For reasonable compensation in the form of a charge, merchant banks offer their clients the professional service of merchant banking in consideration of their financial needs. Banks known as merchant banks provide multinational firms with loan services, financial guidance, and fundraising.
These banks are specialists in working with big businesses and industries since they have extensive experience in international trading. The country’s big firms and international corporations are given money via merchant banking, which contributes to strengthening the economy of the nation.
The services offered by merchant banks are only available to major enterprises and corporate organizations, not to ordinary people.
An individual who assists in the subscription of securities is known as a merchant banker. The merchant banker has several duties, including managing public offerings of securities, providing international financial advising services, and managing private placements of securities.
History of Merchant Banking
Italian grain traders founded commercial banks in France and Italy in the 17th and 18th centuries. A small number of merchant bankers who served as middlemen in the financing of other transactions or their own were first included in merchant banking.
The current practice of merchant banking emerged in London after a few years. As soon as the bill was accepted, merchants started to fund international commerce. Over time, they began utilizing other services, including loan syndication, portfolio management, and issue underwriting.
National Grindlays launched merchant banking in India in 1967; Citi Bank followed suit in 1970. The first commercial bank to establish a separate section for merchant banking was SBI in the year 1972. In 1973, ICICI followed suit, after which several other banks—including PNB, Bank of India, UCO Bank, etc.—started offering comparable services.
The establishment of FERA in 1973 contributed to an expansion of commercial banking activity in India. Various banks, including IDBI and IFCI, thereafter joined the market.
Functions of a Merchant Bank
The banks provide a range of services and make a profit. The services are distinct from those provided by conventional banks.
Let’s examine each service in further detail:
- Project guidance: Merchant bankers support their customers throughout the whole project lifecycle, from concept formulation to report writing, budgeting to funding. This is especially true for novice business owners.
- Leasing Services: Banks provide leasing facilities; customers lease equipment and assets to earn rental money.
- Issue Management: To issue equity shares, preference shares, and debentures to the general public, high-net-worth people work with merchant banks.
- Equity underwriting is also made possible by banks. They launch the public issuance and distribution of stocks after evaluating the price and risk associated with certain security.
- Fund Raising: Bankers assist private enterprises in raising money from local and international markets through a variety of services like underwriting and the issuing of securities.
- Portfolio management: These bankers invest in various financial products on behalf of their clients.
- Loan Syndication: They fund term loans to support funding-required initiatives.
- Financial intermediaries called merchant banks engage in promotional activities for new businesses.
Merchant Banking in India
The various roles of Merchant Banking in India are as follows:
- trades stocks for a living.
- works to enhance promotional efforts.
- carries out underwriting work. Because organizations frequently take significant risks, it makes the firm or business seems more dependable and trustworthy. Additionally, they inform and entice members of the public to purchase business shares.
- improves the company’s understanding of its finances, particularly the overall expenses expected. This aids the business in getting ready for the situation in advance and taking the appropriate safety measures.
- helps open credit.
- brings forth a variety of economic answers.
- dispenses counseling. This aids in helping the individuals fully comprehend their idea, if it would be appropriate for them, dangers, budgets, and other important topics.
- The merchant banker is in charge of organizing and maintaining the company’s profile. Additionally, they invest money on the business’s behalf.
- They make sure that all registrations are completed and approved.
- It makes sure the business always complies with all legal requirements, i.e., all laws and regulations that must be followed.
- It works to organize, manage, and watch over foreign currency.
- offers tax consulting.
- The goal is to provide them with instructions on the date and dividend rate.
- assists in finding creative sponsors for contract negotiations such as acquisitions and mergers.
Regulations to be followed by Merchant Bankers
As a regulatory agency for defending the interests of investors in the securities industry, SEBI was created in 1992. To prevent monopolies and protect consumers’ interests, they created a few norms and principles for merchant bankers.
The Securities Exchange Board of India (SEBI) Regulations, 1992 are what they are known as. These regulations are periodically updated to reflect the shifting market conditions:
In India, there are five chapters and four schedules of rules and regulations for merchant banks:
- Several words that are regularly used in merchant banking are defined and explained in the first chapter.
- The Registration and Certification of Merchant Bankers in India are covered in the second chapter. Additionally, it possesses several operational capabilities and capital requirements that must be met to register as a merchant banker.
- The third chapter covers the general responsibilities and obligations that a merchant banker would be required to carry out. The General Code of Conduct, information disclosure, account audits, and other significant operational requirements are a few of the crucial aspects.
- The Board’s authority to investigate merchant bankers and the potential course of action based on the findings are covered in the fourth chapter, which is now available.
- You may discover examples of defaults and the steps executed when anything goes wrong or if the rules are not followed in the fifth chapter.