What is the Role and Activities of Merchant Banker in India?

Shreya Patel

07 Jul, 2023

Introduction 

In the beginning, merchant banking-a phrase that dates back to the UK of the 19th century-supported trade and commerce by offering loans for imports and exports. In the early 1900s, European institutions like HSBC and Standard Chartered pushed the expansion of this practice to India. As time went on, merchant bankers in India added new services to their repertoire, such as handling initial public offerings (IPOs) and providing financial guidance. The first merchant bank to be established in India was National Grindlays Bank, followed by Citibank, ICICI Bank, and SBI Capital Markets. The Merchant Bankers Regulation (MBR) was established by the Securities and Exchange Board of India (SEBI) in 1992 to control merchant banking operations. In light of the requirement that merchant bankers adhere to the MBR and register with SEBI, there are currently more than 500 registered merchant bankers in India. With India’s economic expansion, companies have come to rely more and more on merchant bankers for financial services, and they have also helped the country’s capital markets thrive.

What do you mean by a Merchant Banker?

Fundamentally, merchant bankers are financial institutions. The main activities of merchant bankers are business loans as well as underwriting. They primarily offer their services to large enterprises and individuals of high net worth. While acting as a banker to an issue, a merchant banker has to disclose full details to the Securities Exchange Board of India (SEBI)¹ as it is the regulator for this entity. They do not undertake the activities of depositories or retail lender institutions. Merchant bankers are basically intermediaries.

Role of Merchant Banker

In India, a merchant banker’s duties can be divided into the following main categories:

• Underwriting: Merchant bankers are essential to the process of underwriting new securities issues. In order to guarantee that there is a market for the securities and provide investors confidence, this involves a commitment to buy any unsold securities from the issuer.
• Issue Management: Merchant bankers are in charge of overseeing every step of the issuance of new securities. This encompasses duties including creating the prospectus, selecting the type of securities to be issued, establishing the price, and managing the marketing and sale of the securities to investors, among other things.
• Advisory Services: Merchant bankers offer helpful advice to companies on a range of financial issues. This involves giving advice on company restructuring, mergers and acquisitions, and strategic planning. They assess possible buyers or sellers, determine the financial sustainability of firms, and negotiate the terms of agreements.
• Portfolio Management: Merchant bankers also look after the portfolios of high-net-worth clients and companies. In order to maintain a balanced portfolio involves identifying suitable property, keeping an eye on investment performance, and making the required modifications.

Activities of Merchant Bankers

1. Raising finance: Merchant Bankers (MB) assist their clients in fundraising by way of issue of a debenture, shares, bank loans, etc.
2. Promotional activities: In India, the Activities of Merchant bankers play a very vital role as promoters of industrial enterprises. They assist entrepreneurs in the matter of conceiving ideas, identifying projects, preparation of feasibility reports, getting Government approvals as well as incentives, etc.
3. Brokers in stock exchanges: Merchant bankers also buy and sell shares in the stock exchange on behalf of their clients. They also additionally conduct research on equity shares.
4. Project management: Merchant bankers offer their service to clients in several ways in the process of project management also.

Advise On Modernization and Expansion

Further, Merchant bankers also advise on amalgamations, mergers, acquisitions, takeovers, foreign collaborations, diversification of business, technology up-gradation, joint-ventures, etc., to their clients.

Managing the ensuing public issue of the client is also an essential service offered by Merchant Bankers. In fact, it is a prime function of Merchant Bankers.

They offer the following services for the above-mentioned purpose:

• The timing of the public issue to be fixed
• Determining the size of the public issue
• The price of the share to be issued
• Acting in the capacity of manager to the issue
• Helping in receiving applications as well as allotment of securities
• Appointment of brokers as well as underwriters for the issue
• Lastly, listing of the shares on the relevant stock exchange for the trading purpose

Credit Syndication

A merchant banker offers some specialized assistance in the phases of preparation of a project, the loan applications required for the raising of short-term and long-term credit from various banks and financial institutions, etc. 

Handling Government Consent for Industrial Projects

A merchant banker fulfils all formalities for his client to obtain government permission to expand and modernize businesses and start new businesses.

Special Assistance to Entrepreneurs and Small Companies

Merchant banker councils and explains the people in business and small companies on availability and avenues of business opportunities, concessions, incentives, and government policies and helps them to take advantage of this.

Services to PSU’s

Merchant banker also offers several services to public sector undertakings and units and their public utilities.

The Revival of Sick Units

A merchant bank assists in reviving sick industrial units also. They negotiate with several agencies such as banks, long-term lending institutions, and the Board for Industrial and Financial Reconstruction (BIFR).

Portfolio Management of Sick Units

Merchant bankers help in offering revival services to companies issuing the securities.

Conclusion

In the Indian financial system, merchant bankers are crucial since they carry out a variety of tasks that help to expedite capital market transactions and offer business advising services. Regulatory compliance, capital market services, business advisory services, and project finance are all part of their duties. Merchant bankers protect investor interests and uphold financial transaction transparency by ensuring compliance with SEBI regulations and other pertinent legislation. Merchant bankers must have comprehensive knowledge of and experience in the financial markets. They must have a thorough awareness of the numerous financial products and services that are available, as well as the regulatory structure that oversees the sector. Furthermore, it is critical that they be able to build and maintain excellent connections with customers and other stakeholders. Due to the Indian financial market’s ongoing growth and evolution, merchant bankers are becoming more and more important. Merchant bankers are required to provide a broader range of services in order to successfully fulfill the demands of businesses and investors, given the changing market conditions.

FAQ

Read our article: Registration of Merchant Banker – An overview

1. https://www.sebi.gov.in/