Merchant banking is a set of select banking and financial services offered by merchant banks to large corporations, institutional investors, and high net worth individuals (HNIs). Some of the most common merchant banking services include, fundraising, financial advisory, lending, underwriting, corporate portfolio management, international trade advisory, mergers and acquisitions, and asset sale and management advisory.
Typically, merchant banks avoid retail banking and depository services, which means their services are mostly limited to large companies, and multinational businesses.
Say, Company A wants to raise funds worth ₹10,000 Crore from the market and decides to issue debentures and preference shares worth the same amount. Now, they hire Merchant Bank Z to oversee the issue and sale of shares.
Merchant Bank Z will use its expertise to create a detailed action plan and budget for the entire exercise. They will also hire and coordinate with equity underwriters, who will use their own distribution networks to sell the debentures and preference shares of Company A to investors.
As part of the action plan, Merchant Bank Z may also hire advertising and marketing agencies to drum up support and publicity before and after the issue of shares.
In addition, this merchant bank will obtain regulatory clearances from the relevant authorities and handle the associated paperwork.
Did you know that the functions and operations of a merchant bank in India are regulated by SEBI? And that the capital adequacy mandated for a merchant bank is ₹5 Crore?
The primary functions of merchant banking are as follows:
Merchant banks offer portfolio management and advisory services to help investors make better decisions. Furthermore, merchant banks can even make trading and investing decisions on behalf of their clients.
Merchant banks help their clients raise funds from the domestic and international markets by issuing securities, such as debentures, preference shares, equities, and bonds.
These act as financial intermediaries for promoting new enterprises in their initial phases and getting approval from the government.
Merchant banks can help and guide their clients on raising capital from banks and financial institutions via the loan route.
Merchant banks extend leasing services wherein the clients lease assets and equipment to generate rental income.
Merchant banks offer equity underwriting as a premium service. These banks assess the levels of price and risk involved in a particular asset and initiate public issues and distribution of stocks.
Merchant banks help clients issue equity shares, preference shares, debentures, and other types of securities to the general public.
|Merchant Banking||Investment Banking|
|Helps companies raise funds by offering capital issues management services||Usually acts as an intermediary between a company issuing securities and investors|
|Generally focuses on internal trade, expansion through strategic partnerships, acquisitions, and mergers, etc.||Focuses primarily on equity issue and underwriting activities|
|Generally caters to the financing and banking needs of small companies and wealthy individuals||Their client list usually involves large corporations and institutional investors|
|Offers international trade financing services||Rarely offers this service|
|Usually earns by offering advisory, trade finance, custodial, and safekeeping services||Usually earns through commissions, lease rentals, and interest charges|
Merchant banks are non-depository financial institutions that offer services to wealthy individuals and enterprises that require capital raising, financial advisory, or assistance with international trade. Currently, there are 135 SEBI-registered merchant banks in India, who are working relentlessly to meet the financing and banking needs of their customers.
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The two most common types of merchant banking are public and private sector merchant banks.
The primary objectives of merchant banking include providing funds to companies, underwriting, managing their portfolios, offering corporate advisory, and managing corporate issues.
The primary characteristics of merchant banking include a quick decision process, high density of information, loose organisational structure, the concentration of short and medium-term engagements, emphasis on fee and commission income, low-profit distribution rate, high liquidity ratio, and more.
Merchant banks process short-term and long-term credit applications from financial institutions. In addition to estimating the total costs involved, they develop a financial plan for the entire project and prepare a loan application for lenders.
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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