Study Material

Banking Financial Services and Insurance

Prof. Vishal Jivani, Department of Management,

FOBC
Atmiya University
 Banking Financial Services and Insurance
BBA Semester-5

PREFACE
Course Description:
The course is designed in a way that discusses the role of banks and financial
intermediaries in the economy. It explains the special status of the banking system
in the economy and why the financial industry is so prone to crises. Strengths and
shortcomings of the current regulatory framework will be discussed with the aim
to provide students with a lasting conceptual framework.

Course Purpose:
The course is to introduce various Banking terms and their relevance. To develop
students into an aspiring manager who deals with various divisions in the banking
sector.

PROF. VISHAL JIVANI, DEPARTMENT OF MANAGEMENT, FOBC 2

 Banking Financial Services and Insurance
BBA Semester-5

UNIT - 2: MERCHANT BANKING

Unit Content
• Merchant Banking: Concept, Origin, Functions, Nature, Growth
• Institutional Structure
• Merchant Banking Services in India
• Commercial Banks and Investment Banks

❖ CONCEPT OF MERCHANT BANKING

Merchant banking is a specialized form of banking that involves providing financial

services such as advisory, underwriting, and capital raising to corporations and
governments.
Merchant banks do not provide services to the general public; their services are
limited to business entities and large business corporations.
Merchant banker is a person who provides assistance for the subscription of
securities. The merchant banker plays an important role and carries a lot of
responsibilities like, private placement of securities, managing public issue of
securities, stock broking, international financial advisory services, etc.
Merchant banking is a professional service provided by the merchant banks to their
customers considering their financial needs, for adequate consideration in the form
of fee. Merchant banks are banks that conduct fundraising, financial advising and
loan services to large corporations.
These banks are experts in international trade, which makes them experts in dealing
with large corporations and industries. Merchant banking provides funds to the
multinational businesses and large business entities in the country which helps to
boost the country’s economic strength.

• HOW DOES MERCHANT BANKING WORK?

PROF. VISHAL JIVANI, DEPARTMENT OF MANAGEMENT, FOBC 3

 Banking Financial Services and Insurance
BBA Semester-5

● Merchant banks typically work with large, established companies that need help
with mergers and acquisitions, IPOs, and other complex financial transactions.
● The services provided by merchant banks may include underwriting, corporate
finance, securities trading, and advisory services.
● Merchant banks may also offer services like investment management, asset
management, and wealth management to high-net-worth individuals and families.
● Merchant banks typically charge higher fees for their services compared to
traditional banks due to the specialized nature of their work.
● Merchant banks may also take equity stakes in the companies they work with, which
can provide additional revenue streams and potentially lucrative investments.
● Merchant banks may be standalone institutions or part of larger financial institutions
like investment banks or commercial banks.
● The merchant banking industry has evolved significantly over time, with new
regulations and market dynamics shaping the way that merchant banks operate and
provide services to their clients.

Questions [01]
(1) What is merchant banking?
(2) Describe the various services provided by merchant bankers

❖ ORIGIN AND GROWTH OF MERCHANT BANKING

ORIGIN OF MERCHANT BANKING IN THE WORLD

Merchant banking has its origins in medieval Europe, where merchants began to offer
financial services in addition to their primary business activities. Here are key points
in its development:
1. Before 17th Century:
Financial institution dates back to the 13th century when family-owned firms
engaged in the sale and purchase of commodities also engaged in banking activity.
These firms acted as bankers to the kings of European States, financed coastal trade,
and even issued bills of exchange.
The concept of merchant banking originated in Italy, and the first-ever merchant
banks were Riccardi of Luca, Medici, and Fugger, among others. These institutions’
primary purpose was to facilitate and/or finance the production and trade of
commodities, hence the name. Initially, there was no distinction between the functions
of commercial banking and merchant banking until 1932 when the term merchant
banking came into existence.

PROF. VISHAL JIVANI, DEPARTMENT OF MANAGEMENT, FOBC 4

 Banking Financial Services and Insurance
BBA Semester-5

2. 17th and 18th Centuries:

o Rise of Merchant Banking Firms: In the 17th century, Amsterdam
emerged as a major financial center. Firms like Hope & Co. and the Dutch
East India Company began to provide banking services alongside their
trading operations.
o British and French Influence: By the 18th century, London and Paris
became prominent financial centers. Rothschilds and Barings were notable
merchant banking families that emerged in this period.
3. 19th and Early 20th Centuries:
o Industrial Revolution: With the rise of industrialization, merchant banks
played a crucial role in financing infrastructure projects like railways and
shipping.
o International Expansion: Merchant banks began to operate globally,
facilitating international trade and investment.

ORIGIN OF MERCHANT BANKING IN INDIA

1. Before Independence:

● Colonial Period: Merchant banking in India started during the British colonial
era, with British banks like Grindlays and HSBC setting up operations to
support trade and commerce.

2. Post-Independence Development:

● 1950s-1960s: After independence in 1947, India's economic policies focused

on industrialization and self-reliance. The government and financial institutions
like the Industrial Development Bank of India (IDBI) played crucial roles in
promoting industrial finance.

3. Formal Establishment:

● 1967: The concept of merchant banking formally took shape with the
establishment of Grindlays Bank's Merchant Banking Division. This was the
first time a specialized merchant banking service was offered in India.

4. Growth and Evolution:

● 1970s-1980s: Other banks and financial institutions entered the merchant

banking sector, including the State Bank of India, ICICI, and IFCI. These
institutions offered a variety of services like underwriting, project finance, and
advisory services.

PROF. VISHAL JIVANI, DEPARTMENT OF MANAGEMENT, FOBC 5

 Banking Financial Services and Insurance
BBA Semester-5

● 1990s Onwards: Economic liberalization in the early 1990s led to rapid

growth in the financial sector. Foreign banks and private players entered the
market, bringing in sophisticated financial products and services. The
Securities and Exchange Board of India (SEBI) was established to regulate the
capital markets, including merchant banking activities.

5. Current Scenario:

● Present Day: Today, India has a robust merchant banking sector with both
domestic and international players offering a wide range of services. The sector
continues to evolve with the advent of digital banking and fintech innovations.

Questions: [01]
(1) Name the first ever merchant banks in the world.
(2) Which bank was the India’s first formal Merchant bank and when it has started
it operation in India formally?

Questions: [04]
(1) Explain origin and growth of merchant banking

❖ MERCHANT BANKING FUNCTIONS

❖ MERCHANT BANKING SERVICES IN INDIA

The basic function of merchant banker or investment banker is marketing of

corporate and other securities. In the process, he performs a number of services
concerning various aspects of marketing, viz., origination, underwriting, and
distribution, of securities. During the regime of erstwhile Controller of Capital Issues
in India, when new issues were priced at a significant discount to their market prices,
the merchant banker’s job was limited to ensuring press coverage and dispatching
subscription forms to every corner of the country. Now, merchant bankers are designing
innovative instruments and perform a number of other services both for the issuing
companies as well as the investors.

The functions of merchant banking are listed as follows:

1. Raising Finance for Clients

PROF. VISHAL JIVANI, DEPARTMENT OF MANAGEMENT, FOBC 6

 Banking Financial Services and Insurance
BBA Semester-5

• Meaning: Merchant banks help companies raise funds through shares,

debentures, and bank loans, both domestically and internationally. This finance
can be used for starting new ventures, expanding existing ones, or modernizing
operations.
• Example: When Bharti Airtel sought funds for expanding its network
infrastructure, it raised capital through both equity and debt markets with the
assistance of merchant banks like ICICI Securities.

2. Broker in Stock Exchange

• Meaning: Acting as brokers, merchant bankers buy and sell shares for their
clients, provide research on equity shares, and advise on investment decisions.
• Example: HDFC Securities provides brokerage services to its clients, advising
them on which stocks to buy or sell based on market research.

3. Project Management

• Meaning: Assisting clients with project location advice, feasibility studies,

project reports, financing plans, and sourcing funds.
• Example: SBI Capital Markets helped the Adani Group in preparing a project
report and securing funding for the development of the Mundra Port.

4. Advice on Expansion and Modernization

• Meaning: Offering expert advice on mergers, acquisitions, technology

upgrades, foreign collaborations, and diversification.
• Example: Kotak Mahindra Capital advised Mahindra & Mahindra on its
acquisition of SsangYong Motor Company, providing insights into foreign
collaboration and technology upgrades.

5. Managing Public Issue of Companies

• Meaning: Guiding companies through the process of public issues, including

timing, size, price, managing applications, and listing on stock exchanges.
• Example: Axis Capital managed the initial public offering (IPO) of Zomato,
advising on the optimal timing and pricing of the issue.

6. Handling Government Consent for Industrial Projects

• Meaning: Assisting companies in obtaining necessary government approvals

for starting or expanding projects.
• Example: Merchant banks assisted Tata Steel in obtaining governmental
permissions for setting up new steel plants and expanding existing ones.

7. Special Assistance to Small Companies and Entrepreneurs

PROF. VISHAL JIVANI, DEPARTMENT OF MANAGEMENT, FOBC 7

 Banking Financial Services and Insurance
BBA Semester-5

• Meaning: Providing advice on business opportunities, government policies,

and available incentives to small businesses and entrepreneurs.
• Example: Small Industries Development Bank of India (SIDBI) offers
merchant banking services to SMEs, helping them navigate government
schemes and funding opportunities.

8. Services to Public Sector Units

• Meaning: Helping public sector units (PSUs) in raising long-term capital,

marketing securities, and arranging foreign collaborations.
• Example: SBI Capital Markets assisted Bharat Heavy Electricals Limited
(BHEL) in raising funds for its projects and finding foreign collaboration
partners.

9. Revival of Sick Industrial Units

• Meaning: Assisting in the turnaround of financially troubled companies by

negotiating with banks, planning revival packages, and liaising with regulatory
bodies.
• Example: Merchant banks played a crucial role in the revival of Jet Airways,
negotiating with banks and investors to restructure debt and secure new
funding.

10. Portfolio Management

• Meaning: Managing clients' investment portfolios to ensure safety, liquidity,

and profitability.
• Example: HDFC Bank provides portfolio management services, helping high-
net-worth individuals and corporate clients optimize their investment strategies.

11. Corporate Restructuring

• Meaning: Assisting in mergers, acquisitions, divestitures, and disinvestments,

including negotiations and legal formalities.
• Example: Merchant bankers facilitated the merger between Vodafone India
and Idea Cellular, managing the entire process from negotiation to regulatory
approval.

12. Money Market Operation

• Meaning: Dealing with and underwriting short-term money market instruments

like government bonds, certificates of deposit, commercial paper, and treasury
bills.
• Example: Kotak Mahindra Bank deals with money market instruments,
underwriting treasury bills issued by the Reserve Bank of India (RBI).

PROF. VISHAL JIVANI, DEPARTMENT OF MANAGEMENT, FOBC 8

 Banking Financial Services and Insurance
BBA Semester-5

13. Leasing Services

• Meaning: Assisting in leasing contracts where companies can use specific

assets like equipment for a period in exchange for rental payments.
• Example: Tata Capital provides leasing services, allowing companies to lease
industrial equipment or machinery.

14. Management of Interest and Dividend

(1) Meaning: Managing the disbursement of interest on debentures/loans and

dividends on shares, advising on timing and rate of dividends.
(2) Example: ICICI Bank offers services to manage dividend payouts for
companies, ensuring timely and efficient disbursement to shareholders.

Questions: [07]
(1) Explain the functions of merchant bank
OR
Describe the merchant banking services in India.

❖ NATURE OF MERCHANT BANKING

1. Financial Expertise

Merchant banks employ financial experts who possess a deep understanding of capital
markets, investment strategies, and financial analysis. These experts provide valuable
insights and advice to clients.

2. Risk Management

Merchant bankers are skilled in managing financial risks. They use various
instruments and strategies to help clients hedge against market volatility and minimize
potential losses.

3. Investment Banking Functions

Merchant banks often engage in investment banking activities, such as underwriting

securities, facilitating mergers and acquisitions, and providing advisory services for
capital-raising activities.

PROF. VISHAL JIVANI, DEPARTMENT OF MANAGEMENT, FOBC 9

 Banking Financial Services and Insurance
BBA Semester-5

4. Advisory Services

A significant part of merchant banking involves offering advisory services to clients.

This can include financial planning, portfolio management, and guidance on strategic
financial decisions.

5. Client-Centric Approach

Merchant bankers take a client-centric approach. They work closely with clients to
understand their financial goals and tailor services to meet specific needs.

6. Long-Term Relationships

Merchant banks often build long-term relationships with clients. This trust and rapport
are essential for effective advisory and financial management.

Questions: [04]
(1) Explain the nature of merchant banking

❖ INSTITUTIONAL STRUCTURE OF MERCHANT

BANKING

The institutional structure of merchant banking in India comprises various entities

regulated by the Securities and Exchange Board of India (SEBI), the Reserve Bank of
India (RBI), and other financial regulatory bodies. The structure includes a mix of
domestic and international institutions offering a range of merchant banking services.
Here's an overview of the key components of the merchant banking framework in
India:
REGULATORY FRAMEWORK
1. Securities and Exchange Board of India (SEBI):
o SEBI is the primary regulatory body overseeing merchant banking activities
in India. It mandates the registration of merchant bankers, defines their
roles and responsibilities, and sets the regulatory guidelines to ensure
transparency, accountability, and investor protection.
2. Reserve Bank of India (RBI):
o The RBI regulates certain aspects of merchant banking, particularly those
related to foreign exchange, capital flows, and the functioning of merchant
banking divisions of commercial banks.

PROF. VISHAL JIVANI, DEPARTMENT OF MANAGEMENT, FOBC 10

 Banking Financial Services and Insurance
BBA Semester-5

3. Ministry of Finance:
o The Ministry of Finance, through its various departments, provides policy
directions and regulatory oversight for the financial sector, including
merchant banking.

INSTITUTIONAL STRUCTURE OF MERCHANT BANKING

a) Institutional Base:
Where merchant banks function as an independent wing or as subsidiary of various
Private/ Central Governments/State Governments Financial institutions. Most of the
financial institutions in India are in public sector and therefore such set up plays a role
on the lines of governmental priorities and policies.
b) Banker Base:
These merchant bankers function as division/ subsidiary of banking organization. The
parent banks are either nationalized commercial banks or the foreign banks operating
in India. These organizations have brought professionalism in merchant banking sector
and they help their parent organization to make a presence in capital market.
c) Broker Base:
In the recent past there has been an inflow of Qualified and professionally skilled
brokers in various Stock Exchanges of India. These brokers undertake merchant baking
related operating also like providing investment and portfolio management services.
d) Private Base:
These merchant banking firms are originated in private sectors. These organizations are
the outcome of opportunities and scope in merchant banking business and they are
providing skill oriented specialized services to their clients. Some foreign merchant
bankers are also entering either independently or through some collaboration with their
Indian counterparts. Private Sectors merchant banking firms have come up either as sole
proprietorship, partnership, private limited or public limited companies. Many of these
firms were in existence for quite some time before they added a new activity in the form
of merchant banking services by opening new division on the lines of commercial banks
and All India Financial Institution (AIFI).

Questions: [04]
(1) Explain the Institutional Structure of Merchant Banking

PROF. VISHAL JIVANI, DEPARTMENT OF MANAGEMENT, FOBC 11

 Banking Financial Services and Insurance
BBA Semester-5

❖ DIFFERENCE: MERCHANT BANKS, INVESTMENT

BANKS & COMMERCIAL BANKS

Merchant banks Investment banks Commercial banks

Clientele High-net-worth Large corporations and The general public and small
individuals, corporations, government entities. businesses
and start-ups
Services Project financing, trade Underwriting, private Deposit accounts, loans, and
financing, leasing, placement, initial public credit cards, in addition to
underwriting, and merger offering (IPO) management, wealth management services
and acquisition advisory. debt and equity securities
issuance, and financial
restructuring.
Capital Merchant banks typically Investment banks typically Commercial banks also
use their own capital to do not invest their own typically do not invest their
invest in their clients’ capital in transactions but own capital in transactions
businesses. rather act as intermediaries but instead, use the deposits
between clients and the of their customers to fund
capital markets. loans and other investments
Regulations Securities and Exchange SEBI and the Reserve Bank RBI
Board of India (SEBI) of India (RBI).
Risk Lower financial risk High financial risk due Lower financial risk
compared to investment to volatile market conditions compared to investment
banks banks and merchant banks
Focus International finance, trade Advisory services and help Broader customer base and
finance, and corporate corporations raise capital focus on providing basic
investment through the issuance of banking services
securities
Revenue The main revenue stream is Generates revenue mainly Generates revenue through
through investment through investment banking traditional banking activities
activities, such as investing activities, such as such as deposit-taking,
in clients’ businesses and underwriting and managing lending, and interest on
providing financing and IPOs, mergers and loans.
advisory services. acquisitions, and other May also generate revenue
Earns fees through corporate finance services. through fees charged for
underwriting and managing May also earn revenue services such as ATM usage,
IPOs, mergers and through trading activities, account maintenance, and
acquisitions, and other including securities trading wire transfers.
investment banking and derivatives trading.
services.

Question [07]
(1) Explain the difference between Commercial bank and Investment banks

PROF. VISHAL JIVANI, DEPARTMENT OF MANAGEMENT, FOBC 12