Merchant Banking

Merchant banking is a type of institution that helps in loan services, underwriting, fundraising services and financial advising, for large corporations. Merchant banks are high level professionals in international trade, which makes merchant banks specialists in operating with big corporations. The retail or commercial banks provide financial services to the general public unlike the merchant bankers. Merchant banks are different from other types of financial organisations. As they don’t deal with the general public. Merchant banks don’t allow day to day financial services like checking different types of accounts, bill of payments, or investments. They don’t take any deposits or make any withdrawals for their customers.

Merchant banks have a tendency of performing activities related to international finance and  underwriting, foreign investments and trading finance.

These merchant banks work with organisations that may not be big enough to generate funds from the normal public, through an initial public offering (IPO). These banks assist in private placement through initial public offerings. These require less disclosure and are given to big  investors.

The growth of Merchant Banks in a short span

• Globalisation: When reforms in 1991 took place, the Indian economy felt a big change as it cleared roads for foreign organisations. They helped in getting funds from abroad; thus, it has brought merchant banking a lot of growth
• Higher Competition: The issue of the globalisation of the economy is that market scenarios become frictionless and business options become favourable for various individuals. This affected the Indian corporate area and a big expansion was seen in this sector. This motivates the Merchant Bankers to have an important activity by giving up specialised services to corporate
• Change in consumer trends: There has been a large change in the companies and business sectors because of the foreign players in the whole market
• The biggest advantage is that the Indian population started receiving good quality items as the Indian organisations began working on the quality of the product and if it matches the foreign qualities. In such growing sectors, financial assets and goods became more popular
• Government changes: Government inclusion has been reduced, and privatisation has been spiked. It has also raised the heights of investment and slowed the direct problems that led to an increase in the inclusion of foreign parties

These following points mentioned in the above paragraph are few of the reasons why merchant banking had an exponential growth.

Services Provided By Merchant Banks

1. Portfolio Management: It refers to lowering the risk and increasing the profits. This word is usually used with shares and debentures only. Merchant bankers give these services to the customers and also guide the customers in selecting the right kind of securities for their needs. So, merchant bankers make sure that they have the latest information on the market.
2. Loan Syndication: This feature is pretty unnatural as compared to what other banks offer. Here the merchant banks are in charge of making  a loan available for the borrower who can be anyone from a big company, a government department to a  local authority. But, there are many more steps that are taken by merchant bankers before a loan.
3. Underwriting services: This is one of the most important features served by the merchant banks as they give a guarantee that states that if the agreement is lower than the accepted level, then the banks would have to pay the stated expense.
4. Management of Capital: This feature sums up selling securities, equity shares, debentures, preference shares,  to the shareholders. The role of the merchant banker here is to make a proper plan and finance regarding expenses for working with underwriters.
5. Corporate Counselling: This is the most common service that merchant banks give as industrial units, be it new or old, have to use this service. There are a wide range of features that are supplied by merchants namely working capital management, corporate counselling, project counselling, project management, capital restructuring, public issue management, loan syndications,  lease financing, and fixed deposit.

Functions Of Merchant Banks In India

Five major function of merchant of banks has been mentioned below:

1) Portfolio management: Merchant banks provide consultancy to investors on investments and manage the investors portfolio.

2) Brokers in the stock exchange: Merchant bankers play the role of brokers for their investors in stock exchanges. They also help in advising the clients about what to buy and what not to.

3) Money Market Operation: The merchant bankers also dealt with short term finance instruments like bonds by the government, commercial papers and treasury bills by the government.

4) Raising funds for clients:  Merchant banks help clients and business firms in raising capital from foreign and national markets by issuing securities. The finance raised by merchant banks helps many business firms in expanding and growing  their business activities.

5) Services to Public Sector Units: Merchant banks help in raising long term capitals, securities are marketed by the merchant bankers.

Conclusion

The above article tells in brief about what merchant banks are and what functions they provide. The merchant banks are basically banks that provide different kinds of services and act as brokers to stock market clients. The merchant banks deal with transactions and many other financial instruments related to the stock market. They help in managing loans, underwriting and financial advising.