Merchant Banking

MERCHANT BANKING HISTORY

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n late 17th and early 18th century Europe, the largestcompanies of the
world were merchant adventurers.Supported by wealthy groups of
people and a network of overseas trading posts, the collected
large amounts of money to finance trade across parts of the world.
For example, The East
I
ndia Trading Company secured aRoyal Warrant from England,
providing the firm withofficial rights to lucrative trading activities
in
I
ndia. Thiscompany was the forerunner in developing the crown jewel
of the English Empire. The English colony wasstarted by what we
would today call merchant bankers,because of the firm's
involvement in financing,negotiating, and implementing trade
transactions

MERCHANT BANKING HISTORY

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The colonies of other European countries were started in the
samemanner. For example, the Dutch merchant adventurers
were active inwhat is now
I
ndonesia; the French and Portuguese acted similarly in
their respective colonies. The American colonies also represent
the product of merchant banking, as evidenced by the activities
of the famous HudsonBay Company. One does not typically
look at these countries' economicdevelopment as having been
fueled by merchant bank adventurers.However, the colonies
and their progress stem from the business of merchant banks,
according to today's accepted sense of the word.
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The colonies of other European countries were started in the
samemanner. For example, the Dutch merchant adventurers
were active inwhat is now
I
ndonesia; the French and Portuguese acted similarly in
their respective colonies. The American colonies also represent
the product of merchant banking, as evidenced by the activities
of the famous HudsonBay Company. One does not typically
look at these countries' economicdevelopment as having been
fueled by merchant bank adventurers.However, the colonies
and their progress stem from the business of merchant banks,
according to today's accepted sense of the word.

THE HISTORICAL MERCHANTBANK

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Merchant Banking, as the term has evolved in Europe from the
18thcentury to today, pertained to an individual or a banking
housewhose primary function was to facilitate the business
processbetween a product and the financial requirements for
itsdevelopment. Merchant banking services span from the
earliestnegotiations from a transaction to its
actual consummation betweenbuyer and seller.
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in particular, the merchant banker acted as a capital sources
whoseprimary activity was directed towards a commodity
trader/cargoowner who was involved in the buying, selling, and
shipping of goods. The role of the merchant banker, who had
the expertise tounderstand a particular transaction, was to
arrange the necessarycapital and ensure that the transaction
would ultimately produce"collectable" profits. Often, the
merchant banker also becameinvolved in the actual
negotiations between a buyer and seller in atransaction

Definition of Merchant Banking

The Notification of the Ministry of Finance defines merchant banker
as;
“Any person who is engaged in the business of issue management
either by making arrangements regarding selling, buying or
subscribing to securities as manager-consultant, adviser or
rendering corporate advisory services in relation to such issue
management”
The Amendment Regulation specifies that issue management
consist of prospectus and other information relating to
 issue, determining financial structure, tie-up of financiers and final
allotment and refund of the subscriptions, underwriting
and portfolio management services.
In the words of Skully “A Merchant Bank could be best defined as a
financial institution conducting money market activities and lending,
underwriting and financial advice, and investment services whose
organization is characterized by a high proportion of professional staff
able to able to approach problems in an innovative manner and to make
and implement decisions rapidly.”

Nature of Merchant Banking

Merchant banking is skill based activities and involves serving
every financial need of every client. It requires focused skill-base to
provide for the requirements of the client. SEBI has made the
quality of man-power as one of the criteria for registration as
merchant banker. These skills should not be concentrated in issue
management and underwriting alone, which may have an adverse
Characteristics of Merchant Banking
 High proportion of decision makers as a percentage of total staff.
 Quick decision process.
 High density of information.
 Intense contact with the environment.
 Loose organizational structure.
 Concentration of short and medium term engagements.
 Emphasis on fee and commission income.
 Innovative instead of repetitive operations.
 Sophisticated services on a national and international level.
 Low rate of profit distribution.
 High liquidity ratio.

Qualities of a Merchant Banker

 Ability to analyse
 Abundant knowledge
 Ability to built up relationship
 Innovative approach
 Integrity

Merchant Banking in India

Merchant banking activity was formally initiated into the Indian capital markets when Grind lays
bank received the license from Reserve Bank in 1967. Grind lays started with management of
capital issues, recognized the needs of emerging class of entrepreneurs for diverse financial
services ranging from production planning and system design to market research. Even it
provides management consulting services to meet the requirements of small and medium sector
rather than large sector. Citibank Setup its merchant banking division in 1970. The various tasks
 performed by this divisions namely assisting new entrepreneur, evaluating new projects, raising
funds through borrowing and issuing equity. Indian banks started banking services as a part of
multiple services they offer to their clients from 1972. State bank of India started the merchant
banking division in 1972. In the initial years the SBI’s objective was to render corporate advice
and assistance to small and medium entrepreneurs. Merchant banking activities is of-course
organized and undertaken in several forms. Commercial banks and foreign development finance
institutions have organized them through formation divisions, nationalized banks have formed
subsidiaries companies and share brokers and consultancies constituted themselves into public
limited companies or registered themselves as private limited companies. Some merchant
banking outfits have entered into collaboration with merchant bankers abroad with several
branches.

Related Articles:
 Introduction to Investment Banking
 Functions of Commercial Banks
 Investment Banking in India
 Principal Functions of Investment Banks
 Credit Rating
 Role and Functions of Reserve Bank of India (RBI)
 Problems of Leasing
 Functions of merchant bankers
 Operating Lease definition
 Merchant banking services: Project counseling

impact on business. Merchant bankers can turn to any of the activities

mentioned above depending upon resources, such as capital, foreign
tie-ups for overseas activities and skills. The depth and sophistication
in merchant banking business are improving since the avenues for
participating in capital market activities have widened from issue
management and underwriting to private placement, bought out deals
(BODS), buy-back of shares, merges and takeovers.
The services of merchant bank cover project counseling, pre-investment
activities, feasibility studies, project reports, design of capital
structure, issue management, underwriting, loan syndication,
mobilization of funds from Non-Resident Indians, foreign currency
finance, mergers, amalgamation, takeover, venture capital, buy back
and public deposits. A Category-1 merchant banker can undertake issue
management only. Separate registration is not necessary to carry on the
activity as underwriter.
 Activities of Merchant Bankers

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Some of the important functions of a MB are
±Syndication of loans and project finance
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Aid in applying to financial institutions, banks and
other sources of finance
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Expert advise on government policies, demand-supply
gaps,raw material availability, product-mix, plan
capacityutilization, requirements of plant and machinery etc
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Consultation about alternative sources of finance, debt-
equityratios, etc
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iaison with government departments, financial
institutions,banks etc
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Advise and assistance for modernization, expansion
anddiversification

Activities of Merchant Bankers

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Some of the important functions of a MB are
±
I
ssue management
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Deciding on the size and timing of a public issue in the light
of market conditions
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Preparing the base of successful issue marketing from
initialdocumentation, liaison with SEB
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to the preparation of actuallaunch
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Optimum underwriting support
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Appointment of bankers and brokers as well as issue houses
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ssue management
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Professional liaison with share market functionaries likebrokers,
portfolio managers and financial press for pre-sellingand media
coverage
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Preparation of draft prospectus and other documents
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Wide coverage throughout the country for collection
of applications
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advertisement

Activities of Merchant Bankers

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Some of the important functions of a MB are
± P r o vi s i o n o f w o r ki n g c ap i t al
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Arrangement with banks
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Merchant banking is a part of the banking system
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Sometimes, syndication is arranged by MB
±Foreign Currency
L
oans
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Arranges foreign currency loans
± P o r t fo l i o M an ag e m e n t
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Basically advisory in nature regarding purchase and sale
of securities, handling transactions, safe custody of
documents,collection of dividend etc