Nature, Characteristics and Scope of Merchant Banking


Nature of Merchant Banking

Advisory in nature

Merchant bankers provide advisory services to their clients in field of management, financial and legal matters. They assist businessmen in various ways like advising them about how to start a business, expand its size and revive it in case of any downfall.

Financial arrangement

Merchant bankers do all financial arrangement for their client for fulfillment of their needs. First, they analyze their needs and accordingly suggest them sources for raising funds. They guide people in raising funds by taking bank loans or issuing securities such as shares and debentures. It provides access to both national and international sources for acquiring the required funds.

Fees based

They charges fees for providing their professional services to a group a customer. Merchant banker operates their services in return for some consideration that may be in the form of fees or commission. It serves as the key source of generating income for these highly-skilled individuals.

Portfolio management

Merchant banks monitors the investment of their customers for ensuring safety of their principal. It guides them in taking all investment decisions for ensuring better return. All investment vehicles are properly analyzed by them in terms of their votality, liquidity and profitability before choosing any of them.

Corporate reconstructing

Corporate reconstructing refers to various events taking place within the organization that changes its overall capital structure. These events comprise of mergers, takeovers, disinvestment and sale of business units. All these business events leads to various formalities in terms of documentation, negotiation various other legal duties. Merchant banker perform all these formalities on behalf of its clients thereby relieving them from such hectic process. 

Stock Broker

Merchant bank function as a broker of stock exchange by purchasing and selling securities of their customers. They perform a detailed research of market performance and direct their clients which securities are to be purchased and which not. Customers make all decisions on their recommendations regarding when to buy a security, in what amount and when it should be sell.

Innovative approach

Merchant bankers follows an innovative for delivering their services to people. Instead of same repetitive operations, it performs different analysis and researches to come up with innovative techniques. New ways of dealing with business affairs are found to come up with better results. 

Characteristic of Merchant Banking

High proportion of Decision makers

Merchant banks have large numbers of highly professional decision makers. The personnel working in these banks are skilled and knowledgeable in their fields that enable them to provide excellent management services. SEBI has allowed only the quality manpower to act as a merchant banker which provide consultant services on basis of their research and analysis.

Rapid decision process

Merchant bankers are characterized by rapid decision making due to the presence of efficient and innovative staff. They handle every matter of their client in a professional manner that leads to quick decision making. All services are provided by these bankers with focused state of mind which helps in approaching problems and implementing decisions rapidly.

Large information

There is a large density of information available with merchant bankers that enables them in taking strategic decisions. Large set of data is collected related to various areas like market conditions, legal laws, business internal affairs etc. These information is then processed by them to arrive at better conclusion for helping their clients. 

Emphasis on fees and commission income

Merchant bankers provide their professional services to their client in return for some financial consideration. This consideration is either in the form of fees or commission. This financial consideration is the reward for providing wide range of consultant services in field of management, finance, corporate and legal matters.

Intense Environmental contact

These type of banks have an intense contact with environmental conditions on a regular basis. Merchant banker properly studies market conditions for guiding their clients in decision related to creation of portfolio. While raising the funds for their customers, they properly analyses the market for choosing the most suitable source that fulfills their needs efficiently.

Handle promotional activities

Merchant banker take responsibilities of carrying out all the promotional activities of business enterprise. Right from the beginning when idea is conceived to its approval from government and final establishment of business enterprise, all activities are carried out by these professional individuals. They provide both financial and technical assistance.

Scope of Merchant Banking

Fund raising

Acquisition of required funds timely for their clients is one of the major role played by Merchant bankers. They provide access to various sources of finances at both domestic and international level to their customers. These professional analyses the needs of people and accordingly suggest them better source of finance. Various source of finance available are taking loans, issuing equity share and debentures etc. Timely availability of funds facilitates in establishing a new business project, modernizing and expanding their areas of activities.

Portfolio Management

It does the work of managing the portfolio of their customer. Merchant banker direct their clients with regard to their investment decisions by suggesting them the securities in which they should invest. They ensure safety of their clients’ money by analyzing the securities in terms of risk, return and rate of votality.

Manages Project

Merchant banker perform the responsibility of managing the project of their clients. They guide them in various events related to project such as choosing the project location, preparing project report, performing feasible studies, deciding financing plan, choosing financial source and informing them about government incentives.

Revive sick industrial units

Revival of sick industrial units is an important function rendered by merchant banks. They help small industries by arranging the finance facilities for them by doing negotiations with lending institutions, banks and Board for Industrial and Financial reconstruction. These professionals support the expansion of these industries by apprising them of new technologies and guiding in legal matters.

Manage public issues of companies

Merchant banks handles all activities of companies related to public issue of their securities. These highly-skilled individuals forecast the market conditions and accordingly direct organization when to issue securities, at what price and in what amount. All process related to such issue like accepting application forms from public, allotting shares, appointment of broker and underwriter etc. are all performed by merchant bankers.

Decides interest and dividend decisions

A merchant banks assist its clients in taking decisions regarding declaration of dividend on its securities and interest on loans/debentures. They conduct an analysis of overall market conditions and availability of business profit before deciding the rate and timing of such declaration. 

Broker in stock exchange

Merchant bankers act as stock exchange broker by dealing in activities such as purchasing and selling of securities. They perform all these activities on part of their customers. These individuals conduct a detailed analysis of market performance for choosing the most suitable securities. They give advice regarding which security to purchase, when to purchase, in what amount and when it should be sell.

Leasing services

These banks also offers leasing service to their clients. Lease is a formal agreement entered into between two individuals for renting a particular equipment whereby owner allows the usage of its asset by another person on rent basis. Merchant banks facilitate the access to these services by acting as an intermediary of leasing companies.