Merchant Banking is a combination of Banking and consultancy services. It provides consultancy to its clients for financial, marketing, managerial and legal matters. The Concept of Merchant Banking is studying and explains – Definition, Nature, Functions, and Characteristics. Consultancy means to provide advice, guidance, and service for a fee. It helps a businessman to start a business. It helps to raise (collect) finance. They help to expand and modernize the business. It helps in the restructuring of business. This helps to revive sick business units. It also helps companies to register, buy and sell shares at the stock exchange. Also learned, Set-Up of Merchant Banking.
Learn, Explain Merchant Banking: Definition, Nature, and Characteristics.
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.
Definition of Merchant Banking:
The Notification of the Ministry of Finance defines merchant banker as;
“Any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities as manager-consultant, adviser or rendering corporate advisory services in relation to such issue management.”
The Amendment Regulation specifies that issue management consists of a prospectus and other information relating to the issue, determining the financial structure, tie-up of financiers and final allotment and refund of the subscriptions, underwriting and portfolio management services.
In the words of Skully,
“A Merchant Bank could be best defined as a financial institution conducting money market activities and lending, underwriting and financial advice, and investment services whose organization is characterized by a high proportion of professional staff able to able to approach problems in an innovative manner and to make and implement decisions rapidly.”
Nature of Merchant Banking:
It is skill-based activities and involves serving every financial need of every client. It requires a focused skill-base to provide for the requirements of the client. SEBI has made the quality of manpower as one of the criteria for registration as the merchant banker. These skills should not be concentrated in issue management and underwriting alone, which may hurt business.
Merchant bankers can turn to any of the activities mentioned above depending upon resources, such as capital, foreign tie-ups for overseas activities and skills. The depth and sophistication in merchant banking business are improving since the avenues for participating in capital market activities have widened from issue management and underwriting to private placement, bought out deals (BODS), buy-back of shares, mergers, and takeovers.
The services of merchant bank cover project counseling, pre-investment activities, feasibility studies, project reports, the design of the capital structure, issue management, underwriting, loan syndication, mobilization of funds from Non-Resident Indians, foreign currency finance, mergers, amalgamation, takeover, venture capital, buyback, and public deposits. A Category-1 merchant banker can undertake issue management only. Separate registration is not necessary to carry on the act as the underwriter; next, we are going to study the functions of merchant banking.
Functions of Merchant Banking Organization:
The following functions of merchant banking below are:
1] Portfolio Management:
Merchant banks provide advisory services to institutional investors, on account of investment decisions. They trade in securities, on behalf of the clients, to provide the portfolio management services.
2] Raising funds for clients:
Merchant banking organization assists 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 a business enterprise, during its initial stage, right from conceiving the idea of obtaining government approval. There is some organization, which even provides 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 organizations render leasing services to their customers. There are some banks which maintain venture capital funds to help entrepreneurs.
They help in coordinating the operations of intermediaries, concerning 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.
Characteristics of Merchant Banking:
They are below as;
- The high proportion of decision-makers as a percentage of total staff.
- Quick decision process.
- The high density of information.
- Intense contact with the environment.
- Loose organizational structure.
- A concentration of short and medium-term engagements.
- Emphasis on fee and commission income.
- Innovative instead of repetitive operations.
- Sophisticated services on a national and international level.
- The low rate of profit distribution.
- High liquidity ratio.
Qualities of a Merchant Banker:
- Ability to analyze
- Abundant knowledge
- Ability to built up a relationship
- Innovative approach
Merchant Banking in India:
The activity was formally initiated into the Indian capital markets when Grind lays the bank received a license from Reserve Bank in 1967. Grind lays started with the management of capital issues, recognized the needs of the emerging class of entrepreneurs for diverse financial services ranging from production planning and system design to market research.
Even it provides management consulting services to meet the requirements of the small and medium sectors rather than a large sector. Citibank Setup its merchant banking division in 1970. The various tasks performed by these divisions namely assisting new entrepreneurs, evaluating new projects, raising funds through borrowing and issuing equity.
Indian banks started banking services as a part of the multiple services they offer to their clients from 1972. The state bank of India started the merchant banking division in 1972. In the initial years, the SBI’s objective was to render corporate advice and assistance to small and medium entrepreneurs.
Merchant banking activities are of-course organized and undertaken in several forms. Commercial banks and foreign development finance institutions have organized them through formation divisions, nationalized banks have formed subsidiaries companies and share brokers and consultancies constituted themselves into public limited companies or registered themselves as private limited companies. Some merchant banking outfits have entered into the collaboration with merchant bankers abroad with several branches.