TERM PAPER

OF

(FINANCIAL INSTITUTIONS SYSTEM)

ON

SUBMITTED BY
Mandeep Kaur
MBA- Semester 3rd

ACKNOWLEDGEMENT

I express my gratitude to ALLAH the almighty, who aided me with strength, gave me
wisdom and patience to complete this term paper.

Additionally, I thank my course instructors who believed that I could terminate this term
paper on time. Her moral guidelines, endless effort and joyful encouragement made me
successful in this term paper.

At last, I thank to my parents for their support and sacrifices during the study period.

Mandeep Kaur

CONTENT

SR. NO. TOPIC

1. INTRODUCTION TO THE TOPIC:
  Underwriting, Types of underwriting
 Underwriter, Types of underwriters
 Role of Underwriter

2. MERCHANT BANKERS
 Merchant banking
 Merchant Bankers in India
 Role of Merchant Bankers

3. ANALYSIS OF ARTICLES:
Article 1  Role of underwriter in initial public offering (IPO).
Article 2
 Monitoring roles of underwriters in IPO earnings
management.
Article 3
 A time for self-promotion: underwriters play a central role in
the life-insurance business, but insurers may not fully
recognize their value.
Article 4  Effects of underwriters, venture capital and industry on long-
term initial public offering performance.
Article 5  SEBI asks merchant bankers to respond to complaints directly.

 Merchant Banking: past and present.

Article 6

4. CONCLUSION

5. REFERENCES

INTRODUCTION TO UNDERWRITING

Underwriting is an agreement, entered by a company with a financial agency, in order to

ensure that the public will subscribe for the entire issue of shares or debentures made by the
company. The financial agency is known as the underwriter and it agrees to buy that part of
the company issues which are not subscribed to by the public in consideration of a specified
underwriting commission. The underwriting agreement, among others, must provide for the
period during which the agreement is in force, the amount of underwriting obligations, the
period within which the underwriter has to subscribe to the issue after being intimated by the
issuer, the amount of commission and details of arrangements, if any, made by the
underwriter for fulfilling the underwriting obligations. The underwriting commission may not
exceed 5 percent on shares and 2.5 percent in case of debentures.

Underwriting has become very important in recent years with the growth of the
corporate sector. It provides several BENEFITS to a company:-

 It relieves the company of the risk and uncertainty of marketing the securities.
 Underwriters have an intimate and specialized knowledge of the capital market. They
offer valuable advice to the issuing company in the preparation of the prospectus, time
of floatation and the price of securities, etc. They also provide publicity service to the
companies which have entered into underwriting agreements with them.
 It helps in financing of new enterprises and in the expansion of the existing projects.
 It builds up investors' confidence in the issue of securities.
 The issuing company is assured of the availability of funds. Important projects are not
delayed for want of funds.
 It facilitates the geographical dispersal of securities because generally, the
underwriters maintain contacts with investors throughout the country.

TYPES OF UNDERWRITING

 Syndicate Underwriting: - is one in which, two or more agencies or underwriters

jointly underwrite an issue of securities. Such an arrangement is entered into when the
total issue is beyond the resources of one underwriter or when he does not want to
block up large amount of funds in one issue.
 Sub-Underwriting:- is one in which an underwriter gets a part of the issue further
underwritten by another agency. This is done to diffuse the risk involved in
 underwriting.
 Firm Underwriting: - is one in which the underwriters apply for a block of securities.
Under it, the underwriters agree to take up and pay for this block of securities as
ordinary subscribers in addition to their commitment as underwriters.

UNDERWRITER

The term underwriter is used in a variety of businesses and industries, but it primarily refers
to a person or firm who is responsible for assessing and assuming financial risks on behalf of
another firm or individual. Underwriters work for investment banks and insurance
companies, but they are also individuals who are financially responsible for sponsoring
events. Essentially, underwriters receive special terms or benefits for their participation in
events or business ventures.

To act as an underwriter, a certificate of registration must be obtained from Securities and

Exchange Board of India (SEBI) . The certificate is granted by SEBI under the Securities
and Exchanges Board of India (Underwriters) Regulations, 1993. These regulations deal
primarily with issues such as registration, capital adequacy, obligation and responsibilities of
the underwriters. Under it, an underwriter is required to enter into a valid agreement with the
issuer entity and the said agreement among other things should define the allocation of duties
and responsibilities between him and the issuer entity. These regulations have been further
amended by the Securities and Exchange Board of India (Underwriters) (Amendment)
Regulations, 2006.

TYPES OF UNDERWRITERS

INSTITUTIONAL NON-INSTITUTIONAL

LIC, UTI, ICICI,

IDBI
COMMERCIAL
BANKS
GENERAL
INSURANCE
COMPANIES
 BROKERS

ROLE OF UNDERWRITERS

• The primary role of the underwriter is to purchase securities from the issuer and
resell them to investors.
• Underwriters act as intermediaries between issuers and investors, providing for an
efficient of capital.
• The underwriters take the risk that it will be able to resell the securities at a profit.
• Perhaps the most visible and familiar element of the initial public offering process is
the underwriter. The underwriter is the organization that is actually responsible
for pricing, selling, and organizing the issue, and it may or may not provide
additional services. With direct public offerings, there is no need for an underwriter.

Selection of a good underwriter is of the utmost importance, but it's important to

understand that many underwriters are equally selective of their clients. Because an
underwriter's reputation depends on successful issues, few firms will be willing to
stake their reputation on questionable companies.

• When selecting an underwriter, it's important to seek out an established company

with a good reputation and quality research coverage in your field. The decision may
also depend on the kind of agreement the underwriter is willing to make regarding the
sale of shares. For profitable and established private companies, it shouldn't be
 difficult to locate an underwriter willing to make a firm commitment arrangement.
Under such an agreement, the underwriter agrees to buy all issues shares, regardless
of ability to sell them at a particular price.

• For riskier or less established companies, an underwriter may offer best efforts
arrangement for the initial public offering. A best efforts contract requires the
underwriter to buy only enough shares to fill investor demand. Under this
arrangement, the underwriter accepts no responsibility for unsold shares.

• Aside from fees and sales arrangements, most underwriters are fairly similar in their
roles. An underwriter will assist in the preparation and submission of all appropriate
SEC filings, helping potential investors make informed decisions about your offering.
All underwriters are required to exercise due diligence in verifying the information
they submit, so a certain amount of investigation should be expected from any
responsible underwriter.

In addition to SEC registration filings, the underwriter will create a preliminary

prospectus that will become a major part of the issue's marketing campaign. This
document is also referred to as the red herring, after a small red passage in the
document that states that the company is not attempting to sell shares prior to SEC
approval.

Once SEC approval is obtained, the underwriter and the corporation will embark on a
road show to gauge and attract interest from investors. While the road show does not
involve getting binding commitments from investors, it helps the underwriter
determine the best strategies for pricing and issuance.

MERCHANT BANKERS
 “Merchants are businessmen who trade in commodities that they do not produce
themselves, in order to earn profit.”

• The merchant bankers are those financial intermediaries involved with the activity of
transferring capital funds to those borrowers who interested in borrowing.
• They guarantee the success of issues by underwriting them.
• Merchant banks are popularly known as “issuing and accepting houses”.
• Unlike in the past, their activities are now primarily non-fund based (fee based).
• They offer a package of financial services. The basic function of merchant banks is
marketing corporate and other services that are guaranteeing sales and distribution of
securities and also other activities such as management of customer services,
portfolio management of customer services, portfolio management ,credit
syndication , acceptance credit, counseling, insurance etc.
As per SEBI (Merchant bankers) Rules, 1992:

“Merchant bankers means any person who is engaged in the business of issue management
either by making arrangements regarding selling, buying or subscribing to securities or acting
as manager, consultant, advise or rendering corporate advisory service in relation to such
issue management.”

MERCHANT BANKING
Merchant banking activity was formally initiated into the Indian capital markets when grind
lays bank received the license from reserve bank in 1967. Grind lays started with
management of capital issues, recognized the needs of emerging class of entrepreneurs for
diverse financial services ranging from production planning and system design to
market research. Even it provides management consulting services to meet the
requirements of small and medium sector rather than large sector. Citibank setup its
merchant banking division in1970. The various tasks performed by this divisions namely
assisting new entrepreneur, evaluating new projects, raising funds through borrowing
and issuing equity. Indians banks started banking services as a part multiple services they
offer to their clients from 1972.

REGISTRATION OF MERCHANT BANKERS WITH SEBI

• It is mandatory for a merchant banker to register with the SEBI. Without holding a
certificate of registration granted by the securities and exchange board of India, no
person can act as a merchant banker in India.
• Only a body corporate other then a non-banking financial company shall be
eligible to get registration as merchant banker.
• The applicant should not carry on any business other than those connected with the
securities market.
• All applicants for merchant bankers should have qualifications in finance, law or
business management.
• The applicant should have infrastructure like office space, equipment, manpower etc.
• The applicant must have at least two employees with prior experience in merchant
banking.

MERCHANT BANKERS IN INDIA

There are 135 merchant bankers who are registered with sebi now in India. There are
public sector, private sector and foreign players registered with SEBI. The below are
the examples of few of the merchant bankers in each of the public, private and foreign
players.

• PUBLIC SECTOR MERCHANT BANKERS

• SEBI CAPITAL MERKETS LTD.
• PUNJAB NATIONAL BANK.
• IFCI FINANCIAL SERVICES LTD.
• STATE BANK OF BIKANER AND JAIPUR.
• PRIVATE SECTORS MERCHANT BANKERS:
• ICICI SECURITIES LTD.
• AXIS BANK LTD (FORMERLY UTI BANK LTD.)
• BAJAJ CAPITAL MARKETS LTD
• TATA CAPITAL MARKETS LTD.
• KOTAK MAHINDRA CAPITAL COMPANY LTD.
• YES BANK LTD.
 ROLE OF MERCHANT BANKS
• PROJECT COUNSELLING:
Project counseling includes preparation of project reports, deciding upon the
financing pattern to finance the cost of the project and appraising the project
report with the financial institutions or banks. It also includes filling up of
application forms with relevant information for obtaining funds from financial
institutions and obtaining government approval.

• MANAGEMENT OF DEBT AND EQUITY OFFERINGS

This forms the main function of the merchant banker. He assists the companies
in raising funds from the market. The main areas of work in this regard include:
instrument designing, pricing the issue, registration of the offer document,
underwriting support and marketing of the issue, allotment and refund, listing on
stock exchanges.

• ISSUE MANAGEMENT
Management of issue involves marketing of corporate securities viz. equity shares,
preference shares and debentures or bonds by offering them to public. Merchant
banks act as per SEBI guidelines, the merchant banker arranges a meeting with
company representatives and advertising agents to finalize arrangements relating to
date of opening and closing of issue, registration of prospectus, launching publicity
campaign and fixing date of board meeting to approve and sign prospectus and pass
the necessary resolutions. Pricing of issues is done by the companies in consultant
with the merchant bankers.

• MANAGERS, CONSULTANATS AND ADVISERS OF THE ISSUE:

The managers of the issue assist in the drafting of prospectus, application forms and
completion of formalities under the companies act, appointment of registrar for
dealing with share applications and transfer and listing of shares of the company on
 the stock exchange. Companies can appoint one or more agencies as managers to the
issue.

• CORPORATE ADVISORY SERVICES:

Merchant bankers offer customized solutions to the financial problems.

The following are the main areas in their advice are sought:

• Financial Restructuring
• Refinancing Alternatives
• Sources of funds
• Rehabilitation and turnaround management
• Design revival package (for sick units)
• Risk Management

• UNDERWRITING OF PUBLIC ISSUE:

Underwriting is a guarantee given by the underwriter that in the event of under
subscription, the amount underwritten would be subscribed by him. Merchant banking
subsidiaries cannot underwrite more than 15% of any issue.

• PORTFOLIO MANAGEMENT:
Portfolio refers to investment in different kinds of securities such as shares,
debentures or bonds issued by different companies and government securities.
Portfolio management refers to maintaining proper combinations of securities in a
manner that they give maximum return with minimum risk.

• RESTRUCTURING STRATEGIES:
 A merger is a combination of two companies into a single company where one
survives and other losses its corporate existence. A takeover is the purchase by one
company acquiring controlling interest in the share capital of another existing
company. Merchant bankers are the middlemen in setting negotiation between the
companies. Merchant bankers assist the management of the client company to
successfully restructure various activities, which include mergers and acquisitions,
management buyouts, joint ventures among others.

• OFFSHORE FINANCE:

The merchant bankers help their clients in the following areas involving foreign
currency:

a) Long term foreign currency loans

b) Joint ventures abroad

c) Financing exports and imports

d) Foreign collaboration arrangements

ROLE OF MERCHANT BANKER IN A PRIMARY MARKET ISSUE

MANAGEMENT:

Merchant banker is the intermediary appointed by companies in the primary market issue. It
has to look at the entire issue management and work as the manager to the public issue.

Principal steps that merchant bankers have to perform n a bringing up a public issue
are as follows:

 Vetting of prospectus

 Appointment of underwriters

 Appointment of bankers
  Appointment of registrars

 Appointments of brokers and principal brokers

 Printing and dispatch of prospectus and application form

 Filing of initial listing application

 Promotion of the issue

 Statutory Announcement

 Collection of applications

 Processing of applications

 Establishing the liability underwriters

 Allotment of shares

 Listing of the issue

 Costs of public issue

ROLE OF MERCHANT BANKERS IN TAKEOVERS

• Independent Person with fiduciary responsibility

• Designated person to ensure that all parties fulfill each of their OBLIGATION
within the TIMEFRAME prescribed under the Takeover Code

• Clause 24 specially lays down the General Obligations of the Merchant

Banker under the Takeover Code

WHAT DRIVES THE ROLE OF MERCHANT BANKER

• Cardinal principal of Takeover Code, which is based on:

 – Principle of Equality and Opportunity to all the shareholders

– Protection of minority interest

– Fairness and Protection

• Broad role laid out includes:

– Facilitate the entire takeover process

– Confirm basis principles of takeover

– Transparency and facilitate informed decision making

– Protecting the interest of minority shareholders

ROLE IN TYPICAL TAKEOVER ASSIGNMENT

 ANALYSIS OF ARTICLES
ARTICLE 1

ROLE OF UNDERWRITER IN INITIAL PUBLIC OFFERING (IPO)

http://www.grin.com/e-book/72982/the-role-of-the-underwriter-in-the-initial-public-offering-
process

In this article it is defined that a company want to raise funds through initial public offering
(IPO) it appoints an investment bank for underwriting the issue. An investment bank is also
called as merchant bank. There is no restriction to use the services of a merchant bank for
IPO. Since in an IPO a company participates for the first time, it doesn’t have complete
understanding of the rules and documentation, required to be submitted, to get a clearance
from the regulator. If the issue size is very large a syndicate of merchant banks takes up the
task of underwriting the issue. However, one merchant bank leads the other.If the issue size is
very large a syndicate of merchant banks takes up the task of underwriting the issue.
However one merchant bank leads the other.

ARTICLE 2
MONITORING ROLES OF UNDERWRITERS IN IPO
EARNINGS MANAGEMENT
http://www.fma.org/Texas/Papers/FMA_IPO_Paper_SY.pdf
This article is all about the investigation of certification and monitoring roles played by the
largely overlooked. After reading this article I analyzed that the underwriters have strong
incentives to continue providing monitoring to the firms and there is a positive relation
between underwriter regulation and post IPO firm operating performance. I find that IPOs
underwritten by lower reputation underwriters have more initial discretionary accruals and
higher initial firm values.

ARTICLE 3
A TIME FOR SELF-PROMOTION: UNDERWRITERS PLAY A
CENTRAL ROLE IN THE LIFE-INSURANCE BUSINESS, BUT
INSURERS MAY NOT FULLY RECOGNIZE THEIR VALUE.

http://www.thefreelibrary.com/A+time+for+selfpromotion:
+underwriters+play+a+central+role+in+the+...-a0101437231

In this article it is stated that underwriting decisions impact the most critical issues of our
business. The underwriting function has taken stiff hits in the industry attempts to speed
decision making on the front end. Underwriters are also part detective. They need to be able
to detect fraud. Underwriters are also need to understand the international scene.
Underwriters create the personality of the insurance company.

ARTICLE 4

EFFECTS OF UNDERWRITERS, VENTURE CAPITAL AND

INDUSTRY ON LONG-TERM INITIAL PUBLIC OFFERING
PERFORMANCE
Author(s): Yewmun Yip, Yuli Su, Jiun Boon Ang

Journal: Managerial Finance

Year: 2009

This article is all about to examine the choice of underwriters, venture capital support,
industry and their interactions have any impact o the long term performance of initial public
offerings. Under a multi factor framework, only significant underwriter and venture capital
effects are found. Short term price momentum and long term price reversal pattern is more
pronounced for IPOs that are underwritten by investment banks.

ARTICLE 5

SEBI ASKS MERCHANT BANKERS TO RESPOND TO

COMPLAINTS DIRECTLY
In this article it describes that the SEBI market regulator has asked the merchant bankers to
respond to any complaints regarding an offer document directly after independently
examining the matter before the issuer company coming out with explanations. In a
notification, SEBI advised the merchant bankers to refrain from the current practice of
forwarding issuer company' responses without comments from lead managers.

ARTICLE 6

MERCHANT BANKING: PAST AND PRESENT

http://www.allbusiness.com/sales/internet-e-commerce-merchant-bank/1046472-1.html

By Craig, Valentine V Publication: FDIC Banking Review Date: Monday, January 1 2001

This article begins by defining the merchant banking and provides a short history of the
merchant banking. This article also defines the private equity market in the United States,
examining that market in terms of its evolution, uses of funds and forms taken by the
investments. Currently, more than 80% of private equity investments are made by limited
partnership. Direct investment in private equity is also made. This article also defines the
commercial bank involvement in merchant banking, several very large banks holding
companies come to dominate the merchant banking, directing as much as 10 percent of their
capital to these activities. For the most part, reported earnings from these merchant banking
activities have been very good. Commercial banks are permitted to report either realized or
unrealized gains on their merchant banking portfolios.

CONCLUSION
At last I want to conclude it as the merchant banker plays a vital role in channelizing the
financial surplus of the society into productive investment avenues. Hence before selecting a
merchant banker, one must decide what the services for which he is being approached are.
Selecting the right intermediary who has the necessary skills to meet the requirements of the
client will ensure success. The underwriting is one of the functions of the merchant banking.

REFERENCES:
  Bachelorarbeit, Georgi Georgiev, role of underwriter in initial public offering
(IPO) 2005, 39 Seiten
http://www.grin.com/e-book/72982/the-role-of-the-underwriter-in-the-initial-public-
offering-process
 http://www.fma.org/Texas/Papers/FMA_IPO_Paper_SY.pdf

 http://www.thefreelibrary.com/A+time+for+selfpromotion:
+underwriters+play+a+central+role+in+the+...-a0101437231

Yewmun Yip, Journal: Managerial Finance, effects of underwriters, venture capital and
industry on long-term initial public offering performance, 2009
 http://www.allbusiness.com/sales/internet-e-commerce-merchant-bank/1046472-
1.html

 http://www.ehow.com/about_4696815_definition-of-underwriter.html