Table of Contents
What is a Merchant Bank?
Merchant banking is a special branch of banking that provides financial services to medium to small-sized businesses. They may help with underwriting, fundraising, credit or financial advice. Merchant banks may also provide services to high net worth individuals.
Some merchant banks may be affiliated with other retail or investment banks, but this specialized branch of banking does not provide services to the general public.
Read more: SEBI-registered merchant banks in India
Here’s an overview of the services that merchant banks offer to the general public.
How Does Merchant Banking Work?
Merchant banks work with large companies to cater to their complex financial needs. The services they provide include:
- Fundraising and capital acquisition for various purposes like mergers, acquisitions, expansion.
- They also provide underwriting, securities trading and advisory services
- Asset management, wealth management, investment management for companies and high net worth individuals and families
Functions of Merchant Banks
A merchant bank’s primary function is to provide financial and advisory services to medium-sized businesses.
➡️ Portfolio Management
Merchant banking companies provide portfolio management services to high-net-worth individuals and corporate investors. These services include a selection of securities, portfolio monitoring and review, advice on the rationalization of portfolios, and tax planning.
➡️ Fundraising
Merchant banking helps businesses raise funds from the public by issuing shares and debentures, rights issues of shares, preferential allotment of shares, private placement of shares and debentures, and other instruments.
➡️ Loan Syndication
Merchant bankers help arrange funds for large corporate borrowers by syndicating loans from multiple lenders. They act as an intermediary between the borrowing company and the lending institutions.
➡️ Leasing Services
Merchant banks provide leasing services to companies in the form of capital goods, vehicles and office equipment. This helps to reduce the overall financial burden of the companies.
➡️ Underwriting Services
Merchant banks also provide underwriting services for initial public offerings (IPOs), private placements, follow-on public offerings (FPOs) and rights issues. This service helps companies to raise the required funds from the public.
Example of Merchant Banking
In 2021, merchant bank Avendus Capital helped the Indian company Piramal Enterprises acquire the debt-ridden assets of Dewan Housing Finance Corporation (DHFL) for ₹34,250 crore ($4.4 billion). This was one of the largest debt restructuring deals in India and helped Piramal Enterprises to become a major player in the Indian financial services sector.
Top 10 Merchant Banks in India
- Kotak Mahindra Capital: India’s largest merchant bank, providing a wide range of services to businesses, including raising capital, mergers and acquisitions (M&A), and project finance.
- Morgan Stanley India: Global investment bank with a strong presence in India, offering services such as underwriting, M&A advisory, and equity research.
- JM Financial: Full-service merchant bank with a focus on emerging markets, providing services such as debt and equity capital markets, M&A advisory, and restructuring.
- Avendus Capital: Leading merchant bank with a focus on M&A and private equity, providing services such as deal origination, execution, and post-merger integration.
- Edelweiss Financial Services: India’s leading financial services company, providing a wide range of services to businesses, including investment banking, asset management, and wealth management.
- Goldman Sachs India: Global investment bank with a strong presence in India, offering services such as underwriting, M&A advisory, and equity research.
- Axis Capital: Leading merchant bank with a focus on debt capital markets, providing services such as debt issuance, restructuring, and advisory.
- Citigroup Global Markets India: Global investment bank with a strong presence in India, offering services such as underwriting, M&A advisory, and equity research.
- Nomura Financial Advisory and Securities India: Global investment bank with a strong presence in India, offering services such as underwriting, M&A advisory, and equity research.
- Bank of America Securities India: Global investment bank with a strong presence in India, offering services such as underwriting, M&A advisory, and equity research.
Merchant Banking vs Investment Banking
Both merchant and investment banks provide financial services to businesses, but serve very different functions.
| Feature | Merchant Bank | Investment Bank |
|---|---|---|
| Focus | International finance, business loans for companies, and underwriting | Underwriting and issuance of securities on behalf of large corporations |
| Clients | Small and medium-sized businesses, high-net-worth individuals, and family offices | Large corporations and government entities |
| Services | Mergers and acquisitions (M&A), project finance, trade finance, leasing, and advisory services | Underwriting, private placement, initial public offering (IPO) management, debt and equity securities issuance, and financial restructuring |
| Risk appetite | Higher risk appetite since they deal with smaller businesses | Lower risk appetite, generally not open to doing business with riskier, high-growth businesses |
| Profit model | Fee-based | Commission-based |
Merchant banking is a valuable financial service that can provide growing businesses with the capital and financial help they need. It can also provide advice and assistance in areas such as financial management, corporate strategy and risk management.
By utilizing the services of a merchant bank, businesses can access capital, reduce costs and gain access to a variety of specialized services. In short, merchant banking is an essential component of any business’s financial strategy.
- One-stop banking solutions platforms like RazorpayX allow business owners to open current accounts, pay taxes, schedule payments, pay vendors seamlessly and check invoices from a single dashboard. This saves valuable time and effort.
- It is an accounting and banking platform that fills the gap between advanced banking solutions and finance professionals. It allows easy accounting software integration.
- With RazorpayX Payroll, businesses can automate salary payments and provide insurance policies to their employees
Frequently Asked Questions
What is merchant banking?
Merchant banking is a financial service provider that offers a wide range of services such as underwriting, issuing of securities, asset management, portfolio management, and advisory services. Merchant banks provide specialized services to large corporations, high net worth individuals, and institutional investors.
What services do merchant banks offer?
Merchant banks offer a wide range of services such as underwriting, issuing of securities, asset management, portfolio management, and advisory services. They also provide specialized services such as capital raising, merger and acquisition advice, foreign exchange transactions, and project finance.
What is the role of merchant banks in the capital markets?
Merchant banks play an important role in the capital markets. They help companies to raise capital in the form of debt or equity. They can also provide advice on mergers and acquisitions, restructuring, and project financing. In addition, they can provide valuable services such as portfolio management, asset management, and advisory services.
What are the advantages of using merchant banks?
The main advantages of using merchant banks are access to capital markets, expertise in dealing with financial products and services, and the ability to provide valuable advice. Merchant banks can provide advice on mergers and acquisitions, restructuring, and project financing. They can also offer a wide range of services such as underwriting, issuing of securities, asset management, and portfolio management.
What are the risks of using merchant banks?
The main risks associated with using merchant banks include the potential for conflicts of interest, the cost of using their services, and the complexity of their services. Additionally, there is the risk of mismanagement of funds and potential for fraudulent activities.
