Merchant Bankers and Underwriters and Financial Services Provided by them [Indian Financial System Notes BCOM NEP Syllabus]
Merchant Banker Meaning
Merchant bankers are body corporate who engaged in issue of securities. It acts as manager or advisor or consultant to issuing company. A merchant banker requires compulsory registration under the regulation 3 of SEBI (Merchant Bankers) Regulations, 1992. These activities mainly include determining the composition of capital structure, compliance with procedural formalities, appointment of registration, listing of securities, arrangement of underwriting, selection of brokers and bankers, publicity and advertisement agent, private placement of securities, advisory services, etc.
The merchant bankers are responsible to make all efforts to protect the interest of investors. The merchant bankers have to exercise due diligence, high standards of integrity, dignity. The merchant bankers are also responsible in providing adequate information without misleading about the applicable regulations and guidelines. It is now mandatory for all public issue is to be managed by merchant bankers functioning as the lead managers.
Main Characteristics of Merchant Banking
1. High proportion of decision
makers as a percentage of total staff helps in quick decision making.
2. High density of information
and strong database available with merchant bankers.
3. Merchant bankers make money in
the form of fees and commissions.
4. Merchant bankers are
Innovative instead of repetitive operations.
5. They offer services on a
national and international level.
6. Liquidity ratio of merchant
bankers are very high.
Meaning of Underwriters
An underwriter may be an individual, broker, merchant banker, financial institution or banks. The underwriting is an agreement between the issuing company and the assuring party through an agreement to take up shares or debentures or other securities to a specified extent in case public subscription does not amount to the expected level. Thus, in case any short-fall, it has to be made good by underwriting arrangements by the underwriter as per the agreement.
The underwriter shall not derive any benefit from underwriting the issue than commission as specified in the agreement. If an underwriter is being called upon to subscribe the shares of a company has to subscribe such securities within 45 days of receipt of such intimation as per the agreement. The underwriter has to appoint a compliance officer who is responsible for fulfilling the provision Act. The compliance officer is required to report to SEBI and responsible for complying the notification, guidelines, instruction issued by SEBI.
Financial Services Provided by Merchant Bankers
The development of a sophisticated and matured
financial system in the country, especially after the early nineties, led to
the emergence of a new sector. This new sector is known as financial services
sector. Its objective is to intermediate and facilitate financial transactions
of individuals and institutional investors. The financial institutions and
financial markets help the financial system through financial instruments. The
financial services include all activities connected with the transformation of
savings into investment. Important financial services include lease financing,
hire purchase, instalment payment systems, merchant banking, factoring,
forfaiting etc. Following other services are provided by merchant bankers.
1. Corporate counselling: Corporate counselling
covers entire field of merchant banking viz project counselling, capital
restructuring, project management, loan syndication, working capital, lease
financing, portfolio management, underwriting etc. Such counselling is provided
to corporate and client units to solve their problems.
2. Project Counselling: Which includes preparing
project reports, finance for cost of project, appraising projects from the
angle of technical, commercial and financial viability, Getting approval of
project from bank/Govt and other agencies & Planning for public issue.
3. Loan Syndication: Arranging loan for big
projects not only from one bank or financial institution but from more than one
bank or financial institution as amount of loan is very large.
4. Underwriting of public issue: Underwriting is a
guarantee given by the underwriter that in the event of under subscription, the
amount would be provided by him to the extent of under subscription. All public
issues are to be underwritten fully. Merchant banks provide such service of
underwriting pubic issue subject to some limitations.
5. Managers, Consultants or advisors to the issue:
Managers to the issue assist in drafting of prospectus, application forms and
completion of formalities under companies’ act, appointment of Registrar for
dealing with share applications, transfer and listing of shared with stock
exchange.
6. Portfolio Management: It refers to investments
in different kinds of securities such as shares, debentures, bonds issued by
different companies and securities issued by the Govt. Merchant bankers advise
about mix of investments a company should follow to ensure maximum return with
minimum risk and for this purpose merchant makers have to make a careful study
of Govt. policies, capital market as well as financial position of companies.
7. Corporate restructuring: Merchant bankers are
also advising companies; about corporate restructuring including merger,
acquisition, takeovers etc.
8. Off-share financing: Merchant bankers are also
arranging foreign currency, foreign loans, foreign collaborations, financing
exports imports etc.
9. Technical assistance: Merchant bankers are also
providing services on technical aspects such as technological up gradation,
modernization of industries etc.
10. Revival package for sick units: Merchant
bankers are also liaisoning with Board of Industrial and Financial
Reconstruction (BIFR) and industrial Reconstruction Bank of India (IRBI) and
such helping their clients in this regard also.
Also Read: Indian Financial System Topic Wise notes
Role of Merchant Banker in the Capital Market
The Role of merchant banker in
the process of issue management is vital and his services are broadly
categorized as pre-issue management and post issue management.
1. Pre-issue management involves
the following:
- Obtaining approval for the
issue from SEBI
- Drafting of prospectus and
getting it approved by various authorities concerned.
- Underwriting of issue of shares
- Drafting the documents like
application forms, newspaper advertisements etc.,
- Process of advertisement
- Selection of registrar to
issue, printing press, advertising agencies, brokers and bankers to issue
- Arranging press conferences for
brokers and investors
- Selection and fixation of collection
centre for receiving application money
- Listing of securities in stock
exchange
2. Post issue management includes
the following:
- Collection of application forms
-
Screening the applications
- Deciding allotment procedure
- Mailing of letter of allotment
- Issue of share certificates
- Refund of application money to
non-allottees.
3. Advisory services relating to
mergers and takeovers
- A merchant banker acts as a
‘liasoning officer’ for mergers and acquisitions.
- He helps the company in
managing its portfolio.
4. Off shore financing: Merchant
bankers help their clients in off shore financing such as long term foreign
currency loans, joint ventures abroad, licensing and franchising, financing
exports and imports, foreign collaboration arrangements etc.
Merchant Bank vs. Commercial Bank
1. Services
offered: Merchant banks typically offer a wider range of services, such as
corporate finance, asset management, trade finance, and private banking. Commercial
banks, on the other hand, primarily focus on financing services.
2. Risk: Risk associated
with merchant banks are considered to be very as compared to commercial banks.
3. Laws: The commercial banks are
governed by Banking Regulation Act, 1949. In contrast, the merchant banks
follow the rules and regulations framed by SEBI, i.e. Securities and Exchange
Board of India.
4. Aim: The commercial bank aims
at fulfilling the needs of the general public, whereas big business houses that
are operating in more than one nation and high net worth individuals are
catered by merchant banks.