Merchant Banking

Merchant is an organization, that underwrite securities

for corporation, advices such clients on mergers, and is involved in the
ownership of commercial ventures.
These organizations are neither some time banks which are not merchant
and sometimes merchant who are not bank and sometimes which are
neither merchant nor bank.

Merchant banker:
Any person who is engaged in the business of issues
management either by making arrangement regarding selling, buying or
subscribing to securities as manager consultant, adviser or rendering
corporate advisory services in relation to issue management.

Issue management:
The management of issues for raising funds through
various types of instruments by company is known as “issue management”

Leasing:
A lease is an agreement whereby Lessor conveys to the lessee in
return for rent, the right to uses an asset for agreed period of time.

Lessor:
Lessor is a person who conveys to another person, the right to use
assets in consideration, of a payment of periodical rental under the
agreement.

Lessee:
Lessee is a person who obtains from the lessor, the right to use the
assets for periodical rental payment for an agreed period of time.

Hire purchasing:
An agreement under which goods all let on him and under
which the buyer has an opinion to purchase them in accordance with the
terms of the agreement.
Factoring:

A Financial service, whereby and intuitions called “Factor” undertakes

the task of realizing accounts receivable such as book debts, bills
receivables and managing sundry debts, and sells registers of commercial
and trading firms in the capacity of an agent for a commission.
`
Forfeiting:
A form of financing of receivables arising from international trade
is known as forfaiting with this arrangement a financial institutions
undertake the purchase of trade bills without recourse to the seller.

Purchase is through discounting of the documents covering the entire

risk of non- payment at the time of collection. forfeiter pays cash to the
seller after discounting the bills.

Mutual funds:
Mutual fund is a financial service organization that receivers
money from share holders, invest it, earns return on it, attempt to make it
grow and agrees to pay the shall holder cash on demand for the current value
of his investment.

Credit ratings:
The process of assigning a symbol with specific reference to
the instrument being rated that acts as an indicator of the current opinion on
relating capability on the issuer to service its debt obligation in a timely
fashion

Venture capital:
Venture capital investment is the kind as an activity by
which investors support entrepreneurial talent with finance and business
skills to exploit market opportunity and thus obtain long term capital gains.

Project management:
Project can be defined as a scheduled set of activities aimed at the
creation of a particular asset as per planned specifications, with a view
to generate wealth as estimated for future years.
Non banking financial companies [NBFC]

Receiving deposits or that of a financial institutions such as lending,

investment in securities, Hire purchase finance or equipment leasing.

UNIT-I
Merchant banking:
Overview of Indian financial system:
Financial company:
It include both
1. Assets mgt companies
2. Liability mgt companies

Assets mgt companies include leasing company, mutual funds, merchant

bankers etc
Liability mgt companies comprises of the bill discounting [IDBI]

Financial system:
A financial system functions as intermediaries and
facilitates the flow of fund from the areas of surplus to the area of deficit.

Components/consititunants of financial system:

Financial system

Financial instruments Financial markets Financial intermediaries

1.mony market 1.money market 1. mutual fund

instrument

2.Capital market 2. Capital market 2.investment bank

instrument

3. Hybrid instrument 3. Forex market 3. banks

4. Credit market 4. Brokers
5. underwriters
6. self regulatory
organization
Merchant banking Function:

1. corporate counseling
2. project counseling

3. Pre-investment studies
4. Capitol restructuring
5. Project finance.
6. Issue management
7. Working capital finance
8. mergers and take over
9. venture capital
10.lease financing
11.Foreign currency finance.
12.fixed deposit broking
13. mutual fund
14.relief to sick industry
15. acceptance credit and bill discounting

16.portfolio management

Merchant bankers code of conduct:

 Information
 Secrecy
 Best advice
 Responsible statement
 Fair practices
 Compliance
 True market
 Regulations of merchant banking

 Guide lines for advertisement

 Operational guideline
 Pre- issue obligation
 Post- issue obligation

1.Guide limes for advertisement:

 Factual and truth full

 Clear and conscience
 Promise of profits
 Mode of advertising
 Financial data
 Risk factors
 Product advertisement
 Subscription
 issue closer
 Incentive
 Reservation

2.Operational guide lines:

 Submission of offer document

 Dispatch of issue material
 Under writing
Compliance obligation
Redressal of investors grievances
Submission of post issue reports
Registration of merchant bankers
Reporting requirements
Imposition of penalty point
Issue of no objection certificate
3. Post – issue obligation:

 Post issue monitoring report

 Redressal of investor grievances
 Co-ordination with intermediaries
  Under writers.
 Bankers to issue.
 Post issue advertisement
 Bases of allotment
 Reservation for small individual applicants
 Stock invest
 Certificate regarding realizations of stock invest.

4. Post – issue obligation:

 Memorandum of understanding
 Appointment of intermediaries
 Underwriting
 Offer document to be made public
 Dispatch of issue materials
 Mandatory collection center
 Authorized collection agent
 Advertisement
 Appointment of compliance officers.

Issue management:
Issue manager;
Any financial institution or intermediaries which can carry
out the activities connected with issue management, he is registered with
SEBI is called issue manager”

Category of issue manager:

Based on the core functions, they categorized.

1. Advisor+ underwriter +portfolio mgrs+ consultant.

2. Advisors+ underwriter + profiling.
3. Advisor + consultant + underwriter
4. Advisor

Category of issues:
 1. Public issue
Issuers supposed to attach the prospects with the share, to sell at
the time of public.
2. Rights issue
Share holder, existing share holder to receive the shares without
prospect

3. Private placement:
 Without prospect.
 Neither rights nor public people

Functions of issue management:

 Obtaining approval
 Arranging the under writing
 Finalization of prospects
 Arranging for press conferences
 Arranging for investor conferences
 Complain with SEBI guideline
 Co-ordination printing and publicity.

Pre issue and post issue activities:

Post issue
 Advertisement
 Dispatch of the share critical
 Finalization of ashes of allotment

Pre issue:

 Memorandum of understanding
 Optimal capital saturate
 Convening meeting
 Preparing documents
 Appointment of intermediaries.
 Certification of SEBI
 Submission of offer document.
 Deciding collection center
 Launching the issue
 Issue closer.
 Merchant banking in India;
2 categories classified
1. Before 1967
2. After 1967

Before 1967 the merchant banking act as “managing agency”

After 1967 some banks and financial intuition they do merchant activities
SBI, ICICI, syndicate bank of Baroda, merchant bank standee charted
bank.

UNIT-II
Leasing
Characteristics of leasing:

1. The parties [Lesser & Lessee]

2. The assets [Plant, machinery, building, automobiles]
3. The term [Time duration ]
4. Lease rental.

Type of leasing:

1. Financial lease

 Long term based lose, the lessee nil benefit.

 Transfer of assets limited one.
 Risk bearer to leases.
 Full payout lease

2. Operational lease

 Short term
 Transfer of assets unlimited.
 Risk is bear to leaser.

3. Consumer leases.
4. Balloon lease
5. Swept lease:
6. Wrap leases

7. Conveyance lease
8. Leverage leases

9. Sale and lease back

10. Close end leasing

11. Open end leasing

12. Import leasing:

13. International leasing
14. Cross border leasing
15. Partial payout leasing:

Advantages of leasing
Lesser:
1. Stable business
2. Minimum risk
3. Tax Benefit
4. Easy fiancé
5. Growth of capital.
6. Wider distribution
7. Second hand mkt.

Lessee:
1. Efficient use of found.
2. Cheaper source.
3. Favorable terms.
4. Protection against obsolescence
5. Avoidance of initial outlay.

Difference b/w financial lease & operational lease

Specificity
Financial Operation
Ownership risk
Obsolescence risk
Compellability
Lease period
Maintains
Payout

Legal aspect of leasing:

 o Description
Retail detail
o Asset delivery
o Insurance
o Lease rental variation:
o Dispute
o Return on asset
o Lease responsibility
HIRE PURCHASE

Hirer – buyer [purchase]- customer

Hire vendor -owner – seller
Hire purchase - Activity
Hire purchase –Finance – Like Bank.

Right of Hirer:

1. Right to protection
2. Right of notice.
3. Right Of statement.
4. Right to excess amount.
5. Right of repossession.

Different b/w leasing & Hire purchasing:

1. Ownership
2. Depreciation
3. Capitalization
4. Payout installment
5. Salvage value
6. Magnitude
7. down payout
8. Maintenance charge
9. Suitability
10. Nature of assets
11. Receipts
12. Repossession
13. Taxation

Factoring:
Characteristics of factoring:

 Compensation
 Recourse
 Less dependences
 Credit realization
 Professnalism
 The assignment
 The form
 Nature

Types of Factors:

1. Domestic Factoring

 Disclosed factoring
 Undisclosed factoring
 Discount factoring
2. Export factoring
3. Cross border factoring
4. Full service factoring
5. With recourse factoring
6. without recourse factoring
7. Advanced & maturity factoring
8. Bank participation factoring
9. Collection& maturing factoring

Forfeiting:
Process of forfeiting:
1. Commercial contract [Export –Import]
2. Transaction [Export- import]
3. Note cataract [Importer bank –exporter]
4. Factoring contract [Exporter – forfeiter]
5. Sale of notes [Exporter – forfeiter]
6. Payment [forfeiter- export]

Difference b/w Factor and forfeiting:

1. Suitability
2. Recourse
3. Risk
 4. Cost
5. Coverage
6. Exited of financing
7. Base of financing
8. service
9. exchange fluctuation
10.contract

Advantage of forfeiting:
1. As a sales tool
2. As a protective tool
3. Risk free
4. Simple to use
5. Cost effective

Difference b/w bills discounting & factoring:

1.recourse
2.collector
3.services
4.bulk finance
5.finance.