What is Merchant Banking? Importance, functions, objectives of merchant banking

What is Merchant Banking in India, how does it work? You will get complete information about this. Merchant Banking is engaged in providing financial and advisory services to corporate customers. It was introduced in the 1960s, but this sector has grown and progressed very rapidly in the 1990s. Today, merchant banking is an important part of the Indian economy and is important in facilitating corporate finance and capital market transactions. In this post we will understand the information about merchant banking in India, its objectives and functions.

What is Merchant Banking in India?

It is an organization that provides advice to its clients with respect to key financial, managerial, marketing, and legal concerns. They typically provide assistance with trade loans, international finance, and underwriting for large companies. These banks specialize in doing business with outside companies.

Merchant banks provide any kind of financial services, advice, consultancy, management and solutions to large corporate houses. They support the businessperson to start business and make money. Furthermore, they help them to expand, modernize and restructure the business. They also provide assistance in listing, buying and selling of shares in the stock exchange.

These are different from normal merchant banks in many ways. To borrow, ordinary merchant banks usually take deposits and give loans, but merchant banks charge a fixed fee only for advice and management. They only take deposits and provide loans to a select number of customers, and are not meant for the general public.

Merchant banking terms have different meanings in different countries. U.S. In the UK they are called “Investment Banks”, while in the UK they are called “Investment Banks”. are called “accepting and issuing houses”.

Who is a Merchant Banker?

Merchant banker is a person who plays an important role in managing the process of depositing money for securities such as stocks and bonds. A merchant banker in India is a person who helps governments raise money for securities such as stocks and bonds. He can work as any type of managers, advisors, or consultants. Their main work is to deal with buying, selling, or subscribing to these securities. Due to the rapidly increasing work in industries in India, the demand for merchant bankers has increased a lot. These professionals provide a mix of commercial and advisory services to meet business needs. In simple words, merchant bankers help companies raise funds for securities as well as provide them with necessary advice.

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What are the main objectives of merchant banks?

  1. The main objective is to help companies raise funds through standby credit service.
  2. Merchant banks provide credit solutions to both institutional and corporate clients.
  3. Merchant banks also provide financial assistance to small businesses, such as startup loans and help with fund raising.
  4. Underwriting is a type of financial insurance that a bank provides to its clients, which guarantees payment in case of any loss or damage.
  5. Banks manage their clients’ portfolios and monitor their assets, loans and transactions to avoid losses. They also provide services like asset liquidation and income tracking.
  6. Corporate advisory services are provided to help new and expanding companies obtain the financial support and guidance they need to succeed and avoid problems.
  7. Banks act as intermediaries in capital transfers and manage corporate issues such as securities.
  8. These banks establish a second market where bills can be exchanged or traded, with merchant banks acting as central accepting houses.
  9. Merchant banks also provide services like buying and selling of financial instruments as a dealer.

Features of Merchant Banking

Merchant banking in India offers some special features that make it different from traditional banking and financial institutions. Let us understand these features in detail:

  1. Targeted Clientele: Merchant banking mainly focuses on the needs of big business and wealthy individuals, focusing on meeting their special economic need rather than general things.
  2. Customized Services: Unlike banks and other financial institutions, merchant banks provide tailored services to meet individual needs. They specialize in providing solutions to the specific financial problems of their clients.
  3. Decision-making authority: A significant portion of the employees working in merchant banks are empowered to take decisions. These decisions are taken quickly and play an important role in financial transactions.
  4. Access to information: Merchant banks operate by accessing very large amounts of information and databases. This helps them in taking right decisions and helps the customers in getting information about the new market.
  5. Dynamic Environment: Merchant banks create intense interactions with their business environment. This gives them the latest information on market changes, regulatory changes and industry developments, ensuring clients receive the most up-to-date advice.
  6. Foreign Relations: Merchant banks have a wealth of foreign relations, which they can use to help their customers get the right funding and investments. These are achieved by having good relationships with other economic institutions and stakeholders, which helps them provide economic solutions.
  7. Flexibility in Organizational Structure: Merchant banks create flexible organizational structures, which they can quickly adapt to the changing market environment and customer needs. This flexibility helps in taking decisions faster and providing economic services effectively.
  8. Focus on Short and Medium-Term Projects: Merchant banking focuses primarily on short and medium projects, rather than long-term engagements. This enables them to provide innovative solutions in a timely manner to suit the changing needs of their customers.
  1. Focus on Income Generation: Merchant banks focus on generating their income through fees and commissions. Their focus is on providing customers with high-quality financial solutions to their financial problems.
  2. Competitive Rates: Merchant banks offer competitive interest rates and fees compared to other institutions. This enables them to provide customers with favorable terms and cost-effective financial solutions. Makes a good option to provide.
  3. Innovation: Merchant banks emphasize innovation in their operations, often seeking new identities and approaches rather than following established ones. These new solutions are able to be provided to the customers.
  4. Domestic and International reach: Merchant banks provide advanced financial services to both domestic and international markets. They have experience in international transactions, due to which they can provide assistance in a prosperous economic system.
  5. Profit Distribution: Merchant banks distribute profits at a lower rate.

Reasons for growth of merchant banking in India

Merchant banking business has grown rapidly in India due to many reasons, which can be understood in easy Hindi as follows:

  • Increasing number of new investors:  More foreign and domestic investors than ever before are investing money in the Indian market. These new investors bring capital and create new investment opportunities. Merchant bankers play an important role in connecting these investors with Indian companies.
  • Disinvestment of government companies:  When the government sells government companies, merchant bankers are important in this process. They advise on the financial aspects of the company and manage the entire sales process.
  • Economic Liberalization:  The economic reforms of 1991 opened India to foreign investment. Due to this, foreign money came to India and Indian and foreign companies needed the services of merchant banking more.
  • Increasing Competition:  Nowadays, there are more companies in the market than ever before, due to which everyone needs better financial advice and services to move ahead. This is what merchant bankers provide.
  • Changing consumer trends:  Competition in the Indian market has increased with the entry of foreign companies. Customers now want better things, which has increased the demand for financial products. Merchant bankers provide such financial solutions.
  • Government reforms:  The government has reduced interference in the economy, promoted privatization and increased limits on foreign investment. This has created a good environment for business, which has also benefited merchant banking.

Overall, merchant banking business is growing rapidly in India to meet the needs of new investors, economic reforms and changing market.

Services of Merchant Banking

Merchant banking offers a range of services to businesses and individuals, tailored to their specific needs. Let’s take a look at some of these services:

  1. Investment Banking: Merchant banks provide financial services and guidance to businesses and individuals. They help in underwriting new securities, facilitating mergers and acquisitions, and offering equity capital to companies.
  2. Corporate Finance: Merchant banks assist companies in raising funds for various purposes, such as expansion and growth. They arrange debt or equity financing, provide financial advice on mergers and acquisitions, and offer other relevant services.
  3. Private Banking: Merchant banks offer personalized banking solutions for managing personal wealth, investment portfolios, estate planning, and tax planning.
  4. Trade Finance: Merchant banks provide services related to trade finance, such as issuing letters of credit, arranging letters of guarantee, and facilitating foreign exchange transactions.
  5. Asset Management: Merchant banks offer services for managing assets, including portfolio management and investment advice.
  6. Cash Management: Merchant banks help businesses manage their cash flow effectively and provide advice on liquidity-related issues.
  7. Advisory Services: Merchant banks offer advisory services to businesses, assisting them in developing strategies and managing risks.
  8. Project Counseling: Merchant banks provide guidance in various project-related activities, including creating project reports, determining financing methods, and obtaining necessary approvals from financial institutions and government authorities.
  9. Restructuring Strategies: Merchant bankers play a crucial role in supporting companies undergoing restructuring, such as mergers, acquisitions, or takeovers. They act as intermediaries, facilitating negotiations and working closely with management to ensure successful outcomes.

In addition to these specific services, merchant banks also offer general services worldwide, including merger and acquisitions assistance, corporate financial management and guidance, project financing and administration, promotion and underwriting of new issues, investment portfolio management, banking services for investments, trade financing advice and support, venture capital raising and advising, asset supervision and management, foreign currency financing, consultancy for sick industrial units, and acting as debenture trustees.

Functions of Merchant Bankers

Merchant bankers provide a variety of services as per your business or personal needs. Let us understand some of these in easy Hindi:

  • Investment Banking: Helping companies and individuals make new share issues, mergers or acquisitions, and providing advice on raising capital.
  • Corporate Finance: Helping companies raise funds through debt or shares to expand business or start a new business. Also giving advice on mergers and acquisitions.
  • Private Banking: Providing specialized banking services to wealthy people to help them manage their assets, invest, plan for the future and minimize taxes.
  • Trade Finance: Issuing letters of credit necessary for import-export, obtaining bank guarantees and conducting foreign exchange transactions.
  • Asset Management: Providing advice in properly managing shares and other investments.
  • Cash Management: Helping companies manage their cash flow properly.
  • Advisory Services: Advising businesses on strategy formulation and risk reduction.
  • Project Counselling: Helping in preparing project reports, finding ways to raise funds and obtaining government approvals.
  • Restructuring Strategies: Providing advice and facilitating negotiations during mergers, acquisitions or company restructuring.

Apart from this, merchant bankers provide many other services across the world, such as foreign currency loans, raising funds for projects, advising sick companies, etc.

History of Merchant Banking

The story of merchant banking is very old, it started in different countries and times. Let us know some important events:

  • 17th and 18th century: It started with traders from France and Italy. Initially, some traders used to act as middlemen for the business of others or for their own business, that is, they used to help in giving money.
  • End of the 18th century: Its activities increased significantly in London. Merchants started financing foreign trade by approving bills of exchange. Gradually he started doing more work, like helping in issuing shares, providing loans and managing investments.
  • 1967: “National Grindlays” became the first merchant bank in India.
  • 1970: Citibank also helped advance merchant banking in India.
  • 1972: State Bank of India (SBI) first created a separate merchant banking department.
  • 1973: ICICI Bank also started merchant banking. During this time, “Foreign Exchange Regulation Act (FERA)” was enacted in India, which gave a great boost to merchant banking. After this, other banks like Punjab National Bank (PNB), Bank of India, UCO Bank also started providing merchant banking services.

Merchant Bankers in India and Types of Organization They Belong to

Merchant bankers in India work in different types of institutions.

Public Commercial Banks and their sub-banks:

  • State Bank of Bikaner and Jaipur
  • Karur Vysya Bank
  • SBI Capital Markets Ltd.
  • Punjab National Bank
  • Bank of Maharashtra

Private Commercial Banks:

  • Yes Bank Ltd.
  • ICICI Bank Ltd.
  • Axis Bank Ltd.
  • Tata Capital Markets Ltd.
  • Reliance Securities Ltd.
  • Bajaj Capital Ltd.
  • ICICI Securities Ltd.

Foreign Banks:

  • Citi Bank
  • National Grindlays Bank
  • Hong Kong Bank
  • Barclays Bank Plc
  • Deutsche Bank
  • FedEx Securities Ltd.
  • Goldman Sachs (India) Securities Pvt. Ltd.
  • Deutsche Equities India Private Limited
  • Morgan Stanley India Company Pvt. Ltd.
  • Citigroup Global Markets India Pvt. Ltd.
  • Barclays Securities (India) Pvt. Ltd.

State Level Financial Institutions:

  • State Industrial Development Corporations (SIDC’s)
  • State Financial Corporations

All India Financial Institutions and Development Banks:

  • IFCI
  • IDBI

Private Financial Consultancy Firms and Brokers:

  • J.M. Financial and Investment Services Ltd.
  • Enam Financial Consultants
  • Ceat Financial Services
  • DSP Financial Consultants
  • Kotak Mahindra

Professional Merchant Banking Houses:

  • A.K. Capital Services Ltd.
  • Almondz Financial Services Limited
  • Batlivala And Karani Securities India Private Limited
  • Gretex Corporate Services Limited
  • IIFL Securities Limited

Technical Consultancy Organizations:

  • Tata Consultancy Services
  • L&T Technology Services
  • HCLTech
  • Infosys
  • Wipro
  • Tech Mahindra

Regulations for Merchant Banking in India

Regulations for Merchant Banking in India
Merchant banking in India is primarily governed by the Securities and Exchange Board of India (SEBI) Regulations, 1992.

Registration and Certification: Chapter Two of SEBI Regulations outlines the process of registration and certification for merchant bankers in India. To become a registered merchant banker one must meet certain operational capabilities and capital requirements.

Obligations and Responsibilities: Chapter Three of the Regulations covers the general obligations and responsibilities of merchant bankers. This includes adhering to the code of conduct, disclosing information, conducting audits, and following other important operational guidelines.

Investigation and Consequences: The fourth chapter discusses SEBI’s authority to investigate merchant bankers and the consequences arising from its findings.

Defaults and Measures: The fifth chapter addresses cases of defaults and the measures that will be taken if the guidelines are not followed or any wrongdoing occurs.
Additionally, the regulations include programs that provide adequate forms and formats of reports as well as required fees for various purposes.

It is important to note that no organization can become a merchant banker without obtaining a registration certificate from SEBI. Compliance with these rules is mandatory for conducting merchant banking activities.

Apart from SEBI, the Reserve Bank of India (RBI) also plays a regulatory role in supervising financial institutions. Merchant banks engaged in banking activities must adhere to the prudential risk norms and statutory limits as outlined in the Banking Regulation Act, 1949, prescribed by the RBI.

The application process for obtaining a certificate of registration involves meeting the operational capabilities and capital adequacy norms specified by SEBI. Capital adequacy is calculated on the basis of capital contributed to the business and free reserves.

Examples of Merchant Banking

Structured Finance: Merchant banks may specialize in structured finance, which involves creating and implementing complex financial products and solutions tailored to the specific needs of customers. This may include securitization, asset-backed securities, collateralized debt obligations, and other structured products.

International Trade Finance: Merchant banks can facilitate international trade by providing trade finance solutions, such as letters of credit, export financing, import financing, and other trade-related services.

Real Estate Finance: Merchant banks provide real estate investment and development, including project financing, construction financing, acquisition financing and advisory services related to real estate investment and development. Can offer.

Advisory Services: Merchant banks often provide strategic advisory services to customers, helping them make informed decisions about business strategy, capital structure, risk management, and other financial matters.

These are just a few examples of the various services and activities in which merchant banks engage. The specific services offered by merchant banks may vary depending on their specialization and the regulatory framework of the country in which they operate.

How to become a merchant banker in India?

To become a merchant banker in India, here are the general steps to follow:

  • Meet the eligibility criteria: Make sure you meet the eligibility criteria set by SEBI, such as minimum net worth of Rs. 50 million.
  • GET SEBI REGISTRATION: Apply for registration with SEBI by filling the prescribed application form and submitting it along with the required documents and fee. The application form can be obtained from SEBI website.
  • Pay the Registration Fee: Pay the non-refundable registration fee. Demand draft in favor of SEBI, payable at Mumbai will have to be prepared.
  • Compliance with SEBI Regulations: Familiarize yourself with the SEBI (Merchant Bankers) Regulations, 1992 and ensure that you comply with all the requirements including capital adequacy norms, operational capabilities, and code of conduct.
  • Prepare offer documents: If you wish to act as a book running lead manager (BRLM) for an issue, the issuing company will engage your services to prepare the offer documents. Make sure to follow legal compliance and provide accurate information in the document.
  • Pay Registration and Renewal Fees: The initial registration fee of Rs 5 lakh has to be paid to SEBI within the given deadline. Additionally, merchant bankers will have to pay a renewal fee of Rs. To maintain your registration you have to pay Rs 2.5 lakh every three years.
  • Ongoing Compliance: Once registered, merchant bankers must comply with SEBI rules and guidelines, conduct audits as required, maintain proper records and fulfill their obligations and responsibilities as outlined by SEBI.

It is important to note that the process and requirements may vary, so it is advisable to refer to the latest rules and guidelines provided by SEBI and seek professional advice for specific details and procedures.

Classification of Merchant Bankers

Here is the classification of merchant bankers in India based on their registration categories and minimum net worth requirements set by SEBI:

Category 1 Merchant Bankers:

  • Minimum Net Worth: Rs. 50 million
  • Roles: He is a consultant, advisor, issue manager, portfolio manager, and underwriter. Can act as.

Category 2 Merchant Bankers:

  • Minimum Net Worth: Rs. 50 lakhs
  • Roles: They can act as consultant, advisor, portfolio manager and underwriter. However, they cannot be their own issue managers but can act as co-managers.

Category 3 Merchant Bankers:

  • Minimum Net Worth: Rs. 2 million
  • Roles: They cannot engage in activities related to portfolio management or undertake their own issue management. They can act as consultant, advisor and underwriter.

Category 4 Merchant Bankers:

Minimum Net Worth: Nil (No specific net worth requirement)
Roles: They can only act as a consultant or advisor on the issue of capital.

It is important to note that the roles and activities for each category are subject to the rules and guidelines prescribed by SEBI. Merchant bankers must operate within the scope of their registered category and meet the applicable capital adequacy norms.

What should you remember while choosing a merchant banker?

When choosing a merchant banker, it is important to consider the following:

Expertise in Relevant Sector: The merchant banker should have a deep understanding of the specific industry or sector in which your company operates. This knowledge will enable them to provide valuable insights and advice tailored to your business.

Research abilities: Look for a merchant banker who demonstrates strong research skills. They must be able to analyze market trends, collect relevant data, and provide informed recommendations based on their findings.

Investor Relations: A good merchant banker should have a strong network and positive relationship with investors. They should be able to connect you with potential investors and facilitate meaningful conversations.

Track Record: Consider the merchant banker’s past successes and achievements. See evidence of their ability to execute deals and deliver positive results for their clients.

Market-making capabilities: Assess the ability of the merchant banker to make market-building arrangements. This involves developing strategies to increase market demand for your company’s securities and increase its visibility among investors.

Analytical skills: Merchant bankers must have strong analytical skills to evaluate various financial aspects of your business. This includes assessing your company’s financial health, growth potential and valuation.

Behavioral Skills: Consider the merchant banker’s interpersonal skills, including their honesty, transparency, helpfulness and friendliness. A positive and professional attitude is important for effective communication and collaboration.

Problem-solving approach: Look for a merchant banker who demonstrates a proactive and solution-oriented mindset. They must be able to identify and address potential challenges or issues that may arise during the transaction process.

Remember, selecting the right merchant banker is critical to the success of your financial transactions, so take time to evaluate their capabilities and fit with your business needs.

Merchant Bank vs. Commercial Bank

Clients: Merchant banks work primarily with corporate firms, providing specialized financial services and advice tailored to their needs. Commercial banks, on the other hand, cater to a wide range of customers, including individuals, small businesses and corporate customers.

Attitude towards risk: Merchant banks are generally more open to risk taking than commercial banks. They often engage in activities such as underwriting securities, venture capital investments and providing advisory services that involve a high level of risk. Commercial banks, being more risk-averse, focus on traditional banking activities and prioritize the safety of customer deposits.

Ability to open accounts: Merchant banks usually have specific criteria and requirements for opening accounts, and they may only accept customers who meet certain eligibility criteria, such as corporate firms or high-net-worth individuals. A person of worth. Commercial banks, on the other hand, are open to anyone who meets the basic requirements to open an account.

Orientation: Merchant banks are primarily management-oriented, focusing on providing strategic financial advice and solutions to their corporate clients. Commercial banks are more asset-oriented, focusing on managing and lending to a range of financial assets such as deposits, loans, and mortgages.

Type of Assets: Merchant banks mainly deal in equities and equity related instruments, such as stocks and shares. They may also be involved in other financial assets such as bonds, derivatives and private equity investments. Commercial banks, on the other hand, typically deal with loan-related assets, such as mortgages, and fixed-income securities.

Roles and Functions: Merchant banks perform a variety of roles and functions, including underwriting securities offerings, portfolio management, financial advisory, mergers and acquisitions, and corporate restructuring. Commercial banks may provide some advisory services, focusing primarily on traditional banking functions such as deposit-taking, lending, and transaction processing.

Type of market concerned: Merchant banks are mainly associated with the primary market, which deals with the issuance and distribution of new securities such as IPOs. They play a vital role in facilitating the underwriting and offering process. Commercial banks are more involved with the secondary market, where previously issued securities are bought and sold.

It is important to note that these differences may vary depending on the specific regulatory environment and market conditions in different countries.

Difference between Merchant banking and Investment banking

Merchant banking

Clients: Works with medium-sized organizations.
Purpose: Engages in international financing activities and provides services such as trade finance, real estate investment and corporate investment.
Roles and Functions: Provides trading facilities to clients and provides a number of fee and fund-based services such as custodial, banking and advisory services.
Asset Dependency: Dependent on both fees and funds from its services.

Investment banking

Clients: Primarily serves large and established companies.
Purpose: Focuses on underwriting and issuance of securities to help organizations achieve long-term capital needs by connecting them with investors.
Roles and Functions: Limited provides trade financing facilities and earns money mainly through fees for services offered, lease rental and interest.
Merchant banking has been influential in shaping the corporate industry and the economy as a whole. As the Indian economy continues to grow, merchant banking is expected to have a significant impact on the country’s business and economic sectors.

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