1. Revise Lecture 30 1

2. Merchant Banking 2

3. Merchant Banking – An Overview The financial services sector is an important constituent of the financial system and plays a significant role in the realm of economic development of a country. Merchant Banking is a prominent component of the financial sector of our country. 3

4. Merchant Banking – An Overview Merchant banking, although a non-banking financial activity, resembles banking function. The function of merchant banking which originated, and grew in Europe, was enriched by American patronage, and these services are now being provided throughout the world by both banking and non-banking institutions. 4

5. Merchant Banking – An Overview The word ‘Merchant Banking’ originated among the Dutch and the Scottish traders, and was later on developed and professionalized in Britain. 5

6. Merchant Banking – An Overview In the U.S., investment bankers cater to the needs of business enterprises carrying out merchant banking functions. The main functions of merchant banking are the following; 1.Corporate counselling 2.Project counselling 3.Pre-investment studies 6

7. Merchant Banking – An Overview 4. Capital restructuring 5. Credit syndication and project finance 6. Issue management and underwriting 7. Portfolio management 8. Working capital finance 9. Acceptance creat and bill discounting 10. Mergers, Amalgamations and takeovers 7

8. Merchant Banking – An Overview 11. Venture capital 12. Lease financing 13. Foreign currency finance 14. Fixed deposit broking 15. Mutual funds 16. Relief to sick industries 17. Project appraisal 8

9. Public Issue Management 9

10. The management of securities of the corporate sector offered to the public on a regular basis, and existing shareholders on a rights basis, is known as ‘public issue management’. Issue management is an important function of merchant bankers and lead managers. 10

11. Public Issue Management The management of issues for raising funds through various types of instruments by companies is known as ‘issue management’. A fast growing economy like Pakistan offers tremendous scope for issue management and the merchant bankers provide their skills and expertise to companies in the management of capital issues. 11

12. Categories of Securities Issue 12

13. Public Issue Management Corporate enterprise use several sources for raising funds from the capital market. Issue of securities constitutes an important mode of raising such finances. Security issues takes the following forms; 1.Public issue 2.Right issue 3.Private placement 13

14. Public Issue Management Public issue of securities: When capital funds are raised through the issue of a prospectus, it is called ‘public issue of securities’. It is the most common method of raising funds in the capital market. A security issue may take place either at par, or at a premium or at a discount. 14

15. Public Issue Management Public issue of securities: The prospectus has to disclose all the essential facts about the company to the prospective purchasers of the shares. SECP insists on the adequacy of disclosure of information that should serve as the basis for investors to make a decision about the investment of their money. 15

16. Public Issue Management Right issue: When shares are issued to the existing shareholding of a company on a privileged basis, it is called as ‘Rights Issue’. The existing shareholders have a pre-emptive right to subscribe to the new issue of shares. Rights shares are offered as additional issues by corporates to mop up further capital funds. 16

17. Public Issue Management Private placement: When the issuing company sells securities directly to the investors, especially institutional investors, it takes the form of private placement. In this case, no prospectus is issued, since it is presumed that the investors have sufficient knowledge and experience and are capable of evaluating the risks of the investment. 17

18. Public Issue Management Public issue of securities: Private placement covers shares, preference shares and debentures. The role of financial intermediary, such as merchant bankers and lead managers, assumes greater significance in private placement. They involve themselves in the task of preparing an offer memorandum and negotiating with investors. 18

19. Public Issue Management Public issue of securities: Private placement obviously commands an advantage over the public issue on the following grounds; 1.Speed and confidentiality of issue 2.Access to capital market more quickly than a public issue which may take 6 months to one year. Time taken by private placement is just 2 to 3 months. 19

20. Public Issue Management Public issue of securities: 3. Less expensive method of raising capital because of fewer compliance procedures 4. Advantageous to small companies which cannot afford a public issue because of the expense involved. 5. Ideally suited to companies which need only relatively limited amount of capital funds. 20

21. Public Issue Management Issue Manager 21

22. Public Issue Management Issue Manager Any financial institution / intermediary which can carry out the activities connected with issue management, is registered with SECP, and can follow its regulations and guidelines, is capable of venturing into issue management. Issue management is an important activity for merchant bankers. 22

23. Public Issue Management Issue Manager (Requirements) The Issue manager needs to satisfy the following requirements before being allowed by the SECP to carry out various issue management activities; 1.Adequate and necessary infrastructure such as adequate office space, equipments and manpower to effectively discharge activities. 23

24. Public Issue Management Issue Manager (Requirements) 2. Minimum number of two persons needed, who are professionally qualified in Law, Finance or Banking management and have the experience to conduct the business of the merchant banker. 3. Fulfilling the capital adequacy requirements, i.e. a minimum net worth of Rs 5 crores. 24

25. Categories of Issue managers 25

26. Public Issue Management Categories of Issue managers SECP has classified Issue managers into four categories as follows; Merchant banker who is authorized to act as issue manager, advisor, consultant, underwriter and portfolio manager. Merchant banker who is authorized to act only as advisor, consultant, underwriter and portfolio manager. 26

27. Public Issue Management Categories of Issue managers Merchant banker who is authorized to act as underwriter, advisor to an issue. Merchant banker who is authorized to act only as advisor or consultant to an issue. 27

28. Public Issue Management Role of Issue manager 28

29. Public Issue Management Role of Issue manager The merchant banker as an issue manager is helpful is the following ways; 1. Easy floatation: An issue manager acts as an indispensable pilot facilitating a public / right issue. This is made possible with the help of a repository of special skills possessed by him to execute the management of issue. 29

30. Public Issue Management 2. Financial consultant: An issue manager essentially acts as a financial architect, by providing advice relating to capital structuring, capital gearing and financial planning for the company. 3. Underwriting: An issue manager allows for underwriting the issues of securities made by corporate enterprise. This ensures due subscription of the issue. 30

31. Public Issue Management 4. Market makers: Merchant bankers, an issue managers often act as the market makers for the issues lead managed by them. They invest, continue to hold and provide, buy and sell quotes for the listed scrips of the company. 31

32. Public Issue Management 5. Due diligence: The issue manager has to comply with SECP guidelines. The merchant banker will carry out activities with due diligence and furnish a Due Diligence Certificate to SECP. SECP has also prescribed a code of conduct for merchant bankers. 32

33. Activities involved in public issue management 33

34. Public Issue Management Activities involved in public issue management: There are several activities that have to be performed by the issue manager in order to raise money from the capital market. Adequate planning needs to be done while chalking out an appropriate marketing strategy. 34

35. Public Issue Management Activities involved in public issue management: The various activities involved in raising funds from the capital markets are the following; Pre-issue Activities: 1.Signing of MoU 2.Obtaining appraisal note 3.Optimum capital structure 35

36. Public Issue Management Activities involved in public issue management: 4. Convening meeting 5. Appointment of financial intermediary 6. Preparing documents 7. Due diligence certificate 8. Submission of offer document 9. Finalization of collection centres 36

37. Public Issue Management Activities involved in public issue management: 10. Filing with RoC. 11. Launching the issue 12. Promoter’s contribution. 13. Issue closure 37

38. Lecture 31 Marketing of new issues 38

39. Marketing of New Issues Methods of marketing securities: Following are the various methods being adopted by corporate entities for marketing the securities in the New Issues Market; 1.Pure prospectus method 2.Offer for sale method 3.Private placement method 39

40. Marketing of New Issues Methods of marketing securities: 4. Initial public offers (IPOs) method 5. Right issue method 6. Bonus issue method 7. Book-building method 8. Stock option method 9. Bought-out deals method 40

41. Marketing of New Issues Pure prospectus method: The method whereby a corporate enterprise mops up capital funds from the general public by means of an issue of a prospectus, is called ‘pure prospectus method’. It is the most popular method of making public issue of securities by corporate enterprises. 41

42. Marketing of New Issues Pure prospectus method: Advantages: The pure prospectus method of marketing the securities serves as an excellent mode of disclosure of all the information pertaining to the issue. The method promotes confidence of investors through transparency and non- discriminatory basis of allotment. 42

43. Marketing of New Issues Pure prospectus method: Drawbacks: 1.High issue costs 2.Time consuming 43

44. Marketing of New Issues Offer for Sale method: Where the marketing of securities takes place through intermediaries, such as issue houses, stockbrokers and others, it is a case of ‘Offer for Sale Method’. Under this method, the sale of securities takes place in two stages. 44

45. Marketing of New Issues Offer for Sale method: First stage, the issuer company makes an en- block sale of securities to intermediaries such as the issue houses and share brokers at an agreed price. Second stage, the securities are re-sold to ultimate investors at a market-related price. The difference between the purchase price and the issue price constitutes ‘profit’ for the intermediaries. 45

46. Marketing of New Issues Offer for Sale method: Advantage: The biggest advantage of this method is that it saves the issuing company the hassles involved in selling the shares to the public directly through prospectus. Drawback: This method is, however, expensive for the investor as it involves the offer of securities by issue houses at very high prices. 46

47. Marketing of New Issues Private Placement Method: A method of marketing of securities whereby the issuer makes the offer of sale to individuals and institutions privately without the issue of a prospectus is known as ‘Private Placement Method’. 47

48. Marketing of New Issues Private Placement Method: Advantages: 1.Less expensive as various types of costs associated with the issue are borne by the issue houses and other intermediaries. 2.Placement of securities suits the requirements of small companies. 48

49. Marketing of New Issues Private Placement Method: Disadvantages: 1.Concentration of securities in a few hands. 2.Depriving the common investors of an opportunity to subscribe to the issue, thus affecting their confidence level. 49

50. Marketing of New Issues Initial Public Offer (IPO) Method: The public issue made by a corporate entity for the first time in its life is called ‘Initial Public Offer’ (IPO). Under this method of marketing, securities are issued to successful applicants on the basis of the orders placed by them, through their brokers. 50

51. Marketing of New Issues Initial Public Offer (IPO) Method: The job of selling the stock is entrusted to a popular intermediary, the underwriter. Advantage: The biggest advantage of this method of marketing of securities is that there is no need for the investors to part with the money even before the shares are allotted in his favor. 51