Professional Documents
Culture Documents
MERCHANT BANKING
Merchant banking : As per SEBI (MB 1992, Regulations), a merchant banker means a person who is engaged in the business of securities issue management either by making arrangements regarding selling, buying of securities; rendering consultancy/ advisory services related to capital market securities.
ORIGIN :
The term merchant banking originated from the London who started financing foreign trade through acceptance of bills Later they helped government of under developed countries to raise long term funds Later these merchants formed an association which is now called Merchant Banking and Securities House Association
Category III merchant bankers : Can act as co-managers but cannot undertake portfolio management
Category IV merchant bankers :Can merely act as consultant or advisor to issue of capital CAPITAL ADEQUACY NORMS : Category I : Rs. 5 crores
Category II
: Rs.50 lakhs
SEBI has been vested with the power to suspend or cancel the authorisation in case of violation of the guidelines SEBI has the right to send inspecting authority to inspect books of accounts,records etc of merchant bankers
Inspections will be conducted by SEBI to ensure that provisions of the regulations are properly complied An initial authorisation fee,an annual fee and renewal fee may be collected by SEBI
A lead manager holding a certificate under category I shall accept a minimum underwriting obligation of 5% of size of issue or Rs.25 lakhs whichever is less
CODE OF CONDUCT :
Should maintain high standards of integrity,dignity and fairness in conduct of business. Should fulfill all obligations in a professional and ethical manner. Should provide true & adequate information to investors Shall not be aparty to any Price rigging& false presentation Shall ensure all statutory compliances.
Post Issue
Deciding allotment
Mailing of allotment letters,share certificates
Refund In case of book built route, decide the cut off price. Addressing investor grievances Statutory filling with SEBI, post offer closure Liasioning with Stock exchange for listing
IPO
Topics: Pre Issue decision making Key concepts Issue pricing, structuring, timing Procedural aspect Regulatory Provisions & SEBI guidelines Requirements under Companies Act Process for making Issue ( Fixed price, Book building) Post issue management
The cons:
The Loss of control Information disclosure requirements Exchange listing requirements
Strategic perspective
Long term benefits of listing Does it help you to achieve strategic & financial goals?? Does your business model need listing??
Financial perspective
Fund requirement Are there other cheaper alternatives?? Capital structuring Impact on key financial ratios.
Timing
Bull phase High business confidence Investor sentiments Market conditions
Pricing
Generally MB use following method. Price to earning ratio(P/E Ratio) Price to book value ratio(M/B ratio)
Pricing
P/E ratio. The firms preceding 3 years average EPS is taken. The average P/E multiple for the industry is taken. 2 approaches are adopted a) Conservative pricing b) Aggressive pricing
Pricing- Example
FY 05-06 06-07 07-08
EPS
AVG EPS = 5 Generally we take wt. average. Assuming wt. as(0.2, 0.3,0.5), the EPS =4.4
Pricing
P/E Highest multiple for the Industry Lowest Average
For Yr 3
30
10
15
Pricing
A) Conservative pricing- 11 * 4.4 = 48.4 B) Aggressive pricing - 15*4.4 = 66.0
Issue structuring
Issue size Promoters quota Firm allotments Net public offer Face value, premium value Final offer price Minimum & maximum subscription