MERCHANT

BANKING
Definition
Merchant banking can be defined as a
skill-oriented professional service
provided by merchant banks to their
clients, concerning their financial
needs, for adequate consideration, in
the form of fee
Functions of Merchant Banking
Organization
 Portfolio Management: Merchant banks provides advisory services to
the institutional investors, on account of investment decisions. They trade
in securities, on behalf of the clients, with the aim of providing them
portfolio management services.

 Raising funds for clients: Merchant banking organization assist the

clients in raising funds from the domestic and international market, by
issuing securities like shares, debentures, etc., which can be deployed for
starting a new project or business or expansion activities.

 Promotional Activities: One of the most important activities of

merchant banking is the promotion of business enterprise, during its initial
stage, right from conceiving the idea to obtaining government approval.
There is some organization, which even provide financial and technical
assistance to the business enterprise.
 .
 Loan Syndication: Loan Syndication means service provided
by the merchant bankers, in raising credit from banks and
financial institutions, to finance the project cost or working
capital of the client’s project, also termed as project finance
service.
 Leasing Services: Merchant Banking organizations renders
leasing services to their customers. There are some banks
which maintain venture capital funds to help entrepreneurs.
 Advantages of Merchant Banking

 1.You will receive honest project feedback.

Merchant banks will work with your company to develop an idea for a
project or review the project profile you’ve already created.You’ll be able to
determine an estimated cost for the project, look for financing solutions, and
begin to create the action steps that are needed to get the project off the
ground. Some merchant banks will even provide help in obtaining government
consent to get the project started

 2.You receive portfolio management.

Services are offered by merchant banks to investors and companies which
issue securities. Most clients of a merchant bank are institutional investors,
looking to create a secure portfolio that will help to build their wealth over
time.. Merchant banks will also buy and sell securities for their clients. Some
even manage off-share funds and mutual funds too.
 3.You are able to protect your IP.
 When you work with a merchant bank, you’re working with a
partner that creates success for themselves by helping you to be
successful.. Any information you supply during the merchant
banking process is kept confidential.

 4.You can have currency exchanges managed for your

company.
 Merchant banks provide funds by issuing a letter of credit. If you’re
looking to expand internationally, then the letter of credit would be
received by the sellers as payment for the purchase you are making.
Then you’ll walk through the legal issues required to conduct
business in the new market. A merchant bank will also help you to
manage currency exchanges as funds are transferred out of
international markets
Disadvantages of Merchant
Banking
 1.Your account will be more expensive than a
traditional bank account.
 Merchant banks tend to charge higher fees for their services
compared to traditional banking services and products. You may
be required to have a minimum net worth to work with the
bank, have a specific portfolio already developed, or have a
strong credit profile with a history of project development to
qualify for the bank’s services.
 2.You have no control over your interest rates or
returns.
 This issue may be the biggest disadvantage of working with a
merchant bank. Most will not provide a guaranteed return if you
have them managing your investment portfolio.. If your company
is seen as high-risk, even if it turns out to be a low-risk venture,
you’re going to pay more for the services received.
 3.You will always have the risk of a mixed chance for
success.
 Merchant banks might decide to work with you on a financing package,
but that is only one step toward eventual success. Merchant banks are
like all other banks – they like to invest when they know there is a
good chance for a return.
 4.You may have added reporting requirements to meet.
 A merchant bank will help you make sure that you’re aware of your
regulatory requirements. What they will not do is create the reports
for you. When you begin working with a merchant bank, there may be
a need for added disclosure to any stakeholders that are associated
with your business.
Services provided by merchant
banks
1. Issue management
2. Portfolio management
3. Leasing services
4. Corporate counseling
5.Corporate restructuring
6. Loan syndication
7.Underwriting services
8. Providing assistance for technical and financial
collaborations
9. Investment transactions
10. Corporate advisory services
Characteristics of Merchant
Banking
 The high proportion of decision makers as a percentage of
total staff.
 Quick decision process.
 The high density of information.
 Intense contact with the environment.
 Loose organizational structure.
 A concentration of short and medium term engagements.
 Emphasis on fee and commission income.
 Innovative instead of repetitive operations.
 Sophisticated services on a national and international level.
 The low rate of profit distribution.
 High liquidity ratio