Merchant banking services, in India, were started only in 1967 by National Grindlays. The State Bank of India was the first Indian commercial bank to set up a separate merchant banking division in 1972. The first category provides services such as Issue Management, Consultancy, Portfolio Management and Underwritings.
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.
Regulations for Merchant Banking in India
One of the most important things to remember is that no organization would be able to become a merchant banker until and unless they get a certificate of registration from SEBI. Plus, he must get himself registered under these regulations if they want to persevere any of the merchant banker activities. formal merchant banking activity in india was originated in On 1st March, 1993 new policy guidelines have been issued by SEBI for the merchant bankers to ensure greater transparency in their operations and to make them accountable so as to protect the investor’s interest. The guidelines relate to pre-issue obligations, underwriting, advertisements and post-issue obligations of the merchant bankers. Such merchant bankers can act as advisor, consultant, underwriter and portfolio manager. To obtain the certificate of registration, one had to apply in the prescribed form and fulfill two sets of norms (i) operational capabilities and (ii) capital adequacy norms.
Merchant Banking in India: An In-Depth Analysis
The Reserve Bank of India is another regulatory authority that oversees financial institutions. The Foreign Exchange Management (International Financial Services Centre) Regulations, 2015 apply to merchant banks falling under Section 2 clause (b) explanation. Banks engaged in merchant banking activities must comply with the prudential exposure norms and statutory limits outlined in Section 19(2) & (3) of the Banking Regulation Act, 1949, as prescribed by RBI. Merchant banks render numerous financial services, advice, consultation, management, counseling, and solutions to big corporate houses. They help a businessperson to commence a business and raising finance. Furthermore, they help them to expand, modernizing, and restructuring the business.
- 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.
- 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.
- 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.
- Compliance with these regulations is crucial for maintaining the integrity and stability of the financial system.
Compliance with these regulations is crucial for maintaining the integrity and stability of the financial system. Merchant banks are also subject to periodic inspections and audits by SEBI to ensure ongoing compliance. Any violations can result in penalties, including suspension or cancellation of the registration certificate. 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. The Government issued policy guidelines for merchant bankers to ensure sufficient physical infrastructure, necessary expertise, good financial standing, professional integrity and fairness in their transactions.
The industrial boom in India has led to major growth in the need for merchant bankers. Merchant banking provides financial and advisory services to corporate clients. Though it was introduced in the 1960s, the sector witnessed significant growth and development in the 1990s. Today, merchant banking is an integral part of the Indian economy and is important for facilitating corporate finance and capital market transactions. This article will provide an overview of merchant banking in India, its objectives and functions.
The Evolution of Merchant Banking in the Indian Scenario
It developed further in countries such as the UK and USA where it was adopted by many as their profession. The modern concept of merchant banking started in the city of London where it was practiced on a large scale by merchants. 2.In efficiency of the clients are oftenblamed on to the merchant banks, so they are into trouble without any fault oftheir own. Since then, many private and public banks such the State Bank of India, Citibank, ICICI Bank etc. and other national and international firms have set up their own Merchant Banking services. Further, a merchant banker to keep registration in force shall pay renewal fee of Rs. 2.5 lakhs every three years from the fourth year from the date of initial registration.
GUIDELINES
A category IV merchant banker can merely act as consultant or advisor to an issue of capital. Later, the ICICI set up its merchant banking division in 1973 followed by a number of other commercial banks like Canara Bank, Bank of Broada, Bank of India, Syndicate Bank, Punjab National Bank, Central Bank of India, UCO Bank, etc. At present no organisation can act as a ‘merchant banker’ without obtaining a certificate of registration from the SEBI.
Private Commercial Banks
The second category cannot indulge in Issue Management alone, they act as Co-Managers. The Securities and Exchange Board (SEBI), which was established as a regulatory body to protect the interests of investors in the securities market in 1992 framed some guidelines for the Merchant Banks operating in India. These are known as the Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992, and have been regularly amended to keep up with the changing market conditions. These were some of the causes that hastened the increase of Merchant Banking in India. Let us also know the services that merchant banking offers to corporate and big business houses.
This category of Bankers is allowed to act as Advisors, Consultants and Underwriters only. They can neither act as Issue Managers on their own nor as Co-Managers. Merchant Banking as a concept can be traced back to the 17th and 18th Centuries to countries like France and Italy where grain merchants intermediated or assisted other merchants in financial matters for a small fee.
Initially they were issue mangerslooking after the issue of shares and raising capital for the company. In 1973,SBI started the merchant banking and it was followed by ICICI. SBI capitalmarket was set up in August 1986 as a fully fledged merchant banker. Between1974 and 1985, the merchant banker has promoted lot of companies. In 1993, there were 568 merchant bankers in our country out of which 312 were authorised by the Securities and Exchange board of India.
They also grant support in registering, buying, and selling shares at the stock exchange. To provide long-term source of funds required by the corporate sector. The merchant banker primarily came into being as corporate counsellors for restructuring base of capital, thereafter for issue management and underwriting of the same.
- The inception of merchant banking in India can be traced back to the early 1960s when the need for sophisticated financial advisory services became apparent.
- Furthermore, they help them to expand, modernizing, and restructuring the business.
- The first category provides services such as Issue Management, Consultancy, Portfolio Management and Underwritings.
- They can neither act as Issue Managers on their own nor as Co-Managers.
Types of Merchant Banks in India
During the 1970s, the concept of merchant banking gained momentum with the entry of commercial banks and foreign banks, which established dedicated merchant banking divisions. The 1980s and 1990s saw significant regulatory developments with the establishment of the Securities and Exchange Board of India (SEBI) in 1988. SEBI introduced stringent guidelines for merchant bankers, ensuring transparency and investor protection.