Merchant Banking

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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 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:

  1. Institutional based merchant banking organizations operate as subsidiaries of private financial institutions or those recognized by the state or central governments.

  2. Banker based organizations are those that operate as divisions or subsidiaries of the nationalized commercial banks or the foreign banks functioning in the country.

  3. The third category consists of qualified brokers who provide skilled merchant banking services like portfolio management.

  4. The private merchant banking organizations work as sole proprietorships, private limited, public limited or partnership companies.

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