Merchant Banking

SEBI
Section 2(e) of SEBI Act, 1992 defines merchant banker as any 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 service in relation to such issue management.

What is an Investment Bank?

An Investment Bank is a financial institution that raises capital, trades securities and manages corporate mergers and acquisitions. Investment banks profit from companies by raising money through issuing and selling securities in capital markets (both equity, debt) and insuring bonds (e.g. selling credit default swaps), and providing advice on transactions such as mergers and acquisitions.

What is an Investment Bank?

A majority of investment banks offer strategic advisory services for mergers, acquisitions, divestiture or other financial services for clients, such as the trading of derivatives, fixed income, foreign exchange, commodity, and equity securities.

Whattypicallyan Investment Bank? is consists of three distinct, but related businesses: An investment bank
Traditional Investment Banking Capital raising Debt Equity Strategic advisory services Mergers & acquisitions Restructuring Takeover defense Sales & Trading Distribution and execution arm of the investment bank Sells and trades stocks and bonds Manages the firms risk and makes markets for the securities underwritten by the investment bank Research Analysis and recommendations of stocks and bonds Includes company coverage and sector coverage

Products and Services

An investment bank provides numerous corporate finance functions.
Balance Sheet Management Hedging Capital Raising Equity Investment Grade Debt High Yield Debt Syndicated Loans M&A Restructuring Financial Strategy
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Share and Debt Repurchases Debt Exchanges

Consent Solicitations Advisory

Bridge Commitments

Strategic Advisory
A good investment banker is a trusted advisor to their client a CEOs first call for strategic advice Investment bankers are most valuable when they can provide unique insight regarding a companys operations or strategic direction As part of a normal client dialogue, investment bankers will show clients strategic ideas that may or may not be obvious to their client CEOs often use their bankers to approach potential counterparties on an informal basis

Strategic Advisory
Investment bankers typically handle negotiations and most other aspects of the M&A process, allowing management to focus on running their business Valuation Process management Structuring Fairness opinion Purchase/Sale documentation Whatever else it takes

Strategic Advisory M&A

Purchasing other companies Friendly Mergers Hostile Takeovers Leveraged Buyouts Selling companies Selling entire companies Spin-off of subsidiaries Defending Company Buyouts Poison Pill

 One of the most common functions of investment bankers is to assist companies in raising capital Investment banks are the intermediaries between users of capital and providers of capital Equity IPO Secondary Offering Debt Investment Grade High Yield Debt Structured & New Product Financing

Raise Capital for Clients

Capital Raising Assignment

Pre-Filing Pitching Preparation Marketing

Pricing / Closing

Post-deal follow-up

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Capital Raising: Pre-Filing

Screen the Deal Internally Put together all internal memos and coordinate meetings Commitment Committee

Investor Issues Committee

Organizational Meeting

Establish agenda, timetable, information request list and working group list
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Due Diligence Meetings

Capital Raising: Pre-Filing

Drafting of Registration Statement Development of business section and positioning Participation in drafting sessions Work with underwriters counsel on underwriting agreement Marketing Preparation

Prepare roadshow presentation with company

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Capital Raising: Marketing

Prepare memos for sales forces Institutional sales memo Retail Sales Memo Coordinate dry-run (company presentation to sales force) Roadshow: Responsible that ALL logistics run smoothly Accompany company to investor meetingskeep meetings on time Feedback to Capital Markets desk: know how the book is building ANTICIPATE everything

Capital Raising: Pricing/Closing

Pricing Finalize registration statement Meet with lawyers and printers to add in final pricing information Closing: Help coordinate wiring of funds to company How much? Where? When? Wire instructions via memo to syndicate Post-deal client relationship

Raising Capital Public Offer

The traditional role associated with investment banking is underwriting of securities. Investment banks perform one or more of following three functions:
1) Advising the issuer on the terms and the timing of the offering 2) Buying the securities from the issuer 3) Distributing the issue to public

Underwriting
Buying the securities from the issuer is called underwriting. When an investment banking firms buys the securities from issuer and accepts the risk of selling securities to investor at a lower price, it is referred underwriter. Investment bankers need not to undertake the second function of buying the securities from the issuer.
An investment banker may merely act as an advisor and/or distributor of the new security.

Underwriting
When an investment banking firms agrees to buy securities from the issuer at a set price, the underwriting arrangement is referred to as a firm commitment. Best effort underwriting arrangement investment banking firms agrees only to use expertise to sell the securities; it does not buy the entire issue from issuer.