All you need to know about “Merchant Banking”.

A Merchant bank is a financial institution which performs a wide range of banking activities such as, underwriting of shares, granting loans, insurance, financial advising, fundraising etc, but, only for large corporations and high-net-worth individuals. The prime purpose of such banks was to raise/arrange funds for trading commodities and hence the name originated as “merchant”.

How is Merchant banking different from Commercial Banking

A Merchant bank likewise any commercial bank, performs all the banking functions, but there are one or the other differences.

Target Clients:-

Any commercial bank contemplates the needs of common people, whereas, a merchant bank specifies its services towards corporative firms.

Who can open an account

As the name suggests, commercial banks are for general people coming from any class or background of people. On the other hand, only those with registered business documents can avail an account in a Merchant bank.

Risk factor:-

 Commercial banks are comparatively less exposed to risk when compared to merchant banks. The reason is that merchant banks deal with the volatility of market.

Orientation:-

Merchant banks are for a specific propose of facilitating trade and businesses, thus, it is inclined towards management. Whereas, commercial banks are the people’s bank, thus, they are asserts oriented.

Functions:-

Main functions of a merchant bank includes managing portfolios, underwriting, etc. The functions of commercial banks are limited up to facilitating the individual clients only.

Functions of Merchant Banks

The functions of merchant banks in India are governed by Securities and Exchange Board of India (SEBI) regulations, 1992.

Portfolio management:-

Providing investment advice for making profitable investment decisions is one of the major tasks of Merchant bank.. It provides portfolio managing assistance to its investors by trading securities on their behalf.

Underwriting:-

These banks may provide underwriting services for IPOs and other securities. This undertaking involves taking on the risk of buying securities from the issuer and selling it to investors at a profit.

Advisory:-

A merchant banker is a person who provides assistance for the subscription of securities. He plays an important role and carries a lot of responsibilities, for example, stock broking, private placement of securities, international financial advisory services, managing public issue of securities, and a lot more.

Loan syndication:-

Merchant bankers help in arranging funds for large corporate borrowers by syndicating loans from multiple lenders. They act as an intermediary broker between the borrowing company and the lending institutions.

Promotional activities:-

When an institution is in its budding stage, a merchant bank helps it in the promotion of its business. It helps the organization to work on its business idea and in getting various related approvals from the government.

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