Merchant banking is a term used to describe the professional services given by merchant bankers, which primarily include consulting and banking services. They charge a suitable level of consideration from their client in the form of a fee in exchange for their unique forms of services.
In India, merchant banking plays an important role. Essentially, they give marketing, management, legal, and financial services to their clients. Its responsibilities include assisting a person in beginning a business, providing ways to raise finances, assisting in the expansion of activities, and assisting in the reconstruction and revival of ill business units. In other terms, it is also known as a company organization’s financial engineer.
The concept of merchant banks was first introduced in India by National Grindlays Bank in 1967. The State Bank of India established a distinct Merchant Banking Division in 1972, making it the first Indian commercial bank to do so. However, unlike in other nations, merchant banks in India have largely operated as issuing houses rather than full-fledged commercial banks.
For service provider bankers to sign in beneath the numerous categories, the Securities Exchange Board of India (SEBI) has set up capital adequacy standards. The minimum `internet worth’ certain with the aid of using SEBI for Category-I service provider bankers became to start with decided at Rs. 1 crore, however became later elevated to Rs. five crores via a 1995 revision to the regulations.
Role of Merchant Bankers:
1. Helping clients in raising funds: One of the most significant functions of commercial bankers is to arrange funds and provide diverse sources of funding. It aids in the acquisition of capital through the use of bank loans and the issuance of securities such as stocks, bonds, and debentures. It aids firms in their expansion and modernization plans by taking into account both the national and international markets for financing.
2. Broker in stock exchange: Merchant bankers buy and sell stock on behalf of their clients on the stock exchange. They also do stock share research and advise customers on which shares to buy, when to buy them, how much to buy, and when to sell them. Merchant banking, major brokers, investment banks, and venture capital are all services provided by mutual funds.
3. Assisting in the management of the project: Merchant bankers assist their clients in full project management through their specialist services. They carry out tasks such as locating the best location for a project and recommending it to their clients, conducting and arranging for a detailed study for the project, thinking about and devising the best financing plans for project financing, and keeping up with the latest government benefit schemes for their clients.
4. Help in modernization and expansion: It is advantageous for a profitable enterprise to make a decision regarding the expansion of business operations at the appropriate time. On the other side, if not taken at the right time, it can result in losses. As a result, merchant bankers undertake a thorough market analysis and offer expert advise on topics such as business expansion, takeovers and acquisitions, upgradation, joint ventures, and so on.
5. Managing with companies public issues: Companies issue securities to the public for the express purpose of raising and acquiring efficient finances. They conduct a thorough analysis of the market in which securities are to be issued and then advise companies on when to make a public offering, how to price their securities, and play an important role in the entire issue process, such as assisting in the acceptance of public applications and then allotment of securities to the public, appointing underwriters and brokers, and completing all formalities for securities listing on stock exchanges.
6. Fullfiling the government applied obligation for the successful functioning of business: For their operations, every firm must adhere to a set of severe regulatory requirements. They must be met on a regular basis by the respective firms. Merchant bankers are in charge of completing all government paperwork and obtaining consent on behalf of their clients, saving them from having to deal with all of these time-consuming procedures.
7. Helping in the revial of the sick companies: A merchant bank can assist in the resuscitation of ill industrial units. They work with a number of organisations, including banks, long-term lending institutions, and the Board for Industrial and Financial Reconstruction (BIFR). They can also plan and carry out complete revival packages. Merchant bankers assist both issuers and investors in the resurrection of their securities. These bankers provide investment advice to their clients, who are primarily institutional investors. They buy and sell shares for clients as part of their portfolio management services. Some of these bankers manage both domestic and international mutual funds.
8. Managing the client’s portfolio: Investors cannot anticipate a better return until and until their portfolios are properly managed and comprised of better securities. Merchant bankers are extremely effective at managing their clients’ portfolios with the sole goal of making their investments liquid, safe, and profitable. It advises its clients on investing selections as an expert.
9. Corporate restructuring of the company: Mergers, acquisitions (of existing units), unit sales, and disinvestment are all services provided by merchant bankers. These procedures necessitate proper negotiations, meticulous document preparation, and the execution of lengthy legal formalities. All of these formalities are handled by merchant bankers on behalf of their clients.
10. Managing the dividend and interest: Merchant banks assist their clients in managing interest on debentures or loans, as well as dividends on their stock. Furthermore, they advise the customer on the dividend’s timing (interim or annual) as well as the dividend rate.
11. Lease and finance services: Leasing and finance services are also aided by merchant banks. A lease is a contract between a lessor and a lessee in which the lessor allows the lessee to use a specific asset that belongs to him or her (such as equipment or land) for a certain length of time. The lessor is required to levy a fee known as the rents. Customers can get leasing and financing from a number of merchant bankers. Some banks have venture capital funds on hand to help entrepreneurs. These banks also assist businesses in raising funds through public deposits
12. Managing the services problem: Merchant bankers today also serve as paying agents for the service of debt securities, as well as registrars and transfer agents. They keep track of the shareholders and debenture holders in this fashion, as well as arrange for the payment of dividends and interest due to them.
13. Other services: Along with all of the services listed above, merchant bankers also provide specialty services such as mergers and acquisitions, tax-related concerns, executive recruitment, and audit cost and management, to name a few. With the ongoing development of the money market, the breadth of functions, operations, and services provided by merchant bankers is expanding.
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