Merchant Banking: History, Regulations and Government Policy

This has led to a sharp growth in the Merchant Banking business in the last 2 years. In India, Merchant Bank services were formally started by an already well-established National Grindlays Bank in 1967, through its merchant banking division. Following in the footsteps, Citibank also set up a merchant banking department in 1970 and the State Bank of India in 1972. In the years to come, most of the commercial banks in India, like the ICICI Bank, IDBI Bank, Syndicate Bank, Canara Bank, Bank of Baroda, Bank of India and many others set up their own merchant banking divisions to compete in this growing market.

Characteristics and functions of Central Banks

formal merchant banking activity in india was originated in

Hence, commercial bankers set up their merchant banking subsidiaries to cater  financial services for the corporate sector. Deregulation and liberalisation of the industry in India has accounted for changes in the financial sector. With the passage of time merchant banking activities have changed in line with the changing need pattern of the enterprises in the wake of economic development. The establishment of the Industrial Finance Corporation of India (IFCI) in 1948 marked the beginning of formal merchant banking activities. For example, commercial banks generally accept deposits and give loans, but merchant banks only offer consultation and management for a certain charge. In the United States of America (USA), they are called ‘Investment Banks’, while in the United Kingdom (UK), they are known as ‘accepting and issuing houses’.

Merchant Banking in India

Their role is wide ranging and they can now provide most of the financial services required by a company, touching almost all aspects of establishing and running of industrial units on sound financial footing. Such merchant bankers can act as advisor, consultant, underwriter and portfolio manager. They also used to finance sovereign government through grant of long-term loans.

  • In India, Merchant Bank services were formally started by an already well-established National Grindlays Bank in 1967, through its merchant banking division.
  • These banks challenged public sector banks, offering tailored products and competitive interest rates, thereby significantly improving service delivery in India’s banking system.
  • Commercial Banks can undertake some of the merchant banking activities like Issue Management whereas Merchant Banking Units cannot undertake commercial banking activities.

The schedule by SEBI also comprises of the format of substantial forms and reports and states the fees that are required to be paid for different purposes. It consists of innumerable investors who take own individual investment decisions. If these markets destabilized, the investors will look for alternative avenues to invest their funds. The strength of the holdings of the multinational companies at affordable prices in the latter part of the 1970s had generated significant interest, which was, carries well into the next decade.

Functions of Merchant Bankers

Merchant Banks can be defined as financial institutions which provide a wide range of financial services such as consultation, management, counselling to large corporate houses or individuals. The Commercial Banks deal in activities such as accepting deposits and providing loans, while Merchant Banks only indulge in consultation or management for a certain fee. Although they may also accept deposits and provide credit, but this is done for only select clients of the bank and not to the public in general as commercial banks do. Merchant Banking activity was formally initiated into the Indian capital markets when Grind lays Bank received the license from Reserve Bank in 1967. Grind lays which started with management of capital issues, recognized the needs of emerging class of entrepreneurs for diverse financial services ranging from production planning and system design to market research.

Category II Merchant Bankers:

The period of economic liberalisation in the 1990s saw new opportunities open up as more and more individuals and businesses started to expand. Although these banks are subject to many rules and regulations framed by the SEBI as well as the Reserve Bank of India, they continue to flourish. Now with changing international conditions and consumer trends, it is upto the government to bring in reforms which protect the interests of the customers as well as provide a platform for these banking services to prosper.

The term “Merchant Banking” has its origin in the trading methods of countries in the late eighteenth and early nineteenth century when trade-taking place was financed by bill of exchange drawn by merchanting houses. As international trade grew and other lesser-known names wanted to import goods from abroad, the established merchants ‘lent their names’ to the newcomers by agreeing to accept bills of exchange on their behalf. The acceptance houses would charge a commission for this service and thus there grew up the business of accepting bills of finance trade not merely of themselves, but of others. She has spent a lot of time researching and writing about the ever-changing world of money-making games and websites, making her an expert at finding ways to make money online. The Third Chapter talks about the General Obligations and Responsibilities that a registered Merchant Banker has to undertake.

The SEBI guidelines regulate merchant banks’ activities like public issue allotments and disclosure of non-core business income. Looking ahead, merchant banks will need to ensure their activities protect investors and promote healthy capital markets as the industry continues to evolve in India. The report discusses the concept of merchant banking in India, detailing its historical evolution, services, and significance in the financial sector. It highlights the role of merchant banks in providing financial services such as issue management, advisory services, and capital raising, which are crucial for corporate growth and economic development. The document also outlines the major players in the Indian merchant banking industry, including State Bank of India and ICICI Bank, and their contributions to the sector. Since then, a number of development banks and financial institutions such as IFCI and IDBI have formal merchant banking activity in india was originated in also entered this field.

Their importance in the economy is expected to grow even further in the coming years with an increasing proportion of household savings getting invested in corporate & other securities. In 1993, there were 568 merchant bankers in our country out of which 312 were authorised by the Securities and Exchange board of India. These activities lead to the creation of larger, more efficient entities that can compete more effectively in the global market. Banking in India traces its roots from ancient barter systems, evolving through community trust-based practices to formal banking institutions. The establishment of the Bank of Hindustan in 1770 marked a significant transition, with British colonial regulations shaping the sector. Post-independence, nationalisation efforts aimed at promoting inclusive growth, while 1990s reforms opened the sector to private banks, enhancing competition and formal merchant banking activity in india was originated in customer services.

formal merchant banking activity in india was originated in

It is in the context of fast increasing economy and a liberalized and deregulated atmosphere that the growth of the Indian Stock Market activities has to be viewed. During the seventeenth and most of the eighteenth century, international finance was centered on Amsterdam. Consequently, Amsterdam merchants became the first masters of the various financial techniques and developments which, in the course of time, became identified with the emergent profession of ‘Merchant Bankers’. EssaySauce.com is a free resource for students, providing thousands of example essays to help them complete their college and university coursework. Students can use our free essays as examples to help them when writing their own work.

  • Other banks also started these services such as PNB, Bank of India, UCO Bank, etc.
  • These banks follow the cooperative principles of democratic control and shared benefits.
  • With the speculation about the growth of the Indian economy in the coming years, merchant banking is expected to impact the country’s business and economic sectors.

Essay Categories:

It is an institution that primarily offers consultancy to its customers regarding financial, managerial, marketing, and legal concerns. They usually offer assistance to business loans for big companies, international finance, and underwriting. They can neither undertake issue management of their own nor they act as co-manager. Merchant banking services, in India, were started only in 1967 by National Grindlays.

Apart from meeting specially, the needs of small-scale units it provided management constancy services to large and medium sized companies. The division took up the task of supporting new entrepreneur and existing units in the evaluation of new projects and raising funds through borrowing and issue of equity. Consequent to the recommendations of Banking Commission in1972, that Indian bank should start Merchant Banking Division in 1972. In the initial years the SBI’s objective was to render corporate advice and assistance to small and medium entrepreneurs.

Finally, the top players, which exist in merchant banking, are also dealt with their services are also been focused. To get the practical knowledge about merchant banking activities, the researcher visited and interviewed State bank of India, Kotak Mahindra bank and SPA Merchant Bankers Ltd. Other banks also started these services such as PNB, Bank of India, UCO Bank, etc. The Second Chapter deals with the Registration and Certification of Merchant Bankers in India. It lays out certain Operational Capabilities and Capital Requirements that need to be fulfilled to register as a Merchant Banker in India. For e.g., Section 7 of the regulations state that a capital adequacy requirement of net worth of Rupees Five Crores needs to be fulfilled.

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