Merchant banking refers to the combination of banking and consultancy.
Merchant Banking involves the provision of banking services and consultancy to its customers regarding financial, marketing, managerial, and legal services. Consultancy denotes providing advice, guidance, and service for remuneration. It involves the provision of a wide range of services that help businesses from its inception to successful operations to winding up the business.
A merchant bank is an organization that underwrites securities for corporations advises such clients on mergers and is involved in the ownership of commercial ventures.
Merchant banker is defined as a person who is engaged in the business of issue management either by making arrangements regarding buying and selling securities or acting as a management consultant, advisor in relation to such issue management.
Merchant banking services help individuals and businesses in the following ways –
It helps an individual to start a new business.
It helps businesses to raise finance
It helps businesses to modernize, expand and restructure their business
It helps in revival sick business units
It also helps companies to register, buy and sell shares at the stock exchange
Merchant banking is a type of banking where both commercial banks and investment banks can participate. It is involved in trading of unregistered securities including stock, bonds, and private equities.
Significance of Merchant Banking
The reason for the very existence of merchant banking is illustrated by the need for specialized investment information and services. An experienced merchant banker knows exactly where strategic assets are located, and which organizations and strategies to ward off. With a merchant banker, a businessman enjoys the benefit of hiring a skilled and knowledgeable partner with a long-term commitment to the business. The real benefit here is that a merchant bank helps to lower the risks for a new firm.
Functions of the Merchant Bank
Provide guidance in diversification
Undertaking evaluation of product lines
Rejuvenation of old companies
Evaluation of revival prospects
Undertaking the general evaluation of projects
Providing advice on procedures
Conducting technical feasibility
Assisting in technical feasibility
Identification of potential investment avenues
Carrying out detailed environmental studies and feasibility studies
Assisting the client in shortlisting projects with greater return
Evaluating the capital structure of clients
Preparing comprehensive memorandum related to Capital issues
Suggesting alternative capital structures
Estimating the total cost of projects
Drawing up financial plans
Preparing loan plans for financial assistance
Issue Management and Underwriting
Creation of an action plan
Creation of budget
Drafting of prospects
Undertaking investments in securities
Undertaking a review of the portfolio
Carrying out a critical evaluation of the investment portfolio
Working Capital Finance
Assessment of working capital
Providing advice on the issue of debentures
Acceptance Credit and Bill discounting
Acceptance and the discounting of bills of exchange
Mergers, Amalgamations, and Takeovers
Identifying organizations with similar characteristics
Undertaking management audit
Obtaining approvals from shareholders
Financing high risk yet high return projects
Providing guidance on the feasibility of leasing as a substitute source for financing capital investment projects.
Providing guidance on the choice of a favourable rental structure.
Foreign Currency Finance
Evaluation and assistance in carrying out a study of turnkey projects
Guiding for exchange risk
Assisting in operating international bank accounts
Fixed Deposit Broking
Assisting the company to observe and maintain all rules
Making arrangement for payment of loans
Drafting of advertisements for inviting deposits
Collecting public savings
Investing in a diversified portfolio
Earning for the investor a steady flow if returns
Relief to Sick Industries
Rejuvenating old and sick firms
Creating rehabilitation packages
Exploring merger and acquisition opportunities
The evaluation of industrial projects on the basis of technology, cost, capacity, etc.