Merchant Banking and Financial Services

The first merchant bank was set up in 1969 by Grind lays Bank.

Initially they were issue mangers looking after the issue of shares and raising capital for the company.

But subsequently they expanded their activities such as

Working capital management; Syndication of project finance, Global loans, Mergers, Capital restructuring, etc.,

Initially the merchant banker in India was in the form of management of public issue and providing financial consultancy for foreign banks.

In 1973, SBI started the merchant banking and it was followed by ICICI.

SBI capital market was set up in August 1986 as a full fledged merchant banker. Between 1974 and 1985, the merchant banker has promoted lot of companies. However they were brought under the control of SEBI in 1992.

Merchant Bank - Introduction

A merchant bank is a financial institution that engages in underwriting and business loans, catering primarily to the needs of large enterprises and high net worth individuals.

In the British market, the term merchant bank refers to an investment bank.

Merchant Bank

An organisation that acts as an intermediary between the issuers and the ultimate purchasers of securities in the primary security market .

“A Merchant Banking is an institution that helps the companies to raise capital. It is an organization that underwrites corporate securities, provide advisory services to its clients”.

“It is an organization that underwrites corporate securities and advices its clients on issues like corporate mergers, etc involved in ownership of commercial ventures”.

Merchant Banker Definition – SEBI

According to Securities and Exchange Board of India (Merchant Banker) rules, 1992,

“ A merchant banker has been defined as any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or acting as manager, consultant, adviser or rendering corporate advisory services in relation to such issue management”

Functions of Merchant Banking

•Corporate Counselling Services

•Project Counselling Services

•Pre – Investment Studies

•Capital Restructuring services

•Credit Syndication Services

•Issue Management and underwriting services

•Portfolio Management Services

•Working Capital Financing Services

•Acceptance Credit and Bill Discounting Services

•Mergers and Acquisitions services

•Venture Financing Services

•Lease Financing Services

•Project Appraisal Services

•Foreign Currency Financing Services

•Relief to sick companies

Services contd.Corporate Counseling:

Set of activities undertaken for efficient running of an enterprise.

Identifying areas of growth & diversification.Guiding clients on aspects like locational factors,

organizational size, investment decision, choice of product.

Contd.Project counseling:

It’s a part of corporate counseling & deals with analysis of project viability .

Comprises of preparation of project report & deciding finance pattern for cost of project.

Filling up of application form with significant information for obtaining funds.

Services contd.Working Capital Finance:

Meeting the day-to-day expenses of an enterprise is working

capital finance.

Assessment of working capital requirements.

Preparing necessary application to negotiation for sanction of appropriate credit facilities.

Portfolio Management.Making decisions for the investment of cash resources of a

corporate enterprise in marketable securities.

Decides quantum, timing & type of security to be bought.

Help in achieving maximum return with minimum risk by proper combination of securities.

Restructuring Strategies.Deals with Mergers & Acquisitions.It’s a specialized service of Merchant bankers wherein they act

as middle-men in negotiating between two companies.Offers expert evaluation regarding identification organizations

with matching characteristics.Obtaining approvals from various authorities.

Services contd.Credit Syndication:

Relates to activities connected with credit procurement & project financing.

Estimates total cost of the project Drawing up of financial plan which conforms requirements

of promoters & their collaborators. Selecting institutions for participation for financing.

Lease Financing.

It’s an important alternative source of financing a capital outlay.

Involves letting out assets on lease for use by the lessee for a particular period of time.

Providing advice on viability of leasing & choice of favorable rental structure.

Other Services:

Relief to Sick Industries: Rejuvenating old lines & ailing units by appraising

technology, process etc.

Evolving rehabilitation packages acceptable to financial institutions/banks.

Exploring possibilities of mergers & acquisitions.

Other Services contd.Mutual Funds:

It’s collective investment scheme that pools money from several investors & channels them into productive investments.

Investing money in diversified portfolio of shares & debentures.

Assuring Investors return in terms of capital appreciation.

Difference b/w Commercial & Merchant banks

Commercial Banking Catering needs of common man. Anyone can open an A/c. Less exposed to risk. Related to secondary markets. Plays the role of financers.

Merchant Banking Catering needs of corporate firms. It cannot be done. More exposed to risk. Related to Primary markets. Plays different roles like underwriting, portfolio etc.

Merchant BankingAdvantages: Merchant banks perform functions that

cannot be carried out by businesses on their own.

Merchant banks have access to traders, financial institutions, and markets that companies or individuals could not possibly reach.

By using their skills and contacts, merchant banks can get the best

possible deals for their clients.

Disadvantages: Merchant banks are really only for

large corporate customers, or extremely wealthy smaller businesses owned by individual clients.

Not all deals carried out by merchant banks meet with unqualified success.

There is always risk attached to the kinds of deal that merchant banks undertake.

Merchant BankingAdvantages: Merchant banks perform functions that

cannot be carried out by businesses on their own.

Merchant banks have access to traders, financial institutions, and markets that companies or individuals could not possibly reach.

By using their skills and contacts, merchant banks can get the best

possible deals for their clients.

Disadvantages: Merchant banks are really only for

large corporate customers, or extremely wealthy smaller businesses owned by individual clients.

Not all deals carried out by merchant banks meet with unqualified success.

There is always risk attached to the kinds of deal that merchant banks undertake.

Institutes offering Merchant BankingPublic Sector

SBI capital markets ltd Punjab national bank Bank of Maharashtra Karur Vysya bank ltd State Bank of Bikaner and Jaipur. IFCI financial services ltd.

Private Sector ICICI Securities Ltd Axis Bank Ltd Bajaj Capital Ltd Reliance Securities Limited Kotak Mahindra Capital Company Ltd Yes Bank Ltd

Key Foreign PlayersGoldman Sachs (India) Securities Pvt. Ltd. Morgan Stanley India Company Pvt. Ltd.Barclays Securities (India) Pvt. Ltd. Bank Of AmericaCitigroup Global Markets India Pvt. Ltd.DSP Merrill Lynch Ltd.