Merchant Banking Merchant banking may be defined as, “an institution which covers a wide range of activities such as management of customer services, portfolio management, credit syndication, acceptance credit, counselling, insurance, etc. ” Merchant Banks are popularly known as “issuing and accepting houses”. They offer a package of financial services. Unlike in the past, their activities are now primarily non-fund based. One of the basic requirements of merchant banks is highly professional staff with skills and worldwide contacts.
The basic function of merchant banks is marketing corporate and other securities, that is guaranteeing sales and distribution of securities. All the aspects- origination, underwriting and distribution of the sale of industrial securities are handled by them. They are experts and good judges of the type, timing and terms of issues and make them acceptable to investors under prevailing preferences and market conditions, and at the same time afford the borrowing company, flexibility and freedom that it needs to meet possible future contingencies.
They guarantee the success of issues by underwriting them. They also provide all the services related to receiving applications, allotment, collecting money, sending share certificates and so on. The merchant banker normally does not assume all the risk himself while underwriting the issue. Merchant banks offer services also to investors. The range of activities offered by merchant banks is much wider than sponsoring public issues of industrial securities. They offer project finance, syndication of credit, corporate advisory services, mutual fund investments, investment management etc.
Services of Merchant Banks • Project Counselling: Project counselling includes preparation of project reports, deciding upon the financing pattern to finance the cost of the project and appraising the project report with the financial institutions or banks. It also includes filling up of application forms with relevant information for obtaining funds from financial institutions and obtaining government approval. • Issue Management: Management of issue involves marketing of corporate securities viz. equity shares, preference shares and debentures or bonds by offering them to public.
Merchant banks act as an intermediary whose main job is to transfer capital from those who own it to those who need it. After taking action as per SEBI guidelines, the merchant banker arranges a meeting with company representatives and advertising agents to finalise arrangements relating to date of opening and closing of issue, registration of prospectus, launching publicity campaign and fixing date of board meeting to approve and sign prospectus and pass the necessary resolutions. Pricing of issues is done by the companies in consultant with the merchant bankers. • Underwriting of Public Issue:
Underwriting is a guarantee given by the underwriter that in the event of under subscription, the amount underwritten would be subscribed by him. Banks/Merchant banking subsidiaries cannot underwrite more than 15% of any issue. • Managers, Consultants or Advisers to the Issue: The managers to the issue assist in the drafting of prospectus, application forms and completion of formalities under the Companies Act, appointment of Registrar for dealing with share applications and transfer and listing of shares of the company on the stock exchange. Companies can appoint one or more agencies as managers to the issue. Portfolio Management: Portfolio refers to investment in different kinds of securities such as shares, debentures or bonds issued by different companies and government securities. Portfolio management refers to maintaining proper combinations of securities in a manner that they give maximum return with minimum risk. • Advisory Service Relating to Mergers and Takeovers: A merger is a combination of two companies into a single company where one survives and other loses its corporate existence. A takeover is the purchase by one company acquiring controlling interest in the share capital of another existing company.
Merchant bankers are the middlemen in setting negotiation between the two companies. • Off Shore Finance: The merchant bankers help their clients in the following areas involving foreign currency. (a) Long term foreign currency loans (b) Joint Ventures abroad (c) Financing exports and imports (d) Foreign collaboration arrangements • Non-resident Investment: The services of merchant banker includes investment advisory services to NRI in terms of identification of investment opportunities, selection of securities, investment management, and operational services like purchase and sale of securities. • Loan Syndication:
Loan syndication refers to assistance rendered by merchant bankers to get mainly term loans for projects. Such loans may be obtained from a single development finance institution or a syndicate or consortium. Merchant bankers help corporate clients to raise syndicated loans from banks or financial institutions. • Corporate Counselling: Corporate counselling covers the entire field of merchant banking activities viz. project counselling, capital restructuring, public issue management, loan syndication, working capital, fixed deposit, lease financing acceptance credit, etc. bibliography a manual on merchant banking by JC Verma