Merchant Bankers can’t undertake any other businesses

Swetha Dhinesh

23 Feb, 2023

For a reasonable consideration in the form of a charge, merchant banks offer their clients the professional service of merchant banking in consideration of their financial needs. Banks known as merchant banks provide multinational firms with loan services, financial guidance, and fundraising. These banks are specialists in dealing with big businesses and industries since they have extensive experience in international trading. The country’s large business entities and multinational corporations are given money by merchant bankers, which contributes to strengthening the economy of the nation. The services offered by merchant banks are only available to large enterprises and corporate entities, not to ordinary people.

What is Merchant Banking?

The term’ merchant banking’ describes the financial and banking services offered by a merchant bank to significant businesses and high-net-worth individuals. Underwriting, issue management, fundraising, loan syndication, portfolio management, financial advising, and other services are provided by merchant banks^[1]. The general public is not served by merchant banks. They help multinational firms do cross-border business.

Merchant bankers are someone who helps in the subscription of securities. The merchant banker has many duties, including handling public offerings of securities, placing private placements of securities, stock broking, and providing international financial advising services

How Do Merchant Bankers Operate?

Merchant Bankers are examples of non-depository financial entities that operate independently of the broader population. They are not like ordinary retail and corporate banks, which allow customers to open a savings account and deposit money with the bank, as this statement implies. Instead, merchant bankers provide finance, investing, and financial advising services to wealthy individuals and private firms.

• A merchant bank is a type of financial organisation that offers a range of services, including retail banking, investment banking, and merchant banking.

• Merchant bankers frequently serve as a bridge between businesses and investors, facilitating transactions and offering financial strategy guidance.

• Moreover, merchant bankers may handle clients’ financial assets and investments in addition to lending or investing funds to businesses.

• Merchant banks also provide additional services such as processing credit and debit cards, currency exchange, and merchant services.

SEBI Regulation for Merchant Bankers to conduct business only in the securities Market

The capital markets regulator SEBI states that a merchant banker is only permitted to engage in business related to the securities market.

In the recent issue, the Securities and Exchange Board of India (SEBI) informed PNB Investment Services, a division of Punjab National Bank (PNB), informally that its views may vary from case to case. The clarification followed PNB Investment Services’ informal request for advice on whether it could act as a direct selling agent by launching a new business vertical for marketing retail products like home loans and car loans on behalf of PNB or other banks. PNB Investment Services is licenced as a merchant banker. The applicant planned to start a new business acting as a direct selling agent for PNB and other banks to canvassing retail clients for lead generation and customer conversion. Following an examination of the submissions, Sebi stated: “since referral activities for non-security related products and or services do not fall within the ambit of the activities permitted by regulation 13A (merchant banker rules) or are specifically enumerated, you are not permitted to engage in such activities.”

According to Sebi’s informal guidance made public, Regulation 13A of the Merchant Banker explicitly says that a merchant banker may only conduct business in the securities market. A merchant banker is only allowed to conduct business in the securities market, according to Regulation 13A of the Merchant Bankers Regulations. The regulation’s extract is as follows: 

• Regulation 13A. No merchant banker who has been granted a certificate of registration under these regulations, except for a Bank or a Public Financial Institution, shall [after June 30, 1998] engage in any business other than that in the securities market. 
• The SEBI circular of June 5, 1998, further clarified Regulation 13A and particularly mentioned such activities, including “advice services for projects,” “syndication of rupee term loans,” and “international financial advisory services.”
• You are not allowed to engage in such activity since referral activities for non-security-related products and services do not fit under the purview of the activities approved by regulation 13A or are specifically listed.

Advantages of Merchant Banking

Let’s examine the advantages of merchant banking.

Fundraising for clients – Both large and small businesses can raise money from the public using a variety of instruments, including the issue of shares, preferential allotments of shares, public offerings of shares and debentures, private placements of shares and debentures, and other methods.

Portfolio Administration – High-net-worth individuals and business investors might use the portfolio management services offered by merchant banking firms. These services include the choice of securities, portfolio evaluation and monitoring, portfolio rationalisation guidance, and tax preparation.

Services for Underwriting – Merchant banks offer underwriting services for rights issues, follow-on public offerings (FPOs), Initial public offerings (IPOs), and private placements. This service aids businesses in obtaining the necessary funding from the general population.

Syndicating loans – Loan syndication is the fundamental purpose of merchant banking. Through the syndicating of loans from various lenders, merchant bankers assist in securing funding for large corporate borrowers. They serve as a middleman between the lending institutions and the borrowing enterprise.

Leasing Services – Leasing services from merchant banks are offered to businesses in the form of capital goods, vehicles, and office equipment. As a result, the companies’ overall financial burden is lessened.

Services that Merchant Bankers Provide

As noted, merchant bankers in India offer a wide range of services, many of which are essential. Due to the rise of globalisation, it is now crucial for businesses to investigate merchant banking because it can help them better understand the market.

• It aids a business in managing ongoing conflict and competition. It aids in a company’s ability to decide whether a risk is worth it.
• It enables them to suggest ideas to grow their business and have a relatively low loss rate.
• When proposing a proposal, they are also in charge of carefully evaluating the clients because this is important for firms.
• They manage stock pay-outs and bond interest payments while also giving their clients management advice.

Conclusion 

Merchant banks are non-depository financial organisations that provide services to wealthy people and businesses that need help obtaining funds, managing their finances, or making investment decisions. These banks commonly offer private equity funding to clients in return for a portion of the client’s ownership interest. Businesses frequently seek the advice of a merchant bank to learn about their financing options for the deal and to make decisions on whether to merge with or purchase another company. Despite having a similar function, merchant and investment banks have different target clients and investment strategies. 

Also Read:
A Study on Merchant Banking Awareness
How to Get a Merchant Banking License in India
What is the Role and Activities of Merchant Banker in India?