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Merchant Banking

Merchant Banking

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Published by Pranav D. Potekar

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Categories:Business/Law, Finance
Published by: Pranav D. Potekar on Sep 18, 2009
Copyright:Attribution Non-commercial


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Merchant Banking
Merchant banking, although a non-banking financial activity, resemblesbanking function. The functions of merchant banking which originated, and grew inEurope, was enriched by American patronage, and these services are now beingprovided throughout the world by both banking and non-banking institutions. Theword “Merchant Banking” originated among the Dutch and the Scottish traders, andwas later on developed and professionalized in Britain.
A set of functions and services rendered by a merchant banker may betermed as ‘merchant banking’.1. According to Random House Dictionary, “merchant bank is an organisationthat underwrites securities for corporations, advises such clients on mergers and isinvolved in the ownership of commercial ventures. These organizations aresometimes banks which are not merchants and sometimes which are not banks andsometimes houses which bare neither merchants nor banks.2. According to Charles P. Kindleburger, “merchant banking is thedevelopment of banking from commerce which frequently encountered a prolongedintermediate stage known in England originally as merchant banking”.3. According to the Securities and Exchange Board of India (MerchantBankers) Rules, 1992, management either by making arrangements regardingselling , buying or subscribing to securities or acting as manager, consultant,adviser or rendering corporate advisory services in relation to such issuemanagement”
Merchant Bankers
A set of financial institutions that are engaged in providing specialist services,which generally include the acceptance of bills of exchange, corporate finance,portfolio management and other banking services, are known as “merchant
bankers’. It is not necessary for a merchant banker to carry out all the above-mentioned activities. A merchant banker may specialize in one activity, and take uother activities, which may be complementary or supportive to the specializedactivity.
Merchant banking being a service oriented industry renders the sameservices in India as merchant banks in UK and other European countries. In the U.S.,investment bankers cater to the needs of business enterprises carrying outmerchant banking functions. Merchant banks in India carry out the followingfunctions and services:1. Corporate Counseling2. Project Counseling3. Pre-investment Studies4. Capital Restructuring5. Credit Syndication and Project Finance6. Issue Management and Underwriting7. Portfolio Management8. Working Capital Finance9. Acceptance Credit and Bill Discounting10. Mergers, Amalgamations and Takeovers11. Venture Capital12. Lease Financing13. Foreign Currency Finance
14. Fixed Deposits Broking15. Mutual Funds16. Relief to Sick Industries17. Project AppraisalsA brief description of these functions is presented below:
I. Corporate Counseling
Corporate counseling refers to a set of activities that is undertaken to ensureefficient running of a corporate enterprise at its maximum potential througheffective management of finance. It aims at rejuvenating old-line companies andailing units, and guiding existing units in locating areas/ activities of growth anddiversification.A merchant banker, as a managerial economist, guides the client on aspectsof organizational goals, locational factors, organization size and operational scale,choice of product and market survey , forecasting for a product, cost reduction andcost analysis, allocation of resources, investment decisions, capital managementand expenditure control pricing methods and marketing strategy, etc. As a financialand investment expert, a capital management, financial requirements and sourcesof finance, evaluating financial alternatives, rate of return and cost of capital,besides providing basic corporate services such as financial rearrangement,reorganization, mergers and acquisitions, etc.Following are the activities which form part of corporate counseling:1. Providing guidance in areas of diversification based on the government’seconomic and licensing policies.2. Undertaking appraisal of product lines, analyzing their growth andprofitability and forecasting future trends.

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