What is Merchant Banking | types, classification | functions

Merchant Banking: The term ‘Merchant banker’ was used in relation to a wealthy merchant, who developed the banking side of one’s business, in England. In India, merchant banking definition is framed in SEBI rules 1992. It defines merchant banker as “ any person who is engaged in the business of issue management either by making arrangement regarding selling, buying or subscribing to securities as manager, consultant, advisor or rendering corporate advisory services in relation to such issue management.”

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Merchant Banking :

Merchant banking means the activity of rendering a number of services including Management of securities, Portfolio management, Underwriting and Insurance, Financial advice and project counseling etc. Large brokers, Mutual Funds, Venture capital companies and Investment Banks offer Merchant-Banking services.

The term merchant banking has been used differently in different countries. In UK merchant-banking is termed as accepting and issuing house and in the USA it is known as investment banking.The merchant banks mainly offer financial services for a fee.

Merchant Banking in India :

Even though the State Bank of India is the first institution to set up a separate division for merchant Banking services in 1972, merchant banking services were started in 1967 by National Grindlays Bank followed by Citi Bank in 1970.

The main difference between merchant banking and commercial banking is , commercial banking involves accepting deposits and granting loans and advances whereas merchant banking involves rendering of the services for a fee.

Must Read – Various Terms of Banking

Functions of Merchant banks :

  • (1) Underwriting of shares and debentures
  • (2) Management of Public issues
  • (3) Portfolio management
  • (4) Credit syndication which involves all the steps of applying for a loan.
  • (5) Corporate Advisory services.
  • (6) Management of off shore funds.
  • (7) Leasing and financing
  • (8) Foreign collaborations and foreign currency management.
  • (9)Investment services for non resident Indians.
  • (10) Counselling small scale business organizations
  • (11) Project finance and project promotion services.
  • (12) Treasury management services
  • (13) Disbursement of dividends.

Must Read – Bank Deposits in India

In India Merchant banking services are provided by

  • (1) Commercial Banks
  • (2) Financial Institutions
  • (3) Private consultancy firms.

Classification of Merchant Banks :

In India Every organization providing merchant-Banking services should register with SEBI. On the basis of the Capital Adequacy and operational activities SEBI has classified the merchant bankers into following types :

Category            Minimum Net Worth for Capital Adequacy Activities Permitted by SEBI
Category – IRs. 5 CroreIssue Manager, Advisor, Consultant, Underwriter and Portfolio Manager
Category – IIRs. 50 LakhsAdvisor, Consultant, Underwriter and Portfolio Manager
Category – IIIRs. 20 LakhsAdvisor, Consultant, Underwriter
Category – IV-NILAdvisor and Consultant Service Only

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