Merchant Banking

Group Members

Udita Paliwal - 2645

Anjul Pratap Singh - 2640

Ganesh Mehta - 2627

Vaibhav Gupta - 2649

About Merchant Banking

• Bank that deals mostly in international finance, long-term loans for companies and stock underwriting.

• Merchant banking primarily involves financial advice and

services for large corporations and wealthy individuals.• Merchant banks do not provide regular banking services to the

general public.

• Merchant banks invest their own capital in client companies &

provide services for mergers and acquisitions.

Contd.

• A merchant bank is sometimes said to be a wholesale bank, or in the business of wholesale banking.

• It’s because merchant banks tend to deal primarily with other

merchant banks and other large financial institutions.• As of today there are 135 Merchant bankers who are registered

with SEBI, India.

• This includes Private, Public & Foreign players.

Merchant Banking: Origin

• Merchant Banking came into existence in 17th & 18th century in Italy & France.

• Merchant banking in the modern era started from London; Merchants started to finance the foreign trade through acceptance of bill.

• Merchant Banking officially came to India through Grindlays Bank in 1967.

• Recognized the requirements of upcoming class of Entrepreneurs for diverse financial services.

Services:

• Corporate counseling.

• Project counseling.

• Working capital finance.

• Restructuring strategies.

• Credit Syndication.

• Lease Financing.

• Some Other Services.

Services contd.

• Corporate Counseling:

Set of activities undertaken for efficient running of an enterprise.

Identifying areas of growth & diversification. Guiding clients on aspects like locational factors,

organizational size, investment decision, choice of product.

Contd.

• Project counseling:

It’s a part of corporate counseling & deals with analysis of project viability .

Comprises of preparation of project report & deciding finance pattern for cost of project.

Filling up of application form with significant information for obtaining funds.

Services contd.

• Working Capital Finance:

Meeting the day-to-day expenses of an enterprise is working

capital finance.

Assessment of working capital requirements.

Preparing necessary application to negotiation for sanction of appropriate credit facilities.

Restructuring Strategies.

• Deals with Mergers & Acquisitions.

• It’s a specialized service of Merchant bankers wherein they act as middle-men in negotiating between two companies.

• Offers expert evaluation regarding identification organizations with matching characteristics.

• Obtaining approvals from various authorities.

Services contd.

• Credit Syndication:

Relates to activities connected with credit procurement & project financing.

Estimates total cost of the project Drawing up of financial plan which conforms requirements of

promoters & their collaborators. Selecting institutions for participation for financing.

Lease Financing.

• It’s an important alternative source of financing a capital outlay.

• Involves letting out assets on lease for use by the lessee for a particular period of time.

• Providing advice on viability of leasing & choice of favorable rental structure.

Other Services:

• Relief to Sick Industries: Rejuvenating old lines & ailing units by appraising

technology, process etc.

Evolving rehabilitation packages acceptable to financial institutions/banks.

Exploring possibilities of mergers & acqusitions.

Difference b/w Commercial & Merchant banks

• Commercial Banking Catering needs of common

man. Anyone can open an A/c. Less exposed to risk. Related to secondary markets. It’s asset oriented. Plays the role of financers.

• Merchant Banking Catering needs of corporate

firms. It cannot be done. More exposed to risk. Related to Primary markets. It’s management oriented. Plays different roles like

underwriting, advisory etc.

Merchant Banking

• Advantages: Merchant banks perform functions

that cannot be carried out by businesses on their own.

Merchant banks have access to traders, financial institutions, and markets that companies or individuals could not possibly reach.

By using their skills and contacts, merchant banks can get the best

possible deals for their clients.

• Disadvantages: Merchant banks are really only for

large corporate customers, or extremely wealthy smaller businesses owned by individual clients.

Not all deals carried out by merchant banks meet with success.

There is always risk attached to the kinds of deal that merchant banks undertake.

Need For Regulation

• The regulation would assure for the issuer market for raising resources at low cost, effectively and easily, ensure high degree of protection of investors interest.

• The regulations provide merchant bankers a dynamic and competitive market with the high standard of professional competence, dignity, integrity and solvency.

• The regulations promote a primary market, which is fair, efficient, and flexible, and inspire confidence.

Major terms and conditions of authorization.

• All merchant bankers must have a minimum net worth of Rs.1 Crore.

• Authorization will be for a initial period of three years.

• All issues should be managed by at least one authorized merchant banker, functioning as the sole manager on the lead manager. 

• The specific responsibilities of each lead manager must be submit ted to SEBI prior to the issue.

Contd..

• Lead managers/merchant bankers would be responsible for ensuring timely refunds and allotment of securities to the investors.

• SEBI shall prepare and prescribe a code of conduct for merchant bankers which they should adhere to.

• Merchant bankers have to segregate their business from other ac tivities and they cannot take up any fund-based business.

• SEBI may suspend/cancel the authorization of merchant bankers for a suitable duration in case of isolations of the terms of authorization.

Institutes offering Merchant Banking

• Public Sector SBI capital markets ltd Punjab national bank Bank of Maharashtra Karur Vysya bank ltd State Bank of Bikaner and

Jaipur. IFCI financial services ltd.

• Private Sector ICICI Securities Ltd Axis Bank Ltd Bajaj Capital Ltd Reliance Securities Limited Kotak Mahindra Capital

Company Ltd Yes Bank Ltd

Key Foreign Players

Goldman Sachs (India) Securities Pvt. Ltd. Morgan Stanley India Company Pvt. Ltd. Barclays Securities (India) Pvt. Ltd. Bank Of America Citigroup Global Markets India Pvt. Ltd.

DSP Merrill Lynch Ltd.

CASE STUDY 1

Role of a Merchant Banker in Underwriting: Facebook IPO

Facebook IPO

• Facebook held its initial public offer (IPO) on May 18, 2012. The IPO was one of the biggest in technology, and the biggest in Internet history, with a peak market capitalization of over $104 billion.

Background

• Facebook's founder and chief executive Mark Zuckerberg had for years been unwilling to take the company public, and he resisted a number of buyout offers after Facebook's founding.

• The company did, however, accept private investments from companies--often technology firms.

• When the number of shareholders crossed the 500 threshold, Facebook had to take the company public. Zuckerberg retains control over the company, despite its being a public entity.

What actually happened

• In early May, the company was aiming for a valuation somewhere from $28 to $35 per share ($77 billion to $96 billion).

• On May 14, it raised the targets from $34 to $38 per share.

• Ultimately underwriters settled on a price of $38 per share, at the top of its target range.

Contd..

• This price valued the company at $104 billion, the largest valuation to date for a newly public company.

• On May 16, two days before the IPO, Facebook announced that it would sell 25% more shares than originally planned due to high demand.

• This meant the stock would debut with 421 million shares.

• Morgan Stanley was in the underwriting role.

What after the IPO

Reasons for failure: Flaw in the Valuation

• Its PE ratio was 85, despite a decline in both earnings and revenue in the first quarter of 2012.

• Facebook had been heavily overvalued because of an illiquid private market, where trades of stock were minimal and thus pricing unstable.

• They had issued too many shares.

CASE STUDY 2

Investment Advisory

Just Dial

• Just Dial promoters will sell shares in an Initial Public Offer from 20th to 22nd May 2013. They will sell 1.75 crore (17.5 million) shares at a price band of 470 to 543. The IPO size is Rs. 822 cr. to Rs. 950 cr.

• Retail investors get a discount of Rs. 47 from the discovered price. This means investors putting in less than Rs. 2,00,000.

Why to Invest?

• The company has 475 cr. of cash• With 22 cr. in their current account and over

Rs. 450 cr. in fixed income mutual funds.• They seem to generate about 100 cr. from

operations every year.• At Rs. 470 per share, the company is valued at

a P/E of 49 at the lower end of the pricing band. Overvalued?

Overvalued?

• Valuation is high but the internet has seen higher growth. There aren’t many great companies out there – JustDial is a good and well known player. They have cash, so they might be able to disrupt the market. There is potential.

Safety Net

• Retail investors that apply for less than 200,000 rupees worth shares get a safety net; the three promoter brothers of Mani, Ramani and Krishnan will guarantee the retail decided price for six months. Remember that retail gets a discount of Rs. 47 from the price decided. Q4 2013 and Q1 2014, and likely also Q2 2014. Enough time to exit.

Forecasting

• In 2013, they are likely to make a revenue of 350 cr. This is 36% higher than the 259 cr. in FY 2012.

• However, net profit by the same extrapolation is 63 cr., only 25% higher than the 51 cr. in 2012. At a P/E of more than 40, this is a slightly high.

IPO Day 1 (Timing the purchase)50% Takers on 1st Day

JustDial IPO Fully Subscribed

• While institutions bid for more than 10 times their allocation, retail investors who pitched for less than 200K worth have bid for 3.3x their quota.

• HNIs bit this up 22x. They Value the company.

Valuation Today

Verdict

• JustDial, has its current price at Rs. 762, a 43.77% increase from the issue price of Rs. 530. The gains are even larger for retail investors who got the shares at Rs.483, a Rs. 47 discount – they gain 57.7% in about 100 days.

• CFAT 28.04 Cr. from 21.37. A 31% rise.

CASE STUDY 3

Bridge Loans

A short-term loan that is used until a person or company secures permanent financing or removes an existing obligation.

This type of financing allows the user to meet current obligations by providing immediate cash flow. The loans are short-term (up to one year) with relatively high interest rates and are backed by some form of collateral such as real estate or inventory.

Also known as "interim financing", "gap financing" or a "swing loan".

TATA - JLR

• Tata Motors acquired JLR for USD 2.3bn.• Tata Motors UK raised USD 3bn by way of bridge loans.• Raised through a syndicate of banks, to be repaid in 15

months.• Lead advisors: JP Morgan and Citigroup• Underwritten by a consortium of eight banks.• Interest rate linked to LIBOR.1. First six months: LIBOR + 0.85%2. Next three months: LIBOR + 1.2%3. Rest of the period: LIBOR + 1.5%Average in terms of weighted cost of bridge finance: 5.5%

Initial Plan to re-finance the Bridge loan

1. Raise USD 1.8bn through three simultaneous but unlinked rights issues. Overseas floatation of following securities:-

• USD 550 mn through equity shares• USD 500 mn through ‘A’ Equity shares carrying differential

voting rights.• USD 750 mn through five year 0.5% convertible preference

shares (later shelved).

2. USD 500 mn through issue of securities in foreign markets (later shelved).

3. Remaining USD 700 mn through debt on the books of JLR.