Unit 1
Merchant Banking
Q1) Explain merchant banking.
A1)
According to SEBI Act:“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.”
Merchant banking can be defined as a skill-oriented professional service provided by merchant banks to their clients, concerning their financial needs, for adequate consideration, in the form of fee.
Merchant Banks are issue houses which manage new issues of the companies in the capital market. According to the Banking Commission (1972), merchant banking institutions are to offer services like syndication of financing, promotion of projects, investment management and advisory services to medium and small savers and to provide funds and trusts to various types. In fact, merchant banking implies a wider range of specialist services, such as:
(i) Loan syndication,
(ii) Financial and management consultancy,
(iii) Project counselling,
(iv) Portfolio management,
(v) Formulation of schemes of rehabilitation,
(vi) Guidance on foreign trade financing,
(vii) Guidance to non-resident Indians for investment in India.
Nature of merchant banking
- Advisory In Nature - Merchant bankers provide advisory services to their clients in field of management, financial and legal matters. They assist businessmen in various ways like advising them about how to start a business, expand its size and revive it in case of any downfall.
2. Financial Arrangement- Merchant bankers do all financial arrangement for their client for fulfillment of their needs. First, they analyze their needs and accordingly suggest them sources for raising funds. They guide people in raising funds by taking bank loans or issuing securities such as shares and debentures. It provides access to both national and international sources for acquiring the required funds.
3. Fees Based - They charges fees for providing their professional services to a group a customer. Merchant banker operates their services in return for some consideration that may be in the form of fees or commission. It serves as the key source of generating income for these highly-skilled individuals.
4. Portfolio Management- Merchant banks monitors the investment of their customers for ensuring safety of their principal. It guides them in taking all investment decisions for ensuring better return. All investment vehicles are properly analyzed by them in terms of their votality, liquidity and profitability before choosing any of them.
5. Corporate Reconstructing- Corporate reconstructing refers to various events taking place within the organization that changes its overall capital structure. These events comprise of mergers, takeovers, disinvestment and sale of business units. All these business events leads to various formalities in terms of documentation, negotiation various other legal duties. Merchant banker perform all these formalities on behalf of its clients thereby relieving them from such hectic process.
6. Stock Broker- Merchant bank function as a broker of stock exchange by purchasing and selling securities of their customers. They perform a detailed research of market performance and direct their clients which securities are to be purchased and which not. Customers make all decisions on their recommendations regarding when to buy a security, in what amount and when it should be sell.
7. Innovative Approach- Merchant bankers follows an innovative for delivering their services to people. Instead of same repetitive operations, it performs different analysis and researches to come up with innovative techniques. New ways of dealing with business affairs are found to come up with better results.
Q2) Explain nature and scope of merchant banking.
A2)
According to SEBI Act:“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.”
Merchant banking can be defined as a skill-oriented professional service provided by merchant banks to their clients, concerning their financial needs, for adequate consideration, in the form of fee.
Merchant Banks are issue houses which manage new issues of the companies in the capital market. According to the Banking Commission (1972), merchant banking institutions are to offer services like syndication of financing, promotion of projects, investment management and advisory services to medium and small savers and to provide funds and trusts to various types. In fact, merchant banking implies a wider range of specialist services, such as:
(i) Loan syndication,
(ii) Financial and management consultancy,
(iii) Project counselling,
(iv) Portfolio management,
(v) Formulation of schemes of rehabilitation,
(vi) Guidance on foreign trade financing,
(vii) Guidance to non-resident Indians for investment in India.
Nature of merchant banking
- Advisory In Nature - Merchant bankers provide advisory services to their clients in field of management, financial and legal matters. They assist businessmen in various ways like advising them about how to start a business, expand its size and revive it in case of any downfall.
2. Financial Arrangement- Merchant bankers do all financial arrangement for their client for fulfillment of their needs. First, they analyze their needs and accordingly suggest them sources for raising funds. They guide people in raising funds by taking bank loans or issuing securities such as shares and debentures. It provides access to both national and international sources for acquiring the required funds.
3. Fees Based - They charges fees for providing their professional services to a group a customer. Merchant banker operates their services in return for some consideration that may be in the form of fees or commission. It serves as the key source of generating income for these highly-skilled individuals.
4. Portfolio Management- Merchant banks monitors the investment of their customers for ensuring safety of their principal. It guides them in taking all investment decisions for ensuring better return. All investment vehicles are properly analyzed by them in terms of their votality, liquidity and profitability before choosing any of them.
5. Corporate Reconstructing- Corporate reconstructing refers to various events taking place within the organization that changes its overall capital structure. These events comprise of mergers, takeovers, disinvestment and sale of business units. All these business events leads to various formalities in terms of documentation, negotiation various other legal duties. Merchant banker perform all these formalities on behalf of its clients thereby relieving them from such hectic process.
6. Stock Broker- Merchant bank function as a broker of stock exchange by purchasing and selling securities of their customers. They perform a detailed research of market performance and direct their clients which securities are to be purchased and which not. Customers make all decisions on their recommendations regarding when to buy a security, in what amount and when it should be sell.
7. Innovative Approach- Merchant bankers follows an innovative for delivering their services to people. Instead of same repetitive operations, it performs different analysis and researches to come up with innovative techniques. New ways of dealing with business affairs are found to come up with better results.
Scope of merchant banking
Fund Raising
Acquisition of required funds timely for their clients is one of the major role played by Merchant bankers. They provide access to various sources of finances at both domestic and international level to their customers. These professional analyses the needs of people and accordingly suggest them better source of finance. Various source of finance available are taking loans, issuing equity share and debentures etc. Timely availability of funds facilitates in establishing a new business project, modernizing and expanding their areas of activities.
Portfolio Management
It does the work of managing the portfolio of their customer. Merchant banker direct their clients with regard to their investment decisions by suggesting them the securities in which they should invest. They ensure safety of their clients’ money by analyzing the securities in terms of risk, return and rate of votality.
Manages Project
Merchant banker perform the responsibility of managing the project of their clients. They guide them in various events related to project such as choosing the project location, preparing project report, performing feasible studies, deciding financing plan, choosing financial source and informing them about government incentives.
Revive Sick Industrial Units
Revival of sick industrial units is an important function rendered by merchant banks. They help small industries by arranging the finance facilities for them by doing negotiations with lending institutions, banks and Board for Industrial and Financial reconstruction. These professionals support the expansion of these industries by apprising them of new technologies and guiding in legal matters.
Manage Public Issues Of Companies
Merchant banks handles all activities of companies related to public issue of their securities. These highly-skilled individuals forecast the market conditions and accordingly direct organization when to issue securities, at what price and in what amount. All process related to such issue like accepting application forms from public, allotting shares, appointment of broker and underwriter etc. are all performed by merchant bankers.
Decides Interest And Dividend Decisions
A merchant banks assist its clients in taking decisions regarding declaration of dividend on its securities and interest on loans/debentures. They conduct an analysis of overall market conditions and availability of business profit before deciding the rate and timing of such declaration.
Broker In Stock Exchange
Merchant bankers act as stock exchange broker by dealing in activities such as purchasing and selling of securities. They perform all these activities on part of their customers. These individuals conduct a detailed analysis of market performance for choosing the most suitable securities. They give advice regarding which security to purchase, when to purchase, in what amount and when it should be sell.
Leasing Services
These banks also offers leasing service to their clients. Lease is a formal agreement entered into between two individuals for renting a particular equipment whereby owner allows the usage of its asset by another person on rent basis. Merchant banks facilitate the access to these services by acting as an intermediary of leasing companies.
Q3) Explain scope of merchant banking.
A3)
According to SEBI Act:“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.”
Merchant banking can be defined as a skill-oriented professional service provided by merchant banks to their clients, concerning their financial needs, for adequate consideration, in the form of fee.
Merchant Banks are issue houses which manage new issues of the companies in the capital market. According to the Banking Commission (1972), merchant banking institutions are to offer services like syndication of financing, promotion of projects, investment management and advisory services to medium and small savers and to provide funds and trusts to various types. In fact, merchant banking implies a wider range of specialist services, such as:
(i) Loan syndication,
(ii) Financial and management consultancy,
(iii) Project counselling,
(iv) Portfolio management,
(v) Formulation of schemes of rehabilitation,
(vi) Guidance on foreign trade financing,
(vii) Guidance to non-resident Indians for investment in India.
Scope of merchant banking
Fund Raising
Acquisition of required funds timely for their clients is one of the major role played by Merchant bankers. They provide access to various sources of finances at both domestic and international level to their customers. These professional analyses the needs of people and accordingly suggest them better source of finance. Various source of finance available are taking loans, issuing equity share and debentures etc. Timely availability of funds facilitates in establishing a new business project, modernizing and expanding their areas of activities.
Portfolio Management
It does the work of managing the portfolio of their customer. Merchant banker direct their clients with regard to their investment decisions by suggesting them the securities in which they should invest. They ensure safety of their clients’ money by analyzing the securities in terms of risk, return and rate of votality.
Manages Project
Merchant banker perform the responsibility of managing the project of their clients. They guide them in various events related to project such as choosing the project location, preparing project report, performing feasible studies, deciding financing plan, choosing financial source and informing them about government incentives.
Revive Sick Industrial Units
Revival of sick industrial units is an important function rendered by merchant banks. They help small industries by arranging the finance facilities for them by doing negotiations with lending institutions, banks and Board for Industrial and Financial reconstruction. These professionals support the expansion of these industries by apprising them of new technologies and guiding in legal matters.
Manage Public Issues Of Companies
Merchant banks handles all activities of companies related to public issue of their securities. These highly-skilled individuals forecast the market conditions and accordingly direct organization when to issue securities, at what price and in what amount. All process related to such issue like accepting application forms from public, allotting shares, appointment of broker and underwriter etc. are all performed by merchant bankers.
Decides Interest And Dividend Decisions
A merchant banks assist its clients in taking decisions regarding declaration of dividend on its securities and interest on loans/debentures. They conduct an analysis of overall market conditions and availability of business profit before deciding the rate and timing of such declaration.
Broker In Stock Exchange
Merchant bankers act as stock exchange broker by dealing in activities such as purchasing and selling of securities. They perform all these activities on part of their customers. These individuals conduct a detailed analysis of market performance for choosing the most suitable securities. They give advice regarding which security to purchase, when to purchase, in what amount and when it should be sell.
Leasing Services
These banks also offers leasing service to their clients. Lease is a formal agreement entered into between two individuals for renting a particular equipment whereby owner allows the usage of its asset by another person on rent basis. Merchant banks facilitate the access to these services by acting as an intermediary of leasing companies.
Q4) Explain nature of merchant banking.
A4)
According to SEBI Act:“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.”
Merchant banking can be defined as a skill-oriented professional service provided by merchant banks to their clients, concerning their financial needs, for adequate consideration, in the form of fee.
Merchant Banks are issue houses which manage new issues of the companies in the capital market. According to the Banking Commission (1972), merchant banking institutions are to offer services like syndication of financing, promotion of projects, investment management and advisory services to medium and small savers and to provide funds and trusts to various types. In fact, merchant banking implies a wider range of specialist services, such as:
(i) Loan syndication,
(ii) Financial and management consultancy,
(iii) Project counselling,
(iv) Portfolio management,
(v) Formulation of schemes of rehabilitation,
(vi) Guidance on foreign trade financing,
(vii) Guidance to non-resident Indians for investment in India.
Nature of merchant banking
- Advisory In Nature - Merchant bankers provide advisory services to their clients in field of management, financial and legal matters. They assist businessmen in various ways like advising them about how to start a business, expand its size and revive it in case of any downfall.
2. Financial Arrangement- Merchant bankers do all financial arrangement for their client for fulfillment of their needs. First, they analyze their needs and accordingly suggest them sources for raising funds. They guide people in raising funds by taking bank loans or issuing securities such as shares and debentures. It provides access to both national and international sources for acquiring the required funds.
3. Fees Based - They charges fees for providing their professional services to a group a customer. Merchant banker operates their services in return for some consideration that may be in the form of fees or commission. It serves as the key source of generating income for these highly-skilled individuals.
4. Portfolio Management- Merchant banks monitors the investment of their customers for ensuring safety of their principal. It guides them in taking all investment decisions for ensuring better return. All investment vehicles are properly analyzed by them in terms of their votality, liquidity and profitability before choosing any of them.
5. Corporate Reconstructing- Corporate reconstructing refers to various events taking place within the organization that changes its overall capital structure. These events comprise of mergers, takeovers, disinvestment and sale of business units. All these business events leads to various formalities in terms of documentation, negotiation various other legal duties. Merchant banker perform all these formalities on behalf of its clients thereby relieving them from such hectic process.
6. Stock Broker- Merchant bank function as a broker of stock exchange by purchasing and selling securities of their customers. They perform a detailed research of market performance and direct their clients which securities are to be purchased and which not. Customers make all decisions on their recommendations regarding when to buy a security, in what amount and when it should be sell.
7. Innovative Approach- Merchant bankers follows an innovative for delivering their services to people. Instead of same repetitive operations, it performs different analysis and researches to come up with innovative techniques. New ways of dealing with business affairs are found to come up with better results.
Q5) Explain regulation of Merchant Banking Activity.
A5)
The merchant banking activity in India is governed by SEBI (Merchant Bankers) Regulations, 1992. Registration with SEBI is mandatory to carry out the business of merchant banking in India. An applicant should comply with the following norms:
i) The applicant should be a corporate body.
Ii) The applicant should not carry on any business other than those connected with the securities market.
Iii) The applicant should have necessary infrastructure like office space, equipment, manpower, etc.
Iv) The applicant must have at least two employees with prior experience in merchant banking.
v) Any associate company, group company, subsidiary or interconnected company of the applicant should not have been a registered merchant banker.
Vi) The applicant should not have been involved in any securities scam or proved guilt for any offence.
Vii) The applicant should have a minimum net worth Rs50 million.
Q6) Explain overview of current Indian Merchant Banking scene.
A6)
In India, though the existence of this branch of financial services can be traced to over three decades, investment banking was largely confined to merchant banking services.
In India prior to the enactment on Indian Companies Act, 1956, managing agent acted as issue houses for the securities, evaluated project reports, planned capital structure and to some extent provided venture capital for new firms. Few share broking firm also functioned as Merchant Bankers.
The need for the specialized Merchant Banking services was felt in India with the rapid growth in the number and size of the issues made in the primary market. The Merchant Banking services were started by foreign banks, namely the National Grindlays Bank in 1967 with licence obtained from RBI followed by the Citi Bank in 1970.
The Banking commission in its report in 1972 recommended the setting up of Merchant Banking institutions by commercial banks and Financial institutions. This marked the beginning of specialized merchant banking in India
To begin with, Merchant Banking services were offered with traditional banking services. In the mid-eighties, the Banking Regulations Act was amended permitting commercial banks to offer a wide range of financial services through the subsidiaries rule.
The State Bank of India was the first to set up Merchant Banking Division in 1972 and ICICI was the first financial institution to set up its Merchant Banking Division in 1973. This was followed by Bank of India, Central Bank of India, Bank of Baroda, Syndicate Bank, Punjab National Bank, Canara Bank,etc. The later entrant were IFCI and IDBI with the latter setting up its Merchant Banking Division in 1992.
Growth
Merchant Banking in India was given a shot in the arm with the advent of SEBI in 1992 and subsequent introduction of free pricing of primary market equity issues in 1992. However, post-1992, the merchant banking industry was largely driven by issue management activity which fluctuated with the trends in the primary market.
There have been phases of hectic activity followed by a severe setback in business. SEBI started to regulate the merchant banking activity in 1992 and a majority of the merchant bankers who registered with SEBI were either in issue management or associated activity such as underwriting or advisorship. SEBI has four categories of merchant bankers with varying eligibility criteria based on their networth. The highest number of merchant bankers with SEBI was seen in the mid-nineties, but the numbers have reduced since, due to the inactivity in the primary market. The number of registered merchant bankers with SEBI as at end of March 2003 was 124, from a peak of almost a thousand in the nineties and later on number started reducing
Q7) Explain structure of merchant banking industry.
A7)
Initially Merchant Bankers were classified into 4 categories with regard to their nature and range of activities and their responsibilities to SEBI, investors and issuers of securities. Since September 1997 only a single category exists. The requirements are as under:
There are four different categories of merchant bankers. Only category 1 merchant bankers are allowed to act as lead managers to the issue:
Category 1: Those merchant bankers who can conduct all above mentioned activities, relating to management of issues. They may, if they so choose, act only in an advisory capacity or as co-manager, underwriter or as portfolio manager.
Category 2: Those merchant bankers who can act as consultant, advisor, portfolio manager and co-manager.
Category 3: Those merchant bankers who can act as underwriter, advisor and consultant.
Category 4: Those merchant bankers who can act only as advisor or consultant to an issue.
Different types of organizations in India which provide merchant banking services:
i. Commercial Banks
Ii. All India Financial Institutions
Iii. Private Consultancy Firms
Iv. Technical Consultancy Organizations
Q8) explain professional Ethics and code of conduct?
A8)
Professional ethics and code of conduct
- REGULATORY/STATUTORY COMPLIANCE: The Members/Associates of AMBI are custodians of confidence and a bridge between investors and investees. The role includes reporting obligations which have in essence a legal requirement for meeting certain specific objectives. Accordingly, various Government agencies on the local, state and federal level may require the filing of numerous records and reports which are designed to safeguard public interest. Members/Associates of AMBI are expected to adhere to the Code of Conduct, regulations, guidelines, clarifications, rules, circulars and press releases issued by SEBI from time to time. Special care must be taken to ensure that all reporting to any branch or agency of the government is done with the utmost accuracy and promptness. No attempt should be made to distort or disguise the true nature of any procedure or transaction.
Ii. CONFIDENTIALITY: Members/Associates may obtain financial and other “price sensitive” information, information about their client and/or competitors. The success of a Merchant Banker depends on the confidence of the client that its Merchant Banker would maintain confidentiality of the information obtained by it and the assurance that it would be utilized by the Merchant Banker in a proper manner. It goes with assurance that such information shall never be used for gain.
Iii. ACCURATE RECORDS, REPORTING AND FINANCIAL RECORD KEEPING: Merchant Bankers are required by law to maintain financial and other records that will accurately present its activities and transactions. All supporting documents, including agreements, invoices, cheque requests and expense reports, are likewise required to fairly and accurately reflect the information contained therein. No false or misleading entries should be made in any books or records of the Members/Associates for any reason; either in its accounts or in accounts maintained for and on behalf of clients and no fund, asset or account of the company should be established for any purpose unless it is accurately and fairly recorded in the books and records of the company. All errors and adjustments should be promptly corrected and recorded when discovered. Accounting information should be prepared in conformity with the prescribed accounting standards and generally accepted accounting practices. In the event of the adherence causing any hardship the Members/Associates could refer such situations to AMBI to enable it to examine the same. No entries should be made which will conceal or differently portray the essence of a transaction
Iv. CONFLICT OF INTEREST : Members/Associates shall always endeavour to avoid conflict of interest in performance of its service as a Merchant Banker. Conflict of interest may be actual or apparent. All situations which leads to a conflict of interest should be avoided. This would apply in relation to other Members/Associates, clients, employees, group companies and dealings with other regulatory authorities. Before accepting a new assignment from a prospective client, a merchant banker is expected to conduct its own Due Diligence with the prospective clients’ bankers, merchant bankers and other capital market intermediaries with a view to arrive at a decision whether to accept or reject the assignment.
v. ETHICS IN CONDUCTING BUSINES :Members/Associates shall in dealings with other members, clients, investors, institutions, the public, employees and others comply with all applicable laws, rules and regulations both in letter and in spirit. Where there appears any difficulty in interpretation of any law, rules, regulation, the Members/Associates may refer such issues to AMBI.
Vi. POLITICAL CONTRIBUTIONS AND ACTIVITY: Members/Associates may, on its absolute sole discretion make political donations and participate in any political activity that are legally permitted. When expressing views on political issues the Member/Associate should make it clear that the views expressed are those of concerned Member/ Associate and not of AMBI.
Vii. COMMUNICATION: Members/Associates are required to communicate with the Regulatory Authority, Government departments and Agencies, Public etc. The Member/Associates shall communicate accurately in a manner which would ensure that the communication is truthful and accurate. All communication by a member to the investor at the instance of a client or based on information available with the client, should be made only if the member is fully aware of the facts and contents of the matter. Members/Associate would acknowledge the fact that they are an important link between the listed companies and the investment public.
Viii. PUBLIC DISCLOSURE AND REPORTING: Reporting of financial information to the investing stockholders, the SEBI and the financial institutions requires the highest standard of fairness and honesty. Much harm can be caused due to incorrect or fraudulent or misleading reporting. All advice which suppresses or does not wholly disclose the material nature of a transaction should be avoided as being prohibited.
Ix. DISPARAGEMENT OF COMPETITORS: Competition among Merchant Bankers is increasing day after day which is welcome as public interest is best served by free and open competition. Any activity or conduct that reduces or eliminates competition in the market place is not in the interest of the development of a vibrant security market and investors. No Member/Associate shall undertake any activity which tends to or is likely to result in any restrictive trade practice or an unfair trade practice. One may choose not discuss fees, costs, commissions etc. earned/incurred by him with a competitor as this may lead to an unlawful agreement to determine price or restrain competition. However, a member is discouraged from entertaining client solely on the ground of fees when matters may have reached advanced stages of negotiation with other members.
x. MARKETING & SALES :Members/Associates are encouraged to compete in the market place solely based on merits and competitive positioning. Abiding by generally accepted practices and norms of fair competition and providing clients with accurate, adequate and prompt information is expected. Business should be obtained on merits, avoiding compromising the loyalty of a customer’s employee in an effort to make a sale through misuse of business courtesies.
Xi. DISCRIMINATION: No Member/Associate shall discriminate in favour of or against any of its competing customers. No client company shall by an agreement or otherwise be coerced into resorting to the services of a particular Merchant Banker. While AMBI recognizes that collective co-operation strengthens the position of Merchant Banker generally, it should in no circumstances be considered as being a tool adverse to the interest of any client.
Xii. CONTRACTS WITH CLIENTS: All agreements with clients shall be in writing and contain detailed scope of services to be rendered by the Members/Associates. The agreement shall include the amount of fees to be charged and the manner of payment thereof. The agreement between the Member/Associate and the client shall be entered into before any service is rendered by the Member/Associate. A Member/Associate before accepting any assignment from the client / prospective client shall obtain information as to whether the client / prospective client has already entered into an MOU / Agreement with any other Merchant Banker in respect of the same assignment and its status thereof
Xiii. EXPENSES REIMBURSEMENT: It is customary for a client to reimburse its Merchant Banker for all reasonable and necessary expenses actually incurred in the conduct of the client’s business. Members / Associates are expected to incur such expenditure as would normally have been incurred by them in the discharge of their duties. Without making it mandatory in any manner, Members / Associates are encourage to confirm with clients the particulars of expenses they would be incurring including the nature and class of travel, particulars regarding stay and expected duration etc.
Xiv. GIFTS, ENTERTAINMENT, FAVOURS AND OTHER ITEMS OF VALUE: Members / Associates shall not accept or give any gift which may deem to influence the making of any commercial decision by the recipient of the gift. A gift may take various forms including money, tangible property, services free of cost or at concessional rate, discount, credit etc. Member / Associates are required by needs of the profession to interact with a cross section of the society. Members/Associates shall not make any illegal payment either directly or indirectly to any person irrespective of the reason or motive. Even reasonable gifts, be they received or given, should be avoided if to a reasonable observer, it might appear to influence a decision.
Xv. PROCUREMENT / PURCHASING: AMBI may, from time to time, indicate minimum fees for the services to be rendered by members in certain select areas of merchant banking activities, eg. Lead Managers/Joint Managers/ Co-Managers fees. While indicating such fees, AMBI shall keep in mind the cost expected to be incurred in rendering such services. No undercutting should be resorted to in any circumstances much less in a manner which may not be easily detected in the course of discharging responsibilities. Similarly all deals for procuring investments, either short, medium or long term should not be structured in a manner as not to be in keeping with the spirit and essence of this code.
Xvi. INSIDE INFORMATION: A Merchant Banker will be considered as an “insider” in accordance with the meaning of the term as per the Securities and Exchange Board of India (Insider Trading) Regulations, 1992. A Member/Associate shall not :
Either on his behalf, or on behalf of any other person, deal in securities of a company listed on any stock exchange on the basis of any unpublished price sensitive information. Communicate any unpublished price sensitive information to any person except as may be necessary to carry on the business ordinarily on or under any law; Give advice, suggestions, recommendations, to any person to deal in securities of any company on the basis of unpublished price sensitive information.
No Members/Associates or any of their employees shall indulge in “insider trading”. This may require the Members/Associates to obtain from its employees, existing as well as to be employed in their organization in future to give suitable declarations that he/she shall not act on any unpublished price sensitive information.
Xvii. TRADE SECRETS: During the course of employment, employees may work with innovative derivatives or other tools for financial management. They may also learn valuable information and gather materials relating to the business of the Member / Associate that are not otherwise known or available outside. This information and materials are of great importance in the present day highly competitive business; and to retain their value they must be kept confidential. Any person taking up employment with a Member / Associate accepts a continuing moral and legal obligation not to disclose any trade secrets to anybody including an earlier or subsequent employer. The obligation to protect the secrets would continue, even after ceasing employment for any reason.
Xviii. COMPLIANCE RESPONSIBILITY: Every Member/Associate is expected to be responsible for the conduct of its employees and will be reasonable for his or her compliance with this Code of Conduct. If there be any questions of interpretation they should be directed to AMBI.
Xix. POWER OF AMBI TO CALL FOR CERTAIN INFORMATION: AMBI may call for such information from members as it may feel necessary or appropriate.
Xx. QUALITY PERFORMANCE: It should be the objective of every Member/Associate, to encourage and develop high-quality performance and excellence in all aspect of operations and fostering of those characteristics in their employees.
Xxi. CODE OF CONDUCT VIOLATIONS:AMBI expects every Member/Associate to assist in upholding the high traditions of the profession. AMBI may investigate the cases of violation of the Code of Conduct by its Members/Associates and may take such action against the Member/Associate as it may deem fit. The decision of AMBI Board in this regard shall be final.
Xxii. POWER OF AMBI TO AMEND THE CODE: AMBI reserves the right to modify/alter, from time to time, any or all of the provisions of this Code of Conduct.
Q9) Explain current development of merchant banking.
A9)
The first merchant bank was set up in 1969 by Grind lays Bank. Initially they were issue mangers looking after the issue of shares and raising capital for the company. But subsequently they expanded their activities such as working capital management; syndication of project finance, global loans, mergers, capital restructuring, etc., initially the merchant banker in India was in the form of management of public issue and providing financial consultancy for foreign banks. In 1973, SBI started the merchant banking and it was followed by ICICI. SBI capital market was set up in August 1986 as a full fledged merchant banker. Between 1974 and 1985, the merchant banker has promoted lot of companies. However they were brought under the control of SEBI in 1992.
Recent Developments in Merchant Banking and Challenges Ahead: The recent developments in Merchant banking are due to certain contributory factors in India. They are
- The Merchant Banking was at its best during 1985-1992 being when there were many new issues. It is expected that 2010 that it is going to be party time for merchant banks, as many new issue are coming up.
- The foreign investors – both in the form of portfolio investment and through foreign direct investments are venturing in Indian Economy. It is increasing the scope of merchant bankers in many ways.
- Disinvestment in the government sector in the country gives a big scope to the merchant banks to function as consultants.
- New financial instruments are introduced in the market time and again. This basically provides more and more opportunity to the merchant banks.
- The mergers and corporate restructuring along with MOU and MOA are giving immense opportunity to the merchant bankers for consultancy jobs.
However the challenges faced by merchant bankers in India are:
- SEBI guideline has restricted their operations to Issue Management and Portfolio Management to some extent. So, the scope of work is limited.
- In efficiency of the clients are often blamed on to the merchant banks, so they are into trouble without any fault of their own.
- The net worth requirement is very high in categories I and II specially, so many professionally experienced person/ organizations cannot come into the picture.
- Poor New issues market in India is drying up the business of the merchant bankers. Thus the merchant bankers are those financial intermediary involved with the activity of transferring capital funds to those borrowers who are interested in borrowing. The activities of the merchant banking in India is very vast in the nature of
- The management of the customers securities
- The management of the portfolio
- The management of projects and counseling as well as appraisal
- The management of underwriting of shares and debentures
- The circumvention of the syndication of loans
- Management of the interest and dividend etc
Q10) Explain nature and regulation of merchant banking.
A10)
According to SEBI Act:“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.”
Merchant banking can be defined as a skill-oriented professional service provided by merchant banks to their clients, concerning their financial needs, for adequate consideration, in the form of fee.
Merchant Banks are issue houses which manage new issues of the companies in the capital market. According to the Banking Commission (1972), merchant banking institutions are to offer services like syndication of financing, promotion of projects, investment management and advisory services to medium and small savers and to provide funds and trusts to various types. In fact, merchant banking implies a wider range of specialist services, such as:
- Loan syndication,
- Financial and management consultancy,
- Project counselling,
- Portfolio management,
- Formulation of schemes of rehabilitation,
- Guidance on foreign trade financing,
- Guidance to non-resident Indians for investment in India.
Nature of merchant banking
- Advisory In Nature - Merchant bankers provide advisory services to their clients in field of management, financial and legal matters. They assist businessmen in various ways like advising them about how to start a business, expand its size and revive it in case of any downfall.
- Financial Arrangement- Merchant bankers do all financial arrangement for their client for fulfillment of their needs. First, they analyze their needs and accordingly suggest them sources for raising funds. They guide people in raising funds by taking bank loans or issuing securities such as shares and debentures. It provides access to both national and international sources for acquiring the required funds.
- Fees Based - They charges fees for providing their professional services to a group a customer. Merchant banker operates their services in return for some consideration that may be in the form of fees or commission. It serves as the key source of generating income for these highly-skilled individuals.
4. Portfolio Management- Merchant banks monitors the investment of their customers for ensuring safety of their principal. It guides them in taking all investment decisions for ensuring better return. All investment vehicles are properly analyzed by them in terms of their votality, liquidity and profitability before choosing any of them.
5. Corporate Reconstructing- Corporate reconstructing refers to various events taking place within the organization that changes its overall capital structure. These events comprise of mergers, takeovers, disinvestment and sale of business units. All these business events leads to various formalities in terms of documentation, negotiation various other legal duties. Merchant banker perform all these formalities on behalf of its clients thereby relieving them from such hectic process.
6. Stock Broker- Merchant bank function as a broker of stock exchange by purchasing and selling securities of their customers. They perform a detailed research of market performance and direct their clients which securities are to be purchased and which not. Customers make all decisions on their recommendations regarding when to buy a security, in what amount and when it should be sell.
7. Innovative Approach- Merchant bankers follows an innovative for delivering their services to people. Instead of same repetitive operations, it performs different analysis and researches to come up with innovative techniques. New ways of dealing with business affairs are found to come up with better results.
Regulation
The merchant banking activity in India is governed by SEBI (Merchant Bankers) Regulations, 1992. Registration with SEBI is mandatory to carry out the business of merchant banking in India. An applicant should comply with the following norms:
i) The applicant should be a corporate body.
Ii) The applicant should not carry on any business other than those connected with the securities market.
Iii) The applicant should have necessary infrastructure like office space, equipment, manpower, etc.
Iv) The applicant must have at least two employees with prior experience in merchant banking.
v) Any associate company, group company, subsidiary or interconnected company of the applicant should not have been a registered merchant banker.
Vi) The applicant should not have been involved in any securities scam or proved guilt for any offence.
Vii) The applicant should have a minimum net worth Rs50 million.
Q11) Explain professional Ethics and code of conduct - current Development of merchant banking.
A11)
Professional ethics and code of conduct
- REGULATORY/STATUTORY COMPLIANCE: The Members/Associates of AMBI are custodians of confidence and a bridge between investors and investees. The role includes reporting obligations which have in essence a legal requirement for meeting certain specific objectives. Accordingly, various Government agencies on the local, state and federal level may require the filing of numerous records and reports which are designed to safeguard public interest. Members/Associates of AMBI are expected to adhere to the Code of Conduct, regulations, guidelines, clarifications, rules, circulars and press releases issued by SEBI from time to time. Special care must be taken to ensure that all reporting to any branch or agency of the government is done with the utmost accuracy and promptness. No attempt should be made to distort or disguise the true nature of any procedure or transaction.
Ii. CONFIDENTIALITY: Members/Associates may obtain financial and other “price sensitive” information, information about their client and/or competitors. The success of a Merchant Banker depends on the confidence of the client that its Merchant Banker would maintain confidentiality of the information obtained by it and the assurance that it would be utilized by the Merchant Banker in a proper manner. It goes with assurance that such information shall never be used for gain.
Iii. ACCURATE RECORDS, REPORTING AND FINANCIAL RECORD KEEPING: Merchant Bankers are required by law to maintain financial and other records that will accurately present its activities and transactions. All supporting documents, including agreements, invoices, cheque requests and expense reports, are likewise required to fairly and accurately reflect the information contained therein. No false or misleading entries should be made in any books or records of the Members/Associates for any reason; either in its accounts or in accounts maintained for and on behalf of clients and no fund, asset or account of the company should be established for any purpose unless it is accurately and fairly recorded in the books and records of the company. All errors and adjustments should be promptly corrected and recorded when discovered. Accounting information should be prepared in conformity with the prescribed accounting standards and generally accepted accounting practices. In the event of the adherence causing any hardship the Members/Associates could refer such situations to AMBI to enable it to examine the same. No entries should be made which will conceal or differently portray the essence of a transaction
Iv. CONFLICT OF INTEREST : Members/Associates shall always endeavour to avoid conflict of interest in performance of its service as a Merchant Banker. Conflict of interest may be actual or apparent. All situations which leads to a conflict of interest should be avoided. This would apply in relation to other Members/Associates, clients, employees, group companies and dealings with other regulatory authorities. Before accepting a new assignment from a prospective client, a merchant banker is expected to conduct its own Due Diligence with the prospective clients’ bankers, merchant bankers and other capital market intermediaries with a view to arrive at a decision whether to accept or reject the assignment.
v. ETHICS IN CONDUCTING BUSINES :Members/Associates shall in dealings with other members, clients, investors, institutions, the public, employees and others comply with all applicable laws, rules and regulations both in letter and in spirit. Where there appears any difficulty in interpretation of any law, rules, regulation, the Members/Associates may refer such issues to AMBI.
Vi. POLITICAL CONTRIBUTIONS AND ACTIVITY: Members/Associates may, on its absolute sole discretion make political donations and participate in any political activity that are legally permitted. When expressing views on political issues the Member/Associate should make it clear that the views expressed are those of concerned Member/ Associate and not of AMBI.
Vii. COMMUNICATION: Members/Associates are required to communicate with the Regulatory Authority, Government departments and Agencies, Public etc. The Member/Associates shall communicate accurately in a manner which would ensure that the communication is truthful and accurate. All communication by a member to the investor at the instance of a client or based on information available with the client, should be made only if the member is fully aware of the facts and contents of the matter. Members/Associate would acknowledge the fact that they are an important link between the listed companies and the investment public.
Viii. PUBLIC DISCLOSURE AND REPORTING: Reporting of financial information to the investing stockholders, the SEBI and the financial institutions requires the highest standard of fairness and honesty. Much harm can be caused due to incorrect or fraudulent or misleading reporting. All advice which suppresses or does not wholly disclose the material nature of a transaction should be avoided as being prohibited.
Ix. DISPARAGEMENT OF COMPETITORS: Competition among Merchant Bankers is increasing day after day which is welcome as public interest is best served by free and open competition. Any activity or conduct that reduces or eliminates competition in the market place is not in the interest of the development of a vibrant security market and investors. No Member/Associate shall undertake any activity which tends to or is likely to result in any restrictive trade practice or an unfair trade practice. One may choose not discuss fees, costs, commissions etc. earned/incurred by him with a competitor as this may lead to an unlawful agreement to determine price or restrain competition. However, a member is discouraged from entertaining client solely on the ground of fees when matters may have reached advanced stages of negotiation with other members.
x. MARKETING & SALES :Members/Associates are encouraged to compete in the market place solely based on merits and competitive positioning. Abiding by generally accepted practices and norms of fair competition and providing clients with accurate, adequate and prompt information is expected. Business should be obtained on merits, avoiding compromising the loyalty of a customer’s employee in an effort to make a sale through misuse of business courtesies.
Xi. DISCRIMINATION: No Member/Associate shall discriminate in favour of or against any of its competing customers. No client company shall by an agreement or otherwise be coerced into resorting to the services of a particular Merchant Banker. While AMBI recognizes that collective co-operation strengthens the position of Merchant Banker generally, it should in no circumstances be considered as being a tool adverse to the interest of any client.
Xii. CONTRACTS WITH CLIENTS: All agreements with clients shall be in writing and contain detailed scope of services to be rendered by the Members/Associates. The agreement shall include the amount of fees to be charged and the manner of payment thereof. The agreement between the Member/Associate and the client shall be entered into before any service is rendered by the Member/Associate. A Member/Associate before accepting any assignment from the client / prospective client shall obtain information as to whether the client / prospective client has already entered into an MOU / Agreement with any other Merchant Banker in respect of the same assignment and its status thereof
Xiii. EXPENSES REIMBURSEMENT: It is customary for a client to reimburse its Merchant Banker for all reasonable and necessary expenses actually incurred in the conduct of the client’s business. Members / Associates are expected to incur such expenditure as would normally have been incurred by them in the discharge of their duties. Without making it mandatory in any manner, Members / Associates are encourage to confirm with clients the particulars of expenses they would be incurring including the nature and class of travel, particulars regarding stay and expected duration etc.
Xiv. GIFTS, ENTERTAINMENT, FAVOURS AND OTHER ITEMS OF VALUE: Members / Associates shall not accept or give any gift which may deem to influence the making of any commercial decision by the recipient of the gift. A gift may take various forms including money, tangible property, services free of cost or at concessional rate, discount, credit etc. Member / Associates are required by needs of the profession to interact with a cross section of the society. Members/Associates shall not make any illegal payment either directly or indirectly to any person irrespective of the reason or motive. Even reasonable gifts, be they received or given, should be avoided if to a reasonable observer, it might appear to influence a decision.
Xv. PROCUREMENT / PURCHASING: AMBI may, from time to time, indicate minimum fees for the services to be rendered by members in certain select areas of merchant banking activities, eg. Lead Managers/Joint Managers/ Co-Managers fees. While indicating such fees, AMBI shall keep in mind the cost expected to be incurred in rendering such services. No undercutting should be resorted to in any circumstances much less in a manner which may not be easily detected in the course of discharging responsibilities. Similarly all deals for procuring investments, either short, medium or long term should not be structured in a manner as not to be in keeping with the spirit and essence of this code.
Xvi. INSIDE INFORMATION: A Merchant Banker will be considered as an “insider” in accordance with the meaning of the term as per the Securities and Exchange Board of India (Insider Trading) Regulations, 1992. A Member/Associate shall not :
Either on his behalf, or on behalf of any other person, deal in securities of a company listed on any stock exchange on the basis of any unpublished price sensitive information. Communicate any unpublished price sensitive information to any person except as may be necessary to carry on the business ordinarily on or under any law; Give advice, suggestions, recommendations, to any person to deal in securities of any company on the basis of unpublished price sensitive information.
No Members/Associates or any of their employees shall indulge in “insider trading”. This may require the Members/Associates to obtain from its employees, existing as well as to be employed in their organization in future to give suitable declarations that he/she shall not act on any unpublished price sensitive information.
Xvii. TRADE SECRETS: During the course of employment, employees may work with innovative derivatives or other tools for financial management. They may also learn valuable information and gather materials relating to the business of the Member / Associate that are not otherwise known or available outside. This information and materials are of great importance in the present day highly competitive business; and to retain their value they must be kept confidential. Any person taking up employment with a Member / Associate accepts a continuing moral and legal obligation not to disclose any trade secrets to anybody including an earlier or subsequent employer. The obligation to protect the secrets would continue, even after ceasing employment for any reason.
Xviii. COMPLIANCE RESPONSIBILITY: Every Member/Associate is expected to be responsible for the conduct of its employees and will be reasonable for his or her compliance with this Code of Conduct. If there be any questions of interpretation they should be directed to AMBI.
Xix. POWER OF AMBI TO CALL FOR CERTAIN INFORMATION: AMBI may call for such information from members as it may feel necessary or appropriate.
Xx. QUALITY PERFORMANCE: It should be the objective of every Member/Associate, to encourage and develop high-quality performance and excellence in all aspect of operations and fostering of those characteristics in their employees.
Xxi. CODE OF CONDUCT VIOLATIONS:AMBI expects every Member/Associate to assist in upholding the high traditions of the profession. AMBI may investigate the cases of violation of the Code of Conduct by its Members/Associates and may take such action against the Member/Associate as it may deem fit. The decision of AMBI Board in this regard shall be final.
Xxii. POWER OF AMBI TO AMEND THE CODE: AMBI reserves the right to modify/alter, from time to time, any or all of the provisions of this Code of Conduct.
CURRENT DEVELOPMENT
The first merchant bank was set up in 1969 by Grind lays Bank. Initially they were issue mangers looking after the issue of shares and raising capital for the company. But subsequently they expanded their activities such as working capital management; syndication of project finance, global loans, mergers, capital restructuring, etc., initially the merchant banker in India was in the form of management of public issue and providing financial consultancy for foreign banks. In 1973, SBI started the merchant banking and it was followed by ICICI. SBI capital market was set up in August 1986 as a full fledged merchant banker. Between 1974 and 1985, the merchant banker has promoted lot of companies. However they were brought under the control of SEBI in 1992.
Recent Developments in Merchant Banking and Challenges Ahead: The recent developments in Merchant banking are due to certain contributory factors in India. They are
Vi. The Merchant Banking was at its best during 1985-1992 being when there were many new issues. It is expected that 2010 that it is going to be party time for merchant banks, as many new issue are coming up.
Vii. The foreign investors – both in the form of portfolio investment and through foreign direct investments are venturing in Indian Economy. It is increasing the scope of merchant bankers in many ways.
Viii. Disinvestment in the government sector in the country gives a big scope to the merchant banks to function as consultants.
Ix. New financial instruments are introduced in the market time and again. This basically provides more and more opportunity to the merchant banks.
x. The mergers and corporate restructuring along with MOU and MOA are giving immense opportunity to the merchant bankers for consultancy jobs.
However the challenges faced by merchant bankers in India are:
v. SEBI guideline has restricted their operations to Issue Management and Portfolio Management to some extent. So, the scope of work is limited.
Vi. In efficiency of the clients are often blamed on to the merchant banks, so they are into trouble without any fault of their own.
Vii. The net worth requirement is very high in categories I and II specially, so many professionally experienced person/ organizations cannot come into the picture.
Viii. Poor New issues market in India is drying up the business of the merchant bankers. Thus the merchant bankers are those financial intermediary involved with the activity of transferring capital funds to those borrowers who are interested in borrowing. The activities of the merchant banking in India is very vast in the nature of
- The management of the customers securities
- The management of the portfolio
- The management of projects and counseling as well as appraisal
- The management of underwriting of shares and debentures
- The circumvention of the syndication of loans
- Management of the interest and dividend etc.
