6.

Issue Management and Underwriting

Issue management and underwriting connotes activities that are concerned with the management
of the public issues of corporate securities, viz. equity shares, preference shares, and debentures or bonds,
and are aimed at mobilization of money from the capital market.

Following are some of the popular services provided by merchant bankers in this regard

1. Preparation of an action plan

2. Preparation of budget for the total expenses for the issues

3. Preparation of CCI application and assisting in obtaining consent/acknowledgement

4. Drafting of prospectus

5. Selection of institutional and broker underwriters for syndication/underwriting

arrangements

6. Selection of Issue Houses and advertising for undertaking pre and post-issue publicity

7. Obtaining the approval of institutional underwriters and stock exchange for publication of the

prospectus

8. Making arrangements for designing and printing of prospectus and application forms, as well

as their dispatch, if necessary

9. Providing assistance in launching the issue in the form of advertising campaigns by holding

press, brokers and investors conferences, etc.

 10. Coordination with the underwriters, brokers and bankers to the issue, and the stock

exchanges.

11. Providing advice on the design of a sound capital structure, acceptable to financial to

financial institutions

12. Determining the quantum, terms and timing of the public issue of different forms of
securities, the extent and sources, loan finance and deployment of internal resources etc in compliance
with the requirements of the Companies Act/Stock Exchanges, etc
13. Arranging for Stock Exchange clearances and listing of securities

14. Liasioning and coordinating with various constituents of the public issue to make the

function of issue management successful

7. Portfolio Management

Making decisions relating to the investment of the cash resources of a corporate enterprise in
marketable securities by deciding the quantum, timing and the type of security to be bought, is known as
Portfolio Management. It involves making the right choice of investment, aimed at obtaining an
optimum investment mix, taking into account factors such as the objectives of the investment, tax bracket
of the investor, need for maximizing yield and capital appreciation, etc.

The services covered are as follows:

1. Undertaking investment in securities

2. Undertaking investment for non-resident Indians, on both repatriation and non-repatriation

basis

3. Undertaking review of Provident fund Investment, Trust investment, etc

4. Safe custody of securities in India and overseas

 5. Collection of return on investment and re-investment of the same in profitable avenues,
investment advisory services to the investors and other related services on selection of
investments

6. Providing advice on selection of investments

7. Carrying out a critical evaluation of investment portfolio

8. Securing approval from RBI for the purchase /sale of securities(for NRI clients)

9. Maintaining investment records and complying with ceiling requirements 10.Collecting

and remitting interest and dividend on investment 11.Providing tax counseling and filing tax

returns through tax consultants

8. Working Capital Finance

The finance required for meeting the day-to-day expenses of an enterprise is known as Working
Capital Finance. Merchant Bankers undertake the following activities as part of providing this type of
finance:

1. Assessment of working capital requirements

2. Preparing the necessary application to negotiations for the sanction of appropriate credit facilities

3. Providing assistance in negotiations with all banks, and suggesting a sharing pattern of credit

limits amongst participating banks, where more than one bank is involved.

4. Assisting coordinating and expediting documentation and other formalities for disbursement

5. Advising on the issue of debentures for augmenting long-term requirements of working capital
9. Acceptance Credit and bill Discounting

Activities relating to the acceptance and the discounting of bills of exchange, besides the
advancement of loans to business concerns on the strength of such instruments, are collectively known as
Acceptance Credit and Bill Discounting. Bill accepting and discounting are an integral part of the
developed merchant market.

In order that the bill accepting and discounting takes place on sound lines, it is imperative that the
firms involved command a good reputation and financial standing. Further, collecting credit information
and rating the credit-worthiness of the parties concerned are very much a part of this function. In
developed money markets like London and New York, there are specialized agencies, such as discount
houses and acceptances houses, that play an active role in the promotion of this function. In India, RBI
takes special care in developing the bill market.

10. Merger and Acquisition

This is a specialized service provided by the merchant banker who arranges for negotiating
acquisitions and mergers by offering expert valuation regarding the quantum and the nature of
consideration, and other related matters.

The various functions that form part of this activity are as follows:

1. Undertaking management audits to identify areas of corporate strength and weakness in order to

help formulate guidelines and directions for future growth.

2. Conducting exploratory studies on a global basis to locate overseas markets, foreign collaboration

and prospective joint ventures associates

3. Examining the pros and cons of proposals and formulating schemes for financial reconstruction,

merger and acquisition

4. Obtaining approvals from the shareholders, depositories, creditors, government and other

authorities.
 5. Monitoring the implementation of merger and amalgamation schemes

6. Identifying organizations with matching characteristics

7. Assisting in the compliance of legal requirements, obtaining consent from various authorities, etc
by coordinating with solicitors, accountants, valuators and other professional experts involved in
the task

8. Advising on capital reorganization of business enterprises

Merchant bankers provide advice on acquisition propositions after careful examination of all aspects,
viz., financial statements, articles of associations, provisions of companies act, rules and guidance of
trade chambers, the issuing house associations, etc.
There are many reasons for the recent trend towards mergers and amalgamations, such as:

1. Existence of excess unused manufacturing capacity of the purchasing company, which can be

utilized efficiently by taking over other units.

2. Lack of manufacturing space with the purchase company. The best solution may be to buy
the controlling interest in another company having excessive manufacturing space or capacity.

3. Advantages of economics of scale, viz. bulk buying and joint-selling, particularly the
possibility of reduced sales promotion expenses may cause a takeover bid in a horizontal merger
of enterprises in a similar trade.

4. Benefit of vertical integration attracts a takeover bid by a company which is a supplier to

customers who are making larger profits, so that the group as a whole can reap the benefits.
11. Venture financing

A specially designed capital, as a form of equity financing for funding high-risk and high reward
projects, is known as Venture Capital. The concept of venture capital originated in the USA in the
1950s, when business magnates like Rockfeller financed new technology companies. The concept
became more popular in the sixties and the seventies, when several private enterprises undertook the
financing of high-risk and high reward projects. In India, venture capital companies have largely
contributed to the technological and industrial revolution.

A large number of Indian and international companies are engaged in venture capital funding for
high technology and high risk projects. A number of leading national development financial institutions
such as IFCI, IDBI and ICICI are engaged in venture capital financing, and have developed a number of
special schemes for this purpose.

12. Lease Financing

A Merchant banking activity whereby financial activities are provided to companies that
undertake leasing is known as Lease Financing. Leasing involves letting out assets on lease for a
particular time period for use by the lessee.

Leasing provides an important alternative source of financing capital outlay. Lease financing benefits

both the lessor and the lessee.

Following are the important services provided in regard to leasing:

1. Providing advice on the viability of leasing as an alternative source for financing

capital investment projects.

2. Providing advice on the choice of a favorable rental structure.

3. Providing assistance in establishing lines of lease for acquiring capital equipment,

including preparation of proposals, documentation, etc.

In India, leasing is a non-banking financial activity, undertaken by leading development financial

institution like ICICI, IDBI and IFCI. Commercial banks also

provide lease financing by forming subsidiaries under the amended Banking Regulations Act of 1949.

13. Foreign Currency Financing

The finance provided to fund foreign trade transactions is called Foreign Currency Finance. The
provision of foreign currency finance takes the form of export-import trade finance, euro currency loans,
and Indian Joint Ventures abroad and foreign collaborations. The main areas that are covered in this type
of merchant activity are as follows:

1. Providing assistance for carrying out the study of turnkey and construction contract jobs

2. Arranging assistance in application to working groups, liaison with RBI, ECGD and other

institutions

3. Arranging for the syndication of various types of guarantees, letters of credit pre-shipment credit

deferred post-shipment credit, bridge loans, and other credit facilities

4. Providing assistance in opening and operating bank accounts abroad

5. Arranging foreign currency loans under buyers credit scheme for importing goods

6. Arranging deferred payment guarantees under suppliers credit schemes for importing capital

goods

7. Providing assistance in obtaining export credit facilitates from the EXIM bank for export of

capital goods, and arranging for the necessary government approvals and clearance

8. Undertaking negotiations for deferred payment, export payment, export finance, buyers credit,

documentary credits and other foreign exchange services like packing credit, etc.
 9. Providing guidance on forward cover for exchange risk

10. Assisting in arranging foreign currency guarantees and performance bonds for exporters

14. Brokering Fixed Deposits

Following are the services rendered by merchant bankers in this regard:

1. Computation of the amount that could be raised by a company in the form of deposits from the

public and loams from shareholders.

2. Drafting of advertisements for inviting deposits

3. Filing a copy of advertisement with the Registrar of Companies for registration

4. Arranging for the issue of advertisement in newspapers, as required by the Companies Act

5. Drafting and printing of application forms

6. Making arrangements for the collection of deposits at the bank branches

7. Submission of periodical statements to companies concerned

8. Making arrangement for payment of interest amounts

9. Providing advice to the company on the terms and conditions of fixed deposits, and deciding on
the appropriate rate of interest, keeping in view the prevailing capital and money market
conditions

10. Helping the company to observe all the rules and regulations in this connection

11. Assisting in maintenance of records and registers for the purpose

Assistance in provided under Sec.58 (A) of the Companies Act, 1956 and the rules there under.
15. Mutual Funds

Institutions and agencies that are engaged in the mobilization of savings of innumerable investors
for the purpose of channeling them into productive investments of a wide variety of corporate and other
securities are called Mutual Funds. UTI is the first and the largest mutual fund in the country. The
mutual fund industry has a large number of players, both in the public as well as the private sector.
Commercial banks are also making rapid strides in the realm of mutual funds business.

Some of the services rendered by Mutual Funds are as follows

1. Mopping up public savings

2. Investing the funds in a diversified portfolio of shares and debentures belonging to well

managed and growing companies

3. Earning investors a steady return on investments with an assurance of capital appreciation0

4. Engaging in the business of acquisition, holding or disposable of securities

5. Making investments in any commercial paper floated by the central Govt., RBI, any local
authority, any foreign govt., foreign bank, or any other authority outside India and approved by
RBI.

16. Relief to Sick industries

Merchant Bankers extend the following services as part of providing relief to sick industries:

1. Rejuvenating old-lines and ailing units by appraising their technology and process, assessing their

requirements and restructuring their capital base

2. Evolving rehabilitation packages which are acceptable to financial institutions and banks
 3. Exploring the possibilities of mergers/amalgamations, wherever called for

4. Assisting in obtaining approvals from the Board for Industrial and Financial
Reconstruction and other authorities under the Sick Industrial Companies (Special Provisions)
Act, 1985

5. Monitoring the implementation of rehabilitation schemes, mergers and/or amalgamations

17. Project Appraisal

The evaluation of industrial projects in terms of alternative variants in technology, raw materials,
production capacity, and location of plant is known as Project Appraisal. Project evaluation is
indispensable because resources are scarce and alternative opportunities exist in terms of projects for
commitment of resources. Project selection can be rational only if it is superior to others commercially or
important to the nation as a whole. The various steps in a project appraisal are:

Financial appraisal

Financial appraisal involves assessing the feasibility of a new proposal for setting up a new
project or the expansion of existing production facilities. Financial appraisal is done in order to gauge
the viability of the project, as well as to rank projects on the basis of their profitability. It may be
noted that financial appraisal is concerned with the measurement of profitability of the project
without reference to the source of finance. While appraising a project, the direct benefits and costs
that are associated with the project are estimated at the prevailing market prices.

Financial appraisal is undertaken through an analysis which takes into account the financial
features of the project, including sources of financing. Financial analysis helps trace the smooth
operation of the project over its entire life cycle. The two major aspects of financial analysis are
liquidity analysis and
capital structure analysis, for which ratios are employed. Liquidity ratios measure a projects
ability to meet its short-term obligations. Capital structure analysis is done to assess long
term solvency, i.e., the projects ability to meet long-term commitments to creditors.

Technical Appraisal

Technical appraisal is primarily concerned with the project concept in terms of

technology, design, scope and content of the plant, as well as inputs and infrastructure
facilities envisaged for the project. Basically, the project should be able to deliver a
marketable product from the resources deployed, at a cost which would leave a margin that
would be adequate to service the investment, and also plough back a reasonable amount into
the project to enable the enterprise to consolidate its position.

Economic Appraisal

Economic appraisal of a project deals with the impact of the project on economic
aggregates. These may be classified under two broad categories. The first deals with the
effect of the project on employment and foreign exchange, and the second deals with the
impact of the project on net social benefits or welfare.