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Q 1 What is meant by merchant banking? Discuss in detail the various functions performed by merchant bankers.

A merchant bank is fee based and fund based as it provides banking, advisory and custodial services to its clients. It enables merchant bankers to have a close association with his own clients and understand their future expansion programmes. It helps industrial undertakings to carry on their business smoothly for a long period. In the English dictionary the term merchant banking is an organisation that underwrites securities for corporations, advises its clients and is involved in the ownership of commercial ventures. Merchant banks are limited to providing services and counseling to certain people.

define merchant banking and explain its functions

These are the sectors that cater to specific private clients and not just anyone can be assisted. Basically, Merchant banks are the general umbrella that covers the other bank categories. The history of service provider bank can be dated again to seventeenth & 18th centuries when it first started in Italy & France. Some of them even keep enterprise capital funds to help the entrepreneurs.

Recent Terms

These organizations are sometimes banks which are not merchants and sometimes merchants who are not bankers and sometimes houses which neither merchants nor banks”. The financial institutions which conducts underwriting, financial advising, loan services and other financial services. Intermediaries such as decision bankers to the issue, register, underwriter are appointed in consultation with lead merchant bankers. Merchant Banking involves the provision of banking services and consultancy to its customers regarding financial, marketing, managerial, and legal services.

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  • Merchant bankers who can be an advisor, consultant, portfolio manager and underwriter.
  • Merchant banking is a type of banking where both commercial banks and investment banks can participate.
  • Management of issue involves advertising of corporate securities like equity shares, preference shares and debentures or bonds by providing them to public.
  • In United States these are called as “Investment Banks” and in UK they’re known as as “accepting and issuing houses”.

The institutional network consists of mutual funds, foreign institutional investors, private equity funds, pension funds, financial institutions etc. The size of such a network signifies the wholesale reach of the merchant banker. Since they offer, a lot of services, some of them have high rates while the other is only for a minimal fee. Unlike investment banks that earn money through interests made from loans and the likes, merchant banks do not earn the same. What they usually do is they offer their expertise for a certain amount. That is why it is very important that merchant bankers have all the knowledge and skills required for the job so that they can produce good results.

A service provider banker advises the shopper on completely different hedging strategies and suggests the suitable technique. Functions Of Merchant Banks • Leasing and Finance – Many merchant bankers provide leasing and finance facilities. Project counseling comprises preparation of project reports, deciding upon the financing pattern to finance the cost of the project and appraising the project report with the financial institutions define merchant banking and explain its functions and banks. It also includes filling up of application forms with significant information for obtaining funds from financial institutions and obtaining government approval. Merchant banking activities are capital restructuring, underwriting, portfolio management etc whereas the commercial banks play the role of financers. Merchant banks deal primarily with small businesses or start-ups that consider it challenging to collect funds.

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Traditional service provider banks primarily carry out international financing and underwriting actions. These might embrace, but aren’t limited to, international corporate investing, foreign actual estate investment, commerce finance, and the facilitation of international transactions. Loan syndication is an assistance provided by merchant bankers to get mainly term loans for projects. Such loans may be obtained from a single development finance institution or a syndicate or consortium. Merchant bankers help corporate clients to raise syndicated loans from banks and other financial institutions.

The reason for the very existence of merchant banking is illustrated by the need for specialized investment information and services. An experienced merchant banker knows exactly where strategic assets are located, and which organizations and strategies to ward off. With a merchant banker, a businessman enjoys the benefit of hiring a skilled and knowledgeable partner with a long-term commitment to the business.

Some merchant bankers are operating mutual funds and off shore funds also. Management of issues refers to effective marketing of corporate securities viz., equity shares, preference shares and debentures or bonds by offering them to public. Merchant banks act as intermediary whose main job is to transfer capital from those who own it to those who need it. The issue function may be broadly divided in to pre issue and post issue management. It is provided to a corporate unit with a view to ensure better performance, maintain steady growth and create better image among investors. The Merchant Bank got more importance in the year 1983 when there was a huge boom in the primary market where the companies were going for new issue.

define merchant banking and explain its functions

Merchant banks helps in identifying which financial institution should be approached for term loans. The merchant bankers follow certain steps before assisting the clients approach the appropriate financial institutions. The merchant banker helps in distributing different securities like equity shares, debt instruments, mutual fund products, fixed deposits, insurance products, commercial paper, etc. The distribution network of the merchant banker can be classified as institutional and retail in character.

They also offer services like estimating the funds and raising the funds needed for a certain company. Raising of funds can come from the capital market or other new ideas that the bank can offer. Another scope covers Project counseling which includes projects that need to be submitted to the government, financial assistance projects and many other projects that companies need assistance on.


They would also require specific documents from their clients to prove that they are covered within the scope of clients any merchant bank can assist. The scope of merchant banking is very simple, it covers services that are targeted to small and medium scale companies. They cannot assist any other clients that do not fall under this category. 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 banking is a combination of banking and consultancy services. It provides consultancy to its clients for financial, marketing, managerial and legal matters.

The offer document shall be finalised on the basis of complaints received and observation by SEBI. Bajaj Capital Ltd., ICICI Bank Ltd., and Reliance Securities Ltd. are some examples of the Private sector of Merchant banks. Maintain a separate bank bankers to an issue as per provision of section 73 of the companies act 1956. Maintaining close coordination with registers to be issued and to depute its officers to various intermediaries. Save taxes with ClearTax by investing in tax saving mutual funds online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP.

define merchant banking and explain its functions

Portfolio indicates investment in different types of securities such as shares, debentures or bonds issued by different companies. Portfolio management means maintaining proper combinations of securities in a mode that they give maximum return with minimum risk. The merchant bank is exposed to the market so it is more exposed to risk as compared to commercial banks. Commercial banks are catering to the needs of the common man whereas the merchant banks cater to the needs of corporate firms. The word ‘merchant banking’ was originated among the Dutch and Scottish traders. Later on it was developed and professionalised in the UK and the USA.

Objectives Of Merchant Banking

Merchant banking activities are organized and undertaken in several forms. Some merchant banking companies have entered into collaboration with merchant bankers of foreign countries abroad with several branches. In trendy phrases, a service provider bank is a firm or financial establishment that invests equity capital immediately in companies and infrequently offers these companies with advisory providers.

In United States these are called as “Investment Banks” and in UK they are called as “accepting and issuing houses”. In general the merchant banks are the financial institution which provides financial services, solutions, & advice to corporate houses. Some of the world famous merchant banks are Goldman Sachs, Credit Suisse & Morgan Stanley etc. In India there are many banks which are into the field of merchant banking some of the banks are ICICI, State Bank Of India, Punjab National Bank etc. Management of issue involves marketing of corporate securities like equity shares, preference shares and debentures or bonds by offering them to public.

Merchant financial institution aims at fulfilling the advisory requirements of big enterprise ventures and excessive web price people. It offers financing companies to multinational firms and in addition looks after the administration of currency exchange whenever the funds are transferred. It also assists corporations in issuing securities utilizing non-public placements, which do not require adherence to the authorized formalities as in the case of preliminary public offering . They also handle the public problem of companies, give recommendation on the timing, measurement and worth of the public points, and help to appoint brokers and underwriters.

Merchant Banks vs. Investment Banks

As per regulation 26 of ICDR merchant banker should ensure that draft offer letter is available for the public on SEBI and stock exchange website for at least 21 days from the date of filling. A public announcement is also needed to be made within 2 days of the filling of the offer document in an English and Hindi national newspaper inviting the public to give their comments to the SEBI. A merchant bank is a company that conducts underwriting, loan services, financial advising, and fundraising services for large corporations and high net worth individuals. Unlike retail or commercial banks, merchant banks do not provide services to the general public.

Merchant banks tend to give attention to small-scale firms by offering creative equity financing, bridge financing, mezzanine financing, and a number of highly delineated corporate credit score products. Merchant banks could also be concerned in issuing letters of credit, internationally transferring funds, and consulting on trades and trading expertise. These banks earn money from charges as a result of they provide advisory and other related services to their purchasers.

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