Merchant Banking: Meaning, Features, Objective and Functions

What Is Merchant Banking?

The banking activities performed by merchant banks is called Merchant Banking. In other words the banking system which is concerned with providing financial services to the business community is called Merchant Banking.

In the English dictionary the term merchant banking is an organisation that underwrites securities for corporations, advises its clients and is involved in the ownership of commercial ventures.

In the UK merchant banking refers to accepting and issuing houses in the USA. It is known as Investment Banking. The word merchant sometimes applied to banks who are not merchants, sometimes to merchants who are not banks and sometimes to those intermediaries who are neither merchants nor banks.

A merchant bank may be considered as an institution which centres its activities. These are pointed below:

The activities of Merchant Banking are

1. Holding and dealing with quoted and unquoted investments.

2. Acceptance credit and all forms of export finance.

3. It offers Medium term lending and syndication of loans.

4. Taking deposits in foreign currency.

5. Ensuring fund management on behalf of clients etc.

6. Corporate finances advice on such matters as a new issue of shares and bonds.

What Is Portfolio Management?

The management of assets and liabilities of merchant banks in order to ensure profitability is called Portfolio Management.

Generally it helps in identifying and arranging investment in such a way. So that it should be suitable to each individual’s it includes:

i. Advice on market conditions.

ii. Collection of earnings.

iii. Provide safe custody of documents etc.

Role Of Merchant Bankers in issue Management

The success of the fund raising activity basically depends upon the state of the financial market in general and the financial services organisation particularly the merchant banking companies. The management of the public issue of securities core of merchant banking.

1.Pre Issue activity

2.Post issue activity

3.Issue Marketing

1.Pre issue Activity

The Merchant Banking assumes to perform the following pre issue obligation.

i.Documents to be Submitted

The lead managers shall submit the following documents.

a. MoU (Memorandum Of Understanding) between lead merchants banker and issuer company specifying their mutual right, liability relating to the issue.

b. Due to diligence certificate by lead merchant banker with specified draft prospects.

c. A list of people who constitute the promoters group and their individual share holding.

d. Certificate signed by the company secretary.

ii.Appointment of Intermediaries

Intermediaries such as decision bankers to the issue, register, underwriter are appointed in consultation with lead merchant bankers.

iii.Underwriting

Underwriting of public issue is not mandatory. If an issue is underwritten the subscriber portion has to be purchased by the underwriters lead merchant banker shall undertake a minimum of five percent of 25 lacks whichever is low.

iv.Offer document to be made public

Draft offered document shall be made public for a period of 21 days from date of feeling the offer document with the board.

v.Appointment Of Compliance Officer

Compliance officers have a relationship with the board with regard to various laws, rules, regulations and other directions of the issue.

vi.Final offer document

The offer document shall be finalised on the basis of complaints received and observation by SEBI.

vii.Application Form

Application form must be accompanied by the integrated prospects. It should also contain instructions to maintain the application form with the new issue.

viii.Period of subscription

Subscription shall be kept open for at least 3 working days and not more than ten working days.

2. Post issue activities

i.Post issue obligation

The merchant banker shall ensure the post issue obligation on the basis of guidelines. It provides high priority to investors to minimise the complaints. The lead bankers submit the post issue monitoring before within three working days.

ii.Coordination with Intermediaries

Maintaining close coordination with registers to be issued and to depute its officers to various intermediaries.

iii.Stock Invest

Ensure compliance with instructions issued by the RBI.

iv.Underwritters

a. Issue is closed at earliest date then issue shall be fully subscribed before closure.

b. No definite figure of subscription the issue should be kept open.

c. In development of underwriters, underwriters shall honour commitment within 60 days.

d. In under subscribed issues, lead merchant bankers furnish their information to those who failed to meet their underwriting development.

v.Bankers to an issue

Maintain a separate bank bankers to an issue as per provision of section 73(3) of the companies act 1956.

vi.post issue advertisement

All issues and details are released within 10 days from completion of activities. Post issues lead merchants ensure that the issuer company, banker or advisors connected with the issue do not publish.

vii.Basis of allotment

In over subscription allotment are to be made in the prescribed manner.

viii.Compliance with guidelines on advertisement

The lead merchant banker shall ensure compliance with guidelines on advertisement by the issuer company. It includes pamphlets, hoarding, posters, TV, radio etc.

3.Issue Marketing

The merchant banker has to undertake the marketing of issues. The ultimate aim of issue marketing is to persuade the investor to subscribe to the issue made by the company. Merchant Banker advises for

a. A fresh issue

b. Additional issue

c. Bonus Issue

d. A right issue and in what proportion 

e.The common strategy adopted by the merchant banker.

f. The common strategy adopted by the merchant banker.

example like: media advertisement, press interview, client and banner & hoarding

Functions Of Merchant Banking

The activities or functions of a merchant bank are considered as merchant banking assistance. Generally its functions are broadly classified into 2 types that is – counselling and procuring finance.

The various functions of Merchant Banking in India regulated by the Securities and Exchange Board Of India (SEBI) 1992. It’s various main functions are:

1. Project Counselling

The primary function of a merchant bank is project counselling. It enables the banker to compare among different projects.

1.Identify promising projects

2.Prepare in-death project reports 

3.Assist investors in obtaining a license.

4.Arrange and negotiate foreign collaborations etc.

2. Syndications of loans

The second important function which is performed by merchant banks after identifying projects is syndication of loans. It helps business units to arrange their financial requirements from banks or other financial institutions. It helps in;

1.Applying to financial institutions for loans.

2.Consulting about alternative sources of finance

3.Ensuring modernisation, expansion and diversification etc.

3. Issue Management 

The management of public issues on various matters is also considered as another function of a merchant bank. It performs a number of activities in order to ensure effective issue management. It includes

1.Preparation of advertising and promotional materials.

2.Appointment of bankers and brokers.

3.Deciding the size and timing of public issues.

4.Preparation of draft prospectus and other documents.

4. Provision Of Working Capitals

The arrangements of working capital finance for a new venture is considered as another important function of a merchant bank. It helps business units to arrange their working capital requirements either by issuing shares or debentures or by raising loans from financial institutions. It also arranges trustees for the debentures in order to maintain a proper balance with bankers.

5. Foreign Currency Loans

The merchant banker also arranges for export credit for various countries. It enables industrial undertakings to arrange foreign currency loans against valuable securities. Therefore arrangements of foreign currency loans is considered as another important functions of merchant bank.

6. Portfolio Management of Non resident

The Portfolio Management of Non residence is also considered as another important function of a merchant banker. It means identifying suitable arrangements of investment so that maximum benefits can be derived. It includes:

i. Guidance on purchase and sale of securities.

ii. Advice on market conditions.

iii. Safe custody of documents

iv. Collection of earning etc.

7. Leasing Business

A business which has undertaken enough hiring for a long period is called a leasing business. Generally it is considered as a new dimension in which the merchant bankers have been working on; it enables industrial undertakings to carry on their business activities at a minimum fixed capitals.

8. Marketing

The last but not the least function of a merchant bank is marketing. It enables merchant bankers to have a close association with his own clients and understand their future expansion programmes. It helps industrial undertakings to carry on their business smoothly for a long period.

Other Functions of Merchant Banking

• Leasing Services

• Loan syndication

• Promotional activities

• Raising Funds for clients

• Portfolio Management

Objectives Of Merchant Banking

• To regulate the raising of funds in the primary market.

• To ensure a high degree of protection of the investors.

• To provide a high standard of professional competence.

• To ensure in raising resources at low cost.

• To ensure raising resources effectively and easily.

• To promote a primary market which is fair, efficient and flexible.

Role Of Merchant Banking In India

i. Merchant Banking works as a stock broker.

ii. Merchant Banking works as an underwriter.

iii. It also works in improving promotional activities.

iv. It initiated a credit facility.

v. It provides tax counselling.

vi. It always works towards providing instructions regarding the dividend rate and date.

vii. It works for arranging, managing and monitoring foreign money.

viii. It always follows the mandatory rules and regulations.

ix. It delivers a diverse range of economic solutions.

Merchant Bankers In India

In India more than 120 Merchant Bankers financial institutions and Banks are registered with SEBI. Some of the most significant merchant banks of India are listed below.

List Of Public Sector Merchant Bank In India

Karur Vysya Bank, SBI Capital Markets, Bank Of Maharashtra, Punjab National Bank, IFCI Financial Services Ltd, State Bank Of Bikaner and Jaipur.

List Of Private Sector Merchant Bank In India

Kotak Mahindra Capital Company, Reliance Securities, Yes Bank, Axis Bank, Bajaj Capital, Tata Capital Markets.

List Of Foreign Merchant Banks In India

Bank Of America, Citigroup Global Markets India, DSP Merrill Lynch Ltd, FEDEX Securities Ltd, Barclays Securities (India), Morgan Stanley India, Goldman Sachs (India)

Basic Requirements Of Merchant Banking In India

➢Merchant Banking Company shall comply with the provision of the Stock Exchange Board Of India (SEBI) Act 1992.

➢Merchant Banking Company at least has a minimum of 2 employees holding a prior working experience in Merchant Banking.

➢Merchant Banking Company must not be related to any other directly or indirectly registered as a Merchant Banker.

➢Merchant Banking Company must not engage in any other financial activities which are mentioned in section 45i(c) of the RBI Act 1934.

➢For opening a Merchant Banking Company a minimum Capital required is of 5 crore rupees for category 1, Rs 50 lakh for Category 2 and Rs 50 lakhs for Category 3.

➢Merchant Banking Company must not engage in any activity other than those connected to the securities market.

Categories Of Merchant Banker

General categories of Merchant Bankers are classified into 4 categories like category-I, category-II, category-III and category-IV.

Category-I

Merchant Bankers can act as an issue manager, advisor, consultant, underwriter and portfolio Manager.

Category- II

Such Merchant Bankers can act as an consultant, underwriter, co-manager, portfolio Manager and advisor.

Category-III

Under this category Merchant Bankers can act as an underwriter, advisor and consultant.

Category-IV

Under this category Merchant Bankers act only as consultant or advisor to an issue.

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