What is Merchant Banking?
Merchant banking refers to the financial services merchant banks provide to large corporations and high-net-worth individuals. These services include:
- Fundraising: Assisting businesses in raising capital.
- Advisory Services: Offering guidance on mergers, acquisitions, and financial strategy.
- Loan Syndication: Coordinating credit arrangements from multiple institutions.
- Portfolio and Wealth Management: Managing investments and assets.
Merchant banks specialise in complex financial transactions and international trade, providing critical support to multinational businesses and boosting economic growth.
How Does Merchant Banking Work?
- Clientele: Serves large corporations, multinational companies, and high-net-worth individuals.
- Core Activities:
- Underwriting securities for IPOs.
- Advising on mergers and acquisitions (M&A).
- Facilitating international trade and investments.
- Revenue Models:
- Higher service fees due to specialised expertise.
- Equity stakes in client companies for potential long-term gains.
- Nature: Merchant banks operate as standalone entities or divisions of larger financial institutions like investment or commercial banks.
Key Functions of Merchant Banking
Governed by SEBI regulations (1992) in India, the primary functions include:
- Portfolio Management: Advising and managing client investments.
- Raising Funds: Assisting businesses in raising domestic and international capital.
- Business Promotion: Supporting firms and startups during their inception.
- Loan Syndication: Arranging credit facilities from multiple financial entities.
- Leasing Services: Offering leasing solutions to clients.
These functions significantly contribute to business development and national economic growth.
Benefits of Merchant Banking
- Risk Management: Hedging, derivatives, insurance
- Specialised Knowledge: Market insight
- Global Network: Access to investors and institutions
- International: Helping clients into foreign markets
- Customised: Solutions for individual clients
- Long term: Building relationships for ongoing advice
Examples of Merchant Banking Activities
- Underwriting: Merchant banks manage the risk of IPOs by purchasing securities from issuers and selling them to investors.
- Mergers & Acquisitions: Acting as intermediaries ensures smooth deal structuring and negotiation.
- Private Equity: Investing in companies to improve operations and generate long-term returns.
- Venture Capital: Funding early-stage startups with high growth potential.
- Wealth Management: Catering to high-net-worth individuals with investment, tax, and estate planning.
- Corporate Finance: Offering debt/equity financing, restructuring, and risk management solutions.
