MERCHANT

BANKING
 ORIGIN
Merchant banks were the first modern banks that
emerged in the middle ages from Italian grain and
cloth merchant community . They were first
developed in the large European fair of St.
Giles(England) and then at Champagne fair
(France) in 11 century.
th
In 13th century a few family owned and managed
firms engaged in sale and purchase of commodities
were also found engaged in banking activity. These
were known as ‘Fuggers’.
These firms acted as :
• Bankers to the kings of European states.
• Financers of coastal trade
• Bearers of exchange risk
In the same period due to expectation of higher
returns, investments in risky projects grew. High
interest rates were charged for financing highly
risky projects. This resulted in huge losses and
many closures.
The one who survived , later came to be known as
‘commission agents’
 In 18 century Industrial revolution came in
th

England which led to increase in scope of

international trade.
Merchant banking grew due increase in exports of
machine made goods and import of raw material .
During early 19 century , they made a good
th

reputation in the business.

Later they started accepting the bills of lesser
reputed traders by guaranteeing the holder to
receive full payment on due date . This practice
continued to grow . Hence making the
‘acceptance houses’ the stepping stones in the
development of merchant banking. As they grew
they were titled as ‘hallmarks of true MB’
In countries like London , Australia , Germany and
South Africa this concept gained nourishment to be
present in the developed form today.
In India the concept of ‘hundies’ highlighted the
presence and working of MB . The indigenous bankers
used to receive deposits , deal in hundies and perform
other functions . There was combined money lending
and trading of hundies at that time.
Some important terms :
Merchant:- A person or a company involved in
wholesale trade , especially one dealing with
foreign countries.
Bank :- A financial institution licensed to receive
deposits and make loans.
Banker:- A person who manages or owns a bank
or group of banks.
Banking :- A business conducted by bank.
Meaning
and
Concept
MERCHANT MERCHANT
BANK BANKER
MERCHANT MERCHANT
+ +
BANK BANKER

A bank dealing in A person who

commercial loans and performs the
investment. functions of
merchant and bank.
 MERCHANT
Merchant
BANKING
+
Banking

Merchant banking means an organisation that underwrites

securities for corporations , advises such clients on mergers
and is involved in the ownership of commercial ventures.
 In a simple sense
Merchant Bank means a ‘merchant’ turned into
‘bank’ and was named as ‘merchant bank’ .

ENTRUSTED WITH RESPECT

TO FUNDS OF
THE CUSTOMERS
ORIGIN OF
TERM
MERCHANT
BANKING
In U.K. , the term merchant banking originated from merchants in
London who started financing of foreign trade through accepting of
bills.

After sometimes , the merchants began to help government of

underdeveloped countries in raising long term funds through
floating of bonds in London money market.

In 1914 , these merchants formed association which is now

called ‘Merchant Banking and Securities House Association’.
The merchant banks, then extended their activity to
domestic business of loan syndication both for short
term and long term purposes.

Today these banks provide various services such as issue

management , portfolio management , asset management ,
underwriting of new issues , act as registrars , share transfer
agents ,trustees etc.
 ORIGIN OF
TERM
INVESTMENT
BANKING
 In U.S.A. , investment Investment bankers are
banking is concerned in primarily the They do not invest
‘garnering savings and intermediaries who their own funds in
directing the flow of provide specialised securities for a
funds to business service in the marketing long term.
enterprises’ of securities.
They simply buy the securities in They also provide other services
bulk wit a purpose of selling the involved in marketing of
same shortly to investors at securities including
large. underwriting of capital issues.
ORIGIN OF
MERCHANT
BANKS IN
INDIA
 • Merchant banking services started in
1967 India by National Grindlays Bank.

• Citi bank came up providing these

1970 services.

• SBI became 1st Indian commercial bank

having set up a separate merchant
1972 banking division.
NATURE OF MERCHANT
BANKS
Offers financial services for fee

Do not act as repositories for savings of

individuals
When engaged in fund based activities they
function as wholesale bankers for few
industrial houses

They are different from dealers ,traders and

brokers of securities as they mainly deal with
new issues.
 Commercial Banks :-
Meaning:- It may be described as the financial intermediary,
that offers a number of monetary services to the general public
and corporations as well. These are profit making companies,
which are owned and controlled by the group of individuals.
Functions:-
• Accepting deposits
•Granting loans
•Issuing credit cards
•Purchasing and selling of securities
•Bank overdraft
•Meeting credit needs of commercial enterprises
•Discounting bill of exchange
 Merchant Banking:-
Meaning:-It refers to the banking company that provides
both financial and consultancy services to the clients. It has
got expertise in international finance, underwriting and
business loans. It is also engaged in following activities :-
•Loan syndication
•Portfolio management
•Issue management
•Corporate counselling
•Providing project advisory services
•Managing mergers
•Leasing services
•Acceptance of bills
 Comparison Chart :-
• Commercial bank is a banking • Merchant bank refers to the
company established by a financial institution, that
number of people for providing specializes in international
the basic banking functions i.e. trade and provide and array of
accepting deposits and lending services to its clients.
money to general public.
• Regulated by Banking • Rules and regulations designed
Regulation Act, 1949. by SEBI.
• General banking business. • Consultancy type business.
• Debt - related • Equity-related.
• Less risky • Comparatively more risky
• Role of financier • Role of Financial Advisor
• Manages needs of general • Manages needs of corporate
public. firms.
 CONCLUSION:-
Besides, the different services provided by two,
these are entirely different from one another. A
merchant bank charges fees for the financial and
consultancy services, whereas commercial bank
charges fees for the facilities provided like ATM,
mobile banking and net banking. Commercial banks
are required to maintain required ratios in form of
Statutory Liquidity Ratio (SLR) AND Cash Reserve
Ratio (CRR). But, there is no regulatory framework
on the working of merchant banks.
 INVESTMENT BANKING:-
meaning:- Investment banks are set up to help the
clients, i.e. Companies, High net-worth individuals
and government in arranging capital. They act as a
financial intermediary between the Company
requiring capital and the investors and in this way,
the savings are turned into investments. Investor
bankers don’t invest their own funds in securities for
a long-term. They simply buy securities at whole sale
and sell them at retail to investors.
Functions:-
• Underwriting of shares and bonds
• Selling and trading of securities
• Advisory services for the mergers and
acquisitions.
• Managing the assets.
• Indentifying the funds requirements of the
companies.
Examples:-Some of the major investment banks
that are operating internationally are Goldman
Sachs, Credit Suisse, Morgan Stanley, Bank of
America, Merill Lynch, Deutsche Bank, etc.
 Merchant Banking:-
Meaning:- It refers to a banking company engaged
in international financing and offers end number of
services to its clients such as underwriting of new
issue, management of securities, investment
banking, portfolio management, project
promotion, advisory services, project promotion,
corporate investing, corporate counselling, loan
syndication and so forth
 Comparison Chart:-
• Merchant Bank implies a • Investment Banks are the
banking institution, that middleman between the issuer
fulfills capital requirements of of securities and the investing
the companies in the form of public, and also provides various
share ownership, rather than financial services to the clients.
granting loans.
• Indulge in International • Indulge in underwriting and
financing activities issuance of securities
• Fee Based • Fee based and fund based
• Trade- financing offered to • Trade-financing is rarely provided
the clients in this case
• Deals with Small companies • Deals with Large companies
 CONCLUSION:-
In a nutshell, the two banks differ in the sense that a
merchant bank assists companies in issuing shares
through private placement, whereas an investment
bank underwrites and sell shares through initial
public offering to the general public.
DEVELOPMENT BANKS
AND
MERCHANT BANKING
MERCHANT BANKING :-
Merchant banks as an institution which
provides a number of services including
management of securities issues,
portfolio services, credit syndication,
financial advices and project counselling,
etc. These banks are experts in
international trade which makes them
specialists in dealing with multinational
corporations.
DEVELOPMENT BANKS:-
Development banks are the specialised
financial institutions because they provide
not only finances but also help in promotion
of new enterprises. Development banks play
a very significant role in the industrial
development of our country.
Example of developments banks :-
National bank for agricultural and
rural development(NABARD),
export and import of India, small
industries development bank of
India etc.
OBJECTIVES OF DEVELOPMENT BANKS:-
 Promote the development of
industry or agriculture.
 Provide medium and long term loans
 Offering concessional loans for
setting up industry.
 Evaluating investment proposals
 EVOLUTION OF
MERCHANT BANKING
• ‘Hundi’ was the main instrument of
credit used by indigenous bankers
before the coming of western
merchants in India.
• It was in 1813, when merchants
came from European countries to
trade with India.
• Agency houses were set up by
merchant bankers based at London
 Raise deposits at cheaper rate.
 Made advances at higher rate.
• During 19th century, foreign merchant
bankers operated in India “East India
house”.
• Some new banks were founded which
includes orient bank in 1845, chartered
merchantile bank of India, London and
china in 1857 and so on.
• The control and management of these
banks lied with managing agents.
• The managing agents acted as merchants
banks and performed functions of
promoting financing and marketing of
securities.
• In 1948, industrial finance corporation of
India(IFCI) was set up and 1951 state
financial corporations were also set up.
• Some institutions was set up to boost
industrial sector, improve capital market
namely as industrial development bank
of India, unit trust of India, etc.
• The need of merchant banking services
was widely felt.
• During the period of National and
Grindlays bank took a lead of by taking
up merchant banking activities and
announced inauguration of its
“Merchant Banking Division” in January,
1969.
 FUNCTIONS OF MERCHANT
BANKS
• CORPORATE COUNSELLING
• PROJECT COUNSELLING
• CAPITAL RESTRUCTRING SERVICES
• PORTFOLIO MANAGEMENT
• ISSUE MANAGEMENT
• LOAN/CREDIT SYNDICATION
• ARRANGING WORKING CAPITAL FINANCE
• LEASE FINANCE
• VENTURE CAPITAL
 CORPORATE
COUNSELLING
The service is ,usually provided free of charge to
a corporate unit . Merchant bankers render
advise to corporate enterprises from time to
time in order to improve performance and build
better image/reputation among investors and to
increase the market value of its equity shares
 AREAS OF CORPORATE
COUNSELLING
• After considering the existing governments
economic and licensing ,it guides to corporate
units as to areas of diversification .
• Merchant bank make a detailed market
analysis so as to evaluate profitability of each
product line ,its growth or demand at present
and in future .
• It helps in reviving the old line projects and
sick units .
PROJECT COUNSELLING
• Project counselling broadly covers the study of the
project and providing advisory services on the project
viability and procedural steps to be followed for its
implementation . It covers the following aspects :-
• Development of idea of the project .
• Preparation of project report .
• Estimation of the cost of the project .
• Studying the procedural aspects of project
implementation .
 OTHER SERVICES IN THE FIELD OF
PROJECT COUNSELLING

• Identification of potential investment

opportunities.
• Shaping the pattern of financing.
• Amalgamation, mergers and takeovers .
• Guiding young entrepreneurs as to
investment opportunities in India.
• Profitability study of the project.
3.CAPITAL RESTRUCTURING SERVICES.
Merchant banks offer different capital restructuring
services to the corporate units .
It may include the following services:
a.) Examination of the capital
structure of corporate units to decide the extent of
capitalisation.
b.)In case of bonus issue it helps the clients in preparing
the memorandum for controller of capital issue(CCI) and
in obtaining his consent.
c.) For sick units ,it suggests appropriate
capital structure which will help the unit in
revival.
d.)Merchant bankers also render advice on
mergers, takeovers and amalgamations and
help in their implementation.
e.)Merchant bankers also identify the areas
of diversification of the existing production
systems.
4.PORTFOLIO MANAGEMENT
Merchant banks offer services not only to the
companies issuing the securities but also to investors.
They advise their clients mostly institutional investors,
regarding investment decisions .
They provide services to the investors taking into
account the following factors:
1.Objectives of the investment.
2.Tax bracket applicable to the investors.
3.Need for maximising return.
4.Capital appreciation etc.
SERVICES TO INDIAN NATIONALS:
a.)The sale and purchase of securities;
b.)Investing and purchase of securities;
c.)Investing and managing fixed deposits;
d.)Safe custody of securities in India and
overseas;
e.)Trust funds, pension funds and
provident fund investments and their
review.
SERVICES TO NON–RESIDENT INDIANS:
a.)Advice on selection of investment.
b.)Critical evaluation of investment
portfolio.
c.)Hold securities in safe custody.
d.)Securing approval from RBI for the
purchase and sale of securities.
e.)Collection and remitting interest and
dividend on investment.
 ISSUE MANAGEMENT:

Following services are provided by Merchant banker:-

1.Preparation of the prospectus.

2.Preparation of the plan and budget to estimate total expenditure of the issue.

3.Preparation of CCI[CONTROLLER OF CAPITAL ISSUE] application for obtaining consent of CCI.

.
4.Selection of institutional and broker
underwriters and underwriting agreements.

5.Appointment of registrars, brokers and

bankers of issue.

6.Advertising and arranging publicity agency for

post and pre-issue.

7.Selection of issue house.

8.Compliance of listing requirements of stock
exchanges.

9.Act as coordinator with underwriters,

brokers and banker of issue and stock
exchanges.

10.Merchant banker advise the client whether

go for-a fresh issue , additional issue , bonus
issue , a right issue of equity or preference or if
both then in what proportion it is to be made.
 LOAN/CREDIT SYNDICATION:

Following services are provided by Merchant Banker

1.Estimation of the total cost on project.

2.Preparing a financial plan to meet the total cost of

project keeping into consideration the requirements
of the promoters.

3.Assisting the clients in the preparation of loan

application with financial assistance from term
Lenders , financial institutions , bankers and
monitoring their progress.

4.Making selection of institution/bankers for

participating in financing.

5.Follow-up of the term loan application with

the financial institutions and banks and
obtaining the satisfaction of their share of
participation.
6.Merchant banks also helps in expediting
legal documentation formalities listed by the
participating financial institutions and banks.

7.Merchant banks also help in estimating the

working capital requirements and assist the
client in negotiating for the sanction
appropriate facilities.
Thank You