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.
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 feebased business, where the bank assumes market risks but no long-term credit risk.”
Categories of Merchant Banking in India
According to the Securities and exchanges Board of India (SEBI), four categories of the merchant banking organizations exist in the country:
- Institutional based merchant banking organizations operate as subsidiaries of private financial institutions or those recognized by the state or central governments.
- Banker based organizations are those that operate as divisions or subsidiaries of the nationalized commercial banks or the foreign banks functioning in the country.
- The third category consists of qualified brokers who provide skilled merchant banking services like portfolio management.
- The private merchant banking organizations work as sole proprietorships, private limited, public limited or partnership companies.