Merchant Banking: Meaning, Features, Services and Role [Finance Notes for AHSEC Class 12 2024 Exam]

Finance Notes for AHSEC Class 12 for 2024 Exam
Unit 4: Merchant Banking – Meaning, Features, Services and Role

Q.1 What do you mean by merchant banking? What are its features?

Ans: Merchant Banking is a combination of Banking and consultancy services. Merchant banking involves providing a range of financial services to businesses, including underwriting of securities, managing IPOs, providing merger and acquisition advice, managing private equity placements, portfolio management services and offering various types of structured finance solutions.

Main Characteristics of Merchant Banking:

1. High proportion of decision makers as a percentage of total staff helps in quick decision making.

2. High density of information and strong database available with merchant bankers.

3. Merchant bankers make money in the form of fees and commissions.

4. Merchant bankers are Innovative instead of repetitive operations.

5. They offer services on a national and international level.

6. Liquidity ratio of merchant bankers are very high.

Q.2 What are the functions or services offered by Merchant Bankers?

Ans: Following other services are provided by merchant bankers:

1. Corporate counseling: Corporate counseling covers entire field of merchant banking viz project counseling, capital restructuring, project management, loan syndication, working capital, lease financing, portfolio management, underwriting etc. Such counseling is provided to corporate and client units to solve their problems.

2. Project Counseling: It includes preparing project reports, finance for cost of project, appraising projects from the angle of technical, commercial and financial viability, Getting approval of project from bank/Govt and other agencies & Planning for public issue.

3. Loan Syndication: Merchant banker helps in arranging loan for big projects not only from one bank or financial institution but from more than one bank or financial institution.

4. Underwriting of public issue: Underwriting is a guarantee given by the underwriter that in the event of under subscription, the amount would be provided by him to the extent of under subscription. All public issues are to be underwritten fully by merchant bankers.

5. Corporate restructuring: Merchant bankers are also advising companies; about corporate restructuring including merger, acquisition, takeovers etc.

6. Off-share financing: Merchant bankers are also arranging foreign currency, foreign loans, foreign collaborations, financing exports imports etc.

Q.3. Explain the role of merchant bankers in the capital market.

Ans: The Role of merchant banker in the process of issue management is vital and his services are broadly categorized as pre-issue management and post issue management.

1. Pre-issue management involves the following:

- Obtaining approval for the issue from SEBI

- Drafting of prospectus and getting it approved by various authorities concerned.

- Underwriting of issue of shares

- Drafting the documents like application forms, newspaper advertisements etc.,

- Process of advertisement

- Selection of registrar to issue, printing press, advertising agencies, brokers and bankers to issue

- Arranging press conferences for brokers and investors

- Selection and fixation of collection centre for receiving application money

- Listing of securities in stock exchange

2. Post issue management includes the following:

- Collection of application forms

-  Screening the applications

- Deciding allotment procedure

- Mailing of letter of allotment

- Issue of share certificates

- Refund of application money to non-allottees.

3. Advisory services relating to mergers and takeovers

- A merchant banker acts as a ‘liasoning officer’ for mergers and acquisitions.

- He helps the company in managing its portfolio.

4. Off shore financing: Merchant bankers help their clients in off shore financing such as long term foreign currency loans, joint ventures abroad, licensing and franchising, financing exports and imports, foreign collaboration arrangements etc.

Q.4. What are the differences Between Merchant Banks and commercial banks?

Ans: Difference between Merchant banks and commercial bank are given below:

1. Services offered: Merchant banks typically offer a wider range of services, such as corporate finance, asset management, trade finance, and private banking. Commercial banks, on the other hand, primarily focus on financing services.

2. Risk: Risk associated with merchant banks are considered to be very as compared to commercial banks.

3. Laws: The commercial banks are governed by Banking Regulation Act, 1949. In contrast, the merchant banks follow the rules and regulations framed by SEBI, i.e. Securities and Exchange Board of India.

4. Aim: The commercial bank aims at fulfilling the needs of the general public, whereas big business houses that are operating in more than one nation and high net worth individuals are catered by merchant banks.