Sei sulla pagina 1di 55

1

Chapter:- 1 Introduction To Bank


1.1 An Introduction
Finance is the life blood of trade, commerce and industry. Now-a-
days, banking sector acts as the backbone of modern business.
Development of any country mainly depends upon the banking system.
The term bank is derived from the French word Bunco which means
a Bencher Money exchange table. In olden days, European money
lenders or money changers used to display (show) coins of different
countries in big heaps (quantity) on benches or tables for the purpose of
lending or exchanging.
Its and advances and other related services. It receives money from
those who want to save in the form of deposits and it lends money to
those who need it.
A bank is a financial institution and a financial intermediary that
accepts deposits and channels those deposits into lending activities, either
directly or through capital markets. A bank connects customers that have
capital deficits to customers with capital surpluses.[citation needed]
Due to their critical status within the financial system and the
economy[citation needed] generally, banks are highly regulated in most
countries. Most banks operate under a system known as fractional reserve
banking where they hold only a small reserve of the funds deposited and
lend out the rest for profit. They are generally subject to minimum capital
requirements which are based on an international set of capital standards,
known as the Basel Accords.
2

The oldest bank still in existence is Monte die Paschi di Siena,
headquartered in Siena, Italy, which has been operating continuously
since 1472.


1.2 Definition of a Bank
"an establishment for custody of money, which it pays out on
customer's order."
---- Oxford
Dictionary

Bank is an organization whose principal operations are concerned
with the accumulation of the temporarily idle money of the general public
for the purpose of advancing to others for expenditure.
----- Prof.
Kent

Bank are institutions whose debts are usually referred to as bank
deposits are commonly accepted in final settlement of other peoples
debts.
---- R.S.Sayers


3

1.3 Characteristics / Features of a Bank
1. Dealing in Money
Bank is a financial institution which deals with other people's money i.e.
money given by depositors.
2. Individual / Firm / Company
A bank may be a person, firm or a company. A banking company means
a company which is in the business of banking.
5. Payment and Withdrawal
A bank provides easy payment and withdrawal facility to its customers in
the form of cheques and drafts, It also brings bank money in circulation.
This money is in the form of cheques, drafts, etc.
6. Agency and Utility Services
A bank provides various banking facilities to its customers. They include
general utility services and agency services.
7. Profit and Service Orientation
A bank is a profit seeking institution having service oriented approach.
9. Connecting Link
A bank acts as a connecting link between borrowers and lenders of
money. Banks collect money from those who have surplus money and
give the same to those who are in need of money.

4

10. Banking Business
A bank's main activity should be to do business of banking which should
not be subsidiary to any other business.


1.4 Functions Of Bank
The functions of banks are briefly highlighted in following Diagram or
Chart.


5

A. Primary Functions of Banks
The primary functions of a bank are also known as banking
functions. They are the main functions of a bank.These primary functions
of banks are explained below.
1. Accepting Deposits
The bank collects deposits from the public. These deposits can be of
different types, such as :-
a. Saving Deposits
b. Fixed Deposits
c. Current Deposits
d. Recurring Deposits
2. Granting of Loans and Advances
The bank advances loans to the business community and other members
of the public. The rate charged is higher than what it pays on deposits.
The difference in the interest rates (lending rate and the deposit rate) is its
profit.
The types of bank loans and advances are :-
a. Overdraft
b. Cash Credits
c. Loans
d. Discounting of Bill of Exchange
6

B. Secondary Functions of Banks
The bank performs a number of secondary functions, also called as
non-banking functions. These important secondary functions of banks are
explained below.
1. Agency Functions
The bank acts as an agent of its customers. The bank performs a
number of agency functions which includes :-
a. Transfer of Funds
b. Collection of Cheques
c. Periodic Payments
d. Portfolio Management
e. Periodic Collections
f. Other Agency Functions
2. General Utility Functions
The bank also performs general utility functions, such as :-


7


a. Issue of Drafts, Letter of Credits, etc.
b. Locker Facility
c. Underwriting of Shares
d. Dealing in Foreign Exchange
e. Project Reports
f. Social Welfare Programmes
g. Other Utility Functions

CHAPTER:-2 FINANCIAL MARKET

In economics, typically, the term market means the aggregate of
possible buyers and sellers of a thing and the transactions between them.
Financial markets are an important component of a financial system in an
economy. Financial system aims at establishing regular, smooth, efficient
and cost effective link between savers and investors so it helps
encouraging both saving and investment. Financial systems facilitate
expansion of financial market over space and time and promote efficient
allocation of financial resources for socially desirable and economically
productive purpose.
The term "market" is sometimes used for what are more strictly
exchanges, organizations that facilitate the trade in financial securities,
e.g., a stock exchange or commodity exchange. Much trading of stocks
takes place on an exchange; still, corporate actions (merger, spin-off) are
outside an exchange, while any two companies or people, for whatever
8

reason, may agree to sell stock from the one to the other without using an
exchange.

2.1 Types of Financial Market:-
The financial markets can be divided into three parts
Money market
Capital market
Forex market


MONEY MARKET:-
Money market is the market for short term financial assets which are near
substitutes for money. Money markt instruments are liquid and can be
turned over quickly at low transaction cost and without loss.The money
market is a wholesale market. The volumes are very large and generally
transactions are settled on daily bases. Trading in the money market is
FINANCIAL
MARKET
MONEY
MARKET
FOREX
MARKET
CAPITAL
MARKET
9

conducted over the telephone followed by written confirmation from both
the borrowers and lenders.
There are large numbers of participants in the money market :
commercial banks, mutual funds, investment institutions, financial
instutions and finally RBI.
Money market performs the crucial role of providing an
equilibrating mechanism to evenout short term liquidity and in the
process, facilitating the conduct of monetary policy. Short term surpluses
and deficits are evenedout. The money market is the major mechanism
through which the reserve bank of india influences liquidity and the
general level of interest rates.

FOREX MARKET:-
Eevey sovereign nation has its own currency. Theoretically the monetary
unit of a country can be exchnged with any other currency of any other
country. Most of the international financial transactions involve an
exchange of one currency for another. The ratio in which they are
exchanged, or prices in terms of each other are known as exchange rate.
Countries when they trade with each other require money flows.
Foreign exchange markets provides the mechanism for exchanging
different monetary units for each other. Sometimes, nationals of one
country may prefer to hold financial assets in a foregin or dominated in a
foregin because-
Domestic currency may be subject to variable and high inflation,
rendering it a poor store of value;
Foreign currency balance may reduce risks;
Foreign currency assets help hedge anticipated foreign currency
liabilities.
10

The efficiency of the internation financial system and its degree of
integration with individual sovereign financial system depends to a
large extent on how cheaply and quickly, foregin exchange transaction
can be effected.




2.2 AN INTRODUCTION TO CAPITAL MARKET:-
The capital markets consist of primary markets and secondary markets.
Newly formed (issued) securities are bought or sold in primary markets.
Secondary markets allow investors to sell securities that they hold or buy
existing securities.
CLASIFICATION OF CAPITAL MARKET


Primary market:-
The primary is that part of the capital markets that deals with the
issuance of new securities. Companies, governments or public sector
institutions can obtain funding through the sale of a new stock or bond
issue to meet their requirements of investment and/or discharge some
CAPITAL
MARKET
PRIMARY
MARKET
SECONDARY
MARKET
11

obligation. This is the market for new long term capital. The primary
market is the market where the securities are sold for the first time.
Therefore it is also called New Issue Market (NIM). It facilitates direct
conversion of savings into corporate investment or diversion of resources
from the rest of the system to the corporate sector. Primary market deals
in only new securities which acquire for the first time i.e. which were not
available previously. They are offered to the investors for the first time.

Features of primary market
In a primary issue, the securities are issued by the company
directly to investors.
The company receives the money and issues new security
certificates to the investors.
Primary issues are used by companies for the purpose of setting up
new business or for expanding or modernizing the existing
business.
The primary market performs the crucial function of facilitating
capital formation in the economy.
The new issue market does not include certain other sources of new
long term external finance, such as loans from financial
institutions. Borrowers in the new issue market may be raising
capital for converting private capital into public capital; this is
known as going public.

Secondary Market:-
The capital market apart from the primary market also includes the
secondary market where existing issues are traded. These secondary
market also referred to as stock markets predominantly deal in the stock
12

or equity shares. They enable shareholders to sell their holdings readly
thereby ensuring liquidity. Any trading of a share subsequent to its
primary offering, is the secondry transection. The initial buyer (in the
primary market) may reoffer the securities to an intrested buyer at a price
which is mutually satisfectory. An active secondary market in fact
promotes the growth of the primary market and aids capital formation.
For the general investors, the secondary market provides an efficient
platform for trading of a securities
The indian security market, in the last decade, witnessed a
significant transformation in the market design, to a paperless market
characterised by a transparent screen-based trading system with complete
restructuring of the trading, clearing and settelement infrastructure. The
indian securities market has developed and grown voluminously on
several counts such as the number of stock exchanges, intermediaries and
institutional investors, the number of listed stock, market captilisation,
trading volumes and turnover on stock exchanges. The two major stock
exchange in india are BSE (Bombay Stock Exchange) and NSE (National
Stock Exchange).



2.3 Difference Between Primary Market And Secondary
Market

S.NO PRIMARY MARKET SECONDARY MARKET
1. Market for new securities.

Market for existing securities.
2. No fixed geographical location. Located at a fixed place.
13


3. Results in raising fresh resources
for the corporate sector.
Facilitate transfer of securities from one
corporate investor to another.
4. All companies enter primary
market.

Securities of only listed companies can
be traded at stock exchanges.
5. No tangible form or
administrative setup. Recognised
only by the service it renders.
Has a definite administrative setup and
a tangible form.
6. Subjected to outside control by
SEBI, stock exchange and the
companies act.
Subjected to control both from within
and outside.


2.4 Relationship between Primary market and Secondary
market

Securities traded at stock exchanges are those which have first been
issued by the companies i.e. securities first pass through primary
market and only thereafter enter the secondary market.
While issuing prospectus for fresh issue of capital, the companies
stipulate in the prospectus that application has been made or will be
made in due course for listing of shares with the stock exchanges.
Stock exchanges exercise significant control over the organisation of
new issues to their regulatory framework as a precondition for listing
of shares.
Stock exchanges provide liqudity to the securities which has pass
through primary market.
14

A period of rising activity in stock exchanges is accompanied with
higher activity in primary market resulting in large numder of
seccessful issues a vice versa.
In a period of rising prices in stock exchanges premiums are high in
primary market and oversubscription becomes a common
phenomenon.
CHAPTER:-3 AN INTRODUCTION TO IPO
3.1 MEANING
A public offering is the offering of securities of a company or a
similar corporation to the public. Generally, the securities are to be listed
on a stock exchange. In most jurisdictions, a public offering requires the
issuing company to publish a prospectus detailing the terms and rights
attached to the offered security, as well as information on the company
itself and its finances. Many other regulatory requirements surround any
public offering and they vary according to jurisdiction.
Initial public offering (IPO) is one type of public offering. Not all
public offerings are IPOs. An IPO occurs only when a company offers its
shares (not other securities) for the first time for public ownership and
trading, an act making it a public company. However, public offerings are
also made by already-listed companies. The company issues additional
securities to the public, adding to those currently being traded. For
example, a listed company with 8 million shares outstanding can offer to
the public another 2 million shares. This is a public offering but not an
IPO. Once the transaction is complete, the company will have 10 million
shares outstanding. Non-initial public offering of equity is also called
seasoned equity offering.
15

A shelf prospectus is often used by companies in exactly that
situation. Instead of drafting one before each public offering, the
company can file a single prospectus detailing the terms of many
different securities it might offer in the next several years. Shortly before
the offering (if any) actually takes place, the company informs the public
of material changes in its finances and outlook since the publication of
the shelf prospectus.
Other types of securities, besides shares, can be offered publicly.
Bonds, warrants, capital notes and many other kinds of debt and equity
vehicles are offered, issued and traded in public capital markets. A
private company, with no shares listed publicly, can still issue other
securities to the public and have them traded on an exchange. A public
company, of course, may also offer and list other securities alongside its
shares.
Most public offerings are in the primary market, that is, the issuing
company itself is the offerer of securities to the public. The offered
securities are then issued (allocated, allotted) to the new owners. If it is an
offering of shares, this means that the company's outstanding capital
grows. If it is an offering of other securities, this entails the creation or
expansion of a series (of bonds, warrants, etc.). However, more rarely,
public offerings take place in the secondary market. This is called a
secondary market offering: existing security holders offer to sell their
stake to other, new owners, through the stock exchange. The offerer is
different from the issuer (the company). A secondary market offering is
still a public offering with much the same requirements, including a
prospectus.
16

The services of an underwriter are often used to conduct a public
offering.
An initial public offering (IPO) or stock market launch is a type of
public offering where shares of stock in a company are sold to the general
public, on a securities exchange, for the first time. Through this process, a
private company transforms into a public company. Initial public
offerings are used by companies to raise expansion capital, to
possiblymonetize the investments of early private investors, and to
become publicly traded enterprises. A company selling shares is never
required to repay the capital to its public investors. After the IPO, when
shares trade freely in the open market, money passes between public
investors. Although an IPO offers many advantages, there are also
significant disadvantages. Chief among these are the costs associated with
the process, and the requirement to disclose certain information that could
prove helpful to competitors, or create difficulties with vendors. Details
of the proposed offering are disclosed to potential purchasers in the form
of a lengthy document known as a prospectus. Most companies
undertaking an IPO do so with the assistance of an investment banking
firm acting in the capacity of an underwriter. Underwriters provide a
valuable service, which includes help with correctly assessing the value
of shares (share price), and establishing a public market for shares (initial
sale). Alernative methods, such as the dutch auction have also been
explored. The most notable recent example of this method is the Google
IPO. China has recently emerged as a major IPO market, with several of
the largest IPO offerings taking place in that country.
When a company lists its securities on a public exchange, the
money paid by the investing public for the newly issued shares goes
directly to the company (primary offering) as well as to any early private
17

investors who opt to sell all or a portion of their holdings (secondary
offering) as part of the larger IPO. An IPO, therefore, allows a company
to tap into a wide pool of potential investors to provide itself with capital
for future growth, repayment of debt, or working capital. A company
selling common shares is never required to repay the capital to its public
investors. Those investors must endure the unpredictable nature of the
open market to price and trade their shares. After the IPO, when shares
trade freely in the open market, money passes between public investors.
For early private investors who choose to sell shares as part of the IPO
process, the IPO represents an opportunity tomonetize their investment.
After the IPO, once shares trade in the open market, investors holding
large blocks of shares can either sell those shares piecemeal in the open
market, or sell a large block of shares directly to the public, at a fixed
price, through a secondary market offering. This type of offering is not
dilutive, since no new shares are being created.
Once a company is listed, it is able to issue additional common
shares in a number of different ways, one of which is the follow-on
offering. This method provides capital for various corporate purposes
through the issuance of equity (see stock dilution) without incurring any
debt. This ability to quickly raise potentially large amounts of capital
from the marketplace is a key reason many companies seek to go public.

3.2 ADVANTAGE/DISADVANTAGE OF IPO
Advantages Of An IPO
Enlarging and diversifying equity base
Enabling cheaper access to capital
18

Increasing exposure, prestige, and public image
Attracting and retaining better management and employees through
liquid equity participation
Facilitating acquisitions (potentially in return for shares of stock)
Creating multiple financing opportunities: equity, convertible debt,
cheaper bank loans, etc.

Disadvantages of an IPO
There are several disadvantages to completing an initial public
offering:
Significant legal, accounting and marketing costs, many of which
are ongoing
Requirement to disclose financial and business information
Meaningful time, effort and attention required of senior
management
Risk that required funding will not be raised
Public dissemination of information which may be useful to
competitors, suppliers and customers.

3.3 PARTIES INVOLVED IN THE IPO:
The promoters also should have a clear idea about the agencies to
coordinate their activities effectively in the public issue. The various
parties involved are:
The manager to the issue,
The registrars to the issue,
19

Underwriters,
Bankers,
Advertising agencies,
Financial Institutions and
Government /Statutory Agencies.



The Managers To The Issue:
Lead managers are appointed by the company to manage the initial
public offering campaign. Their main duties are:
Drafting of prospectus
Preparing the budget of expenses related to the issue
Suggesting the appropriate timings of the public issue
Assisting in marketing the public issue successfully
Advising the company in the appointment of registrars to the issue,
underwriters, brokers, bankers to the issue, advertising agents etc.
Directing the various agencies involved in the public issue.
The merchant banking division of the financial institutions,
subsidiary of commercial banks, foreign banks, private sector banks and
private agencies are available to act as lead mangers. Such as SBI Capital
Markets Ltd., Bank of Baroda, Canara Bank, DSP Financial Consultant
Ltd. ICICI Securities & Finance Company Ltd., etc.

The Registrar To The Issue
After the appointment of the lead managers to the issue, in
consultation with them, the Registrar to the issue is appointed.
Quotations containing the details of the various functions they would be
20

performing and charges for them are called for selection. Among them
the most suitable one is selected. It is always ensured that the registrar
to the issue has the necessary infrastructure like Computer, Internet and
telephone.
The Registrars normally receive the share application from various
collection centers. They recommend the basis of allotment in
consultation with the Regional Stock Exchange for approval. Usually
registrars to the issue retain the issuer records at least for a period of six
months from the last date of dispatch of letters of allotment to enable
the investors to approach the registrars for redressal of their complaints.

The Underwriters
Underwriting is a contract by means of which a person gives an
assurance to the issuer to the effect that the former would subscribe to
the securities offered in the event of non-subscription by the person to
whom they were offered. The person who assures is called an
underwriter. The underwriters do not buy and sell securities. They stand
as back-up supporters and underwriting is done for a commission.
Underwriting provides an insurance against the possibility of inadequate
subscription. Underwriters are divided into two categories:
Financial Institutions and Banks
Brokers and approved investment companies.
The company after the closure of subscription list communicates in
writing to the underwriter the total number of shares/debentures under
subscribed, the number of shares/debentures required to be taken up by
the underwriter. The underwriter would take up the agreed portion. If
the underwriter fails to pay, the company is free to allot the shares to
others or take up proceeding against the underwriter to claim damages
for any loss suffered by the company for his denial.
21


The Bankers To The Issue:
Bankers to the issue have the responsibility of collecting the
application money along with the application form. The bankers to the
issue generally charge commission besides the brokerage, if any.
Depending upon the size of the public issue more than one banker to the
issue is appointed. When the size of the issue is large, 3 to 4 banks are
appointed as bankers to the issue. The number of collection centers is
specified by the central government. The bankers to the issue should
have branches in the specified collection centers.

Advertising Agents:
Advertising plays a key role in promoting the public issue. Hence,
the past track record of the advertising agency is studied carefully.
Tentative program of each advertising agency along with the estimated
cost are called for. After comparing the effectiveness and cost of each
program with the other, a suitable advertising agency if selected in
consultation with the lead managers to the issue. The advertising
agencies take the responsibility of giving publicity to the issue on the
suitable media. The media may be newspapers/ magazines/
hoardings/press release or a combination of all.

The Financial Institutions
Financial institutions generally underwrite the issue and lend term
loans to the companies. Hence, normally they go through the draft of
prospectus, study the proposed program for public issue and approve
them. IDBI, IFCI & ICICI, LIC, GIC and UTI are the some of the
financial institutions that underwrite and give financial assistance. The
22

lead manager sends copy of the draft prospectus to the financial
institutions and includes their comments, if any in the revised draft.




Government And Statutory Agencies
The various regulatory bodies related with the public issue are:
Securities Exchange Board of India
Registrar of companies
Reserve Bank of India (if the project involves foreign investment)
Stock Exchange where the issue is going to be listed
Industrial licensing authorities

3.4 SEBIs Guidelines for IPO
1. IPOs of small companies
Public issue of less than five crores has to be through OTCEI and
separate guidelines apply for floating and listing of these issues.
2. Size of the Public Issue
Issue of shares to general public cannot be less than 25% of the
total issue, incase of information technology, media and
telecommunication sectors this stipulation is reduced subject to the
conditions that:
Offer to the public is not less than 10% of the securities issued.
A minimum number of 20 lakh securities is offered to the public and
23

Size of the net offer to the public is not less than Rs. 30 crores.



3. Promoter Contribution
Promoters should bring in their contribution including premium fully
before the issue
Minimum Promoters contribution is 20-25% of the public issue.
Minimum Lock in period for promoters contribution is five years
Minimum lock in period for firm allotments is three years.

4. Collection centers for receiving applications
There should be at least 30 mandatory collection centers, which
should include invariably the places where stock exchanges have been
established.
For issues not exceeding Rs.10 crores (including premium, if any), the
collection centers shall be situated at the four metropolitan centers viz.
Mumbai, Delhi, Calcutta, Chennai; and at all such centers where stock
exchanges are located in the region in which the registered office of
the company is situated.
5. Regarding allotment of shares
24

Net Offer to the General Public has to be at least 25% of the Total
Issue Size for listing on a Stock exchange.
It is mandatory for a company to get its shares listed at the regional
stock exchange where the registered office of the issuer is located.
In an Issue of more than Rs. 25 crores the issuer is allowed to place
the whole issue by book-building
Minimum of 50% of the Net offer to the Public has to be reserved for
Investors applying for less than 1000 shares.
There should be at least 5 investors for every 1 lakh of equity offered
(not applicable to infrastructure companies).
Quoting of Permanent Account Number or GIR No. in application for
allotment of securities is compulsory where monetary value of
Investment is Rs.50,000/- or above.
Indian development financial institutions and Mutual Fund can be
allotted securities upto 75% of the Issue Amount.
A Venture Capital Fund shall not be entitled to get its securities listed
on any stock exchange till the expiry of 3 years from the date of
issuance of securities.
Allotment to categories of FIIs and NRIs/OCBs is upto a maximum of
24%, which can be further extended to 30% by an application to the
RBI - supported by a resolution passed in the General Meeting.
6. Timeframes for the Issue and Post- Issue formalities
The minimum period for which a public issue has to be kept open is 3
working days and the maximum for which it can be kept open is 10
25

working days. The minimum period for a rights issue is 15 working
days and the maximum is 60 working days.
A public issue is effected if the issue is able to procure 90% of the
Total issue size within 60 days from the date of earliest closure of the
Public Issue. In case of over-subscription the company may have the
right to retain the excess application money and allot shares more than
the proposed issue, which is referred to as the green-shoe option.
A rights issue has to procure 90% subscription in 60 days of the
opening of the issue.
Allotment has to be made within 30 days of the closure of the Public
Issue and 42 days in case of a Rights issue.
All the listing formalities for a public Issue has to be completed within
70 days from the date of closure of the subscription list.
7. Dispatch of Refund Orders
Refund orders have to be dispatched within 30 days of the closure of
the Public Issue.
Refunds of excess application money i.e. for un-allotted shares have to
be made within 30 days of the closure of the Public Issue.
8. Other regulations pertaining to IPO
Underwriting is not mandatory but 90% subscription is mandatory for
each issue of capital to public unless it is disinvestment in which case
it is not applicable.
If the issue is undersubscribed then the collected amount should be
returned back (not valid for disinvestment issues).
26

If the issue size is more than Rs. 500 crores voluntary disclosures
should be made regarding the deployment of the funds and an
adequate monitoring mechanism to be put in place to ensure
compliance.
There should not be any outstanding warrants or financial instruments
of any other nature, at the time of initial public offer.
In the event of the initial public offer being at a premium, and if the
rights under warrants or other instruments have been exercised within
the twelve months prior to such offer, the resultant shares will not be
taken into account for reckoning the minimum promoter's contribution
and further, the same will also be subject to lock-in.
9. Restrictions on other allotments
Firm allotments to mutual funds, FIIs and employees not subject to
any lock-in period.
Within twelve months of the public/rights issue no bonus issue should
be made.
Maximum percentage of shares, which can be distributed to
employees cannot be more than 5% and maximum shares to be
allotted to each employee cannot be more than 200.
10. Relaxations to public issues by infrastructure
companies.
These relaxations would be applicable to Infrastructure Companies
as defined under Section10(23G) of the Income Tax Act, 1961, provided
their projects are appraised by any Developmental Financial Institution
(DFI) or IDFC or IL&FS. The projects must also have a participation of
27

at least 5% of the project cost (in debt and/or equity) by the appraising
institution.

The infrastructure companies will be exempted from the requirement
of making a minimum public offer of 25 per cent of its securities.

The requirement of 5 shareholders per Rs. 1 lakh of offer is also
waived in case of offerings by infrastructure companies.
For public issues by infrastructure companies, minimum subscription
of 90% would no longer be mandatory provided disclosure is made
about the alternate source of funding which the company has
considered, in the event of under subscription in the public issue.
Infrastructure companies are permitted to freely price the offerings in
the domestic market provided that the promoter companies along with
Equipment Suppliers and other strategic investors subscribe to 50% of
the equity at the same or a higher price than what is being offered to
the public. Adequate disclosures about the justification for the pricing
will be required to be made in the offer documents.

3.5 Seven Steps for companies for success of its IPO
With IPO being the buzzword in the industry sector, following the
seven steps would ensure a smooth climb up the IPO ladder when an
Initial Public Offering (IPO) comes in for funding ambitious, gigantic
projects. .
However, going for an IPO is definitely not easy. An industry
expert cautions, "The right recipe is to go step by step with each step
28

dependent on the other. If you miss out one step the whole structure will
crumble."
Making an IPO involves immense research, planning and
strategizing. One must bear in mind that here the ownership and
management of the organization is not just focused on a particular
person(s), but instead distributed and diluted on a larger scale and hence
the stakes are automatically higher. So, an error even on a miniscule level
can have drastic repercussions.



1. Choosing the Perfect Time
Before even plunging into the intricacies of the pre-IPO
arrangements, choosing the ideal time to go public is of core importance.
The timing of going public is very crucial in the pre-IPO process. One
should look into many aspects before the plungelike looking into the
prevailing market sentiment.
In the 1980's and early 1990's when branding and marketing were
non-existent, liquidity in the market, behavior of the secondary market
and merchant bankers' advice were instrumental in deciding the right time
for the IPO.

2. Choosing the Right Team
Forming the right team is essential before going for an IPO. Apart
from the Chief Executive Officer (CEO) or the Chairman, the main
members are the Chief Financial Officer (CFO), Chief Operating Officer
(COO), the Company Secretary, the auditors, professional merchant
bankers, and the Chief Information Officer (CIO) in the current age of
information and legal advisors.
29

It is very important for the board of directors involved in the
venture to have a progressive outlook. Only an intelligent team can
contribute to the success of the venture. Team building and the
professional team that you bring in is very important. You should be very
careful not only about land and equipment but also while deploying
money and manpower.

Apart from the CFO and the Company Secretary, choosing
appropriate auditors makes a world of difference. Unlike other members
of the team, the auditor has the additional job of assessing whether the
entire accounting system is in order, is transparent and analyzing whether
the numbers and projections as shown in the Excel sheet are realistic and
practical. If you have a good auditor, half your battle is won. In fact, one
should employ auditors at least one or two years before the IPO is
launched.
When the company goes public, it must make a note of disclosures
about the company operations and past records. It can't afford to make
any observations which are incorrect or not backed by strong evidence.
You should have a team who can strategies and can plan the inflow and
outflow of resources and money.

3. Definite Goals and Purposes
A company should be focused and clear about the purpose of the
IPO. Usually, the purpose behind making an IPO is to accumulate funds
and finances for expansion and investments and above all woo the
investors and consolidate as a brand. This requires a purely corporate
structure.
Currently, there are stringent SEBI guidelines to be followed
before any company goes public. Keeping this in mind, the valuations
30

which the company wishes to command will depend on the future goals
and projects of the company, and the management team. Unless the
management is fully sure of the ultimate goals, the company will not be
able to come up with a high valuation for the proposed issue of shares.


4. Choosing the Right Merchant Bankers
The primary role of a merchant banker should be to act as a bridge
between the organization and the investors. Firstly, the merchant banker
should have a brand image in the market. A merchant banker should have
the capability and the experience to handle a large-scale IPO. And they
should be able to reach a larger mass of people because investors today
are just not located in the metros but also in tier-II and tier-III cities."
Simultaneously, they also chalk out the risk management strategies
for the company since risks and ventures are two sides of the same coin.
Hence a company should choose such a merchant banker who is just not
professional but who understands the logistics and mechanics of the
industry. Apart from being a link between the organization and the
investors, a banker also has to generate interest and build up the
confidence of the investors.
5. Capital Restructuring
Companies should decide on the ways to deploy their capital,
namely capital restructuring. Companies should be clear about the debt
and equity ratio. This boils down to setting the ideal Debt-Equity Ratio
(DER), which can vary from 1:1 to 2:2. "You have to work out your ratio
according to the cash and the growth rate, so that they can accordingly
structure their profits.
In capital restructuring, you have to be sure of the DER
maintained, what are the facilities you are planning to set up and what is
31

the land value you are going to purchase. The way you are going to
deploy your capital is also very important. You have to be very careful
while deploying the resources and forecast the profit you will incur in
three-four years' time."


6. Creating Investor Interest
Confidence building and generating investor interest should be on
the priority list for a company. A Company must project an image of
transparency and good governance to the investors. Infosys should be the
role model for all companies going in for an IPO. Many of the experts
agree that IT giant Infosys is a role model because their balance sheet is
very clear, they value their managers as assets and year after year they
expand rapidly. A company is accountable to its investors, which is why
when they go public they have to disclose company projectionspast,
present and future prospects.
This is where the team of advisors, consultants and legal experts
comes into the picture. IPO is all about building investors' confidence so
we over perform to hike up investor confidence. If you raise the
expectations and do not meet them, then investors will not excuse you for
the next two-three years. Infosys, for instance, follows this strategy and
gets higher multiples because they understate their plans.The projections
given to the public should be realistic. The excel sheet might project rosy
details of growth, but if they do not live up to the expectations then public
confidence is sure to plummet to the lowest level.
7. Media Campaigns
A few years ago, marketing and media campaigns were considered
a luxury, but today they are absolutely necessary. They contribute to the
relative success of an IPO venture. The campaigns can be in the form of
32

road shows and extensive investor meetings. They are required because
the investors need to be made aware of the company and its past
performances and any important projects undertaken/completed. During
the campaigns, various facets related to company performance, the need
to raise money and future plans are disclosed, information that investors
seek. A successful media campaign ensures complete participation in the
IPO by one and all.
In fact, recently when a bigwig real estate company went public, a
few crores went in media campaigns alone. However, there is no short cut
to success. A step-by-step approach always pays in the end.




3.6 PLACEMENT OF THE IPO
Initial public offers are floated through Prospectus; Bought out
deals/offer for sale; Private Placement and Book Building.

OFFER THROUGH PROSPECTUS
According to Companies (Amendment) Act 1985, application
forms for shares of a company should be accompanied by a
Memorandum (abridged prospectus). In simple terms a prospectus
document gives details regarding the company and invites offers for
subscription or purchase of any shares or debentures from the public.
The draft prospectus has to be sent to the Regional Stock Exchange
where the shares of the company are to be listed and also to all other
stock exchanges where the shares are proposed to be listed. The stock
33

exchange scrutinizes the draft prospectus. After scrutiny if there is any
clarification needed, the stock exchange writes to the company and also
suggests modification if any. The prospectus should contain details
regarding the statutory provisions for the issue, program of public issue
opening, closing and earliest closing date of the issue, issue to be
listed at, highlights and risk factors, capital structure, board of
directions, registered office of the company, brokers to the issue, brief
description of the issue, cost of the project, projected earnings and other
such details. The board, lending financial institutions and the stock
exchanges in which they are to be listed should approve the prospectus.
Prospectus is distributed among the stock exchanges, brokers and
underwriters, collecting branches of the bankers and to the lead
managers.
BOUGHT OUT DEALS (OFFER FOR SALE)
Here, the promoter places his shares with an investment banker
(bought out dealer or sponsor) who offers it to the public at a later date.
In other works in a bought out deal, an existing company off-loads a
part of the promoters capital to a wholesaler instead of making a public
issue. The wholesaler is invariably a merchant banker or some times
just a company with surplus cash. In addition to the main sponsor, there
could be individuals and other smaller companies participating in the
syndicate. The sponsors hold on to these shares for a period and at an
appropriate date they offer the same to the public. The hold on period
may be as low as 70 days or more than a year.
In a bought out deal, proving is the essential element to be decided.
The bought out dealer decides the price after analyzing the viability, the
gestation period, promoters background and future projections. A bough
out dealer sheds the shares at a premium to the public.
34

PRIVATE PLACEMENT
In this method the issue is placed with a small number of financial
institutions, corporate bodies and high net worth individuals. The
financial intermediaries purchase the shares and sell them to investors at
a later date at a suitable price. The stock is placed with issue house
client with the medium of placing letter and other documents which
taken together contribute a prospectus, giving the information regarding
the issue. The special feature of the private placement is that the issues
are negotiated between the issuing company and the purchasing
intermediaries. Listed public limited company as well as closely held
private limited company can access the public through the private
placement method. Mostly in the private placement securities are sold to
financial institutions like Unit Trust of India, mutual funds, insurance
companies, and merchant banking subsidiaries of commercial banks and
so on. Through private placement equity shares, preference shares,
cumulative convertible preference shares, debentures and bonds are
sold.
BOOK BUILDING
Book building is a mechanism through which the initial public
offerings (IPOS) take place in the U.S. and in India it is gaining
importance with every issue. Most of the recent new issue offered in the
market has been through Book Building process. Similar mechanisms are
used in the primary market offerings of GDRs also. In this process the
price determination is based on orders placed and investors have an
opportunity to place orders at different prices as practiced in international
offerings.
The recommendations given by Malegam Committee paved way
for the introduction of the book building process in the capital market in
35

Oct 1995. Book building involves firm allotment of the instrument to a
syndicate created by the lead managers who sell the issue at an acceptable
price to the public. Originally the potion of book building process was
available to companies issuing more than Rs.100 cr. The restriction on
the minimum size was removed and SEBI gave impression to adopt the
book building method to issue of any size. In the prospectus, the company
has to specify the placement portion under book building process. The
securities available to the public are separately known as net offer to the
public. Nirma by offering a maximum of 100 lakh equity shares through
this process was set to be the first company to adopt the mechanism.
Among the lead managers or the syndicate members of the issue or
the merchant bankers as member. The issuer company as a book runner
nominates this member and his name is mentioned in the draft prospectus.
The book runner has to circulate the copy of the draft prospectus to be
filed with SEBI among the institutional buyers who are eligible for firm
allotment. The draft prospectus should indicate the price band within
which the securities are being offered for subscription.
The offers are sent to the book runners. He maintains a record of
names and number of securities offered and the price offered by the
institutional buyer within the placement portion and the price for which
the order is received to the book runners. The book runner and the issuer
company finalize the price. The issue price for the placement portion and
offer to the public should be the same. Underwriting agreement is entered
into after the fixation of the price.
One day earlier to the opening of the issue to the public, the book
runner collects the application forms along with the application money
from the institutional buyers and the underwriters. The book runner and
other intermediaries involved in the book building process should
36

maintain records of the book building process. The SEBI has the right to
inspect the records.
Book building as discussed is a process of offering securities in
which bids at various prices from investors through syndicate members
are collected. Based on bids, demand for the security is assessed and its
price discovered. In case of normal public issue, investor knows the price
in advance and the demand is known at the close of the issue. In case of
public issue through book building, demand can be known at the end of
everyday but price is known at the close of issue.
An issuer company proposing to issue capital through book
building has two options viz., 75% book building route and 100% book
building route. In case of 100% book building route is adopted, not more
than 60% of net offer to public can be allocated to QIBs (Qualified
Institutional Buyers), not less than 15% of the net offer to the public can
be allocated to non-institutional investors applying for more than 1000
shares and not less than 25% of the net offer to public can be allocated to
retail investors applying for up to 1000 shares. In case 75% of net public
offer is made through book building, not more than 60% of the net offer
can be allocated to QIBs and not less than 15% of the net offer can be
allocated to non-institutional investors. The balance 25% of the net offer
to public, offered at a price determined through book building, are
available to retail individual investors who have either not participated in
book building or have not received any allocation in the book built
portion. Allotment to retail individual or non-institutional investors is
made on the basis of proportional allotment system. In case of under
subscription in any category, the un-subscribed portions are allocated to
the bidder in other categories. The book built portion, 100% or 75%, as
37

the case may be, of the net offer to public, are compulsorily underwritten
by the syndicate members or book runners.
Other requirements for book building include:
Bids remain open for at least 5 days.
Only electronic bidding is permitted.
Bids are submitted through syndicate members.


Bids can be revised.
Bidding demand is displayed at the end of every day.
Allotments are made not later than 15 days from the closure of the issue
etc.
The SEBI guidelines for book building provides that the company
should be allowed to disclose the floor price, just prior to the opening
date, instead of in the Red herring prospectus, which may be done by
any means like a public advertisement in newspaper etc. Flexibility
should be provided to the issuer company by permitting them to indicate
a 20% price band. Issuer may be given the flexibility to revise the price
band during the bidding period and the issuers should be allowed to
have a closed book building i.e. the book will not be made public. The
mandatory requirement of 90% subscription should not be considered
with strictness, but the prospectus should disclose the amount of
minimum subscription required and sources for meeting the shortfall.
The Primary Market Advisory Committee recommended the practice of
green-shoe option available in markets abroad which is an over
allotment option granted by the issuer to the underwriter in a public
offering. This helps the syndicate member to over allocate the shares to
the extent of option available and to consequently purchase additional
38

shares from the issuer at the original offering price in order to cover the
over-allotments.




3.7 Procedure of IPO
IPOs generally involve one or more investment banks known as
"underwriters". The company offering its shares, called the "issuer",
enters into a contract with a lead underwriter to sell its shares to the
public. The underwriter then approaches investors with offers to sell
those shares.
The sale (allocation and pricing) of shares in an IPO may take
several forms. Common methods include:
Best efforts contract
Firm commitment contract
All-or-none contract
Bought deal
A large IPO is usually underwritten by a "syndicate" of investment
banks, the largest of which take the position of "lead underwriter". Upon
selling the shares, the underwriters retain a portion of the proceeds as
their fee. This fee is called an underwriting spread. The spread is
calculated as a discount from the price of the shares sold (called the gross
spread). Components of an underwriting spread in an initial public
offering (IPO) typically include the following (on a per share basis):
39

Manager's fee, Underwriting fee earned by members of the syndicate, and
the Concession earned by the broker-dealer selling the shares. The
Manager would be entitled to the entire underwriting spread. A member
of the syndicate is entitled to the underwriting fee and the concession. A
broker dealer who is not a member of the syndicate but sells shares would
receive only the concession, while the member of the syndicate who
provided the shares to that broker dealer would retain the underwriting
fee. Usually, the managing/lead underwriter, also known as the
bookrunner, typically the underwriter selling the largest proportions of
the IPO, takes the highest portion of the gross spread, up to 8% in some
cases.
Multinational IPOs may have many syndicates to deal with
differing legal requirements in both the issuer's domestic market and
other regions. For example, an issuer based in the E.U. may be
represented by the main selling syndicate in its domestic market, Europe,
in addition to separate syndicates or selling groups for US/Canada and for
Asia. Usually, the lead underwriter in the main selling group is also the
lead bank in the other selling groups.
Because of the wide array of legal requirements and because it is
an expensive process, IPOs typically involve one or more law firms with
major practices in securities law, such as the Magic Circle firms of
London and the white shoe firms of New York City.
Public offerings are sold to both institutional investors and retail
clients of the underwriters. A licensed securities salesperson (Registered
Representative in the USA and Canada) selling shares of a public offering
to his clients is paid a portion of the selling concession (the fee paid by
the issuer to the underwriter) rather than by his client. In some situations,
40

when the IPO is not a "hot" issue (undersubscribed), and where the
salesperson is the client's advisor, it is possible that the financial
incentives of the advisor and client may not be aligned.
The issuer usually allows the underwriters an option to increase the
size of the offering by up to 15% under certain circumstance known as
the greenshoe or overallotment option. This option is always exercised
when the offering is considered a "hot" issue, by virtue of being
oversubscribed.
In the USA, clients are given a preliminary prospectus, known as a
red herring prospectus, during the initial quiet period. The red herring
prospectus is so named because of a bold red warning statement printed
on its front cover. The warning states that the offering information is
incomplete, and may be changed. The actual wording can vary, although
most roughly follow the format exhibited on the Facebook IPO red
herring.During the quiet period, the shares cannot be offered for sale.
Brokers can, however, take "indications of interest" from their clients. At
the time of the stock launch, after the Registration Statement has become
effective, indications of interest can be converted to buy orders, at the
discretion of the buyer. Sales can only be made through a final prospectus
cleared by the Securities and Exchange Commission.
Before legal actions initiated by New York Attorney General Eliot
Spitzer, which later became known as the Global Settlement enforcement
agreement, some large investment firmshad initiated favorable research
coverage of companies in an effort to aid Corporate Finance departments
and retail divisions engaged in the marketing of new issues. The central
issue in that enforcement agreement had been judged in court previously.
It involved the conflict of interest between the investment banking and
41

analysis departments of ten of the largest investment firms in the United
States. The investment firms involved in the settlement had all engaged in
actions and practices that had allowed the inappropriate influence of their
research analysts by their investment bankers seeking lucrative fees. A
typical violation addressed by the settlement was the case of CSFB and
Salomon Smith Barney, which were alleged to have engaged in
inappropriate spinning of "hot" IPOs and issued fraudulent research
reports in violation of various sections within the Securities Exchange
Act of 1934.
3.8 TYPES OF OFFERING
Dutch Auction
A Dutch Auction allows shares of an initial public offering to be
allocated in an impartial way, with all successful bidders paying the same
price per share. One version of the Dutch auction is OpenIPO, which is
based on an auction system designed by Nobel Prize-winning economist
William Vickrey. This auction method uses a mathematical model to treat
all qualifying bids in an impartial way. It is similar to the model used to
auction Treasury bills, notes, and bonds. Like a typical auction, the
highest bidders win in this type of auction, but there are important
differences. In the OpenIPO auction, the entire auction is private, and
winning bidders all pay the same price per sharethe public offering
price.
A variation of the Dutch Auction has been used to take a number of
companies public including Morningstar, Interactive Brokers Group,
Overstock.com, Ravenswood Winery,Clean Energy Fuels, and Boston
Beer Company. In 2004, Google used the Dutch Auction system for its
Initial Public Offering. Traditional investment banks have shown
42

resistance to the idea of using an auction process to engage in public
securities offerings. The auction method allows for equal access to the
allocation of shares and eliminates the favorable treatment accorded
important clients by the underwriters in conventional IPOs. In the face of
this resistance, the Dutch Auction is still a little used method in public
offerings.
In determining the success or failure of a Dutch Auction, one must
consider competing points of view. If the objective is to raise as much
money as possible for the issuer, a traditional IPO offering, priced near
the top end of the underwriter's range, would likely achieve that
objective. From the viewpoint of the investor, however, the Dutch
Auction would be more effective at price discovery, and potentially result
in a lower offering price.
Direct Public Offering
Financial historians Richard Sylla and Robert E. Wright have
shown that before 1860 most early U.S. corporations sold shares in
themselves directly to the public without the aid of intermediaries like
investment banks.The direct public offering or DPO, as they term it,[6]
was not done by auction but rather at a share price set by the issuing
corporation. The DPO eliminated the agency problem associated with
offerings intermediated by investment banks but was not as effective at
price discovery as the Dutch Auction.

3.9 Pricing of IPO
A company planning an IPO typically appoints a lead manager,
known as a bookrunner, to help it arrive at an appropriate price at which
43

the shares should be issued. There are two primary ways in which the
price of an IPO can be determined. Either the company, with the help of
its lead managers, fixes a price (fixed price method) or the price can be
determined through analysis of confidential investor demand data,
compiled by the bookrunner. That process is known as book building.
Historically, some IPOs both globally and in the United States have
been underpriced. The effect of "initial underpricing" an IPO is to
generate additional interest in the stock when it first becomes publicly
traded. Flipping, or quickly selling shares for a profit, can lead to
significant gains for investors who have been allocated shares of the IPO
at the offering price. However, underpricing an IPO results in lost
potential capital for the issuer. One extreme example is theglobe.com IPO
which helped fuel the IPO "mania" of the late 90's internet era.
Underwritten by Bear Stearns on November 13, 1998, the IPO was priced
at $9 per share. The share price quickly increased 1000% after the
opening of trading, to a high of $97. Selling pressure from institutional
flipping eventually drove the stock back down, and it closed the day at
$63. Although the company did raise about $30 million from the offering
it is estimated that with the level of demand for the offering and the
volume of trading that took place the company might have left upwards
of $200 million on the table.
The danger of overpricing is also an important consideration. If a
stock is offered to the public at a higher price than the market will pay,
the underwriters may have trouble meeting their commitments to sell
shares. Even if they sell all of the issued shares, the stock may fall in
value on the first day of trading. If so, the stock may lose its marketability
and hence even more of its value. This could result in losses for investors,
many of whom being the most favored clients of the underwriters.
44

Underwriters, therefore, take many factors into consideration when
pricing an IPO, and attempt to reach an offering price that is low enough
to stimulate interest in the stock, but high enough to raise an adequate
amount of capital for the company. The process of determining an
optimal price usually involves the underwriters ("syndicate") arranging
share purchase commitments from leading institutional investors.
Some researchers (e.g. Geoffrey C., and C. Swift, 2009) believe
that the underpricing of IPOs is less a deliberate act on the part of issuers
and/or underwriters, than the result of an over-reaction on the part of
investors (Friesen & Swift, 2009). One potential method for determining
underpricing is through the use of IPO Underpricing Algorithms.


CHAPTER:-4 MERCHANT BANK & IPO
4.1 AN INTRODUCTION TO MERCHANT BANKING
A merchant banker, according to securities and exchange broad of
india (merchant bankers) regulations, 1992is a person who is engaged in
the business of issue management either by making arrangements
regarding selling, buying or subscribing to securities as manager,
consultant, adviser or rendering corporate advisory services in relation to
such issue management.
In banking, a merchant bank is a financial institution primarily
engaged in offering financial services and advice to corporations and
45

wealthy individuals on how to use their money. The term can also be used
to describe the private equity activities of banking.
Merchant banking is the financial intermediation that matches the
entities that need capital and those that have capital. It is a function that
facilitates the low of capital in the market.
Merchant banking is a service-oriented industry specializing in
investment and financial decision making, assisting in making corporate
strategies, assessing capital needs and helping in procuring the equity and
debt funds for corporate sectors and ultimately helping establishing
favorable economic environment.
Merchant banker renders services to meet the needs of trade and
industry and investors, by performing as intermediary, consultant and a
liason.
Companies raise capital by issuing securities in the market.
Merchant bankers act as intermediaries between the issuers of capital and
the ultimate investors who purchase these securities.
Their primary sources of income are PIPE financings and
international trade. Their secondary income sources are consulting,
Mergers & Acquisitions help and financial market speculation. Because
they do not invest against collateral, they take far greater risks than
traditional banks. Because they are private, do not take money from the
public and are international in scope, they are not regulated.
4.2 Scope of merchant banking activities
Merchant banking activity helps:
46

In channelising the financial surplus of the general public into
productive investment avenues.
To coordinate the activities of various intermediaries to the share
issue such as the registrar, bankers, advertising agency, printers,
underwriters, brokers etc.
To ensure the compliance with rules and regulations governing the
securities market

4.3 SERVICES OFFERED BY MERCHANT BANKER
Merchant banks offer many of the following services:
Consulting advice on going public and international business.
Advice and help in taking your company public. If they are
unwilling to supply Investment Banking bridge loans, they have a
low cost strategy for taking your company public.
The do PIPE (Private Investment in Public Equities) financings.
They can advise or help with a companys M&A strategy.
They are essential advisors for companies seeking to become
multinational corporations.
They off pragmatic general business advice for real world
situations.
In providing advice and assistance, merchant bankers must
possess a complete understanding of all facets of capital markets.
This includes every type of debt and equity financing both
domestically and internationally. Merchant bankers cognizant of
capital costs, seek optimum sources of capital. It is fundamental to
acknowledge that interest rates are not the only standard relating to
47

capital costs. Restrictions on funding availability, repayment terms,
and operating effectiveness often outweigh what might appear to
be inexpensive capital.
Too frequently capital costs compel a growing business to
undesirable actions. Some action might be necessary - or advantageous -
but in the long run - inordinate capital costs can be detrimental. The
traditional merchant banker understands capital limitations and is able to
structure transactions which are beneficial to all parties - not just the
capital source. A knowledgeable merchant banker knows how to
substitute one kind of capital for another - sometimes utilizing internal
sources by way of either asset or corporate repositioning or equity
creation. Above all, a merchant banker fully comprehends the "risk"
versus "return" element necessary to complete the capital procurement
process.

Modern practices
The definition of merchant banking has changed greatly since the
days of the Rothschilds. The great merchant banking families dealt in
everything from underwriting bonds to originating foreign loans. Bullion
trading and bond issuing were some of the specialties of the Rothschild
family.
The modern merchant banks, however, tend to advise corporations
and wealthy individuals on how to use their money. The advice varies
from counsel on Mergers and acquisitions to recommendation on the type
of credit needed. The job of generating loans and initiating other complex
financial transactions has been taken over by investment banks and
private equity firms.
48

Today there are many different classes of merchant banks. One of
the most common forms is primarily utilized in America. This type
initiates loans and then sells them to investors. Even though these
companies call themselves "Merchant banks," they have few if any of the
characteristics of former Merchant banks.
A bank that deals mostly in (but is not limited to) international finance ,
long-term loans for companies and underwriting. Merchant banks do not
provide regular banking services to the general public.
4.4 Functions Of A Merchant Banker In IPO
Managment
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
49

institutions etc. The size of such a network represents the wholesale reach
of the merchant banker. The retail network depends on networking with
investors.
Financial structuring-
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-
Merchant bankers arrange to tie up loans for their clients. This
takes place in a series of steps. Firstly they analyse the pattern of the
clients cash flows, based on which the terms of borrowings can be
defined. Then the merchant banker prepares a detailed loan memorandum,
which is circulated to various banks and financial institutions and they are
50

invited to participate in the syndicate. The banks then negotiate the terms
of lending on the basis of which the final allocation is done.
Providing venture capital and mezzanine financing-
Merchant bankers help companies in obtaining venture capital
financing for financing their new and innovative strategies.

4.5 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.5 crores

51





CHAPTER:-5 ROLE OF MERCHANT
BANKER IN IPO
5.1 Role Of Merchant Banker In Ipo:-
A company selects an investment bank to be lead manager of a
securities offering; responsibilities include leading the due diligence and
drafting the prospectus. The lead manager forms a team of third-party
specialists, including legal counsel, accounting and tax specialists,
financial printers and others.

In addition, the lead manager invites other banks into an
underwriting syndicate as co-managers. The lead and co-managers will
allot portions of the shares to be offered among themselves. Because their
underwriting fees derive from how much of the issue they sell, the
competition for lead manager and senior allotment positions is quite
intense.

When a company issues publicly traded securities for the first time
through an initial public offering (IPO), the lead manager appoints a
research analyst to write a research report and begin ongoing coverage of
the company. The report will contain an economic analysis of the
business and its prospects given the market for its products and services,
competition and other factors. Once the analyst initiates coverage, he or
she will make ongoing recommendations to the bank's clients to buy, hold
or sell shares based on the perceived fair value relative to current share
price.

52

Distribution begins with the book-building process. The
underwriting syndicate builds a book of interest during the offering
period, usually accompanied by a road show, in which the issuer's senior
management and syndicate team members meet with potential investors
(mostly institutional investors such as pension funds, endowments and
insurance companies). Potential investors receive a red herring, a
preliminary prospectus that contains all materially significant information
about the issuer but omits the final issuing price and number of shares.

At the end of the road show, the lead manager sets the final
offering price based on the prevailing demand. Underwriters seek to have
the offering oversubscribed (create more demand than available shares).
If they succeed, they will exercise a 15% overallotment option, called a
greenshoe, which is named after the Green Shoe Company, the first
issuer of such an option. This permits the underwriters to increase the
number of new shares issued by up to 15% (from the number stated in the
prospectus) without going through any additional registration.

The new issue market is called the primary market. The
Securities and Exchange Commission (SEC) registers the securities prior
to their primary issuance, then they start trading in the secondary market
on the New York Stock Exchange, Nasdaq or other venue where the
securities have been accepted for listing and trading.

5.2 SOME EXAMPLE OF BANKS HAVING
MERCHANT BANKING DIVISION FOR IPO
MANAGMENT
A) PUNJAB NATIONAL BANK
Punjab National Bank, Indias one of the Leading Nationalized
Bank established in 1895, serving over 3.5 crore customers through 4520
branches and 439 extension counters is the largest amongst Nationalized
Banks. The Bank has recently been ranked 21
st
among top 500 companies
and 9
th
among top 50 brands by the Economic Times. All the Branches of
the Bank have been computerized. The Bank has a concept of "Any
Time, Any Where Banking" through the introduction of Centralized
53

Banking Solution (CBS) and over 2511 offices have already been brought
under its ambit.

The Bank is registered with SEBI as Category I Merchant Banker
for providing all the major Merchant Banking services.

Their gamut of Merchant Banking services includes:
Issue Management Services to act as Book Running Lead
Manager/Lead Manager for the IPOs/FPOs/Right issues/Debt
issues
Project appraisal
Corporate Advisory Services
Underwriting of equity issues
Banker to the Issue/Paying Banker
Refund Banker
Monitoring Agency
Debenture Trustee
Marketing of the issue through a strong network of
QIBs/HNIEs/Corporates and Retail investor. The Bank itself is one
of the major investor in the market having a treasury of 45000
crores.

Depository Services
Bank offers Depository Services to its clients and has designated
large network of branches to cater to their demat requirements through
Depository Participant of NSDL and CDSL depositories. We also provide
the Speed e facility to demat account holders to submit their delivery
instructions through Internet. The Bank has recently launched online
54

securities trading facility in strategic alliance with IDBI Capital Market
Services Ltd.



B) CANARA BANK
AN INTRODUCTION:
Canara Bank is also one of the leading Merchant Bankers in India,
offering specialised services to Banks, PSUs, State owned Corporations,
Local Statutory bodies and corporate sector.
They are SEBI registered Category I Merchant Banker /
Underwriter to carry on Issue Management (Public / Rights / Private
Placement Issues), Underwriting, Consultancy and Corporate Advisory
Services etc.
They also hold SEBI registration Certificate to act as "Bankers to
an Issue" with network of exclusive Capital Market Service Branches to
handle "Capital Market" related assignments.
They undertake "project appraisals" with resource raising plans
from Capital Market/ Debt Markets and facilitate tie-ups with Banks /
Financial Institutions and Potential Investors.
Their uniqueness is extending services under single window
concept covering the following areas:
1. Merchant Banking
55

2. Commercial Banking
3. Investments
4. Bankers to Issue - Escrow Bankers
5. Underwriting
6. Loan Syndication