Merchant Banking & Financial Services

Lecture -2

Thiyagaraj Rangasamy MBA.,PGDED.,PGDRMB (UK)

Consultant – FINZINE MANAGEMENT CONSULTING

Advisor – INFINITE SUM MODELING INC

Visiting faculty (finance) – PARK GLOBAL B-SCHOOL

 CONTENTS
 Issue Management Intermediaries
 Issue of Debt Instruments
 Greenshoe option
 Qualified Institutional Placement
 Issue of Indian Depository Receipts (IDR)
 Book Building
 Initial Public Offer Through Stock Exchange Online
system
 ISSUE MANAGEMENT INTERMEDIARIES

The origin of merchant banking is Italy. The Italian grain

merchants provided fund for commodity traders and cargo
owners.
 Their other activities were buying , selling and shipping of
goods.
 The new issue market was regulated under the provision of
capital issue (control) act 1947 and rules made under it.
 Many intermediaries who play an important role in the
process of selling new issues emerged.
Merchant Bankers, Lead Managers, Underwriter, Bankers
to issue, Brokers to an issue, Registrars to issue and share
transfer agent, debentures
 ISSUE MANAGEMENT INTERMEDIARIES
 A 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/advisors or rendering corporate advisory
service in relation to such issue.
 Preparation of Prospectus and other information relating to issue,
Determining the financial structure
 Tie-up of financiers
 Final allotment of securities
 Refund of subscribes etc.
 Merchant bankers should also be a body corporate other than non-
banking financial company.
 Merchant Bankers must have necessary infrastructure such as place,
equipment and manpower to effectively discharge their activities.
 ISSUE OF DEBT INSTRUMENTS

Debt Instruments mean non-convertible securities which

create/acknowledge indebtedness and include debentures,
bonds and other securities of a body corporate/statutory
body.
Bonds issued by Government/other bodies specified by SEBI
Security receipts
Securitized debt instruments
 Continu…

 Methods of Issue
Public Issue :It is a public offer by an issuer to subscribe
the debt securities.
Private Placement : It is an offer to less than 50 persons
to subscribe to debt securities
Elements SEBI Regulations :The main elements of
Issue requirements for public issue
Listing of debt instruments
Conditions for continuous listing and trading
Obligations of intermediaries and issuers
 Issue Requirements for Public Issue
 Issue cannot make public issue of debt securities if he has
been prohibited/debarred by the SEBI from dealing in
securities.

 Application should have been made to a recognized stock

exchange for their listing.
 Should have obtained in principal approval.
 As per the company act provisions, the issuer should create
debenture Redemption Reserve
 LISTING OF DEBT SECURITIES
 The listing of debt securities is mandatory. The issuer should
comply with the conditions specified in the listing agreement.
 Under the private placement basis the conditions of listing
specified in the listing agreement should be complied with.
 Rating should be periodically reviewed by the rating agency.
 Rating changes should be communicated the investors
 The trading of debt securities issued to public are on private
placement basis should be cleared/settled in recognized stock
exchanges.
 As regards securities made over the counter, the trade should
be reported on a recognized stock exchange.
 BOOK BUILDING
 Book building is essentially a process used by companies
raising capital through Public Offerings-both Initial Public
Offers (IPOs) and Follow-on Public Offers (FPOs) to aid price
and demand discovery.
 It is a mechanism where, during the period for which the
book for the offer is open, the bids are collected from
investors at various prices, which are within the price band
specified by the issuer.
 The process is directed towards both the institutional as well
as the retail investor.
 There are two alternatives in Book Building
75% Book Building process
Offer to public through Book Building process
 Continu….
75% Book Building Process
The option for 75% Book Building is available subject to the
following conditions:
The prospectus should indicate separately placement
portion category issue of securities through the Book Building
Process.
Securities available to the public i.e net offer to the public
should be separately identified.
A minimum of 25% of the securities is required to be offered
to the public is also applicable.

PROCESS : The price band within which the securities are being
offered for subscription should be indicated in the draft
prospectus circulated.
The names and number of securities ordered
The price at which the institutional buyer/underwriter is
willing to subscribe to the securities under the placement portion.
 GREEN SHOE OPTION (G.S.O)
 Green shoe option means an option of allocating shares in
excess of the shares included in the public issue and
operating a post listing price stabilizing mechanism through
a stabilizing agent.
 The green shoe option has the ability to diminish the risk for
the company issuing the shares.
 When the shares are priced and can be publicly traded, the
underwriters can buy back 15% of the shares.
 It allows the underwriters to have good buying power in
order to cover their deficit when a stock price falls without
the risk of having to buy stock if the price rises.
 This in turn ensures the price stability of share prices which
has greater positive impact on the investors and issuers.
 ORIGIN OF GREEN SHOE OPTION
 The term Green shoe option is derived from a company named
Green shoe Manufacturing Company established in 1919.
 This company is currently known as Stride Rite Corp.
 This company was first to commence this option in 1960.
 It is mainly practiced in US and European Market.

WHY GSO ?
It is to reduce the risk of the IPO(Initial Public Offering)
When the public demand for the shares exceeds expectations and
the stock trades above the offering price.
Objectives of GSO
Risk diminution
Price constancy
INITIAL PUBLIC OFFER THROUGH STOCK EXCHANGE ONLINE SYSTEM

 An issuing company may issue securities to the public either

through the existing banking channel or through the online
system of the stock exchange (E-IPO).
 An Initial Public Offer (IPO) is the selling of securities to the
public in the primary market.
 It is when an unlisted company makes either a fresh issue of
securities or an offer for sale of its existing securities or both
for the first time to public.
 The e-IPO software smooth the progress of online bidding for
Retail/HNI/QIB clients of the member in different IPO’s, this
software works as a distinct interface to bid for different IPO’s
in NSE and BSE at one go and also do activities such as viewing
the details of upcoming IPO’s transferring the funds etc.
 Continu…..
 e-IPO provides facility to create and sustain the client and
assign rights to them based on the member’s business
modulate.
 e-IPO Provides facility to bulk upload of orders for
institutional clients.
 e-IPO aids generation of bulk files online, through a single
platform
 e-IPO facilitates export of bid
 Multiple reports are accessible to end clients with report
formation and export to excel facility.
 e-IPO make possible post IPO closure activities such as
allocation etc.
 e-IPO supports both fixed price and Book Building methods
of IPO bidding.
 MODE OF OPERATION
 The advertisement should contain in addition to other
required information the following
The date of operating/closing of issue
The method and process of application/allotment
The names/addresses/telephone numbers of the
brokers/centers for accepting applications.
 They may send the application forms with the cheque /DD
towards application money to the registrar to the issue or
place the order to subscribe through a broker under the
online system.
 The broker should collect the client registration form from
the applicants duly filled and signed before placing the
order in the system as per the know your client rule as
specified by the SEBI.
 QUALIFIED INSTITUTIONAL PLACEMENT
 Qualified Institutional placement is the placing on a private
placement basis specified securities with the QIBs(Qualified
Institutional Buyers) only.
 Specified securities mentioned above are Equity shares and
other convertible/exchangeable securities excluding warrants.
 Mutual funds should be allotted a minimum of 105 of the
specified securities and the portion allotted but not
subscribed can be allotted to other QIBs.
 If a QIB is a promoter or related to promoter no allotment
can be made to it either directly or indirectly.
 Persons related to QIB means QIB having
Rights under a shareholders/voting agreement
Veto right
Right to appoint any nominee director on the Board of the
Issuer.
Any Questions ?

Thank you