Merchant banks are the financial institutions providing specialist services which generally include the acceptance of bills of exchange, corporate finance, portfolio management, and other banking services.
It creates a secondary market to boost industrial activities in the nation.
Different Types of Services are Offered by Merchant Bankers
Following are the services provided by the merchant bankers:
1. Corporate Counseling
Corporate counseling is the beginning of merchant banking services.
Every industrial unit either new or existing needs it. The scope of corporate counseling is very vast.
It covers a wide range of merchant banking activities and includes services such as project counseling, project management, loan syndications, working capital management, capital restructuring, public issue management, fixed deposit, lease financing.
2. Project Counseling
This has originated from corporate counseling. It relates to project finance and includes preparation of project reports, cost of the project and also arranging the financing pattern.
The projects are appraised on the basis of the location, marketing, and technical and financial viability of the project.
3. Loan Syndication
It refers to a loan arranged by a bank for a borrower who is likely to be a large company, a local authority, or a government department.
So, the merchant banker first finalizes the cost of the project before approaching a financial institution for term loans.
After that, the merchant banker designs the capital structure, determine the promoter’s contribution, and decides the approximates amount to be raised.
It also ensures that the project adheres to the guidelines for financing industrial projects.
Merchant bankers render comprehensive services of loan syndication to cover all types of arrangements.
4. Management of Capital Issues
Management of capital issues involves selling of securities, namely, equity shares, preference shares, and debentures and bonds to the investors.
The merchant bankers prepare the action plan and budget for the total expenses for the issues, drafting the prospects getting the consent letter publicity, coordinating with underwriters, selecting the advertising agency for pre-issue and post-issue merchant banker renders the advice to the issuer company regarding the types of security to be issued.
For the success of the issue, the merchant banker should keep close liaison and coordination with various agencies involved in public issues.
It is the responsibility of the merchant banker to groom the issue to ensure full subscription.
Evolution of Capital Structure Alternatives.
5. Corporate Advisory Services
Merchant bankers set up corporate advisory service branches to render exclusive services to their corporate customers.
In India, SEBI guidelines insist that all the issues should be managed by at least one authorized merchant banker.
The success of the issue is dependent on the selection of the right types of security.
So, expert advice for merchant bankers is on immense importance to ensure success and security.
6. Portfolio Management
Portfolio management refers to minimizing the risk and maximizing the returns.
Hence, the term portfolio management can be applied only to share and debentures.
Merchant bankers render portfolio management services to their customers and help the investors to choose the right type of securities that is safe and ensures liquidity and profitability.
So merchant bankers need to keep regular market information and economic surveys.
7. Advisory Services to Mergers and Takeovers
The term merger means a combination of two companies in a manner such that only one company survives and another goes out of existence.
On the other hand, takeover refers to the purchase of a company by another company and in the process of acquiring and controlling interest in the shares capital of another existing company.
Merchant banker act as a middleman between two companies by safeguarding the interest of both.
He gets the approval from the financial institutions of the government or from the RBI.
8. Consultancy to Sick Industrial Units
A merchant banker guides the existing units for growth and diversification.
He/she appraises their technology and process, assessing their requirements and restructuring their capital base and also chalks out the rehabilitation program which can be accepted by the banks and other financial institutions.
Derivatives: Meaning, Functions, Types, Pros, and Cons.
9. Leasing
In a lease transaction, the merchant banker renders the services that include an arrangement for lease finance facilities for leasing companies, advice on the optimal structuring of the transaction, legal documentation, and tax counseling.
10. Foreign Currency Financing
Foreign currency finance is the fund provided for foreign trade transactions.
It may take the form of export-import trade finance, euro currency loan. Indian joint venture abroad or foreign collaborations.
The main areas that are covered in this type of merchant activity are as follows:
- Providing assistance for carrying out the study of turnkey and construction contract projects.
- Providing assistance in applications to working groups, liaison with RBI, ECGD, and other institutions.
- Providing assistance in opening and operating bank accounts abroad.
- Providing assistance in obtaining export credit facilities from the EXIM bank for export of capital goods, and arranging for the necessary government approvals and clearance.
- Providing guidance on the forward cover for exchange risk.
- Assisting in arranging foreign currency guarantees and performance bonds for exporters.
11. Providing Venture Capital Financing
Merchant bankers help companies in obtaining venture capital financing for financing their new and innovative strategies.
Main Sources of Venture Capital in India (With List)
12. Broking
Brokers are persons mainly concerned with the procurement of subscription to the issue from the prospective investors.
The appointment of brokers is not compulsory and the companies are free to appoint any number of brokers.
13. Act as Debenture Trustee
Trustees who are appointed to safeguard the interest of debenture holders are called debenture trustees.
They are to be appointed before the issue of debentures by a company.
No person can act as a debenture trustee a certificate of registration has been obtained from SEBI for the purpose.
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