Definition of 'Merchant Bank'

 A bank that deals mostly in (but is not limited to) international finance, long-term loans for companies and underwriting. Merchant banks do not provide regular banking services to the general public.  Their knowledge in international finances make merchant banks specialists in dealing with multinational corporations.  A merchant bank is a financial institution which provides capital to companies in the form of share ownership instead of loans. A merchant bank also provides advisory on corporate matters to the firms they lend to. In the United Kingdom, the term "merchant bank" refers to an investment bank.

Merchant Banking Meaning

 Merchant Banking is a combination of Banking and consultancy services. It provides consultancy, to its clients, for financial, marketing, managerial and legal matters. Consultancy means to provide advice, guidance and service for a fee. It helps a businessman to start a business. It helps to raise (collect) finance. It helps to expand and modernise the business. It helps in restructuring of a business. It helps to revive sick business units. It also helps companies to register, buy and sell shares at the stock exchange.  In short, merchant banking provides a wide range of services for starting until running a business. It acts as Financial Engineer for a business Structure &Functions of Merchant Banking

Structure An investment bank is split into the so-called front, middle, and back office functions. The front office deals with investment banking and management, sales and trading, structured products, private equity investment, research, and strategy. The middle office deals with risk management, finance, and. The back office deals with transactions, operations, and technology. Functions  Raising Finance for Clients : Merchant Banking helps its clients to raise finance through issue of shares, debentures, bank loans, etc. It helps its clients to raise finance from the domestic and international market. This finance is used for starting a new business or project or for modernization or expansion of the business.  Broker in Stock Exchange : Merchant bankers act as brokers in the stock exchange. They buy and sell shares on behalf of their clients. They conduct research on equity shares. They also advise their clients about which shares to buy, when to buy, how much to buy and when to sell. Large brokers, Mutual Funds, Venture capital companies and Investment Banks offer merchant banking services.  Project Management : Merchant bankers help their clients in the many ways. For e.g. Advising about location of a project, preparing a project report, conducting feasibility studies, making a plan for financing the project, finding out sources of finance, advising about concessions and incentives from the government  Advice on Expansion and Modernization : Merchant bankers give advice for expansion and modernization of the business units. They give expert advice on mergers and amalgamations, acquisition and takeovers, diversification of business, foreign collaborations and joint- ventures, technology upgradation, etc.  Handling Government Consent for Industrial Projects : A businessman has to get government permission for starting of the project. Similarly, a company requires permission for expansion or modernization activities. For this, many formalities have to be completed. Merchant banks do all this work for their clients.  Special Assitance to Small Companies and Entreprenuers : Merchant banks advise small companies about business opportunities, government policies, incentives and concessions available. It also helps them to take advantage of these opportunities, concessions, etc.  Services to Public Sector Units : Merchant banks offer many services to public sector units and public utilities. They help in raising long-term capital, marketing of securities, foreign collaborations and arranging long-term finance from term lending institutions.  Revival of Sick Industrial Units : Merchant banks help to revive (cure) sick industrial units. It negotiates with different agencies like banks, term lending institutions, and BIFR (Board for Industrial and Financial Reconstruction). It also plans and executes the full revival package.  Portfolio Management : A merchant bank manages the portfolios (investments) of its clients. This makes investments safe, liquid and profitable for the client. It offers expert guidance to its clients for taking investment decisions.  Corporate Restructuring : It includes mergers or acquisitions of existing business units, sale of existing unit or disinvestment. This requires proper negotiations, preparation of documents and completion of legal formalities. Merchant bankers offer all these services to their clients  Money Market Operation : Merchant bankers deal with and underwrite short-term money market instruments, such as:  Government Bonds.  Certificate of deposit issued by banks and financila institutions.  Commercial paper issued by large corporate firms.  Treasury bills issued by the Government (Here in India by RBI).

 Leasing Services : Merchant bankers also help in leasing services. Lease is a contract between the lessor and lessee, whereby the lessor allows the use of his specific asset such as equipment by the lessee for a certain period. The lessor charges a fee called rentals.  Management of Interest and Dividend : Merchant bankers help their clients in the management of interest on debentures / loans, and dividend on shares. They also advise their client about the timing (interim / yearly) and rate of dividend. Advantages  Merchant banks perform functions that cannot be carried out by businesses on their own.  Merchant banks have access to traders, financial institutions, and markets that companies or individuals could not possibly reach.  By using their skills and contacts, merchant banks can get the best possible deals for their clients. Disadvantages  Merchant banks are really only for large corporate customers, or extremely wealthy smaller businesses owned by individual clients.  Not all deals carried out by merchant banks meet with unqualified success.  There is always risk attached to the kinds of deal that merchant banks undertake.

Services Provided by Merchant Banks

 Merchant banks, otherwise known as investment banks, provide a range of services to institutional and high net worth individual clients. These services can include stock underwriting, bond issuances, consulting and representation pursuant to a merger or acquisition. According to Investopedia, merchant banks do not provide retail banking services, such as savings or checking accounts, to the general public. In addition to providing services to their clients, many merchant banks make investments for their own accounts

Underwriting

 Companies who seek to go public most often retain the services of an underwriter. The process of an initial public offering (IPO) entails selling stock to the underwriter who then resells it to the general public.  The underwriter's job entails properly valuing the company, ensuring all legal requirements are met and marketing the stock upon the IPO generating interest in its purchase. According to Inc. Magazine, investment banks will form together in a syndicate to jointly underwrite large stock offerings.

Bond Sales

 Companies who need to raise money oftentimes sell bonds as opposed to offering stock. A bond sale is essentially finding parties who desire to loan the company money. This loan is transacted in the form of a bond which serves as the debt instrument.  Merchant banks locate parties interested in purchasing bonds from their clients. In addition to locating interested investors, services provided to bond issuing clients include formulation of the appropriate bond interest rate, determination of the duration of the bond and identification of potential collateral owned by the company which can back the bond.

Mergers and Acquisitions

 Companies on occasion seek to acquire or merge with a competitor. Conversely, companies can also find themselves as a target for acquisition. In both scenarios, a company needs someone to advise them through the complex negotiations and analysis associated with corporate mergers and acquisitions. Investment banks fill the role of providing this advice and guidance for their corporate clients. It is exceedingly rare for a company to be involved in a merger or acquisition without the help of an investment bank.

Consulting

 Investment banks provide their clients with a wide range of consulting services related to finance. They give financial advice and find appropriate investments for their high net worth individual clients. Investment banks consult to corporate clients on areas including finance, business plan formulation and growth plans.

organizational set up  In India a common organizational set up of merchant bankers to operate is in the form of divisions of Indian and Foreign banks and Financial institutions, subsidiary companies established by bankers like SBI, Canada Bank, Punjab National Bank, Bank of India, etc.  some firms are also organized by financial and technical consultants and professionals. Securities and exchanges Board of India (SEBI) has divided the merchant bankers into four categories based on their capital adequacy. Each category is authorized to perform certain functions.  From the point of Organizational set up India’s merchant banking organizations can be categorized into 4 group on the basis of their linkage with parent activity. They are: a) Institutional Base:-

 Where merchant banks function as an independent wing or as subsidiary of various Private/ Central Governments/State Governments Financial institutions. Most of the financial institutions in India are in public sector and therefore such set up plays a role on the lines of governmental priorities and policies. b) Banker Base:-

 These merchant bankers function as division/ subsidiary of banking organization. The parent banks are either nationalized commercial banks or the foreign banks operating in India. These organizations have brought professionalism in merchant banking sector and they help their parent organization to make a presence in capital market. c) Broker Base :

 In the recent past there has been an inflow of Qualified and professionally skilled brokers in various Stock Exchanges of India. These brokers undertake merchant baking related operating also like providing investment and portfolio management services. d) Private Base:-

 These merchant banking firms are originated in private sectors. These organizations are the outcome of opportunities and scope in merchant banking business and they are providing skill oriented specialized services to their clients. Some foreign merchant bankers are also entering either independently or through some collaboration with their Indian counterparts.  Private Sectors merchant banking firms have come up either as sole proprietorship, partnership, private limited or public limited companies. Many of these firms were in existence for quite some time before they added a new activity in the form of merchant banking services by opening new division on the lines of commercial banks and All India Financial Institution (AIFI).