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Contd.
A merchant bank is sometimes said to be a wholesale bank, or
in the business of wholesale banking.
Its because merchant banks tend to deal primarily with other
merchant banks and other large financial institutions.
As of today there are 135 Merchant bankers who are registered
with SEBI, India.
This includes Private, Public & Foreign players.
Services:
Corporate counseling.
Project counseling.
Working capital finance.
Restructuring strategies.
Credit Syndication.
Lease Financing.
Some Other Services.
Services contd.
Corporate Counseling:
Set of activities undertaken for efficient running of an
enterprise.
Identifying areas of growth & diversification.
Guiding clients on aspects like locational factors,
organizational size, investment decision, choice of product.
Contd.
Project counseling:
Its a part of corporate counseling & deals with analysis of
project viability .
Comprises of preparation of project report & deciding finance
pattern for cost of project.
Filling up of application form with significant information for
obtaining funds.
Services contd.
Working Capital Finance:
Meeting the day-to-day expenses of an enterprise is working
capital finance.
Assessment of working capital requirements.
Preparing necessary application to negotiation for sanction of
appropriate credit facilities.
Restructuring Strategies.
Deals with Mergers & Acquisitions.
Its a specialized service of Merchant bankers wherein they act
as middle-men in negotiating between two companies.
Offers expert evaluation regarding identification organizations
with matching characteristics.
Obtaining approvals from various authorities.
Services contd.
Credit Syndication:
Relates to activities connected with credit procurement &
project financing.
Estimates total cost of the project
Drawing up of financial plan which conforms requirements of
promoters & their collaborators.
Selecting institutions for participation for financing.
Lease Financing.
Other Services:
Merchant Banking
Advantages:
Merchant banks perform functions
that cannot be carried out by
businesses on their own.
Merchant banks have access to
traders, financial institutions, and
markets that companies or individuals
could not possibly reach.
By using their skills and contacts,
merchant banks can get the best
possible deals for their clients.
Disadvantages:
Merchant banks are really only for
large corporate customers, or
extremely wealthy smaller
businesses owned by individual
clients.
Not all deals carried out by
merchant banks meet with success.
There is always risk attached to the
kinds of deal that merchant banks
undertake.
Contd..
Lead managers/merchant bankers would be responsible for
ensuring timely refunds and allotment of securities to the
investors.
SEBI shall prepare and prescribe a code of conduct for
merchant bankers which they should adhere to.
Merchant bankers have to segregate their business from other
activities and they cannot take up any fund-based business.
SEBI may suspend/cancel the authorization of merchant
bankers for a suitable duration in case of isolations of the
terms of authorization.
Private Sector
CASE STUDY 1
Facebook IPO
Facebookheld itsinitial public
offer(IPO)on May 18, 2012. The IPO
was one of the biggest in technology,
and the biggest in Internet history,
with a peak market capitalization of
over $104 billion.
Background
Facebook's founder and chief executiveMark
Zuckerberghad for years been unwilling to take the
company public, and he resisted a number of buyout
offers after Facebook's founding.
The company did, however, accept private
investments from companies--often technology firms.
When the number of shareholders crossed the 500
threshold, Facebook had to take the company public.
Zuckerberg retains control over the company, despite
its being a public entity.
Contd..
This price valued the company at $104 billion,
the largest valuation to date for a newly
public company.
On May 16, two days before the IPO,
Facebook announced that it would sell 25%
more shares than originally planned due to
high demand.
This meant the stock would debut with 421
million shares.
Morgan Stanley was in the underwriting role.
CASE STUDY 2
Investmen
t Advisory
Just Dial
Just Dial promoterswill sell shares in an
Initial Public Offer from 20th to 22nd
May 2013. They will sell1.75 crore
(17.5 million) sharesat a price band
of470 to 543. The IPO size isRs. 822 cr.
to Rs. 950 cr.
Retail investors get adiscount of Rs.
47from the discovered price. This means
investors putting in less than Rs. 2,00,000.
Why to Invest?
The company has 475 cr. of cash
With 22 cr. in their current account and
over Rs. 450 cr. in fixed income mutual
funds.
They seem to generate about 100 cr.
from operations every year.
At Rs. 470 per share, the company is
valued at a P/E of 49 at the lower end
of the pricing band. Overvalued?
Overvalued?
Valuation is high but the internet has
seen higher growth. There arent
many great companies out there
JustDial is a good and well known
player. They have cash, so they
might be able to disrupt the market.
There is potential.
Safety Net
Retail investors that apply for less than
200,000 rupees worth shares get a
safety net; the three promoter brothers
of Mani, Ramani and Krishnan will
guarantee the retail decided price for
six months. Remember that retail gets a
discount of Rs. 47 from the price
decided. Q4 2013 and Q1 2014, and
likely also Q2 2014. Enough time to exit.
Forecasting
In 2013, they are likely to make
arevenue of 350 cr. This is 36%
higher than the259 cr. in FY 2012.
However,net profitby the same
extrapolation is63 cr.,only25%
higherthan the 51 cr. in 2012. At a
P/E of more than 40, this is a slightly
high.
Valuation Today
Verdict
JustDial, has its current price atRs.
762, a 43.77% increasefrom the
issue price of Rs. 530. The gains are
even larger for retail investors who
got the shares at Rs.483, a Rs. 47
discount they gain 57.7% in
about 100 days.
CFAT 28.04 Cr. from 21.37. A 31%
rise.
CASE STUDY 3
Bridge Loans
A short-termloanthat is used until a person or
company secures permanent financing or
removes an existing obligation.
This type of financing allows the user to meet
current obligations by providing immediate cash
flow. The loans are short-term (up to one year)
with relatively high interest rates and are backed
by some form of collateral such as real estate or
inventory.
Also known as "interim financing", "gap financing"
or a "swing loan".
TATA - JLR
Tata Motors acquired JLR for USD 2.3bn.
Tata Motors UK raised USD 3bn by way of bridge
loans.
Raised through a syndicate of banks, to be repaid
in 15 months.
Lead advisors: JP Morgan and Citigroup
Underwritten by a consortium of eight banks.
Interest rate linked to LIBOR.
1. First six months: LIBOR + 0.85%
2. Next three months: LIBOR + 1.2%
3. Rest of the period: LIBOR + 1.5%
Average in terms of weighted cost of bridge
finance: 5.5%