Introduction

A Merchant Banker is a financial institution or individual that provides a wide range of services such as
corporate finance, advisory, underwriting, and securities trading to corporations, governments, and other
entities. They play a crucial role in facilitating capital formation and investment opportunities in the financial
markets.

Here are some key functions and services typically provided by merchant bankers:

 Corporate Finance Advisory: Merchant bankers advise companies on various financial matters such
as mergers and acquisitions, capital restructuring, divestitures, and raising capital through debt or
equity issuances.

 Underwriting: They underwrite securities offerings, meaning they commit to purchasing a certain
number of securities (stocks, bonds, etc.) from a company and then resell them to investors. This helps
companies raise capital by guaranteeing a certain level of funds.

 Securities Trading: Merchant bankers engage in buying and selling securities on behalf of their clients
or for their own account. They may trade in various financial instruments including stocks, bonds,
derivatives, and commodities.

 Risk Management: They assist clients in managing financial risks through hedging strategies,
derivatives trading, and other risk mitigation techniques.

 Research and Analysis: Merchant bankers conduct research and analysis on financial markets,
industries, and companies to provide insights and recommendations to their clients.

 Project Financing: They arrange financing for large-scale projects such as infrastructure development,
real estate ventures, and industrial projects by sourcing funds from banks, institutional investors, and
capital markets.

 Venture Capital and Private Equity: Some merchant bankers also engage in venture capital and
private equity investments, providing funding to startups and emerging companies in exchange for
equity ownership.

 Capital Raising: Merchant bankers assist companies in raising capital through various channels, such
as public offerings (Initial Public Offerings or IPOs, Follow-on Public Offerings or FPOs), private
placements, debt issuances, and alternative financing methods like venture capital or private equity
investments. They help determine the appropriate funding sources, structure transactions, and facilitate
negotiations with investors.

Meaning of FPO
FPO (Follow on Public Offer) is a process by which a company, which is already listed on an
exchange, issues new shares to the investors or the existing shareholders, usually the promoters. FPO is
used by companies to diversify their equity base.

 Risk Management: Merchant bankers provide risk management solutions to clients, helping them
identify, assess, and mitigate financial risks associated with their business operations. This may involve
offering hedging strategies, derivatives trading, and other risk management tools to protect against
market volatility, interest rate fluctuations, currency risks, and other uncertainties.
  Market Research and Analysis: Merchant bankers conduct in-depth research and analysis on
financial markets, industry trends, regulatory developments, and macroeconomic factors. They provide
valuable insights and recommendations to clients, helping them make informed decisions regarding
investments, financing strategies, and risk management.

 Deal Structuring and Negotiation: Merchant bankers play a crucial role in structuring financial
transactions and negotiating terms and conditions on behalf of their clients. They leverage their
expertise in finance, law, and negotiation to craft optimal deal structures that align with the objectives
and preferences of all parties involved.

 Relationship Management: Merchant bankers cultivate strong relationships with clients, investors,
regulators, and other stakeholders in the financial industry. They act as trusted advisors, providing
ongoing support and guidance to clients throughout the lifecycle of their businesses and transactions.

COST OF A MERCHANT BANKER

The cost of engaging a merchant banker can vary significantly depending on several factors, including the scope
and complexity of the services required, the reputation and expertise of the merchant banker or firm, and
prevailing market conditions. Here are some common ways in which merchant bankers may charge for their
services:

 Advisory Fees: Merchant bankers typically charge advisory fees for providing strategic advice,
financial analysis, and transaction structuring services. These fees may be based on a fixed retainer,
hourly rates, or a percentage of the transaction value. The percentage-based fee can range from 1% to
5% or more of the transaction size, depending on the complexity and size of the deal.

 Underwriting Fees: When acting as underwriters for securities offerings, merchant bankers earn
underwriting fees, which are typically calculated as a percentage of the total offering size. The
underwriting fee may vary depending on factors such as the type of securities being issued, market
conditions, and the level of risk involved.

 Success Fees: In addition to advisory and underwriting fees, merchant bankers may also receive
success fees or transaction bonuses upon the successful completion of a deal. These fees are often
contingent upon achieving certain milestones or performance targets and can represent a significant
portion of the overall compensation.

 Placement Fees: For private placements of securities, merchant bankers may charge placement fees
based on the amount of capital raised or a percentage of the funds secured from investors. Placement
fees can vary depending on the level of investor interest, the difficulty of raising capital, and the
negotiation skills of the merchant banker.

 Retainer Fees: Some merchant bankers may require clients to pay a retainer fee upfront to secure their
services and cover initial expenses associated with conducting due diligence, market research, and
other preparatory work. The retainer fee may be credited toward future advisory or transaction fees
upon the successful completion of the engagement.

 Ancillary Costs: Clients should also consider additional costs and expenses associated with engaging a
merchant banker, such as legal fees, due diligence expenses, regulatory filing fees, and other
transaction-related costs. These costs can vary depending on the nature of the transaction and any
regulatory requirements applicable to the deal.
It is important for clients to carefully review and negotiate the fee structure with their merchant banker
to ensure transparency, fairness, and alignment of interests. Clients should also consider the value-
added services, expertise, and track record of the merchant banker in assessing the overall cost-
effectiveness of engaging their services.