What is Merchant Banking?

Understanding Merchant Banking

Merchant banking acts as a financial engineer for corporations. Merchant Banking is a mixture of Banking services and consultancy services. Where banking services helps the businessman to start the business to raise or collect finance and consultancy services provides to its clients for, marketing, finance, managerial and legal matters. Consultancy generally means to provide suggestion, guidance and service for a fee. These services of banking help to expand and modify the business. It helps to restart bad businesses. It also assist companies to buy and sell shares at the stock exchange.

The name ‘merchant banking’ has been used in a different way in different parts of the world. As in United Kingdom merchant banking means accepting and issuing houses whereas in U.S.A. it is stated as investment banking. In brief, merchant banking give a wide range of services from starting till running a business.

History of merchant banking

It was first started in the Italy and France during 17th & 18th centuries. It include of merchant bankers who assisted in financing the transactions of their own trade and other traders. As, the time passes the practices of the merchant banking evolved in the modern era started from London where the merchants through the acceptance of bill started to finance the foreign trade. Over the period they extended their services to many under developed counties by providing loan syndication, underwriting the issues, portfolio management etc. After sometimes, there is huge increase in the merchant banking activities.

Merchant banking was started in India in 1967 by Grindlays Bank. As of now there are about 135 Merchant bankers who are registered with Securities exchange board in India. 

Various Functions and a Role of Merchant Banking are:

1) Broker in Stock Exchange:

They act as brokers in the stock exchange as they buy and sell shares on behalf of their users. They advise their users about which type of shares to purchase, when to purchase, how much to purchase and when to sell. As a broker, they even conduct research on equity shares. Mutual Funds, Venture capital companies, huge brokers and Investment Banks offer merchant banking services.

Think of the recent biggest IPO that has hit the market. One of the major role in bringing in, accounting and release of the IPO is carried out by the merchant banks. Below, you can find a list of the merchant banks that have topped the list of IPO deals.  Merchant Banking

2) Raising Finance:

Merchant Banking assist its clients to raise finance by the way of issue of shares, debentures, bank loans, etc. Merchant banking also helps to raise finance which is used for starting a new project or new business or for expansion of the existing business. It also assists the clients to raise finance from the domestic and international market.

3) Promotional Activities:

Merchant Bankers helps the entrepreneur in visualizing an idea, identifying projects, preparing feasibility reports, acquiring government approvals, an incentive and many more. Merchant banks also provide assistance for technical and financial collaborations and joint ventures.

4) Advice on Expansion of business:

Merchant bankers also provide an advice for expansion, modernization or upgradation, mergers and acquisition, diversification of business, joint-ventures and foreign collaborations, technology up-gradation, etc for the business units

5) Credit syndication

Merchant banks provide specialised services in terms of loan application for raising short term and long term credit for various banks, preparation of project, etc. They also handle Euro-issues and in raising funds.

6) Portfolio Management:

A merchant bank manages the investments of its clients. Portfolio signifies investment in different types of securities such as shares, bonds or debentures issued by different companies. They give advice to their clients, mainly institutional investors, regarding investment decisions. This makes investments safe and profitable for the client and maintains proper combination of securities so that they give maximum return with minimum risk.

7) Handling Government approval for Industrial Projects:

A Merchant bank helps to get the approval of all the formalities from the government for starting of the project, for expansion and modernizing of the business (for companies) and commencing new businesses.

8) Managing public issue

Merchant banks advice and manage the public issues of the businesses. They provide the advice relayed to the timing of the public issue, the size of the issue, the price of the issue , acting as manager to the issue, helping in receiving applications as well as allotment of securities, listing of the shares on the relevant stock exchange and helping in appointment of brokers as well as underwriters of the issue

9) Services to Public Sector Units and revival of Sick Industrial Units:

Merchant banks offer lot of services to public sector units and public utilities in raising long term capital, foreign collaborations, marketing of securities, and arranging long-term finance from term lending institutions.  Merchant banks also help in reviving or cure of sick industrial units. They negotiate with several agencies like banks, financial institutions, and Board for Industrial and Financial Reconstruction.

SEBI guidelines allow merchant bankers to take up only issue related activities. This limits the scope of activities of these merchant bankers and protecting them from working to their full potential.

Managing Activities of Merchant Banking

Merchant banks are managed and governed by Securities Exchange Board of India (SEBI), under the SEBI Merchant Bankers Regulation Act 1992. Under this act, merchant bankers are required to:

  1. Compulsorily Register with SEBI and obtain a Registration Certificate.
  2. Renew the certificate at appropriate intervals.
  3. Have adequate capital requirements and sufficient cushion to meet up any unpleasant fluctuations.
  4. Maintain a transparent book of accounting.
  5. Follow SEBI’s code of conduct and match up with the standards during any inspection carried out by SEBI.

Non adherence to any of the guidelines would result in strict punishments and even cancellation of merchant banking license.

Categories of Merchant Banking

Merchant banking has some subsets as categorised by SEBI, under which they can perform desired functions.  Refer to the table of classification of merchant bankers below for more information:

                                           Classification of merchant bankers

The Securities Exchange Board of India segregated merchant bankers into the following four categories

Category-I             Advisor, issue manager, consultant, portfolio manager and underwriter.
Category-II                  Consultant, advisor, portfolio manager, and underwriter.
Category-III                     Advisor, underwriter, and consultant only.
Category-IV                   Advisor or consultant to issue of capital.

 

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