Below is a detailed, and easy-to-learn explanation of Merchant Banking Services, covering meaning, scope, functions, role, and Indian context.
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? Merchant Banking Services — Detailed Notes
1. Meaning of Merchant Banking
Merchant banking refers to a specialised financial service that provides professional advisory and consultancy services to corporate clients, entrepreneurs, and investors.
Merchant banks assist in raising funds, managing public issues, mergers & acquisitions, portfolio management, and corporate restructuring.
> In simple words: Merchant banks act as financial advisors + issue managers + corporate consultants.
Definition
SEBI Definition: Merchant banker means any person engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or by acting as manager, consultant, advisor or rendering corporate advisory services.
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2. Scope of Merchant Banking
The scope of merchant banking is wide and covers financial, advisory, fund-raising, and corporate service activities.
Major areas in its scope:
1. Issue Management (IPO, FPO, Rights Issue)
2. Corporate Advisory Services
3. Project Counseling
4. Underwriting
5. Portfolio Management
6. Mergers & Acquisitions Advisory
7. Loan Syndication
8. Private Placement of Securities
9. Management of NRI Investments
10. Venture Capital Assistance
11. Foreign Currency Exchange Advisory
12. Corporate Restructuring
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3. Functions of Merchant Banking
Merchant banks perform specialized functions for smooth functioning of capital markets.
A. Issue Management
Drafting prospectus
Pricing of securities
Marketing of issue
Allotment of shares
B. Project Counseling
Feasibility studies
Preparation of project reports
Identifying sources of finance
C. Underwriting
Providing guarantee to subscribe to the issue
Reduces risk for companies
D. Loan Syndication
Arrangement of long-term finance
Negotiations with banks and financial institutions
E. Mergers & Acquisitions (M&A) Advisory
Valuation of companies
Negotiating deals
Drafting of agreements
F. Portfolio Management
Investment advisory
Portfolio restructuring
Risk-return analysis
G. Corporate Advisory
Capital restructuring
Debt management
Tax planning
H. Private Placement of Securities
Placing shares/bonds to institutional investors
Saves time and cost of public issue
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4. Who is a Merchant Banker?
A merchant banker is a financial expert or a firm providing merchant banking services such as:
Issue management
Underwriting
Corporate consultancy
Investment advice
Project evaluation
According to SEBI
Only SEBI-registered Category I merchant bankers can act as lead managers for public issues.
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5. Role of Merchant Banker
Merchant bankers play a key role in capital market development, particularly in raising corporate finance.
Major roles:
1. Advisory Role
Guide companies on capital structure, fund requirements, and compliance.
2. Managerial Role
Manage the entire process of issuing securities.
3. Promotional Role
Promote new projects, locate investors, and assist entrepreneurs.
4. Financial Intermediary
Act as a bridge between investors and issuers.
5. Risk Management Role
Help clients reduce financial and market risks.
6. Due-Diligence Support
Conduct business valuation, legal checks, and regulatory compliance.
7. After-Issue Services
Refund, allotment, investor grievance redressal.
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6. Merchant Banking Services in India
Merchant banking in India is mainly regulated by SEBI.
Evolution in India
Introduced by Grindlays Bank in 1967
SBI and ICICI entered the field in the 1970s
Post-liberalisation, private players grew rapidly
Current Merchant Banking Players
ICICI Securities
SBI Capital Markets
HDFC Bank Investment Banking
JM Financial
Axis Capital
Kotak Mahindra Capital
Regulatory Control
SEBI (Merchant Bankers) Regulations, 1992 govern:
Registration
Code of Conduct
Capital adequacy norms
Responsibilities for issue management
Role in Indian Capital Market
Supporting IPO boom
Assisting companies in compliance
Helping startups raise funds
Managing private placements and QIPs
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7. Importance of Merchant Banking
Merchant banking is crucial for modern financial systems:
Why important?
Encourages entrepreneurship
Helps companies mobilize capital
Improves the efficiency of capital markets
Supports corporate restructuring
Provides expert advisory in complex financial transactions
Enhances investor confidence
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8. Case Example (India)
Case Study: Zomato IPO (2021)
Lead managers:
Kotak Mahindra Capital
Morgan Stanley
BofA Securities
Merchant bankers:
Prepared DRHP
Conducted business valuation
Ensured SEBI compliance
Marketed the issue to investors
Managed allotment and listing
Result:
Successful oversubscription and strong listing — proving the importance of merchant bankers in large IPOs.
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9. Conclusion
Merchant banking is an essential pillar of financial services, offering crucial advisory, issue management, and corporate restructuring support. It plays a major role in capital formation, investment management, and economic growth, especially in emerging markets like India.
