Introduction to Merchant Banking

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 consist of prospectus and other information relating to issue, determining 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

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, merges 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.

Qualities of a Merchant Banker

  • Ability to analyse
  • Abundant knowledge
  • Ability to built up relationship
  • Innovative approach
  • Integrity

Merchant Banking in India

Merchant banking activity was formally initiated into the Indian capital markets when Grind lays bank received the license from Reserve Bank in 1967. Grind lays started with management of capital issues, recognized the needs of 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 small and medium sector rather than large sector. Citibank Setup its merchant banking division in 1970. The various tasks performed by this divisions namely assisting new entrepreneur, evaluating new projects, raising funds through borrowing and issuing equity. Indian banks started banking services as a part of multiple services they offer to their clients from 1972. 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 is 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 collaboration with merchant bankers abroad with several branches.

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