ROLE OF MERCHANT BANKING

Raising finance

Merchant Bankers help their clients in raising finance by way of issue of a debenture,
shares, bank loans, etc. They tap both the domestic as well as the international
markets. Finance raised by this method may be used for commencing a new project or
business or it may even be used for expansion and modernization of an existing
business.

Promotional activities

In India, merchant bankers play the role of promoter of industrial enterprises. They
help entrepreneurs in conceiving ideas, identifying projects, preparation of feasibility
reports, getting Government approvals as well as incentives, etc. Merchant bankers
may, at times, also provide assistance in financial and technical collaborations and i
joint ventures.

Brokers in stock exchanges

Merchant bankers buy and sell shares in the stock exchange on behalf of the clients.
They additionally conduct researches on equity shares, advise the clients on the share
to be purchased, the time of purchase, quantity of such purchase and the time for
selling these shares. Mutual funds offer merchant banking services, large brokers,
investment banks, and venture capitals.

Project management

Merchant bankers offer help to clients in several ways in the process of project
management. They offer advice regarding the location of the project, preparation of
project report, in carrying out feasibility studies, planning out the financing of the
project, tapping sources of such finance, information regarding incentives and
concessions from the government.
 Handling government consent for industrial projects

A merchant banker completes all formalities for his or her client, about government
permission to expand and modernize business (necessary for companies) and
commencing new businesses (necessary for business people).

Special assistance to entrepreneurs and small companies

Merchant banker advises entrepreneurs and small companies on availability and

existence of business opportunities, concessions, incentives and government policies
and helps them to take advantage of this option available to them, to the best of their
capabilities.

Services to PSUs

Merchant banker offers numerous services to public sector undertakings and units and
their public utilities. They assist in raising capital (long-term), in the marketing of
securities, in foreign collaborations as well as in arranging for long-term finances
from lending institutions.

SERVICES OF MERCHANT BANKING

i. Project counseling
ii. Market survey and forecasting
iii. Estimating the amount of funds required.
iv. Raising funds from capital market.
v. Raising of funds through new instruments.
vi. Bought out deals.
vii. OTC market operations.
viii. Mergers and amalgamations.
ix. Loan syndication.
x. Technology tie-ups.
xi. Working Capital Finance.
xii. Venture Capital.
xiii. Lease Finance.
xiv. Fixed deposit management.
xv. Factoring
xvi. Portfolio management of mutual funds.
xvii. Rehabilitation of sick units.

CODE OF CONDUCT:
 Should make all efforts to protect the interest of investors
Should maintain high standards of integrity, dignity and fairness in conduct of
business
Should fulfill all obligations in a professional and ethical manner
Should not discriminate among the clients
Should ensure that prospectus, letter of offer etc.. is available to investors at
the time of issue
Should render best possible advice to its clients
Any penal action taken by SEBI should be informed to its clients

SEBI GUIDELINES FOR MERCHANT BANKING-

Every merchant banker should maintain copies of balance sheet, Profit and
loss account, statement of financial position
Half-yearly unaudited result should be submitted to SEBI
Merchant bankers are prohibited from buying securities based on the
unpublished price sensitive information of their clients
SEBI has been vested with the power to suspend or cancel the authorization in
case of violation of the guidelines
Every merchant banker shall appoint a Compliance Officer to monitor
compliance of the Act
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 authorization 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

For each issue managed by an M.B, the matters to be disclosed mandatorily on

their website are:
Three years track record of companies whose IPOs/FPOs were managed by
them.
Issue size
Extent of over/under subscription
The shareholding of QIBs at the end of each of the three subsequent years
Financials of the company for three years
EPS and Price-Earning multiple at the end of each of the financial year
Post-listing vis--vis the peer as well as the industry average
The extent of trading of shares whether thin or active
 UNDERWRITING-

Underwriting is an agreement entered into before the shares are bought by the public
that in the event of the public not taking up the whole of them the underwriter will
take an allotment of such part of the shares as the public has not applied for.

SEBI GUIDELINES FOR UNDERWRITING

Eligibility criteria, Procedure for registration and operational guidelines

are covered under SEBI (Underwriters) Rules, 1993 and SEBI
(Underwriters) Regulations 1993. The words "underwriting" and
"Underwriter" are defined in the aforesaid Rules as under:

"Underwriting" means an agreement with or without conditions to

subscribe to the securities of a body corporate when the existing
shareholders of such body corporate or the public do not subscribe to the
securities offered to them.

"Underwriter" means a person, who engages in the business of

underwriting of an issue of securities of a body corporate;

Rule 3(1) of the aforesaid Rules makes Registration with the SEBI
compulsory.

To quote the said Rule-

"No person shall act as underwriter unless he

holds a certificate granted by the Board under the regulations".

 REGISTERATION

The Board may grant or renew a certificate to an underwriter subject to the following
conditions namely;

o in case of any change in the status and constitution, the underwriter

shall obtain prior permission of the Board to continue to act as
underwriter;

o without prejudice to the obligations under any other, the underwriter

shall enter into a valid agreement with the body corporate on whose
behalf he is acting as underwriter and the said agreement amongst
other things may define the allocation of duties and responsibilities
between him and such body corporate and;

o he shall pay the amount of fees of registration in the manner provided

in the regulations;

o he shall abide by the rules and regulations made under the Act in
respect of the activities carried on by him as an underwriter.
CREDIT RATING

A credit rating estimates the credit worthiness of an individual, corporation, or

even a country. It is an evaluation made by credit bureaus of a borrowers
overall credit history.
Credit ratings are based on financial history and current assets and liabilities.
Typically, a credit rating tells a lender or investor the probability of the subject
being able to pay back a loan.

IMPORTANCE OF CREDITING RATING

Credit Rating establish a link btw risk and return

An investor uses the rating to assess the risk level and compares the offered
rate of return with his expected rate of return.
Good credit ratings allow borrowers to easily borrow money from financial
institutions or public debt markets. At the consumer level, banks will usually
base the terms of a loan as a function of your credit rating, so the better your
credit rating, the better the terms of the loan typically are. If your credit rating
is poor, the bank may even reject you for a loan.
At the corporate level, it is usually in the best interest of a company to look
for a credit rating agency to rate their debt. Investors often times base part of
their decision to buy bonds, or even the stock, on the credit rating of the
company's debt.

RATING PROCESS
The process begins with issue of rating request letter by the issuer of the
instrument and signing of the rating agreement.

CRA assigns an analytical team consisting of two or more analysts one of

whom would be the lead analyst and serve as the primary contact.

Meeting with Management- the analytical team obtains and analyses

information relating to its financial statements, cash flow projections and other
relevant information.

Discussion with management on management philosophy, competitive

position, financial policies and future plans.

Discussions on financial projections based on objectives and growth plan ,

risks and opportunities.

Rating committee- after meeting with the management the analysts present
their report to a rating committee, which then decides on the rating.

After the committee has assigned the rating, the rating decision is
communicated to the issuer, with reasons or rationale supporting the rating.
 Dissemination to the Public: Once the issuer accepts the rating, the CRAs
disseminate it, along with the rationale, to the print media.

RATING METHODOLOGY
The rating methodology involves an analysis of industry risk, issuers business
and financial risk. A rating is assigned after assessing all factors that could
affect the credit worthiness of the entity. The industry analysis is done first
followed by the company analysis.

Consist of 4 areas:

Business analysis- covers an analysis of industry risk, market position

in the country, operating efficiency of the company and legal position.

Financial Analysis- analysis of accounting quality, earnings

protection, cash flow adequacy and financial flexibility.

Management Evaluation- study of track record of the managements

capacity to overcome adverse situations, goals, philosophy and
strategies.

Fundamental analysis- analysis of liquidity management, asset

quality, profitability and interest and tax sensitivity.

Steps:-

information is collected and then analysed by a team of professionals

in an agency.

If necessary, meetings with top management suppliers and dealers and

a visit to the plant of proposed sites are arranged to collect additional
data. This team of professionals submit their recommendations to the
rating committee.

Committee discusses this report and then assigns rating.

Rating assigned is then notified to the issuer and only on his

acceptance, rating is published.

Assures confidentiality of information.

Once the issuer decides to use and publish the rating, agency has to continuously
monitor it over the entire life of instrument, called surveillance
SEBI GUIDELINES
Credit Rating Agencies should be SEBI Registered.

A registration fee of Rs. 50,000 should be paid to SEBI.

SEBI Registration is valid for a Period of 3 Years.

Minimum Net worth of Rs 5 Crore is needed for a Credit Rating Agency or an

Undertaking to Enhance the Net worth with in a period of 3 Years.

No Company shall make a Public Issue or rights issue of Debt Instruments,

unless Credit Rating is obtained from at least one Credit Rating Agency.

DRAWBACKS OF CREDIT RATING-

Possibility of Bias Exist : The information collected by the rating
agency may be subject to personal bias of the rating team. However,
rating agencies try their best to provide an unbiased opinion of
the credit quality of the company and/or instrument. If not, they will
not be trusted.

Improper Disclosure May Happen : The company being rated may

not disclose certain material facts to the investigating team of the
rating agency. This can affect the quality of credit rating.

Impact of Changing Environment : Rating is done based on present

and past data of the company. So, it will be difficult to predict the
future financial position of the company. Many changes take place due
to changes in economic, political, social, technological, legal and other
environments. All this will affect the working of the company being
rated. Therefore, rating is not a guarantee for financial soundness of
the company.
 Problems for New Companies : There may be problems for new
companies to collect funds from the market. This is because, a new
company may not be in a position to prove its financial soundness.
Therefore, it may receive lower credit ratings. This will make it
difficult to collect funds from the market.

Downgrading by Rating Agency : The credit-rating agencies

periodically review the ratings given to a particular instrument. If the
performance of a company is not as expected, then the rating agency
will downgrade the instrument. This will affect the image of the
company.

Difference in Rating : There are cases, where different ratings are

provided by various rating agencies for the same instrument. These
differences may be due to many reasons. This will create confusion in
the minds of the investor.

Functions of Reserve Bank of India

1. Traditional Functions
Issue of Currency Notes
Banker to other Banks
Banker to the Government
Exchange Rate Management
Credit Control Function
Supervisory Function

2. Developmental / Promotional Functions of RBI

Development of the Financial System
Development of Agriculture
Provision of Industrial Finance
Provisions of Training
Collection of Data
Publication of the Reports
Promotion of Banking Habits
Promotion of Export through Refinance

3. Supervisory Functions of RBI

Granting license to banks
Bank Inspection
Control over NBFIs
Implementation of the Deposit Insurance Scheme
.