Merchant Banking is a combination of Banking and consultancy
services. It provides consultancy, to its clients, for financial, marketing,
managerial and legal matters. 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. It helps to expand and modernise the business. It
helps in restructuring of a business. It helps to revive sick business units.
It also helps companies to register, buy and sell shares at the stock exchange.
In short, merchant banking provides a wide range of services
for starting until running a business. It acts as Financial Engineer for a
business.
Merchant banking was first started in India in 1967
by Grindlays Bank. It has made rapid progress since 1970.
Functions of Merchant Banking
The important functions of merchant banking are depicted
below.
The functions of merchant banking are listed as follows:
1.Raising Finance for Clients : Merchant Banking helps its
clients to raise finance through issue of shares, debentures, bank loans, etc.
It helps its clients to raise finance from the domestic and international
market. This finance is used for starting a new business or project or for
modernization or expansion of the business.
2.Broker in Stock Exchange : Merchant bankers act as brokers
in the stock exchange. They buy and sell shares on behalf of their clients.
They conduct research on equity shares. They also advise their clients about
which shares to buy, when to buy, how much to buy and when to sell. Large
brokers, Mutual Funds, Venture capital companies and Investment Banks offer
merchant banking services.
3.Project Management : Merchant bankers help their clients
in the many ways. For e.g. Advising about location of a project, preparing a
project report, conducting feasibility studies, making a plan for financing the
project, finding out sources of finance, advising about concessions and
incentives from the government.
4.Advice on Expansion and Modernization : Merchant bankers
give advice for expansion and modernization of the business units. They give
expert advice on mergers and amalgamations, acquisition and takeovers,
diversification of business, foreign collaborations and joint-ventures,
technology upgradation, etc.
5.Managing Public Issue of Companies : Merchant bank advice
and manage the public issue of companies. They provide following services:
Advise on the timing of the public issue.
Advise on the size and price of the issue.
Acting as manager to the issue, and helping in accepting
applications and allotment of securities.
Help in appointing underwriters and brokers to the issue.
Listing of shares on the stock exchange, etc.
6.Handling Government Consent for Industrial Projects : A
businessman has to get government permission for starting of the project.
Similarly, a company requires permission for expansion or modernization
activities. For this, many formalities have to be completed. Merchant banks do
all this work for their clients.
7.Special Assitance to Small Companies and Entreprenuers :
Merchant banks advise small companies about business opportunities, government
policies, incentives and concessions available. It also helps them to take
advantage of these opportunities, concessions, etc.
8.Services to Public Sector Units : Merchant banks offer
many services to public sector units and public utilities. They help in raising
long-term capital, marketing of securities, foreign collaborations and
arranging long-term finance from term lending institutions.
9.Revival of Sick Industrial Units : Merchant banks help to
revive (cure) sick industrial units. It negotiates with different agencies like
banks, term lending institutions, and BIFR (Board for Industrial and Financial
Reconstruction). It also plans and executes the full revival package.
10.Portfolio Management : A merchant bank manages the
portfolios (investments) of its clients. This makes investments safe, liquid
and profitable for the client. It offers expert guidance to its clients for
taking investment decisions.
11.Corporate Restructuring : It includes mergers or
acquisitions of existing business units, sale of existing unit or
disinvestment. This requires proper negotiations, preparation of documents and
completion of legal formalities. Merchant bankers offer all these services to
their clients.
12.Money Market Operation : Merchant bankers deal with and
underwrite short-term money market instruments, such as:
Government Bonds.
Certificate of deposit issued by banks and financila
institutions.
Commercial paper issued by large corporate firms.
Treasury bills issued by the Government (Here in India by RBI).
13.Leasing Services : Merchant bankers also help in leasing
services. Lease is a contract between the lessor and lessee, whereby the lessor
allows the use of his specific asset such as equipment by the lessee for a
certain period. The lessor charges a fee called rentals.
14.Management of Interest and Dividend : Merchant bankers
help their clients in the management of interest on debentures / loans, and
dividend on shares. They also advise their client about the timing (interim /
yearly) and rate of dividend.
