Merchant banks are the banks that do not provide banking services to general people as they are the financial institutions that perform underwriting, loan services, financial advising and fundraising services to large corporations and high net worth individuals. A vast majority of merchant banking activities involves international transactions.
It is a combination of banking and consultancy activities where it provides loan as well as provides counselling for financial, marketing, managerial and legal activities. merchant banks is a institution that renders services such as underwriting of shares, counselling, portfolio management, insurance, loan facilitation etc. for a fee.
The origin of merchant banking can be traced Italy in late medieval time and France during the seventeenth and eighteenth century period when Italian houses and family-owned import-export and commodity trading businesses began to use their excess fund to finance the foreign trade in return for a profit. The trade was long sea voyages, thus the investments were too risky and illiquid.
In France, during seventeenth and eighteenth centuries a merchant banker was hardly a trader but an entrepreneur. He invested his accumulated profits in all kind of promising activities.
Later the centre of merchant banking shifted from Italy to Amsterdam and then, in the eighteenth century to London. London was filled with the immigrants from Prussia, France, Ireland, Russia and Italy states. They formed many small family owned business houses and continued both to trade for their businesses and to finance the trade of others.
By the end of the eighteenth century, British merchant houses had increased in size and began specialising in trade, finance and marketing. With the opening of the nineteenth century, no merchant house remained focused on both trading and financing.
Merchant banks in India
In 1967 Grindlays bank received the license from reserve bank to carry out the merchant banking activities in India. Grindlays bank started its operations with the management of capital issues, providing various financial services from planning to market research to upcoming entrepreneurs. It also involves providing management consulting services to meet the requirement of small, medium and large sectors.
In 1970 Citibank setup is merchant banking division, after that India Bank and the State Bank of India started its services in merchant banking in 1972. After this many banks including ICICI Bank of India, Bank of Baroda, Canara Bank, Punjab national bank, UCO bank started their merchant banking division.
In 1983, the merchant banks got more importance, when there was a boom in the primary market where companies were going listed.
As of now, there are more than 130 merchant banks registered with SEBI. It includes private, public, and foreign players.
Some of merchant banks examples are:-
1. Sbi capital market limited.
2. Punjab National Bank.
3. IfCI financial services limited.
4. Krur Vysya bank limited.
1. Icici securities
2. Yes bank ltd.
3. Reliance securities limited.
4. Icici bank limited
1. Bank of America
2. Barclays Securities (India) limited.
3. Morgan Stanley India company private limited.
Functions of merchant bankings
1. Corporate counselling
This service is given by a merchant bank to the corporate body time to time in order to perform better and build a better reputation among its stakeholders and to increase the market value of its equity shares. Counselling is provided in the form of suggestions or opinions with a detailed analysis of corporate laws.
a. Opinion about diversification.
b. Detailed analysis of product line.
c. Capital restructuring.
d. Helps in reviving the sick units.
2. Project counselling
It includes the opinion about the project that has been undertaken. It includes feasibility studies related to project viability and the intermediate steps that have been followed.
a. Review of the project idea.
b. Studying financial, economic and market feasibility.
c. Estimation of cost.
d. Estimation of profit
e. Obtaining government consents.
f. Identification of potential investment opportunities.
3. Capital restructuring services.
Every business unit has different needs, merchant banks provide the capital restructuring services as per the business need.
a. Examination of capital structure.
b. Bonus issue, preparing memorandum for the controller of capital issue.
c. Advise on mergers and acquisition
4. Portfolio management.
Merchant banks render their services to investors also, mostly institutional investors. They advise their client regarding the investment decisions as which security should opt and quantum of investment. Sometimes merchant banks buy and sell securities on the behalf of their clients.
Factors taken into consideration are:
a. The objective of investment.
b. Tax bracket
c. Need for maximising return
d. Capital appreciation.
5. Loan – credit syndicate.
Merchant banks also provide long-term as well as short-term credits to different business units. They sometimes borrow money from banks and foreign investors and then invests in business units.
It includes the following services:
a. Estimation of the total cost.
b. Assisting clients with a loan application.
c. Legal documentation
d. Arrange bridge finance
6. Arranging working capital finance
Some merchant banks in India like Canara Bank, Central Bank of India have started rendering the services of working capital finance to business units. Finance of working capital is provided to new ventures or against debentures for existing companies
It includes following services:
a. Estimation of working capital requirements.
b. Assist in preparation of the application.
c. Assist in negotiation and sanction of credit
7. Specialised services
In addition to these basic services, merchant banks provide corporate advisory services in mergers and acquisitions, takeover, amalgamations, tax regimes, cost management, audits, legal documentation etc.
Merchant banker’s commission
As per the finance ministry, the government of India, merchant banks are eligible to charge commission from their clients as follows.
· The maximum commission charge a merchant banker can charge is 0.5 percent on the whole issue.
· Merchant banks can charge project appraisal fees.
· Commission of a lead manager is 0.5 percent up to rupees 25 crores and 0.2 percent in excess of rupees 25 crores.
· Underwriting commissions are as follows
Type of Security
On amount devolving on underwriters.
On amount subscribed by public
Preference shares/ Debentures
1) up to rupees 5 lakh
2) excess of rupees 5 lakh
· Brokerage charges: 1.5 percent.
· Other expenses related to issuing like advertisements, stamp duty, printing, and registrar expenses, the prospectus can be reimbursed from the client.
Merchant banks v/s commercial banks
Commercial banks may differ from merchant banks as their purpose, method, vision, mission and aims are different.
Following table shows the difference between a commercial bank and merchant bank.
· Helps in raising fund through securities.
· Provides finance in the form of borrowings or loans.
· Advising is main business.
· They are closer to their clients.
· They cannot afford a close relationship with their clients.
· They don’t accept chequable deposits
· Fund deposits are the main feature.
· They charge fees for their services.
· The business is based on funds.
· Work includes underwritings, issue equities, book building, documentation etc.
· Work includes only lending and deposit funds.
· They are management oriented.
· They are asset-oriented
· They generally are willing to take risks.
· They avoid risks.
Qualities of a good merchant banker
A merchant banker is an institute provides counselling services to companies along with helps them to raise capital through primary market, accordingly a good merchant banker must possess certain qualities, skills, expertise along with significant knowledge and experience of that field.
The certain qualities a merchant banker must possess are:
1) Must have adequate knowledge of the capital market.
2) Must be friendly along with sharp communication skills.
3) Must have a problem-solving attitude.
4) The highest level of honesty and integrity.
5) A good strategic thinker.
6) Eager to learn a new skill and gain knowledge.
These following qualities will help him to perform his job which includes.
1) Protection of interest of client
2) Maintaining the highest level of integrity and fairness.
3) Providing best possible advice to clients
4) Safeguarding the interest of investors.