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In banking, a merchant bank is a financial institution primarily engaged in offering financial services and advice to corporations and to wealthy individuals. The term can also be used to describe the private equity activities of banking. The chief distinction between an investment bank and a merchant bank is that a merchant bank invests its own capital in a client company whereas an investment bank purely distributes (and trades) the securities of that company in its capital raising role. Both merchant banks and investment banks provide fee based corporate advisory services including in relation to mergers and acquisitions.
Merchant banks, now so called, are in fact the original "banks". These were invented in the Middle Ages by Italian grain merchants. As the Lombardy merchants and bankers grew in stature based on the strength of the Lombard plains cereal crops, many displaced Jews fleeing Spanish persecution were attracted to the trade. They brought with them ancient practices from the middle and far east silk routes. Originally intended for the finance of long trading journeys, these methods were now utilized to finance the production of grain. The Jews could not hold land in Italy, so they entered the great trading piazzas and halls of Lombardy, alongside the local traders, and set up their benches to trade in crops. They had one great advantage over the locals. Christians were strictly forbidden the sin of usury. The Jewish newcomers, on the other hand, could lend to farmers against crops in the field, a high-risk loan at what would have been considered usurious rates by the Church, but did not bind the Jews. In this way they could secure the grain sale rights against the eventual harvest. They then began to advance against the delivery of grain shipped to distant ports. In both cases they made their profit from the present discount against the future price. This two-handed trade was time consuming and soon there arose a class of merchants, who were trading grain debt instead of grain. The Jewish trader performed both finance (credit) and an underwriting (insurance) functions. He would derive an income from lending the farmer money to develop and manufacture (through seeding, growing, weeding and harvesting) his annual crop (the crop loan at the beginning of the growing season). He would underwrite (insure) the delivery of the crop (through crop or commodity insurance) to the merchant wholesaler who was the ultimate purchaser of the farmer’s harvest. And he would make arrangements to supply this buyer through alternative sources (the merchant function) of supply (such as grain stores or alternate producer markets), should any particular farming district suffer a seasonal crop failure. He could also keep the farmer (or other commodity producer) in business during a drought or other crop failure, through the issuance of a crop (or commodity) insurance against the hazard of failure of his crop.
These and other great merchant banking families dealt in everything from underwriting bonds to originating foreign loans. Modern practices Known as “accepting and issuing houses” in the U. banca. later a bill of exchange. etc. And so the next generation of bankers arose from migrant Jewish merchants in the great wheat growing areas of Germany and Poland. modern merchant banks offer a wide range of activities. later still. They also had links with family members who had. This course of events set the stage for the rise of banking names which still resonate today: Schroders. Many of these merchants were from the same families who had been part of the development of the banking process in Italy. a cheque). Being "broke" has the same connotation. etc. which is what happened when someone lost his traders' deposits. a note. Warburgs. counsel on mergers and acquisitions. thus overcoming the usury objection. were all the product of the continental grain trade. including portfolio management. and then to holding deposits for settlement of "billete" or notes written by the people who were still brokering the actual grain. credit syndication. Islam makes similar condemnations of usury as Christianity. The medieval Italian markets were disrupted by wars and in any case were limited by the fractured nature of the Italian states. And so the merchant's "benches" (bank is a corruption of the Italian for bench.Thus in his underlying financial function the merchant banker (trader) would ensure the continuous smooth flowing of the commodity (crop.. Bullion trading and bond issuing were some of the specialties of the Rothschild family. It was a short step from financing trade on their own behalf to settling trades for others. but often were used for the bench's own trades in the meantime.) markets by providing both credit and insurance. A sensible manner of discounting interest to the depositors against what could be earned by employing their money in the trade of the bench soon developed.S. The term bankrupt is a corruption of the Italian banca rotta. wool. selling an "interest" to them in a specific trade. Rothschilds. in short.K. a letter of formal exchange. . and indirectly. acceptance credit. salt. fled Spain for both Italy and England. salt-cod. as in a counter) in the great grain markets became centers for holding money against a bill (billette. Once again this merely developed what was an ancient method of financing long distance transport of goods. the early Iberian persecution of Jews. insurance. These deposited funds were intended to be held for the settlement of grain trades. or broken bench. centuries before. and “investment banks” in the U. even the ill-fated Barings.
All the aspects.S. flexibility and freedom that it needs to meet possible future contingencies. They guarantee the success of issues by underwriting them. “an institution which covers a wide range of activities such as management of customer services.origination. group company. The merchant banker normally does not assume all the risk himself while underwriting the issue. They also provide all the services related to receiving applications. One of the basic requirements of merchant banks is highly professional staff with skills and worldwide contacts. An applicant should comply with the following norms: • • • • • • • The applicant should be a body corporate The applicant should not carry on any business other than those connected with the securities market The applicant should have necessary infrastructure like office space." they have few. collecting money. allotment. credit syndication. Unlike in the past. Merchant Banking Merchant banking may be defined as. They are experts and good judges of the type. corporate advisory services.5 crores . portfolio management. acceptance credit. mutual fund investments. They offer a package of financial services. The range of activities offered by merchant banks is much wider than sponsoring public issues of industrial securities. the U. sending share certificates and so on. of the characteristics of former merchant banks. that is guaranteeing sales and distribution of securities. variant initiates loans and then sells them to investors Even though these companies call themselves "merchant banks. timing and terms of issues and make them acceptable to investors under prevailing preferences and market conditions. underwriting and distribution of the sale of industrial securities are handled by them. investment management etc. manpower etc. The basic function of merchant banks is marketing corporate and other securities. counselling. insurance. Registration of merchant bankers… Registration with SEBI is mandatory to carry out the business of merchant banking in India. syndication of credit. They offer project finance.Of these two classes of merchant banks. equipment. etc.” Merchant Banks are popularly known as “issuing and accepting houses”. Merchant banks offer services also to investors. subsidiary or interconnected company of the applicant should not have been a registered merchant banker The applicant should not have been involved in any securities scam or proved guilt for any offence The applicant should have a minimum net worth of Rs. and at the same time afford the borrowing company. The applicant must have at least two employees with prior experience in merchant banking Any associate company. if any. their activities are now primarily non-fund based.
The retail network depends on networking with investors. Then the merchant banker prepares a detailed loan memorandum. mutual fund products. allotment and refund. underwriting support. In case of sick units.Functions of a merchant banker… The following comprise the main functions of a merchant banker: • • • • • Management of debt and equity offerings. Corporate advisory services. He advises the client on different hedging strategies and suggests the appropriate strategy. merchant bankers may design a revival package in coordination with banks and financial institutions. insurance products. Another area of advice is rehabilitation and turnaround management.The merchant banker helps in distributing various securities like equity shares. Risk management is another area where advice from a merchant banker is sought. Loan syndication. listing on stock exchanges.Merchant bankers arrange to tie up loans for their clients. and evaluate cheaper sources of funds. pension funds. This takes place in a series of steps. Firstly they analyse the pattern of the client’s cash flows. They assist them in conceptualising the project idea in the initial stage. The banks then negotiate the terms of lending on the basis of which the final allocation is done.This forms the main function of the merchant banker. . they conduct feasibility studies to examine the viability of the proposed project. debt instruments. Once the idea is formed. based on which the terms of borrowings can be defined. The following are the main areas in which their advice is sought: Financial structuring includes determining the right debt-equity ratio and gearing ratio for the client. financial institutions etc. The institutional network consists of mutual funds. They also assist the client in preparing different documents like the detailed project report. fixed deposits. marketing of the issue. Project advisory services. foreign institutional investors.Merchant bankers help their clients in various stages of the project undertaken by the clients. the appropriate capital structure theory is also framed.Merchant bankers offer customised solutions to their clients financial problems. The distribution network of the merchant banker can be classified as institutional and retail in nature. commercial paper to name a few. Merchant bankers also explore the refinancing alternatives of the client. The main areas of work in this regard include: instrument designing. pricing the issue. Placement and distribution. registration of the offer document. The size of such a network represents the wholesale reach of the merchant banker. • Providing venture capital and mezzanine financing. He assists the companies in raising funds from the market.Merchant bankers help companies in obtaining venture capital financing for financing their new and innovative strategies. private equity funds. which is circulated to various banks and financial institutions and they are invited to participate in the syndicate.
preference shares and debentures or bonds by offering them to public. equity shares. the amount underwritten would be subscribed by him. launching publicity campaign and fixing date of board meeting to approve and sign prospectus and pass the necessary resolutions. After taking action as per SEBI guidelines. deciding upon the financing pattern to finance the cost of the project and appraising the project report with the financial institutions or banks. the merchant banker arranges a meeting with company representatives and advertising agents to finalise arrangements relating to date of opening and closing of issue. It also includes filling up of application forms with relevant information for obtaining funds from financial institutions and obtaining government approval. Pricing of issues is done by the companies in consultant with the merchant bankers. Merchant banks act as an intermediary whose main job is to transfer capital from those who own it to those who need it. • Underwriting of Public Issue: Underwriting is a guarantee given by the underwriter that in the event of under subscription. Banks/Merchant banking subsidiaries cannot underwrite more than 15% of any issue. registration of prospectus. • Issue Management: Management of issue involves marketing of corporate securities viz. .Services of Merchant Banks • Project Counselling: Project counselling includes preparation of project reports.
(a) Long term foreign currency loans (b) Joint Ventures abroad (c) Financing exports and imports (d) Foreign collaboration arrangements . debentures or bonds issued by different companies and government securities. appointment of Registrar for dealing with share applications and transfer and listing of shares of the company on the stock exchange. application forms and completion of formalities under the Companies Act. • Portfolio Management: Portfolio refers to investment in different kinds of securities such as shares. Portfolio management refers to maintaining proper combinations of securities in a manner that they give maximum return with minimum risk. • Advisory Service Relating to Mergers and Takeovers: A merger is a combination of two companies into a single company where one survives and other loses its corporate existence. Consultants or Advisers to the Issue: The managers to the issue assist in the drafting of prospectus. • Off Shore Finance: The merchant bankers help their clients in the following areas involving foreign currency. A takeover is the purchase by one company acquiring controlling interest in the share capital of another existing company. Merchant bankers are the middlemen in setting negotiation between the two companies.• Managers. Companies can appoint one or more agencies as managers to the issue.
Such loans may be obtained from a single development finance institution or a syndicate or consortium. capital restructuring. public issue management. loan syndication. • Corporate Counselling: Corporate counselling covers the entire field of merchant banking activities viz. . lease financing acceptance credit. etc. project counselling. fixed deposit.• Non-resident Investment: The services of merchant banker includes investment advisory services to NRI in terms of identification of investment opportunities. • Loan Syndication: Loan syndication refers to assistance rendered by merchant bankers to get mainly term loans for projects. Merchant bankers help corporate clients to raise syndicated loans from banks or financial institutions. working capital. and operational services like purchase and sale of securities. selection of securities. investment management.
• To act as financial intermediary for the collection of the scare financial resources spread all over the country and mobilizing the same for the economic development of the country through fair competition. expansion and diversification of agriculture. business and agriculture development of the country. • . service. technical & management consultancy. technology & training for the same and thereby actively contributing towards the alleviation of poverty in the country. To provide quality & reliable financial services to the general public by protecting the rights and interest of the depositors and shareholders • Mobilizing the financial resources from company’s internal as well as from external sources for the establishment. development. development. industry. expansion and diversification of productive and employment oriented business in the rural as well as cities and towns and to provide necessary financial resources. business and other commercially viable project in the country and thereby helping the industrial. labor and capital for the establishment.OBJECTIVES The company was incorporated following main objectives: • with the Properly mobilizing the available talent.
Merchant banks still offer trade financing products to their clients. investment banks only participated in underwriting and selling securities in large blocks. bridge financing. merchant banks offer their services to companies that are too big for venture capital firms to serve properly. larger merchant banks tend to privately place equity with other financial institutions. Traditional merchant banks primarily perform international financing activities such as foreign corporate investing. often taking on large portions of ownership in companies that are believed to have strong growth potential. In practice. while many investment banks participate in trade financing activities. As a general rule. are different kinds of financial institutions that perform different services. Traditionally. transferring funds internationally. but are still too small to make a compelling public share offering on a large exchange. Traditionally. foreign real estate investment. but there are a few characteristics that most companies that offer both investment and merchant banking share. in their purest forms. In order to bridge the gap between venture capital and a public offering. In theory. Traditional merchant banks often expand into the field of securities underwriting. Investment banks facilitate mergers and acquisitions through share sales and provide research and financial consulting to companies. investment banks and merchant banks perform different functions. mezzanine financing and a number of corporate credit products. While investment banks tend to focus on larger companies. investment banks did not deal with the general public. The current offerings of investment banks and merchant banks varies by the institution offering the services. Pure investment banks raise funds for businesses and some governments by registering and issuing debt or equity and selling it on a market. Investment banks rarely offer trade financing because most investment banking clients have already outgrown the need for trade financing and the various credit products linked to it. trade consulting and co-investment in projects involving trade of one form or another. the fine lines that separate the functions of merchant banks and investment banks tend to blur. Some of the activities that a pure merchant bank is involved in may include issuing letters of credit. Merchant banks tend to operate on small-scale companies and offer creative equity financing. . trade finance and international transaction facilitation.What is the difference between investment banks and merchant banks? Merchant banks and investment banks. investment banks focus on initial public offerings (IPOs) and large public and private share offerings.
* For the set of issues. 6. The progress of the securities Industry of any country depends mainly on the flow of funds.0 INN 4.8 5. will include all high and low quality issues.2 3.3 .8 4.2 4. Capital generation is the lifeblood of the capital market without which the health and soundness of the financial system cannot be geared up and for which well-developed capital market as well as money market is essential.7 6.0 3. which are placed through a public offering.9 5. The regulations in question applied to investment or Merchant Banking Services required for corporate issues of long-term securities in India. * SEBI's objectives of improving disclosure of private information and investor protection can be achieved.2 5. will be placed through a rights offering.5 4. Reports in Merchant Banking in present trend: A report document on "Merchant Banking under SEBI guidelines – A study of Regulators in Developing Capital Markets" is the significant contribution of sarker De and sushil Kanna. This importance of the financial sector reforms affirms an effective means for solving the problems of economic.7 QPS 4.1 FSS 4.0 QM 3. * The set of issues.6. Indian economy is no exception of this.0 4.0 6. financial and social in India and elsewhere in the developing nations of the world.EMERGENCE OF MERCHANT BANKING Introduction: The Progress of any economy mainly depends on the efficient financial system of the country.Infact.2 4.3 4. which are placed through a public offering. 6. further screening can be achieved by making underwriting optional. * For the screening mechanism in the preceding recommendation to be effective. Ranking of Merchant Banking in India: Merchant Banker ICICI Securities IDBI SBI Caps DPS OE 4. the current 90% subscription rule should be strengthened. Significant recommendations of the study: * Regulation requiring all issues to be managed and certified by a Merchant Banker chould be relaxed in case of rights offerings.4.
Moreover.1 6. underwriting and bought-out deals. book building.. May 30: The Securities and Exchange Board of India (SEBI) is planning to ban merchant bankers from doing other business.7 5.'' sources said.8 Current situation SEBI to segregate merchant banking MUMBAI.2 6. SEBI officials feel that the role of merchant bankers in the new scheme of things has increased as they are involved in launching issues. The SEBI move to segregate merchant banking business from other businesses is expected to create a stir among finance companies.0 6.6 5.appointed by the SEBI to inspect the books of the CRB Mutual Fund had come out with reports indicting the actions of the fund. Merchant bankers have to vet new issue applications before submitting it to the SEBI.0 6.0 6.9 6. the market watchdog has decided to bring about major changes in merchant banking regulations. .3 6. While these companies chipped in funds when CRB scheme opened for subscription.Two panels M P Chitale & Co in 1995 and Kalyaniwala & Mistry in 1997 -.7 6.5 6.8 5.3 6.IFCI Bank of Baroda Jardine Fleming JM Finance ENAM PNB Caps 6. the understanding was that this money will be later used to rig up prices of these companies.8 6.8 6.9 5. SEBI is also looking into allegations of price rigging in several leading companies using the money raised by CRB Mutual Fund.5 5.7 5. Currently finance companies come under the purview of the Reserve Bank of India while their merchant banking activities are regulated by the SEBI. In another move. If implemented.4 6.3 6.5 6.5 6. the number of merchant bankers are also likely to come down as it will not be profitable for small finance companies to float separate merchant banking firms.8 6. ``We'll look into this allegation.8 6.'' SEBI chairman D R Mehta said.7 6. ``It was a quid pro quo arrangement.8 5.4 6. This means finance companies which are currently doing merchant banking business will have to set up new companies only for the merchant banking business. CRB Mutual Fund which collected Rs 229 crore through its Arihant Mangal scheme later used this money to rig share prices of companies in the stock market.2 6.0 5.
Issue Management Merger and Acquisition and Other advisory Services. A Wing. 4th Floor.22875191 PRIME SECURITIES LTD Debit and Equity Organisation. Senapati Bapat Marg. Primary Dealership in Government Securities.List of recently updated merchant banks in India DSP MERRILL LYNCH LTD Profile Merchant Banking. Nariman Point Mumbai 400021 Maharashtra India 022 .24981515 . 462. Address City Pincode State Country Phone No Fax No. Mafatlal Centre 10th Floor. Stco Broking and Merchant Banking Product Category : Merchant Banking Contact Details of Prime Securities Ltd Address City Pincode State Country Phone No Phoenix House . Distri-butition of Securities Product Category : Merchant Banking Contact Details of Dsp Merrill Lynch Ltd. Lower Parel Mumbai 400013 Maharashtra India 022 .66328513 022 . Stock Broking.
Mumbai 400038 Maharashtra India 022 .24970777 SICOM LTD Profile Merchant Banking Division Asso Merchant Product Category : Merchant Banking Contact Details of Sicom Ltd Address City Pincode State Country Phone No Nirmal P B No11571 Nariman Point.Fax No.22023108 TATA FINANCE MERCHANT BANKERS Profile Finance Solutions Product Category : Merchant Banking Contact Details of Tata Finance Merchant Bankers Ltd Address City Pincode State Country Phone No 15 Dubash House J N Hereda Marg Ballard Estate. 022 . Mumbai 400021 Maharashtra India 022 .22661471 .
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