Module-1

Merchant Banking & Financial Services

DefinitionMerchant Banking is a skill based activity and involves servicing any financial need of the client.

Unit 1: An Introduction to Merchant Banking

Meaning of Merchant Banking Nature of services Structure of merchant banking firms Financial Markets:  Capital markets-

Money market- Forex markets. Linkages between the markets

Unit 2: Merchant Bankers and SEBI

SEBI guidelines for merchant bankers Issue Management-equity issues, rights

issues, debenture issues, Book building, Private placement: Pre issue and post issue

activities Rising of capital from international markets: 

Loan syndication, ADRs, GDRs,EDRs, ECB, IDR Design of Capital structure—pricing of issues.

Unit 3: Financial Services

Fund based and fee based services Credit rating – Meaning and Definition Process of credit rating of financial instruments Depositary services Role of depositories A brief discussion on performance of NSDL and

CSDL Stock Broking Services including SEBI

guidelines:

Unit 4: Money Markets

Instruments with their features including treasury bills, commercial bills, commercial papers, certificate of deposits and gild-edged securities.

Money  Market,  Mutual Funds Bills Discounting, Factoring, Forfeiting.

Consumer finance, credit cards, vehicle   financing and consumer durable financing.

Unit 5: Lease Financing

Meaning and types Historical perspective Present legislative frameworks of

leasing, lease & taxes Lease evaluation form lessor and

lessee’s point of view

Unit 6: Hire Purchasing

Concept and characteristics Hire purchase V/s Lease Condition and warranties in leasing and

their implications, tax implications of hire purchasing.

Evaluation of hire purchasing from hirer & hiree’s angle

Unit 7: Securitization of Debt

Meaning Features Special Purpose Vehicle Pass Through Certificate & mechanism

Unit 8: Marketing of Financial Services

Conceptual framework Distribution Pricing Promotion Attracting & retaining customers Segmentation Positioning Development and launching of new products Behavioral profile of customers

Merchant – Banker Rich merchant

It requires a focused skill base to provide for the requirements of a client.

They can provide the entire gamut of services or develop niche business.

Merchant banking includes the entire range of financial services.

“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 service in relation to such Issue Management”

‘Securities represent claims on a stream of income & or particular asset’

Equity Debentures Preference shares Bonds International financial market

A M.B could be best defined as a financial Institutions conducting Money market activities and lending,

underwriting & financial advise, & Investment services whose

organization is characterized by high proportion of professional staff able to approach problem in an innovative manner and to make & implement decisions rapidly.

Banking commission Report, 1972 has indicated the necessity of MB service in view of the wide industrial base in the Indian economy.

The commission was in favor of a separate institution (as distinct from commercial banks and term lending institutions) to render merchant banking services.

Merchant Banking-Functions

Advisory services particularly to the small or medium savers.

They should be able to manage provident funds, pension funds & trusts of various types

Managing of Public Issue of securities

Underwriting connected with the aforesaid public Issue management business

Managing advisory for projects

The M.B regulations which seek to regulate the raising of funds in the primary market would assure for the issuer a market for raising resources at low cost,.

Effectively & easily, ensure high degree of protection of interests of the Investors & provide for the M.B a dynamic & competitive market with high standard of professional competence, honestly Intensity and solvency.

Instituted when GRINDLAYS Bank received the license from RBI in 1967,

SBI started the MB division in 1972 as part of their multiple services many could offer their clients.

Central Bank of India – Syndicate Bank – 1972

Services Rendered by merchant Banks

The working of merchant banking agencies & units formed subsequently to offer MB services has shown that MB are rendering diverse serves and fluctuations such as

ISSUE MANAGEMENT:provides expert services to manage public issues of the companies successfully, It has already managed Public Issues as a lead Manager with great success.

UNDERWRITING: In order to provide a protective umbrella to the public issues of its clients, also underwrites the issue.

SUBSCRIPTION TO EQUITY SHARE: subscribes to the equity shares reserved under FI quota, to enable the company to market the public issue effectively.

ADVISORY SERVICES: with its long experience, advises its clients for various advisory services such as capital Structuring, loan syndication etc.

PROJECT CERTIFICATION: also certifies the projects going to capital markets for raising funds. This is a specialized activity of the Corporation.

OTHER FINANCIAL SERVICES: As a part of its commitment to provide professionalized financial services to its clients, also offers Bill Discounting, Equipment Leasing & Hire Purchase Services, Short- term loan, Brand Equity loan, etc to meet diversified requirements of it's clients.

Services Rendered by merchant Banks

Issue management Organizing & extending finance for

investment in projects Assistance in financial

management Acceptance house business

Services Rendered by merchant Banks

Raising Euro Dollar loans Issue of foreign currency Bonds Financing of local authorities Ships Hydro-power Installation

Services Rendered by merchant Banks

Railways Financing of hire purchase

transactions Equipment leasing Mergers & takeovers Valuation of Assets Investment Management Promotion of Investment trusts

Structure of merchant Banking Units:

The structure of organization of MB reveals certain similar characteristics

A high proportion of professionals total Staff

A substantial delegation of Decision Making

A short chain of command

Structure of merchant Banking Units:

Rapid decision making Flexible organization structure Innovative approaches to

problems solving High level of Financial

Sophistication

M.B activities regulated by

1. Guidelines of SEBI and Ministry of finance

2. Companies Act 1956

3. Listing guidelines of stock Exchange

4. Securities contract (Regulation) Act 1956

CAPITAL MARKET

Capital Market Money Market international financial Market

(FOREX)

Indian financial Market system

Organized sector Un-Organized sector

Capital market Intermediaries

Developmental Banks

Insurance Co. (LIC & GIC)

UTIEXIM Bank

NBFC

Hire Purchase Co.

Leasing Co.

Investment Co.

Finance Co.

Money market Intermediaries

RBI Commercial Banks

Post office SB

Govt Bills

FINANCIAL INTERMEDIARIES IN INDIA

Capital Market

Primary Market Secondary Market

Issue of L-T Securities

Raising securities

Transaction of SECURITIES (fully paid up)

Stock exchange- Function

capital market

A capital market works : People who have extra money to invest are brought together with people who are looking for money to fund an enterprise and are prepared to pay for the privilege of using it.

CAPITAL MARKET

The C.M is the market for L-T funds C.M discharges the important function

of transfer of savings, especially of the household sector to companies, government and public sector bodies.

Exchange for shares / debentures LT sources of finance (Equity/Debt)

A capital market is the sum of all providers and users of capital, all the financial products like stocks and bonds which make the transfer of capital possible, and all the people and organizations which support the process.

The capital market apart form the primary market also includes the secondary market where existing Issues are traded.

Function of the Financial Markets

Lender-SaversHouseholdsBusiness firmsGovernmentsForeigners

FinancialIntermediaries

Borrower SpendersBusiness FirmsGovernmentsHouseholdsForeigners

FinancialMarkets

Funds Funds

Funds

Funds Funds

Debt and Equity Markets

A firm or individual can obtain funds in a financial markets in two ways; issue of bonds or issue of equities.

Bonds: A contractual agreement by the borrower of the fund to pay the holder of the instrument fixed amount at regular interval (int. payments and principal) until a specified time (maturity period).

In the P.M, new issues of equity and debt are arranged in the form of new flotation,. Either publicly or privately or in the form of rights offers to existing share holders.

The transaction in the primary market result in capital formation.

The primary market deals with the Initial public offerings (IPO) or sales of shares by companies to the public for the first time.

Once the IPO’s are completed all further transactions of the sold shares take place in the secondary market, more commonly known as stock markets.

The major stock exchanges in India are the BSE and the NSE.

The regulator of the Indian capital market is the Securities and exchange board of India (SEBI).

It makes sure that the small investors are not cheated and ensures transparency of the transactions.

These Secondary markets also referred to as stock markets predominantly deal in stock or equity Shares

They enable shareholders to sell their holdings readily thereby ensuring liquidity.

Divesting Secondary transaction The stock exchange provide a market

where such mutually satisfactory price may be determined.

Indian corporate can access international capital markets through external equity and commercial borrowing

GDR/ADR FCCB (Foreign Currency

convertible bonds) ECB (External Commercial bonds)

Capital structure & financial structure

C.S is financial by LT Sources which consists of debt and equity

F.S which includes all forms of debt & equity covers all financial resources (Includes ST as well as LT)

Capital market

Capital market further divided into three market.

Industrial securities market Govt securities market L-T Loans market

Industrial securities market

It is market where industrial concerns raise their capital or debt by issuing appropriate instruments.

Industrial securities marketEquity shares

Preference sharesDebentures or bonds

Primary market- New issues Public issues (New) Rights issues (Existing) Private placements (small private

investors) Secondary market- Secondary

sale of securities

Govt securities market

Gilt edged securities It is market where Govt securities

are traded. (L-T) Securities issued by central Govt,

State Govt, Govt Authorities, Port trusts, improvement trusts, state electricity boards, public sector enterprises.

L-T Loans market

Development banks and commercial banks play significant role in this market by supplying LT loans corporate customers.

Identifying investment opportunities, encourage new entrepreneurs and support modernization efforts.

Importance of capital market

Absence of capital market acts as a deterrent factor to capital formation and economic growth.

The capital market serves as an important source for the use of economy savings-It mobilises the savings

It provides incentives to saving and facilitate capital formation by offering interest rate.

It facilitates in production and productivity in the economy.

The operations of different institutions in the capital market induces economy growth.

Importance of capital market

Expert intermediaries promotes stability.

CM serves as an important source for technological upgradation in the industrial sector by utilizing by the public.

Importance of capital market

Money Market

In general terms, the money market is the market where liquid and short-term borrowing and lending take place. 

The lending of funds in this market constitutes short-term investments.

It is a market for lending and barrowing of short term funds.

Money Market

A market for short term financial assets are close substitutes for money, facilitates the exchange of money for new financial claims in the primary amrket as also for financial claims already issued in the secondary market.

The MM is the collective name given to the various firms an institution that deal in the various grades of near money.

Differences b/w MM and CM

Capital market Money Market

Long term Short term

Financing capital requirement Financing working capital requirement

Share and debentures Bill of exchange and Treasury bill

Development banks and commercial banks

Central bank and commercial bank

Secondary market No such secondary market-

Formal place –Stock exchange Over phone –no place

Brokers No Brokers

Feature of money market

1. Short term funds2. Maturity period up to one year3. Assets converted in to cash with

min transaction cost4. Without brokers5. Components are central bank,

commercial bank, NBFC,. Discount houses

Objectives of MM Employ short term funds Overcoming ST deficits Central bank to influence and

regulate Liquidity in the economy thru intervention in this market

Reasonable access to users of ST funds to meet their requirements quickly, adequately and at reasonable.

Components of MM

Call money market The call money market refers to

the market for extremely short period loans say one day to fourteen days

The loans are repayable on demand at the option of either the lender or the barrower

Advantages

High liquidity High profitability Safe and cheap Assistance to central bank

operations(call money market is the sensitive part of any financial system)

Commercial bills or discount market

A commercial bill is one which arises out of a genuine transaction.

As soon as goods are sold on credit, the seller draws a bill on the buyer for the amount due.

The buyer accepts it immediately agreeing to pay their amount mentioned therein after certain period of time.

Contains written order- 3 months

Commercial bills

An instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay certain sum of money only or the order of a person to the bearer of the instrument.

Discount market

DM refers to the market where ST genuine trade bills are discounted by financial intermediaries like commercial banks.

On the date of maturity, the intermediary claims the amount of the bill from the person who has accepted the bill.

Acceptance market

The AM refers to the market where ST genuine trade bills are accepted by financial intermediaries.

All Trade bills cannot be discounted easily because the parties to the bill may not be financially sound.

Treasury bill market

Just like commercial bills represents commercial debt, TB represent ST barrowings of the govt.

TB market is the market where ATB are bought and sold.

Enjoy high degree of liquidity. TB are issued by RBI on behalf of

Govt.

The Govt promises to pay the specified amount mentioned therein to the bearer of the instrument on the due date.

  In a certain sense all bank notes, current accounts, cheque accounts, etc. belong to the money market.

In financial market terms, the money market exists for the purpose of issuing and trading of short-term instruments, that is,

instruments where the term remaining from the date when trading takes place to the date of redemption of the loan represented by instrument (commonly referred to as the "term to maturity"), is of a short-term nature. 

In theory, this term for classification as a money market instrument is given as one year. 

In practice, however instruments with a term to maturity of three years or less are normally classified as money market instruments although this is not a hard and fast rule.