[Overview, Meaning, Functions, Origin, Indian Laws]
The emphasis on the growth of the economy and increase in savings lying idle, added with the inefficiency of businesses to raise capital to expand, modernize, diversify, Merchant Banks(MB) was the need of the hour. Securities Exchange Board of India’s formation in 1992, there were multiple guidelines, rules, and regulations for the corporate sector to comply with. Merchant Banks while providing its services to companies, kept their knowledge updated about various enactments such as income tax act, Companies Act, FERA, and further corporate laws and regulations. Goldman Sachs, Credit Suisse, JP Morgan, Citigroup are top merchant banks in the world. They are called “Accepting and Issuing Houses” in the UK, and ‘investment banks ‘ in the USA.
Simplified Definition:
Merchant Banks are banks giving banking services as well as consultancy services. Usually, merchant banks are defined as what merchant bankers do. Merchant banks provide underwriting, long term loans, and advice on the merger of companies, etc. They often indulge in work with only foreign and multinational companies.
As per the Securities and Exchange Board of India (Merchant Banker) Regulation, 1992, a merchant banker has been defined as “ Any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities as a manager, consultant, adviser or rendering corporate advisory services in relation to such issue management.”
For instance, if company X wants to buy company Z, it may approach a merchant banker. The merchant banker will guide them through the best and economical line of direction, which abides all complex laws, to buy company Z. One should remember that services offered by merchant banks vary from country to country. It is important to mention there are several other services that merchant banks provide, and a merchant bank may specialize in a function or take up other activities as well.
FUNCTIONS OF MERCHANT BANKS
- Underwriting of capital issues.
- Loan Syndication
- Merger and Acquisition services
- Issue Management
- Portfolio Management
- Corporate Counseling
- Project Counselling
- Leasing Services
- Investment services to foreign companies
ORIGIN & EVOLUTION
Merchant Banks were first found in the 13th century and the modern merchant banking system started in the 17th century. Today merchant banks are involved in an exhausting list of functions. In the 1880s, London based banks initiated merchant banking in India and the Far East, as per Thoman Skinner’s annual directories. Merchant bankers were traditionally called ‘agency houses’ and they operated in India through an ” East India House” named agency. Several banks originated during the end of the 18th century, but they were entirely controlled by London based merchant bankers. Hence, merchant banking only developed under them, for their sole benefits, rather than the benefits of the economy.
Later these merchant bankers entered the manufacturing and trade sector of India, through merchant based agencies controlled by them. The monopoly of London merchant bankers led to the meager development of the Indian merchant banking system.
During the pre-second world war era, Indian managing agencies as family businesses emerged on British pattern, namely Thapars, Tatas, Singhanias, Birlas, etc. They later turned into companies.
Post-independence India ended up having an underdeveloped capital market. Amendments and Acts were made to facilitate India’s capital market, and the merchant agency system was abolished.
In 1967, when the government gave license for the establishment of a National Grindlays bank in 1967, Merchant banking started in India. Although many financial institutions like IFCI, ICICI, IDBI, LIC emerged in 1969, in ways working the same as merchant banks, the growth of the capital market was low. The Banking Commission 1972, to end the monopoly of foreign banks, suggested the need for establishing Merchant Banks in India. On its recommendations, SBI became India’s first bank to offer merchant banking services. Subsequently, the Central Bank of India, Syndicate Bank, UCO Bank, Canara Bank, and others established there own merchant banking divisions.
LAWS REGULATING MERCHANT BANKERS
SEBI Regulations 1992, provide guidelines for merchant banks fair, dynamic, and flexible working, in 5 chapters. SEBI categorizes merchant banks in four divisions and has prescribed their minimum net worth required for registration.
Types of merchant banks under SEBI are:
Category-I: Act as issue manager, advisor, consultant, underwriter, and portfolio
manager. (5 crores)
Category-II: Act as an advisor, consultant, underwriter, and portfolio manager. (50 Lakhs)
Category-III: Act as underwriter, advisor, and consultant only. (20 lakhs)
Category-IV: Act as consultant or advisor to the issue of capital. (Not required)
After SEBI Amendment 1997, merchant bankers could only register as Category 1 bankers, and separate entities as Underwriters, Portfolio Managers. The 1997 Act also exempted merchant bankers from compulsory registration and keeping of liquid assets and reserves with the RBI.
SEBI GUIDELINES(Latest)
- Every merchant banker is supposed to register themselves with SEBI. The applicant registering should be a corporate body and cannot hold any other business than the securities market.
- Every merchant is obliged to renew certificates and a payable fee and audit their books of accounts, documents as directed by SEBI.
- Every merchant banker is supposed to keep a “Compliance Officer” to monitor their activities according to the Acts and report to SEBI in case of any fault.
- Underwriting Obligation: A merchant banker has to accept a minimum of 5% or 25 lakhs (whichever is less) for underwriting services.
This blog is written by Dharna Prasad, Hindu College.
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