Merchant Banking is a non-banking financial activity that deals mostly in infrastructure finance, business loan for companies, and underwriting. It is a combination of consultancy and banking services. It provides consultancy to its clients for financial, managerial and legal matters. Consultancy refers to provide advice, guidelines, and services for a fee. Merchant banking may perform some services as an investment bank but does not provide regular banking services. It helps businessman to:
- start a business,
- expand the business,
- restructuring the business,
- collect finance
- revive sick business unit in a viable unit.
In short, it involves servicing any financial need of the client. It provides the variety of services like Securities underwriting, merger & acquisitions, stock & bond trading, providing financial advice, etc. It was started in India in 1967.
These are mainly concerned with the long-term financing of the business. Merchant bankers provide expert advice in various financial and legal aspects. Also, they act as an agent in the direct placement of the issue of securities.
Objectives of Merchant Banking:
- Helps in capital formation,
- Promote economic growth,
- deciding the capital structure,
- project counseling- loan syndication, project appraisal and arrangement of working capital
- provide financial assistance,
- mobilize funds from the public,
- portfolio management,
- underwriting of securities,
- listing of securities
Functions of Merchant Banking:
Merchant bankers perform some most essential functions:
- Raising Funds for Clients: Merchant banking raises funds for clients through shares, debentures, bank loans etc. The finance is used for starting a new business or project or expansion of a business.
- Act as a Broker: Merchant bankers act a broker in stock exchange for buying and selling of shares on behalf of the clients. They advise the clients about which share to buy when to buy, how much to buy and when to sell.
- Project Management: They advise about the advising about the location of a project, preparing a project report, making a plan for financing, funding out sources for the project.
- Portfolio Management: They provide portfolio management services for their clients. merchant bankers make investment safe, liquid and profitable for their clients. They analyze the market and make decisions regarding which portfolio is best. They also keep an eye on the stock market.
- Relief of Sick Industrial Units: It also plans the full revival package.
- Venture Financing: Another function of the merchant banker is to provide the venture finance to the projects.
- Managing Public Issue of Companies: Merchanter bankers advise on the timing of the public issue, size and price of the public issue and helping in the appointment of underwriters and brokers.
- Working Capital Finance: They provide finance to meet the day-to-day expenses of an organization. Merchant bankers also access working capital requirement.
- Merger and Acquisitions: Mergers refers to the combination of two or more companies to make a single company. Merchant bankers are the mediator in setting negotiations between the offeree and the companies.
- Loan Syndication: Merchant bankers help their client to get loans from financial banks institutions for projects. Such a loan may be obtained from the single institution or a syndicate.
Advantages and Disadvantages of Merchant Banking: