MERCHANT

BANKING
Topics for discussion
Meaning ,definition, functions and regulatory framework
 History and definition
• Merchant banking – a non-banking financial activity, resembles banking function.
• Originated in Europe, enriched By American patronage
• Word originated among Dutch and Scottish traders, developed in Britain
Definition – Merchant banking is development of banking from commerce which
frequently encountered a prolonged intermediate stage known in England originally as
merchant banking.
NOTE : STUDY- the definition given by SEBI
 MERCHANT BANKERS
A set of financial institutions that are engaged in providing specialist services, which
generally include the acceptance of bills of exchange, corporate finance, portfolio
management and other banking services are known as merchant bankers.
Functions
Merchant banking – service oriented industry
1. Corporate counselling –set of activities that is undertaken to ensure efficient
running of corporate enterprise at its maximum potential through effective
management of finance. E.g : financial rearrangements, cost analysis, assistance
for soft loans, revival prospects and planning etc.,
2. Project counselling : Relates to Corporate counselling and related to project finance.
Offering advisory assistance on the viability and procedural steps for its implementation.
E.g : TCO, approval for license, Government approval, Guidance Indian entrepreneurs for investment
Indian
projects.
3. Pre-investment studies : To evaluate alternative avenues of capital investment in terms of growth and
profit prospects. E.g. : in-depth investigation of environment and regulatory factors, location of raw
materials, demand projection etc.,
4. Capital Restructuring services : To assist in achieving their maximum potential through effective
capital restructuring. E.g. : advising companies governed by FERA, implement schemes for
amalgamations, merger or change in business status, prepare comprehensive memorandum for the
Controller of capital issues, examine tax implications etc.,
5. Credit Syndication : Connected with Credit procurement and project financing aimed at raising
Indian and foreign currency loans from banks and financial institutions. E.g : arranging bridge finance,
assist in completing formalities for drawing term finance, assessing working capital requirements.
6. Issue Management and Underwriting : Concerned with the management of public issues of
corporate securities, viz., equity shares, preference shares and debentures and bonds, aimed at
mobilization of money from capital market. E.g.: preparation of Action Plan, budget, draft prospectus,
selection of issue houses and advertising agencies, investor’s conferences etc.,
7. Portfolio management
8. Working capital finance : Finance required to meet the day-to-day expenses of an enterprise.
9. Acceptance of credit and bill discounting : It is an integral part of a developed money market. E.g.: collecting credit
Information and rating the credit worthiness of the parties concerned , involved in command a good reputation and
Financial standing of a firm.
10. Merger and acquisition : Examining the pros and cons of proposals and formulating schemes for financial re-
Construction, merger and acquisition.
11. Venture Financing : A specially designed capital, as a form of equity financing for funding high-risk and high-reward
Projects, is known as Venture capital. A number of leading national development financial institutions such as IFCI,
IDBI and ICICI are engaged in venture capital financing.
12. Lease financing : A merchant banking activity whereby financial facilities are provided to companies that undertake
Leasing is Known as Lease financing. Commercial banks also provide lease financing by forming subsidiaries under the
Amended Banking Regulations Act of 1949.
13. Foreign Currency Financing : Finance to provide fund for foreign trade transactions.
14. Brokering Fixed Deposits : Providing advice to the companies on the terms and conditions of fixed deposits, and
Deciding on the appropriate rate of interest, keeping in view the prevailing capital and money market conditions.
15. Mutual funds : Institutions and agencies that are engaged in the mobilization of savings of innumerable investors
For the purpose of channeling them into productive investments of a wide variety of corporate and other securities.
E.g.: Mopping up public savings, diversify portfolio of shares, earning investors a steady return on investment,
engage-
Ing in the business acquisition, holding or disposal of securities.
16. Relief to Sick Industries : Evolving rehabilitation packages which are acceptable to financial institutions and
banks.
17. Project Appraisal : the evaluation of industrial projects in terms of alternative variants in technology , raw
Materials, production capacity and location of plant is known as “project Appraisal”.
Steps
1. Financial appraisal : Involves assessing the feasibility of a new proposal for setting a new project or the
expansion
Of existing production facilities.
2. Technical Appraisal : Concerned with the project concept in terms of technology, design, scope and content
of
The plant, as well as inputs and infrastructure facilities envisaged for the project.
3. Economic appraisal : Deals with the impact of the project on economic aggregates, first deals with the effect
of the
Project on employment and foreign exchange, and secondly with the impact of the project on net social
benefits or
Welfare.