https://1investing.in/ banker‘s dynamism lies in promptly attending to the corporate problems and suggests ways and means to solve it. The nature of merchant banking services is development oriented and promotional to help the industry and trade to grow and survive. Merchant banker is, therefore, dedicated to achieve this objective through his dynamism. He is always awake to renew his skills, develop expertise in new areas so as to equip himself with the knowledge and techniques to deal with emerging new problems of corporate business world.
- They also help small organisations and entrepreneurs to obtain initial funding, other business ideas and opportunities, Government policies and incentives.
- Such merchant bankers can act as advisor, consultant, underwriter and portfolio manager.
- Consequent to the recommendations of Banking Commission in1972, that Indian bank should start Merchant Banking Division in 1972.
- Merchant banks constitute highly specialized and professionally managed financial institutions, which have expertise in tendering advice to their clients.
- Merchant banks assume the duty of getting maximum benefits to its clients by guiding them to invest in various type of securities, ensuring minimal risk involvement.
Although these banks are subject to many rules and regulations framed by the SEBI as well as the Reserve Bank of India, they continue to flourish. Now with changing international conditions and consumer trends, it is upto the government to bring in reforms which protect the interests of the customers as well as provide a platform for these banking services to prosper. A merchant bank is an institute that is both fee and fund-based as it offers custodial, banking, and advisory service to its customers. On the other hand, an investment bank is just fee-based as it earns money from services offered, lease rentals, and interest. It is an institution that offers consultancy to its customers regarding financial, managerial, marketing, and legal concerns.
Regulations for Merchant Banking in India
Merchant Banking in India has enhanced the ease of doing business, because of which they have gained a considerable position in the market. Furthermore, the involvement of SEBI as a watchdog for all their activities has helped people gain confidence in merchant banks. With the dynamic international conditions, the government might bring in a few more guidelines for merchant banks that would protect customers’ interests and offer a platform for these banking services to flourish. A1) It is an institution that trades in underwriting, business loans for companies, advice on mergers & acquisitions, and international finance.
A merchant bank also provides advice on corporate matters to the firms in which they invest. Merchant bankers play a varied role in an acquisition ranging from acting as an advisor or consultant to a full-fledged issue manager. Scope of their functions is extremely wide as ‘advising’ and ‘consulting’ can involve so many activities. Oftentimes, merchant bankers identify assets/undertakings that are being offered for sale, they find potential buyers, negotiate prices and oversee the entire transaction. The managing agents acted as merchants banks and performed functions of promoting financing and marketing of securities. They developed strong roots in depth of India’s economic, commercial and industrial structure.
They cannot act as issue manager of their own but can act co-manager. Some leading banks have floated wholly owned subsidiaries for carrying out these activities. Private brokers and financial consultancy firms have also been quite active in the field of merchant banking.
SMEs are facing stiff competition from large scale companies. Mahindra/Goldman Sachs topped the heap by executing 13 deals valued at $2.53 billion . This bank was ranked No. 4 last year in the process, the investment bank has increased its share by 420 basis points from 13.1% for last year to 17.3% now. Morgan Stanley retained its No 2 position, having sewn up 11 deals worth $2.23 billion so far. M&A are also getting hit because more & more companies are opting for the global depository receipts/foreign currency convertible bonds issue to sate their capital needs.
Merchant Banking in India –
The merchant banks act as middlemen between the issuer of debt securities and individual or institutional investors and assists the companies in raising funds from the market. Merchant banks evaluate the value of the business and the number of shares or debentures is to be issued. The economic reforms initiated by the Government since July 1991 in the files of industry, trade and financial sector have paved the way for rapid development of the economy. Several projects have been conceived since then and almost all the major groups in the country that have announced their intentions to set-up mega projects in infrastructure sector envisaging investment of thousands of crores.
The term Merchant Banking has its origin in the trading methods of countries in the late eighteenth and early nineteenth century when trade-taking place was financed by bill of exchange drawn by merchanting houses. At that time the merchants were merely financing their own activities. As international trade grew and other lesserknown names wanted to import goods from abroad, the established merchants ‗lent their names’ to the newcomers by agreeing to accept bills of exchange on their behalf. One of the most important things to remember is that no organization would be able to become a merchant banker until and unless they get a certificate of registration from SEBI. Plus, he must get himself registered under these regulations if they want to persevere any of the merchant banker activities. Now comes the fourth chapter, which comprises the right of the Board to examine the merchant bankers and the actions that can be taken based on the report.
Most particularly, they took equity positions in LBOs, takeovers, or recapitalizations or provided subordinated debt in the form of bridge loans to facilitate the transaction. Commercial banks financed much of the LBO activity of the 1980s.Then, in the mid-1990s; major commercial banks began once again focusing on venture capital, where they had substantial expertise from their previous exposure to this kind of investment. Some of these recent venture-capital investments have been spectacularly successful. For example, the Internet search engine Lycos was a 1998 investment of Chase Manhattan‘s venture-capital arm. Commercial banks are permitted to report either realized or unrealized gains on their merchant-banking portfolios, as long as they are consistent in the reporting. This option makes it difficult for one to compare different entities‘ financial results and could lead to an overly liberal reporting of profits.
Registration of Merchant Bankers –
This has led to a sharp growth in the Merchant Banking business in the last 2 years. Important reason for the growth of merchant banking is due to exerting excess demand on the sources of funds forever expanding industry and trade. Corporate sector had the only alternative to avail of the capital market services for meeting their long-term financial requirements through capital issues of equity and debentures.
He has to guide the wider section of the community possessing surplus money to invest in corporate securities and other productive investment channels. He must bridge the communication gap between different sections and resolve the problem being faced in different areas concerned with the business world. While acting as a banker to an issue, a merchant banker has to disclose full details to the Securities Exchange Board of India as it is the regulator for this entity. This is the service provided by merchant banks to its clients for raising credit from banks and financial institutions. In modern usage in the United States, the term additionally has taken on a more narrow meaning, and refers to a financial institution providing capital to companies in the form of share ownership instead of loans.
Now, with increased formal merchant banking activities in india was originated in activities in all avenues, more and more merchant bankers, with their expertise, are going to be needed to facilitate their transactions. Its capitalization, including the owners funds (capital, reserves, etc.) and various-long sources of funds, e.g. institutional borrowings and market borrowings in the form of equity/debt issues. Merchant bankers take the responsibility of raising the funds from all the above external sources. They also provide tailor-made solutions to the financial problems faced by their clients, including the financial restructuring. Companies desirous of venturing into novel projects are assisted by the merchant bankers in obtaining necessary venture capital finance. In the area of fund-based activities also, merchant bankers offer their services.
These developments offer a good opportunity to merchant bankers to extend their area of operations. In UK, the term merchant banking originated from merchants in London who started financing of foreign trade through acceptance of bills. After sometimes, the merchants began to help governments of underdeveloped countries in raising long-term funds through floating of bonds in the London Money Market. Later, merchant Bankers were known as “commission agents” who handled the coastal trade on commission basis and provided finance to the owners or supplier of goods. They made investments in goods manufactured by sellers and made huge profits.
SBI Capital Markets Ltd. was the preferred choice of maximum issuers . This was followed by Enam Securities Ltd with 35 equity issues. ICICI Securities Ltd, UTI Securities Ltd and Kotak Mahindra Capital Co. SBI Capital Markets Ltd was the preferred choice of public and private banks for the management of their public issues of equity. Out of 40 public issues of equity floated by public sector banks in India during the period under review, SBI Capital Markets Ltd was the lead manager/BRLM/co-lead manager in as many as 31 equity issues.
In this topic, we will learn the concept of Merchant Banking in brief. Merchant banker also offers several services to public sector undertakings and units and their public utilities. Merchant Bankers assist their clients in fund raising by way of issue of a debenture, shares, bank loans, etc. National Grindlays Bank introduced the concept of merchant banks in India somewhere in 1967. Similarly, the State Bank of India became the first Indian Commercial Bank to set up a separate Merchant Banking Division in the year 1972.
Efiling Income Tax Returns is made easy with ClearTax platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing. A merchant account is a bank account specifically established for business purposes where companies can make and accept payments. Making arrangements of foreign currency guarantees’ and ‘performance bonds for their exporter-clients.
Merchant banks assume the duty of getting maximum benefits to its clients by guiding them to invest in various type of securities, ensuring minimal risk involvement. They play an important role in ensuring that various rules and regulations pertaining to the securities. Market are adhered to by the corporate participants of the market. A number of mediators are involved in the process of ‘share issue’, e.g. the registrar, bankers, advertising agency, underwriters, brokers, etc. Merchant bankers act as a coordinating agency ensuring their cohesive activities in a synchronized manner.
Merchant bank helps a business person to commence a business and raising finance. Furthermore, they help them to expand, modernizing, and restructuring the business. They also grant support in registering, buying, and selling shares at the stock exchange. Merchant bankers help companies in obtaining venture capital financing for financing their new and innovative strategies.
A Category-1 merchant banker can undertake issue management only. Separate registration is not necessary to carry on the activity as underwriter. ‘Hundi’ was the main instrument of credit used by indigenous bankers before the coming of western merchants in India. It was in 1813, when merchants came from European countries to trade with India. Agency houses were set up by merchant bankers based at London. The merchant banks are also different from the dealers, traders and brokers of securities.
Underwriting of Debt and Equity –
Project appraisal may be defined as the method of evaluating, through certain steps, the case for going ahead with a proposal of a project. As part of the appraisal exercise, available options are compared making use of various techniques, like economic appraisal and decision analysis. Its objective is to help the client in taking a final decision with regard to the options available with him, keeping in view the nature and level of investment in the project and subsequent implementation thereof. Arranging export credit facilities from the Export and Import Bank for the export of capital goods.