Merchant Banking

By Singh & Associates

Merchant banking implies investment management. Companies raise capital by issuing

securities in the market. Merchant bankers act as intermediaries between the issuers of capital
and the investors who purchase these securities.

Merchant banking is the financial intermediation that matches the entities that need capital
and those that have capital for investment.

Services of merchant bankers

The services provided by merchant bankers includes management of mutual funds, public
issues, trusts, securities and international funds. It involves dealing with the corporate clients
and advising them on various issues like- mergers, acquisitions, public issues, etc.

Functions of merchant bankers include:

i) Management of debt and equity offerings. This forms the main function of the merchant
banker. He assists the companies in raising funds from the market. The undergoing tasks
include instrument designing, pricing the issue, registration of the offer document,
underwriting support, marketing of the issue, allotment and refund and listing on stock
exchanges.

ii) Placement and Distribution. The merchant banker helps in distributing various securities
like equity shares, debt instruments, mutual funds, insurance products, and commercial
paper, to name a few. The distribution network of the merchant banker can be classified
as institutional and retail in nature. The institutional network consists of mutual funds,
foreign institutional investors, private equity funds pension funds, financial institutions,
etc.

iii) Corporate advisory services. Merchant bankers offer customized solutions to their clients’
financial problems. Financial structuring includes determining the right debt-equity ratio
and the framing of appropriate capital structure theory.

iv) Project advisory services. Merchant bankers help their clients in various stages of the
project undertaken by the clients. They assist them in conceptualizing the project idea in
the initial stage. Once the idea is formed, they conduct feasibility studies to examine the
viability of the proposed project.

v) Loan Syndication. Merchant bankers arrange to tie up loans for their clients. This takes
place in a series of steps. Firstly, they analyze the pattern of the client’s cash flows, based
on which the terms of the borrowings can be defined. Then the merchant banker prepares
a detailed loan memorandum, which is circulated to various banks and financial
institutions and they are invited to participate in the syndicate. The banks then negotiate
the terms of lending on the basis of which the final allocation is done.

vi) Providing venture capital financing. Merchant bankers help companies in obtaining
venture capital financing for financing their new and innovative strategies.
Regulatory framework The merchant banking activity in India is governed by SEBI
(Merchant Bankers) Regulations, 1992. Registration with SEBI is mandatory to carry out the
business of merchant banking in India. An applicant should comply with the following
norms:
i) The applicant should be a corporate body.
ii) The applicant should not carry on any business other than those connected with the
securities market.
iii) The applicant should have necessary infrastructure like office space, equipment,
manpower, etc.
iv) The applicant must have at least two employees with prior experience in merchant
banking.
v) Any associate company, group company, subsidiary or interconnected company of the
applicant should not have been a registered merchant banker.
vi) The applicant should not have been involved in any securities scam or proved guilt for
any offence.
vii) The applicant should have a minimum net worth Rs50 million.

Scope of merchant banking in India: Merchant banking activities help in channelizing the
financial surplus of the general public into productive investment avenues. They help to
coordinate the activities of various intermediaries to the share issue such as the registrar,
bankers, advertising agency, printers, underwriters, brokers, etc. and to ensure the compliance
with rules and regulations governing the securities market. This being the era where mergers
and acquisitions are hot, the scope of merchant banking has grown to a large extent.