Merchant Banking Functions

The meaning and functions of merchant banking
SEBI (Merchant Bankers) Rules 1992 defines a Merchant Banker as

“ Merchant Banker means a person who is engaged in the business of issue management either by making
arrangements regarding selling, buying or subscribing to the securities as manager, consultant, advisor or
rendering corporate advisory service in relation to such issue management”
Functions
1. Raising Finance for Clients : Merchant Banking helps its clients to raise finance through issue of
shares, debentures, bank loans, etc. It helps its clients to raise finance from the domestic and international
market. This finance is used for starting a new business or project or for modernization or expansion of the
business.
2. Broker in Stock Exchange : Merchant bankers act as brokers in the stock exchange. They buy and
sell shares on behalf of their clients. They conduct research on equity shares. They also advise their
clients about which shares to buy, when to buy, how much to buy and when to sell. Large brokers, Mutual
Funds, Venture capital companies and Investment Banks offer merchant banking services.
3. Project Management : Merchant bankers help their clients in the many ways. For e.g. Advising about
location of a project, preparing a project report, conducting feasibility studies, making a plan for financing
the project, finding out sources of finance, advising about concessions and incentives from the
government.
4. Advice on Expansion and Modernization : Merchant bankers give advice for expansion and
modernization of the business units. They give expert advice on mergers and amalgamations, acquisition
and takeovers, diversification of business, foreign collaborations and joint-ventures, technology up-
gradation, etc.
5. Managing Public Issue of Companies : Merchant bank advice and manage the public issue of
companies. They provide following services:
(1) Advise on the timing of the public issue.
(2) Advise on the size and price of the issue.
(3) Acting as manager to the issue, and helping in accepting applications and allotment of securities.
(4) Help in appointing underwriters and brokers to the issue.
(5) Listing of shares on the stock exchange, etc.
6. Handling Government Consent for Industrial Projects : A businessman has to get government
permission for starting of the project. Similarly, a company requires permission for expansion or
modernization activities. For this, many formalities have to be completed. Merchant banks do all this work
for their clients.
7. Special Assistance to Small Companies and Entrepreneurs : Merchant banks advise small
companies about business opportunities, government policies, incentives and concessions available. It
also helps them to take advantage of these opportunities, concessions, etc.
8. Services to Public Sector Units : Merchant banks offer many services to public sector units and
public utilities. They help in raising long-term capital, marketing of securities, foreign collaborations and
arranging long-term finance from term lending institutions.
9. Revival of Sick Industrial Units : Merchant banks help to revive (cure) sick industrial units. It
negotiates with different agencies like banks, term lending institutions, and BIFR (Board for Industrial and
Financial Reconstruction). It also plans and executes the full revival package.
10. Portfolio Management : A merchant bank manages the portfolios (investments) of its clients. This
makes investments safe, liquid and profitable for the client. It offers expert guidance to its clients for taking
investment decisions.
11. Corporate Restructuring : It includes mergers or acquisitions of existing business units, sale of
existing unit or disinvestment. This requires proper negotiations, preparation of documents and completion
of legal formalities. Merchant bankers offer all these services to their clients.
12. Money Market Operation : Merchant bankers deal with and underwrite short-term money market
instruments, such as:
(1) Government Bonds.

(2) Certificate of deposit issued by banks and financial institutions.
(3) Commercial paper issued by large corporate firms.
(4) Treasury bills issued by the Government (Here in India by RBI).
13 Leasing Services : Merchant bankers also help in leasing services. Lease is a contract between the
lessor and lessee, whereby the lessor allows the use of his specific asset such as equipment by the
lessee for a certain period. The lessor charges a fee called rentals.
14 Management of Interest and Dividend : Merchant bankers help their clients in the management of
interest on debentures / loans, and dividend on shares. They also advise their client about the timing
(interim / yearly) and rate of dividend.

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Merchant Banking Functions

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The meaning and functions of merchant banking

SEBI (Merchant Bankers) Rules 1992 defines a Merchant Banker as

(1) Government Bonds.

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