Merchant Banking in India

Public Sector In Public Sector: SBI Capital Markets Ltd., Merchant Banking Divisions of IDBI & IFCI, PNB Capital Services Ltd., Bank of Maharashtra, etc.

In Private Sector: ABN AMRO, ICICI Bank Ltd, Axis Bank Ltd., Kotak Mahindra Capital Co., Bajaj Capital, Reliance Security Ltd., Yes bankLtd, Tata capital market ltd., JM Financial Co. and DCM Financial Services Ltd etc.

Foreign Players: Goldman SACH (India) Security Pvt. Ltd., Morgan Stanley Indian co. Pvt. Ltd., Barclays Security Indian Pvt. Ltd., Bank of America, Deutsche Bank, Citi Group Global Market Indian Pvt. Ltd., Fedex Security Ltd.,

• (cb) “merchant banker” means any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or acting as manager, consultant, adviser or rendering corporate advisory service in relation to such issue management;]

Who can be a merchant banker

Reg. 6 -[(a) the applicant shall be a body corporate other than a non-banking financial company as defined under clause (f) of section 45-I of the Reserve Bank of India Act, 1934.

(c) a person directly or indirectly connected with the applicant has not been granted registration by the Board. expression “directly or indirectly connected” means any person being an associate, subsidiary or inter-connected or group company of the applicant in case of the applicant being a body corporate;

SEBI HAS DIVIDED MERCHANT BANKER’S IN FOUR CATEGORIES, WHICH ARE AS FOLLOW:-

CATEGORIES ACTIVITIES NETWORTH

Category I To carry on the activities of issue mgt & act as advisor, consultant, manager, underwriter, portfolio management.

RS 5 Crore

Category II To act as advisor, consultant , co-manager,Underwriter, portfolio management.

Rs 50 lakh

Category III To act as advisor, underwriter or consultant to an issue

Rs 20 lakh

Category IV To act only as advisor& consultant to an issue

Nil

Role of Merchant Banker• ISSUE MANAGEMENT :

• Management of issues involves marketing of corporate securities ie…equity shares, preference shares and debentures by offering them to public.

Pre-issue activities:

• They prepare copies of prospectus and send it to SEBI and then file them to Registrar of Companies

• They conduct meetings with company representatives and advertising agencies to decide upon the date of opening issue, closing issue, launching publicity campaign etc..

• They help the companies in fixing up the prices for their issues Post-issue activities:

• It includes collection of application forms, screening of applications, deciding allotment procedure, mailing of allotment letters, share certficates and refund orders

• UNDERWRITING OF PUBLIC ISSUES :

• Underwriting is an insurance to the company which makes public issues. Raising of external resources is easy for the issues backed by well known underwriters.

• MANAGERS,CONSULTANTS OR ADVISERS TO THE ISSUE :

• Earlier restriction on the number of lead merchant bankers according to issue of size has been removed vide SEBI 2006 amendment.

• PROJECT COUNSELLING :

• It includes preparation of project reports, deciding upon the financing pattern, appraising the project relating to its technical, commercial and financial viability. It includes filling up of application forms for obtaining funds from financial institutions

• LOAN SYNDICATION :

• Assistance is rendered to raise loans for projects after determining promoter’s contribution. These loans can be obtained from a single institution or a consortium.

PORTFOLIO MANAGEMENT :

• Portfolio refers to investment in different kinds of securities such as shares, debenture issued by different companies. It is a combination of assets but a carefully blended asset combination.

• Portfolio management refers to maintaining proper combination of securities in a manner that they give maximum return

• Investors are interested in safety, liquidity and profitability of his investment but they cant choose the appropriate securities.So merchant bankers help their investors in choosing the shares. They conduct regular market and economic surveys.

NRI INVESTMENT :

• NRIs has to follow lots of complicated rules for investing in the shares in India.Merchant bankers help them in choosing the shares and offer expert advice fulfilling government regulations thus mobilising more resources for corporate sector.

Merchant Banker Regulations 1992• SEBI’s authorization is a must to act as merchant bankers. Authorisation criteria include Professional qualification in finace, law or business management Infrastructure like office space, equipment and man power Capital adequacy Past track of record, experience, general reputation and fairness in all

transactions

13A. No merchant banker, other than a Bank or a 30[***]Public Financial Institution, who has been granted a certificate of registration under these regulations shall 31[after June 30, 1998] carry on any business other than that in the securities market.

Every merchant banker should maintain copies of balance sheet, Profit and loss account, statement of financial position

Half-yearly unaudited result should be submitted to SEBI Merchant bankers are prohibited from buying securities based on the unpublished price sensitive

information of their clients

Code of conduct• Should make all efforts to protect the interest of investors

• Should maintain high standards of integrity, dignity and fairness in conduct of business

• Should fulfill all obligations in a professional and ethical manner

• Should not discriminate among the clients

• Should ensure that prospectus, letter of offer etc.. is available to investors at the time of issue

• Should render best possible advice to its clients

• Any penal action taken by SEBI should be informed to its clients

Lead Merchant Banker• All issue shall be managed by at least one merchant banker

functioning as the lead merchant banker.20. (1) No lead manager shall agree to manage or be associated with any issue unless his responsibilities relating to issue mainly, those of disclosures, allotment and refund are clearly defined, allocated and determined and a statement specifying such responsibilities is furnished to the Board at least one month before the opening of the issue for subscription: Provided that, where there are more than one lead merchant bankers to the issue the responsibilities of each of such lead merchant bankers shall clearly be demarcated and a statement specifying such responsibilities shall be furnished to the Board at least one month before the opening of the issue for subscription.

Acquisition of shares prohibited.

• 26. No merchant banker or any of its directors, partner or manager or principal officer shall either on their respective accounts or through their associates or relatives, enter into any transaction in securities of bodies corporate on the basis of unpublished price sensitive information obtained by them during the course of any professional assignment either from the clients or otherwise.

• SEBI frowns upon merchant bankers role in IPO pricing“Between 2008-09 and 2011-12, there have been 117 issues. (Of which) 72 issues are trading not only below the issue price but also below the price after adjusting for market decline. If two-third of the IPOs are trading below issue price then there is something wrong.”

Mr. U.K SinhaIn Re: IPO of m/s PGEL v. Its Directors, Merchant Banker (Almondz Global Securities) 2011 – Role of M.B In securities market – “Fiduciary Duty”SEBI v. Merchant Banker Imperial Corporate finance and services ltd. (SAT-2003) – “maximum care”SEBI v. Vatsa Corp. ltd, Merchant Banker Hitek Industries ltd (SAT-2003)

Underwriters• Indian Underwriters(i) Private Firms. Egs.Siddons and Gough,, M/s Dalal and Co., M/s Kothari and Co., and M/s Wright and Co. (ii) Indian Commercial Banks.(iv) Life Insurance Corporation.(v) Industrial Finance Corporation. (vi) Industrial Credit and Investment Corporation of India.(vii) Industrial development Bank of India. (viii) Unit Trust of India. It is also one of the four largest underwriters in India. (ix) State Financial Corporations.

SEBI- Underwriters Reg. 19932(fa) “underwriting” means 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 means undertaking a responsibility or giving a

guarantee that the shares or debentures offered to the public will be subscribed for in full. The persons or institutions that give such guarantee are called underwriters.

• For this service underwriters charge a commission which is generally calculated at a specified rate on the issue price of the whole of the shares or debentures underwritten.

Types of Underwriters in India• Full UnderwritingIf the underwriters underwrite the whole of the issue of shares or debentures of a company, it is called full underwriting.Measuring Liability:Example:- A Ltd. Issued 20,000 equity shares of 10 each. The whole of the issue was underwritten by X. The public applied for 19,000 shares. Calculate the liability of underwriter. No. Of shares issued by A Ltd. 20,000 less- applications received for 19,000 Undersubscribed 1000

A will be liable to take up all the shares remaining unsubscribed i.e. 1000 shares

• Partial UnderwritingIf the underwriters underwrite only a part of the issue of shares or debentures of the company, it is called partial underwriting.For example :-Suppose X Ltd issues 1,00,000 equity shares of rs. 10 each at par. 80% of the issue is underwritten by idbi. This is the case of partial underwriting.

• Firm UnderwritingIf the underwriters make a definite commitment to take up a specified number of shares or debentures irrespective of the results of the public response to the issue, it is called Firm underwriting.Suppose X Ltd issues 1,00,000 equity shares of rs. 10 each at par. 80% of the issue is underwritten by the idbi with the definite commitment to take up 10,000 shares. This is the case of firm underwriting.

Advantages of underwriting• Guarantee of full subscription: The main advantage of underwriting is that

the underwriters give a guarantee that the shares offered to the public will be subscribe for in full. Thus in case of poor public response, the underwriters will take up the balance of shares not subscribed for the public and pay for them.

• Boost up the confidence of investors: Underwriting of shares boost up the confidence of the investors. They generally feel that the underwriters underwrite the shares of only good companies.

• Expert financial advise: In addition to underwriting of shares, the company also gets the expert financial advise of underwriters as to where, when and how the shares are to be sold.

• Wide coverage: Underwriters possess a specialised knowledge of the share market. They help the company in the dispersal of shares to public over a wide area.

Banker to an issue Reg. 1994

• (aa) “banker to an issue” means a scheduled bank carrying on all or any of the following activities, namely :—

(i) acceptance of application and application monies; (ii) acceptance of allotment or call monies; (iii) refund of application monies; (iv) payment of dividend or interest warrants;

General Obligations and Responsibilities:

• Furnish Information: When required a banker to an issue has to furnish to the SEBI the following information: (1) the number of issues for which he was engaged as a banker to an issue; (2) the number of applications/details of applications’ money received; (3) the dates on which applications from investors were forwarded to the issuing company/registrar to an issue; (4) the dates/ amount of refund to the investors.

• Agreement with Issuing Companies: Every banker to an issue enters into an agreement with the issuing company. The agreement provides for the number of collection centers at which applications/application money received is forwarded to the registrar, for instance and submission of daily statement by the designated controlling branch of the banker, stating the number of applications and the amount of money received from the investors.

• State Bank of India Vs. Securities and Exchange Board of India 1999 SATrequirement of agreement not merely technical formality but absolute condition for registration – agreement can be spelled out from letters only if from correspondence clearly emerged that parties ad idem to terms – for purposes of Regulation 14 agreement should contain duties and responsibilities between banker and issuer company and also details required under regulation

• The Dhanalakshmi Bank Ltd. Vs. Securities & Exchange Board of India 1999 SATmatter relating to whether banker to issue required to enter into agreement with every issuer company – Section 15B states that if any person registered under SEBI Act to enter into agreement with client fails to enter into agreement he shall be liable to penalty – Regulation 14 provides that every banker to issue shall enter into agreement with body corporate for whom it is acting as banker to issue

RTI & STA•“registrar to an issue” means the person appointed by a body corporate or any person or group of persons to carry on the following activities on its or his or their behalf:(i) collecting applications from investors in respect of an issue; (ii) keeping a proper record of applications and monies received from investors or paid to the seller of the securities; and (iii) assisting body corporate or person or group of persons in:

(a) determining the basis of allotment of securities in consultation with stock exchange; (b) finalising list of persons entitled to allotment; (c) processing and dispatching allotment letters, refund orders or certificates and other related documents in respect of an Issue.

(g) “share transfer agent” means– (i) any person, who on behalf of any body corporate, maintains the records of holders of securities issued by such body corporate and deals with all matters connected with the transfer and redemption of its securities; (ii) a department or division, by whatever name called, of a body corporate performing the activities referred in sub-clause (i) if at any time the total number of the holders of its securities issued exceed one lakh;]

The application under sub-regulation (1) may be made for any of the following categories, namely: (a) Category I: to carry on the activities as a registrar to an issue and share transfer agent; (b) Category II: to carry on the activity either as a registrar to an issue or as a share transfer agent;

• 7. Capital Adequacy Requirement.─ • (a) Category I - net worth of 6 lakhs • (b) Category II - net worth of 3 lakhs."networth" means– (a) in the case of an applicant being a proprietary concern or a firm or an association of persons or any body of individuals, the value of capital contributed to such business by the applicant and the free reserves of any kind belonging to the business of the applicant, and (b) in the case of a body corporate, the value of the paid up capital and the free reserves as disclosed in the books of accounts of the applicant at the time of making the application under sub-regulation (1) of regulation .3.

GENERAL OBLIGATIONS[13A. Registrar to an Issue not to act as such for an associate.─No registrar to an issue shall act as such registrar for any issue of securities in case he or it is an associate of the body corporate issuing the securities. Explanation.─ For the purpose of this regulation, a registrar to an issue or the body corporate as the case may be shall be deemed to be an associate of the other where:-(a) he or it controls directly or indirectly not less than 10 percent of the voting power of the body corporate or of the registrar to an issue, as the case may be; or, (b) he or any of his relative is a director 1[or promoter] of the body corporate or of the registrar to an issue, as the case may be.

Broker- SEBI regulation 1992

• A stock broker is an intermediary who arranges to buy and sell securities on the behalf of clients (the buyer and the seller).

• According to SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992, a stockbroker is member of a stock exchange and requires to hold a certificate of registration from SEBI in order to buy, sell or deal in securities. Reg. (2 gb)

Process of order execution

Investor

Broker

Stock exchange

account of broker DMAT of investor

The persons eligible to become broker are:

1. Individuals;

2. Partnership firms registered under the Indian Partnership Act, 1932;

3. Institutions, including subsidiaries of banks engaged in financial Services;

4. Companies.

Corporate & subsidiaries of banks (Rs in lakh)Particulars Capital

marketCapital Market & Future And Option

Whole Sale Debt Market

CM andWDM

CM,WDM &F&O

Minimum Paid-up capital

30 30 30 30 30

Net Worth 100 100 200 200 200Deposit with NSEIL

85 110 150 235 260

Deposit with NSCCL

15 15 * NIL 15 15 *

Experience Two year's experience in securities marketEducation Two directors should be graduates. Dealers should also have passed SEBI

approved certification test.

Track Record The Directors should not be defaulters on any stock exchange. They must notbe debarred by SEBI for being associated with capital market asintermediaries

Eligibility criteria for brokers

Individuals & Partnership Firms(Rs in lakh)Particulars Capital

marketCapital market & future and option

Whole sale debt market

CM &WDM

CM,WDM &F&O

Net Worth 75 75 200 200 200

Deposit with NSEIL

26.5 51.5 150 176.5

201.5

Deposit with NSCCL

17.5 17.5* NIL 17.5 17.5 *

Experience Two year's experience in securities market

Track Record

The Partners/Proprietor should not be defaulters on any stock exchange. They must not be debarred by SEBI for being associated with capital market as Intermediaries.

Education The Partners/Proprietor should be HSC. Dealers should also have passed SEBI approved certification test.

Admission procedure for new membership

• to become a stock broker, it is required to get a separate certificate of registration from SEBI while operating in different segments of a stock exchange viz. equity, equity derivatives, currency derivatives and also for each category like trading member, trading cum self clearing member and a professional clearing member."

Types of Brokers

• Full service brokersThere are full service brokers who make their own research. They are the best person who provides you the best information on the different profitable stocks. Very expensive.– Advisory services

• With advisory services, the stockbroker either advises you about what shares to buy and sell, according to your needs, or looks at your investments as a whole to achieve longer-term goals. The stockbroker will consult you before taking any action and it’s up to you to decide whether to take their advice. You may also be sent market information and stock recommendations to help you make informed decisions.

• Execution-only servicesAn execution-only service means that your stockbroker makes trades based on your instructions, without giving advice. These trades are usually made either by telephone or over the internet. This type of service suits more experienced investors who want to make their own trading decisions. Cheap – Risky

• Discretionary servicesIf you opt for a discretionary service, this means that your broker can buy and sell shares on your behalf, based on your requirements, without consulting you each time. Deals can be done immediately in response to changing market conditions, rather than after your broker has contacted you. Good opportunities are less likely to be missed but there could be a risk that more deals are done than necessary.

Process

• Only stock exchanges can conduct transactions on the stock exchange therefore whenever individuals or corporates wish to buy or sell securities they must go through a registered stock broker.

• Brokers use the terminal allotted to them by respective stock exchanges of which they are members, to place orders on behalf of the investors. After completion of the transaction, the broker is required to supply to the client a contract note which contains details like price, no. of shares purchased /sold, timing of transaction.

Broker Brokerage for Delivery Brokerage for Intraday trading

SBICAP Securities 0.50% 0.10%

Sharekhan 0.03% - 0.50% 0.03% - 0.10%

Motilal Oswal 0.30% - 0.50% 0.03% - 0.15%

5 paisa 0.25% - 0.85% 0.07%

Angel Broking 0.50% 0.02% - 0.03%

ICICI direct 0.75% 0.15%

Indiabulls 0.25% - 0.50% 0.05% - 0.10%

HDFC Securities 0.50% 0.15%

UTI Securities 0.80% 0.15%

Religare 0.20% - 0.30% 0.02% - 0.03%

Reliance Money 0.01% 0.01%

Geogit 0.30% 0.03%

Indiainfoline 0.50% 0.10%

Major brokerage firms in India

• SEBI simplifies process for broker registration- 2013 "With a view to simplifying and rationalizing the registration requirement, the Board decided to amend the regulations for stock brokers so that there may be one Certificate of registration per stock exchange for a stock broker. For operating in other segments and in aforesaid different categories he would take approval from the stock exchange, subject to compliance of all regulatory requirements.

• Sebi mulls new ethics code for stock brokers 2012

KYC norms to apply

Sub-broker• A ‘Sub-Broker’ is any person who is not a Trading Member of a Stock Exchange but

who acts on behalf of a Trading Member as an agent or otherwise for assisting investors in dealing in securities through such Trading Members.

All Sub-Brokers are required to obtain a Certificate of Registration from SEBI without which they are not permitted to deal in securities. SEBI has directed that no Trading Member shall deal with a person who is acting as a Sub-Broker unless he is registered with SEBI and it shall be the responsibility of the Trading Member to ensure that his clients are not acting in the capacity of a Sub-Broker unless they are registered with SEBI as a Sub-Broker.

It is mandatory for Trading Members to enter into an agreement with all the Sub-Brokers. The agreement lays down the rights and responsibilities of Trading Members as well as Sub-Brokers.

• Regulation 16 of 1992 regulations stipulates that what applies to brokers will apply to sub brokers with regard to general obligations and responsibilities, procedure for inspections, procedure for action in case of default.

Portfolio Manager