1.1.INTRODUCTION Financial services are an important component of financial system. The smooth functioning of financial system depends upon the range of financial services extended by the providers. Financial services in India have witnessed remarkable changes in the recent past after implementation of “Liberalization, privatization and globalization". Funds are tapped from the capital market to finance various mega industrial projects. In attracting public savings, merchant bankers play a vital role as specialized agencies. The resources raising functions are primary business of a merchant banker. The primary market holds the key to rapid capital formation, growth in industrial productions and exports. There has to be accountability to the end use of funds raised from the market. The increase in the number of issues and amount raised the number of merchant bankers. Therefore, the field became highly competitive market where it requires a specialized skill in handling the situation. The merchant bankers have a social responsibility to in building an industrial structure in India. Merchant bankers assist corporate in raising capital. They assist in issue of Shares, syndicating loans, public issue of debentures. They do not provide funds. They only assist. They also actively arrange working capital, appraisal Projects scrutinize & persuade merger proposals. In India, Merchant banker is a body corporate who carries on any activity of the issue management, which consists of preparing prospectus & other information relating to the issue. Merchant banks in India are not allowed to conduct any business other than that related to securities market. 1.2. MERCHANT BANK A Merchant bank is a financial institution primarily engaged in internal finance and long term loans for multinational corporations and governments. It can also be used to describe the private equity activities of banking. Merchant banks 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. A merchant bank deals with the commercial banking needs of finance, long term company loans, and stock underwriting. A merchant bank does not have retail offices where one can go and open a savings or checking account. A merchant bank sometimes said to be a wholesale bank, or in the business of wholesale banking. This is because merchant banks tend to deal primarily with other merchant banks and other large financial institutions. The most familiar role of the merchant bank is stock underwriting. A large company that wishes to raise money from investors through the stock market can hire a merchant bank to implement and underwrite the process. The merchant bank determines the number of stocks to be issued, the price at which the stock will be issued, and the timing of the release of this new stock. The merchant bank files all the paperwork required with the various market authorities, and is also frequently responsible for marketing the new stock, though this may be a joint effort with the company and managed by the merchant bank. For really large stock offerings, several merchant banks may work together, with one being the lead underwriter. By limiting their scope to the needs of large companies, merchant banks can focus their knowledge and be specific use to such clients. Some merchant banks specialize in a single area, such as underwriting or international finance. Many of the largest banks have both a retail division and a merchant bank division. The divisions are generally very separate entities, as there is very little similarity between retail banking and what goes on in a merchant bank. 1. • Merchant banker is one who underwrites corporate securities and advices clients on issues like corporate mergers. • Merchant Banker understands the requirements of the business concern and arranges finance with the help of financial institutions. consultant. Securities and Exchange Board of India (Merchant Bankers) Rules.3. . banks.‖any person who is engaged in the business of issue management either by making arrangements regarding selling. consultant. adviser or rendering corporate advisory services in relation to such issue management. firm or even a proprietary concern. buying or subscribing to securities or acting as manager. 1992 A merchant banker has been defined as any person who is engaged in the business of issue management either by making arrangements regarding selling. • A merchant banker is one who is a critical link between a company raising fund and the investors. Random House Dictionary ―Merchant banker is an organization that underwrites securities for corporations. These organizations are sometime banks which are not merchants and sometimes merchants who are not banks and sometimes houses which are neither merchants nor banks. The Notification of the Ministry of finance defines A merchant banker as . • The merchant banker may be in the form of a bank. a company. stock exchanges and money market. advices such clients on mergers and is involved in the ownership of commercial ventures. buying or subscribing to the securities as manager. adviser or rendering corporate advisory service in relation to such issue management. Charles P. Kindleberger ―Merchant banking is the development of banking from commerce which frequently encountered a prolonged intermediate stage known in England originally as merchant banking. leaving a widening gap under bridged between the supply and demand of inevitable funds. In the circumstances corporate sector had the only alternative to avail of the capital market services for meeting their long term financial requirements through capital issues of equity and debentures. the need of merchant banking institutions is felt in the wake of huge public savings lying still untapped. With the growth of merchant banking profession corporate enterprises in both public and private sectors would be able to raise required amount of funds for establishing new enterprises. exerting excess demand on the sources of funds for ever expanding industry and trade. thus. All Indian financial institutions and experienced resources constraint to meet the ever increasing demands for funds from the corporate sector enterprises. This reinforces the need for a vigorous role to be played by merchant banks. With the growing demands for funds there was pressure on capital market that enthused the commercial banks. Importance and need of merchant banking Important reason for the growth of merchant banking has been developmental activity throughout the country. There has been a mushroom growth of financial consultancy firms and broker firms doing advisory functions as well as managing public issues in syndication with other merchant bankers. Merchant banks have been procuring impressive support from capital market for the corporate sector for financial their projects. . undertaking expansion / modernization / diversification of the existing enterprises. share brokers and financial consultant firms to enter into the field of merchant banking and share the growing capital markets. With the result.4. Merchant banks can play highly significant role in mobilizing funds of savers to investible channels assuring promising return on investments thus can help in meeting the widening demand for investible funds for economic activity.1. Notwithstanding the above facts. all the commercial banks in nationalized and public sector as well as in private sector including the foreign banks in India have opened their merchant banking window and are competing in the field. provide this service to the corporate units and advise them on such requirements to be complied with for raising funds from the capital market under different enactments viz. Foreign Exchange Regulation Act. Income-tax Act. Companies Act. other statutory relaxations. the need of skilled agency existed which could provide counseling in these matters in a package form. Securities Contracts (Regulation) Act and various other corporate laws and regulations. . guidelines and offshoot press release instructions brought out by the government from time to time imposing statutory obligations upon the corporate sector to comply with all those requirements prescribed therein. In view of multitude of enactments.This is evidenced from the increasing amount raised from the capital market by the corporate enterprises year after year. with their skills. good return on investment and capital appreciation in such investment to motivate them to invest their savings in securities of the corporate sector. updates information and knowledge. Merchant bankers advise the investors of the incentives available in the form of tax relief‟s. Merchant bankers. rules and regulations. 1. He is always awake to renew his skills. diversifications. . its agencies. Merchant banker has to think and devise new instruments of financing industrial projects. Role of Merchant Banker The role of merchant banker is dynamic in the wake of diverse nature of merchant banking services.5. a merchant banker has to be dynamic. He must bridge the communication gap between different sections and resolve the problem being faced in different areas concerned with the business world. therefore. He has to watch the interest and win over the confidence of the government. along with the entrepreneurs. develop expertise in new areas so as to equip himself with the knowledge and techniques to deal with emerging new problems of corporate business world. where science and technology create new innovations in production processes of industries envisaging immediate innovations. The nature of merchant banking services is development oriented and promotional to help the industry and trade to grow and survive. dedicated to achieve this objective through his dynamism. the investors and the whole community. To discharge the above role. He has to assume wider responsibilities of saving industrial units from going sick and guiding industries to be setup in industrially backward areas to eliminate regional imbalances in industrial development of the country. He has to keep pace with the changing environment where government rules. Merchant banker‟s dynamism lies in promptly attending to the corporate problems and suggest ways and means to solve it. He has guide the wider section of the community possessing surplus money to invest in corporate securities and other productive investment channels. regulations and politics affecting business conditions frequently change. modernizations or replacements of existing plant and machinery or other equipment putting new demands for finances and necessitating overhauling of the capital structure of the firms. Merchant banker is. He has to help the industry in different forms to ensure that it runs risk free and devoid of uncertainty by assisting the promoters with knowledge and skills to resolve the problems being faced by them. the industry and the economy as a whole which is.In the days ahead. merchant bankers have very significant role to play tuning their activities to the requirements of the growth pattern of the corporate sector. in it. a challenging task and to meet these challenges merchant bankers will have to be more vigorous and strategic in playing their role. . They will have also to adopt new ways and means in discharging their role. underwriters. grants. public issue management. The scope of corporate counseling is limited to giving suggestions and opinions to the client and help taking actions to solve their problems. lease financing. c. 2) Project Counseling Project counseling is a part of corporate counseling and relates to project finance. a.. loan syndication. amalgamations.. b. project management. Capital structuring i. offering advisory assistance on the viability and procedural steps for its implementation. maintain steady growth and create better image among investors. It broadly covers the study of the project. working capital fixed deposit. j. licenses. Arranging and negotiating foreign collaborations. Assisting clients in preparing applications for financial assistance to various national and state level institutions banks etc. brokers. advertising agency. 1) Corporate counseling Corporate counseling covers counseling in the form of project counseling. from government h. to the share issue • Ensuring the compliance with rules and regulations governing the securities market. Functions of merchant bankers in India • Channelizing the financial surplus of the general public into productive investments avenues Co-coordinating the activities of various intermediaries like the registrar. Reviewing the technical feasibility of the project e. mergers and takeovers. Advising on procedural aspects of project implementation d.. etc. foreign collaboration etc.. capital restructuring. A general view of the project ideas or project profiles. The following are the functions of merchant bankers in India. Assisting in obtaining approvals. Assisting in the selection of TCO„s (Technical Consultancy Organizations) for preparing project reports f. acceptance credit etc. bankers. printers. .6. It is provided to a corporate unit with a view to ensure better performance.1. Identification of potential investment avenues. Assisting in the preparation of project report g. k. Issue through prospectus.. a. fixed capital requirements. The issue function may be broadly divided in to pre issue and post issue management. 3) Capital structuring Here the Capital Structure is worked out i. The merchant bankers follow certain steps before assisting the clients approach the appropriate financial institutions. Merchant banks helps in identifying which financial institution should be approached for term loans. b. b. Pricing of issues 6) Credit Syndication Credit Syndication refers to obtaining of loans from single development finance institution or a syndicate or consortium. determining the promoter„s contribution and arriving at a figure of approximate amount of term loan to be raised. Merchant banks act as intermediary whose main job is to transfer capital from those who own it to those who need it. Merchant banker first makes an appraisal of the project to satisfy that it is viable. . the capital required... issue of shares and debentures. working capital.. Marketing and underwriting c. raising of the capital. a. debtequity ratio. Merchant Banks help corporate clients to raise syndicated loans from commercials banks. Providing assistance to entrepreneurs coming to India in seeking approvals from the Government of India. c. etc. It helps in designing capital structure.e. offer for sale and private placement. preference shares and debentures or bonds by offering them to public. equity shares. 5) Issue Management Management of issues refers to effective marketing of corporate securities viz. 4) Portfolio Management It refers to the effective management of Securities i. Investments are done in such a way that it ensures maximum returns and minimum risks. Taxation and inflation are taken into account while advising on investment in different securities.e. The merchant banker also undertakes the function of buying and selling of securities on behalf of their client companies. He ensures that the project adheres to the guidelines for financing industrial projects. the merchant banker helps the investor in matters pertaining to investment decisions. d. 7) Working capital The Companies are given Working Capital finance. Stock broking. 10) Fixed Deposits Merchant bankers assist the companies to raise finance by way of fixed deposits from the public.Management of short term fund requirements by client companies. 11) Other Functions Treasury Management. .servicing the shareholders and debenture holders in distributing dividends. 9) Lease Finance A specialized area of finance dealing with renting property owned by a lender. financing the leases of a company engaged in rentals. After verifications of the project.counseling SSI units on marketing and finance Equity research and investment counseling – merchant banker plays an important role in providing equity research and investment counseling because the investor is not in a position to take appropriate investment decision. 8) Venture Capital Venture Capital is a kind of capital requirement which carries more risks and hence only few institutions come forward to finance. debenture interest.helping the investors through a network of service units Servicing of issues. the application is filled and submitted along with other documents. The merchant banker looks in to the technical competency of the entrepreneur for venture capital finance. However such companies should fulfill credit rating requirements. e. Assistance to NRI investors . financing the purchase of an item to be leased out by a borrower. the Merchant Banker arranges for a preliminary meeting with financial institution. Small Scale industry counseling.the NRI investors are brought to the notice of the various investment opportunities in the country. depending upon their earning capacities in relation to the interest rate prevailing in the market. If the financial institution agrees to consider the proposal. . Foreign Collaboration: Foreign collaboration arrangements are made by the Merchant bankers. Initially they were issue mangers looking after the issue of shares and raising capital for the company. It is increasing the scope of merchant bankers in many ways. SBI capital market was set up in August 1986 as a full-fledged merchant banker. The foreign investors – both in the form of portfolio investment and through foreign direct investments are venturing in Indian Economy. . Between 1974 and 1985. They are The Merchant Banking was at its best during 1985-1992 being when there were many new issues. New financial instruments are introduced in the market time and again. However they were brought under the control of SEBI in 1992. capital restructuring. But subsequently they expanded their activities such as working capital management. It is expected that 2010 that it is going to be party time for merchant banks. Recent Developments in Merchant Banking and Challenges Ahead: The recent developments in Merchant banking are due to certain contributory factors in India. Merchant Banking in India The first merchant bank was set up in 1969 by Grind lays Bank.. In 1973. etc. the merchant banker has promoted lot of companies. This basically provides more and more opportunity to the merchant banks. initially the merchant banker in India was in the form of management of public issue and providing financial consultancy for foreign banks. The mergers and corporate restructuring along with MOU and MOA are giving immense opportunity to the merchant bankers for consultancy jobs.7. syndication of project finance. mergers. global loans.1. as many new issue are coming up. Disinvestment in the government sector in the country gives a big scope to the merchant banks to function as consultants. SBI started the merchant banking and it was followed by ICICI. the scope of work is limited. so many professionally experienced person/ organizations cannot come into the picture. In efficiency of the clients are often blamed on to the merchant banks. Poor New issues market in India is drying up the business of the merchant bankers. The activities of the merchant banking in India is very vast in the nature of The management of the customers securities The management of the portfolio The management of projects and counseling as well as appraisal The management of underwriting of shares and debentures The circumvention of the syndication of loans Management of the interest and dividend etc . 2. 3. So. The net worth requirement is very high in categories I and II specially. SEBI guideline has restricted their operations to Issue Management and Portfolio Management to some extent. Thus the merchant bankers are those financial intermediary involved with the activity of transferring capital funds to those borrowers who are interested in borrowing. 4.Challenges: However the challenges faced by merchant bankers in India are 1. so they are into trouble without any fault of their own. If a brand new company or a company already in existence. Underwriters SEBI – Securities an Exchange Board of India . advertising agencies. etc. PARTICIPANTS IN AN INITIAL PUBLIC OFFER Issuing Firm Merchant Bankers. For owners of a successful and growing private business an initial public offering (“IPO”) provides an opportunity to further advance the growth of the business through the injection of public funds. decides to invite the public to buy shares. it is also referred to as 'going public'. the IPO makes the company's stock accessible to a large group of public investors for the first time. The term initial public offering (IPO) refers to a company's first issuance of stock on the open market.printers.2.2. mailing agencies. Since it is the first time it is approaching the public for money. it is called an Initial Public Offering or an IPO. but with no shares listed on the stock exchange. INITIAL PUBLIC OFFER Initial Public Offer is the first sale of stock by a private company to the public. In most cases.1. 2. Book Running Lead Manager Registrars Investing Public Retail investors Institutional investors Bankers to an issue Depositories Intermediaries. c) Under the 90% scheme. an issuer company can issue securities in the following manner: a) 100% of the net offer to the public through the book building route. this percentage would be 90 and 10 respectively. IPO PROCEDURE Corporates may raise capital in the primary market by way of an initial public offer. This Initial Public Offering can be made through the fixed price method. . Demand Demand for the securities Demand for the securities offered is known only after the offered closure of the issue. book building method or a combination of both the fixed price and book building method. In case the issuer chooses to issue securities through the book building route then as per SEBI guidelines. rights issue or private placement. Only an indicative price range is known. known in advance to the investor. b) 75% of the net offer to the public through the book building process and 25% through the fixed price portion. An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. Difference between shares offered through book building and offer of shares through normal public issue: Features Fixed Price process Book Building process Pricing Price at which the securities Price at which securities will are offered / allotted is known be offered / allotted is not in advance to the investor.3. Payment Payment if made at the time of Payment only after allocation subscription wherein refund is given after allocation.2. can be known everyday as the book is built. The process aims at tapping both wholesale and retail investors. Bids cannot be entered less than the floor price. etc. which are above or equal to the floor price. This process is called 'bidding' and is similar to open auction. The book runner and the company conclude the final price at which it is willing to issue the stock and allocation of securities. The Issuer specifies the number of securities to be issued and the price band for orders. BOOKBUILDING Book Building is basically a capital issuance process used in Initial Public Offer (IPO) which aids price and demand discovery. Investors place their order with a syndicate member who inputs the orders into the 'electronic book'. The offer/issue price is then determined after the bid closing date based on certain evaluation criteria.4. during the period for which the book for the IPO is open. On the close of the book building period the 'book runner evaluates the bids on the basis of the evaluation criteria which may include – Price Aggression Investor quality Earliness of bids. . It is a process used for marketing a public offer of equity shares of a company.2. Bids can be revised by the bidder before the issue closes. bids are collected from investors at various prices. The Issuer also appoints syndicate members with whom orders can be placed by the investors. A Book should remain open for a minimum of 5 days. It is a mechanism where. The Process: The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'. Generally. the numbers of shares are fixed. only electronically linked transparent facility is allowed to be used in case of book building. As per SEBI. Allocation of securities is made to the successful bidders. An open outcry system cannot be used. . Book Building is a good concept and represents a capital market which is in the process of maturing. the issue size gets frozen based on the price per share discovered through the book building process. 00 p. On the last day of the IPO. to 3.m. the session timings can be further extended on specific request by the Book Running Lead Manager. efficient & transparent method for collecting bids using latest electronic trading systems Costs involved in the issue are far less than those in a normal IPO The IPO market timings are from 10. NSE operates a fully automated screen based bidding system called NEAT IPO that enables trading members to enter bids directly from their offices through a sophisticated telecommunication network.m.BOOK BUILDING AT NSE The NSE has set up nation-wide network for trading whereby members can trade remotely from their offices located all over the country. Book Building through the NSE system offers several advantages: The NSE system offers a nationwide bidding facility in securities It provide a fair. . NSE decided to offer this infrastructure for conducting online IPOs through the Book Building process.00 a. Procedures Issuers Issuers desirous of using NSE's online IPO system are required to comply with the following procedures: 1. BRLM) for usage of electronic facilities and software of NSE 2. Give details regarding Book Running Lead Manager. Submit a written request as per prescribed format (Letter1. Co Book Running Lead Managers and Syndicate Members. . Subscribers Subscribers can approach any of the approved trading members for submitting bids in the NEAT IPO system. Eligible trading members have to give in the prescribed format details of the user IDs that they would like to use. Letter2. Trading Members The Book Running Lead Manager will give the list of trading members who are eligible to participate in the Book Building process to the Exchange. On line transaction registration slip are generated automatically after entering the bids in to the system which acts as proof of the registration of each Bid option. Members have to submit a one-time undertaking to the Exchange. VSATs and Campus LANS. . The software is operated through book-runners of the issue and by the syndicate member brokers. the syndicate member brokers on behalf of themselves or their clients' place orders.BOOKBUILDING AT BSE BSE offers the book building services through the Book Building software that runs on the BSE Private network. the software gives visual graphs displaying price v/s quantity on the terminals. Bids are placed electronically through syndicate members and the information is collected on line real-time until the bid date ends. In order to maintain transparency. This system is one of the largest electronic book building networks anywhere spanning over 350 Indian cities through over 7000 Trader Work Stations via eased lines. Through this book. through an eligible Merchant Banker. a track record of distributable profits in terms of section 205 of Companies Act. ELIGIBILITY NORMS FOR COMPANIES ISSUING SECURITIES No company shall make any issue of a public issue of securities.2 An unlisted company which does not satisfy the requirement specified in Clause 2. and.5. equity. Clause 2. the appraising bank or institution shall bring in the minimum specified contribution at least one day before the opening of the public issue. has appraised the project to be financed through the proposed offer to the public.2. can make a public issue of equity share capital or any security convertible at later date into equity share capital. b. participation in the issue of security in the proposed issue or combination of any of them. . a pre-issue net worth of not less than Rupees One crore in three out of preceding five years. with the minimum net worth to be met during immediately preceding two years. c. and ii. 2. Public Issue by Unlisted Companies Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines for Capital Issues 2000 chapter 2 states the following in this respect.2: 2.1 above. unless a draft prospectus has been filed with the Securities and Exchange Board of India (SEBI).2. for at least three out of immediately preceding five years. not less than 10% of the project cost is financed by the said appraising bank or institution by way of loan.i. provided a public financial institution or a scheduled commercial bank:- a.1 No unlisted company shall make a public issue of any equity share or any security convertible at a later date into equity share unless the company has.2. at least 21 days prior to the filing of Prospectus with the Registrar of Companies (ROCs).2. Public Issue by Listed Companies Clause 2. if as a result of the proposed issue.2. it has a track record of distributable profits in terms of Section 205 of Companies Act. (b) and (c ) of clause 2. it can make a public issue provided that it satisfies the requirements laid down in sub-clauses (a). if the company does not satisfy the requirements specified in clause (a) above. a.1 A listed company shall be eligible to make a public issue of equity shares or any security convertible at later date into equity share.2. and (ii) it has a pre-issue net worth of not less than Rs. .2.3: 2. with the minimum net worth to be met during immediately preceding two (2) years. before it can make the proposed public issue.3. net worth of the company becomes more than five times the net worth prior to the issue.1 or Clause 2. the company shall satisfy either the provisions of Clause 2. 2. b. for at least three (3) out of immediately preceding five (5) years from the information technology business / activities.2. shall be eligible to make a public issue of equity share or securities convertible at a later date into equity share. if.2 Public issue by listed companies which has changed its name to indicate as if it was engaged in the business / activities in information technology sector during a period of three years prior to filing of offer document with the Board. One Crore in three (3) out of preceding five (5) years.3.2. Provided that. 6. - Dispatch of Issue Material . - Underwriting: The Lead merchant banker shall satisfy themselves about the ability of the underwriters to discharge their underwriting obligations. Inter-se Allocation of Responsibilities of each merchant banker shall be demarcated as specified in Schedule II of Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines for Capital Issues 2000. - The Lead Merchant Banker should furnish Certificates Signed by the Company Secretary or Chartered Accountant. - Appointment of Intermediaries Appointment of Merchant Bankers Appointment of Co-managers Appointment of Other Intermediaries The Lead Merchant Banker should ensure that Bankers to the Issue are appointed in all the mandatory collection centers.2. liabilities and obligations relating to the issue.ISSUE OBLIGATIONS Memorandum of Understanding (MOU) has been entered into between a lead merchant banker and the issuer company specifying their mutual rights. PRE. - Due Diligence Certificate should be furnished to the Board by the Lead Merchant Bankers. in Case of Listed Companies Making Further Issue of Capital. - The issuer shall submit an undertaking to the Board to the effect that transactions in securities by the `promoter' the 'promoter group' and the immediate relatives of the `promoters during the period between the date of filing the offer documents with the Registrar of Companies or Stock Exchange as the case may be and the date of closure of the issue shall be reported to the Stock exchanges concerned within 24 hours of the transaction(s). . - The investors from the places other than from the places where the mandatory collection centers and authorized collection agents are located.- The issuer company can also appoint authorized collection agents in consultation with the Lead Merchant Banker subject to necessary disclosures including the names and addresses of such agents made in the offer document. can forward their applications along with stock invests to the Registrars to the Issue directly by Registered Post with Acknowledgement Due. 2. the lead Merchant Banker shall satisfy himself that the issue is fully subscribed before announcing closure of the issue. The Post -Issue Lead Merchant Banker shall submit within two weeks from the date of allotment. The Post -issue Lead Merchant Banker shall actively associate himself with post-issue activities namely. a Certificate to the Board certifying that the stock invests on the basis of which allotment was finalized. allotment. refund and dispatch and shall regularly monitor redressal of investor grievances arising therefrom. In case there is a devolvement on underwriters. the Executive Director/Managing Director of the Regional Stock Exchange along with the post issue Lead Merchant Banker and the Registrars to the Issue shall be responsible to ensure that the basis of allotment is finalized in a fair and proper manner in accordance with the guidelines.ISSUE OBLIGATIONS Lead Merchant Banker shall ensure the submission of the post-issue monitoring reports as per formats specified in Schedule XVI. Co-ordination with Intermediaries The lead merchant banker shall ensure compliance with the instructions issued by the RBI on handling of stock invest by any person including Registrars. In a public issue of securities. . If the issue is proposed to be closed at the earliest closing date. POST.7. have been realized. the lead Merchant Banker shall ensure that the underwriters honor their commitments within 60 days from the date of closure of the issue. A "wealth constraint" prevents current owner-managers from financing the project. As such. Provides liquidity for current stockholders (for consumption or diversification).. An IPO require a company to divulge information such as expected profitability.C. capital structure. 2. 3. Disclosure of proprietary information may be helpful to competitors. SEBI and other regulatory bodies Costs of corporate control outside stockholders can impose costs on managers if they feel that the firm isn't being managed in the stockholders' interests.2. COSTS OF INITIAL PUBLIC EQUITY OFFERING Agency costs Costs of reporting/filing with the S. Information asymmetry creates greater uncertainty about the value of the firm and makes it more difficult to value and it is costly for investors to attain information. Some such information which serves as a competitive advantage by the issuing company can now be used by the competitors.9. This won't work if owner-manager has a large undiversified stake in the firm 2.E.8. . By issuing capital at a discount results in fewer proceeds and hence a higher cost of raising capital. even if they only represent a minority position. the cost of IPO is risk of losing competitive edge due to disclosure of information. other contracting parties. Equity is often used to pump in fresh finance. Under pricing: An IPO issues capital and underpricing is a substantial cost of the issued capital. Lowers the cost of capital for the firm: one of the main lessons from portfolio theory is that risk reduction due to diversification lowers the risk (and required return) for stocks. new business opportunities etc. BENEFITS OF PUBLIC EQUITY ISSUE 1. A merchant banker has to pay a registration fee annually. merchant bankers in category I are the lead managers to an issue. 100-200 crores 4 lead managers may be appointed. They have to submit documents and records and other legal papers under the guidelines of the SEBI. Category IV acts only as advisors or consultants to the issue. . The role of the Merchant bankers was considered complementary to the IPO as they carry out all the activities relating to issue of shares. They draft prospectus. portfolio manager.50.50 for the third year. 2. underwriter or manager. Merchant bankers must be regulated with the SEBI and is granted recognition on the basis of its capital adequacy norms in terms of its net worth.5 lakhs for the first two years and 1. 50-100 crores issue requires 3 lead managers and for Rs. A lead manager has to prepare prospectus and submit it to the SEBI at least two weeks before the issue.000 for the first two years and 50. 1. appoint registrars for share application and transfers. Two lead managers are appointed for an issue of less than Rs. There are four categories of merchant bankers: Category I to carry out activities relating to issue management have to pay fees of Rs. Rs.000 for the 3rd year. consultant. Category II merchant bankers were to pay Rs. Therefore. A merchant banker has to abide by the code of conduct laid down by SEBI. SEBI has made it manadatory for all firms issuing shares to appoint merchant bankers. It has now become mandatory for all companies who are bringing out new issues to appoint merchant bankers. Those in Category III were to act as advisor. provide arrangements for underwriting. They advise the firm in drawing up the capital structure of the company. Merchant bankers in this category were to act as advisor.Role of a merchant banker in IPO The company has to appoint a merchant banker. The numbers of lead managers are related to the size of the issue. bankers to the issue and handle past issue problems. 50 crores. select brokers. underwriter and consultant.