Over view of merchant banking system

Introduction-
CHINMOY GHOSH

The Progress of any economy mainly depends on the efficient financial system of the
country. Indian economy is no exception of this. This importance of the financial sector
reforms affirms an effective means for solving the problems of economic, financial and
social in India and elsewhere in the developing nations of the world. The progress of the
securities Industry of any country depends mainly on the flow of funds.Infact, Capital
generation is the lifeblood of the capital market without which the health and soundness
of the financial system cannot be geared up and for which well-developed capital market
as well as money market is essential.
To study the significance of Merchant Banking towards the development of securities
industry.

* To analyze issue management regulations.

* To analyze the functions of Merchant Banking in relation to rules and regulations of
SEBI.
* To evaluate the performance of Merchant Bankers, both activity performance and
operational and financial performance.
* To draw a conclusion and suggestions based on the analysis and experiences.
The services of merchant banking cover project counseling, per investment activities,
feasibility studies, and project reports, design of capital structure, issue management,
underwriting, loan syndication, and mobilization of funds, venture capital and public
deposits. Merchant Banking is skill based activities and involves serving financial need
of every client. Merchant Bankers can turn to any of the activities depending upon
resources such as capital, foreign tie-ups for overseas activities and skills. The issue of
securities is the core of merchant banking function. The issue function may be broadly
divided into pre-issue management and post-issue management.

Types of issues are:

• Public issue
• Bonus issue
• Right issue

Origin of Merchant Banking

The origin of merchant banking is to be traced to Italy in late medieval times and France
during the seventeenth and eighteenth centuries. The Italian merchant bankers introduced
into England not only the bill of exchange but also all the institutions and techniques
connected with an organized money market during seventeenth and eighteenth centuries.
In France a merchant banker (le merchant banquet) was not merely a trader but an
entrepreneur par excellence. He invested his accumulated profits in all forms of
promising activities. He added banking business to his merchant activities and became a
merchant banker.

Money changer and exchanger

In the late medieval to early modern times distinction existed in banking system between
money changer and exchanger. Money changers concentrated on the manual change of
different currencies operated locally and later accepted deposits for security reasons. In
course of time, money changers evolved into public or deposit banks. International
exchangers engaged in bill-broking, raising foreign exchange and provision of long term
capital for public borrowers. The exchangers were remitters and merchant bankers.
During this period merchant banker was a dealer in bills of exchange who operated with
correspondent abroad and speculated on the rate of exchange. Initially, merchant banks
were not banks at all and a distinction was drawn between banks, merchant banks and
other financial institutions. Among all these institutions, it was only banks that accepted
deposits from public
.

Merchant banks in the United Kingdom

in the United Kingdom, merchant's banks came into operation in the late eighteenth
century and early nineteenth century. Industrial revolution made England into a powerful
trading nation. Rich merchant houses that made their fortunes in colonial trade diversified
into banking. Their principal activity started with the acceptance of commercial bills
pertaining to domestic as well as international trade. The acceptance of the trade bills and
discounting gave rise to acceptances houses, discount houses and issue houses. Merchant
banker was primarily a merchant rather than a banker but he was entrusted with funds by
his customers. The term merchant bank is used to denote banks that are not merchants.
Sometimes for merchants who are not bankers and sometimes for business houses that
are neither merchants nor banks. These confusions emerge because of a wide range of
activities carried out by modern merchants. The merchants provide various services, like:

-Finance foreign trade

-Issue capital
-Manage individual funds
-Undertake foreign security business
-foreign loan business
Sometimes, finance sovereign government through granting long terms loans and also
British government for purchasing shares of Suez Canal.

Since the end of the Second World War, commercial banks in Western Europe have been
offering multiple services including merchant banking services to their individuals and
corporate clients. British banks set up divisions or subsidiaries to offer their customers
merchant banking services.
Merchant Banking in India

Merchant banking activity was formally initiated into the Indian capital Markets when
Grind lays bank received the license from reserve bank in 1967. Grind lays started with
management of capital issues, recognized the needs of emerging class of entrepreneurs
for diverse financial services ranging from production planning and system design to
market research. Even it provides management consulting services to meet the
requirements of small and medium sector rather than large sector. Citibank Setup its
merchant banking division in 1970. The various tasks performed by this divisions namely
assisting new entrepreneur, evaluating new projects, raising funds through borrowing and
issuing equity. Indian banks Started banking Services as a part of multiple services they
offer to their clients from 1972. State bank of India started the merchant banking division
in 1972. In the Initial years the SBI's objective was to render corporate advice And
Assistance to small and medium entrepreneurs. Merchant banking activities is OF course
organized and undertaken in several forms. Commercial banks and foreign development
finance institutions have organized them through formation divisions, nationalized banks
have formed subsidiaries companies and share brokers and consultancies constituted
themselves into public limited companies or registered themselves as private limited
companies. Some merchant banking outfits have entered into collaboration with merchant
bankers abroad with several branches.

Nature of merchant banking

The services of merchant bank cover project counseling, pre investment activities,
feasibility studies, project reports, design of capital structure, issue management,
underwriting, loan syndication, mobilization of funds, foreign currency finance, mergers,
amalgamation, takeover, venture capital and public deposits. Merchant banking is skill
based activities and involves serving financial need of every client. Merchant bankers can
turn to any of the activities depending upon resources, such as capital, foreign tie-ups for
overseas activities and skills.
The depth and sophistication in merchant banking business are improving since the
avenues for raising funds are widening and demands for funds is increasing.

Objectives of the merchant banker's regulations

The merchant banker's regulations, which regulate the raising of funds in the primary
market, would assure for the issuer market for raising resources at low cost, effectively
and easily, ensure high degree of protection of investors interest. The regulations provide
for the merchant bankers a dynamic and competitive market with the high standard of
professional competence, dignity, integrity and solvency. The regulations promote a
primary market, which is fair, efficient, and flexible, and inspire confidence. An
authorization from SEBO is necessary for running merchant banking business.
Conclusion-

Any person who is engaged in the business if issue management either by making
arrangements regarding selling, buying or subscribing to securities has manager,
consultant, advisor or rendering corporate advisory services in relation to such issue
management.
References-
Indian Financial system by M.Y. KHAN