What is Merchant Banking?
Merchant banking refers to a specialised financial service that is provided by banks or financial institutions to their customers. It offers a range of financial services such as advising, loan services, and fundraising primarily to businesses and large organisations. Unlike traditional banking services focussing on individual savings and loans, merchant banking deals with large-scale financial activities, corporate finance, and investment services.
Merchant banks specialise in international trade and provide funds to multinational businesses thus contributing to the country’s overall economic growth. A merchant banker is a professional who helps businesses with buying and selling of securities. Their responsibilities include handling private placement of securities, managing public offerings, stock broking, and offering international financial advice.
What are the Functions of Merchant Banking?
In India, the functions of merchant banking are regulated by Securities and Exchange Board of India (SEBI) regulations of 1992. These are as follows:
- Portfolio management
- Offer investment advice and manage investment portfolios for clients.
- They are involved in trading securities on behalf of the investors.
- Raising Funds
- Assist clients in securing funds from both domestic and international markets by buying and selling securities.
- Promotional Activities
- Help clients to start new businesses by promoting their ideas and helping them get the government’s approval.
- Loan Syndication
- Help clients obtain credit by coordinating with banks and financial institutions to raise large amounts of money.
- Leasing Services
- Provide leasing options, helping clients acquire equipment or property through leasing arrangements rather than purchasing outright.
Advantages of Merchant Banking
- Assist businesses in managing financial risks through various strategies, including hedging against market fluctuations and currency risks.
- Provide expert advice on complex financial matters such as mergers and acquisitions, corporate restructuring, and market entry strategies.
- Merchant banks have extensive networks of contacts, including investors, corporations, and financial institutions. This global reach can help businesses explore new opportunities and expand their market presence.
- Merchant banks build long-term relationships with their clients, providing continuous support and financial solutions tailored to evolving business needs.
