Merchant BankingThe Dictionary of Banking and Financedefines a merchant bank as “ a bank whicharranges loans to companies, deals ininternational finance, buys and sells sharesand launches new companies on the stockexchange, but does not provide normalbanking services to the general public ”.
Bird’s eye view of Merchant Banking :Merchant Banking is a fee-based service.It arranges funds rather than providing them.Originally Merchant Banking business was started in Italyand France.Later on, it came into existence in the U.K., and the U.S.A.In India, it has become popular from 1983-84.
Merchant Banking In India The Grindlays Bank initiated the merchant banning activity in Indian Capital Market in 1969. It’s business forms was on the management of Public Issues and Financial Consultancy. City Bank introduced its merchant banking division in 1970.
Functions of Merchant Banking Corporate Counseling Portfolio Management Venture Capital Financing Mergers and Amalgamations Project Counseling Underwriting 6
Contd.... Functions of Merchant Banking Export Financing for capital goods Hire purchasing Equipment leasing Investment trust Valuation of assets Financial management 7
Private Investment Bankers Lehman Brothers Merrill Lynch etc.Bought loans that fall outside the specs of agencies.
Who’s to blame?Borrower: Buy a house with 20% down payment to live in and later sell at a profit. If this works out well, then … Buy a house with 0% down payment to live in and later sell at a bigger profit. If this works out well, then … Buy two houses with 0% down payment and sell at a profit?Investors Buy a subprime loan and sell at a profit because losses less than expected. If this works out well, then … Buy risky piece – lower rated tranches – of pool of subprime loans and sell at a bigger profit because losses less than expected.
Core Business Portfolio Non-fund Based Merchant Banking Advisory and Services transaction Services in ->Management of ->Project Financing.Public Offers of Equityand debt Instruments. ->Syndicated loans. ->Rights issues. ->Private Equity/Venture Capital. ->Buyback Offers. Etc. ->Business Advisory. Etc.
Core Business Portfolio Fund Base Allied Businesses ->Asset Management services. ->Underwriting. --Mutual Funds. ->Market making. --Portfolio Management ->Bought Out Deals. --Venture capital etc.->Trading in Equities, bonds and derivatives. ->Secondary Market Services. --Brooking --Equity Research.
. Securities and Exchange Board of India (SEBI) has dividedmerchant bankers into four categories, which are as follows: -