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Corporate Advisory Services: Determining Financial Structure Portfolio Management

The document provides background information on the history and definition of merchant banking. It can be summarized as follows: 1. Merchant banking originated in the late 18th/early 19th centuries when merchant houses financed international trade through bills of exchange. They began lending their names to other traders to accept bills and finance trade beyond their own, charging commissions. 2. A second historical role of merchant banks was raising capital for foreign governments. Merchant banks gained confidence through existing trade relationships and raised capital through stock/bond issues. 3. Merchant banks can accept bills, issue stocks/bonds, or do both. Their modern role includes providing most financial services needed by companies, touching all aspects of business operations.

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281 views3 pages

Corporate Advisory Services: Determining Financial Structure Portfolio Management

The document provides background information on the history and definition of merchant banking. It can be summarized as follows: 1. Merchant banking originated in the late 18th/early 19th centuries when merchant houses financed international trade through bills of exchange. They began lending their names to other traders to accept bills and finance trade beyond their own, charging commissions. 2. A second historical role of merchant banks was raising capital for foreign governments. Merchant banks gained confidence through existing trade relationships and raised capital through stock/bond issues. 3. Merchant banks can accept bills, issue stocks/bonds, or do both. Their modern role includes providing most financial services needed by companies, touching all aspects of business operations.

Uploaded by

K-Ayurveda Welex
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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INTRODUCTION

The term Merchant Banking has its origin in the trading methods of countries in the late eighteenth and the
early nineteenth century when trade taking place was financed by bill of exchange drawn by merchanting
houses. At that time the merchants were merely financing their own activities. As international trade grew
and other lesser-known names wanted to import goods from abroad, the established merchants lent their
names to the newcomers by agreeing to accept bills of exchange on their behalf. The acceptance houses
would charge a commission for his service and thus there grew up the business of accepting bill of finance
trade not merely of themselves, but of others. Acceptance business thus became and to a degree always has
been landmark of true Merchant Banks.
The second historical of Merchants banks was the raising of capital for foreign Government. In many cases,
the Merchant Banks have been trading in the countries concerned and gained the confidence of governments
and other authorities in those countries. Thus the second principle ingredient of Merchant Banking became
and still is raising of capital through the issue of stocks and bonds. Therefore, Merchant Banks can be
accepting houses or issuing houses or both. Merchant Banking started in the beginning of 20th century in UK
and USA. More recently, the services offered by Merchant Banks have entered into the other areas of
operations. Their role is wide ranging and they can now provide most of the financial services required by a
company, touching almost all aspects of establishing and running of industrial units on sound financial
footing.
Dictionary meaning of merchant Bank refers to an organisation that underwrites corporate securities and
advises such clients on issues like corporate mergers, etc. involved in the ownership of commercial
ventures. This organisation may be a bank, corporate body, firm or proprietary concern.

Definition of Merchant Banking.


The Notification of the Ministry of Finance defines merchant banker as;
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, adviser or
rendering corporate advisory services in relation to such issue management
The Amendment Regulation specifies that issue management consist of prospectus and other information
relating to issue, determining financial structure, tie-up of financiers and final allotment and refund of the
subscriptions, underwriting and portfolio management services.
In the words of Skully A Merchant Bank could be best defined as a financial institution conducting
money market activities and lending, underwriting and financial advice, and investment services
whose organization is characterized by a high proportion of professional staff able to able to approach
problems in an innovative manner and to make and implement decisions rapidly.

HISTORY OF MERCHANT BANKING


During the seventeenth and the most of the eighteenth century international finance was centered on
Amsterdam. Consequently Amsterdam merchants became the first masters of the various financial
techniques and the developments which in the course of time, became identified with the emergent
profession of Merchant Bankers.
Commercial Banking and Investment Banking are often confused with Merchant Banking. In many ways,
there may be similarities in their functions. However, in certain ways, Merchant Banking is distinctly
different from commercial banking and Investment Banking.
The primary function of a commercial bank is to receive deposits from the public and lend the same to
others. Commercial Banks can undertake some of the merchant banking activities like Issue Management
whereas Merchant Banking units can not undertake commercial banking activities. However, the functions
of Merchant Banking may not widely vary from Investment Banking. The Merchant Banker mainly deals
with Issue management, post issue services, corporate advisor services etc. the Investment Banker
undertaken trading in securities, Investment advises and bought out deals which are not the main activities of
Merchant Bankers.
In todays Scenario the Merchant banker and management consultants undertake advisory services to the
corporate sector. The Merchant Banker advices corporation and firms relating to opening of issues, receiving
loans etc. which the management consultants also do. The management consultants have a wide area
operations like Production, Marketing, Personnel Relations of finance etc. but they lack statutory recognition
to undertake capital market related activities which has enabled the merchant banker to cater to the needs if
the Corporate Sector.
MERCHANT BANKING IN INDIA
In India prior to the enactment of Indian Companies Act, 1956 manging agents acted as issue houses for
securities, evaluated project reports, planned capital structure and to some extend provided venture capital
for new firms. Few share broking firms also functioned as merchant bankers.
The need for specialised merchant banking services was felt in India with the rapid growth in the number
and size of the issues made in the primary market. The merchant banking services were started by foreign
banks, namely the National Grindlays Bank in 1967 and the City Bank in 1970. The Banking Commission in
its report in 1972 recommended the setting up of merchant banking institutions. This marked the beginning
of specialised merchant banking in India.
To begin with, merchant banking services were offered along with other traditional banking services. In the
Mid-Eighties, the Banking Regulation Act was amended permitting commercial banks to offer a wide range

of financial services through the subsidy rule. The State Bank of India was the first India Bank to set up
Merchant Banking Division in 1972. Later ICICI set up its Merchant Banking division followed by Bank of
India, Bank of Baroda, Canada Bank, Punjab National Bank and UCO Bank. The merchant banking gained
prominence during 1983-84 due to new issue boom.

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