The industrial boom in India has led to major growth in the need for merchant bankers. Merchant banking is an amalgam of banking and consultancy services. Although, the word merchant banking has a different meaning in different countries. In the U.S. merchant, bankers are called “Investment Banks,” in the U.K., they are called “accepting and issuing houses.”
In India, a merchant banker is defined as “an individual who is who is involved in the business of issue management either by making arrangements regarding buying, selling or subscribing to the securities as a manager, advisor, consultant in relation to such an issue management.”
Merchant banks render numerous financial services, advice, consultation, management, counseling, and solutions to big corporate houses. They are pretty different from normal commercial banks in several ways.
For example, commercial banks generally accept deposits and give loans, but merchant banks only offer consultation and management for a certain charge. They only accept deposits and offer loans only to a few clients and not to the general public.
It is an institution that offers consultancy to its customers regarding financial, managerial, marketing, and legal concerns. They usually offer assistance to business loans for big companies, international finance, and underwriting. These banks are specialists in trading with multinational companies.
Merchant bank helps a business person to commence a business and raising finance. Furthermore, they help them to expand, modernizing, and restructuring the business. They also grant support in registering, buying, and selling shares at the stock exchange.
Here are some of the must-know characteristics of merchant banking in India-
You would be amazed to know that merchant banks were established back in the 17 and 18 centuries in France and Italy by the Italian grain merchants. Initially, in merchant banking, a few merchant bankers were included who were intermediates in financing other transactions or their own.
After a couple of years, the practice of merchant banking evolved in the modern era from London. Merchants began to finance foreign trade by acceptance of the bill. With time they started using other services such as underwriting the issues, loan syndication, portfolio management, etc.
Merchant banking in India began in 1967 by National Grindlays; later, Citi Bank started it in 1970. In the year 1972, SBI became the first commercial bank to set up a distinct division for merchant banking. Then it was followed by ICICI in 1973, and then various banks started these services such as PNB, Bank of India, UCO Bank, etc.
It was in 1973 when FERA came into existence that helped increase merchant banking activities in India. After that, various banks such as IDBI and IFCI entered the market.
Also Read: Banking System in India Explained
There are a few reasons that accelerated the growth of these banks in India. Some of the reasons are:
1. Globalization: After the 1991 reforms, the Indian economy saw a drastic change as it opened gates for foreign companies. It helped in getting funds from abroad; thus, it led to the growth of merchant banks.
2. Elevated Competition: Because of the globalization of the economy, the market scenarios became lucrative, and business options became favorable for various individuals. This pivoted the Indian corporate sector, and a huge expansion was seen in this sector. This motivated the Merchant Bankers to play an important role by offering specialized services to corporate.
3. Switch in consumer trends: There was a huge transformation in the industrial and corporate sectors because of the foreign players in the market.
The major benefit was that the Indian massed started getting better quality products as the Indian companies also started working on quality to match the foreign products. In such prevailing environments, financial products and instruments became more prominent.
4. Government Reforms: Government intervention was reduced, and privatization was increased. It also raised the limits of investment and lessened direct interventions that led to an increase in the proposition of foreign players.
These were some of the causes that hastened the increase of Merchant Banking in India. Let us also know the services that merchant banking offers to corporate and big business houses.
1. Portfolio Management: It refers to decreasing the risk and maximizing the profits. This expression is usually used in connection to shares and debentures only. Merchant bankers offer these services to their customers and guide the investors in selecting the right securities as per their needs. Thus, merchant bankers ensure that they are updated with the complete market information.
2. Corporate Counseling: This is the basic service that merchant banks offer as all industrial units, whether new or existing, require this service. There is a wide range of services that come under corporate counseling, such as project counseling, capital restructuring, project management, working capital management, public issue management, loan syndications, fixed deposit, and lease financing.
3. Management of Capital Issues: This service comprises selling securities, equity shares, debentures, preference shares, etc., to the investors. The role of the merchant banker here is to make an action plan and budget for expenses for coordinating with underwriters, the expense for the issues, choosing the advertising agency for pre and post-issue.
For doing this, they have to be in touch with agencies that are involved in public issues.
4. Underwriting services: This is one of the most important services given by merchant banks as in this, the bank gives a guarantee that states that if the agreement is below the specified level, then the bank would have to contribute to the stated expense.
5. Loan Syndication: This service is pretty unusual from what the other banks offer. Here the merchant banks arrange a loan for a borrower who can be a big company, a government department, or a local authority. But, there are a lot of measures that a merchant banker has to take before a loan.
Firstly, they check and analyze the cost of the project, then they design the capital structure, see how much the promoter is contributing, and then decides on the amount of loan and approaches the financial institution for a loan. They also have to ensure that the company adheres to all the guidelines.
Other services that merchant banks offer are:
Here are the organizations that provide Merchant banking services in India:
Also Read: List of Banks in India
There are a lot of functions that merchant banks do; let’s have a look at some of them:
There are more than 130 merchant bankers who are registered with SEBI. Here is the list of some significant ones:
Also Read: List of Scheduled Banks in India
Merchant bankers have been divided into four categories for registration-
SEBI was established in 1992 as a regulatory body for protecting the interests of investors in the securities market. They made a few rules and guidelines for merchant bankers so that there is no monopoly, plus the interest of the customers is not harmed.
They are called Securities Exchange Board of India (SEBI) Regulations, 1992. These guidelines are amended regularly as per the dynamic market conditions:
Rules and regulations for merchant banks in India have been classified into five chapters and four schedules:
This was about the chapters; the schedule by SEBI comprises of the format of forms and reports, which are substantial and also states the fees that are required to be paid for different purposes.
One of the most important things to remember is that no organization would be able to become a merchant banker until and unless they get a certificate of registration from SEBI. Plus, he must get himself registered under these regulations if they want to persevere any of the merchant banker activities.
For getting the certificate of registration, you would have to apply through the form and complete two sets of norms, which are:
1. Operational capabilities: As per operational capabilities, merchant bankers are divided as per their roles.
2. Capital Adequacy Norms: For registration of the different categories of a merchant banker, SEBI has laid a few norms. Capital adequacy is calculated by taking capital contributed to the business plus free reserves.
Also Read: List of Private Banks in India
Capital Adequacy Norms by SEBI:
|Category of Merchant Banker||Minimum Net Worth|
|Category 1||Rs. 5 Crore|
|Category 2||Rs. 50 Lakhs|
|Category 3||Rs. 20 Lakhs|
Fee- As per SEBI Amendment Regulations, each merchant banker would have to pay a registration fee of Rs. 5 lakh when getting a certificate from the Board. The merchant banker would have to pay the fee within 15 days of the notice from the court.
Also, a merchant banker to keep the registration in force would have to pay a renewal fee of Rs. 2.5 lakhs every three years from the fourth year from the date of actual registration.
Points to remember
Here are a few points that you should review before choosing a merchant banker-
It is paramount to understand the difference between the two banks as it will make it easier for you to understand the merchant banking in India as compared to the other banks-
Also Read: List of Commercial Banks in India
A lot of people get confused between Merchant and Investment banking; therefore, below is the difference between them so that it makes it easy for you to understand their roles and interests-
The different banks had different purposes of establishment, but the merchant banking in India was started for the following objectives-
Frequently Asked Questions
Q1) What is Merchant Banking, for example?
A1) It is an institution that trades in underwriting, business loans for companies, advice on mergers & acquisitions, and international finance. They also offer consultancy to its clients in various areas such as marketing, financial, managerial, etc.
For example, merchant banking renders skill-oriented professional service to their clients concerning their financial requirements for adequate consideration in the form of a fee.
Q2) How many Merchant Bankers are there in India?
A2) There are approximately 1450 merchant bankers in India. Out of 1450, around 930 are registered with SEBI.
The major ones which are registered with SEBI are-
In Public Sector– Commercial Banks (24), Financial Institutions (6), State Institutions (4).
In Private Sector– International Bankers (10), Banks (10), finance and investment (231).
Q3) Who can be a merchant banker in India?
A3) To become a merchant banker, the applicant needs to pay a fee of Rs.50 000 by demand draft drawn in favor of ‘Securities and Exchange Board of India,’ payable at Mumbai, and this fee is non-refundable.
Secondly, the applicant’s net worth must be at least Rs 5 crore, not less than that. There is a fee of 20 Lakhs that he needs to pay as per SEBI Regulations, 2014. This money is to be paid when you get the certificate of initial registration by SEBI.
A merchant banker needs to hold a valid SEBI registration as per the SEBI regulations 1992. Then only he becomes eligible for acting as a Book Running Lead Manager (BRLM) to an issue. After this, the issuer company asks the merchant banker who is SEBI registered to make the offer document.
Merchant banker needs to ensure that he adheres to the legal compliance while preparing the offer document.
Q4) What are the functions of merchant banking?
A4) There are a lot of things that merchant bankers do for their clients; some of the services that it offers are-
Recommended: What is SEBI? Powers, Roles & Functions of SEBI
Merchant Banking in India has enhanced the ease of doing business, because of which they have gained a considerable position in the market. Furthermore, the involvement of SEBI as a watchdog for all their activities has helped people gain confidence in merchant banks. With the dynamic international conditions, the government might bring in a few more guidelines for merchant banks that would protect customers’ interests and offer a platform for these banking services to flourish.