Lecture Retail and merchant banking – Lecture 31

Revise Lecture 31

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Merchant Banking

2


Merchant Banking – An
Overview
•

•

The financial services sector is an
important constituent of the financial
system and plays a significant role in the
realm of economic development of a
country.
Merchant Banking is a prominent
component of the financial sector
of our
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Merchant Banking – An
Overview

•

In the U.S., investment bankers cater to
the needs of business enterprises carrying
out merchant banking functions. The main
functions of merchant banking are the
following;

1.

Corporate counselling

2.

Project counselling

3.

Pre-investment studies
4


Merchant Banking – An
Overview
4. Capital restructuring
5. Credit syndication and project finance
6. Issue management and underwriting
7. Portfolio management
8. Working capital finance
9. Acceptance creat and bill discounting

10. Mergers, Amalgamations and takeovers
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Merchant Banking – An
Overview
11. Venture capital
12. Lease financing
13. Foreign currency finance
14. Fixed deposit broking
15. Mutual funds
16. Relief to sick industries
17. Project appraisal
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Categories of Securities Issue

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Public Issue Management

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•

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Corporate enterprise use several sources
for raising funds from the capital market.
Issue of securities constitutes an important
mode of raising such finances.
Security issues takes the following forms;

1.

Public issue

2.

Right issue

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Public Issue Management
Public issue of securities:
•

•

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When capital funds are raised through the
issue of a prospectus, it is called ‘public
issue of securities’.
It is the most common method of raising

funds in the capital market.
A security issue may take place either at
par, or at a premium or at a discount.
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Public Issue Management
Public issue of securities:
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The prospectus has to disclose all the
essential facts about the company to the
prospective purchasers of the shares.
SECP insists on the adequacy of
disclosure of information that should serve
as the basis for investors to make a
decision about the investment of their
money.
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Public Issue Management
Right issue:
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When shares are issued to the existing
shareholding of a company on a privileged
basis, it is called as ‘Rights Issue’.
The existing shareholders have a preemptive right to subscribe to the new issue
of shares.
Rights shares are offered as additional
issues by corporates to mop up 11
further


Public Issue Management
Private placement:
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•

When the issuing company sells securities
directly to the investors, especially
institutional investors, it takes the form of
private placement.
In this case, no prospectus is issued, since
it is presumed that the investors have
sufficient knowledge and experience and
are capable of evaluating the risks of the
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investment.


Public Issue Management

Public issue of securities:
•

•

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Private placement covers shares,
preference shares and debentures.
The role of financial intermediary, such as
merchant bankers and lead managers,
assumes greater significance in private
placement.
They involve themselves in the task of
preparing an offer memorandum13and


Public Issue Management

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Issue Manager

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Public Issue Management
Issue Manager (Requirements)
The Issue manager needs to satisfy the
following requirements before being allowed

by the SECP to carry out various issue
management activities;
1.

Adequate and necessary infrastructure
such as adequate office space,
equipments and manpower to effectively
discharge activities.
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Public Issue Management
Issue Manager (Requirements)
2. Minimum number of two persons
needed, who are professionally qualified
in Law, Finance or Banking management
and have the experience to conduct the
business of the merchant banker.
3. Fulfilling the capital adequacy
requirements, i.e. a minimum net worth of
Rs 5 crores.
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Categories of Issue managers

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Public Issue Management
Categories of Issue managers
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SECP has classified Issue managers into
four categories as follows;

1. Merchant banker who is authorized to act
as issue manager, advisor, consultant,
underwriter and portfolio manager.
2. Merchant banker who is authorized to act
only as advisor, consultant, underwriter and
portfolio manager.
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Public Issue Management
Categories of Issue managers
3. Merchant banker who is authorized to act
as underwriter, advisor to an issue.
4. Merchant banker who is authorized to act
only as advisor or consultant to an issue.
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Public Issue Management

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Role of Issue manager

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Public Issue Management
Role of Issue manager
The merchant banker as an issue
manager is helpful is the following ways;
1.

2.

Easy floatation
Financial consultant:

3.

Underwriting:

4.

Market makers:

5.

Due diligence:

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Activities involved in public issue
management

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Public Issue Management
Activities involved in public issue
management:
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The various activities involved in raising
funds from the capital markets are the
following;

Pre-issue Activities:
1.

Signing of MoU

2.

Obtaining appraisal note

3.

Optimum capital structure

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Public Issue Management
Activities involved in public issue
management:
4. Convening meeting
5. Appointment of financial intermediary
6. Preparing documents
7. Due diligence certificate
8. Submission of offer document
9. Finalization of collection centres24


Public Issue Management
Activities involved in public issue
management:
10. Filing with RoC.
11. Launching the issue
12. Promoter’s contribution.
13. Issue closure

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