Merchant banking

Merchant banking- an overview

Companies raise capital by issuing securities in the market. Merchant bankers act as intermediaries between the issuers of capital and the ultimate investors who purchase these securities.

Merchant banking… is the financial intermediaries that matches the entities that need capital and those that have capital. It is a function that facilitates the flow of capital in the market.

Scope of merchant banking activities…

Merchant banking activity helps:

• In channelising the financial surplus of the general public into productive investment avenues
• To coordinate the activities of various intermediaries to the share issue such as the registrar, bankers, advertising agency, printers, underwriters, brokers etc.
• To ensure the compliance with rules and regulations governing the securities market

Functions of a merchant banker…

The following comprise the main functions of a merchant banker:

• Management of debt and equity offerings- This forms the main function of the merchant banker. He assists the companies in raising funds from the market. The main areas of work in this regard include: instrument designing, pricing the issue, registration of the offer document, underwriting support, marketing of the issue, allotment and refund, listing on stock exchanges.
• Placement and distribution- The merchant banker helps in distributing various securities like equity shares, debt instruments, mutual fund products, fixed deposits, insurance products, commercial paper to name a few. The distribution network of the merchant banker can be classified as institutional and retail in nature. The institutional network consists of mutual funds, foreign institutional investors, private equity funds, pension funds, financial institutions etc. The size of such a network represents the wholesale reach of the merchant banker. The retail network depends on networking with investors.
  
• Corporate advisory services- Merchant bankers offer customised solutions to their clients financial problems. The following are the main areas in which their advice is sought:Financial structuring includes determining the right debt-equity ratio and gearing ratio for the client, the appropriate capital structure theory is also framed. Merchant bankers also explore the refinancing alternatives of the client, and evaluate cheaper sources of funds. Another area of advice is rehabilitation and turnaround management. In case of sick units, merchant bankers may design a revival package in coordination with banks and financial institutions. Risk management is another area where advice from a merchant banker is sought. He advises the client on different hedging strategies and suggests the appropriate strategy.
  
• Project advisory services- Merchant bankers help their clients in various stages of the project undertaken by the clients. They assist them in conceptualising the project idea in the initial stage. Once the idea is formed, they conduct feasibility studies to examine the viability of the proposed project. They also assist the client in preparing different documents like the detailed project report.
• Loan syndication- Merchant bankers arrange to tie up loans for their clients. This takes place in a series of steps. Firstly they analyse the pattern of the client’s cash flows, based on which the terms of borrowings can be defined. Then the merchant banker prepares a detailed loan memorandum, which is circulated to various banks and financial institutions and they are invited to participate in the syndicate.The banks then negotiate the terms of lending on the basis of which the final allocation is done.
• Providing venture capital and mezzanine financing- Merchant bankers help companies in obtaining venture capital financing for financing their new and innovative strategies.

Registration of merchant bankers…

Registration with SEBI is mandatory to carry out the business of merchant banking in India. An applicant should comply with the following norms:

• The applicant should be a body corporate
  
• The applicant should not carry on any business other than those connected with the securities market
  
• The applicant should have necessary infrastructure like office space, equipment, manpower etc.
  
•  The applicant must have at least two employees with prior experience in merchant banking
•  Any associate company, group company, subsidiary or interconnected company of the applicant should not have been a registered merchant banker
  
• The applicant should not have been involved in any securities scam or proved guilt for any offence
  
•  The applicant should have a minimum net worth of Rs.5 crores