Role /Functions of Merchant Banking

Meaning of Merchant Banking

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. It helps a business person to start a business. It helps to raise (collect) helps finance .It helps to expand and modernize the business .It help in restructuring of a business . It helps to review sick business units. It also helps companies to register, buy and sell share at the stock exchange.

Functions of Merchant Banking

• 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.

• Brokers in stock exchanges

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.

• Promotional activities

In India, merchant bankers play the role of promoter of industrial enterprises. They help entrepreneurs in conceiving ideas, identifying projects, preparation of feasibility reports, getting Government approvals as well as incentives, etc. Merchant bankers may, at times, also provide assistance in financial and technical collaborations and i joint ventures.

• Corporate Counselling

Merchant bankers render advise to corporate enterprises from time to time in order to improve performance and build better image/reputation among investors and to increase the market value of its equity shares. Counselling is provided in the form of opinions, suggestions and detailed analysis of corporate laws as applicable to the business unit.

• Project management or Project Advisory

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, estimation of the cost of the project, advising about concessions and incentives from the government.

Sometimes, merchant banks also encourage and guide Indian entrepreneurs to make investment in Indian projects in India and joint ventures overseas by offering all possible help in project appraisal and implementation.

• Advice on modernization and expansion

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 up-gradation, etc.

• Managing Public Issue of Companies

Merchant bank advice and manage the public issue of companies. They provide following services:

1. Advise on the timing of the public issue.
2. Advise on the size and price of the issue.
3. Acting as manager to the issue, and helping in accepting applications and allotment of securities.
4. Help in appointing underwriters and brokers to the issue.
5. Listing of shares on the stock exchange, etc.

• Loan /Credit syndication

Merchant bankers provide specialised services in preparation of project, loan applications for raising short-term as well as long-term credit from various banks and financial institutions for financing the project or meeting the working capital requirements. They also manage Euro-Issues and help in raising funds abroad.

• 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.

• Bill Discounting and Acceptance Credit

In foreign countries, acceptance credit and bill discounting function is another important area which is recognised as a merchant banking activity. But in India this facility is not provided to the corporate units by the merchant bankers.

The need for such services was recognised when Banking Commission 1972, in its report had recommended the establishment of acceptance and discount house in India following the development of bill market.

A bill of exchange accepted by a house of established reputation automatically becomes acceptable to the seller of goods and to the lenders of money even though they do not have any knowledge of the creditworthiness of the drawer of the bill.

• 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.

• 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

• 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.

• 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.Merchant bankers also help companies in raising finance by way of public deposits.

• Promotional activities

In India, merchant bankers play the role of promoter of industrial enterprises. They help entrepreneurs in conceiving ideas, identifying projects, preparation of feasibility reports, getting Government approvals as well as incentives, etc. Merchant bankers may, at times, also provide assistance in financial and technical collaborations and joint ventures.

• Helping to get government permission for Industrial Projects.

A merchant banker completes all formalities for his or her client, about government permission to expand and modernize business (necessary for companies) and commencing new businesses (necessary for business people)

• Other services

Along with all the services mentioned above, the merchant bankers also offer certain other specialized services such as advisory services on matters such as mergers, amalgamations, tax related matters, on the matter of recruitment of executives, the cost of audit as well as its management among several others.

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