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Merchant banking which is synonymous with financial services has been identified in

India with just issue management in academic and popular parlance. Actually it includes
the entire range of financial services. The services provided by a merchant banking outfit,
however are subject to their inclination and resources, technical and financial.

In banking, a merchant bank is a financial institution primarily engaged in offering


financial services and advice to corporations and to wealthy individuals. The chief
distinction between an investment bank and a merchant bank is that a merchant bank
invests the banks 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.

Who are merchant bankers ?

Their primary sources of income are PIPE (Private Investment In Public Entities )
financings and international trade.

-Their secondary income sources are consulting, Mergers & Acquisitions help and
financial market speculation.

-Because they do not invest against collateral, they take far greater risks than traditional
banks.

-Because they are private, do not take money from the public and are international in
scope, they are not regulated.

-Anyone considering dealing with any merchant bank should investigate the bank and its
managers before seeking their help.

-The reason that businesses should develop a working relationship with a merchant bank
is that they have more money than venture capitalists. Their advice tends to be more
pragmatic than venture capitalists.

Banking commission report, 1972

The banking commission in its report in1972 has indicated the necessity of merchant
banking service in view of the wide industrial base of the Indian economy. The
commission was in favor of a separate institution (distinct from commercial banks and
term lending institutions) to render merchant banking services. The commission
suggested that they should offer investment management and advisory services
particularly to the medium and small savers. The commission also suggested that they
should be able to manage PF, pension funds and trusts of various types.
Merchant banking in India:

1) Merchant banking activity was formally initiated into the Indian capital markets
when Grind lays bank received the license from reserve bank in1967. grind lays
which started with management of capital issues, recognized the needs of an
emerging class of entrepreneurs for diverse financial services ranging from
production planning and systems design to market research. Apart from meeting
specially, the needs of small scale units, it provided management consultancy
services to large and medium sized companies.

2) Following grind lays bank, Citibank set up its merchant banking division in 1970.
The division took up the task of assisting new entrepreneurs and existing units in
the evaluation of new projects and raising funds thro borrowing and equity issues.
Management consultancy services were also offered.

3) Merchant bankers are permitted to carry on activities of primary dealers in govt


securities.

4) Consequent to the recommendations of banking commission in 1972, that Indian


banks should offer merchant banking services as part of the multiple services they
could provide their clients.

5) SBI started the merchant banking division in1972. In the Initial years the SBI
objective was to render corporate advice and assistance to small and medium
entrepreneurs.

6) The commercial banks that followed SBI were Central bank of India, Bank of
India and syndicate bank in 1977,BOB, std chartered bank and mercantile bank in
1978,UBI, PNB,canara bank andIOB in late 70s and early 80s. Among the dvt
banks, ICICI started merchant banking activities in 1973, followed by IFCI
(1986) and IDBI(1991)

Regulation

MB activities are reguklated by 1) guidelines of SEBI and ministry of finance 2)


companies act, 1956 and 3) listing guidelines of stock exchanges and 4) securities
contracts ( regulation) act,1956

Some of the functions of Merchant Bankers :

1. Consulting advice on going public and international business.


2. They do PIPE (Private Investment in Public Equities) financings.
3. They can advise or help with a company’s M&A strategy.
4. They are essential advisors for companies seeking to become multinational
corporations.
5. They off pragmatic general business advice for real world.