1. Revise Lecture 28 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 provides specialist services including portfolio management, project financing and counselling, issue management and underwriting, mergers, acquisitions, venture capital financing, leasing and so on. 4

5. 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. 5

6. 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. 6

7. Merchant Banking – An Overview A set of financial institutions that are engaged in providing specialist services, which generally include the issue and underwriting, project financing, mergers, acquisitions, venture capital financing, acceptance of bills of exchange and other banking services, are known as ‘merchant bankers’. A merchant banker may specialize in one activity and take up other activities, which may be complementary or supportive to the specialized activity. 7

8. 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 8

9. 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 9

10. 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 10

11. Public Issue Management 11

12. Public Issue Management 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. 12

13. 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. 13

14. Public Issue Management The general functions that form part of the capital issues management functions of merchant bankers as follows; 1.Obtaining approval for the issue from SECP 2.Arranging for underwriting the proposed issue 3.Preparation of draft and finalization of the prospectus and obtaining its clearance from the various agencies concerned 14

15. Public Issue Management 4. Preparation of draft and finalization of other documents such as application forms, newspaper advertisements and other statutory requirements 5. Making a choice regarding registrar to the issue, printing press, advertising agencies, brokers and bankers to the issue and finalization of the fees to be paid to them. 15

16. Public Issue Management 6. Arranging for press conferences and the investors conferences 7. Coordinating printing, publicity and other work in order to get everything ready at the time of the public issue 8. Complying with SECP guidelines after the issue is over by sending various reports as required by the authorities. 16

17. Lecture 29 17

18. Categories of Securities Issue 18

19. 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 19

20. 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. 20

21. 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. 21

22. 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. 22

23. 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. 23

24. 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. 24

25. 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. 25

26. 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. 26

27. Issue Manager 27

28. 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. 28

29. 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. 29

30. 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. 30