Merchant Banking

Definition: Merchant banking can be defined as a skill-oriented professional service provided by merchant banks to their clients, concerning their financial needs, for adequate consideration, in the form of fee.

Merchant banks are a specialist in international trade and thus, excel in transacting with large enterprises. It offers a range of financial and consultancy services, to the customers, which are related to:

  • Marketing and underwriting of the new issue.
  • Merger and acquisition related services.
  • Advisory services, for raising funds.
  • Management of customer security.
  • Project promotion and project finance.
  • Investment banking
  • Portfolio Services
  • Insurance Services.

Merchant banking helps in reinforcing the economic development of the country, by acting as a source of funds and information to the business entities.

Merchant Banker

Any person, indulged in issue management business by making arrangements with respect to trade and subscription of securities or by playing the role of manager/consultant or by providing advisory services, is known as a merchant banker. The activities carried out by merchant bankers are:

  • Private placement of securities.
  • Managing public issue of securities
  • Satellite dealership of government securities
  • Management of international offerings like Depository Receipts, bonds, etc.
  • Syndication of rupee term loans
  • Stock broking
  • International financial advisory services.

In India, the functions of the merchant bankers are governed by Securities and Exchange Board of India (SEBI) Regulations, 1992.

Functions of Merchant Banking Organization

  1. Portfolio Management: Merchant banks provides advisory services to the institutional investors, on account of investment decisions. They trade in securities, on behalf of the clients, with the aim of providing them portfolio management services.
  2. Raising funds for clients: Merchant banking organisation assist the clients in raising funds from the domestic and international market, by issuing securities like shares, debentures, etc., which can be deployed for starting a new project or business or expansion activities.
  3. Promotional Activities: One of the most important activities of merchant banking is the promotion of business enterprise, during its initial stage, right from conceiving the idea to obtaining government approval. There is some organisation, which even provide financial and technical assistance to the business enterprise.
  4. Loan Syndication: Loan Syndication means service provided by the merchant bankers, in raising credit from banks and financial institutions, to finance the project cost or working capital of the client’s project, also termed as project finance service.
  5. Leasing Services: Merchant Banking organisations renders leasing services to their customers. There are some banks which maintain venture capital funds to help entrepreneurs.

Merchant Banking helps in coordinating the operations of intermediaries, with respect to the issue of shares like registrar, advertising agency, bankers, underwriters, brokers, printers and so on. Further, it ensures compliance with the rules and regulations, of the capital market.

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