The Evolution of Merchant Banking in the Indian Scenario

The financial crisis of 2007–2008 caused significant stress on banks around the world. The failure of a large number of major banks resulted in government bail-outs. The collapse and fire sale of Bear Stearns to JPMorgan Chase in March 2008 and the collapse of Lehman Brothers in September that same year led to a credit crunch and global banking crises. In response governments around the world bailed-out, nationalised or arranged fire sales for a large number of major banks. Starting with the Irish government on 29 September 2008,[210] governments around the world provided wholesale guarantees to underwriting banks to avoid panic of systemic failure to the whole banking system. These events spawned the term ‘too big to fail’ and resulted in a lot of discussion about the moral hazard of these actions.

In order to speed up the pace of economic development, efforts were made to channelise the household savings into investment in industry and trade. Significant amendments were made in Companies Act, Capital Issues (Control) Act, Banking Companies Act to regulate the growth of business enterprises. 4% to 5% from their home and made advances to native merchants at 10% to 12% and in addition they charged high commissions on every kind of service provided to the clients. But merchant banks in India have been primarily operating as issue houses than full-fledged merchant banks as in other countries. In order to earn profits, they invested their funds where they expected higher returns despite high degree of risk involved.

Further, share brokers generally being partnership; firms do not have the financial clout which is necessary for market making activity. Resultantly, the SEBI has suggested that any member of the stock exchange along with one merchant banker registered with SEBI could act as a market maker. The SEBI has felt that to ensure liquidity of scrip it was necessary to facilitate greater movement, which could only be achieved through the institution of market makers.

formal merchant banking activities in india was originated in: Merchant Banking Origin, Scope and Functions

 They are essential advisors for companies seeking to
become multinational corporations. The analyst sees pharmaceuticals, information technology & engineering specifically auto ancillaries as the areas where an increasing amount of M&As will take place in India. The merchant banker should act as the custodians of the investors money and this puts a lot of responsibility on them.

  • During the 20th century, developments in telecommunications and computing caused major changes to banks’ operations and let banks dramatically increase in size and geographic spread.
  • The State Bank of India was the first Indian commercial bank having set up a separate merchant banking Division in 1972.
  • During the Qing dynasty, the private nationwide financial system in China was first developed by the Shanxi merchants, with the creation of so-called “draft banks”.

With the fall of the Qing dynasty, the financial centers gradually shifted to Shanghai, with western-style modern banks flourishing. Today, the financial centres in China are Hong Kong, Beijing, Shanghai and Shenzhen. Many scholars trace the historical roots of the modern banking system to medieval and Renaissance Italy, particularly the affluent cities of Florence, Venice and Genoa. To obtain the certificate of registration, one had to apply in the prescribed form and fulfill two sets of norms (i) operational capabilities and (ii) capital adequacy norms. (a) Punjab national bank
(b) Standard charted bank
(c) National & Grin days bank
(d) National city bank. (ii) Assist the enterprises in procuring finance by guaranteeing the bank loans and advances.

Merchant Bankers assist their clients in fund raising by way of issue of a debenture, shares, bank loans, etc. National Grindlays Bank introduced the concept of merchant banks in India somewhere in 1967. Similarly, the State Bank of India became the first Indian Commercial Bank to set up a separate Merchant Banking Division in the year 1972. These services highlight merchant banks’ comprehensive financial solutions, allowing businesses and individuals to access capital, manage investments, and optimize their financial strategies. It was during this period that National & Grindlays Bank (now Grindlays Bank) took a lead by taking up merchant banking activities; and announced the inauguration of its “Merchant Banking Division” in January 1969.

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Merchant banking is a specialized banking service that assists businesses and individuals in managing financial transactions beyond traditional banking. It offers functions like underwriting, advisory, and investment activities. Merchant banks act as trusted partners, providing expert guidance and strategic support. They have evolved to offer a wider range of services, leveraging technology and prioritizing sustainable finance. Merchant banking services contribute to a country’s economic progress by serving as sources of finances and information for businesses. The importance of merchant banking services in India is undeniable, given the country’s economic growth.

The modern bank

The merchant banks are also different from the dealers, traders and brokers of securities. Although these banks are subject to many rules and regulations framed by the SEBI as well as the Reserve Bank of India, they continue to flourish. Now with changing international conditions and consumer trends, it is upto the government to bring in reforms which protect the interests of the customers as well as provide a platform for these banking services to prosper. A merchant bank is an institute that is both fee and fund-based as it offers custodial, banking, and advisory service to its customers. On the other hand, an investment bank is just fee-based as it earns money from services offered, lease rentals, and interest. It is an institution that offers consultancy to its customers regarding financial, managerial, marketing, and legal concerns.

Italian bankers

Dictionary meaning of merchant banking points at merchant bank as an organisation that underwrites securities for corporations advises such clients on mergers and is involved in the ownership of commercial ventures. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

Businesses often require specialised banking services which are concentrated in nature. In the financial services realm, merchant banking encompasses specialized services aimed at supporting businesses with their financial needs. This includes underwriting securities, providing capital for expansion, offering advisory services for mergers and acquisitions, and assisting with corporate restructuring.

To discharge this function the merchant bankers have to exercise due diligence independent by verifying the contents of the prospectus and the reasonableness of the views expressed therein. On 1st March, 1993 new policy guidelines have been issued by SEBI for the merchant bankers to ensure greater transparency in their operations and to make them accountable so as to protect the investor’s interest. The guidelines relate to pre-issue obligations, underwriting, advertisements and post-issue obligations of the merchant bankers. The U.S. established the Securities and Exchange Commission in 1933, and passed the Glass–Steagall Act, which separated investment banking and commercial banking. This was to avoid more risky investment banking activities from ever again causing commercial bank failures.

They, infact, have given a tough competition to the commercial banks in the operations of merchant banking. Merchant banking services, in India, were started only in 1967 by National Grindlays. The State Bank of India was the first Indian commercial bank to set up a separate merchant banking division in 1972. If they are
unwilling to supply investment banking bridge loans, they have a
low cost strategy for taking your company public.  They do private investment in public equities
 They can advise or help with a company’s M&A strategy.

Functions of Merchant Bankers

Companies desirous of venturing into novel projects are assisted by the merchant bankers in obtaining necessary venture capital finance. In the area of fund-based activities also, merchant bankers offer their services. I.e. designing the capital structure, deciding the level of the promoters’ stake/contribution in the project, and estimating the amount of term loan to be raised from the financial institutions. In this connection, it is relevant to ensure that various guidelines and other requirements pertaining to the financing of industrial projects are meticulously adhered to. The major activities done by merchant bankers are underwriting, portfolio management, consultant, and advisor, whereas commercial banks mostly play the role of financers only. After a couple of years, the practice of merchant banking evolved in the modern era from London.