Merchant Banking in India



A Merchant Bank is a British term for a bank providing various financial services such as accepting bills arising out of trade, providing advice on acquisitions, mergers, foreign exchange, underwriting new issues, and portfolio managementA Merchant Bank can be generally described as a financial services company with a private equity investment arm offering investment banking and ancillary services as well. Because a merchant bank acts not only as an advisor and broker but also as a principal, a merchant bank has a longer term approach than a typical investment bank and is highly concerned with the viability of each investment opportunity and providing the right advice for a strong partnership with each client company.

In banking, a merchant bank is a traditional term for an Investment Bank. It can also be used to describe the private equity activities of banking. This article is about the history of banking as developed by merchants, from the Middle Ages onwards.

Amidst the swift changes sweeping the financial world, Merchant Banking has emerged as an indispensable financial advisory package. Merchant banking is a service-oriented function that transfers capital from those who own to those who can use it. They try to identify the needs of the investors & corporate sector & advice entrepreneurs what to do to be successful.

Merchant Banking, as the term has evolved in Europe from the 18th century to today, pertained to an individual or a banking house whose primary function was to facilitate the business process between a product and the financial requirements for its development. Merchant banking services span from the earliest negotiations from a transaction to its actual consummation between buyer and seller.

In particular, the merchant banker acted as a capital sources whose primary activity was directed towards a commodity trader/cargo owner who was involved in the buying, selling, and shipping of goods. The role of the merchant banker, who had the expertise to understand a particular transaction, was to arrange the necessary capital and ensure that the transaction would ultimately produce "collectable" profits. Often, the merchant banker also became involved in the actual negotiations between a buyer and seller in a transaction.

Modern Merchant Banking

During the 20th century, however, European merchant banks expanded their services. They became increasingly involved in the actual running of the business for which the transaction was conducted. Today, merchant banks actually own and run businesses for their own account, and that of others.

Since the 18th century, the term merchant banker has, therefore, been considerably broadened to include a composite of modern day skills. These skills include those inherent in an entrepreneur, a management advisor, a commercial and/or investment banker plus that of a transaction broker. Today a merchant banker is who has the ability to merchandise -- that is, create or expands a need -- and fulfill capital requirements. The modern European merchant bank, in many ways, reflects the early activities and breadth of services of the colonial trading companies.

Most companies that come to a U.S. merchant bank are looking to increase their financial stability or satisfy a particular, immediate capital need.

Professional merchant bankers must have: 1) an understanding of the product, its industry and operational management; 2) an ability to raise capital which might or might not be one's own (originally merchant bankers supplied their own capital and thereby took an equity interest in the transaction); 3) and most importantly, effective skills in concluding a transaction - the actual sale of the product and the collection of profit. Some people might question whether or not there are many individuals or organizations that have the abilities to fulfill all three areas of expertise .

Who Are Merchant Bankers ?

-Merchant banks are private financial institution.

-Their primary sources of income are PIPE (Private Investment In Public Entities) financings and international trade.

-Their secondary income sources are consulting, Mergers & Acquisitions help and financial market speculation.

-Because they do not invest against collateral, they take far greater risks than traditional banks.

-Because they are private, do not take money from the public and are international in scope, they are not regulated.

-Anyone considering dealing with any merchant bank should investigate the bank and its managers before seeking their help.

-The reason that businesses should develop a working relationship with a merchant bank is that they have more money than venture capitalists. Their advice tends to be more pragmatic than venture capitalists.

Functions of Merchant Bankers



•  Consulting advice on going public and international business.

•  Advice and help in taking your company public. If they are unwilling to supply Investment Banking bridge loans, they have a low cost strategy for taking your company public.

•  They do PIPE (Private Investment in Public Equities) financings.

•  They can advise or help with a company's M&A strategy.

•  They are essential advisors for companies seeking to become multinational corporations

Significance Of The Study

•  It would help us to develop the ability to study the functioning of Merchant Banking in India & learn & apply multidisciplinary concepts, tools & techniques to solve vital problems.

•  It familiarizes with the various services provided by Merchant Bankers.

•  They would help us to draw comparison between public & private sector companies engaged in Merchant Banking activities.

•  Based upon the comparison, it would help us to determine which sector has more growth potential & where should one invest his/her funds to maximize the return at minimum risk.

In India Merchant Banking activities started from the year 1967 , following the footsteps of similar activities in UK & USA . Currently Merchant Banking activity has mushroomed in the Indian capital market with both public & private sector settings up their respective merchant Banking divisions. Currently, the total no. of merchant bankers in India are approx. 1450 with more than 930 registered with SEBI. The SEBI authorized Merchant Bankers Include merchant Banking divisions of All India Financial Institutions, nationalized & foreign banks, subsidies of the commercial banks, private merchant banks engaged in stock broking, underwriting activities & financial consultancy & investment advisory service firms.

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