What is Merchant Banking? Definition, Category, Functions, Responsibilities

  • Post last modified:10 August 2021
  • Reading time:8 mins read
  • Post category:Finance
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What is Merchant Banking?

Merchant Bank may be defined as a financial institution conducting money market activities and lending, underwriting and financial advice, and investment services for a corporate enterprise or an individual in marketable securities by deciding the quantum, timing and the type of security to be bought.

Any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management. – Securities & Exchange Board of India (Merchant Bankers) Rules, 1992

Thus, a merchant bank is a financial institution which provides capital to companies in the form of share ownership instead of loans. A merchant bank also provides advisory on corporate matters to the firms they lend to.

In the USA, the term “merchant bank” refers to an investment bank. Merchant banking is a fee-based business, where the bank assumes market risks but no long-term credit risk.”

Categories of Merchant Banking

  • Category – I To carry issue management

  • Category – II Act as advisor, underwriter, portfolio manager

  • Category – III Underwriter, advisor, consultant to an issue

  • Category – IV Advisor

Functions of Merchant Banking

  1. Under writer
  2. Banker
  3. Broker
  4. Registration
  5. Debenture Trustee
  6. Port folio Manager

Under writer

Underwriter is a person or agencies that provides guarantees or commitment to take up failure of the stock to get subscription for public known as underwriter.


Banker who engaged in the function of collecting application or money from the investors and he should repay the application money to applicants to whom security could not be allotted are called “Banker to an issue”.


Then another functions of merchant banker is acting as intermediary between savers and investors such as collecting application, issuing the shares etc.


The registrar an issue, as an intermediary in the primary market carry activities of:

  • Collecting application from an investor
  • Keeping a proper record
  • Money receiving
  • Money repaying
  • Allotment of securities

Debenture Trustee

This trustee is the person who are appointed as person to give safeguard the interest of debenture holder called “Debenture Trustee”. He only in-charge for interest of debenture.

Port folio Manager

The person who contact with client in oldest invest and manage or administrative the various stock and security called portfolio manager.

Read in Detail: Functions of Merchant Banking

Responsibilities and Obligation of Merchant Banking

  1. Maintenance of books of accounts record
  2. Submission of half yearly
  3. Appointment of lead merchant banker
  4. Responsibilities of lead merchant banker
  5. Appointment of compliance officer
  6. Underwriting obligation

Maintenance of books of accounts record

  • Copy of balance sheet
  • Copy of auditor report
  • Statement of financial position
  • Every merchant banker has to

Submission of half yearly

Every merchant banker should furnish unaudited half year financial report to SEBI which is required by SEBI.

Appointment of lead merchant banker

At least one merchant banker should functioning as lead merchant banker in order to manage all the issues from public.

Restriction on appointment of lead merchant banker

The lead merchant banker should have fifty crores of his registration otherwise he is not eligible for lead merchant banker.

Responsibilities of lead merchant banker

  • Lead merchant banker must give his responsibility details to SEBI at least one month before.

  • In case there is more than one lead merchant banker the responsibility should be clearly demanded and divided.

Appointment of compliance officer

Every merchant banker should appoint one compliance officer to monitor the complaints of public. He is responsible for monitoring the compliance act, rules and regulation.

Underwriting obligation

In respect of every issue to be managed, the lead merchant banker holding a certificate under category I shall accept 5% of total underwriting commitment.

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