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, advisor or rendering corporate advisory services in relation to such issue management”

Nature of Merchant Banking

Merchant banking is skill based activities and involves serving every financial need of every client. It requires focused skill-base to provide for the requirements of the client. SEBI has made the quality of man-power as one of the criteria for registration as merchant banker. These skills should not be concentrated in issue management and underwriting alone, which may have an adverse impact on 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, design of capital structure, issue management, underwriting, loan syndication, mobilization of funds from Non-Resident Indians, foreign currency finance, mergers, amalgamation, takeover, venture capital, buy back and public deposits.

A Category-1 merchant banker can undertake issue management only. Separate registration is not necessary to carry on the activity as underwriter.


Characteristics of Merchant Banking

  • High proportion of decision makers as a percentage of total staff
  • Quick decision process
  • High density of information
  • Intense contact with the environment
  • Loose organizational structure
  • 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
  • Low rate of profit distribution
  • High liquidity ratio

Types of Merchant Banking

  • Public Sector Merchant Banks
    • Commercial Banks (public)
    • National Financial Institutions
    • State Financial Institutions
  • Private Sector Merchant Banks
    • Foreign Banks
    • Indian Private Banks
    • Leasing Banks
    • Finance and investment companies

Scope for Merchant Banking in India

  • Growth of New Issues Market: The growth of new issue market is unprecedented since 1990-1991. Merchant banking can help with the further sophistication and penetration of the new issues market.

  • Entry of Foreign Investors: Foreign institutional investors were allowed to invest in the primary and secondary market in 1992 and also, Indian companies were allowed to directly tap foreign capital through euro issues.

    Further, foreign direct investment by NRIs has risen considerably due to number of incentives offered to them. They need the services of merchant bankers to advise them for their investment in India. The increasing number of joint ventures abroad by Indian companies also requires expert services of merchant bankers.

  • Changing Policy of Financial Institutions: The policy of decentralization, increase in demand for technical and financial services and encouragement of small and medium industries, requires the services of merchant bankers.

  • Development of Debt Market: The development of debt market will offer tremendous opportunity to Merchant Bankers. Innovations in Financial Instruments: The Indian capital market has witnessed innovations in the introduction of financial instruments. This has further extended the role of merchant bankers as market makers for these instruments.

  • Corporate Restructuring: Due to liberalization and globalization, competition in the corporate sector is becoming intense. To survive and thrive, companies need new strategies, structures and methods of functioning. This has led to corporate restructuring including mergers, acquisitions, etc. These developments offer a good opportunity to merchant bankers to extend their area of operations.

  • Disinvestment: The government of India has raised Rs. 2000 crores through disinvestment of equity shares of selected public sector undertakings in 93-94. Merchant Bankers can help in the disinvestment process.

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