A
merchant bank is a financial institution providing capital to companies in the
form of share ownership instead of loans. A merchant bank also provides
advisory on corporate matters to the firms in which they invest.
Role of merchant bankers
Raising finance
Merchant Bankers
help their clients in raising finance by way of issue of a debenture, shares,
bank loans, etc. They tap both the domestic as well as the international
markets. Finance raised by this method may be used for commencing a new project
or business or it may even be used for expansion and modernization of an
existing business.
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.
Brokers in stock exchanges
Merchant bankers
buy and sell shares in the stock exchange on behalf of the clients. They
additionally conduct researches on equity shares, advise the clients on the
share to be purchased, the time of purchase, quantity of such purchase and the
time for selling these shares. Mutual funds offer merchant banking services,
large brokers, investment banks, and venture capitals.
Project management
Merchant bankers
offer help to clients in several ways in the process of project management.
They offer advice regarding the location of the project, preparation of project
report, in carrying out feasibility studies, planning out the financing of the
project, tapping sources of such finance, information regarding incentives and
concessions from the government.
Advise on modernization and expansion
Merchant bankers
advise on amalgamations, mergers, acquisitions, takeovers, foreign
collaborations, diversification of business, technology up-gradation,
joint-ventures, etc.
Managing public issue
They provide the
following services in the above-mentioned process:
·
the timing of the
public issue
·
the size of the
issue
·
the price of the
issue
·
acting in the
capacity of manager to the issue
·
assisting in
receiving applications as well as allotment of securities
·
appointment of
brokers as well as underwriters of the issue
·
listing of the
shares on the relevant stock exchange.
Initially, merchant
bankers mostly performed the function of managing new public issues of
corporate securities of either newly formed companies or existing companies and
foreign companies in the process of dilution of equity provided under the FERA[20].
Here, they acted as sponsors of issues. They get the permission of the
Controller of Capital Issues (which is now the SEBI). They also provide several
other services to guarantee success in the process of marketing of securities.
These services include, preparation of the prospectus, making underwriting
arrangements, appointing registrars, bankers, brokers to the issue, arranging
for advertising and publicity as well as compliance with the listing
requirements of the relevant stock exchanges, etc. A merchant banker acts as
experts on the terms, type and timing of the issues of the corporate securities
and makes them suitable for investors and provides freedom and flexibility to
issuing companies.
Credit syndication
A merchant banker
provides specialized services in the stages of preparation of a project, the
loan applications required for the raising of short-term and long- term credit
from various banks and financial institutions, etc. They help in managing
Euro-issues and raising funds abroad.
Handling government consent 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).
Special assistance to entrepreneurs and small companies
Merchant banker
advises entrepreneurs and small companies on availability and existence of
business opportunities, concessions, incentives and government policies and
helps them to take advantage of this option available to them, to the best of
their capabilities.
Services to PSU’s
Merchant banker
offers numerous services to public sector undertakings and units and their
public utilities. They assist in raising capital (long-term), in the marketing
of securities, in foreign collaborations as well as in arranging for long-term
finances from lending institutions.
Revival of sick units
A merchant bank
helps in reviving sick industrial units. They negotiate with various agencies
such as banks, long-term lending institutions, and the Board for Industrial and
Financial Reconstruction (BIFR). They also plan and execute full revival
packages.
Portfolio management of sick units
Merchant bankers
offer revival services to companies that issue the securities as well as
investors. These bankers advise clients, which are usually institutional
investors, on investment decisions. They undertake purchase and sale of
securities to provide them with portfolio management services. Some of these
bankers are operating mutual funds as well as offshore funds.
Corporate restructuring
These services of
merchant bankers include mergers, acquisitions (about existing units), the sale
of units and disinvestment. These procedures demand proper negotiations,
thorough preparation of numerous documents and completion of lengthy legal
formalities. Merchant bankers fulfill all these formalities on behalf of the
clients.
Money market operations
A merchant bank
deals with as well as underwrites short-term instruments like:
·
government bonds
·
certificate of
deposit issued by banks and financial institutions
·
commercial paper
issued by large corporate firms
·
treasury bills
issued by the government (in India by the Reserve Bank of India)
Leasing and finance services
Merchant banks also
assist leasing and financing services. A lease refers to a contract that exists
between a lessor and a lessee, by which the lessor permits the use of a
specific asset that belongs to him or her(like equipment, land) by the lessee
for a specified period. There is a fee charged by the lessor charges which is
referred to asthe rentals. Several merchant bankers offer leasing and financing
facilities to the customers. Some banks also keep venture capital funds to
assist entrepreneurs. These banks also help the companies to raise finance
through public deposits.
Servicing issues
Merchant bankers
now also act as the paying agents for service of the debt- securities and act
as the registrars as well as the transfer agents. In this way, they maintain
the registers of the shareholders and the debenture holders and also arrange
the payment of dividend and or the interest that is due to them.
Management of dividend and interest
Merchant banks help
the clients in the management of the interest on the debentures or loans, as
well as the dividend on the shares. In addition to this, they advise the client
with respect to the timings (whether interim or annual) of the dividend as well
as the rate of the dividend.
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. The scope of
functions, activities and the services provided by the merchant bankers are
ever increasing and growing with the constant development in the money marke
