What is Merchant Banking - Services, Features, Functions and Example (2024)

What is Merchant Banking?

Merchant banking is a set of select banking and financial services offered by merchant banks to large corporations, institutional investors, and high net worth individuals (HNIs). Some of the most common merchant banking services include, fundraising, financial advisory, lending, underwriting, corporate portfolio management, international trade advisory, mergers and acquisitions, and asset sale and management advisory.

Typically, merchant banks avoid retail banking and depository services, which means their services are mostly limited to large companies, and multinational businesses.

Example of Merchant Banking

Say, Company A wants to raise funds worth ₹10,000 Crore from the market and decides to issue debentures and preference shares worth the same amount. Now, they hire Merchant Bank Z to oversee the issue and sale of shares.

Merchant Bank Z will use its expertise to create a detailed action plan and budget for the entire exercise. They will also hire and coordinate with equity underwriters, who will use their own distribution networks to sell the debentures and preference shares of Company A to investors.

As part of the action plan, Merchant Bank Z may also hire advertising and marketing agencies to drum up support and publicity before and after the issue of shares.

In addition, this merchant bank will obtain regulatory clearances from the relevant authorities and handle the associated paperwork.

Trivia Corner

Did you know that the functions and operations of a merchant bank in India are regulated by SEBI? And that the capital adequacy mandated for a merchant bank is ₹5 Crore?

Functions of Merchant Banking

The primary functions of merchant banking are as follows:

1. Portfolio Management

Merchant banks offer portfolio management and advisory services to help investors make better decisions. Furthermore, merchant banks can even make trading and investing decisions on behalf of their clients.

2. Raise Capital

Merchant banks help their clients raise funds from the domestic and international markets by issuing securities, such as debentures, preference shares, equities, and bonds.

3. Promotional Activities

These act as financial intermediaries for promoting new enterprises in their initial phases and getting approval from the government.

4. Loan Syndication

Merchant banks can help and guide their clients on raising capital from banks and financial institutions via the loan route.

5. Leasing Services

Merchant banks extend leasing services wherein the clients lease assets and equipment to generate rental income.

6. Equity Underwriting

Merchant banks offer equity underwriting as a premium service. These banks assess the levels of price and risk involved in a particular asset and initiate public issues and distribution of stocks.

7. Issue Management

Merchant banks help clients issue equity shares, preference shares, debentures, and other types of securities to the general public.

Services Offered by Merchant Banks

1. Marketing and underwriting of new issues
2. Merger and acquisitions
3. Corporate finance management and advisory
4. Project financing and management
5. Management of customer security
6. Portfolio services
7. Investment banking
8. Trade finance and advisory
9. Venture capital fundraising and advisory
10. Management of assets

Features of Merchant Banks

1. Merchant banks are non-depository banks that generally do not cater to the banking and finance needs of the general public.
2. Merchant banking is a select set of professional services available to large corporations, HNIs, institutional investors, and venture capitalists, among others.
3. These banks usually make money through commissions and consultation charges.
4. However, the profit distribution of these banks generally tends to be poor.
5. These banks tend to be cash-rich.
6. Merchant banks are known for their premium services, speed of decision-making, and customer-centricity.
7. Merchant banks have a strong network, a large team of financial experts, and generally sit on a huge pile of data.
8. These banks can even advise their customers on matters of international trade, and overseas acquisitions or mergers.

Differences Between Merchant Banking and Investment Banking

Final Word

Merchant banks are non-depository financial institutions that offer services to wealthy individuals and enterprises that require capital raising, financial advisory, or assistance with international trade. Currently, there are 135 SEBI-registered merchant banks in India, who are working relentlessly to meet the financing and banking needs of their customers.

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Disclaimer

This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.