Merchant Banking
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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).
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.
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.
