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Merchant Banking is a professional financial service provided by a merchant banker to its customers depending upon their financial needs. Merchant banks are financial and capital intermediaries which provide fundraising, financial advising, and loan services and assist in the subscription of securities to large corporations. They provide advisory services to their investors right from the stage of the conception of an idea of the point when the project goes on-stream. Raising finance for its client is the primary function performed by merchant bankers. They also help the client in financing transactions through underwriting or some type of syndicated loan arrangement and in promoting and marketing the issue.
Merchant banks are different from regular banks. They do not provide regular cheque service, nor do they take deposits. They do not provide retail or commercial banking operations to individuals. However, they are more inclined towards corporate investors having national as well as international presence. The present article discusses Merchant Banking Awareness.
Table of Contents
The origin of Merchant Bankers can be traced bad back to the 11th Century in Italy. Back then, its primary function was to provide finance for the production of crops, as farming was a prominent form of trade. Up till the 18th Century Merchant Banking services were not organized and were mainly provided by certain families. Over the span of time, it spread to countries. By the 17th Century, it reached large trading countries such as U.K., Germany, and Netherlands. In the 17th Century, Britain’s first merchant bank named Barings was established. By the end of the 18th Century, Barings Bank entered into a strategic alliance with another merchant bank Hope & Co. to undertake cross-border transactions.
In India, a similar concept called “hundi” existed. It was used to provide credit by indigenous bankers. In the 18th Century, when merchants from Europe travelled to India for trade, agency houses of merchant bankers in London were set up. During the British Era, foreign merchant bankers operated through the East India Company. It was in 1967 when the first Merchant Bank named National Grindlay’s Bank was established in India. Post this a number of commercial banks set up their merchant banking division.
The functions of merchant bankers are –
The study on merchant banking awareness also includes the categorization of merchant bankers –
In India, the Securities Exchange Board of India (SEBI) regulates the activities of Merchant Bankers. To be a Merchant Banker, an application has to be made for the grant of a certificate of registration to the Securities Exchange Board of India under Regulation 3 of SEBI (MB) Regulations, 1992. The application has to be made for one of the following categories of merchant banker prescribed under the regulation:
To carry on any activity of the issue management consisting of the preparation of prospectus and other information relating to the issue, determining financial structure, tie up of financiers and final allotment and refund of the subscriptions; and to provide services of an advisor, consultant, manager, underwriter, and portfolio manager;
To provide services related only to an adviser, consultant, co-manager, underwriter and portfolio manager;
To provide services related only to an underwriter, adviser, or consultant to an issue;
To provide services related only to an adviser or consultant to an issue;
Regulation 7 of the SEBI (MB) Regulation, 1997 provides for the requirement of capital adequacy. This regulation was amended by the Securities Exchange Board of India (Merchant Bankers) (Third Amendment) Regulations, 2006, to make capital adequacy requirement to “net-worth of not less than five crores” to be a merchant banker.
Prior to the amendment, the capital requirement for every category of merchant banker was as follows:
For Category I – Rs. 5, 00, 00, 000;
For Category II – Rs. 50 00, 000;
For Category III – Rs. 20, 00 000; and
For Category IV – Nil.
Awareness of Merchant Banking is necessary as every business, at some point in time, requires finance. Merchant Bankers have made the work of raising funds easier for corporate entities. They are professionals dedicated to raise funds and to meet the financial needs of corporate entities. They know exactly in which asset the investment should be made, and they also know how to raise the required amount of finance by mitigating the risk of loss. Their services are beneficial for companies. Further, the industrial market is on a boom in India. This has increased the need for Merchant Bankers in India.
Read our Article: How to Get a Merchant Banking License in India
Ankita is an Advocate and has joined Enterslice as a Legal Researcher. Her work focuses on General Civil and Commercial laws, Corporate Taxation Laws, Labour and Employment Laws and Dispute Resolution. She is a law graduate from School of Law, University of Petroleum and Energy Studies. Prior to joining Enterslice, Ankita has the experience of practicing law in Delhi and Odisha.
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