MERCHANT & INVESTMENT BANKING

1. MERCHANT & INVESTMENT BANKING By. K L S N Rao Visiting Faculty

2. OBJECTIVES • To understand the Indian Financial system • To conduct in-depth study of Merchant Banking Activities • Expose the students to various Regulatory provisions relating to Merchant & Investment banking • To understand Investment banking • To study International Finance • To understand the Role of Rating Agencies

3. EVALUATION • No of Sessions: 33 • Attendance & Class participation: 10 Marks • Class Tests/Quiz/Assignments/ : 25 Marks Projects/ Presentations, etc • Mid Term Examination : 25 Marks • End Term Examination : 40 Marks TOTAL : 100 Marks

4. SESSION I- INTRODUCTION TO FINANCE • Introduction • What is Finance • What is Investment • Interrelationship between Finance & Investment • Relevancy of Finance for Development • Financial System/ sector

5. SESSION II- INDIAN FINANCIAL SYSTEM • Phases of Evolution • Financial Structure/Markets • Financial Institutions • Financial Instruments • Services • Regulators • Financial sector reforms • Corporate Governance

6. SESSION III – CORPORATE FINANCE • Structure of Corporate Finance • Equity Financing • Debt Financing • Relationship between Equity& Debt Finance • Advantages/Disadvantages of Equity & Debt Finance.

7. SESSION IV & V- MERCHANT BANKING • Definition • Functions • Role in Company Financing • Regulatory compliances

8. SESSION VI & VII- SEBI • Role of Regulator in Capital Market • Functions • SEBI Act 1992 • Provisions on Merchant Banking

9. SESSION VIII & IX- NEW ISSUE MARKET • Types of Public Issues • IPOs • Offer for Sale • Placement • Rights Issue • Procedure • Book Building route • Green shoe option • Regulatory Compliances

10. SESSION X & XI– PREPARATION FOR ISSUES • Preparation of Offer Document • Prospectus • Letter of Offer • Issue of check list • Procedural guidelines • Regulatory compliances

11. SESSION XII & XIII- MARKETING OF A PUBLIC ISSUE • Project Appraisal • Different Techniques • Opening and Closing of the Issue • Post issue Compliances

12. SESSION XIV & XV- SUBSIDIARY FUNCTIONS OF MERCHANT BANKERS • Debt Market • Commercial Papers • Public Deposits • Venture Capital • Regulation for Subsidiary Functions

13. SESSION XVI & XVII – INVESTMENT BANKING • Investment Objectives • Investment process • Risk appetite • Regulatory norms for investments

14. SESSION XVIII – VALUATION OF COMPANIES • Different Techniques of Valuation • Regulatory prescriptions

15. SESSION XIX – EQUITY REPURCHASES • Regulation & procedure • Share purchases as a Corporate Finance Tool

16. SESSION XX – MERGERS & ACQISITION • Regulation • Compulsory offers and Takeover code • Capital structure post Mergers

17. SESSION XXI & XXII- INTERNATIONAL FINANCIAL MARKETS • Equity Markets • Debt Markets • Foreign Exchange • Techniques of Forex Dealings

18. SESSION XXIII – EXTERNAL COMMERCIAL BORROWINGS • Meaning • Application • Process • Regulation

19. SESSION XXIV – OVERSEAS LISTING • ADR/ GDR Issues • IDRs • Regulation & Procedure

20. SESSION XXV – CREDIT RATING • Objectives • Rating Agencies • Grading System • Importance • Benefits

21. Introduction • What is Finance? “Finance is the study of Money, its Nature, Creation, Behavior,Regulation& Administration” • What is Investment? “ Purchasing of or Investing in Securities, monetary or paper(financial assets) in the money markets or Capital markets”

22. Interrelationship between Finance & Investment • Both are for the common purpose of mobilisation of funds for undertaking any economic activity. • Same person or entity can either Finance or Invest or perform both in the same company. • Finance is more skewed towards lending where “Interest” or “ Return” is the driving force. • Investment is more oriented towards participation in Capital Market where “ Capital Appreciation” & “Dividend” is the driving force.

23. Finance for Economic Development • Identified as the most catalyzing agent for growth of economy & Key input for development. • Lubricates the economy and keeps the wheels rotating. • Agent for socio- economic development of the economy • It is key to investment, growth & development. • It plays an important role by mobilizing savings and allocating them to economic activities. • Economic development leads to healthy society all around, bringing in Social justice, Economic stability and National Security. • Single most influential factor across the world to bring in economies in unison for overall orderly development of human race. • Finance holds the key to all human activities.

24. Financial System/Sector A place or a mechanism where dealings in Finance takes place is known as “ Financial System/Sector”

25. Objectives of Financial System • To serve as an Agent of Socio Economic development for various sectors of the economy. • Mobilize the resources and channelize the same for various economic activities so as to achieve the objectives of economic and social upliftment. • Access variety of instruments to pool, price and provide protection to the investors, for diverting the scarce resources towards economic development.

26. Functions of Financial system • Promotion of overall savings in the economy by deepening and widening the financial structure. • Purveying the existing savings in a more efficient manner so that those in greater need from the social & economic point of view get priority in allocation • Create suitable products that are helpful for both investors & beneficiaries, leading to happy all. • Facilitate transactions in Trade, Production, Agriculture, Services and all other sectors of the economy, both in domestic and international markets.

27. Cont…d The Financial system consist of a network of an interconnected system of markets, institutions and services. This system contributes to the economic development of a country . It connects the savings surplus and savings deficit institutions and establishes a regular flow of funds in the capital market of a country. The role of Financial system is to make an efficient allocation of the savings and investments through transfer process.

28. Session II- Indian Financial System • Evolution: • Indigenous system existed in India for many centuries • KautilyaArthashastra in the 4th century BC refers to creditors and lending. • It says that “ if any one became bankrupt, debts owed to the King had priority over other creditors” • It also mentions about “ Interest on Commodities loaned” • Thus it can be said that Finance activities were not entirely unknown in the medieval India. Cont…d

29. Cont…d • In the Modern History, the roots of commercial banking in India can be traced to the early 18th century where Bank of Calcuta was established in June 1806&renamed as Bank of Bengal in January 1809 mainly to fund Gen. Wellesley’s war. • Bank of Madras was established in July 1843 by amalgamation of 4 banks viz. Madras bank, Carnatic bank, Bank of Madras & Asiatic bank. • Bank of Madras introduced innovations, such as joint stock company with limited liability for share holders, acceptance of deposits from the general etc. • Bank of Bombay was established in 1868. • These 3 presidency banks were amalgamated in January 1921 to form Imperial bank of India. • Imperial bank of India was also performing the role of a regulator till the formation of RBI in 1935. cont..d

30. Cont…d • RBI formed in 1935 with the enactment of RBI Act 1934 • Comprehensive reform to RBI was brought out in 1949 with the enactment of BR Act 1949. • SBI was formed in 1955 by renaming Imperial bank of India as its regulatory functions were done by RBI. • In 1948 era of Developing banks started with the setting up of Industrial Finance Corporation for financing large industrial houses. • In 1951, State Financial corporation was set up to finance Small & Medium sector. • Industrial Credit & Investment Corporation of India(ICICI) was set up in 1955 to support private sector. Cont….d

31. Cont…d • In 1956, Govtnationalised LIC by amalgamating 245 private life insurance companies. • Refinance corporation of India(RCI) was set up in 1958 to provide refinance to banks. • In 1964, UTI was set up to mobilize the savings from the people. • IDBI was established as a subsidiary of RBI in 1964 to provide term loans to big industries. • RCI merged with IDBI in 1964 and refinance functions were accordingly taken over by IDBI. • For bringing out social control in the economy, 14 commercial banks were nationalised in 1969. cont…..d

32. Cont…d • Industrial Reconstruction Corporation of India was set up in 1971 to rehabilitate sick industries. • In 1972, General Insurance companies were nationalised. • In 1976 IDBI was delinked from RBI and made an independent entity. • In 1980, 6 more commercial banks were nationalised. • IRDA act was passed to regulate Insurance sector. • Mutual funds started working from 1991. • NBFCs commenced their operation in 1991. • SEBI was set up in 1986 by taking over the functions of Controller of Capital issues(CCI) • Since 1991, various reform measures have been initiated in the financial sector.

33. Financial structures/Markets • The Indian Financial structure range from Pawnshops to Moneylenders to Stock exchanges etc. • The Financial market is broadly bifurcated into Organised & Un organised sectors. • Organised Sector: Financial Institutions: - Commercial banks, Co operative banks Non banking FIs - NBFCs, Insurance Cos, Mutual funds, Debt Financials Financial Market: - Money Market & Capital Market cont….d

34. Cont….d • Development Institutions: - ECGC, DICGC, NHB, NABARD, SIDBI,IDFC, Exim bank, IIFCL • Public sector entities: - LIC, GIC, UTI, IFCI, SIDCs etc • Government establishments: - PF, Post offices, National Savings Corporation, etc. • Private secor: - Chit funds, Nidhicos, Leasing and HP Cos, Merchant banking Divisions • Regulators; • Government, RBI, SEBI, IRDA, PFRDA, etc. • Unorganised sector: - Indigeneous Institutions, Money lenders, Traders, Commission agents,

35. Financial Instruments • Cash-Apart from being a medium of exchange enables exchange of goods and services. • Shares • Debt instruments • MF units • Bank Deposits • Post office schemes • ADR/GDR/IDR • Insurance policies • Derivative products • Loans/ Securities

36. Financial Services • Merchant banking • Parabanking, • Factoring/Forefaiting • Underwriting • Venture capital • Leasing/ HP • Credit rating • Loan Syndication • Trustee functions • Universal banking

37. Regulators • RBI : - Head of Monetary system in the country - Regulates, Monitors & controls Financial system in the country. - Bring about Monetary stability in the country. • SEBI: To maintain stable & efficient markets by creating & enforcing regulations in the market place. cont…d

38. RBI • Established on 01.04.1935 based on RBI act 1934. • It regulates, monitors and controls the financial system in India. • Bring about Financial stability in the country. • Not only addresses domestic economic situations but also manages the external sector efficiently.

39. Functions of RBI • Govt banker • Bankers bank • Control & Supervision of the economy • Exchange control regulation • Regulate & control money supply • Issue of currency notes • Promotional role • Moral suasion

40. RBI- Organisational structure • Governor • 4 Dy. Governors • 1 central Govt nominee • 4 Directors( 1 each from their local Boards) • 10 Directors from various fields of economy.

41. Financial sector Reforms • Reform process commenced from 1991 & onwards. • Reform process enunciated through Liberalization, Privatization and Globalization. • Controlled & Restrictive economy impaired the already scarce capital formation thus hindering the growth of economy. • Lack of confidence in the Indian economic system among the international investors resulted in poor Forex reserves causing a deep worry among the economists. • High inflation, High interest rates marked a limping economy. • The main objective of reforms is to instill confidence among international community for treating India as a safe investment destination.

42. Economic Reforms • Reforms were effected in: - Financial sector - Capital Market - Govt Securities market - Globalisation of Financial markets - Modernisation of banks.

43. Effect of Reforms • India is the most favored investment destination in the world • Build up of huge Forex reserves • Achieving continuous GDP of over 6% • Fastest growing economy in the world next to China • Strong Financial system, resilient to any shocks- clearly established despite world wide economic recession • India is leading the revival of the economy in the world. • Considered as one of the leading nations of the world. • Aim to achieve double digit growth of GDP continuously, thus aiming to attain the status of financial super power by 2020.

44. Corporate Governance • Concept: - Nobel Laurette Milton Friedman has stated that “ Corporate governance is the conduct of business in accordance with shareholders desire to make as much money as possible while conforming to the basic rules of the society,embodied in law and customs” - Narayana Murthy “ It is about ethical conduct in business. It is beyond realms of law. It stems from the mindset of management and cannot be regulated by legislation” - CG is a framework to facilitate shareholders and stake holders interest.

45. Corporate Governance • CG concept came into existence in India through Kumara Mangalam Birla in 2000. • The first step was introduction of Clause 49 of Standard Listing agreement. • The salient feature of the recommendations were: - 50% independent Directors on the Board. - Setting up of Audit committee - Board meetings to be held 4 times during a year - bring in Transparency and Disclosure in all the activities of the company. - Stipulate qualification for Directors - Minimum attendance by Directors.

46. SESSION III- CORPORATE FINANCE • Corporate Finance is a segment of finance which deals with the decision taken by the corporates to fund their requirements. • The primary objective of such decision is to maximize the corporate value. • The structure of corporate finance depends upon the period of funds requirement. • It can be bifurcated into Long Term requirement & Short Term requirement. • Long Term funds requirement could be met by: - Equity OR - Debt OR - Combination of both at a specified percentage.

47. Corporate Finance • Sources of Long Term Finance: • Equity: - Equity Capital, including Preference capital - Retained Earnings • Debt: - Term Loans - Debentures. • Short Term Financial requirements met by: - Working capital - Money Market instruments like CP, CD, etc.

48. Corporate Finance • Differences between Equity & Debt Equity Debt Return by way of Dividend Interest Maturity Infinite Finite Control over company Yes No Dividend P&L appr P&L Dr Tax – Dividend is paid after Tax Interest: Tax is deductible Liquidation Last priority Better priority

49. Advantages of Equity Finance • No compulsion to pay dividends • No maturity and hence no need to redeem • Enhances the creditworthiness(networth) of the company • Enhances borrowing capacity & hence expansion Disadvantages: • Issuance of shares dilutes the stake of the promoter & hence the controlling the interest. • Cost of Equity is very high • Dividends are paid after tax & hence no advantage • Interest payments are Tax deductible expenses- Advantage

50. Advantages of Debt Financing • Interest is a tax deductible expenses • Does not result in dilution of capital & controlling interest • Not entitled for the value created by the company. • Maturity of the instrument can be tailored to suit cash flows • Cost of debt is lower compared to equity • Fixed Maturity & Not perpetual • Provides protection against inflation • Regulatory prescriptions are manageable.