Merchant banking/ investment banking

[priyanka1987]

Hello frnds...... here we are coming with another intresting thread on Merchant banking / Investment Banking.

Anyone can post here Information regarding Merchant banking / investment banking..... its a topic in 4r sem under universal banking and in many subjects u need to kw this topic.... its usefull n intresting too..........

Im hoping everyone will participate........

Take care,

Regards,

Priyanka

[maverick_ronnie]

well i can contribute on investment banking

lest start

[maverick_ronnie]

Definitions of INVESTMENT BANKING:-

well i m posting 3 to 4 defination juz chk out

"A form of banking done by investment banking firms for corporations, often in exchange for fees and commissions. The bank performs public offerings, acts as a broker, and carries through mergers and acquisitions."

"nvestment banks assist public and private corporations in raising funds in the Capital Markets (both equity and debt), as well as in providing strategic advisory services for mergers, acquisitions and other types of financial transactions. Investment banks differ from Commercial Banks which serve to directly take deposits and make commercial and retail loans. ..."

[priyanka1987]

MERCHANT BANKING


History

Merchant banks, now so called, are in fact the original "banks". These were invented in the Middle Ages by Italian grain merchants. As the Lombardy merchants and bankers grew in stature on the back of the Lombard plains cereal crops many of the displaced Jews who had fled persecution after 613 entered the trade. They brought with them to the grain trade ancient practices that had grown to normalcy in the middle and far east, along the Silk Route, for the finance of long distance goods trades.

The Jews could not hold land in Italy, so they entered the great trading piazzas and halls of Lombardy, alongside the local traders, and set up their benches to trade in crops. They had one great advantage over the locals. Christians were strictly forbidden the sin of usury. The Jewish newcomers, on the other hand, could lend to farmers against crops in the field, a high-risk loan at what would have been considered usurious rates by the Church, but did not bind the Jews. In this way they could secure the grain sale rights against the eventual harvest. They then began to advance against the delivery of grain shipped to distant ports. In both cases they made their profit from the present discount against the future price. This two-handed trade was time consuming and soon there arose a class of merchants, who were trading grain debt instead of grain.

It was a short step from financing trade on their own behalf to settling trades for others, and then to holding deposits for settlement of "billete" or notes written by the people who were still brokering the actual grain. And so the merchant's "benches" (bank is a corruption of the Italian for bench, as in a counter) in the great grain markets became centers for holding money against a bill (billette, a note, a letter of formal exchange, later a bill of exchange, later still, a cheque).

These deposited funds were intended to be held for the settlement of grain trades, but often were used for the bench's own trades in the meantime. The term bankrupt is a corruption of the Italian banca rotta, or broken bench, which is what happened when someone lost his traders' deposits. Being "broke" has the same connotation.

A sensible manner of discounting interest to the depositors against what could be earned by employing their money in the trade of the bench soon developed; in short, selling an "interest" to them in a specific trade, thus overcoming the usury objection. Once again this merely developed what was an ancient method of financing long distance transport of goods.

Islamic banking has the same constraints against usury as Christianity and from the same old testament notions. Whether the insistence that money cannot be earned from deposits held as debt will be relaxed as Islam ages and matures is unknown.

The medieval Italian markets were disrupted by wars and in any case were limited by the fractured nature of the Italian states. And so the next generation of bankers arose from migrant Jewish merchants in the great wheat growing areas of Germany and Poland. Many of these merchants were from the same families who had been part of the development of the banking process in Italy. They also had links with family members who had, centuries before, fled Spain for both Italy and England.

This course of events set the stage for the rise of banking names which still resonate today: Schroders, Warburgs, Rothschilds, even the ill-fated Barings, were all the product of the continental grain trade, and indirectly, the early Iberian persecution of Jews.

[edit] Modern practices

The definition of merchant banking has changed greatly since the days of the Rothschilds. The great merchant banking families dealt in everything from underwriting bonds to originating foreign loans. Bullion trading and bond issuing were some of the specialties of the Rothschild family. The modern merchant banks, however, tend to advise corporations and wealthy individuals on how to use their money. The advice varies from counsel on M&A to recommendation on the type of credit needed. The job of generating loans and initiating other complex financial transactions has been taken over by investment banks and private equity firms.

Today there are many different classes of merchant banks. One of the most common forms is primarily utilized in America. This type initiates loans and then sells them to investors (Fitch 2000). Even though these companies call themselves "Merchant banks," they have few if any of the characteristics of former Merchant banks.

[maverick_ronnie]

Entry barrier for unlisted companies modified as dividend payment in immediately preceding 3 years.
l A listed company required to meet the entry norm only if the post-issue net worth becomes more than five
times the pre-issue net worth.
l Companies required to make their partly paid-up shares fully paid up or forfeit the same, before making
a public/rights issue.
l Unlisted company allowed to freely price its securities provided it has shown net profit in the immediately
preceding 3 years subject to its fulfilling the existing disclosure requirements.
l The Promoters’ contribution for public issues made uniform at 20% irrespective of the issue size.
l Written consent from share holders in regard to lock-in made compulsory for securities to be offered for
promoter’s contribution.
l Appointment of Registrar to an issue for rights issues made mandatory.
l A provision made regarding disclosure of the share holding of the promoters whose names figure in the
paragraph on “Promoters and their background” in the offer document.
l The SEBI (Registrars to an Issue and Share Transfer Agents) Rules and Regulations 1993 have been
amended to provide for an arm’s length relationship between the Issuer and the Registrar to the Issue. It
has now been stipulated that no Registrar to an Issue can act as such for any issue of securities made
by any body corporate, if the Registrar to the issue and the Issuer company are associates.
l With a view to facilitating raising of funds by infrastructure projects, SEBI has allowed debt instruments
to be listed on the Stock Exchanges without prior listing of equity. Corporates with infrastructure projects
and Municipal Corporations to be exempted from the requirements of Rule 19(2b) of Securities (Contract)
Regulation Rules to facilitate public offer and listing of its pure debt instruments as well as debt instruments
fully or partly convertible into equity without the requirement of prior listing of equity but subject to
conditions like investment grade rating.
l Only body corporates to be allowed to function as Merchant Bankers.
l Multiple categories of merchant bankers to be abolished and there shall be only one entity viz., Merchant
Banker. Presently, the Merchant Banker allowed to perform underwriting activity but required to seek
separate registration to function as a Portfolio Manager under the SEBI (Portfolio Manager) Rules and
Regulations, 1993.
l Merchant Bankers to be prohibited from carrying on fund based activities other than those related exclusively
to the capital market; the activities undertaken by NBFCs such as accepting deposits, leasing, bill
discounting, etc. not to be allowed to be undertaken by a merchant banker; the existing NBFCs performing
merchant banking activities to be given suitable time to restructure their activities.

[maverick_ronnie]

Listing Requirements of stock exchanges to be made more stringent and stock exchanges should be made more
accountable to create greater investor confidence.
l Creation of an effective institutional arrangement for protecting small investors.
l Better corporate goverance on the part of industry; accounting norms to be made uniform and international
standards to be adopted.
l Part of the public sector divestment being done through the GDR route could be done in the domestic market.
l Market making could be made compulsory at least for a period of six to twelve months after listing of issues.
l Adequate amount of credit to be madce available to market makers.
l Derivating trading should be introduced quickly in order to provide hedge instruments for institutional players.
l Depository mode of transactions to be popularised; the possibility of new issues through the depository should
be explored as a means of reducing cost of issue substantially.
l Entry norms for companies to access the market should be made more stringent.
l Greater accountability should be fixed on intermediaries for due diligence and disclosure norms.
l Private placements have a role; at the same time it should be ensured that public issues are not passed off as
private placements. Private placements involving investors above a certain number should be subject to disclosure
requirements; alternatively, private placements could be restricted to Qualified Institutional Investors (QIIs) or High
Networth Individuals.

[maverick_ronnie]

Structural changes have been brought about
in merchant banking activity. The multiple
categories of merchant bankers have been
abolished and replaced by a single category which
can only carry out issue management activity.
Segregation has been brought about between fee
based and fund based activities and merchant
bankers have been prohibited from carrying on
any fund based activity such as acceptance of
deposits, leasing and bill discounting. Arm’s length
relationship has also been introduced between
an issuer and the registrar to issue.

[maverick_ronnie]

Yield curve and Treasury Management
Yield Curve : The relationship between long term and short term rates of a similar risk asset/
bond is known as Term Structure of Interest Rates. Yield Curve is a graphical representation
that compares the interest rate of securities with different terms to maturity. To construct an
Yield curve a set of bonds in the same risk category but with different maturities is selected. On
the 'x' axis term to maturity is plotted and on the 'y' axis, their respective yields. If we join the
points, we have a yield curve ready. There are four types of yield curves as follows :
i) Positive yield curve or an upward sloping yield curve. Here the interest rates show an
upward trend as maturity increase. hence this is known as Positive yield curve or normal
yield curve. This curve indicates that market expects yields to rise on account of the
economic activity and to get overheated.
ii) Inverted yield curve or a downward sloping yield curve is formed when the short term
interest rates are higher than the long term interest rates. As this situation is unusual, this
curve is called 'inverted yield curve'. This curve indicated that the market expects the
yields to fall on account of economic recession.
iii) If short term and long term interest rates are the same, the curve formed is a flat yield
curve (a straight line). This situation rarely happens.
iv) A humped yield curve forms where there is a rise in the short term rates and then a fall in
the medium term and the rate gradually tapers off in the long term. This indicates an
uncertainty / aberration in the maturity where the hump occurs. If the treasury is accurate
in forecasting and finds any opportunity in such maturities, he can take advantage by
shifting his trading portfolio partially to advantageous position.
Regarding some major functions and operations of the treasury
Maintenance of Reserves is one of the major functions of the treasury. This is mainly because
the Reserves are maintained on the overall financial figures of the Bank and no other department
of the Bank other than Treasury will be able to handle it effectively. On account of Treasury's
role/active involvement in bank's major day to day operations, Treasury can manage the Reserves
Maintenance more effectively than others. While CRR management is directly related to the
overall liquidity position of the Bank on day to day basis, SLR Management is nothing but
management of more than 30% of the Assets of the banks.
Selecting the Portfolio Strategy
Almost 30 to 40% of the asset base of the banks now consists of Govt. stock and other Bonds/debentures. The types of Bonds are varied - Fixed income, floating rate, zero coupon, step up/
down, Liquid, option embedded, Indexed, Staggered / bullet repayment, Flexi - and some of
them are on private placement, unrated, unlisted etc. Since a huge proportion of Bank funds are
deployed in these debt instruments, its management assumes a very important factor in the
overall profitability/risk exposure of the bank. As some of these instruments are traded/ tradable
in the secondary market, treasury has a major role in the management of this portfolio. Bank
Treasury has to manage the portfolio with strategies that can play an integral role in meeting
overall Assets and Liability managements goals. With Treasury's trading and distribution skills,
non-fund based income can be generated apart from providing liquidity to the portfolio. An Active
Treasury should shuffle the Investment portfolio of the Bank - by adjusting maturities, changing
the composition of the securities (taxable versus tax free, Gilts vs. debentures etc.) swapping
the securities - and achieve the objectives/policies in the changing market environment. Treasury
that targets to earn a rate of return that consistently exceeds the opportunity cost of funds will
create long term share holder value.
Treasury has to consider many factors while determining which securities to buy or sell. Risks
arise because it is very difficult to outperform the market when forecasting interest rates. Treasury
must also be aware of the bank's overall interest rate risk position to make investments that
offset the prevailing risk or enhance returns as targeted. A treasury with passive strategy, -
passive because of the internal policies restricting its powers, its risk taking decisions, etc., just
adopt 'buy & hold' strategy. Because of this they select maturities that generate average retruns
over the entire business cycle. Whereas an active treasury shuffles the portfolio based on the
forecasts, hedges the portfolio from risks it is exposed, trade in securities and generate nonfund
based income.
Riding the yield curve
Riding the yield curve is a common active strategy adopted by the Treasury when the yield
curve is upsloping (positive) and rates are relatively stable. It involves buying securities with a
maturity longer than the planned holding period and selling the security at a gain prior to its
maturity. It has three basis steps.
i) Identify the preferred investment horizon.
ii) Buy a par security with a maturity longer than the investment horizon, for which the coupon
yield is high in relation to the overall yield curve.
iii) Sell the security when the preferred time elapses with still more time remaining until
maturity. If yields remain relatively stable, the overall return will exceed that from simply
buying the security that matches the planned investment horizon.

[maverick_ronnie]

Role of merchant banker in a primary market issue management.

Merchant banker is the intermediary appointed by companies in the primary market issue. It has
to look at the entire issue management and work as the Manager to the Public Issue.
Principal steps in a Public issue are as follows :
Vetting of Prospects : The prospectus is a document to communicate information about the
company and the proposed security issue to the investing public. The draft prospectus containing
the disclosures has to be vetted by SEBI before a public issue is made.
Appointment of Underwriters : An underwriter agrees to subscribe to a given number of shares
in the event the public do not subscribe to them. The underwriter, in essence, stands guarantee
for public subscription in consideration for the underwriting commission.
Appointment of bankers : The bankers to the issue collect money on behalf of the company
from the applicants.
Appointment of Registrars : The registrars to issue perform a series of tasks from the time the
subscription is closed to the time the allotment is made.
Appointment of Brokers and Principal Brokers : The brokers to the issue facilitate its subscription.
Filing of the Prospectus with the Registrar of Companies
Printing and despatch of prospectus and application form : After the prospects is filed with
the Registrar of Companies, the company should print the prospectus and the application
form.
Filing of Initial Listing Application : Within ten days of filing the prospectus, the initial listing
application must be made to the concerned stock exchanges, along with the initial listing fees.
Promotion of the Issue : The promotional campaign typically commences with the filing of the
prospectus with the Registrar of Companies and ends with the release of the statutory
announcement of the issue.
Statutory Announcement : The statutoty announcement of the issue must be made after seeking
the approval of the lead stock exchange. This must be published at least ten days before the
opening of the subscription list.
Collection of Applications : The statutory announcement (as well as the prospectus) specifies
when the subscription would open when it would close, and the banks where the applications
can be made.
Processing of Applications : The application forms received by the bankers are transmitted to
the registrars to the issue for processing.
Establishing the Liability Underwriters : If the issue is undersubscribed, the liability of the
underwriters has to be established.
Allotment of Shares : If the issue is under-subscribed or just fully subscribed, the company may
allot shares applied for by the applicants after securing the formal approval of the concerned
stock exchanges(s)
Listing of the Issue : The detailed listing application should be submitted to the concerned stock
exchanges along with the listing agreement and the listing fee.
Costs of Public Issue
The cost of public issue is normally between 8 and 12 per cent depending on the size of the
issue and the level of marketing effort. The important expenses incurred for a public issue are
Underwriting Expenses, Brokerage, Fees to the Managers to the Issue Fees for Registrars to
the Issue, Printing Expenses, Postage Expenses, Advertising and Publicity Expenses, Listing
fees, Stamp duty.
In addition to the above procedural matter, the most important issue relates to the pricing of the
issue. The merchant banker has to see that the issue is priced properly.
Pricing of Public Issues
The salient features of SEBI guidelines with respect to pricing of public issues are as
1. A new company set up by entrepreneurs without a track record will be permitted to issue
capital to public only at par.
2. A new company set up by existing companies with a five year track record of consistent
profitability will be free to price its issue provided the participation of the promoting
companies is not less than 50 per cent of the equity of the new company and the issue
price is made applicable to all new investors uniformly.
3. An existing private/closely held company with a three year track record of consistent
profitability shall be permitted to freely price the issue.
4. An existing listed company can raise fresh capital by freely pricing further issue.

[Ravikant]

which are the well known merchant banking co's?

can anybody help me to understand the diff between merchant bankers n invstment bankers?

Do the merchant bankers also provide broking services n treasury services?