Introduction to Merchant Banking
Merchant banking is a professional service provided by the merchant banks to their customers considering their financial needs, for adequate consideration in the form of fee. Merchant banks are banks that conduct fundraising, financial advising and loan services to large corporations.
These banks are experts in international trade, which makes them experts in dealing with large corporations and industries. Merchant banking provides funds to the multinational businesses and large business entities in the country which helps to boost the country’s economic strength.
Merchant banks do not provide services to the general public; their services are limited to business entities and large business corporations.
Merchant banker is a person who provides assistance for the subscription of securities. The merchant banker plays an important role and carries a lot of responsibilities like, private placement of securities, managing public issue of securities, stock broking, international financial advisory services, etc.
Functions of Merchant Banking
The functions of merchant banking in India are governed by Securities and Exchange Board of India (SEBI) regulations, 1992.
Merchant banking provides investment advice to the investors to make the investment decisions. The merchant bank provides portfolio managing assistance to the investors by trading securities on their behalf.
Raising funds for clients
Merchant banks assist clients in raising funds from the domestic and international market by buying securities.
The merchant bank also helps in the promotion of the business institute in its initial stages. It helps the organisation to work on their business idea and to get the approval from the government.
This is the service provided by merchant banks to its clients for raising credit from banks and financial institutions.
Merchant banks also provide leasing services to their customers.
Merchant banking provides a lot of support and opportunities for new businesses. This in turn also has a positive effect on the country’s economic growth.
The important functions of merchant bankers are:
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 undergoing tasks include instrument designing, pricing the issue, registration of the offer document, underwriting support, marketing of the issue, allotment and refund and listing on stock exchanges.
Placement and Distribution:
The merchant banker helps in distributing various securities like equity shares, debt instruments, mutual funds, insurance products, and commercial paper, to name a few. The distribution network of the merchant banker can be classified as institutional and retail in nature. The institutional network consists of mutual funds, foreign institutional investors; private equity funds pension funds, financial institutions, etc.
Corporate Advisory Services:
Merchant bankers offer customized solutions to their clients’ financial problems. Financial structuring includes determining the right debt-equity ratio and the framing of appropriate capital structure theory.
Project Advisory Services:
Merchant bankers help their clients in various stages of the project undertaken by the clients. They assist them in conceptualizing the project idea in the initial stage. Once the idea is formed, they conduct feasibility studies to examine the viability of the proposed project.
Merchant bankers arrange to tie up loans for their clients. This takes place in a series of steps. Firstly, they analyze the pattern of the client’s cash flows, based on which the terms of the borrowings can be defined. Then the merchant banker prepares a detailed loan memorandum, which is circulated to various banks and financial institutions and they are invited to participate in the syndicate. The banks then negotiate the terms of lending on the basis of which the final allocation is done.
Providing Venture Capital Financing:
Merchant bankers help companies in obtaining venture capital financing for financing their new and innovative strategies.
What is the Role and Activities of Merchant Banker in India?
Fundamentally, merchant banker are financial institutions. The main activities of merchant banker are like business loans as well as underwriting. They largely offer their services to large enterprises and individuals of high net worth.
The major functions that a merchant bank carries out are like
- Stock Underwriting: This is one of the most usual activities of a merchant bank.
- Issue Management: In this, a merchant Bank will assist the capital market to increase the supply of securities in the market.
- Portfolio Services is also essential function.
Underwriting is the process by which they raise and arrange to collect the fund from investors on behalf of corporations and governments issuing either equity or debt securities.
While acting as a banker to an issue, a merchant banker has to disclose full details to the Securities Exchange Board of India (SEBI) as it is the regulator for this entity. Basically, merchant bankers are financial institutions. They do not undertake the activities of depositories or retail lender institutions. They are, instead, intermediaries.
They undertake the activities of business loans as well as underwriting. They are an unique combination of consultancy and banking services. They provide consultancy on matters pertaining to the finances, marketing, management, and law. Such consultancy services assist starting of businesses, raise finance, modernize, expand or restructure an existing business, revival of sick units as well as provide assistance to companies in registering, buying and selling shares. They do not undertake the activities of depositories or retail lender institutions. They are, instead, intermediaries.
National Grindlays Bank introduced the concept of merchant banks in India somewhere in 1967. Similarly, the State Bank of India became the first Indian Commercial Bank to set up a separate Merchant Banking Division in the year 1972.
Citibank setup its merchant banking division in 1970.
Role and activities of Merchant Bankers
Raising finance- Merchant Bankers (MB) assist their clients in fund raising by way of issue of a debenture, shares, bank loans, etc.
Promotional activities– In India, Activities of Merchant Banker play a very vital role of promoter of industrial enterprises. They assist entrepreneurs in the matter of conceiving ideas, identifying projects, preparation of feasibility reports, getting Government approvals as well as incentives, etc.
Brokers in stock exchanges– Merchant bankers also buy and sell shares in the stock exchange on behalf of their clients. They also additionally conduct researches on equity shares.
Project management- Merchant bankers offer their service to clients in several ways in the process of project management also.