24 May 2009
In India merchant Banker is defined by SEBI as entities registereed with SEBI as merchant bankers!I will come to it later, meanwhile the origin of the terms: During the odd three hyndred years when Great Britain ruled the waves, British traders / merchants followed the Britisj soldiers and established trading outposts all over the empire. These merchant establishments settled their accounts by drawing bills on their London head offices. The bills were considered as good as currency and changed hands many a time before being presented on teh drawee. Smaller establishments could not issue such bills as they were not widely acceptable. Larger establishments at times co-accepted the bills drawn by smaller establishments and lent credence to such bills. These larger establishments were merchants but by co-accepting the bills they helped the smaller establishments raise short term working capital reources, something that is normally done by banks, hence they were called merchant banks!
Essence of merchant banking has been help firms raise resources without actual lending, which is doen by banks. These merchant banks soon started helping small countries / kingdoms in the Empire ti raise funds in City of London by issuing debt papers. City did not know these far flung countries or kingdoms but knew and respected the big merchants and thus these merchants (merchant banks) lent their names to help the borrowers raise funds.
Over teh years merchant banks developed placement of or managing issue of debt securities as their core activity.
In the US it was done by banks till teh Glaas Stiegal Act forced banks to choose between commercial banking (i.e. accepting deposits or making loans) or investment banking (i.e. managing issue of securities). Thus were borne investment banks in the US who were doing the same thing as merchant banks in London. The two terms are synominous.
Our legal system has borrowed terminalogy from English system - out Company Law is for large parts verbatim reproduction of teh English Company Law and not surprisingly our regulatory authority SEBI chose the English term Merchant Banking rather than the American term Investment banking.
However, practical finance has been dominated by Americans and thus in practice the more common tem in India too is investment banking rather than merchant banking.
Who is a merchant banker : One registered with SEBI under SEBI (Merchant Bankers) Regulations as a merchant banker.
What do merchant bankers do: This question can be divided in three parts - a) What are the functions that only merchant bankers can undertake? b)What are the activities permitted to merchant bankers by SEBI? and c) What are the activities normally undertaken by merchant bankers?
a) In India the following activities can be undertaken by only merchant bankers: 1. manageing public issue of securities 2. managing risghts issue of securities if issue size ifs over Rs 50,00,000 3. managing an open offer by an acquirer to the shareholders of a trget company 4. managing buy back of secuities by the issuer company 5. managing delisting of a liste company
b) SEBI has generally permitted MB's to undnertake "security market" related services - broking, valuing, advisory, project advisory, loan syndication, private placement of securities, international advisory etc.
c) What activities does a merchant banker undertake: This depends on the merchant bankers' strategy. Some are full service banks - SBICAP for example; some are niche players specialising in any one or two activities.
24 May 2009
"merchant banker" means any person who is engaged in the business of issue management either by making arrangements regarding selling , buying or subscribing to securities as manager, consultant, adviser or rendering corporate advisory service in relation to such issue management;
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