November 14, 2012

MA0041 [Merchant Banking and Financial Services] Set1 Q1

Q1. Describe issue management in merchant banking.

The primary market intermediaries are the merchant bankers, underwriters to issue and brokers to issues. The merchant bankers are the issue managers who bring the issues to the primary market investors. Issue management is a tedious job and is closely regulated by SEBI. In many countries, the regulators implement a licensing mechanism for issue management.

Issue management is one of the important fee-based services provided by financial institutions. There are few large-scale and specialised issue management agencies in the country. The growth of stock market and opening up of economy has increased the scope of issue management activity. SEBI has laid guidelines as ground rules relating to new issue management activities to protect the investor’s interest and for development of market. The guidelines are in addition to the company’s law requirements for the issue of capital.

1 Merchant bankers as lead managers
Merchant banker is the person who arranges or assists in funds from investors through stocks, bonds or shares on behalf of the issuer for corporate establishment or for expansion purpose of the corporate firms. The main merchant banker is the lead manager. The lead manager can have associate merchant bankers to the issue. The merchant banker is a channel between the issuer and investors. As per SEBI, merchant banker is anyone who is engaged in business of issue management by making arrangements related to buying, selling or subscribing securities or providing corporate advisory service related to issue management. The importance of merchant bankers as sponsors of capital issues is seen in their major services such as determining the composition of securities types to be issues, draft of prospectus, appointment of registrars, arrangement of underwriters, selection of brokers and advertising agents, and so on. The role of merchant bankers in the process of capital issues is very important. All public issues must be managed by merchant bankers who function as lead managers.

2 Underwriters
A significant intermediary in issue market is the underwriters to issue of capital who take up securities which are not fully subscribed. Underwriter is a person who agrees to take up shares specified in the underwriting agreement of the public, who fails to subscribe them. SEBI has allowed merchant bankers and registered underwriters to act as underwriters. To act as underwriter, a certificate of registration must be obtained from SEBI. The underwriter makes profit on the difference between the public offering price and the price paid to the issuer; and that is called the underwriting spread or price spread. Underwriters are appointed by the issuing companies after consulting with the merchant bankers to the issues.

3 Bankers to an issue
The bankers to an issue engage in activities such as acceptance of applications along with the application money from the investors with respect to issues of capital and refund application of money. Bankers to an issue accept applications with the subscriptions offered at their designated branches and forward them to the registrar in agreement with instructions issued to them. They undertake publicity to the issue by distributing publicity material, prospectus and application forms. They are entitled for brokerage on shares allocated against applications bearing their stamps. In case of large issues, sufficient numbers of banks with branches at major centres are appointed. According to SEBI regulations, registration of bankers to issues with SEBI is compulsory. Under the regulations, inspection of bankers to an issue is done by Reserve Bank on request from SEBI.

4 Brokers to an issue
Brokers are mainly concerned about obtaining the subscription to the issue from the prospective investors. The appointment of brokers is not compulsory. Members of established stock exchange are appointed as brokers to issue. Companies are permitted to appoint any number of brokers. The official brokers together with the managers to the issue coordinate the preliminary distribution of securities and acquire direct subscription from many investors. The stock exchange laws prohibit the members from acting as brokers to the issue. The stock exchange grants permission to the members if the members give their approval and the company conforms to the requirements and undertakes to have its securities listed on a recognised stock exchange. The company appoints the broker to the issue at every centre where stock exchanges are located.

5 Registrar to an issue and share transfer agents
Registrar to an issue is an intermediary in primary market. They conduct activities such as maintaining records of applications and money received from investors or money paid to the seller of securities, assisting companies in deciding the basis of allotment of securities in consultation with stock exchanges, finalising the allotment of securities and dispatching allotment letters, refund orders, and other documents related to issue of capital. Merchant bankers have a panel of registrars who help the issuing company to finalise the terms and conditions of application. Lead managers ensure that the registrar to issue is registered with SEBI and is appointed in all public issues. The registrar to issue is completely responsible for all activities allocated to him for issue management.

The share transfer agents deal with all matters related to transfer of the company’s securities. They maintain the records of holders of securities for and on behalf of the companies. The agents undertake various activities ranging from transfer of holdings to dispatch of documents, annual reports, notices, and other related activities. SEBI has laid guidelines regarding the authorisation to registrar to issue and share transfer agents. According to the guidelines a fee must be paid to SEBI. The authorisation has validity for one year which can be renewed annually.

6 Debenture trustees
Debenture trustee is the trustee of debenture stock. A debenture stock is issued as loan security to secure debts of the company. It is necessary to get a certificate of registration from the SEBI to act as a debenture trustee. The debenture trustee holds a secured property on behalf of the issuer of security. The trustee has the right to carry on with the sale of secured property in case of default by the issuer of security, according to the procedure in the Transfer of Property Act. The profits of sales will be applied to redeem the debentures. The appointment of debenture trustee is mandatory. A company appoints debenture trustees when there is a need for executing a trust deed. This occurs when the company wants to issue a prospectus or letter of offer to the public for securing subscription to its debentures. A debenture trustee is an intermediary between the issuer of debentures and the holder of debentures. The main responsibility of the debenture trustee is to safeguard the interest of holders of debentures. This includes creation of security by the company issuing the debenture and to compensate their grievances.

7 Portfolio managers
Portfolio manager is a person responsible for investing a mutual, exchange-traded fund asset and also responsible for implementing investment strategy and managing the day-to-day portfolio trading. The portfolio manager is an important factor that needs to be considered regarding fund investing. He undertakes the management and administration of portfolio of securities and funds of clients on their behalf. Portfolio management is the art of making decisions about investments and policy, allocating assets for individuals and balancing risk against performance.

Portfolio management can be classified into two types-
Discretionary portfolio management – It permits the use of discretion regarding investment and management of the portfolio of the securities and funds. In this type of management the manager independently manages the capital of each client.

Non-discretionary portfolio management – In this type of management the manager manages funds according to the directions of the client.
It is mandatory to obtain a certificate from SEBI in order to carry on portfolio management services.

1 comment:

  1. Thank you for sharing this information. It was very useful. Looking forward to reading more!


    Merchant bankers | business banking | business finance

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