With a large amount of public funds being invested in equity in the capital markets, merchant banking has gained popularity as a means of bridging the gap between wealthy investors and corporates that are looking for funding to meet their business needs like expansion, diversification or setting up a new enterprise. A merchant banker has specialized skills in mobilizing funds from private investors, and can help both large corporations and SMEs access funds for ensuring better utilization of financial resources.
Who is a merchant banker?
A merchant banker usually refers to a firm or organization involved in all aspects of issue management. Their services include providing consultancy or advisory services to corporates for issue management, making arrangements for buying, selling or subscribing to shares in an issue or any other consultancy or services such as underwriting, analysis and advice related to mergers and acquisitions, arranging offshore funding or venture capital, credit syndication and portfolio management.
In India, the Securities and Exchange Board of India (SEBI) classifies merchant bankers into four categories based on permissible activity and capital adequacy norms (see table below).
|Category||Activities||Minimum net worth requirement|
|Category 1||Act as Issue Manager, underwriter, advisor, consultant or portfolio manager||Rs.5 crore|
|Category 2||Act as co-manager, underwriter, advisor, consultant or portfolio manager||Rs.50 lakhs|
|Category 3||Act as co-managers without undertaking portfolio management||Rs.20 lakhs|
|Category 4||Only act as an advisor or consultant for the issue||Nil|
What services do Merchant Bankers offer?
Merchant banking firms carry out a range of activities that help enterprises mobilize funds from the capital markets. These services include preparing project reports, advising on the best suitable financing structure, identification of sources for buying or selling shares and negotiating with banks and financial institutions with regard to a project’s viability through detailed analysis of the financial, technical, marketing and commercial viability of the enterprise. In addition, merchant bankers undertake underwriting services for an issue, including registration of the offer document, handling marketing and publicity for the issue, providing underwriting support and listing on the stock exchanges. They also take care of all formalities such as filling up applications and getting approvals from the Government, regulatory bodies or financial institutions.
How to choose a merchant banker?
As per SEBI regulations in India, it is mandatory for a merchant banker to have a certificate of registration issued by SEBI, in order to offer merchant banking services.Besides this, tying up with a certified merchant banker, whose profile best suits the requirements of the enterprise can play a crucial role in the raising capital.Here are some guidelines on what to look for in a merchant banker.
- Proven track record: Choosing a merchant banker that has experience in successfully managing at least one issue is essential as they will know all the regulatory and legal formalities that need to be taken care of for listing.
- Good investor relations: A merchant banker with good contacts with investors, venture capitalists and financial institutions, can help in mobilizing funds through successfully placing the company’s shares.
- Industry focus: Opting for a merchant banking firm that has a strong focus in the industry in which the enterprise operates can make a difference as they are aware of the way the market works in a particular sector.
- Research skills: Since there are several aspects to be looked at before floating an IPO, the chosen merchant banker must have the capabilities of thoroughly researching essential information with regard to the company’s capital structuring, financial viability and other elements that are important for the success of the issue.
- Experience in market making: The selected merchant banker should have the required skills and experience related to market making, including the process involved in trading, underwriting, buying, selling and marketing stocks.
Leading merchant bankers in India
In India, there are public sector, private sector as well as foreign players in the merchant banking industry. Some of the key players are listed below.
Public sector: SBI Capital Markets, Punjab National bank, IFCI Financial Services
Private sector: ICICI Securities, Axis Bank, Bajaj Capital, Tata Capital Markets, Yes Bank, Kotak Mahindra Capital Company, Reliance Securities
Foreign merchant bankers: Goldman Sachs (India) Securities, Morgan Stanley India, Barclays Securities (India), Bank of America, Citigroup Global Markets India
Leading merchant bankers in USA
The top merchant bankers in the USA include JP Morgan, Merrill Lynch, Deutsche Bank, Goldman Sachs, Morgan Stanley, Citigroup, Credit Suisse, UBS, Barclays and RBC Capital Markets.
Often, SMEs in India don’t achieve their full potential due to lack of funding during the crucial stages of growth. With the BSE and NSE launching SME exchanges for helping small and medium industries tap the capital markets for additional funding, merchant bankers will have a key role to play by liaising between the enterprises and investors to make sure that public funds are put to the best use for the growth of the SME sector as well as the Indian economy as a whole.
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