Lecture Retail and merchant banking – Lecture 30

The main functions of merchant banking are the following; Corporate counselling, project counselling, pre-investment studies, capital restructuring, credit syndication and project finance, issue management and underwriting, portfolio management, working capital finance, acceptance creat and bill discounting.

Trang 1

Revise Lecture 30

1

Trang 2

• Merchant Banking

2

Trang 3

Merchant Banking – An

Overview

• The financial services sector is an

important constituent of the financial

system and plays a significant role in the realm of economic development of a

country

• Merchant Banking is a prominent

component of the financial sector of our

Trang 4

Overview

• Merchant banking, although a

non-banking financial activity, resembles

banking function

• The function of merchant banking which originated, and grew in Europe, was

enriched by American patronage, and

these services are now being provided

throughout the world by both banking and non-banking institutions 4

Trang 5

Overview

• The word ‘Merchant Banking’ originated

among the Dutch and the Scottish traders, and was later on developed and

professionalized in Britain

5

Trang 6

Overview

• In the U.S., investment bankers cater to

the needs of business enterprises carrying out merchant banking functions The main functions of merchant banking are the

Trang 7

Overview

4 Capital restructuring

5 Credit syndication and project finance

6 Issue management and underwriting

7 Portfolio management

8 Working capital finance

9 Acceptance creat and bill discounting

10 Mergers, Amalgamations and takeovers

7

Trang 8

Overview

11 Venture capital

12 Lease financing

13 Foreign currency finance

14 Fixed deposit broking

15 Mutual funds

16 Relief to sick industries

17 Project appraisal

8

Trang 9

• Public Issue

Management

9

Trang 10

Public Issue Management

• The management of securities of the

corporate sector offered to the public on a regular basis, and existing shareholders

on a rights basis, is known as ‘public issue management’

• Issue management is an important

function of merchant bankers and lead

managers

10

Trang 11

• The management of issues for raising

funds through various types of instruments

by companies is known as ‘issue

management’

• A fast growing economy like Pakistan

offers tremendous scope for issue

management and the merchant bankers

provide their skills and expertise to

companies in the management of capital

Trang 12

• Categories of Securities Issue

12

Trang 13

• Corporate enterprise use several sources for raising funds from the capital market

• Issue of securities constitutes an important mode of raising such finances

• Security issues takes the following forms;

1. Public issue

2. Right issue

3. Private placement 13

Trang 14

Public issue of securities:

• When capital funds are raised through the issue of a prospectus, it is called ‘public

Trang 15

• The prospectus has to disclose all the

essential facts about the company to the prospective purchasers of the shares

• SECP insists on the adequacy of

disclosure of information that should serve

as the basis for investors to make a

decision about the investment of their

money

15

Trang 16

Right issue:

• When shares are issued to the existing

shareholding of a company on a privileged basis, it is called as ‘Rights Issue’

• The existing shareholders have a

pre-emptive right to subscribe to the new issue

of shares

• Rights shares are offered as additional

issues by corporates to mop up further

capital funds 16

Trang 17

• In this case, no prospectus is issued, since

it is presumed that the investors have

sufficient knowledge and experience and are capable of evaluating the risks of the investment 17

Trang 18

• Private placement covers shares,

preference shares and debentures

• The role of financial intermediary, such as merchant bankers and lead managers,

assumes greater significance in private

placement

• They involve themselves in the task of

preparing an offer memorandum and

negotiating with investors 18

Trang 19

Private placement obviously commands an advantage over the public issue on the

following grounds;

1. Speed and confidentiality of issue

2. Access to capital market more quickly

than a public issue which may take 6

months to one year Time taken by

private placement is just 2 to 3 months.19

Trang 20

3 Less expensive method of raising capital

because of fewer compliance procedures

4 Advantageous to small companies which

cannot afford a public issue because of the expense involved

5 Ideally suited to companies which need

only relatively limited amount of capital

Trang 21

• Issue Manager

21

Trang 22

Issue Manager

• Any financial institution / intermediary

which can carry out the activities

connected with issue management, is

registered with SECP, and can follow its

regulations and guidelines, is capable of venturing into issue management

• Issue management is an important activity for merchant bankers

22

Trang 23

Issue Manager (Requirements)

The Issue manager needs to satisfy the

following requirements before being allowed

by the SECP to carry out various issue

management activities;

1. Adequate and necessary infrastructure

such as adequate office space,

equipments and manpower to effectively discharge activities

23

Trang 24

Issue Manager (Requirements)

2 Minimum number of two persons

needed, who are professionally qualified

in Law, Finance or Banking management and have the experience to conduct the business of the merchant banker

3 Fulfilling the capital adequacy

requirements, i.e a minimum net worth of

Rs 5 crores

24

Trang 25

• Categories of Issue managers

25

Trang 26

Categories of Issue managers

• SECP has classified Issue managers into four categories as follows;

• Merchant banker who is authorized to act

as issue manager, advisor, consultant,

underwriter and portfolio manager

• Merchant banker who is authorized to act only as advisor, consultant, underwriter and portfolio manager 26

Trang 27

Categories of Issue managers

• Merchant banker who is authorized to act

as underwriter, advisor to an issue

• Merchant banker who is authorized to act only as advisor or consultant to an issue

27

Trang 28

• Role of Issue manager

28

Trang 29

Role of Issue manager

The merchant banker as an issue

manager is helpful is the following ways;

1 Easy floatation:

• An issue manager acts as an

indispensable pilot facilitating a public /

right issue This is made possible with the help of a repository of special skills

possessed by him to execute the

management of issue 29

Trang 30

2 Financial consultant:

• An issue manager essentially acts as a

financial architect, by providing advice

relating to capital structuring, capital

gearing and financial planning for the

company

3 Underwriting:

• An issue manager allows for underwriting the issues of securities made by corporate enterprise This ensures due subscription

of the issue

30

Trang 31

4 Market makers:

• Merchant bankers, an issue managers

often act as the market makers for the

issues lead managed by them

• They invest, continue to hold and provide, buy and sell quotes for the listed scrips of the company

31

Trang 32

5 Due diligence:

• The issue manager has to comply with SECP guidelines

• The merchant banker will carry out

activities with due diligence and furnish a Due Diligence Certificate to SECP

• SECP has also prescribed a code of

conduct for merchant bankers

32

Trang 33

• Activities involved in public issue management

33

Trang 34

Activities involved in public issue

management:

• There are several activities that have to be performed by the issue manager in order

to raise money from the capital market

• Adequate planning needs to be done while chalking out an appropriate marketing

strategy

34

Trang 35

management:

• The various activities involved in raising funds from the capital markets are the following;

Pre-issue Activities:

1. Signing of MoU

2. Obtaining appraisal note

3. Optimum capital structure 35

Trang 36

management:

4 Convening meeting

5 Appointment of financial intermediary

6 Preparing documents

7 Due diligence certificate

8 Submission of offer document

9 Finalization of collection centres36

Trang 37

management:

10 Filing with RoC

11 Launching the issue

12 Promoter’s contribution

13 Issue closure

37

Trang 38

Lecture 31

issues

38

Trang 39

Marketing of New Issues

Methods of marketing securities:

• Following are the various methods being adopted by corporate entities for

marketing the securities in the New Issues Market;

1. Pure prospectus method

2. Offer for sale method

3. Private placement method

39

Trang 40

Methods of marketing securities:

4 Initial public offers (IPOs) method

5 Right issue method

6 Bonus issue method

7 Book-building method

8 Stock option method

9 Bought-out deals method

40

Trang 41

Pure prospectus method:

• The method whereby a corporate

enterprise mops up capital funds from the general public by means of an issue of a prospectus, is called ‘pure prospectus

Trang 42

Advantages:

• The pure prospectus method of marketing the securities serves as an excellent mode

of disclosure of all the information

pertaining to the issue The method

promotes confidence of investors through transparency and non-discriminatory basis

of allotment

42

Trang 43

Drawbacks:

1. High issue costs

2. Time consuming

43

Trang 44

Offer for Sale method:

• Where the marketing of securities takes place through intermediaries, such as

issue houses, stockbrokers and others, it

is a case of ‘Offer for Sale Method’

• Under this method, the sale of securities takes place in two stages

44

Trang 45

• First stage, the issuer company makes an en-block sale of securities to

intermediaries such as the issue houses and share brokers at an agreed price

• Second stage, the securities are re-sold to ultimate investors at a market-related

price The difference between the

purchase price and the issue price

constitutes ‘profit’ for the intermediaries.45

Trang 46

Trang 47

Private Placement Method:

• A method of marketing of securities

whereby the issuer makes the offer of sale

to individuals and institutions privately

without the issue of a prospectus is known

as ‘Private Placement Method’

47

Trang 48

Advantages:

1. Less expensive as various types of costs

associated with the issue are borne by

the issue houses and other

intermediaries

2. Placement of securities suits the

requirements of small companies

48

Trang 49

Disadvantages:

1. Concentration of securities in a few

hands

2. Depriving the common investors of an

opportunity to subscribe to the issue, thus affecting their confidence level

49

Trang 50

Initial Public Offer (IPO) Method:

• The public issue made by a corporate

entity for the first time in its life is called

‘Initial Public Offer’ (IPO)

• Under this method of marketing, securities are issued to successful applicants on the basis of the orders placed by them,

through their brokers

50

Trang 51

Initial Public Offer (IPO) Method:

• The job of selling the stock is entrusted to

a popular intermediary, the underwriter

Advantage:

The biggest advantage of this method of

marketing of securities is that there is no

need for the investors to part with the money even before the shares are allotted in his

Định dạng
Số trang	51
Dung lượng	77,3 KB