prior to opening of the issue.
- In case of more than one lead merchant banker responsibilities must be clearly
demarcated.
-No lead merchant banker should agree to manage an issue if the body corporate
is an associate of the lead merchant banker.
Underwriting Obligations ? Every lead merchant banker must take at least
5 per cent of total underwriting commitment or Rs 25 lakh whichever is less. If
it is unable to do so then it must make an arrangement with another merchant
banker to the same issue and keep SEBI informed.
Appointment of Compliance officers ? Every merchant banker must
appoint a compliance officer who will monitor compliance to the Act and all
other relevant rules and regulations.
- He shall report to SEBI any non-compliance observed and ensure that
deficiencies observed by SEBI in draft prospectus do not recur.
3.Code of conduct for Merchant bankers
? Regulatory/Statutory compliance
? Confidentiality
? Accurate record keeping
? Conflict of interest
? Ethics in conducting business
? Public Disclosure and Reporting
? Gifts, entertainment and favours etc
? Inside information
? Trade secrets
? Compliance responsibility
4. Procedure for inspection
? SEBIs right to inspect ? SEBI may appoint one or more persons to
inspect books of accounts/records/documents
-Purpose of inspection is to ensure proper book keeping, compliance to
law, to investigate into complaints , to investigate suo moto (own interest)
in investors interest.
? Notice before inspection ? SEBI shall give reasonable notice to the
merchant banker before inspection . During the course of his business
merchant banker is bound to discharge his obligations.
? Submission of reports to SEBI - Inspection authority shall submit
the inspection report to SEBI
? Action on inspection report ? After consideration of the inspection
report SEBI or chairman may take action as deem it fit.
? Appointment of auditors ? SEBI may appoint auditors to look into
the books of accounts provided that the auditors have the same powers as
inspection authorities.
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
Preparation of Prospectus
Is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company
Content of Prospectus:
?General information about the company
?Capital structure of the company
?Terms of the present issue
?Dates of opening and closing of the issue
?Name, address, functions and remuneration of Directors
?Auditors report with name and address of the auditors
Intermediaries to the issue
? Merchant Bankers to the issue or book running lead managers (BRLM).
? Registrar to the issue
? Bankers to the issue
? Underwriters to the issue
? Brokers
? Advertising agencies
? Printers
Pre-issue obligations ? SEBI guidelines
?Due Diligence
? Payment of requisite fees
? Submission of documents
? MOU
? Inter-se allocation of responsibilities
? Due Diligence Certificate
? Certificate in case of further issue by Listed companies
? Undertaking
? List of promoters group
Pre-issue obligations ? SEBI Guidelines
? Appointment of Intermediaries
?Merchant bankers
?Co-managers
?Other intermediaries
? Underwriting
? Offer document made public
? Dispatch of issue material
? No complaints certificate
? Mandatory collection centers
? Authorised collection agents
? Advertisement for rights post-issue
? Appointment of compliance office
? Abridged prospectus
? Agreement with depositories
Post - issue Management
Steps involved:
? To verify and confirm that the issue is subscribed to the extent of
90% including underwriters obligation
? To supervise and co-ordinate allotment procedure by the registrar as
per Stock Exchange guidelines
? To ensure issue of refund order, allotment letters within the prescribed
time limit of 10 weeks after the closure of the subscription list.
? To report periodically to SEBI about progress in allotment and
refunds.
? To ensure listing of securities at the stock exchange
? To attend the investors grievances about the public issue.
Post-issue obligations - SEBI guidelines
? Post-issue monitoring reports
?To be submitted third day from the date of allocation in the book-built
portion or one day prior to the opening of the fixed price portion,
whichever is earlier. It is 3days from the date of closure of the issue in all
other cases.
? Final post-issue report within 78 days from the date of closure of the
subscription in case of book building and public issue, but 50 days in case
of rights issue.
? Redressal of investors grievances
? Co-ordination with intermediaries
?Stock invest
?Underwriters
?Bankers to an issue
? Finalising the basis of allotment
? Dispatch of Share certificate
Changing Landscape of Investment Banking
? Till 2007 Investment banking business was very profitable
? As a result of the sub-prime mortgage crisis in US investment banks collapsed.
? Several acquisitions took place in 2008.
? Impact was felt by the Indian Investment banks.
? Growth rate of Indian economy also slowed down.
? Indian Investment banks were forced to design new strategies for survival and growth.
? Several important trends have emerged:
? Faster growth opportunities for countries.
? To maintain sustained earnings growth, firms pursue a strategy by diversifying and
balancing revenue streams.
? Investment banks pursue balance sheet de-risk and diverse funding
? Regulatory compliance and high standards of governance have become an integral
part of the business.
? Investment banks were expanding the products and services geographically to become
financial supermarkets to the world.
? Investment banks rely on advanced technologies in the front office to enable high
speed, high-frequency trading, as well as fast and accurate analytics for client
services.
Securities and Exchange Board of India (SEBI)
? Established in 1988.
? Upgraded as a statutory board in 1992.
? Securities and Exchange Board of India Act was passed on 30
th
January 1992.
? Objectives of SEBI:
? To protect the interest of investors in securities
? To promote the development of the securities market
? To regulate the securities market
? Functions of SEBI:
? To register and regulate the workings of stock brokers
? To register and regulate the bankers to an issue
? To control and regulate securities market
? To exercise the powers under securities contracts Act
? To regulate the working of mutual funds
? To control fraudulent and unfair trade practices relating to securities market
? To control investment business
? To regulate issue of securities
? To regulate takeovers
? To regulate insider-trading in securities.
SEBI Regulations for Merchant bankers
? SEBI regulates capital markets in India.
? SEBI regulations on merchant banking:
1. Registration of merchant bankers
2. Responsibilities of merchant bankers
3. Code of conduct for merchant bankers
4. Procedure for inspection
5. Procedure for action in case of default
6. Amendments to SEBI (Merchant bankers) Regulations, 1992.
1. Registration of Merchant bankers
? Categories of Merchant Bankers
? Category ? I
?Any activity under issue management including preparation of prospectus,
determination of financial structure, issue, allotment, refund of subscription
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
? Category ? II
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
?Category - III
?To act as underwriter, adviser, and consultant to an issue
?Category ? IV
?To act only as advisor or consultant to an issue.
? Category II, III, IV were abolished through an amendment, dated December 9,
1997 to the SEBI Merchant Bankers Regulation, 1992. Since then only
category I exist.
? Requirement for granting the certificate
? Shall be a body corporate other than an NBFC
? Has the necessary infrastructure to effectively discharge his
activities
? Should have minimum two experienced employees to conduct the
business
? Should fulfill the capital adequacy requirement as specified
? His partner, director or principal officer should not be involved in
any litigation connected with the securities market which has an
adverse bearing on the business of the applicant
? His partner, director or principal officer has not been convicted
for any offence or been found guilty of any economic offence.
? Should have the professional qualification from an institution
recognised by the government in finance, law or business
management
? Should be a fit and proper person.
? Capital Adequacy Requirements (CAR)
? CAR shall not be less than net worth of the person making the application
for grant of registration.
? Net worth not less than Rs Five crores
? Procedure for registration
? Application must be submitted to SEBI in form A and SEBI will
issue certificate of registration in form B. Application fee Rs. 50,000
? On grant of certificate the applicant shall be liable to pay the fees in
accordance with schedule II
? Rs 20,00,000 for initial registration.
? Renewal of certificate
? Certificate of initial registration remains valid for 5 years.
? For renewal, apply in form A three months before the expiry of
certificate
? Renewal application is to be treated similar as a fresh application
? After the verification of application SEBI will grant certificate in
form B
? Applicant is liable to pay the fees of Rs. 9,00,000 for permanent
registration
2. Responsibilities of merchant banker
? Code of conduct ? As per schedule III no merchant banker, other than a bank
or a public financial institution and primary dealer as per RBI can engage in any
activity other than securities market.
? Maintenance of books of accounts ? copy of B/S, P&L account, auditors
report and a statement of financial position. Information to SEBI where these
documents are maintained and furnish such documents when required by SEBI.
? Submission of half yearly results ? furnish to SEBI half yearly unaudited
financial results with a view to monitor the capital adequacy of merchant banker.
? Appointment of lead merchant bankers ? Every issue must have one lead
merchant banker. Lead merchant banker must sign an agreement with the issuer
setting out their mutual rights, liabilities and obligations regarding the issue,
allotment and refund.
?Restriction on appointment of lead merchant banker -
Issue size of less than 50 crore - 2 merchant banker
????? Rs. 50-100 crore - 3???????
?????.Rs 100-200 crore - 4???????
?????..Rs. 200-400 crore - 5??????..
??? more than Rs500 crore - 5 or more ???. as agreed by SEBI
Responsibilities of lead merchant banker ? Lead manager should not
agree to manage an issue unless his roles and responsibilities particularly
relating to disclosures, allotment and refund are clearly defined and a statement
is submitted to SEBI at least a month prior to opening of the issue.
- In case of more than one lead merchant banker responsibilities must be clearly
demarcated.
-No lead merchant banker should agree to manage an issue if the body corporate
is an associate of the lead merchant banker.
Underwriting Obligations ? Every lead merchant banker must take at least
5 per cent of total underwriting commitment or Rs 25 lakh whichever is less. If
it is unable to do so then it must make an arrangement with another merchant
banker to the same issue and keep SEBI informed.
Appointment of Compliance officers ? Every merchant banker must
appoint a compliance officer who will monitor compliance to the Act and all
other relevant rules and regulations.
- He shall report to SEBI any non-compliance observed and ensure that
deficiencies observed by SEBI in draft prospectus do not recur.
3.Code of conduct for Merchant bankers
? Regulatory/Statutory compliance
? Confidentiality
? Accurate record keeping
? Conflict of interest
? Ethics in conducting business
? Public Disclosure and Reporting
? Gifts, entertainment and favours etc
? Inside information
? Trade secrets
? Compliance responsibility
4. Procedure for inspection
? SEBIs right to inspect ? SEBI may appoint one or more persons to
inspect books of accounts/records/documents
-Purpose of inspection is to ensure proper book keeping, compliance to
law, to investigate into complaints , to investigate suo moto (own interest)
in investors interest.
? Notice before inspection ? SEBI shall give reasonable notice to the
merchant banker before inspection . During the course of his business
merchant banker is bound to discharge his obligations.
? Submission of reports to SEBI - Inspection authority shall submit
the inspection report to SEBI
? Action on inspection report ? After consideration of the inspection
report SEBI or chairman may take action as deem it fit.
? Appointment of auditors ? SEBI may appoint auditors to look into
the books of accounts provided that the auditors have the same powers as
inspection authorities.
5. Procedure for action in case of default
Suspension of registration may be imposed:
? When the merchant banker violates the provisions of the Act
? Fails to furnish information or furnish wrong information
?Doesn?t submit periodical information as required by SEBI
? Doesn?t co-operate in enquiry conducted by SEBI
?Fails to resolve complaints by investors or fails to give satisfactory reply
to SEBI
? Indulges in price rigging, cornering and manipulation
? Fails to maintain Capital adequacy requirement
? Fails to pay the fees
? Violates conditions of registration
? Fails to carry out his obligation as specified in the regulation
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
Preparation of Prospectus
Is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company
Content of Prospectus:
?General information about the company
?Capital structure of the company
?Terms of the present issue
?Dates of opening and closing of the issue
?Name, address, functions and remuneration of Directors
?Auditors report with name and address of the auditors
Intermediaries to the issue
? Merchant Bankers to the issue or book running lead managers (BRLM).
? Registrar to the issue
? Bankers to the issue
? Underwriters to the issue
? Brokers
? Advertising agencies
? Printers
Pre-issue obligations ? SEBI guidelines
?Due Diligence
? Payment of requisite fees
? Submission of documents
? MOU
? Inter-se allocation of responsibilities
? Due Diligence Certificate
? Certificate in case of further issue by Listed companies
? Undertaking
? List of promoters group
Pre-issue obligations ? SEBI Guidelines
? Appointment of Intermediaries
?Merchant bankers
?Co-managers
?Other intermediaries
? Underwriting
? Offer document made public
? Dispatch of issue material
? No complaints certificate
? Mandatory collection centers
? Authorised collection agents
? Advertisement for rights post-issue
? Appointment of compliance office
? Abridged prospectus
? Agreement with depositories
Post - issue Management
Steps involved:
? To verify and confirm that the issue is subscribed to the extent of
90% including underwriters obligation
? To supervise and co-ordinate allotment procedure by the registrar as
per Stock Exchange guidelines
? To ensure issue of refund order, allotment letters within the prescribed
time limit of 10 weeks after the closure of the subscription list.
? To report periodically to SEBI about progress in allotment and
refunds.
? To ensure listing of securities at the stock exchange
? To attend the investors grievances about the public issue.
Post-issue obligations - SEBI guidelines
? Post-issue monitoring reports
?To be submitted third day from the date of allocation in the book-built
portion or one day prior to the opening of the fixed price portion,
whichever is earlier. It is 3days from the date of closure of the issue in all
other cases.
? Final post-issue report within 78 days from the date of closure of the
subscription in case of book building and public issue, but 50 days in case
of rights issue.
? Redressal of investors grievances
? Co-ordination with intermediaries
?Stock invest
?Underwriters
?Bankers to an issue
? Finalising the basis of allotment
? Dispatch of Share certificate
Changing Landscape of Investment Banking
? Till 2007 Investment banking business was very profitable
? As a result of the sub-prime mortgage crisis in US investment banks collapsed.
? Several acquisitions took place in 2008.
? Impact was felt by the Indian Investment banks.
? Growth rate of Indian economy also slowed down.
? Indian Investment banks were forced to design new strategies for survival and growth.
? Several important trends have emerged:
? Faster growth opportunities for countries.
? To maintain sustained earnings growth, firms pursue a strategy by diversifying and
balancing revenue streams.
? Investment banks pursue balance sheet de-risk and diverse funding
? Regulatory compliance and high standards of governance have become an integral
part of the business.
? Investment banks were expanding the products and services geographically to become
financial supermarkets to the world.
? Investment banks rely on advanced technologies in the front office to enable high
speed, high-frequency trading, as well as fast and accurate analytics for client
services.
Securities and Exchange Board of India (SEBI)
? Established in 1988.
? Upgraded as a statutory board in 1992.
? Securities and Exchange Board of India Act was passed on 30
th
January 1992.
? Objectives of SEBI:
? To protect the interest of investors in securities
? To promote the development of the securities market
? To regulate the securities market
? Functions of SEBI:
? To register and regulate the workings of stock brokers
? To register and regulate the bankers to an issue
? To control and regulate securities market
? To exercise the powers under securities contracts Act
? To regulate the working of mutual funds
? To control fraudulent and unfair trade practices relating to securities market
? To control investment business
? To regulate issue of securities
? To regulate takeovers
? To regulate insider-trading in securities.
SEBI Regulations for Merchant bankers
? SEBI regulates capital markets in India.
? SEBI regulations on merchant banking:
1. Registration of merchant bankers
2. Responsibilities of merchant bankers
3. Code of conduct for merchant bankers
4. Procedure for inspection
5. Procedure for action in case of default
6. Amendments to SEBI (Merchant bankers) Regulations, 1992.
1. Registration of Merchant bankers
? Categories of Merchant Bankers
? Category ? I
?Any activity under issue management including preparation of prospectus,
determination of financial structure, issue, allotment, refund of subscription
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
? Category ? II
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
?Category - III
?To act as underwriter, adviser, and consultant to an issue
?Category ? IV
?To act only as advisor or consultant to an issue.
? Category II, III, IV were abolished through an amendment, dated December 9,
1997 to the SEBI Merchant Bankers Regulation, 1992. Since then only
category I exist.
? Requirement for granting the certificate
? Shall be a body corporate other than an NBFC
? Has the necessary infrastructure to effectively discharge his
activities
? Should have minimum two experienced employees to conduct the
business
? Should fulfill the capital adequacy requirement as specified
? His partner, director or principal officer should not be involved in
any litigation connected with the securities market which has an
adverse bearing on the business of the applicant
? His partner, director or principal officer has not been convicted
for any offence or been found guilty of any economic offence.
? Should have the professional qualification from an institution
recognised by the government in finance, law or business
management
? Should be a fit and proper person.
? Capital Adequacy Requirements (CAR)
? CAR shall not be less than net worth of the person making the application
for grant of registration.
? Net worth not less than Rs Five crores
? Procedure for registration
? Application must be submitted to SEBI in form A and SEBI will
issue certificate of registration in form B. Application fee Rs. 50,000
? On grant of certificate the applicant shall be liable to pay the fees in
accordance with schedule II
? Rs 20,00,000 for initial registration.
? Renewal of certificate
? Certificate of initial registration remains valid for 5 years.
? For renewal, apply in form A three months before the expiry of
certificate
? Renewal application is to be treated similar as a fresh application
? After the verification of application SEBI will grant certificate in
form B
? Applicant is liable to pay the fees of Rs. 9,00,000 for permanent
registration
2. Responsibilities of merchant banker
? Code of conduct ? As per schedule III no merchant banker, other than a bank
or a public financial institution and primary dealer as per RBI can engage in any
activity other than securities market.
? Maintenance of books of accounts ? copy of B/S, P&L account, auditors
report and a statement of financial position. Information to SEBI where these
documents are maintained and furnish such documents when required by SEBI.
? Submission of half yearly results ? furnish to SEBI half yearly unaudited
financial results with a view to monitor the capital adequacy of merchant banker.
? Appointment of lead merchant bankers ? Every issue must have one lead
merchant banker. Lead merchant banker must sign an agreement with the issuer
setting out their mutual rights, liabilities and obligations regarding the issue,
allotment and refund.
?Restriction on appointment of lead merchant banker -
Issue size of less than 50 crore - 2 merchant banker
????? Rs. 50-100 crore - 3???????
?????.Rs 100-200 crore - 4???????
?????..Rs. 200-400 crore - 5??????..
??? more than Rs500 crore - 5 or more ???. as agreed by SEBI
Responsibilities of lead merchant banker ? Lead manager should not
agree to manage an issue unless his roles and responsibilities particularly
relating to disclosures, allotment and refund are clearly defined and a statement
is submitted to SEBI at least a month prior to opening of the issue.
- In case of more than one lead merchant banker responsibilities must be clearly
demarcated.
-No lead merchant banker should agree to manage an issue if the body corporate
is an associate of the lead merchant banker.
Underwriting Obligations ? Every lead merchant banker must take at least
5 per cent of total underwriting commitment or Rs 25 lakh whichever is less. If
it is unable to do so then it must make an arrangement with another merchant
banker to the same issue and keep SEBI informed.
Appointment of Compliance officers ? Every merchant banker must
appoint a compliance officer who will monitor compliance to the Act and all
other relevant rules and regulations.
- He shall report to SEBI any non-compliance observed and ensure that
deficiencies observed by SEBI in draft prospectus do not recur.
3.Code of conduct for Merchant bankers
? Regulatory/Statutory compliance
? Confidentiality
? Accurate record keeping
? Conflict of interest
? Ethics in conducting business
? Public Disclosure and Reporting
? Gifts, entertainment and favours etc
? Inside information
? Trade secrets
? Compliance responsibility
4. Procedure for inspection
? SEBIs right to inspect ? SEBI may appoint one or more persons to
inspect books of accounts/records/documents
-Purpose of inspection is to ensure proper book keeping, compliance to
law, to investigate into complaints , to investigate suo moto (own interest)
in investors interest.
? Notice before inspection ? SEBI shall give reasonable notice to the
merchant banker before inspection . During the course of his business
merchant banker is bound to discharge his obligations.
? Submission of reports to SEBI - Inspection authority shall submit
the inspection report to SEBI
? Action on inspection report ? After consideration of the inspection
report SEBI or chairman may take action as deem it fit.
? Appointment of auditors ? SEBI may appoint auditors to look into
the books of accounts provided that the auditors have the same powers as
inspection authorities.
5. Procedure for action in case of default
Suspension of registration may be imposed:
? When the merchant banker violates the provisions of the Act
? Fails to furnish information or furnish wrong information
?Doesn?t submit periodical information as required by SEBI
? Doesn?t co-operate in enquiry conducted by SEBI
?Fails to resolve complaints by investors or fails to give satisfactory reply
to SEBI
? Indulges in price rigging, cornering and manipulation
? Fails to maintain Capital adequacy requirement
? Fails to pay the fees
? Violates conditions of registration
? Fails to carry out his obligation as specified in the regulation
Cancellation of registration ? Cancellation can be imposed if:
? Indulges in deliberate manipulation or price rigging
? Financial position deteriorates to the extent that SEBI feels that it is not in the
interest of the investors.
? Guilty of fraud or convicted in a criminal offence
Show-cause notice or order
? On receipt of the report from enquiry officer SEBI may issue show-cause notice
? Merchant banker shall reply to SEBI within 21 days of receipt of the notice
? SEBI passes order within 30 days
? Every order must be self containing giving reasons for the conclusions and penalty
imposed.
? SEBI shall send a copy of the order to the merchant banker
Effect of suspension and cancellation of registration of merchant
banker
? Merchant banker cease to carry-on any activity from the date of suspension during
the period of suspension
? Merchant banker cease to carry-on any activity from the date of cancellation
Publication of order of suspension
? Must be published by SEBI in at least two daily news papers
? Any aggrieved merchant banker may appeal to Securities Appellate Tribunal
having jurisdiction in the matter.
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
Preparation of Prospectus
Is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company
Content of Prospectus:
?General information about the company
?Capital structure of the company
?Terms of the present issue
?Dates of opening and closing of the issue
?Name, address, functions and remuneration of Directors
?Auditors report with name and address of the auditors
Intermediaries to the issue
? Merchant Bankers to the issue or book running lead managers (BRLM).
? Registrar to the issue
? Bankers to the issue
? Underwriters to the issue
? Brokers
? Advertising agencies
? Printers
Pre-issue obligations ? SEBI guidelines
?Due Diligence
? Payment of requisite fees
? Submission of documents
? MOU
? Inter-se allocation of responsibilities
? Due Diligence Certificate
? Certificate in case of further issue by Listed companies
? Undertaking
? List of promoters group
Pre-issue obligations ? SEBI Guidelines
? Appointment of Intermediaries
?Merchant bankers
?Co-managers
?Other intermediaries
? Underwriting
? Offer document made public
? Dispatch of issue material
? No complaints certificate
? Mandatory collection centers
? Authorised collection agents
? Advertisement for rights post-issue
? Appointment of compliance office
? Abridged prospectus
? Agreement with depositories
Post - issue Management
Steps involved:
? To verify and confirm that the issue is subscribed to the extent of
90% including underwriters obligation
? To supervise and co-ordinate allotment procedure by the registrar as
per Stock Exchange guidelines
? To ensure issue of refund order, allotment letters within the prescribed
time limit of 10 weeks after the closure of the subscription list.
? To report periodically to SEBI about progress in allotment and
refunds.
? To ensure listing of securities at the stock exchange
? To attend the investors grievances about the public issue.
Post-issue obligations - SEBI guidelines
? Post-issue monitoring reports
?To be submitted third day from the date of allocation in the book-built
portion or one day prior to the opening of the fixed price portion,
whichever is earlier. It is 3days from the date of closure of the issue in all
other cases.
? Final post-issue report within 78 days from the date of closure of the
subscription in case of book building and public issue, but 50 days in case
of rights issue.
? Redressal of investors grievances
? Co-ordination with intermediaries
?Stock invest
?Underwriters
?Bankers to an issue
? Finalising the basis of allotment
? Dispatch of Share certificate
Changing Landscape of Investment Banking
? Till 2007 Investment banking business was very profitable
? As a result of the sub-prime mortgage crisis in US investment banks collapsed.
? Several acquisitions took place in 2008.
? Impact was felt by the Indian Investment banks.
? Growth rate of Indian economy also slowed down.
? Indian Investment banks were forced to design new strategies for survival and growth.
? Several important trends have emerged:
? Faster growth opportunities for countries.
? To maintain sustained earnings growth, firms pursue a strategy by diversifying and
balancing revenue streams.
? Investment banks pursue balance sheet de-risk and diverse funding
? Regulatory compliance and high standards of governance have become an integral
part of the business.
? Investment banks were expanding the products and services geographically to become
financial supermarkets to the world.
? Investment banks rely on advanced technologies in the front office to enable high
speed, high-frequency trading, as well as fast and accurate analytics for client
services.
Securities and Exchange Board of India (SEBI)
? Established in 1988.
? Upgraded as a statutory board in 1992.
? Securities and Exchange Board of India Act was passed on 30
th
January 1992.
? Objectives of SEBI:
? To protect the interest of investors in securities
? To promote the development of the securities market
? To regulate the securities market
? Functions of SEBI:
? To register and regulate the workings of stock brokers
? To register and regulate the bankers to an issue
? To control and regulate securities market
? To exercise the powers under securities contracts Act
? To regulate the working of mutual funds
? To control fraudulent and unfair trade practices relating to securities market
? To control investment business
? To regulate issue of securities
? To regulate takeovers
? To regulate insider-trading in securities.
SEBI Regulations for Merchant bankers
? SEBI regulates capital markets in India.
? SEBI regulations on merchant banking:
1. Registration of merchant bankers
2. Responsibilities of merchant bankers
3. Code of conduct for merchant bankers
4. Procedure for inspection
5. Procedure for action in case of default
6. Amendments to SEBI (Merchant bankers) Regulations, 1992.
1. Registration of Merchant bankers
? Categories of Merchant Bankers
? Category ? I
?Any activity under issue management including preparation of prospectus,
determination of financial structure, issue, allotment, refund of subscription
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
? Category ? II
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
?Category - III
?To act as underwriter, adviser, and consultant to an issue
?Category ? IV
?To act only as advisor or consultant to an issue.
? Category II, III, IV were abolished through an amendment, dated December 9,
1997 to the SEBI Merchant Bankers Regulation, 1992. Since then only
category I exist.
? Requirement for granting the certificate
? Shall be a body corporate other than an NBFC
? Has the necessary infrastructure to effectively discharge his
activities
? Should have minimum two experienced employees to conduct the
business
? Should fulfill the capital adequacy requirement as specified
? His partner, director or principal officer should not be involved in
any litigation connected with the securities market which has an
adverse bearing on the business of the applicant
? His partner, director or principal officer has not been convicted
for any offence or been found guilty of any economic offence.
? Should have the professional qualification from an institution
recognised by the government in finance, law or business
management
? Should be a fit and proper person.
? Capital Adequacy Requirements (CAR)
? CAR shall not be less than net worth of the person making the application
for grant of registration.
? Net worth not less than Rs Five crores
? Procedure for registration
? Application must be submitted to SEBI in form A and SEBI will
issue certificate of registration in form B. Application fee Rs. 50,000
? On grant of certificate the applicant shall be liable to pay the fees in
accordance with schedule II
? Rs 20,00,000 for initial registration.
? Renewal of certificate
? Certificate of initial registration remains valid for 5 years.
? For renewal, apply in form A three months before the expiry of
certificate
? Renewal application is to be treated similar as a fresh application
? After the verification of application SEBI will grant certificate in
form B
? Applicant is liable to pay the fees of Rs. 9,00,000 for permanent
registration
2. Responsibilities of merchant banker
? Code of conduct ? As per schedule III no merchant banker, other than a bank
or a public financial institution and primary dealer as per RBI can engage in any
activity other than securities market.
? Maintenance of books of accounts ? copy of B/S, P&L account, auditors
report and a statement of financial position. Information to SEBI where these
documents are maintained and furnish such documents when required by SEBI.
? Submission of half yearly results ? furnish to SEBI half yearly unaudited
financial results with a view to monitor the capital adequacy of merchant banker.
? Appointment of lead merchant bankers ? Every issue must have one lead
merchant banker. Lead merchant banker must sign an agreement with the issuer
setting out their mutual rights, liabilities and obligations regarding the issue,
allotment and refund.
?Restriction on appointment of lead merchant banker -
Issue size of less than 50 crore - 2 merchant banker
????? Rs. 50-100 crore - 3???????
?????.Rs 100-200 crore - 4???????
?????..Rs. 200-400 crore - 5??????..
??? more than Rs500 crore - 5 or more ???. as agreed by SEBI
Responsibilities of lead merchant banker ? Lead manager should not
agree to manage an issue unless his roles and responsibilities particularly
relating to disclosures, allotment and refund are clearly defined and a statement
is submitted to SEBI at least a month prior to opening of the issue.
- In case of more than one lead merchant banker responsibilities must be clearly
demarcated.
-No lead merchant banker should agree to manage an issue if the body corporate
is an associate of the lead merchant banker.
Underwriting Obligations ? Every lead merchant banker must take at least
5 per cent of total underwriting commitment or Rs 25 lakh whichever is less. If
it is unable to do so then it must make an arrangement with another merchant
banker to the same issue and keep SEBI informed.
Appointment of Compliance officers ? Every merchant banker must
appoint a compliance officer who will monitor compliance to the Act and all
other relevant rules and regulations.
- He shall report to SEBI any non-compliance observed and ensure that
deficiencies observed by SEBI in draft prospectus do not recur.
3.Code of conduct for Merchant bankers
? Regulatory/Statutory compliance
? Confidentiality
? Accurate record keeping
? Conflict of interest
? Ethics in conducting business
? Public Disclosure and Reporting
? Gifts, entertainment and favours etc
? Inside information
? Trade secrets
? Compliance responsibility
4. Procedure for inspection
? SEBIs right to inspect ? SEBI may appoint one or more persons to
inspect books of accounts/records/documents
-Purpose of inspection is to ensure proper book keeping, compliance to
law, to investigate into complaints , to investigate suo moto (own interest)
in investors interest.
? Notice before inspection ? SEBI shall give reasonable notice to the
merchant banker before inspection . During the course of his business
merchant banker is bound to discharge his obligations.
? Submission of reports to SEBI - Inspection authority shall submit
the inspection report to SEBI
? Action on inspection report ? After consideration of the inspection
report SEBI or chairman may take action as deem it fit.
? Appointment of auditors ? SEBI may appoint auditors to look into
the books of accounts provided that the auditors have the same powers as
inspection authorities.
5. Procedure for action in case of default
Suspension of registration may be imposed:
? When the merchant banker violates the provisions of the Act
? Fails to furnish information or furnish wrong information
?Doesn?t submit periodical information as required by SEBI
? Doesn?t co-operate in enquiry conducted by SEBI
?Fails to resolve complaints by investors or fails to give satisfactory reply
to SEBI
? Indulges in price rigging, cornering and manipulation
? Fails to maintain Capital adequacy requirement
? Fails to pay the fees
? Violates conditions of registration
? Fails to carry out his obligation as specified in the regulation
Cancellation of registration ? Cancellation can be imposed if:
? Indulges in deliberate manipulation or price rigging
? Financial position deteriorates to the extent that SEBI feels that it is not in the
interest of the investors.
? Guilty of fraud or convicted in a criminal offence
Show-cause notice or order
? On receipt of the report from enquiry officer SEBI may issue show-cause notice
? Merchant banker shall reply to SEBI within 21 days of receipt of the notice
? SEBI passes order within 30 days
? Every order must be self containing giving reasons for the conclusions and penalty
imposed.
? SEBI shall send a copy of the order to the merchant banker
Effect of suspension and cancellation of registration of merchant
banker
? Merchant banker cease to carry-on any activity from the date of suspension during
the period of suspension
? Merchant banker cease to carry-on any activity from the date of cancellation
Publication of order of suspension
? Must be published by SEBI in at least two daily news papers
? Any aggrieved merchant banker may appeal to Securities Appellate Tribunal
having jurisdiction in the matter.
6. Amendments to SEBI (Merchant bankers) Regulations, 1992
Amendments dated December 9, 1997
? Applicant should be fit and proper person
? Seek separate registration for its underwriting or portfolio management activities
? Categories like I,II,III,IV are dispensed with
? A merchant banker other than a bank a public financial institution is prohibited
from carrying any activities not pertaining to the securities market
? Applicant should be a corporate body other than a non-banking financial
company
Amendment dated January 21, 1998
? Time provided up to June 30
th
1998 sever their activities not pertaining to the
securities market
? Merchant banker is exempted by Reserve Bank of India regarding compulsory
registration, maintenance of liquid assets, and creation of reserves if they fulfill
certain conditions.
?Amendments 2014 ? Regarding Registration fees and change of control.
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
Preparation of Prospectus
Is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company
Content of Prospectus:
?General information about the company
?Capital structure of the company
?Terms of the present issue
?Dates of opening and closing of the issue
?Name, address, functions and remuneration of Directors
?Auditors report with name and address of the auditors
Intermediaries to the issue
? Merchant Bankers to the issue or book running lead managers (BRLM).
? Registrar to the issue
? Bankers to the issue
? Underwriters to the issue
? Brokers
? Advertising agencies
? Printers
Pre-issue obligations ? SEBI guidelines
?Due Diligence
? Payment of requisite fees
? Submission of documents
? MOU
? Inter-se allocation of responsibilities
? Due Diligence Certificate
? Certificate in case of further issue by Listed companies
? Undertaking
? List of promoters group
Pre-issue obligations ? SEBI Guidelines
? Appointment of Intermediaries
?Merchant bankers
?Co-managers
?Other intermediaries
? Underwriting
? Offer document made public
? Dispatch of issue material
? No complaints certificate
? Mandatory collection centers
? Authorised collection agents
? Advertisement for rights post-issue
? Appointment of compliance office
? Abridged prospectus
? Agreement with depositories
Post - issue Management
Steps involved:
? To verify and confirm that the issue is subscribed to the extent of
90% including underwriters obligation
? To supervise and co-ordinate allotment procedure by the registrar as
per Stock Exchange guidelines
? To ensure issue of refund order, allotment letters within the prescribed
time limit of 10 weeks after the closure of the subscription list.
? To report periodically to SEBI about progress in allotment and
refunds.
? To ensure listing of securities at the stock exchange
? To attend the investors grievances about the public issue.
Post-issue obligations - SEBI guidelines
? Post-issue monitoring reports
?To be submitted third day from the date of allocation in the book-built
portion or one day prior to the opening of the fixed price portion,
whichever is earlier. It is 3days from the date of closure of the issue in all
other cases.
? Final post-issue report within 78 days from the date of closure of the
subscription in case of book building and public issue, but 50 days in case
of rights issue.
? Redressal of investors grievances
? Co-ordination with intermediaries
?Stock invest
?Underwriters
?Bankers to an issue
? Finalising the basis of allotment
? Dispatch of Share certificate
Changing Landscape of Investment Banking
? Till 2007 Investment banking business was very profitable
? As a result of the sub-prime mortgage crisis in US investment banks collapsed.
? Several acquisitions took place in 2008.
? Impact was felt by the Indian Investment banks.
? Growth rate of Indian economy also slowed down.
? Indian Investment banks were forced to design new strategies for survival and growth.
? Several important trends have emerged:
? Faster growth opportunities for countries.
? To maintain sustained earnings growth, firms pursue a strategy by diversifying and
balancing revenue streams.
? Investment banks pursue balance sheet de-risk and diverse funding
? Regulatory compliance and high standards of governance have become an integral
part of the business.
? Investment banks were expanding the products and services geographically to become
financial supermarkets to the world.
? Investment banks rely on advanced technologies in the front office to enable high
speed, high-frequency trading, as well as fast and accurate analytics for client
services.
Securities and Exchange Board of India (SEBI)
? Established in 1988.
? Upgraded as a statutory board in 1992.
? Securities and Exchange Board of India Act was passed on 30
th
January 1992.
? Objectives of SEBI:
? To protect the interest of investors in securities
? To promote the development of the securities market
? To regulate the securities market
? Functions of SEBI:
? To register and regulate the workings of stock brokers
? To register and regulate the bankers to an issue
? To control and regulate securities market
? To exercise the powers under securities contracts Act
? To regulate the working of mutual funds
? To control fraudulent and unfair trade practices relating to securities market
? To control investment business
? To regulate issue of securities
? To regulate takeovers
? To regulate insider-trading in securities.
SEBI Regulations for Merchant bankers
? SEBI regulates capital markets in India.
? SEBI regulations on merchant banking:
1. Registration of merchant bankers
2. Responsibilities of merchant bankers
3. Code of conduct for merchant bankers
4. Procedure for inspection
5. Procedure for action in case of default
6. Amendments to SEBI (Merchant bankers) Regulations, 1992.
1. Registration of Merchant bankers
? Categories of Merchant Bankers
? Category ? I
?Any activity under issue management including preparation of prospectus,
determination of financial structure, issue, allotment, refund of subscription
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
? Category ? II
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
?Category - III
?To act as underwriter, adviser, and consultant to an issue
?Category ? IV
?To act only as advisor or consultant to an issue.
? Category II, III, IV were abolished through an amendment, dated December 9,
1997 to the SEBI Merchant Bankers Regulation, 1992. Since then only
category I exist.
? Requirement for granting the certificate
? Shall be a body corporate other than an NBFC
? Has the necessary infrastructure to effectively discharge his
activities
? Should have minimum two experienced employees to conduct the
business
? Should fulfill the capital adequacy requirement as specified
? His partner, director or principal officer should not be involved in
any litigation connected with the securities market which has an
adverse bearing on the business of the applicant
? His partner, director or principal officer has not been convicted
for any offence or been found guilty of any economic offence.
? Should have the professional qualification from an institution
recognised by the government in finance, law or business
management
? Should be a fit and proper person.
? Capital Adequacy Requirements (CAR)
? CAR shall not be less than net worth of the person making the application
for grant of registration.
? Net worth not less than Rs Five crores
? Procedure for registration
? Application must be submitted to SEBI in form A and SEBI will
issue certificate of registration in form B. Application fee Rs. 50,000
? On grant of certificate the applicant shall be liable to pay the fees in
accordance with schedule II
? Rs 20,00,000 for initial registration.
? Renewal of certificate
? Certificate of initial registration remains valid for 5 years.
? For renewal, apply in form A three months before the expiry of
certificate
? Renewal application is to be treated similar as a fresh application
? After the verification of application SEBI will grant certificate in
form B
? Applicant is liable to pay the fees of Rs. 9,00,000 for permanent
registration
2. Responsibilities of merchant banker
? Code of conduct ? As per schedule III no merchant banker, other than a bank
or a public financial institution and primary dealer as per RBI can engage in any
activity other than securities market.
? Maintenance of books of accounts ? copy of B/S, P&L account, auditors
report and a statement of financial position. Information to SEBI where these
documents are maintained and furnish such documents when required by SEBI.
? Submission of half yearly results ? furnish to SEBI half yearly unaudited
financial results with a view to monitor the capital adequacy of merchant banker.
? Appointment of lead merchant bankers ? Every issue must have one lead
merchant banker. Lead merchant banker must sign an agreement with the issuer
setting out their mutual rights, liabilities and obligations regarding the issue,
allotment and refund.
?Restriction on appointment of lead merchant banker -
Issue size of less than 50 crore - 2 merchant banker
????? Rs. 50-100 crore - 3???????
?????.Rs 100-200 crore - 4???????
?????..Rs. 200-400 crore - 5??????..
??? more than Rs500 crore - 5 or more ???. as agreed by SEBI
Responsibilities of lead merchant banker ? Lead manager should not
agree to manage an issue unless his roles and responsibilities particularly
relating to disclosures, allotment and refund are clearly defined and a statement
is submitted to SEBI at least a month prior to opening of the issue.
- In case of more than one lead merchant banker responsibilities must be clearly
demarcated.
-No lead merchant banker should agree to manage an issue if the body corporate
is an associate of the lead merchant banker.
Underwriting Obligations ? Every lead merchant banker must take at least
5 per cent of total underwriting commitment or Rs 25 lakh whichever is less. If
it is unable to do so then it must make an arrangement with another merchant
banker to the same issue and keep SEBI informed.
Appointment of Compliance officers ? Every merchant banker must
appoint a compliance officer who will monitor compliance to the Act and all
other relevant rules and regulations.
- He shall report to SEBI any non-compliance observed and ensure that
deficiencies observed by SEBI in draft prospectus do not recur.
3.Code of conduct for Merchant bankers
? Regulatory/Statutory compliance
? Confidentiality
? Accurate record keeping
? Conflict of interest
? Ethics in conducting business
? Public Disclosure and Reporting
? Gifts, entertainment and favours etc
? Inside information
? Trade secrets
? Compliance responsibility
4. Procedure for inspection
? SEBIs right to inspect ? SEBI may appoint one or more persons to
inspect books of accounts/records/documents
-Purpose of inspection is to ensure proper book keeping, compliance to
law, to investigate into complaints , to investigate suo moto (own interest)
in investors interest.
? Notice before inspection ? SEBI shall give reasonable notice to the
merchant banker before inspection . During the course of his business
merchant banker is bound to discharge his obligations.
? Submission of reports to SEBI - Inspection authority shall submit
the inspection report to SEBI
? Action on inspection report ? After consideration of the inspection
report SEBI or chairman may take action as deem it fit.
? Appointment of auditors ? SEBI may appoint auditors to look into
the books of accounts provided that the auditors have the same powers as
inspection authorities.
5. Procedure for action in case of default
Suspension of registration may be imposed:
? When the merchant banker violates the provisions of the Act
? Fails to furnish information or furnish wrong information
?Doesn?t submit periodical information as required by SEBI
? Doesn?t co-operate in enquiry conducted by SEBI
?Fails to resolve complaints by investors or fails to give satisfactory reply
to SEBI
? Indulges in price rigging, cornering and manipulation
? Fails to maintain Capital adequacy requirement
? Fails to pay the fees
? Violates conditions of registration
? Fails to carry out his obligation as specified in the regulation
Cancellation of registration ? Cancellation can be imposed if:
? Indulges in deliberate manipulation or price rigging
? Financial position deteriorates to the extent that SEBI feels that it is not in the
interest of the investors.
? Guilty of fraud or convicted in a criminal offence
Show-cause notice or order
? On receipt of the report from enquiry officer SEBI may issue show-cause notice
? Merchant banker shall reply to SEBI within 21 days of receipt of the notice
? SEBI passes order within 30 days
? Every order must be self containing giving reasons for the conclusions and penalty
imposed.
? SEBI shall send a copy of the order to the merchant banker
Effect of suspension and cancellation of registration of merchant
banker
? Merchant banker cease to carry-on any activity from the date of suspension during
the period of suspension
? Merchant banker cease to carry-on any activity from the date of cancellation
Publication of order of suspension
? Must be published by SEBI in at least two daily news papers
? Any aggrieved merchant banker may appeal to Securities Appellate Tribunal
having jurisdiction in the matter.
6. Amendments to SEBI (Merchant bankers) Regulations, 1992
Amendments dated December 9, 1997
? Applicant should be fit and proper person
? Seek separate registration for its underwriting or portfolio management activities
? Categories like I,II,III,IV are dispensed with
? A merchant banker other than a bank a public financial institution is prohibited
from carrying any activities not pertaining to the securities market
? Applicant should be a corporate body other than a non-banking financial
company
Amendment dated January 21, 1998
? Time provided up to June 30
th
1998 sever their activities not pertaining to the
securities market
? Merchant banker is exempted by Reserve Bank of India regarding compulsory
registration, maintenance of liquid assets, and creation of reserves if they fulfill
certain conditions.
?Amendments 2014 ? Regarding Registration fees and change of control.
SEBI Regulations for Intermediaries
Intermediaries are stock brokers, sub brokers, share transfer agents, merchant
bankers, underwriters, portfolio managers, investment advisers and other
intermediaries associated with the securities market specified by the SEBI.
Regulations
1. Registration of intermediaries
? Application to act as a intermediary should be made through concerned stock
exchange.
? Eligibility of the applicants will be examined and is forwarded along with the
fee and its recommendations to SEBI within 30days of receipt complete
application.
? Any change in in the material furnished should be updated by the
intermediary within 15days of the occurrence of change.
2. Obligations of intermediaries
? General obligations
? Redressal of investor grievances
? Appointment of compliance officer
? Investment advice
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
Preparation of Prospectus
Is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company
Content of Prospectus:
?General information about the company
?Capital structure of the company
?Terms of the present issue
?Dates of opening and closing of the issue
?Name, address, functions and remuneration of Directors
?Auditors report with name and address of the auditors
Intermediaries to the issue
? Merchant Bankers to the issue or book running lead managers (BRLM).
? Registrar to the issue
? Bankers to the issue
? Underwriters to the issue
? Brokers
? Advertising agencies
? Printers
Pre-issue obligations ? SEBI guidelines
?Due Diligence
? Payment of requisite fees
? Submission of documents
? MOU
? Inter-se allocation of responsibilities
? Due Diligence Certificate
? Certificate in case of further issue by Listed companies
? Undertaking
? List of promoters group
Pre-issue obligations ? SEBI Guidelines
? Appointment of Intermediaries
?Merchant bankers
?Co-managers
?Other intermediaries
? Underwriting
? Offer document made public
? Dispatch of issue material
? No complaints certificate
? Mandatory collection centers
? Authorised collection agents
? Advertisement for rights post-issue
? Appointment of compliance office
? Abridged prospectus
? Agreement with depositories
Post - issue Management
Steps involved:
? To verify and confirm that the issue is subscribed to the extent of
90% including underwriters obligation
? To supervise and co-ordinate allotment procedure by the registrar as
per Stock Exchange guidelines
? To ensure issue of refund order, allotment letters within the prescribed
time limit of 10 weeks after the closure of the subscription list.
? To report periodically to SEBI about progress in allotment and
refunds.
? To ensure listing of securities at the stock exchange
? To attend the investors grievances about the public issue.
Post-issue obligations - SEBI guidelines
? Post-issue monitoring reports
?To be submitted third day from the date of allocation in the book-built
portion or one day prior to the opening of the fixed price portion,
whichever is earlier. It is 3days from the date of closure of the issue in all
other cases.
? Final post-issue report within 78 days from the date of closure of the
subscription in case of book building and public issue, but 50 days in case
of rights issue.
? Redressal of investors grievances
? Co-ordination with intermediaries
?Stock invest
?Underwriters
?Bankers to an issue
? Finalising the basis of allotment
? Dispatch of Share certificate
Changing Landscape of Investment Banking
? Till 2007 Investment banking business was very profitable
? As a result of the sub-prime mortgage crisis in US investment banks collapsed.
? Several acquisitions took place in 2008.
? Impact was felt by the Indian Investment banks.
? Growth rate of Indian economy also slowed down.
? Indian Investment banks were forced to design new strategies for survival and growth.
? Several important trends have emerged:
? Faster growth opportunities for countries.
? To maintain sustained earnings growth, firms pursue a strategy by diversifying and
balancing revenue streams.
? Investment banks pursue balance sheet de-risk and diverse funding
? Regulatory compliance and high standards of governance have become an integral
part of the business.
? Investment banks were expanding the products and services geographically to become
financial supermarkets to the world.
? Investment banks rely on advanced technologies in the front office to enable high
speed, high-frequency trading, as well as fast and accurate analytics for client
services.
Securities and Exchange Board of India (SEBI)
? Established in 1988.
? Upgraded as a statutory board in 1992.
? Securities and Exchange Board of India Act was passed on 30
th
January 1992.
? Objectives of SEBI:
? To protect the interest of investors in securities
? To promote the development of the securities market
? To regulate the securities market
? Functions of SEBI:
? To register and regulate the workings of stock brokers
? To register and regulate the bankers to an issue
? To control and regulate securities market
? To exercise the powers under securities contracts Act
? To regulate the working of mutual funds
? To control fraudulent and unfair trade practices relating to securities market
? To control investment business
? To regulate issue of securities
? To regulate takeovers
? To regulate insider-trading in securities.
SEBI Regulations for Merchant bankers
? SEBI regulates capital markets in India.
? SEBI regulations on merchant banking:
1. Registration of merchant bankers
2. Responsibilities of merchant bankers
3. Code of conduct for merchant bankers
4. Procedure for inspection
5. Procedure for action in case of default
6. Amendments to SEBI (Merchant bankers) Regulations, 1992.
1. Registration of Merchant bankers
? Categories of Merchant Bankers
? Category ? I
?Any activity under issue management including preparation of prospectus,
determination of financial structure, issue, allotment, refund of subscription
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
? Category ? II
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
?Category - III
?To act as underwriter, adviser, and consultant to an issue
?Category ? IV
?To act only as advisor or consultant to an issue.
? Category II, III, IV were abolished through an amendment, dated December 9,
1997 to the SEBI Merchant Bankers Regulation, 1992. Since then only
category I exist.
? Requirement for granting the certificate
? Shall be a body corporate other than an NBFC
? Has the necessary infrastructure to effectively discharge his
activities
? Should have minimum two experienced employees to conduct the
business
? Should fulfill the capital adequacy requirement as specified
? His partner, director or principal officer should not be involved in
any litigation connected with the securities market which has an
adverse bearing on the business of the applicant
? His partner, director or principal officer has not been convicted
for any offence or been found guilty of any economic offence.
? Should have the professional qualification from an institution
recognised by the government in finance, law or business
management
? Should be a fit and proper person.
? Capital Adequacy Requirements (CAR)
? CAR shall not be less than net worth of the person making the application
for grant of registration.
? Net worth not less than Rs Five crores
? Procedure for registration
? Application must be submitted to SEBI in form A and SEBI will
issue certificate of registration in form B. Application fee Rs. 50,000
? On grant of certificate the applicant shall be liable to pay the fees in
accordance with schedule II
? Rs 20,00,000 for initial registration.
? Renewal of certificate
? Certificate of initial registration remains valid for 5 years.
? For renewal, apply in form A three months before the expiry of
certificate
? Renewal application is to be treated similar as a fresh application
? After the verification of application SEBI will grant certificate in
form B
? Applicant is liable to pay the fees of Rs. 9,00,000 for permanent
registration
2. Responsibilities of merchant banker
? Code of conduct ? As per schedule III no merchant banker, other than a bank
or a public financial institution and primary dealer as per RBI can engage in any
activity other than securities market.
? Maintenance of books of accounts ? copy of B/S, P&L account, auditors
report and a statement of financial position. Information to SEBI where these
documents are maintained and furnish such documents when required by SEBI.
? Submission of half yearly results ? furnish to SEBI half yearly unaudited
financial results with a view to monitor the capital adequacy of merchant banker.
? Appointment of lead merchant bankers ? Every issue must have one lead
merchant banker. Lead merchant banker must sign an agreement with the issuer
setting out their mutual rights, liabilities and obligations regarding the issue,
allotment and refund.
?Restriction on appointment of lead merchant banker -
Issue size of less than 50 crore - 2 merchant banker
????? Rs. 50-100 crore - 3???????
?????.Rs 100-200 crore - 4???????
?????..Rs. 200-400 crore - 5??????..
??? more than Rs500 crore - 5 or more ???. as agreed by SEBI
Responsibilities of lead merchant banker ? Lead manager should not
agree to manage an issue unless his roles and responsibilities particularly
relating to disclosures, allotment and refund are clearly defined and a statement
is submitted to SEBI at least a month prior to opening of the issue.
- In case of more than one lead merchant banker responsibilities must be clearly
demarcated.
-No lead merchant banker should agree to manage an issue if the body corporate
is an associate of the lead merchant banker.
Underwriting Obligations ? Every lead merchant banker must take at least
5 per cent of total underwriting commitment or Rs 25 lakh whichever is less. If
it is unable to do so then it must make an arrangement with another merchant
banker to the same issue and keep SEBI informed.
Appointment of Compliance officers ? Every merchant banker must
appoint a compliance officer who will monitor compliance to the Act and all
other relevant rules and regulations.
- He shall report to SEBI any non-compliance observed and ensure that
deficiencies observed by SEBI in draft prospectus do not recur.
3.Code of conduct for Merchant bankers
? Regulatory/Statutory compliance
? Confidentiality
? Accurate record keeping
? Conflict of interest
? Ethics in conducting business
? Public Disclosure and Reporting
? Gifts, entertainment and favours etc
? Inside information
? Trade secrets
? Compliance responsibility
4. Procedure for inspection
? SEBIs right to inspect ? SEBI may appoint one or more persons to
inspect books of accounts/records/documents
-Purpose of inspection is to ensure proper book keeping, compliance to
law, to investigate into complaints , to investigate suo moto (own interest)
in investors interest.
? Notice before inspection ? SEBI shall give reasonable notice to the
merchant banker before inspection . During the course of his business
merchant banker is bound to discharge his obligations.
? Submission of reports to SEBI - Inspection authority shall submit
the inspection report to SEBI
? Action on inspection report ? After consideration of the inspection
report SEBI or chairman may take action as deem it fit.
? Appointment of auditors ? SEBI may appoint auditors to look into
the books of accounts provided that the auditors have the same powers as
inspection authorities.
5. Procedure for action in case of default
Suspension of registration may be imposed:
? When the merchant banker violates the provisions of the Act
? Fails to furnish information or furnish wrong information
?Doesn?t submit periodical information as required by SEBI
? Doesn?t co-operate in enquiry conducted by SEBI
?Fails to resolve complaints by investors or fails to give satisfactory reply
to SEBI
? Indulges in price rigging, cornering and manipulation
? Fails to maintain Capital adequacy requirement
? Fails to pay the fees
? Violates conditions of registration
? Fails to carry out his obligation as specified in the regulation
Cancellation of registration ? Cancellation can be imposed if:
? Indulges in deliberate manipulation or price rigging
? Financial position deteriorates to the extent that SEBI feels that it is not in the
interest of the investors.
? Guilty of fraud or convicted in a criminal offence
Show-cause notice or order
? On receipt of the report from enquiry officer SEBI may issue show-cause notice
? Merchant banker shall reply to SEBI within 21 days of receipt of the notice
? SEBI passes order within 30 days
? Every order must be self containing giving reasons for the conclusions and penalty
imposed.
? SEBI shall send a copy of the order to the merchant banker
Effect of suspension and cancellation of registration of merchant
banker
? Merchant banker cease to carry-on any activity from the date of suspension during
the period of suspension
? Merchant banker cease to carry-on any activity from the date of cancellation
Publication of order of suspension
? Must be published by SEBI in at least two daily news papers
? Any aggrieved merchant banker may appeal to Securities Appellate Tribunal
having jurisdiction in the matter.
6. Amendments to SEBI (Merchant bankers) Regulations, 1992
Amendments dated December 9, 1997
? Applicant should be fit and proper person
? Seek separate registration for its underwriting or portfolio management activities
? Categories like I,II,III,IV are dispensed with
? A merchant banker other than a bank a public financial institution is prohibited
from carrying any activities not pertaining to the securities market
? Applicant should be a corporate body other than a non-banking financial
company
Amendment dated January 21, 1998
? Time provided up to June 30
th
1998 sever their activities not pertaining to the
securities market
? Merchant banker is exempted by Reserve Bank of India regarding compulsory
registration, maintenance of liquid assets, and creation of reserves if they fulfill
certain conditions.
?Amendments 2014 ? Regarding Registration fees and change of control.
SEBI Regulations for Intermediaries
Intermediaries are stock brokers, sub brokers, share transfer agents, merchant
bankers, underwriters, portfolio managers, investment advisers and other
intermediaries associated with the securities market specified by the SEBI.
Regulations
1. Registration of intermediaries
? Application to act as a intermediary should be made through concerned stock
exchange.
? Eligibility of the applicants will be examined and is forwarded along with the
fee and its recommendations to SEBI within 30days of receipt complete
application.
? Any change in in the material furnished should be updated by the
intermediary within 15days of the occurrence of change.
2. Obligations of intermediaries
? General obligations
? Redressal of investor grievances
? Appointment of compliance officer
? Investment advice
3. Code of Conduct
? Investor protection
? Disclose of information
? Conflict of interest
4. Inspection and disciplinary proceedings
5. Action in case of Default
? Procedure
? Effect of debarment
? Surrender of certificate of registration
? Securities Appellate Tribunal(SAT)
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
Preparation of Prospectus
Is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company
Content of Prospectus:
?General information about the company
?Capital structure of the company
?Terms of the present issue
?Dates of opening and closing of the issue
?Name, address, functions and remuneration of Directors
?Auditors report with name and address of the auditors
Intermediaries to the issue
? Merchant Bankers to the issue or book running lead managers (BRLM).
? Registrar to the issue
? Bankers to the issue
? Underwriters to the issue
? Brokers
? Advertising agencies
? Printers
Pre-issue obligations ? SEBI guidelines
?Due Diligence
? Payment of requisite fees
? Submission of documents
? MOU
? Inter-se allocation of responsibilities
? Due Diligence Certificate
? Certificate in case of further issue by Listed companies
? Undertaking
? List of promoters group
Pre-issue obligations ? SEBI Guidelines
? Appointment of Intermediaries
?Merchant bankers
?Co-managers
?Other intermediaries
? Underwriting
? Offer document made public
? Dispatch of issue material
? No complaints certificate
? Mandatory collection centers
? Authorised collection agents
? Advertisement for rights post-issue
? Appointment of compliance office
? Abridged prospectus
? Agreement with depositories
Post - issue Management
Steps involved:
? To verify and confirm that the issue is subscribed to the extent of
90% including underwriters obligation
? To supervise and co-ordinate allotment procedure by the registrar as
per Stock Exchange guidelines
? To ensure issue of refund order, allotment letters within the prescribed
time limit of 10 weeks after the closure of the subscription list.
? To report periodically to SEBI about progress in allotment and
refunds.
? To ensure listing of securities at the stock exchange
? To attend the investors grievances about the public issue.
Post-issue obligations - SEBI guidelines
? Post-issue monitoring reports
?To be submitted third day from the date of allocation in the book-built
portion or one day prior to the opening of the fixed price portion,
whichever is earlier. It is 3days from the date of closure of the issue in all
other cases.
? Final post-issue report within 78 days from the date of closure of the
subscription in case of book building and public issue, but 50 days in case
of rights issue.
? Redressal of investors grievances
? Co-ordination with intermediaries
?Stock invest
?Underwriters
?Bankers to an issue
? Finalising the basis of allotment
? Dispatch of Share certificate
Changing Landscape of Investment Banking
? Till 2007 Investment banking business was very profitable
? As a result of the sub-prime mortgage crisis in US investment banks collapsed.
? Several acquisitions took place in 2008.
? Impact was felt by the Indian Investment banks.
? Growth rate of Indian economy also slowed down.
? Indian Investment banks were forced to design new strategies for survival and growth.
? Several important trends have emerged:
? Faster growth opportunities for countries.
? To maintain sustained earnings growth, firms pursue a strategy by diversifying and
balancing revenue streams.
? Investment banks pursue balance sheet de-risk and diverse funding
? Regulatory compliance and high standards of governance have become an integral
part of the business.
? Investment banks were expanding the products and services geographically to become
financial supermarkets to the world.
? Investment banks rely on advanced technologies in the front office to enable high
speed, high-frequency trading, as well as fast and accurate analytics for client
services.
Securities and Exchange Board of India (SEBI)
? Established in 1988.
? Upgraded as a statutory board in 1992.
? Securities and Exchange Board of India Act was passed on 30
th
January 1992.
? Objectives of SEBI:
? To protect the interest of investors in securities
? To promote the development of the securities market
? To regulate the securities market
? Functions of SEBI:
? To register and regulate the workings of stock brokers
? To register and regulate the bankers to an issue
? To control and regulate securities market
? To exercise the powers under securities contracts Act
? To regulate the working of mutual funds
? To control fraudulent and unfair trade practices relating to securities market
? To control investment business
? To regulate issue of securities
? To regulate takeovers
? To regulate insider-trading in securities.
SEBI Regulations for Merchant bankers
? SEBI regulates capital markets in India.
? SEBI regulations on merchant banking:
1. Registration of merchant bankers
2. Responsibilities of merchant bankers
3. Code of conduct for merchant bankers
4. Procedure for inspection
5. Procedure for action in case of default
6. Amendments to SEBI (Merchant bankers) Regulations, 1992.
1. Registration of Merchant bankers
? Categories of Merchant Bankers
? Category ? I
?Any activity under issue management including preparation of prospectus,
determination of financial structure, issue, allotment, refund of subscription
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
? Category ? II
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
?Category - III
?To act as underwriter, adviser, and consultant to an issue
?Category ? IV
?To act only as advisor or consultant to an issue.
? Category II, III, IV were abolished through an amendment, dated December 9,
1997 to the SEBI Merchant Bankers Regulation, 1992. Since then only
category I exist.
? Requirement for granting the certificate
? Shall be a body corporate other than an NBFC
? Has the necessary infrastructure to effectively discharge his
activities
? Should have minimum two experienced employees to conduct the
business
? Should fulfill the capital adequacy requirement as specified
? His partner, director or principal officer should not be involved in
any litigation connected with the securities market which has an
adverse bearing on the business of the applicant
? His partner, director or principal officer has not been convicted
for any offence or been found guilty of any economic offence.
? Should have the professional qualification from an institution
recognised by the government in finance, law or business
management
? Should be a fit and proper person.
? Capital Adequacy Requirements (CAR)
? CAR shall not be less than net worth of the person making the application
for grant of registration.
? Net worth not less than Rs Five crores
? Procedure for registration
? Application must be submitted to SEBI in form A and SEBI will
issue certificate of registration in form B. Application fee Rs. 50,000
? On grant of certificate the applicant shall be liable to pay the fees in
accordance with schedule II
? Rs 20,00,000 for initial registration.
? Renewal of certificate
? Certificate of initial registration remains valid for 5 years.
? For renewal, apply in form A three months before the expiry of
certificate
? Renewal application is to be treated similar as a fresh application
? After the verification of application SEBI will grant certificate in
form B
? Applicant is liable to pay the fees of Rs. 9,00,000 for permanent
registration
2. Responsibilities of merchant banker
? Code of conduct ? As per schedule III no merchant banker, other than a bank
or a public financial institution and primary dealer as per RBI can engage in any
activity other than securities market.
? Maintenance of books of accounts ? copy of B/S, P&L account, auditors
report and a statement of financial position. Information to SEBI where these
documents are maintained and furnish such documents when required by SEBI.
? Submission of half yearly results ? furnish to SEBI half yearly unaudited
financial results with a view to monitor the capital adequacy of merchant banker.
? Appointment of lead merchant bankers ? Every issue must have one lead
merchant banker. Lead merchant banker must sign an agreement with the issuer
setting out their mutual rights, liabilities and obligations regarding the issue,
allotment and refund.
?Restriction on appointment of lead merchant banker -
Issue size of less than 50 crore - 2 merchant banker
????? Rs. 50-100 crore - 3???????
?????.Rs 100-200 crore - 4???????
?????..Rs. 200-400 crore - 5??????..
??? more than Rs500 crore - 5 or more ???. as agreed by SEBI
Responsibilities of lead merchant banker ? Lead manager should not
agree to manage an issue unless his roles and responsibilities particularly
relating to disclosures, allotment and refund are clearly defined and a statement
is submitted to SEBI at least a month prior to opening of the issue.
- In case of more than one lead merchant banker responsibilities must be clearly
demarcated.
-No lead merchant banker should agree to manage an issue if the body corporate
is an associate of the lead merchant banker.
Underwriting Obligations ? Every lead merchant banker must take at least
5 per cent of total underwriting commitment or Rs 25 lakh whichever is less. If
it is unable to do so then it must make an arrangement with another merchant
banker to the same issue and keep SEBI informed.
Appointment of Compliance officers ? Every merchant banker must
appoint a compliance officer who will monitor compliance to the Act and all
other relevant rules and regulations.
- He shall report to SEBI any non-compliance observed and ensure that
deficiencies observed by SEBI in draft prospectus do not recur.
3.Code of conduct for Merchant bankers
? Regulatory/Statutory compliance
? Confidentiality
? Accurate record keeping
? Conflict of interest
? Ethics in conducting business
? Public Disclosure and Reporting
? Gifts, entertainment and favours etc
? Inside information
? Trade secrets
? Compliance responsibility
4. Procedure for inspection
? SEBIs right to inspect ? SEBI may appoint one or more persons to
inspect books of accounts/records/documents
-Purpose of inspection is to ensure proper book keeping, compliance to
law, to investigate into complaints , to investigate suo moto (own interest)
in investors interest.
? Notice before inspection ? SEBI shall give reasonable notice to the
merchant banker before inspection . During the course of his business
merchant banker is bound to discharge his obligations.
? Submission of reports to SEBI - Inspection authority shall submit
the inspection report to SEBI
? Action on inspection report ? After consideration of the inspection
report SEBI or chairman may take action as deem it fit.
? Appointment of auditors ? SEBI may appoint auditors to look into
the books of accounts provided that the auditors have the same powers as
inspection authorities.
5. Procedure for action in case of default
Suspension of registration may be imposed:
? When the merchant banker violates the provisions of the Act
? Fails to furnish information or furnish wrong information
?Doesn?t submit periodical information as required by SEBI
? Doesn?t co-operate in enquiry conducted by SEBI
?Fails to resolve complaints by investors or fails to give satisfactory reply
to SEBI
? Indulges in price rigging, cornering and manipulation
? Fails to maintain Capital adequacy requirement
? Fails to pay the fees
? Violates conditions of registration
? Fails to carry out his obligation as specified in the regulation
Cancellation of registration ? Cancellation can be imposed if:
? Indulges in deliberate manipulation or price rigging
? Financial position deteriorates to the extent that SEBI feels that it is not in the
interest of the investors.
? Guilty of fraud or convicted in a criminal offence
Show-cause notice or order
? On receipt of the report from enquiry officer SEBI may issue show-cause notice
? Merchant banker shall reply to SEBI within 21 days of receipt of the notice
? SEBI passes order within 30 days
? Every order must be self containing giving reasons for the conclusions and penalty
imposed.
? SEBI shall send a copy of the order to the merchant banker
Effect of suspension and cancellation of registration of merchant
banker
? Merchant banker cease to carry-on any activity from the date of suspension during
the period of suspension
? Merchant banker cease to carry-on any activity from the date of cancellation
Publication of order of suspension
? Must be published by SEBI in at least two daily news papers
? Any aggrieved merchant banker may appeal to Securities Appellate Tribunal
having jurisdiction in the matter.
6. Amendments to SEBI (Merchant bankers) Regulations, 1992
Amendments dated December 9, 1997
? Applicant should be fit and proper person
? Seek separate registration for its underwriting or portfolio management activities
? Categories like I,II,III,IV are dispensed with
? A merchant banker other than a bank a public financial institution is prohibited
from carrying any activities not pertaining to the securities market
? Applicant should be a corporate body other than a non-banking financial
company
Amendment dated January 21, 1998
? Time provided up to June 30
th
1998 sever their activities not pertaining to the
securities market
? Merchant banker is exempted by Reserve Bank of India regarding compulsory
registration, maintenance of liquid assets, and creation of reserves if they fulfill
certain conditions.
?Amendments 2014 ? Regarding Registration fees and change of control.
SEBI Regulations for Intermediaries
Intermediaries are stock brokers, sub brokers, share transfer agents, merchant
bankers, underwriters, portfolio managers, investment advisers and other
intermediaries associated with the securities market specified by the SEBI.
Regulations
1. Registration of intermediaries
? Application to act as a intermediary should be made through concerned stock
exchange.
? Eligibility of the applicants will be examined and is forwarded along with the
fee and its recommendations to SEBI within 30days of receipt complete
application.
? Any change in in the material furnished should be updated by the
intermediary within 15days of the occurrence of change.
2. Obligations of intermediaries
? General obligations
? Redressal of investor grievances
? Appointment of compliance officer
? Investment advice
3. Code of Conduct
? Investor protection
? Disclose of information
? Conflict of interest
4. Inspection and disciplinary proceedings
5. Action in case of Default
? Procedure
? Effect of debarment
? Surrender of certificate of registration
? Securities Appellate Tribunal(SAT)
Underwriting
? SEBI Rules 1993 defines Underwriting as an agreement with or without conditions to
subscribe to the securities of a body corporate when the existing shareholders of such
body corporate or the public do not subscribe to the securities offered to them.
? Underwriting is similar to Insurance.
? Person who engages in the business of underwriting is called Underwriter .
? Charges for the service rendered is called underwriting commission.
Advantages:
? Relieves the company from the risk and uncertainty of selling the securities.
? Specialised knowledge of the capital market
? Builds up investors confidence in the issue of securities
? Company is assured of the availability of funds
? Helps in raising capital for new enterprises and the expansion of the existing projects.
? Facilitates the geographical dispersal of securities
Types of underwriting:
? Firm Underwriting
? Sub-underwriting
? Joint underwriting
? Syndicate underwriting
? Full underwriting
? Partial underwriting
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
Preparation of Prospectus
Is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company
Content of Prospectus:
?General information about the company
?Capital structure of the company
?Terms of the present issue
?Dates of opening and closing of the issue
?Name, address, functions and remuneration of Directors
?Auditors report with name and address of the auditors
Intermediaries to the issue
? Merchant Bankers to the issue or book running lead managers (BRLM).
? Registrar to the issue
? Bankers to the issue
? Underwriters to the issue
? Brokers
? Advertising agencies
? Printers
Pre-issue obligations ? SEBI guidelines
?Due Diligence
? Payment of requisite fees
? Submission of documents
? MOU
? Inter-se allocation of responsibilities
? Due Diligence Certificate
? Certificate in case of further issue by Listed companies
? Undertaking
? List of promoters group
Pre-issue obligations ? SEBI Guidelines
? Appointment of Intermediaries
?Merchant bankers
?Co-managers
?Other intermediaries
? Underwriting
? Offer document made public
? Dispatch of issue material
? No complaints certificate
? Mandatory collection centers
? Authorised collection agents
? Advertisement for rights post-issue
? Appointment of compliance office
? Abridged prospectus
? Agreement with depositories
Post - issue Management
Steps involved:
? To verify and confirm that the issue is subscribed to the extent of
90% including underwriters obligation
? To supervise and co-ordinate allotment procedure by the registrar as
per Stock Exchange guidelines
? To ensure issue of refund order, allotment letters within the prescribed
time limit of 10 weeks after the closure of the subscription list.
? To report periodically to SEBI about progress in allotment and
refunds.
? To ensure listing of securities at the stock exchange
? To attend the investors grievances about the public issue.
Post-issue obligations - SEBI guidelines
? Post-issue monitoring reports
?To be submitted third day from the date of allocation in the book-built
portion or one day prior to the opening of the fixed price portion,
whichever is earlier. It is 3days from the date of closure of the issue in all
other cases.
? Final post-issue report within 78 days from the date of closure of the
subscription in case of book building and public issue, but 50 days in case
of rights issue.
? Redressal of investors grievances
? Co-ordination with intermediaries
?Stock invest
?Underwriters
?Bankers to an issue
? Finalising the basis of allotment
? Dispatch of Share certificate
Changing Landscape of Investment Banking
? Till 2007 Investment banking business was very profitable
? As a result of the sub-prime mortgage crisis in US investment banks collapsed.
? Several acquisitions took place in 2008.
? Impact was felt by the Indian Investment banks.
? Growth rate of Indian economy also slowed down.
? Indian Investment banks were forced to design new strategies for survival and growth.
? Several important trends have emerged:
? Faster growth opportunities for countries.
? To maintain sustained earnings growth, firms pursue a strategy by diversifying and
balancing revenue streams.
? Investment banks pursue balance sheet de-risk and diverse funding
? Regulatory compliance and high standards of governance have become an integral
part of the business.
? Investment banks were expanding the products and services geographically to become
financial supermarkets to the world.
? Investment banks rely on advanced technologies in the front office to enable high
speed, high-frequency trading, as well as fast and accurate analytics for client
services.
Securities and Exchange Board of India (SEBI)
? Established in 1988.
? Upgraded as a statutory board in 1992.
? Securities and Exchange Board of India Act was passed on 30
th
January 1992.
? Objectives of SEBI:
? To protect the interest of investors in securities
? To promote the development of the securities market
? To regulate the securities market
? Functions of SEBI:
? To register and regulate the workings of stock brokers
? To register and regulate the bankers to an issue
? To control and regulate securities market
? To exercise the powers under securities contracts Act
? To regulate the working of mutual funds
? To control fraudulent and unfair trade practices relating to securities market
? To control investment business
? To regulate issue of securities
? To regulate takeovers
? To regulate insider-trading in securities.
SEBI Regulations for Merchant bankers
? SEBI regulates capital markets in India.
? SEBI regulations on merchant banking:
1. Registration of merchant bankers
2. Responsibilities of merchant bankers
3. Code of conduct for merchant bankers
4. Procedure for inspection
5. Procedure for action in case of default
6. Amendments to SEBI (Merchant bankers) Regulations, 1992.
1. Registration of Merchant bankers
? Categories of Merchant Bankers
? Category ? I
?Any activity under issue management including preparation of prospectus,
determination of financial structure, issue, allotment, refund of subscription
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
? Category ? II
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
?Category - III
?To act as underwriter, adviser, and consultant to an issue
?Category ? IV
?To act only as advisor or consultant to an issue.
? Category II, III, IV were abolished through an amendment, dated December 9,
1997 to the SEBI Merchant Bankers Regulation, 1992. Since then only
category I exist.
? Requirement for granting the certificate
? Shall be a body corporate other than an NBFC
? Has the necessary infrastructure to effectively discharge his
activities
? Should have minimum two experienced employees to conduct the
business
? Should fulfill the capital adequacy requirement as specified
? His partner, director or principal officer should not be involved in
any litigation connected with the securities market which has an
adverse bearing on the business of the applicant
? His partner, director or principal officer has not been convicted
for any offence or been found guilty of any economic offence.
? Should have the professional qualification from an institution
recognised by the government in finance, law or business
management
? Should be a fit and proper person.
? Capital Adequacy Requirements (CAR)
? CAR shall not be less than net worth of the person making the application
for grant of registration.
? Net worth not less than Rs Five crores
? Procedure for registration
? Application must be submitted to SEBI in form A and SEBI will
issue certificate of registration in form B. Application fee Rs. 50,000
? On grant of certificate the applicant shall be liable to pay the fees in
accordance with schedule II
? Rs 20,00,000 for initial registration.
? Renewal of certificate
? Certificate of initial registration remains valid for 5 years.
? For renewal, apply in form A three months before the expiry of
certificate
? Renewal application is to be treated similar as a fresh application
? After the verification of application SEBI will grant certificate in
form B
? Applicant is liable to pay the fees of Rs. 9,00,000 for permanent
registration
2. Responsibilities of merchant banker
? Code of conduct ? As per schedule III no merchant banker, other than a bank
or a public financial institution and primary dealer as per RBI can engage in any
activity other than securities market.
? Maintenance of books of accounts ? copy of B/S, P&L account, auditors
report and a statement of financial position. Information to SEBI where these
documents are maintained and furnish such documents when required by SEBI.
? Submission of half yearly results ? furnish to SEBI half yearly unaudited
financial results with a view to monitor the capital adequacy of merchant banker.
? Appointment of lead merchant bankers ? Every issue must have one lead
merchant banker. Lead merchant banker must sign an agreement with the issuer
setting out their mutual rights, liabilities and obligations regarding the issue,
allotment and refund.
?Restriction on appointment of lead merchant banker -
Issue size of less than 50 crore - 2 merchant banker
????? Rs. 50-100 crore - 3???????
?????.Rs 100-200 crore - 4???????
?????..Rs. 200-400 crore - 5??????..
??? more than Rs500 crore - 5 or more ???. as agreed by SEBI
Responsibilities of lead merchant banker ? Lead manager should not
agree to manage an issue unless his roles and responsibilities particularly
relating to disclosures, allotment and refund are clearly defined and a statement
is submitted to SEBI at least a month prior to opening of the issue.
- In case of more than one lead merchant banker responsibilities must be clearly
demarcated.
-No lead merchant banker should agree to manage an issue if the body corporate
is an associate of the lead merchant banker.
Underwriting Obligations ? Every lead merchant banker must take at least
5 per cent of total underwriting commitment or Rs 25 lakh whichever is less. If
it is unable to do so then it must make an arrangement with another merchant
banker to the same issue and keep SEBI informed.
Appointment of Compliance officers ? Every merchant banker must
appoint a compliance officer who will monitor compliance to the Act and all
other relevant rules and regulations.
- He shall report to SEBI any non-compliance observed and ensure that
deficiencies observed by SEBI in draft prospectus do not recur.
3.Code of conduct for Merchant bankers
? Regulatory/Statutory compliance
? Confidentiality
? Accurate record keeping
? Conflict of interest
? Ethics in conducting business
? Public Disclosure and Reporting
? Gifts, entertainment and favours etc
? Inside information
? Trade secrets
? Compliance responsibility
4. Procedure for inspection
? SEBIs right to inspect ? SEBI may appoint one or more persons to
inspect books of accounts/records/documents
-Purpose of inspection is to ensure proper book keeping, compliance to
law, to investigate into complaints , to investigate suo moto (own interest)
in investors interest.
? Notice before inspection ? SEBI shall give reasonable notice to the
merchant banker before inspection . During the course of his business
merchant banker is bound to discharge his obligations.
? Submission of reports to SEBI - Inspection authority shall submit
the inspection report to SEBI
? Action on inspection report ? After consideration of the inspection
report SEBI or chairman may take action as deem it fit.
? Appointment of auditors ? SEBI may appoint auditors to look into
the books of accounts provided that the auditors have the same powers as
inspection authorities.
5. Procedure for action in case of default
Suspension of registration may be imposed:
? When the merchant banker violates the provisions of the Act
? Fails to furnish information or furnish wrong information
?Doesn?t submit periodical information as required by SEBI
? Doesn?t co-operate in enquiry conducted by SEBI
?Fails to resolve complaints by investors or fails to give satisfactory reply
to SEBI
? Indulges in price rigging, cornering and manipulation
? Fails to maintain Capital adequacy requirement
? Fails to pay the fees
? Violates conditions of registration
? Fails to carry out his obligation as specified in the regulation
Cancellation of registration ? Cancellation can be imposed if:
? Indulges in deliberate manipulation or price rigging
? Financial position deteriorates to the extent that SEBI feels that it is not in the
interest of the investors.
? Guilty of fraud or convicted in a criminal offence
Show-cause notice or order
? On receipt of the report from enquiry officer SEBI may issue show-cause notice
? Merchant banker shall reply to SEBI within 21 days of receipt of the notice
? SEBI passes order within 30 days
? Every order must be self containing giving reasons for the conclusions and penalty
imposed.
? SEBI shall send a copy of the order to the merchant banker
Effect of suspension and cancellation of registration of merchant
banker
? Merchant banker cease to carry-on any activity from the date of suspension during
the period of suspension
? Merchant banker cease to carry-on any activity from the date of cancellation
Publication of order of suspension
? Must be published by SEBI in at least two daily news papers
? Any aggrieved merchant banker may appeal to Securities Appellate Tribunal
having jurisdiction in the matter.
6. Amendments to SEBI (Merchant bankers) Regulations, 1992
Amendments dated December 9, 1997
? Applicant should be fit and proper person
? Seek separate registration for its underwriting or portfolio management activities
? Categories like I,II,III,IV are dispensed with
? A merchant banker other than a bank a public financial institution is prohibited
from carrying any activities not pertaining to the securities market
? Applicant should be a corporate body other than a non-banking financial
company
Amendment dated January 21, 1998
? Time provided up to June 30
th
1998 sever their activities not pertaining to the
securities market
? Merchant banker is exempted by Reserve Bank of India regarding compulsory
registration, maintenance of liquid assets, and creation of reserves if they fulfill
certain conditions.
?Amendments 2014 ? Regarding Registration fees and change of control.
SEBI Regulations for Intermediaries
Intermediaries are stock brokers, sub brokers, share transfer agents, merchant
bankers, underwriters, portfolio managers, investment advisers and other
intermediaries associated with the securities market specified by the SEBI.
Regulations
1. Registration of intermediaries
? Application to act as a intermediary should be made through concerned stock
exchange.
? Eligibility of the applicants will be examined and is forwarded along with the
fee and its recommendations to SEBI within 30days of receipt complete
application.
? Any change in in the material furnished should be updated by the
intermediary within 15days of the occurrence of change.
2. Obligations of intermediaries
? General obligations
? Redressal of investor grievances
? Appointment of compliance officer
? Investment advice
3. Code of Conduct
? Investor protection
? Disclose of information
? Conflict of interest
4. Inspection and disciplinary proceedings
5. Action in case of Default
? Procedure
? Effect of debarment
? Surrender of certificate of registration
? Securities Appellate Tribunal(SAT)
Underwriting
? SEBI Rules 1993 defines Underwriting as an agreement with or without conditions to
subscribe to the securities of a body corporate when the existing shareholders of such
body corporate or the public do not subscribe to the securities offered to them.
? Underwriting is similar to Insurance.
? Person who engages in the business of underwriting is called Underwriter .
? Charges for the service rendered is called underwriting commission.
Advantages:
? Relieves the company from the risk and uncertainty of selling the securities.
? Specialised knowledge of the capital market
? Builds up investors confidence in the issue of securities
? Company is assured of the availability of funds
? Helps in raising capital for new enterprises and the expansion of the existing projects.
? Facilitates the geographical dispersal of securities
Types of underwriting:
? Firm Underwriting
? Sub-underwriting
? Joint underwriting
? Syndicate underwriting
? Full underwriting
? Partial underwriting
Devolvement
?If an issue is unsubscribed, underwriter is required to subscribe for the
remaining shares.
? Underwriter will not hold the shares for too long. He will sell at a lower price.
? SEBI publishes guidelines relating to the extent of devolvement.
In case of fixed price issue:
? The issuer company will communicate the devolvement by giving a
preliminary notice within7 days of closure of issue followed by a final notice
with the auditors certificate within 18 days.
? Underwriter shall subscribe subscription within7 days of the final notice .
Incase of book build issue:
? The syndicate member shall underwrite all shares allocated to bidders who
have bid through them, receive underwriting commission on such bids and get
devolved shares ,if any.
? If the underwriting is different from bids allocated to bidders syndicate
members obligation is restricted to the amount underwritten by him.
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
Preparation of Prospectus
Is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company
Content of Prospectus:
?General information about the company
?Capital structure of the company
?Terms of the present issue
?Dates of opening and closing of the issue
?Name, address, functions and remuneration of Directors
?Auditors report with name and address of the auditors
Intermediaries to the issue
? Merchant Bankers to the issue or book running lead managers (BRLM).
? Registrar to the issue
? Bankers to the issue
? Underwriters to the issue
? Brokers
? Advertising agencies
? Printers
Pre-issue obligations ? SEBI guidelines
?Due Diligence
? Payment of requisite fees
? Submission of documents
? MOU
? Inter-se allocation of responsibilities
? Due Diligence Certificate
? Certificate in case of further issue by Listed companies
? Undertaking
? List of promoters group
Pre-issue obligations ? SEBI Guidelines
? Appointment of Intermediaries
?Merchant bankers
?Co-managers
?Other intermediaries
? Underwriting
? Offer document made public
? Dispatch of issue material
? No complaints certificate
? Mandatory collection centers
? Authorised collection agents
? Advertisement for rights post-issue
? Appointment of compliance office
? Abridged prospectus
? Agreement with depositories
Post - issue Management
Steps involved:
? To verify and confirm that the issue is subscribed to the extent of
90% including underwriters obligation
? To supervise and co-ordinate allotment procedure by the registrar as
per Stock Exchange guidelines
? To ensure issue of refund order, allotment letters within the prescribed
time limit of 10 weeks after the closure of the subscription list.
? To report periodically to SEBI about progress in allotment and
refunds.
? To ensure listing of securities at the stock exchange
? To attend the investors grievances about the public issue.
Post-issue obligations - SEBI guidelines
? Post-issue monitoring reports
?To be submitted third day from the date of allocation in the book-built
portion or one day prior to the opening of the fixed price portion,
whichever is earlier. It is 3days from the date of closure of the issue in all
other cases.
? Final post-issue report within 78 days from the date of closure of the
subscription in case of book building and public issue, but 50 days in case
of rights issue.
? Redressal of investors grievances
? Co-ordination with intermediaries
?Stock invest
?Underwriters
?Bankers to an issue
? Finalising the basis of allotment
? Dispatch of Share certificate
Changing Landscape of Investment Banking
? Till 2007 Investment banking business was very profitable
? As a result of the sub-prime mortgage crisis in US investment banks collapsed.
? Several acquisitions took place in 2008.
? Impact was felt by the Indian Investment banks.
? Growth rate of Indian economy also slowed down.
? Indian Investment banks were forced to design new strategies for survival and growth.
? Several important trends have emerged:
? Faster growth opportunities for countries.
? To maintain sustained earnings growth, firms pursue a strategy by diversifying and
balancing revenue streams.
? Investment banks pursue balance sheet de-risk and diverse funding
? Regulatory compliance and high standards of governance have become an integral
part of the business.
? Investment banks were expanding the products and services geographically to become
financial supermarkets to the world.
? Investment banks rely on advanced technologies in the front office to enable high
speed, high-frequency trading, as well as fast and accurate analytics for client
services.
Securities and Exchange Board of India (SEBI)
? Established in 1988.
? Upgraded as a statutory board in 1992.
? Securities and Exchange Board of India Act was passed on 30
th
January 1992.
? Objectives of SEBI:
? To protect the interest of investors in securities
? To promote the development of the securities market
? To regulate the securities market
? Functions of SEBI:
? To register and regulate the workings of stock brokers
? To register and regulate the bankers to an issue
? To control and regulate securities market
? To exercise the powers under securities contracts Act
? To regulate the working of mutual funds
? To control fraudulent and unfair trade practices relating to securities market
? To control investment business
? To regulate issue of securities
? To regulate takeovers
? To regulate insider-trading in securities.
SEBI Regulations for Merchant bankers
? SEBI regulates capital markets in India.
? SEBI regulations on merchant banking:
1. Registration of merchant bankers
2. Responsibilities of merchant bankers
3. Code of conduct for merchant bankers
4. Procedure for inspection
5. Procedure for action in case of default
6. Amendments to SEBI (Merchant bankers) Regulations, 1992.
1. Registration of Merchant bankers
? Categories of Merchant Bankers
? Category ? I
?Any activity under issue management including preparation of prospectus,
determination of financial structure, issue, allotment, refund of subscription
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
? Category ? II
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
?Category - III
?To act as underwriter, adviser, and consultant to an issue
?Category ? IV
?To act only as advisor or consultant to an issue.
? Category II, III, IV were abolished through an amendment, dated December 9,
1997 to the SEBI Merchant Bankers Regulation, 1992. Since then only
category I exist.
? Requirement for granting the certificate
? Shall be a body corporate other than an NBFC
? Has the necessary infrastructure to effectively discharge his
activities
? Should have minimum two experienced employees to conduct the
business
? Should fulfill the capital adequacy requirement as specified
? His partner, director or principal officer should not be involved in
any litigation connected with the securities market which has an
adverse bearing on the business of the applicant
? His partner, director or principal officer has not been convicted
for any offence or been found guilty of any economic offence.
? Should have the professional qualification from an institution
recognised by the government in finance, law or business
management
? Should be a fit and proper person.
? Capital Adequacy Requirements (CAR)
? CAR shall not be less than net worth of the person making the application
for grant of registration.
? Net worth not less than Rs Five crores
? Procedure for registration
? Application must be submitted to SEBI in form A and SEBI will
issue certificate of registration in form B. Application fee Rs. 50,000
? On grant of certificate the applicant shall be liable to pay the fees in
accordance with schedule II
? Rs 20,00,000 for initial registration.
? Renewal of certificate
? Certificate of initial registration remains valid for 5 years.
? For renewal, apply in form A three months before the expiry of
certificate
? Renewal application is to be treated similar as a fresh application
? After the verification of application SEBI will grant certificate in
form B
? Applicant is liable to pay the fees of Rs. 9,00,000 for permanent
registration
2. Responsibilities of merchant banker
? Code of conduct ? As per schedule III no merchant banker, other than a bank
or a public financial institution and primary dealer as per RBI can engage in any
activity other than securities market.
? Maintenance of books of accounts ? copy of B/S, P&L account, auditors
report and a statement of financial position. Information to SEBI where these
documents are maintained and furnish such documents when required by SEBI.
? Submission of half yearly results ? furnish to SEBI half yearly unaudited
financial results with a view to monitor the capital adequacy of merchant banker.
? Appointment of lead merchant bankers ? Every issue must have one lead
merchant banker. Lead merchant banker must sign an agreement with the issuer
setting out their mutual rights, liabilities and obligations regarding the issue,
allotment and refund.
?Restriction on appointment of lead merchant banker -
Issue size of less than 50 crore - 2 merchant banker
????? Rs. 50-100 crore - 3???????
?????.Rs 100-200 crore - 4???????
?????..Rs. 200-400 crore - 5??????..
??? more than Rs500 crore - 5 or more ???. as agreed by SEBI
Responsibilities of lead merchant banker ? Lead manager should not
agree to manage an issue unless his roles and responsibilities particularly
relating to disclosures, allotment and refund are clearly defined and a statement
is submitted to SEBI at least a month prior to opening of the issue.
- In case of more than one lead merchant banker responsibilities must be clearly
demarcated.
-No lead merchant banker should agree to manage an issue if the body corporate
is an associate of the lead merchant banker.
Underwriting Obligations ? Every lead merchant banker must take at least
5 per cent of total underwriting commitment or Rs 25 lakh whichever is less. If
it is unable to do so then it must make an arrangement with another merchant
banker to the same issue and keep SEBI informed.
Appointment of Compliance officers ? Every merchant banker must
appoint a compliance officer who will monitor compliance to the Act and all
other relevant rules and regulations.
- He shall report to SEBI any non-compliance observed and ensure that
deficiencies observed by SEBI in draft prospectus do not recur.
3.Code of conduct for Merchant bankers
? Regulatory/Statutory compliance
? Confidentiality
? Accurate record keeping
? Conflict of interest
? Ethics in conducting business
? Public Disclosure and Reporting
? Gifts, entertainment and favours etc
? Inside information
? Trade secrets
? Compliance responsibility
4. Procedure for inspection
? SEBIs right to inspect ? SEBI may appoint one or more persons to
inspect books of accounts/records/documents
-Purpose of inspection is to ensure proper book keeping, compliance to
law, to investigate into complaints , to investigate suo moto (own interest)
in investors interest.
? Notice before inspection ? SEBI shall give reasonable notice to the
merchant banker before inspection . During the course of his business
merchant banker is bound to discharge his obligations.
? Submission of reports to SEBI - Inspection authority shall submit
the inspection report to SEBI
? Action on inspection report ? After consideration of the inspection
report SEBI or chairman may take action as deem it fit.
? Appointment of auditors ? SEBI may appoint auditors to look into
the books of accounts provided that the auditors have the same powers as
inspection authorities.
5. Procedure for action in case of default
Suspension of registration may be imposed:
? When the merchant banker violates the provisions of the Act
? Fails to furnish information or furnish wrong information
?Doesn?t submit periodical information as required by SEBI
? Doesn?t co-operate in enquiry conducted by SEBI
?Fails to resolve complaints by investors or fails to give satisfactory reply
to SEBI
? Indulges in price rigging, cornering and manipulation
? Fails to maintain Capital adequacy requirement
? Fails to pay the fees
? Violates conditions of registration
? Fails to carry out his obligation as specified in the regulation
Cancellation of registration ? Cancellation can be imposed if:
? Indulges in deliberate manipulation or price rigging
? Financial position deteriorates to the extent that SEBI feels that it is not in the
interest of the investors.
? Guilty of fraud or convicted in a criminal offence
Show-cause notice or order
? On receipt of the report from enquiry officer SEBI may issue show-cause notice
? Merchant banker shall reply to SEBI within 21 days of receipt of the notice
? SEBI passes order within 30 days
? Every order must be self containing giving reasons for the conclusions and penalty
imposed.
? SEBI shall send a copy of the order to the merchant banker
Effect of suspension and cancellation of registration of merchant
banker
? Merchant banker cease to carry-on any activity from the date of suspension during
the period of suspension
? Merchant banker cease to carry-on any activity from the date of cancellation
Publication of order of suspension
? Must be published by SEBI in at least two daily news papers
? Any aggrieved merchant banker may appeal to Securities Appellate Tribunal
having jurisdiction in the matter.
6. Amendments to SEBI (Merchant bankers) Regulations, 1992
Amendments dated December 9, 1997
? Applicant should be fit and proper person
? Seek separate registration for its underwriting or portfolio management activities
? Categories like I,II,III,IV are dispensed with
? A merchant banker other than a bank a public financial institution is prohibited
from carrying any activities not pertaining to the securities market
? Applicant should be a corporate body other than a non-banking financial
company
Amendment dated January 21, 1998
? Time provided up to June 30
th
1998 sever their activities not pertaining to the
securities market
? Merchant banker is exempted by Reserve Bank of India regarding compulsory
registration, maintenance of liquid assets, and creation of reserves if they fulfill
certain conditions.
?Amendments 2014 ? Regarding Registration fees and change of control.
SEBI Regulations for Intermediaries
Intermediaries are stock brokers, sub brokers, share transfer agents, merchant
bankers, underwriters, portfolio managers, investment advisers and other
intermediaries associated with the securities market specified by the SEBI.
Regulations
1. Registration of intermediaries
? Application to act as a intermediary should be made through concerned stock
exchange.
? Eligibility of the applicants will be examined and is forwarded along with the
fee and its recommendations to SEBI within 30days of receipt complete
application.
? Any change in in the material furnished should be updated by the
intermediary within 15days of the occurrence of change.
2. Obligations of intermediaries
? General obligations
? Redressal of investor grievances
? Appointment of compliance officer
? Investment advice
3. Code of Conduct
? Investor protection
? Disclose of information
? Conflict of interest
4. Inspection and disciplinary proceedings
5. Action in case of Default
? Procedure
? Effect of debarment
? Surrender of certificate of registration
? Securities Appellate Tribunal(SAT)
Underwriting
? SEBI Rules 1993 defines Underwriting as an agreement with or without conditions to
subscribe to the securities of a body corporate when the existing shareholders of such
body corporate or the public do not subscribe to the securities offered to them.
? Underwriting is similar to Insurance.
? Person who engages in the business of underwriting is called Underwriter .
? Charges for the service rendered is called underwriting commission.
Advantages:
? Relieves the company from the risk and uncertainty of selling the securities.
? Specialised knowledge of the capital market
? Builds up investors confidence in the issue of securities
? Company is assured of the availability of funds
? Helps in raising capital for new enterprises and the expansion of the existing projects.
? Facilitates the geographical dispersal of securities
Types of underwriting:
? Firm Underwriting
? Sub-underwriting
? Joint underwriting
? Syndicate underwriting
? Full underwriting
? Partial underwriting
Devolvement
?If an issue is unsubscribed, underwriter is required to subscribe for the
remaining shares.
? Underwriter will not hold the shares for too long. He will sell at a lower price.
? SEBI publishes guidelines relating to the extent of devolvement.
In case of fixed price issue:
? The issuer company will communicate the devolvement by giving a
preliminary notice within7 days of closure of issue followed by a final notice
with the auditors certificate within 18 days.
? Underwriter shall subscribe subscription within7 days of the final notice .
Incase of book build issue:
? The syndicate member shall underwrite all shares allocated to bidders who
have bid through them, receive underwriting commission on such bids and get
devolved shares ,if any.
? If the underwriting is different from bids allocated to bidders syndicate
members obligation is restricted to the amount underwritten by him.
Business Model
? Intention is to collect more in premium and investment income than is paid
out in losses, and to offer competitive price which the consumers will accept.
Earned Premium ???
Add: Investment income ???.
Less: Loss incurred ..???
Less: Underwriting Expenses ???.
-----------
Profit ???
======
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
Preparation of Prospectus
Is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company
Content of Prospectus:
?General information about the company
?Capital structure of the company
?Terms of the present issue
?Dates of opening and closing of the issue
?Name, address, functions and remuneration of Directors
?Auditors report with name and address of the auditors
Intermediaries to the issue
? Merchant Bankers to the issue or book running lead managers (BRLM).
? Registrar to the issue
? Bankers to the issue
? Underwriters to the issue
? Brokers
? Advertising agencies
? Printers
Pre-issue obligations ? SEBI guidelines
?Due Diligence
? Payment of requisite fees
? Submission of documents
? MOU
? Inter-se allocation of responsibilities
? Due Diligence Certificate
? Certificate in case of further issue by Listed companies
? Undertaking
? List of promoters group
Pre-issue obligations ? SEBI Guidelines
? Appointment of Intermediaries
?Merchant bankers
?Co-managers
?Other intermediaries
? Underwriting
? Offer document made public
? Dispatch of issue material
? No complaints certificate
? Mandatory collection centers
? Authorised collection agents
? Advertisement for rights post-issue
? Appointment of compliance office
? Abridged prospectus
? Agreement with depositories
Post - issue Management
Steps involved:
? To verify and confirm that the issue is subscribed to the extent of
90% including underwriters obligation
? To supervise and co-ordinate allotment procedure by the registrar as
per Stock Exchange guidelines
? To ensure issue of refund order, allotment letters within the prescribed
time limit of 10 weeks after the closure of the subscription list.
? To report periodically to SEBI about progress in allotment and
refunds.
? To ensure listing of securities at the stock exchange
? To attend the investors grievances about the public issue.
Post-issue obligations - SEBI guidelines
? Post-issue monitoring reports
?To be submitted third day from the date of allocation in the book-built
portion or one day prior to the opening of the fixed price portion,
whichever is earlier. It is 3days from the date of closure of the issue in all
other cases.
? Final post-issue report within 78 days from the date of closure of the
subscription in case of book building and public issue, but 50 days in case
of rights issue.
? Redressal of investors grievances
? Co-ordination with intermediaries
?Stock invest
?Underwriters
?Bankers to an issue
? Finalising the basis of allotment
? Dispatch of Share certificate
Changing Landscape of Investment Banking
? Till 2007 Investment banking business was very profitable
? As a result of the sub-prime mortgage crisis in US investment banks collapsed.
? Several acquisitions took place in 2008.
? Impact was felt by the Indian Investment banks.
? Growth rate of Indian economy also slowed down.
? Indian Investment banks were forced to design new strategies for survival and growth.
? Several important trends have emerged:
? Faster growth opportunities for countries.
? To maintain sustained earnings growth, firms pursue a strategy by diversifying and
balancing revenue streams.
? Investment banks pursue balance sheet de-risk and diverse funding
? Regulatory compliance and high standards of governance have become an integral
part of the business.
? Investment banks were expanding the products and services geographically to become
financial supermarkets to the world.
? Investment banks rely on advanced technologies in the front office to enable high
speed, high-frequency trading, as well as fast and accurate analytics for client
services.
Securities and Exchange Board of India (SEBI)
? Established in 1988.
? Upgraded as a statutory board in 1992.
? Securities and Exchange Board of India Act was passed on 30
th
January 1992.
? Objectives of SEBI:
? To protect the interest of investors in securities
? To promote the development of the securities market
? To regulate the securities market
? Functions of SEBI:
? To register and regulate the workings of stock brokers
? To register and regulate the bankers to an issue
? To control and regulate securities market
? To exercise the powers under securities contracts Act
? To regulate the working of mutual funds
? To control fraudulent and unfair trade practices relating to securities market
? To control investment business
? To regulate issue of securities
? To regulate takeovers
? To regulate insider-trading in securities.
SEBI Regulations for Merchant bankers
? SEBI regulates capital markets in India.
? SEBI regulations on merchant banking:
1. Registration of merchant bankers
2. Responsibilities of merchant bankers
3. Code of conduct for merchant bankers
4. Procedure for inspection
5. Procedure for action in case of default
6. Amendments to SEBI (Merchant bankers) Regulations, 1992.
1. Registration of Merchant bankers
? Categories of Merchant Bankers
? Category ? I
?Any activity under issue management including preparation of prospectus,
determination of financial structure, issue, allotment, refund of subscription
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
? Category ? II
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
?Category - III
?To act as underwriter, adviser, and consultant to an issue
?Category ? IV
?To act only as advisor or consultant to an issue.
? Category II, III, IV were abolished through an amendment, dated December 9,
1997 to the SEBI Merchant Bankers Regulation, 1992. Since then only
category I exist.
? Requirement for granting the certificate
? Shall be a body corporate other than an NBFC
? Has the necessary infrastructure to effectively discharge his
activities
? Should have minimum two experienced employees to conduct the
business
? Should fulfill the capital adequacy requirement as specified
? His partner, director or principal officer should not be involved in
any litigation connected with the securities market which has an
adverse bearing on the business of the applicant
? His partner, director or principal officer has not been convicted
for any offence or been found guilty of any economic offence.
? Should have the professional qualification from an institution
recognised by the government in finance, law or business
management
? Should be a fit and proper person.
? Capital Adequacy Requirements (CAR)
? CAR shall not be less than net worth of the person making the application
for grant of registration.
? Net worth not less than Rs Five crores
? Procedure for registration
? Application must be submitted to SEBI in form A and SEBI will
issue certificate of registration in form B. Application fee Rs. 50,000
? On grant of certificate the applicant shall be liable to pay the fees in
accordance with schedule II
? Rs 20,00,000 for initial registration.
? Renewal of certificate
? Certificate of initial registration remains valid for 5 years.
? For renewal, apply in form A three months before the expiry of
certificate
? Renewal application is to be treated similar as a fresh application
? After the verification of application SEBI will grant certificate in
form B
? Applicant is liable to pay the fees of Rs. 9,00,000 for permanent
registration
2. Responsibilities of merchant banker
? Code of conduct ? As per schedule III no merchant banker, other than a bank
or a public financial institution and primary dealer as per RBI can engage in any
activity other than securities market.
? Maintenance of books of accounts ? copy of B/S, P&L account, auditors
report and a statement of financial position. Information to SEBI where these
documents are maintained and furnish such documents when required by SEBI.
? Submission of half yearly results ? furnish to SEBI half yearly unaudited
financial results with a view to monitor the capital adequacy of merchant banker.
? Appointment of lead merchant bankers ? Every issue must have one lead
merchant banker. Lead merchant banker must sign an agreement with the issuer
setting out their mutual rights, liabilities and obligations regarding the issue,
allotment and refund.
?Restriction on appointment of lead merchant banker -
Issue size of less than 50 crore - 2 merchant banker
????? Rs. 50-100 crore - 3???????
?????.Rs 100-200 crore - 4???????
?????..Rs. 200-400 crore - 5??????..
??? more than Rs500 crore - 5 or more ???. as agreed by SEBI
Responsibilities of lead merchant banker ? Lead manager should not
agree to manage an issue unless his roles and responsibilities particularly
relating to disclosures, allotment and refund are clearly defined and a statement
is submitted to SEBI at least a month prior to opening of the issue.
- In case of more than one lead merchant banker responsibilities must be clearly
demarcated.
-No lead merchant banker should agree to manage an issue if the body corporate
is an associate of the lead merchant banker.
Underwriting Obligations ? Every lead merchant banker must take at least
5 per cent of total underwriting commitment or Rs 25 lakh whichever is less. If
it is unable to do so then it must make an arrangement with another merchant
banker to the same issue and keep SEBI informed.
Appointment of Compliance officers ? Every merchant banker must
appoint a compliance officer who will monitor compliance to the Act and all
other relevant rules and regulations.
- He shall report to SEBI any non-compliance observed and ensure that
deficiencies observed by SEBI in draft prospectus do not recur.
3.Code of conduct for Merchant bankers
? Regulatory/Statutory compliance
? Confidentiality
? Accurate record keeping
? Conflict of interest
? Ethics in conducting business
? Public Disclosure and Reporting
? Gifts, entertainment and favours etc
? Inside information
? Trade secrets
? Compliance responsibility
4. Procedure for inspection
? SEBIs right to inspect ? SEBI may appoint one or more persons to
inspect books of accounts/records/documents
-Purpose of inspection is to ensure proper book keeping, compliance to
law, to investigate into complaints , to investigate suo moto (own interest)
in investors interest.
? Notice before inspection ? SEBI shall give reasonable notice to the
merchant banker before inspection . During the course of his business
merchant banker is bound to discharge his obligations.
? Submission of reports to SEBI - Inspection authority shall submit
the inspection report to SEBI
? Action on inspection report ? After consideration of the inspection
report SEBI or chairman may take action as deem it fit.
? Appointment of auditors ? SEBI may appoint auditors to look into
the books of accounts provided that the auditors have the same powers as
inspection authorities.
5. Procedure for action in case of default
Suspension of registration may be imposed:
? When the merchant banker violates the provisions of the Act
? Fails to furnish information or furnish wrong information
?Doesn?t submit periodical information as required by SEBI
? Doesn?t co-operate in enquiry conducted by SEBI
?Fails to resolve complaints by investors or fails to give satisfactory reply
to SEBI
? Indulges in price rigging, cornering and manipulation
? Fails to maintain Capital adequacy requirement
? Fails to pay the fees
? Violates conditions of registration
? Fails to carry out his obligation as specified in the regulation
Cancellation of registration ? Cancellation can be imposed if:
? Indulges in deliberate manipulation or price rigging
? Financial position deteriorates to the extent that SEBI feels that it is not in the
interest of the investors.
? Guilty of fraud or convicted in a criminal offence
Show-cause notice or order
? On receipt of the report from enquiry officer SEBI may issue show-cause notice
? Merchant banker shall reply to SEBI within 21 days of receipt of the notice
? SEBI passes order within 30 days
? Every order must be self containing giving reasons for the conclusions and penalty
imposed.
? SEBI shall send a copy of the order to the merchant banker
Effect of suspension and cancellation of registration of merchant
banker
? Merchant banker cease to carry-on any activity from the date of suspension during
the period of suspension
? Merchant banker cease to carry-on any activity from the date of cancellation
Publication of order of suspension
? Must be published by SEBI in at least two daily news papers
? Any aggrieved merchant banker may appeal to Securities Appellate Tribunal
having jurisdiction in the matter.
6. Amendments to SEBI (Merchant bankers) Regulations, 1992
Amendments dated December 9, 1997
? Applicant should be fit and proper person
? Seek separate registration for its underwriting or portfolio management activities
? Categories like I,II,III,IV are dispensed with
? A merchant banker other than a bank a public financial institution is prohibited
from carrying any activities not pertaining to the securities market
? Applicant should be a corporate body other than a non-banking financial
company
Amendment dated January 21, 1998
? Time provided up to June 30
th
1998 sever their activities not pertaining to the
securities market
? Merchant banker is exempted by Reserve Bank of India regarding compulsory
registration, maintenance of liquid assets, and creation of reserves if they fulfill
certain conditions.
?Amendments 2014 ? Regarding Registration fees and change of control.
SEBI Regulations for Intermediaries
Intermediaries are stock brokers, sub brokers, share transfer agents, merchant
bankers, underwriters, portfolio managers, investment advisers and other
intermediaries associated with the securities market specified by the SEBI.
Regulations
1. Registration of intermediaries
? Application to act as a intermediary should be made through concerned stock
exchange.
? Eligibility of the applicants will be examined and is forwarded along with the
fee and its recommendations to SEBI within 30days of receipt complete
application.
? Any change in in the material furnished should be updated by the
intermediary within 15days of the occurrence of change.
2. Obligations of intermediaries
? General obligations
? Redressal of investor grievances
? Appointment of compliance officer
? Investment advice
3. Code of Conduct
? Investor protection
? Disclose of information
? Conflict of interest
4. Inspection and disciplinary proceedings
5. Action in case of Default
? Procedure
? Effect of debarment
? Surrender of certificate of registration
? Securities Appellate Tribunal(SAT)
Underwriting
? SEBI Rules 1993 defines Underwriting as an agreement with or without conditions to
subscribe to the securities of a body corporate when the existing shareholders of such
body corporate or the public do not subscribe to the securities offered to them.
? Underwriting is similar to Insurance.
? Person who engages in the business of underwriting is called Underwriter .
? Charges for the service rendered is called underwriting commission.
Advantages:
? Relieves the company from the risk and uncertainty of selling the securities.
? Specialised knowledge of the capital market
? Builds up investors confidence in the issue of securities
? Company is assured of the availability of funds
? Helps in raising capital for new enterprises and the expansion of the existing projects.
? Facilitates the geographical dispersal of securities
Types of underwriting:
? Firm Underwriting
? Sub-underwriting
? Joint underwriting
? Syndicate underwriting
? Full underwriting
? Partial underwriting
Devolvement
?If an issue is unsubscribed, underwriter is required to subscribe for the
remaining shares.
? Underwriter will not hold the shares for too long. He will sell at a lower price.
? SEBI publishes guidelines relating to the extent of devolvement.
In case of fixed price issue:
? The issuer company will communicate the devolvement by giving a
preliminary notice within7 days of closure of issue followed by a final notice
with the auditors certificate within 18 days.
? Underwriter shall subscribe subscription within7 days of the final notice .
Incase of book build issue:
? The syndicate member shall underwrite all shares allocated to bidders who
have bid through them, receive underwriting commission on such bids and get
devolved shares ,if any.
? If the underwriting is different from bids allocated to bidders syndicate
members obligation is restricted to the amount underwritten by him.
Business Model
? Intention is to collect more in premium and investment income than is paid
out in losses, and to offer competitive price which the consumers will accept.
Earned Premium ???
Add: Investment income ???.
Less: Loss incurred ..???
Less: Underwriting Expenses ???.
-----------
Profit ???
======
Allotment
In case of book built issue:
1. In case an issuer company makes an issue of 100% of the net offer to
public through 100% book building process:
? Not less than 35% of the net offer to the public shall be available for allocation to
retail individual investors.
? Not less than 15% for non-institutional investors
? Not more than 50% for qualified institutional buyers
2. In case of compulsory book built issue at least 50% of the net offer to
public being allotted to the Qualified institutional buyers
In case of Fixed price issue
1. A minimum 50% of the net offer of securities to the public shall initially
be made available for allotment to retail individual investors
2. The balance net offer of securities to the public shall be made available
for allotment to :
? Individual investors other than retail individual investors
? Other investors including corporate bodies/institutions irrespective of the number of
securities applied for.
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
Preparation of Prospectus
Is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company
Content of Prospectus:
?General information about the company
?Capital structure of the company
?Terms of the present issue
?Dates of opening and closing of the issue
?Name, address, functions and remuneration of Directors
?Auditors report with name and address of the auditors
Intermediaries to the issue
? Merchant Bankers to the issue or book running lead managers (BRLM).
? Registrar to the issue
? Bankers to the issue
? Underwriters to the issue
? Brokers
? Advertising agencies
? Printers
Pre-issue obligations ? SEBI guidelines
?Due Diligence
? Payment of requisite fees
? Submission of documents
? MOU
? Inter-se allocation of responsibilities
? Due Diligence Certificate
? Certificate in case of further issue by Listed companies
? Undertaking
? List of promoters group
Pre-issue obligations ? SEBI Guidelines
? Appointment of Intermediaries
?Merchant bankers
?Co-managers
?Other intermediaries
? Underwriting
? Offer document made public
? Dispatch of issue material
? No complaints certificate
? Mandatory collection centers
? Authorised collection agents
? Advertisement for rights post-issue
? Appointment of compliance office
? Abridged prospectus
? Agreement with depositories
Post - issue Management
Steps involved:
? To verify and confirm that the issue is subscribed to the extent of
90% including underwriters obligation
? To supervise and co-ordinate allotment procedure by the registrar as
per Stock Exchange guidelines
? To ensure issue of refund order, allotment letters within the prescribed
time limit of 10 weeks after the closure of the subscription list.
? To report periodically to SEBI about progress in allotment and
refunds.
? To ensure listing of securities at the stock exchange
? To attend the investors grievances about the public issue.
Post-issue obligations - SEBI guidelines
? Post-issue monitoring reports
?To be submitted third day from the date of allocation in the book-built
portion or one day prior to the opening of the fixed price portion,
whichever is earlier. It is 3days from the date of closure of the issue in all
other cases.
? Final post-issue report within 78 days from the date of closure of the
subscription in case of book building and public issue, but 50 days in case
of rights issue.
? Redressal of investors grievances
? Co-ordination with intermediaries
?Stock invest
?Underwriters
?Bankers to an issue
? Finalising the basis of allotment
? Dispatch of Share certificate
Changing Landscape of Investment Banking
? Till 2007 Investment banking business was very profitable
? As a result of the sub-prime mortgage crisis in US investment banks collapsed.
? Several acquisitions took place in 2008.
? Impact was felt by the Indian Investment banks.
? Growth rate of Indian economy also slowed down.
? Indian Investment banks were forced to design new strategies for survival and growth.
? Several important trends have emerged:
? Faster growth opportunities for countries.
? To maintain sustained earnings growth, firms pursue a strategy by diversifying and
balancing revenue streams.
? Investment banks pursue balance sheet de-risk and diverse funding
? Regulatory compliance and high standards of governance have become an integral
part of the business.
? Investment banks were expanding the products and services geographically to become
financial supermarkets to the world.
? Investment banks rely on advanced technologies in the front office to enable high
speed, high-frequency trading, as well as fast and accurate analytics for client
services.
Securities and Exchange Board of India (SEBI)
? Established in 1988.
? Upgraded as a statutory board in 1992.
? Securities and Exchange Board of India Act was passed on 30
th
January 1992.
? Objectives of SEBI:
? To protect the interest of investors in securities
? To promote the development of the securities market
? To regulate the securities market
? Functions of SEBI:
? To register and regulate the workings of stock brokers
? To register and regulate the bankers to an issue
? To control and regulate securities market
? To exercise the powers under securities contracts Act
? To regulate the working of mutual funds
? To control fraudulent and unfair trade practices relating to securities market
? To control investment business
? To regulate issue of securities
? To regulate takeovers
? To regulate insider-trading in securities.
SEBI Regulations for Merchant bankers
? SEBI regulates capital markets in India.
? SEBI regulations on merchant banking:
1. Registration of merchant bankers
2. Responsibilities of merchant bankers
3. Code of conduct for merchant bankers
4. Procedure for inspection
5. Procedure for action in case of default
6. Amendments to SEBI (Merchant bankers) Regulations, 1992.
1. Registration of Merchant bankers
? Categories of Merchant Bankers
? Category ? I
?Any activity under issue management including preparation of prospectus,
determination of financial structure, issue, allotment, refund of subscription
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
? Category ? II
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
?Category - III
?To act as underwriter, adviser, and consultant to an issue
?Category ? IV
?To act only as advisor or consultant to an issue.
? Category II, III, IV were abolished through an amendment, dated December 9,
1997 to the SEBI Merchant Bankers Regulation, 1992. Since then only
category I exist.
? Requirement for granting the certificate
? Shall be a body corporate other than an NBFC
? Has the necessary infrastructure to effectively discharge his
activities
? Should have minimum two experienced employees to conduct the
business
? Should fulfill the capital adequacy requirement as specified
? His partner, director or principal officer should not be involved in
any litigation connected with the securities market which has an
adverse bearing on the business of the applicant
? His partner, director or principal officer has not been convicted
for any offence or been found guilty of any economic offence.
? Should have the professional qualification from an institution
recognised by the government in finance, law or business
management
? Should be a fit and proper person.
? Capital Adequacy Requirements (CAR)
? CAR shall not be less than net worth of the person making the application
for grant of registration.
? Net worth not less than Rs Five crores
? Procedure for registration
? Application must be submitted to SEBI in form A and SEBI will
issue certificate of registration in form B. Application fee Rs. 50,000
? On grant of certificate the applicant shall be liable to pay the fees in
accordance with schedule II
? Rs 20,00,000 for initial registration.
? Renewal of certificate
? Certificate of initial registration remains valid for 5 years.
? For renewal, apply in form A three months before the expiry of
certificate
? Renewal application is to be treated similar as a fresh application
? After the verification of application SEBI will grant certificate in
form B
? Applicant is liable to pay the fees of Rs. 9,00,000 for permanent
registration
2. Responsibilities of merchant banker
? Code of conduct ? As per schedule III no merchant banker, other than a bank
or a public financial institution and primary dealer as per RBI can engage in any
activity other than securities market.
? Maintenance of books of accounts ? copy of B/S, P&L account, auditors
report and a statement of financial position. Information to SEBI where these
documents are maintained and furnish such documents when required by SEBI.
? Submission of half yearly results ? furnish to SEBI half yearly unaudited
financial results with a view to monitor the capital adequacy of merchant banker.
? Appointment of lead merchant bankers ? Every issue must have one lead
merchant banker. Lead merchant banker must sign an agreement with the issuer
setting out their mutual rights, liabilities and obligations regarding the issue,
allotment and refund.
?Restriction on appointment of lead merchant banker -
Issue size of less than 50 crore - 2 merchant banker
????? Rs. 50-100 crore - 3???????
?????.Rs 100-200 crore - 4???????
?????..Rs. 200-400 crore - 5??????..
??? more than Rs500 crore - 5 or more ???. as agreed by SEBI
Responsibilities of lead merchant banker ? Lead manager should not
agree to manage an issue unless his roles and responsibilities particularly
relating to disclosures, allotment and refund are clearly defined and a statement
is submitted to SEBI at least a month prior to opening of the issue.
- In case of more than one lead merchant banker responsibilities must be clearly
demarcated.
-No lead merchant banker should agree to manage an issue if the body corporate
is an associate of the lead merchant banker.
Underwriting Obligations ? Every lead merchant banker must take at least
5 per cent of total underwriting commitment or Rs 25 lakh whichever is less. If
it is unable to do so then it must make an arrangement with another merchant
banker to the same issue and keep SEBI informed.
Appointment of Compliance officers ? Every merchant banker must
appoint a compliance officer who will monitor compliance to the Act and all
other relevant rules and regulations.
- He shall report to SEBI any non-compliance observed and ensure that
deficiencies observed by SEBI in draft prospectus do not recur.
3.Code of conduct for Merchant bankers
? Regulatory/Statutory compliance
? Confidentiality
? Accurate record keeping
? Conflict of interest
? Ethics in conducting business
? Public Disclosure and Reporting
? Gifts, entertainment and favours etc
? Inside information
? Trade secrets
? Compliance responsibility
4. Procedure for inspection
? SEBIs right to inspect ? SEBI may appoint one or more persons to
inspect books of accounts/records/documents
-Purpose of inspection is to ensure proper book keeping, compliance to
law, to investigate into complaints , to investigate suo moto (own interest)
in investors interest.
? Notice before inspection ? SEBI shall give reasonable notice to the
merchant banker before inspection . During the course of his business
merchant banker is bound to discharge his obligations.
? Submission of reports to SEBI - Inspection authority shall submit
the inspection report to SEBI
? Action on inspection report ? After consideration of the inspection
report SEBI or chairman may take action as deem it fit.
? Appointment of auditors ? SEBI may appoint auditors to look into
the books of accounts provided that the auditors have the same powers as
inspection authorities.
5. Procedure for action in case of default
Suspension of registration may be imposed:
? When the merchant banker violates the provisions of the Act
? Fails to furnish information or furnish wrong information
?Doesn?t submit periodical information as required by SEBI
? Doesn?t co-operate in enquiry conducted by SEBI
?Fails to resolve complaints by investors or fails to give satisfactory reply
to SEBI
? Indulges in price rigging, cornering and manipulation
? Fails to maintain Capital adequacy requirement
? Fails to pay the fees
? Violates conditions of registration
? Fails to carry out his obligation as specified in the regulation
Cancellation of registration ? Cancellation can be imposed if:
? Indulges in deliberate manipulation or price rigging
? Financial position deteriorates to the extent that SEBI feels that it is not in the
interest of the investors.
? Guilty of fraud or convicted in a criminal offence
Show-cause notice or order
? On receipt of the report from enquiry officer SEBI may issue show-cause notice
? Merchant banker shall reply to SEBI within 21 days of receipt of the notice
? SEBI passes order within 30 days
? Every order must be self containing giving reasons for the conclusions and penalty
imposed.
? SEBI shall send a copy of the order to the merchant banker
Effect of suspension and cancellation of registration of merchant
banker
? Merchant banker cease to carry-on any activity from the date of suspension during
the period of suspension
? Merchant banker cease to carry-on any activity from the date of cancellation
Publication of order of suspension
? Must be published by SEBI in at least two daily news papers
? Any aggrieved merchant banker may appeal to Securities Appellate Tribunal
having jurisdiction in the matter.
6. Amendments to SEBI (Merchant bankers) Regulations, 1992
Amendments dated December 9, 1997
? Applicant should be fit and proper person
? Seek separate registration for its underwriting or portfolio management activities
? Categories like I,II,III,IV are dispensed with
? A merchant banker other than a bank a public financial institution is prohibited
from carrying any activities not pertaining to the securities market
? Applicant should be a corporate body other than a non-banking financial
company
Amendment dated January 21, 1998
? Time provided up to June 30
th
1998 sever their activities not pertaining to the
securities market
? Merchant banker is exempted by Reserve Bank of India regarding compulsory
registration, maintenance of liquid assets, and creation of reserves if they fulfill
certain conditions.
?Amendments 2014 ? Regarding Registration fees and change of control.
SEBI Regulations for Intermediaries
Intermediaries are stock brokers, sub brokers, share transfer agents, merchant
bankers, underwriters, portfolio managers, investment advisers and other
intermediaries associated with the securities market specified by the SEBI.
Regulations
1. Registration of intermediaries
? Application to act as a intermediary should be made through concerned stock
exchange.
? Eligibility of the applicants will be examined and is forwarded along with the
fee and its recommendations to SEBI within 30days of receipt complete
application.
? Any change in in the material furnished should be updated by the
intermediary within 15days of the occurrence of change.
2. Obligations of intermediaries
? General obligations
? Redressal of investor grievances
? Appointment of compliance officer
? Investment advice
3. Code of Conduct
? Investor protection
? Disclose of information
? Conflict of interest
4. Inspection and disciplinary proceedings
5. Action in case of Default
? Procedure
? Effect of debarment
? Surrender of certificate of registration
? Securities Appellate Tribunal(SAT)
Underwriting
? SEBI Rules 1993 defines Underwriting as an agreement with or without conditions to
subscribe to the securities of a body corporate when the existing shareholders of such
body corporate or the public do not subscribe to the securities offered to them.
? Underwriting is similar to Insurance.
? Person who engages in the business of underwriting is called Underwriter .
? Charges for the service rendered is called underwriting commission.
Advantages:
? Relieves the company from the risk and uncertainty of selling the securities.
? Specialised knowledge of the capital market
? Builds up investors confidence in the issue of securities
? Company is assured of the availability of funds
? Helps in raising capital for new enterprises and the expansion of the existing projects.
? Facilitates the geographical dispersal of securities
Types of underwriting:
? Firm Underwriting
? Sub-underwriting
? Joint underwriting
? Syndicate underwriting
? Full underwriting
? Partial underwriting
Devolvement
?If an issue is unsubscribed, underwriter is required to subscribe for the
remaining shares.
? Underwriter will not hold the shares for too long. He will sell at a lower price.
? SEBI publishes guidelines relating to the extent of devolvement.
In case of fixed price issue:
? The issuer company will communicate the devolvement by giving a
preliminary notice within7 days of closure of issue followed by a final notice
with the auditors certificate within 18 days.
? Underwriter shall subscribe subscription within7 days of the final notice .
Incase of book build issue:
? The syndicate member shall underwrite all shares allocated to bidders who
have bid through them, receive underwriting commission on such bids and get
devolved shares ,if any.
? If the underwriting is different from bids allocated to bidders syndicate
members obligation is restricted to the amount underwritten by him.
Business Model
? Intention is to collect more in premium and investment income than is paid
out in losses, and to offer competitive price which the consumers will accept.
Earned Premium ???
Add: Investment income ???.
Less: Loss incurred ..???
Less: Underwriting Expenses ???.
-----------
Profit ???
======
Allotment
In case of book built issue:
1. In case an issuer company makes an issue of 100% of the net offer to
public through 100% book building process:
? Not less than 35% of the net offer to the public shall be available for allocation to
retail individual investors.
? Not less than 15% for non-institutional investors
? Not more than 50% for qualified institutional buyers
2. In case of compulsory book built issue at least 50% of the net offer to
public being allotted to the Qualified institutional buyers
In case of Fixed price issue
1. A minimum 50% of the net offer of securities to the public shall initially
be made available for allotment to retail individual investors
2. The balance net offer of securities to the public shall be made available
for allotment to :
? Individual investors other than retail individual investors
? Other investors including corporate bodies/institutions irrespective of the number of
securities applied for.
Price fixation under underwriting
?Issuer in consultation with the Merchant Banker will decide the price. SEBI
does not play any role.
?Fixed price offers:
? An issuer company is allowed to freely price the issue.
? Book built offers:
?Book building is a process by which demand for the securities proposed to be issued by a
body corporate is elicited and built up and the price for the securities is assessed on the basis
of the bids obtained for the quantum of securities offered for subscription by the issuer.
Features Fixed price process Book building process
Pricing Price at which the securities are
offered is known in advance to the
investors
Not known in advance to
the investors . Only an
indicative price range is
known.
Demand Demand is known only after the
closure of the issue
Known every day as the
book is built
Payment Made at the time of subscription
wherein refund is given after
allocation
Payment only after
allocation
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
Preparation of Prospectus
Is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company
Content of Prospectus:
?General information about the company
?Capital structure of the company
?Terms of the present issue
?Dates of opening and closing of the issue
?Name, address, functions and remuneration of Directors
?Auditors report with name and address of the auditors
Intermediaries to the issue
? Merchant Bankers to the issue or book running lead managers (BRLM).
? Registrar to the issue
? Bankers to the issue
? Underwriters to the issue
? Brokers
? Advertising agencies
? Printers
Pre-issue obligations ? SEBI guidelines
?Due Diligence
? Payment of requisite fees
? Submission of documents
? MOU
? Inter-se allocation of responsibilities
? Due Diligence Certificate
? Certificate in case of further issue by Listed companies
? Undertaking
? List of promoters group
Pre-issue obligations ? SEBI Guidelines
? Appointment of Intermediaries
?Merchant bankers
?Co-managers
?Other intermediaries
? Underwriting
? Offer document made public
? Dispatch of issue material
? No complaints certificate
? Mandatory collection centers
? Authorised collection agents
? Advertisement for rights post-issue
? Appointment of compliance office
? Abridged prospectus
? Agreement with depositories
Post - issue Management
Steps involved:
? To verify and confirm that the issue is subscribed to the extent of
90% including underwriters obligation
? To supervise and co-ordinate allotment procedure by the registrar as
per Stock Exchange guidelines
? To ensure issue of refund order, allotment letters within the prescribed
time limit of 10 weeks after the closure of the subscription list.
? To report periodically to SEBI about progress in allotment and
refunds.
? To ensure listing of securities at the stock exchange
? To attend the investors grievances about the public issue.
Post-issue obligations - SEBI guidelines
? Post-issue monitoring reports
?To be submitted third day from the date of allocation in the book-built
portion or one day prior to the opening of the fixed price portion,
whichever is earlier. It is 3days from the date of closure of the issue in all
other cases.
? Final post-issue report within 78 days from the date of closure of the
subscription in case of book building and public issue, but 50 days in case
of rights issue.
? Redressal of investors grievances
? Co-ordination with intermediaries
?Stock invest
?Underwriters
?Bankers to an issue
? Finalising the basis of allotment
? Dispatch of Share certificate
Changing Landscape of Investment Banking
? Till 2007 Investment banking business was very profitable
? As a result of the sub-prime mortgage crisis in US investment banks collapsed.
? Several acquisitions took place in 2008.
? Impact was felt by the Indian Investment banks.
? Growth rate of Indian economy also slowed down.
? Indian Investment banks were forced to design new strategies for survival and growth.
? Several important trends have emerged:
? Faster growth opportunities for countries.
? To maintain sustained earnings growth, firms pursue a strategy by diversifying and
balancing revenue streams.
? Investment banks pursue balance sheet de-risk and diverse funding
? Regulatory compliance and high standards of governance have become an integral
part of the business.
? Investment banks were expanding the products and services geographically to become
financial supermarkets to the world.
? Investment banks rely on advanced technologies in the front office to enable high
speed, high-frequency trading, as well as fast and accurate analytics for client
services.
Securities and Exchange Board of India (SEBI)
? Established in 1988.
? Upgraded as a statutory board in 1992.
? Securities and Exchange Board of India Act was passed on 30
th
January 1992.
? Objectives of SEBI:
? To protect the interest of investors in securities
? To promote the development of the securities market
? To regulate the securities market
? Functions of SEBI:
? To register and regulate the workings of stock brokers
? To register and regulate the bankers to an issue
? To control and regulate securities market
? To exercise the powers under securities contracts Act
? To regulate the working of mutual funds
? To control fraudulent and unfair trade practices relating to securities market
? To control investment business
? To regulate issue of securities
? To regulate takeovers
? To regulate insider-trading in securities.
SEBI Regulations for Merchant bankers
? SEBI regulates capital markets in India.
? SEBI regulations on merchant banking:
1. Registration of merchant bankers
2. Responsibilities of merchant bankers
3. Code of conduct for merchant bankers
4. Procedure for inspection
5. Procedure for action in case of default
6. Amendments to SEBI (Merchant bankers) Regulations, 1992.
1. Registration of Merchant bankers
? Categories of Merchant Bankers
? Category ? I
?Any activity under issue management including preparation of prospectus,
determination of financial structure, issue, allotment, refund of subscription
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
? Category ? II
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
?Category - III
?To act as underwriter, adviser, and consultant to an issue
?Category ? IV
?To act only as advisor or consultant to an issue.
? Category II, III, IV were abolished through an amendment, dated December 9,
1997 to the SEBI Merchant Bankers Regulation, 1992. Since then only
category I exist.
? Requirement for granting the certificate
? Shall be a body corporate other than an NBFC
? Has the necessary infrastructure to effectively discharge his
activities
? Should have minimum two experienced employees to conduct the
business
? Should fulfill the capital adequacy requirement as specified
? His partner, director or principal officer should not be involved in
any litigation connected with the securities market which has an
adverse bearing on the business of the applicant
? His partner, director or principal officer has not been convicted
for any offence or been found guilty of any economic offence.
? Should have the professional qualification from an institution
recognised by the government in finance, law or business
management
? Should be a fit and proper person.
? Capital Adequacy Requirements (CAR)
? CAR shall not be less than net worth of the person making the application
for grant of registration.
? Net worth not less than Rs Five crores
? Procedure for registration
? Application must be submitted to SEBI in form A and SEBI will
issue certificate of registration in form B. Application fee Rs. 50,000
? On grant of certificate the applicant shall be liable to pay the fees in
accordance with schedule II
? Rs 20,00,000 for initial registration.
? Renewal of certificate
? Certificate of initial registration remains valid for 5 years.
? For renewal, apply in form A three months before the expiry of
certificate
? Renewal application is to be treated similar as a fresh application
? After the verification of application SEBI will grant certificate in
form B
? Applicant is liable to pay the fees of Rs. 9,00,000 for permanent
registration
2. Responsibilities of merchant banker
? Code of conduct ? As per schedule III no merchant banker, other than a bank
or a public financial institution and primary dealer as per RBI can engage in any
activity other than securities market.
? Maintenance of books of accounts ? copy of B/S, P&L account, auditors
report and a statement of financial position. Information to SEBI where these
documents are maintained and furnish such documents when required by SEBI.
? Submission of half yearly results ? furnish to SEBI half yearly unaudited
financial results with a view to monitor the capital adequacy of merchant banker.
? Appointment of lead merchant bankers ? Every issue must have one lead
merchant banker. Lead merchant banker must sign an agreement with the issuer
setting out their mutual rights, liabilities and obligations regarding the issue,
allotment and refund.
?Restriction on appointment of lead merchant banker -
Issue size of less than 50 crore - 2 merchant banker
????? Rs. 50-100 crore - 3???????
?????.Rs 100-200 crore - 4???????
?????..Rs. 200-400 crore - 5??????..
??? more than Rs500 crore - 5 or more ???. as agreed by SEBI
Responsibilities of lead merchant banker ? Lead manager should not
agree to manage an issue unless his roles and responsibilities particularly
relating to disclosures, allotment and refund are clearly defined and a statement
is submitted to SEBI at least a month prior to opening of the issue.
- In case of more than one lead merchant banker responsibilities must be clearly
demarcated.
-No lead merchant banker should agree to manage an issue if the body corporate
is an associate of the lead merchant banker.
Underwriting Obligations ? Every lead merchant banker must take at least
5 per cent of total underwriting commitment or Rs 25 lakh whichever is less. If
it is unable to do so then it must make an arrangement with another merchant
banker to the same issue and keep SEBI informed.
Appointment of Compliance officers ? Every merchant banker must
appoint a compliance officer who will monitor compliance to the Act and all
other relevant rules and regulations.
- He shall report to SEBI any non-compliance observed and ensure that
deficiencies observed by SEBI in draft prospectus do not recur.
3.Code of conduct for Merchant bankers
? Regulatory/Statutory compliance
? Confidentiality
? Accurate record keeping
? Conflict of interest
? Ethics in conducting business
? Public Disclosure and Reporting
? Gifts, entertainment and favours etc
? Inside information
? Trade secrets
? Compliance responsibility
4. Procedure for inspection
? SEBIs right to inspect ? SEBI may appoint one or more persons to
inspect books of accounts/records/documents
-Purpose of inspection is to ensure proper book keeping, compliance to
law, to investigate into complaints , to investigate suo moto (own interest)
in investors interest.
? Notice before inspection ? SEBI shall give reasonable notice to the
merchant banker before inspection . During the course of his business
merchant banker is bound to discharge his obligations.
? Submission of reports to SEBI - Inspection authority shall submit
the inspection report to SEBI
? Action on inspection report ? After consideration of the inspection
report SEBI or chairman may take action as deem it fit.
? Appointment of auditors ? SEBI may appoint auditors to look into
the books of accounts provided that the auditors have the same powers as
inspection authorities.
5. Procedure for action in case of default
Suspension of registration may be imposed:
? When the merchant banker violates the provisions of the Act
? Fails to furnish information or furnish wrong information
?Doesn?t submit periodical information as required by SEBI
? Doesn?t co-operate in enquiry conducted by SEBI
?Fails to resolve complaints by investors or fails to give satisfactory reply
to SEBI
? Indulges in price rigging, cornering and manipulation
? Fails to maintain Capital adequacy requirement
? Fails to pay the fees
? Violates conditions of registration
? Fails to carry out his obligation as specified in the regulation
Cancellation of registration ? Cancellation can be imposed if:
? Indulges in deliberate manipulation or price rigging
? Financial position deteriorates to the extent that SEBI feels that it is not in the
interest of the investors.
? Guilty of fraud or convicted in a criminal offence
Show-cause notice or order
? On receipt of the report from enquiry officer SEBI may issue show-cause notice
? Merchant banker shall reply to SEBI within 21 days of receipt of the notice
? SEBI passes order within 30 days
? Every order must be self containing giving reasons for the conclusions and penalty
imposed.
? SEBI shall send a copy of the order to the merchant banker
Effect of suspension and cancellation of registration of merchant
banker
? Merchant banker cease to carry-on any activity from the date of suspension during
the period of suspension
? Merchant banker cease to carry-on any activity from the date of cancellation
Publication of order of suspension
? Must be published by SEBI in at least two daily news papers
? Any aggrieved merchant banker may appeal to Securities Appellate Tribunal
having jurisdiction in the matter.
6. Amendments to SEBI (Merchant bankers) Regulations, 1992
Amendments dated December 9, 1997
? Applicant should be fit and proper person
? Seek separate registration for its underwriting or portfolio management activities
? Categories like I,II,III,IV are dispensed with
? A merchant banker other than a bank a public financial institution is prohibited
from carrying any activities not pertaining to the securities market
? Applicant should be a corporate body other than a non-banking financial
company
Amendment dated January 21, 1998
? Time provided up to June 30
th
1998 sever their activities not pertaining to the
securities market
? Merchant banker is exempted by Reserve Bank of India regarding compulsory
registration, maintenance of liquid assets, and creation of reserves if they fulfill
certain conditions.
?Amendments 2014 ? Regarding Registration fees and change of control.
SEBI Regulations for Intermediaries
Intermediaries are stock brokers, sub brokers, share transfer agents, merchant
bankers, underwriters, portfolio managers, investment advisers and other
intermediaries associated with the securities market specified by the SEBI.
Regulations
1. Registration of intermediaries
? Application to act as a intermediary should be made through concerned stock
exchange.
? Eligibility of the applicants will be examined and is forwarded along with the
fee and its recommendations to SEBI within 30days of receipt complete
application.
? Any change in in the material furnished should be updated by the
intermediary within 15days of the occurrence of change.
2. Obligations of intermediaries
? General obligations
? Redressal of investor grievances
? Appointment of compliance officer
? Investment advice
3. Code of Conduct
? Investor protection
? Disclose of information
? Conflict of interest
4. Inspection and disciplinary proceedings
5. Action in case of Default
? Procedure
? Effect of debarment
? Surrender of certificate of registration
? Securities Appellate Tribunal(SAT)
Underwriting
? SEBI Rules 1993 defines Underwriting as an agreement with or without conditions to
subscribe to the securities of a body corporate when the existing shareholders of such
body corporate or the public do not subscribe to the securities offered to them.
? Underwriting is similar to Insurance.
? Person who engages in the business of underwriting is called Underwriter .
? Charges for the service rendered is called underwriting commission.
Advantages:
? Relieves the company from the risk and uncertainty of selling the securities.
? Specialised knowledge of the capital market
? Builds up investors confidence in the issue of securities
? Company is assured of the availability of funds
? Helps in raising capital for new enterprises and the expansion of the existing projects.
? Facilitates the geographical dispersal of securities
Types of underwriting:
? Firm Underwriting
? Sub-underwriting
? Joint underwriting
? Syndicate underwriting
? Full underwriting
? Partial underwriting
Devolvement
?If an issue is unsubscribed, underwriter is required to subscribe for the
remaining shares.
? Underwriter will not hold the shares for too long. He will sell at a lower price.
? SEBI publishes guidelines relating to the extent of devolvement.
In case of fixed price issue:
? The issuer company will communicate the devolvement by giving a
preliminary notice within7 days of closure of issue followed by a final notice
with the auditors certificate within 18 days.
? Underwriter shall subscribe subscription within7 days of the final notice .
Incase of book build issue:
? The syndicate member shall underwrite all shares allocated to bidders who
have bid through them, receive underwriting commission on such bids and get
devolved shares ,if any.
? If the underwriting is different from bids allocated to bidders syndicate
members obligation is restricted to the amount underwritten by him.
Business Model
? Intention is to collect more in premium and investment income than is paid
out in losses, and to offer competitive price which the consumers will accept.
Earned Premium ???
Add: Investment income ???.
Less: Loss incurred ..???
Less: Underwriting Expenses ???.
-----------
Profit ???
======
Allotment
In case of book built issue:
1. In case an issuer company makes an issue of 100% of the net offer to
public through 100% book building process:
? Not less than 35% of the net offer to the public shall be available for allocation to
retail individual investors.
? Not less than 15% for non-institutional investors
? Not more than 50% for qualified institutional buyers
2. In case of compulsory book built issue at least 50% of the net offer to
public being allotted to the Qualified institutional buyers
In case of Fixed price issue
1. A minimum 50% of the net offer of securities to the public shall initially
be made available for allotment to retail individual investors
2. The balance net offer of securities to the public shall be made available
for allotment to :
? Individual investors other than retail individual investors
? Other investors including corporate bodies/institutions irrespective of the number of
securities applied for.
Price fixation under underwriting
?Issuer in consultation with the Merchant Banker will decide the price. SEBI
does not play any role.
?Fixed price offers:
? An issuer company is allowed to freely price the issue.
? Book built offers:
?Book building is a process by which demand for the securities proposed to be issued by a
body corporate is elicited and built up and the price for the securities is assessed on the basis
of the bids obtained for the quantum of securities offered for subscription by the issuer.
Features Fixed price process Book building process
Pricing Price at which the securities are
offered is known in advance to the
investors
Not known in advance to
the investors . Only an
indicative price range is
known.
Demand Demand is known only after the
closure of the issue
Known every day as the
book is built
Payment Made at the time of subscription
wherein refund is given after
allocation
Payment only after
allocation
Placement of the Issue
? Through Prospectus - invites offers for subscription or purchase of any shares or
debentures from the public
? Offer for Sale/ Bought out deals - Promoter places his shares with an investment
banker who offer it to the public at a later date.
? Private placements - Small number of financial intermediaries purchase the shares
and sell them to investors at a later date at a suitable price. E.g. UTI, Mutual funds,
Insurance companies. Advantages -Cost effective, Time effective, Structure
effective, Access effective.
?Rights issue - When a company comes out with additional issue, such shares are
first offered to the existing share holders.
? Book building - is a systematic process of generating, capturing, and recording
investor demand for shares during an initial public offering (IPO), or other securities
during their issuance process, in order to support efficient price discovery.
FirstRanker.com - FirstRanker's Choice
III Semester MBA
Investment Banking and Financial Services
16 MBA FM 302
Unit 1
Investment Banking
Investment Banking
Introduction
? Modern banking finds its roots in Italy in the 13
th
century. World?s oldest bank is known as
Monte di Piet?, or Monte Pio was set up in 1472.
? Traditionally banks are either engaged in commercial banking or investment banking.
? In commercial banking the institution collects deposits from clients and gives direct loans
to businesses and individuals.
? Investment banking is a field of banking that helps companies in acquiring funds.
? Investment banking is a service oriented function that transfers capital from those who own
to those who can use it.
? Investment banking helps the companies in generating funds either by selling shares in
capital market or through venture capital or private equity.
? In India investment bankers are often called as merchant bankers.
Investment Vs Merchant Banking
Investment Banking provide both fee based and fund based service to companies. They
are traditionally engaged in trade financing activities.
Merchant Banking provide a fee based service to companies. Traditionally they are
into underwriting.
Meaning & Definition
? Investment bank is a financial intermediary that performs a variety of services such as
underwriting, acting as an intermediary between a securities issuer and the investing
public, facilitating mergers and acquisitions, and acting as a broker and/or financial
adviser for institutional clients.
? SEBI defines Merchant banker ? any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing
to securities as manager-consultant, advisor or rendering corporate advisory services
in relation to such issue management?.
Functions of Investment Banks
? Underwriter ? The institution or an agency who undertake to take up shares in case full
subscription from public is not received is known as Underwriter. Even though underwriting
is not obligatory they play a significant role in the development of the primary market. The
issuing company in consultation with the merchant banker appoints underwriters and
announces in the prospectus.
? Banker ? Banks who are engaged in the function of acceptance of applications along with
application money and refund of money to applicants to whom securities could not be
allotted are called Bankers to an issue
? Broker ? are concerned with procurement of the subscription to the issue. The managers to
the issue and brokers together form the distribution channel for the issue.
? Registrar ? carry on the activities such as collecting applications, keeping record of
applications, money received and paid, assisting companies in deciding the basis of
allotment in consultation with stock exchange, finalising allotment of securities,
Processing/dispatching allotment letters, refund orders, certificates etc.
? Debenture trustees ? trustees who are appointed to safe guard the interest of the debenture
holders are called debenture trustees. They have to be registered with SEBI.
? Portfolio Managers ? Those who undertake/advise/direct management of portfolio of
securities on behalf of their clients. Portfolio involves entire range of holdings held by a
person.
Types of Investment Banks
? Full service Investment banks ? it operates on a global basis and
provides a complete set of services to their clients. These are large
investment firms which serve large corporations.
? Regional Investment banks ? concentrated in a particular region with
specialised geographic knowledge and a variety of product offerings.
These firms are also known as specialty investment banks.
? Boutique Firms ? small investment banks organised at a local level and
specialise in a particular industry or product. They are independent
firms whose focus is on advisory services such as mergers and
acquisitions.
Investment /Merchant Banking Services
? Corporate counselling
? Project counselling
? Loan syndication
? Management of capital issues
? Corporate Advisory services
? Portfolio management
? Advisory services to mergers and takeovers
? Consultancy to sick industrial units
? Leasing
? Foreign currency financing
? Providing venture capital financing
Issue Management
? Management of issues related to raising funds through
various instruments like shares, debentures etc.
? Issue management involves planning, marketing,
procuring of private subscription to the securities and
offering securities to existing share holders of the
company.
? Section 67 of the Companies Act stipulates that any
offer for more than 50 persons is a public issue and it
has to comply with the Act and SEBI guidelines.
Role of Merchant banks in Issue management
? Appraisal of projects ? is a process of investigation,
review, and evaluation of the project. Includes preparation
of a project report, deciding upon the financing pattern,
appraising the project report with the financial institutions.
? Designing of capital structure ? refers to the composition
of its capitalisation. It includes all long term capital
resources such as loans, reserves, shares and debentures.
Financial structuring includes determining the right debt
equity ratio and framing of appropriate capital structure
theory.
? Capital structure instruments include ? Equity shares,
Preference shares, Retained earnings/ ploughing back of
profits, Debentures, Sweat equity shares, Warrants,
Secured premium notes (SPNs), Derivatives.
Issue management: Pre-issue and Post-issue
Pre-issue Management: Steps involved
? Obtaining SEBI Approval for the issue
? Preparation of the prospectus and approval by SEBI
? Selection of the registrar for the issue, advertising
agencies, underwriters, bankers and brokers.
? Arranging issue and publicity campaign
? Pricing the issue
Preparation of Prospectus
Is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company
Content of Prospectus:
?General information about the company
?Capital structure of the company
?Terms of the present issue
?Dates of opening and closing of the issue
?Name, address, functions and remuneration of Directors
?Auditors report with name and address of the auditors
Intermediaries to the issue
? Merchant Bankers to the issue or book running lead managers (BRLM).
? Registrar to the issue
? Bankers to the issue
? Underwriters to the issue
? Brokers
? Advertising agencies
? Printers
Pre-issue obligations ? SEBI guidelines
?Due Diligence
? Payment of requisite fees
? Submission of documents
? MOU
? Inter-se allocation of responsibilities
? Due Diligence Certificate
? Certificate in case of further issue by Listed companies
? Undertaking
? List of promoters group
Pre-issue obligations ? SEBI Guidelines
? Appointment of Intermediaries
?Merchant bankers
?Co-managers
?Other intermediaries
? Underwriting
? Offer document made public
? Dispatch of issue material
? No complaints certificate
? Mandatory collection centers
? Authorised collection agents
? Advertisement for rights post-issue
? Appointment of compliance office
? Abridged prospectus
? Agreement with depositories
Post - issue Management
Steps involved:
? To verify and confirm that the issue is subscribed to the extent of
90% including underwriters obligation
? To supervise and co-ordinate allotment procedure by the registrar as
per Stock Exchange guidelines
? To ensure issue of refund order, allotment letters within the prescribed
time limit of 10 weeks after the closure of the subscription list.
? To report periodically to SEBI about progress in allotment and
refunds.
? To ensure listing of securities at the stock exchange
? To attend the investors grievances about the public issue.
Post-issue obligations - SEBI guidelines
? Post-issue monitoring reports
?To be submitted third day from the date of allocation in the book-built
portion or one day prior to the opening of the fixed price portion,
whichever is earlier. It is 3days from the date of closure of the issue in all
other cases.
? Final post-issue report within 78 days from the date of closure of the
subscription in case of book building and public issue, but 50 days in case
of rights issue.
? Redressal of investors grievances
? Co-ordination with intermediaries
?Stock invest
?Underwriters
?Bankers to an issue
? Finalising the basis of allotment
? Dispatch of Share certificate
Changing Landscape of Investment Banking
? Till 2007 Investment banking business was very profitable
? As a result of the sub-prime mortgage crisis in US investment banks collapsed.
? Several acquisitions took place in 2008.
? Impact was felt by the Indian Investment banks.
? Growth rate of Indian economy also slowed down.
? Indian Investment banks were forced to design new strategies for survival and growth.
? Several important trends have emerged:
? Faster growth opportunities for countries.
? To maintain sustained earnings growth, firms pursue a strategy by diversifying and
balancing revenue streams.
? Investment banks pursue balance sheet de-risk and diverse funding
? Regulatory compliance and high standards of governance have become an integral
part of the business.
? Investment banks were expanding the products and services geographically to become
financial supermarkets to the world.
? Investment banks rely on advanced technologies in the front office to enable high
speed, high-frequency trading, as well as fast and accurate analytics for client
services.
Securities and Exchange Board of India (SEBI)
? Established in 1988.
? Upgraded as a statutory board in 1992.
? Securities and Exchange Board of India Act was passed on 30
th
January 1992.
? Objectives of SEBI:
? To protect the interest of investors in securities
? To promote the development of the securities market
? To regulate the securities market
? Functions of SEBI:
? To register and regulate the workings of stock brokers
? To register and regulate the bankers to an issue
? To control and regulate securities market
? To exercise the powers under securities contracts Act
? To regulate the working of mutual funds
? To control fraudulent and unfair trade practices relating to securities market
? To control investment business
? To regulate issue of securities
? To regulate takeovers
? To regulate insider-trading in securities.
SEBI Regulations for Merchant bankers
? SEBI regulates capital markets in India.
? SEBI regulations on merchant banking:
1. Registration of merchant bankers
2. Responsibilities of merchant bankers
3. Code of conduct for merchant bankers
4. Procedure for inspection
5. Procedure for action in case of default
6. Amendments to SEBI (Merchant bankers) Regulations, 1992.
1. Registration of Merchant bankers
? Categories of Merchant Bankers
? Category ? I
?Any activity under issue management including preparation of prospectus,
determination of financial structure, issue, allotment, refund of subscription
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
? Category ? II
?To act as adviser, consultant, co-manager, underwriter, portfolio manager
?Category - III
?To act as underwriter, adviser, and consultant to an issue
?Category ? IV
?To act only as advisor or consultant to an issue.
? Category II, III, IV were abolished through an amendment, dated December 9,
1997 to the SEBI Merchant Bankers Regulation, 1992. Since then only
category I exist.
? Requirement for granting the certificate
? Shall be a body corporate other than an NBFC
? Has the necessary infrastructure to effectively discharge his
activities
? Should have minimum two experienced employees to conduct the
business
? Should fulfill the capital adequacy requirement as specified
? His partner, director or principal officer should not be involved in
any litigation connected with the securities market which has an
adverse bearing on the business of the applicant
? His partner, director or principal officer has not been convicted
for any offence or been found guilty of any economic offence.
? Should have the professional qualification from an institution
recognised by the government in finance, law or business
management
? Should be a fit and proper person.
? Capital Adequacy Requirements (CAR)
? CAR shall not be less than net worth of the person making the application
for grant of registration.
? Net worth not less than Rs Five crores
? Procedure for registration
? Application must be submitted to SEBI in form A and SEBI will
issue certificate of registration in form B. Application fee Rs. 50,000
? On grant of certificate the applicant shall be liable to pay the fees in
accordance with schedule II
? Rs 20,00,000 for initial registration.
? Renewal of certificate
? Certificate of initial registration remains valid for 5 years.
? For renewal, apply in form A three months before the expiry of
certificate
? Renewal application is to be treated similar as a fresh application
? After the verification of application SEBI will grant certificate in
form B
? Applicant is liable to pay the fees of Rs. 9,00,000 for permanent
registration
2. Responsibilities of merchant banker
? Code of conduct ? As per schedule III no merchant banker, other than a bank
or a public financial institution and primary dealer as per RBI can engage in any
activity other than securities market.
? Maintenance of books of accounts ? copy of B/S, P&L account, auditors
report and a statement of financial position. Information to SEBI where these
documents are maintained and furnish such documents when required by SEBI.
? Submission of half yearly results ? furnish to SEBI half yearly unaudited
financial results with a view to monitor the capital adequacy of merchant banker.
? Appointment of lead merchant bankers ? Every issue must have one lead
merchant banker. Lead merchant banker must sign an agreement with the issuer
setting out their mutual rights, liabilities and obligations regarding the issue,
allotment and refund.
?Restriction on appointment of lead merchant banker -
Issue size of less than 50 crore - 2 merchant banker
????? Rs. 50-100 crore - 3???????
?????.Rs 100-200 crore - 4???????
?????..Rs. 200-400 crore - 5??????..
??? more than Rs500 crore - 5 or more ???. as agreed by SEBI
Responsibilities of lead merchant banker ? Lead manager should not
agree to manage an issue unless his roles and responsibilities particularly
relating to disclosures, allotment and refund are clearly defined and a statement
is submitted to SEBI at least a month prior to opening of the issue.
- In case of more than one lead merchant banker responsibilities must be clearly
demarcated.
-No lead merchant banker should agree to manage an issue if the body corporate
is an associate of the lead merchant banker.
Underwriting Obligations ? Every lead merchant banker must take at least
5 per cent of total underwriting commitment or Rs 25 lakh whichever is less. If
it is unable to do so then it must make an arrangement with another merchant
banker to the same issue and keep SEBI informed.
Appointment of Compliance officers ? Every merchant banker must
appoint a compliance officer who will monitor compliance to the Act and all
other relevant rules and regulations.
- He shall report to SEBI any non-compliance observed and ensure that
deficiencies observed by SEBI in draft prospectus do not recur.
3.Code of conduct for Merchant bankers
? Regulatory/Statutory compliance
? Confidentiality
? Accurate record keeping
? Conflict of interest
? Ethics in conducting business
? Public Disclosure and Reporting
? Gifts, entertainment and favours etc
? Inside information
? Trade secrets
? Compliance responsibility
4. Procedure for inspection
? SEBIs right to inspect ? SEBI may appoint one or more persons to
inspect books of accounts/records/documents
-Purpose of inspection is to ensure proper book keeping, compliance to
law, to investigate into complaints , to investigate suo moto (own interest)
in investors interest.
? Notice before inspection ? SEBI shall give reasonable notice to the
merchant banker before inspection . During the course of his business
merchant banker is bound to discharge his obligations.
? Submission of reports to SEBI - Inspection authority shall submit
the inspection report to SEBI
? Action on inspection report ? After consideration of the inspection
report SEBI or chairman may take action as deem it fit.
? Appointment of auditors ? SEBI may appoint auditors to look into
the books of accounts provided that the auditors have the same powers as
inspection authorities.
5. Procedure for action in case of default
Suspension of registration may be imposed:
? When the merchant banker violates the provisions of the Act
? Fails to furnish information or furnish wrong information
?Doesn?t submit periodical information as required by SEBI
? Doesn?t co-operate in enquiry conducted by SEBI
?Fails to resolve complaints by investors or fails to give satisfactory reply
to SEBI
? Indulges in price rigging, cornering and manipulation
? Fails to maintain Capital adequacy requirement
? Fails to pay the fees
? Violates conditions of registration
? Fails to carry out his obligation as specified in the regulation
Cancellation of registration ? Cancellation can be imposed if:
? Indulges in deliberate manipulation or price rigging
? Financial position deteriorates to the extent that SEBI feels that it is not in the
interest of the investors.
? Guilty of fraud or convicted in a criminal offence
Show-cause notice or order
? On receipt of the report from enquiry officer SEBI may issue show-cause notice
? Merchant banker shall reply to SEBI within 21 days of receipt of the notice
? SEBI passes order within 30 days
? Every order must be self containing giving reasons for the conclusions and penalty
imposed.
? SEBI shall send a copy of the order to the merchant banker
Effect of suspension and cancellation of registration of merchant
banker
? Merchant banker cease to carry-on any activity from the date of suspension during
the period of suspension
? Merchant banker cease to carry-on any activity from the date of cancellation
Publication of order of suspension
? Must be published by SEBI in at least two daily news papers
? Any aggrieved merchant banker may appeal to Securities Appellate Tribunal
having jurisdiction in the matter.
6. Amendments to SEBI (Merchant bankers) Regulations, 1992
Amendments dated December 9, 1997
? Applicant should be fit and proper person
? Seek separate registration for its underwriting or portfolio management activities
? Categories like I,II,III,IV are dispensed with
? A merchant banker other than a bank a public financial institution is prohibited
from carrying any activities not pertaining to the securities market
? Applicant should be a corporate body other than a non-banking financial
company
Amendment dated January 21, 1998
? Time provided up to June 30
th
1998 sever their activities not pertaining to the
securities market
? Merchant banker is exempted by Reserve Bank of India regarding compulsory
registration, maintenance of liquid assets, and creation of reserves if they fulfill
certain conditions.
?Amendments 2014 ? Regarding Registration fees and change of control.
SEBI Regulations for Intermediaries
Intermediaries are stock brokers, sub brokers, share transfer agents, merchant
bankers, underwriters, portfolio managers, investment advisers and other
intermediaries associated with the securities market specified by the SEBI.
Regulations
1. Registration of intermediaries
? Application to act as a intermediary should be made through concerned stock
exchange.
? Eligibility of the applicants will be examined and is forwarded along with the
fee and its recommendations to SEBI within 30days of receipt complete
application.
? Any change in in the material furnished should be updated by the
intermediary within 15days of the occurrence of change.
2. Obligations of intermediaries
? General obligations
? Redressal of investor grievances
? Appointment of compliance officer
? Investment advice
3. Code of Conduct
? Investor protection
? Disclose of information
? Conflict of interest
4. Inspection and disciplinary proceedings
5. Action in case of Default
? Procedure
? Effect of debarment
? Surrender of certificate of registration
? Securities Appellate Tribunal(SAT)
Underwriting
? SEBI Rules 1993 defines Underwriting as an agreement with or without conditions to
subscribe to the securities of a body corporate when the existing shareholders of such
body corporate or the public do not subscribe to the securities offered to them.
? Underwriting is similar to Insurance.
? Person who engages in the business of underwriting is called Underwriter .
? Charges for the service rendered is called underwriting commission.
Advantages:
? Relieves the company from the risk and uncertainty of selling the securities.
? Specialised knowledge of the capital market
? Builds up investors confidence in the issue of securities
? Company is assured of the availability of funds
? Helps in raising capital for new enterprises and the expansion of the existing projects.
? Facilitates the geographical dispersal of securities
Types of underwriting:
? Firm Underwriting
? Sub-underwriting
? Joint underwriting
? Syndicate underwriting
? Full underwriting
? Partial underwriting
Devolvement
?If an issue is unsubscribed, underwriter is required to subscribe for the
remaining shares.
? Underwriter will not hold the shares for too long. He will sell at a lower price.
? SEBI publishes guidelines relating to the extent of devolvement.
In case of fixed price issue:
? The issuer company will communicate the devolvement by giving a
preliminary notice within7 days of closure of issue followed by a final notice
with the auditors certificate within 18 days.
? Underwriter shall subscribe subscription within7 days of the final notice .
Incase of book build issue:
? The syndicate member shall underwrite all shares allocated to bidders who
have bid through them, receive underwriting commission on such bids and get
devolved shares ,if any.
? If the underwriting is different from bids allocated to bidders syndicate
members obligation is restricted to the amount underwritten by him.
Business Model
? Intention is to collect more in premium and investment income than is paid
out in losses, and to offer competitive price which the consumers will accept.
Earned Premium ???
Add: Investment income ???.
Less: Loss incurred ..???
Less: Underwriting Expenses ???.
-----------
Profit ???
======
Allotment
In case of book built issue:
1. In case an issuer company makes an issue of 100% of the net offer to
public through 100% book building process:
? Not less than 35% of the net offer to the public shall be available for allocation to
retail individual investors.
? Not less than 15% for non-institutional investors
? Not more than 50% for qualified institutional buyers
2. In case of compulsory book built issue at least 50% of the net offer to
public being allotted to the Qualified institutional buyers
In case of Fixed price issue
1. A minimum 50% of the net offer of securities to the public shall initially
be made available for allotment to retail individual investors
2. The balance net offer of securities to the public shall be made available
for allotment to :
? Individual investors other than retail individual investors
? Other investors including corporate bodies/institutions irrespective of the number of
securities applied for.
Price fixation under underwriting
?Issuer in consultation with the Merchant Banker will decide the price. SEBI
does not play any role.
?Fixed price offers:
? An issuer company is allowed to freely price the issue.
? Book built offers:
?Book building is a process by which demand for the securities proposed to be issued by a
body corporate is elicited and built up and the price for the securities is assessed on the basis
of the bids obtained for the quantum of securities offered for subscription by the issuer.
Features Fixed price process Book building process
Pricing Price at which the securities are
offered is known in advance to the
investors
Not known in advance to
the investors . Only an
indicative price range is
known.
Demand Demand is known only after the
closure of the issue
Known every day as the
book is built
Payment Made at the time of subscription
wherein refund is given after
allocation
Payment only after
allocation
Placement of the Issue
? Through Prospectus - invites offers for subscription or purchase of any shares or
debentures from the public
? Offer for Sale/ Bought out deals - Promoter places his shares with an investment
banker who offer it to the public at a later date.
? Private placements - Small number of financial intermediaries purchase the shares
and sell them to investors at a later date at a suitable price. E.g. UTI, Mutual funds,
Insurance companies. Advantages -Cost effective, Time effective, Structure
effective, Access effective.
?Rights issue - When a company comes out with additional issue, such shares are
first offered to the existing share holders.
? Book building - is a systematic process of generating, capturing, and recording
investor demand for shares during an initial public offering (IPO), or other securities
during their issuance process, in order to support efficient price discovery.
? Red herring Prospectus - Prospectus without details of either price or number of
shares being offered or the amount of issue.
? Green shoe option - An option of allocating shares in excess of the shares included in
the public issue. Maximum of 15 per cent of the issue.
? Qualified institutional Buyers - Institutional investors who are perceived to possess
financial expertise to evaluate and invest in the capital market.
? Objectives of investment banking
Responsibilities of Lead Manager
? Drafting the Prospectus
? Preparing budget of expenses related to public issue
? Suggesting the appropriate timing of the public issue
? Assisting in marketing the public issue
? Advising the company in the appointment of intermediaries
? Co-ordinating with the intermediaries.
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This post was last modified on 18 February 2020