Derivatives market and types in India
Merchant Banks are a very significant factor in the capital markets. Merchant Banks have a big role especially in placing equities in the primary markets, through the Initial Public Offers which we call IPO. Public savings and money play a vital role in financing many prominent projects. Through equity or debt from the market, thousands of crores are raised every year from the markets either. The merchant banks play a crucial role in helping the corporate raise money from these markets.
The SEBI issued guideline for the merchant bankers in April 1990. With the passage of time, the role of merchant bankers has enlarged to a great extent. It is mandatory for companies raising money from the capital markets (whether equity or debt) to appoint merchant bankers for this purpose. For the buyback of shares also the companies will need to appoint merchant bankers to oversee the entire process.
One of the major areas where these entities will henceforth play a major role is in the space of mergers and acquisitions. They will especially play a huge role in hostile takeovers. This activity is relatively new in India but it is bound to grow in the coming years. We have already witnessed mega deals through this route. The proposed acquisition of Sahara Air by Jet Airways is one such deal.
Internationally merchant bankers are known as Investment bankers mainly on account of their role valuing companies for possible takeovers and advising companies who are in the market for acquisition these bankers also help raise money for these takeovers. Following the globalization of the Indian economy, we have witnessed that many Indian companies are now acquiring companies abroad.
We have already seen companies like Tata Motors, TISCO, VSNL, Reliance, Bharat Forge and Dr. Reddy’s, to name a few acquiring companies abroad. Many more Indian companies will be in this field from now on. All these companies will iced merchant bankers to help them in this endeavor.
The merchant banks undertake the following activities:
1. Bills Discounting
2. Mergers and Acquisition
3. Working Capital Finance
4. Government Consents
5. Arranging fixed deposits
6. Corporate counseling
8. Non-Resident investments
9. Restructuring of sick units
10. Hire purchase
11. Project appraisal
12. Money market operations
13. Capital restructuring
14. Issue management
15. Loan syndication
16. Foreign currency finances
17. Investment management
18. Mutual Funds
19. Lease Finance
20. Project finances advice
Through the issue of debentures, shares, bonds etc the merchant bankers help corporates to raise money from the markets. They are designed as managers to the issue. Their main business is to attract public money to capital issues. They usually render the following services:
• Composing of the prospectus and getting it approved from the stock exchanges.
• Obtaining consent/ acknowledgment from SEBI.
• Appointing underwriters, bankers, advertisers, brokers, printers’ etc.
• Obtaining the permission of all the agencies involved in the public issue.
• Holding road shows, to sell the issue. These shows are held for the analysts, brokers and institutional investors. The purpose of these shows is to answer queries from these people about the company and the project for which the funds are being raised.
• Determining the pattern of advertising.
• Determining the offices from where application money should be collected.
• Deciding the dates of opening and closing of the issue.
• Obtaining the daily report of application money collected at various branches.
• Getting a subscription to the issue.
• After the close of the issue, obtaining consent of stock exchange for deciding basis of allotment etc. The merchant bankers help the companies to determine their capital structure.
Corporate Advisory Services relating to the issue
In India, The company has authority to decide price with valuable inputs from the merchant bankers, who have to sell the issue at the decided price. The pricing of the issue is very important, especially in a public issue. The pricing has to be such that the investors will be attracted to invest in the issue at that price, at the same time the company should get the premium that it is looking for.
After all, the premium price can play a very prominent role In deciding the company’s capital structure, as larger the premium lesser will be the requirement for borrowed funds. The promoter also requires choosing whether to go in for a rights issue or go for a fresh issue. However, this will depend mainly on the quantum of funds that the company needs to raise.
The success of the issue is dependent on the selection of the right type security. In this matter, the expert advice of the merchant bankers is of immense importance. In the issue management, the merchant bankers have to coordinate the various agencies to the issue. The success of the issue depends on the cooperation of all the agencies involved.
The merchant bankers offer the following services during the public issues:
• Making a budget and plan for the total expenses for the issue.
• Development of an application and compensation in obtaining the approval from SEBI.
• Drafting of the scheme.
• Appointing of underwriters and brokers etc.
• Appointing of bankers to the issue.
• Appointing of an advertising agency for publicity.
• Obtaining approval of the institutional underwriters and stock exchanges for publication of the prospectus.
Companies have authority to appoint one or more agencies as managers to an issue. SEBI guidelines order that all issues should be managed by at least one authorized merchant banker, functioning either as the sole or lead manager to the issue. Ordinarily, not more than two merchant bankers should be associated as lead managers, advisors and consultants to a public issue. In issues of over Rs. 100 crores, the number could be up to a maximum of four. The responsibilities of merchant bankers in management of public issues are many. Some of these are as follows:
We have seen that many unscrupulous promoters have raised money from the market. This has hurt the investors a lot and has also made investors nervous about stock market investments. This in turn affects the functioning of stock markets both the primary and the secondary markets. It is therefore, necessary that merchant bankers are satisfied with the viability of the project, which they can then sell to the investors with confidence.
It is therefore important for the reputation of merchant bankers, to only associate themselves with good issues. It has also been observed that many agencies associated with an issue tend to make tall claims about the promoters, the projects and the profitability etc. the merchant bankers should act as the custodians of the investors’ money and this puts a lot of responsibility on them\To discharge this function the merchant bankers have to exercise due diligence independently by verifying the contents of the prospectus and the reasonableness of the views expressed therein.
Though they do not have to sign the prospectus, they have to give a certificate to that effect to SEB I. It is the responsibility of the merchant bankers to get the securities listed on all the stock exchanges mentioned in the prospectus It can be especially true of companies, who cannot list their shares listed on either NSE or BSE, but promise listing on several regional stock markets, but actually list them only on one or two exchanges.
Non-receipt of refund orders and allotment advice within the stipulated period is a most common complaint of the investors. With the introduction of Demat accounts, the complaints about allotment have surely gone down. It is the responsibility of the merchant bankers and managers to ensure timely refunds and allotment of securities/stock to the investors.
The merchant bankers have to certify that they have verified everything and that they believe it to be true. This assures the investing public about the safety of their investment. The cares by the merchant bankers would ensure that all the fake companies, whose intention is to defraud the investors, do not have access to the market.
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