Merchant Bank Meaning, Functions, Services, Examples

Unlike commercial banks, who are driven by profit, cooperative banks work on a “no profit, no loss” basis. They also extend loans to small scale units, cottage industries, and self-employment activities like artisanship. The Private Commercial banks account for close to 1/4th of the assets of the total banking assets. All the commercial banks in India- Scheduled and Non-Scheduled is regulated under Banking Regulation Act 1949. In order to speed up the pace of economic development, efforts were made to channelise the household savings into investment in industry and trade.

  • Consultancy means to provide advice, guidance and service for a fee.
  • After considering the above aspects, SEBI will grant permission for the merchant banker to start functioning.
  • Thus, they acted as intermediaries of investment by holding the shares of new companies, motivating people to invest and keep deposits for investment.
  • The regulatory disclosure by merchant banks isn’t required while acquiring ownerships is very less.

Jammu & Kashmir Bank is an example of a non-scheduled commercial bank. Non-scheduled banks by definition are those which are not listed in the 2nd schedule of the RBI Act, 1934. The Act specifies the term of office of a director to be not more than two years.

Functions of a Merchant Bank

In USA, investment banking is concerned with ‘garnering savings and directing the flow of funds to business enterprises. ‘Investment bankers are primarily the intermediaries who provide specialised service in the marketing of securities. These banks do not invest their own funds in securities for a long-term. In UK, the term merchant banking originated from merchants in London who started financing of foreign trade through acceptance of bills.

define merchant banking and explain its functions

Merchant bankers helps firms or companies in raising finance by way of issue of a share, bank loans, debenture etc. merchant bank do not provide financial service to normal public. Some merchant bankers are managing mutual funds and off share funds also. By studying various company projects, merchant bankers advise on a project’s viability and development. They also prepare project reports that take into account the financial and economic feasibility of each project as well as the costs involved. Merchant bankers also provide assistance in obtaining a government’s approval for project implementation.

As such, most of their services are not targeted at the general public. While they may offer some banking services to wealthy individuals, merchant banks are more oriented toward corporate clients. Merchant banker offers various services to public sector undertakings and units and their public utilities. They support in raising capital (long-term), in the marketing of securities, in international collaborations as well as in managing for long-term capital from lending institutions.

Investment banks also provide advisory services to companies about mergers and acquisitions (M&A) and provide investment research to clients. Merchant banks are vital to the overseas success of many corporations in the United States because they make multinational operation more securely possible. The functions of merchant banking are different than that of your regular bank because they do not provide services to the general public.

types of Merchant Banks

Companies desirous of venturing into novel projects are assisted by the merchant bankers in obtaining necessary venture capital finance. In the cases of mergers and takeovers, the merchant bankers play the role of intermediaries, safeguarding the interests of both the entities. They also facilitate necessary authorizations from Government/RBI/any other agency. The terms mergers and takeovers are mostly used simultaneously giving an impression similarity between the two. However, they differ from each other; the term ‘merger’ denotes amalgamation of two companies in such a way that after the merger, only one company continues, whereas the other dissolves.

Central Bank of India helps the client companies in the calculation and provisions of working capital needed for a given project, management of non-convertible debenture issues, and management of fixed deposit. Preparing a financial plan to meet the total cost of the project keeping into consideration the requirements of the promoters and their collaborators, financial institutions, banks, government agencies and underwriters. In order to attract foreign capital resources for being invested in India, Union Government has offered various incentives to Non-Resident Indians and Persons of Indian Origin Resident Abroad .

define merchant banking and explain its functions

You won’t see flyers in your mailbox from merchant bankers about college savings accounts, CDs or zero fee checking accounts. Merchant banks for small scale institutions raise money by raising initial public offering by corporate credit products providing, bridge financing, equity financing, and mezzanine financing. They also issue and sell securities on behalf of corporations to investors. 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.

Brokerage Services –

The need for such services was recognised when Banking Commission 1972, in its report had recommended the establishment of acceptance and discount house in India following the development of bill market. Making selection of the institutions/banks for participation define merchant banking and explain its functions in financing. Assisting the clients in seeking approvals from the Government of India for foreign technical and financial collaboration agreements. Assisting clients in preparing the applications for financial assistance to All India Financial Institutions/Banks.

define merchant banking and explain its functions

It also aids in predicting their future performance for price movements. Merchant banks also help in estimating the working capital requirements and assist the client in negotiating for the sanction of appropriate facilities. For sick units, it suggests appropriate capital structure which will help the unit in revival.

Reforms for the merchant bankers

The first merchant bank in Nigeria was the Nigerian Acceptance Limited established in 1966. The business itself delays in shares allotment process and hence makes it difficult for the bankers to sell such stocks. Advising the issuers in taking decision with regard to the basis of allotment of securities in consultation with the stock exchanges.

They also issue and sell securities on behalf of corporations through private placements to refined investors who require less regulatory disclosure. Merchant banks provide financial and advisory services to help corporate clients conduct business. They often work with companies that may not be large enough to raise funds from the public through an initial public offering . “Merchant banks are the financial institutions providing specialist services which generally include the acceptance of bills of exchange, corporate finance, portfolio management and other banking services”. Many merchant bankers provide leasing and finance facilities to their customers. Some of them even maintain venture capital funds to assist the entrepreneurs.

Merchant bankers also manage money market instruments like Government bonds, Treasury bills, commercial papers, certificates of deposits for Government entities as well as large companies and financial institutions. Every corporation whether it is emerging or establish, require funds at some stage during its operation and raise capital from the financial market is the most popular and convenient mode of arranging finance. Hence, the business corporates raise from the market by issuing financial securities and on the other hand individuals or institutional investors purchase these securities to invest their money to earn a profit. In this capacity, the merchant bank usually acts as a sponsor of issues.

Evaluation of investment portfolio periodically at the request of investors. Examination of the capital structure of corporate unit to decide the extent of capitalisation. Provide assistance in obtaining government consent for implementation of the project. Deciding the means of financing and the composition of various types of securities. Preparation of project report after considering its financial, economic and market feasibility.

Dictionary meaning of merchant banking points at merchant bank as an organisation that underwrites securities for corporations advises such clients on mergers and is involved in the ownership of commercial ventures. After 1990, the new economic policy adopted by the government has resulted in the promotion of a number of new companies. The Government abolished the Office of Controller of Capital Issue and the regulation of stock market was taken over by SEBI. In such a situation, to link the investors on the one side and cater to the needs of the entrepreneurs on the other, a new organization came into existence called merchant banker.

While in UK, a merchant banking refers to the ‘accepting and issuing houses’, in USA it is known as ‘investment banking’. The origin of merchant banking can be traced back to 13th century when a few family owned and managed firms engaged in sale and purchase of commodities were also found to be engaged in banking activity. These firms not only acted as bankers to the kings of European States, financed coastal trade but also borne exchange risk. Merchant bankers offer customized solutions to their clients’ financial problems. Financial structuring includes determining the right debt-equity ratio and the framing of appropriate capital structure theory.

Some of the oldest banks offering merchant banking services include Citi Bank and JP Morgan. Of all the types of merchant banking services, merchant accounts are probably the most relatable to your everyday business activities. When you went into business and set up online ordering on a website, you probably also set up an account with a service like PayPal, Square or Stripe. These services are referred to as payment gateways because they are the bridge between the merchant and a merchant bank. Merchant Banking refers to the professional service provided by the merchant bankers that basically comprises of consultancy and banking services. In return for there special types of services, they charge an adequate amount of consideration from their client in the form of there fee.

Providing services as the stock exchange broker is also one of the functions played by the merchant banker. Buying and selling securities for their customers comes under their duties. They perform complete detailed research on the different securities in the market and guides their clients in which to invest for better growth and profitability. Merchant banks are non-depositary institutions that do not provide the same types of consumer services that are offered by a retail bank. Although merchant banks may also serve wealthy individuals, their services are more focused on providing financing and investment to commercial enterprises.

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