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Who is a Merchant Banker? A merchant banker can be defined as “An organization that acts as an intermediary between the issuers and the ultimate purchasers of securities in the primary security market. ” A merchant banker is an institution that helps companies to raise capital. It is an organization that underwrites corporate securities, provides advisory services to its clients. What is Merchant Banking? Merchant bankers facilitate issue process and their activities are termed as merchant banking ‘Essentially, Merchant banking is what merchant bankers do. Merchant Banking As per RBI A merchant banking company has been exempted from the provisions of Section 45-IA [Requirement of registration and net owned fund], Section 45-IB [Maintenance of liquid assets] and 45-IC [Creation of Reserve Fund] of the RBI Act, 1934 , [3] Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 and [4] Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998 subject to compliance with the following conditions: a)It is registered with the Securities and Exchange Board of India as a Merchant Banker under Section 12 of the Securities and Exchange Board of India Act, 1992 and is carrying on the business of merchant Banker in accordance with the Securities and Exchange Board of India Merchant Banking (Rules) 1992 and Securities and Exchange Board of India Merchant Banking (Regulations) 1992; (b)acquires securities only as a part of its merchant banking business; c)does not carry on any other financial activity referred to in Section 45I(c) of the RBI Act, 1934; and does not accept or hold public deposits as defined in paragraph 2(1)(xii) of the Notification No. DFC 118/DG(SPT)-98 dated January 31, 1998. Registration of merchant bankers… Registration with SEBI is mandatory to carry out the business of merchant banking in India. An applicant should comply with the following norms: •The applicant should be a body corporate The applicant should not carry on any business other than those connected with the securities market •The applicant should have necessary infrastructure like office space, equipment, manpower etc. •The applicant must have at least two employees with prior experience in merchant banking •Any associate company, group company, subsidiary or interconnected company of the applicant should not have been a registered merchant banker •The applicant should not have been involved in any securities scam or proved guilt for any offence •The applicant should have a minimum net worth of Rs. crores State Bank Of India – Merchant Bank About State Bank of India State Bank of India is India’s largest commercial bank. The bank has a vast domestic network of 9019 branches (approximately 14% of all bank branches) and commands one-fifth of deposits and loans of all scheduled commercial banks in India. The State Bank Group includes a network of eight banking subsidiaries and several non-banking subsidiaries offering merchant banking services, fund management, factoring services, primary dealership in government securities, credit cards and insurance.
SBI has branches/representative offices in 31 countries and correspondent relationship with 720 foreign banks. State Bank of India is an active participant in the area of finance of Project export activities. These activities will mainly involve financing the fund based and non fund based requirements of the project exporters. • Export of engineering goods on deferred payment terms Execution of turnkey projects abroad • Execution of overseas civil construction contracts abroad • Exports of services are the contracts for export of consultancy, technical and other services. Project export contracts are generally of high value and exporters undertaking them are required to offer competitive terms to be able to secure orders from foreign buyers in the face of stiff international competition.
Our vast network of branches spread all over the country which are authorized to handle trade related transactions, substantial presence overseas with branches/offices in all major commercial centers of the world covering all time zones and our strong network of correspondent relationship with top ranking banks in several countries adds to our competitive strengths to facilitate and meet various requirements of project exporters. More over we also enjoy the comprehensive credentials in International banking community.
Credit facilities offered by us: Various types of credit facilities, both non fund and fund based, that the project exporters may need at the time of bidding and/ or for execution of the project are extended by the Bank. Non Fund Based Facilities Letter of Credit facility on behalf of our customer enabling him to import raw material required for manufacturing goods for project export is provided by us and also all other types of guarantees required for project export contract are issued by us: Bid Bond Guarantee
Advance Payment Guarantee Performance Guarantee Down Payment Guarantee Retention Money Guarantee Maintenance Guarantee Overseas Borrowing Guarantee Fund based i) Pre-shipment credit both in Indian rupees and in foreign currency to extend financial assistance for procuring/ manufacturing/ processing/ packing/ shipping goods meant for export. ii) Rupee/ Foreign currency supplier’s credit : When a project export is on deferred credit terms, we meet the financial requirement of our exporter in Indian rupees or foreign currency. ii) Buyer’s credit :Bank also participates in grant of credit to foreign buyers under the Buyer’s Credit Scheme’ of Exim Bank. SBI – Merchant Banking SBI’s Merchant Banking Group is strongly positioned to offer perfect financial solutions to your business. We specialize in the arrangement of various forms of Foreign Currency Credits for Corporates. We provide the resources, convenience and services to meet your needs by arranging Foreign Currency credits through: • Commercial loans • Syndicated loans • Lines of Credit from Foreign Banks and Financial Institutions • FCNR loans Loans from Export Credit Agencies • Financing of Imports. We are internationally the most Preferred Bank by Export Credit Agencies for Guarantees in case of the Indian Clients or Projects. SBI being an Indian entity has no India exposure ceiling. Our Primary focus is On Indian Clients. SBI’s seasoned Team of professionals provides you with Insightful credit Information and helps you Maximize the Value from the transaction. Scope of Activities 1. Advising the company on designing of its Capital Structure. 2.
Advising the company on the instrument to be offered to the public. 3. Pricing of the instrument. 4. Advising the company on Legal/ regulatory matters and interaction with SEBI/ ROC/ Stock 5. Exchanges and other regulatory authorities. 6. Assisting the company in marketing the issue. 7. In channelising the financial surplus of the general public into productive investment avenues. 8. To coordinate the activities of various intermediaries to the share issue such as the registrar, bankers, advertising agency, printers, underwriters, brokers etc. 9.
To ensure the compliance with rules and regulations governing the securities market Functions of a SBI as a Merchant Banker… The following comprise the main functions of a merchant banker: •Management of debt and equity offerings- This forms the main function of the merchant banker. He assists the companies in raising funds from the market. The main areas of work in this regard include: instrument designing, pricing the issue, registration of the offer document, underwriting support, marketing of the issue, allotment and refund, listing on stock exchanges. Placement and distribution- The merchant banker helps in distributing various securities like equity shares, debt instruments, mutual fund products, fixed deposits, insurance products, commercial paper to name a few. The distribution network of the merchant banker can be classified as institutional and retail in nature. The institutional network consists of mutual funds, foreign institutional investors, private equity funds, pension funds, financial institutions etc. The size of such a network represents the wholesale reach of the merchant banker.
The retail network depends on networking with investors. •Corporate advisory services- Merchant bankers offer customised solutions to their clients financial problems. The following are the main areas in which their advice is sought: Financial structuring includes determining the right debt-equity ratio and gearing ratio for the client, the appropriate capital structure theory is also framed. Merchant bankers also explore the refinancing alternatives of the client, and evaluate cheaper sources of funds.
Another area of advice is rehabilitation and turnaround management. In case of sick units, merchant bankers may design a revival package in coordination with banks and financial institutions. Risk management is another area where advice from a merchant banker is sought. He advises the client on different hedging strategies and suggests the appropriate strategy. •Project advisory services- Merchant bankers help their clients in various stages of the project undertaken by the clients. They assist them in conceptualising the project idea in the initial stage.
Once the idea is formed, they conduct feasibility studies to examine the viability of the proposed project. They also assist the client in preparing different documents like the detailed project report. •Loan syndication- The SBI leverages its vast network of relationships to arrange syndicated credit products for corporate clients and industrial projects. With its rich experience and strong reputation, SBI’s syndication desk can assemble large loan packages involving a ring of reputed financial entities, domestic and international, that match the large credit requirements of infrastructure projects. Leasing Services: The Indian company investors must be acknowledged that lease is that agreement under which the company or Indian firm acquire the exact right and make use of certain capital asset on the consideration of payment of rental charges. The Indian corporate company must equally known that it cannot equally know that it cannot acquire any kind of ownership to such an asset apart from making use of it. The user comparatively pays all the expected operating costs and also the maintenance expenses.
The main corporate companies must equally take into the consideration that developed countries like America, United Kingdom the companies of such a countries are commonly depending on the leasing factor. In India since the era of liberalization, many of the Indian companies have equally been involved in the leasing transactions. On the other side, many financial institutions and even the commercial banks in the Indian financial sector have comparatively been accepted over the same transactions. •Mutual Fund Services:
The Indian corporate companies must equally be informed that the mutual funds comprises of the exact funds gained by pooling all the public savings. The mutual funds are comparatively invested in those portfolios, which are commonly diversified in nature with the main objectives of sharing the risk. The Indian small-scale investors cannot be able to get their funds from the comparative big corporate companies can equally gain there working funds from the mutual funds. However, the modern concept of the mutual funds was developed in1968 in London by the foreign and colonial government trust of London.
By which it gained its invention in India in early 1980, even if it was exactly started in 1964 by the unit trust of India. In addition to the above, the mutual funds can be grouped into [a] Close ended funds & [b] Open ended funds. The Indian corporate companies can only benefits from the mutual funds on gaining savings for investment, better yield low cost on investment, tax benefits, flexible on investment, promoting industrial development reducing the cost of new issue and many more other advantages.
On the other side, Indian corporate companies must be informed on the kind of risks involved with the mutual funds like market risks, scheme risks, business risk, investment risks and even the political nature of risks. While the investors are selecting the funds must take into account the objectives of the fund, consistency of performance of the funds. Historical background of the funds, cost of operation, capacity for innovation, the investors servicing, market trends, and even the transparence of the fund management.
For the Indian mutual funds to have good future there must be full support of SEBI better control of capital issue, better interest rate, good PE ratio, investors must have good choice, tax concessions, and many more. •Hire Purchase Service: In the hire purchase kind of transaction is that method of selling by which goods are left out on hiring by the Indian corporate company to the purchaser by which the hirer is comparatively required to the payment on an agreed sum of amount in the system of periodical installments.
In the hire purchase the Indian corporate companies must know that the ownership of such kind of the property exactly remain under the control of the creditor who normally passes the right to hirer on the condition of payment of the last agreed sum of money in installment. The Indian corporate company must know that legally, payment is made in installment over the agreed specified period, possession of the same right is delivered to the purchaser during the time of agreement, the property passes to the exact purchaser on the agreed last installment, and the hirer has a right to return the property without further installment.
In addition to the above, the Indian corporate company must know that the agreement must comparatively contain the nature of the goods as described in manner so that to identify them easily, the nature of the hire purchase price, the date of commencement and finally the extend or number of installments. •Venture Capital Service: The venture capital is that investment in the new Indian enterprises without stability in growth. It’s that environment of capital, shareholding and even the setting up of small firms, which are comparatively specializing, in same new technological ideas in the commercial sectors.
The venture capital is equity participation, it’s of high risk in nature, it’s also available only for commercialization of new technologies and it’s the exact promoter of the projects, and it’s continuous in nature and input of the firm. The Indian corporate companies must equally know that venture capital involves the development of project idea, implementation, fledging or additional financing, and establishment stage. The main importance of venture capital to Indian, corporate companies are the reduction of risk, easy to analyze the business prospects and to assume the investors on affairs of the business.
The Indian methods of venture financing are equity participation, income notes, the conventional loans and even the conditional loans. In order to promote the venture capital growth in India, there must be tax concessions for capital gains, high level development of capital market, giving of fiscal incentives to Indian corporate companies, high level participation of the private sectors the improving and reviewing of the existing laws and limited partnership and many more. Discounting, factoring and forfeiting services: Due to the exact trade transaction the trade bill comparatively arises, the Indian corporate companies must take into consideration that the supplier of the exact goods draws bill which is based on the purchase for the invoice price of goods sold on credit method of which is drawn on the short period of time. The buyer pays the amount on the exact date by which the supplier of goods has to await until the expiry of the exact bill.
However, the banks provides the cash discounting based on the exact trade bills by which they deduct certain charges as discount based on the amount of the bill and credit balance of the customers account. •Factoring: Factoring is to get thing being done. The ward factor means to mark or to do according to R. W. Johnson factoring is a service involving the purchase by financial organization, called a factor of receivables owned by manufacturers and distributors by the customers with the factor assuming full credit and collection responsibilities.
The main conditions of factoring that the Indian corporate companies must know are these must be assignment of debt that has to be in favour of the factor. The selling limits for the client, the factor must have recourse to the client in the case of non-payment by the customer; the factor will equally have recourse in case of non-payment, details on payment for the services, interest and limit of any overdraft facility charged.
The Indian corporate companies must be well informed about the types of factoring as full service, recourse factoring, maturity, bulk, invoice, agency and also international factoring. At the same time the exact cost of factoring like the pricing, fee, discount, accounting system must be taken into consideration. •Forfeiting: Forfeiting is the French term means “to give something” or “give one’s right”. Generally the term forfeit is non-recourse purchase by the commercial bank or any other financial intermediaries or institutions receivables that equally arises from the export of the goods. Channel Financing: Channel financing is an innovative finance mechanism by which the bank meets the various fund necessities along your supply chain at the supplier’s end itself, thus helping you sustain a seamless business flow along the arteries of the enterprise. Channel finance ensures the immediate realization of sales proceeds for the SBI client’s supplier, making it practically a cash sale. On the other hand, the corporate gets credit for a duration equaling the tenor of the loan, enabling smoother liquidity management.
SBI has the world’s largest banking network of over 9,000 branches and this enables it to deliver the financial solution at your suppliers’ doorsteps, across the span of the country. •Dealer Financing: SBI extends financial support to the corporate distribution networks, by providing both working capital finance and term loans to select dealers of identified companies. This gives dealers to leverage their business relationship with major corporates to avail low cost credit.
Also, this type of financial solutions allows the corporate negotiate a better price with dealers. Dealer financing may be extended in the bill discounting form or simply as cash credit. •Structured Finance: SBI structured finance involves assembling unique credit configurations to meet the complex fund requirements of large industrial and infrastructure projects. Structured finance can be a combination of funded and non-funded facilities as well as other credit enhancement tools, lease contracts for instance, to fit the multi-layer financial requirements of large an