MERCHANT BANKING

Definition:

“Merchant banker means any person who is engaged in the business

of issue management either by making arrangements regarding selling,

buying or subscribing to securities as manager-consultant, advisor or

rendering corporate advisory services in relation to such issue management”

The main function of a merchant bank is to buy and sell financial products. They

manage risk through proprietary trading, carried out by special traders who do not

interface with clients. The trader manages the risk for the principal after they buy or

sell a product to a client but does not hedge their total exposure. Banks also try

to maximize the profitability of certain risk on their balance sheets.

Merchant banks manage debt and equity offerings. They assist

companies in raising funds from the market. This can include designing

instruments, pricing issues, registering offer documents, underwriting

support, issue marketing, allotment and refund, and stock exchange listing.

They also help in distributing securities such as equity shares, mutual fund

products, debt instruments, insurance products, and fixed deposits among

others. Merchant banks use a mix of institutional networks—mutual funds,

foreign institutional investors, pension funds, private equity funds, and

financial institutions—and retail networks, depending on how they interact with

specific clients.

Objectives of Merchant Banking

1. Guidance

2. Project Formulations

3. Implementation

4. Modernization

5. Diversification

6. Mobilizing Resources

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7. Raising Working

8. Activities of Merchant Bankers

1. Some of the important functions of a MB are Project counseling or reinvestment studies for investors

•Identify promising projects

•Prepare feasibility studies – economic and financial

•Prepare in-depth project reports

•Assist investors in obtaining licenses

•Do precise capital structuring

•Arrange and negotiate foreign collaborations

•Give guidance on amalgamations, mergers and takeovers

2. Some of the important functions of a MB are

–Syndication of loans and project finance

•Aid in applying to financial institutions, banks and other sources of finance

•Expert advise on government policies, demand-supply gaps, raw material

availability, product-mix, plan capacity utilization, requirements of plant and

machinery etc

•Consultation about alternative sources of finance, debt-equity Ratios, etc

•Liaison with government departments, financial institutions, Banks etc

•Advise and assistance for modernization, expansion and Diversification.

3. Some of the important functions of a MB are

–Issue management

•Deciding on the size and timing of a public issue in the light of Market

conditions

•Preparing the base of successful issue marketing from initial

documentation, liaison with SEBI to the preparation of actual launch

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•Optimum underwriting support

•Appointment of bankers and brokers as well as issue houses

•Issue management

•Professional liaison with share market functionaries like brokers, portfolio

managers and financial press for pre-selling and media coverage

•Preparation of draft prospectus and other documents

•Wide coverage throughout the country for collection of applications

•advertisement

4. Some of the important functions of a MB are

–Provision of working capital

•Arrangement with banks

•Merchant banking is a part of the banking system

•Sometimes, syndication is arranged by MB

–Foreign Currency Loans

•Arranges foreign currency loans

–Portfolio Management

•Basically advisory in nature regarding purchase and sale of securities,

handling transactions, safe custody of documents, collection of dividend etc

Difference bt investment banking and merchant banking

Pure investment banks raise funds for businesses and some

governments by registering and issuing debt or equity and selling it on a

market. Traditionally, investment banks only participated in underwriting and

selling securities in large blocks. Investment banks facilitate mergers and

acquisitions through share sales and provide research and financial consulting

to companies. Traditionally, investment banks did not deal with the general

public.

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Investment banks focus on initial public offerings (IPOs) and large public

and private share offerings Traditional merchant banks primarily perform

international financing activities such as foreign corporate investing, foreign

real estate investment, trade finance and international transaction

facilitation. Some of the activities that a pure merchant bank is involved in

may include issuing letters of credit, transferring funds internationally, trade

consulting and co-investment in projects involving trade of one form or

another Merchant banks tend to operate on small-scale companies and offer

creative equity financing, bridge financing, mezzanine financing and a number

of corporate credit products

Advantages

Merchant banks perform functions that cannot be carried out by

businesses on their own.

Merchant banks have access to traders, financial institutions, and markets

that companies or individuals could not possibly reach. By using their skills

and contacts, merchant banks can get the best possible deals for their

clients.

Disadvantages

Merchant banks are really only for large corporate customers, or

extremely wealthy smaller businesses owned by individual clients.

Not all deals carried out by merchant banks meet with unqualified

success.

There is always risk attached to the kinds of deal that merchant banks

undertake.

The debt-to-equity ratio (D/E) is a financial ratio indicating the relative

proportion of shareholders' equity and debt used to finance a company's

assets.[1] Closely related to leveraging, the ratio is also known as Risk,

Gearing or Leverage. The two components are often taken from the firm's

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balance sheet or statement of financial position (so-called book value), but

the ratio may also be calculated using market values for both, if the

company's debt and equity are publicly traded, or using a combination of

book value for debt and market value for equity financially.

Underwriting refers to the process that a large financial service provider

(bank, insurer, investment house) uses to assess the eligibility of a customer

to receive their products (equity capital, insurance, mortgage, or credit). The

name derives from the Lloyd's of London insurance market. Financial

bankers, who would accept some of the risk on a given venture (historically a

sea voyage with associated risks of shipwreck) in exchange for a premium,

would literally write their names under the risk information that was written

on a Lloyd's slip created for this purpose

A stock exchange is an entity that provides services for stock brokers

and traders to trade stocks, bonds, and other securities.

A stock exchange is an entity that provides services for stock brokers

and traders to trade stocks, bonds, and other securities.

An initial public offering (IPO), referred to simply as an "offering" or

"flotation", is when a company (called the issuer) issues common stock

or shares to the public for the first time. They are often issued by

smaller, younger companies seeking capital to expand, but can also be

done by large privately owned companies looking to become publicly

traded.

Common stock is a form of corporate equity ownership, a type of

security. It is called "common" to distinguish it from preferred stock. In

the event of bankruptcy, common stock investors receive their funds

after preferred stock holders, bondholders, creditors, etc. On the other

hand, common shares on average perform better than preferred

shares or bonds over time.

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