Merchant Banking: Understanding its Meaning, Key Features, Types, Functions and Benefits

Last Updated : Sept. 15, 2023, 4:42 p.m.

Aiding large corporations in running their business while also conducting fundraising merchant banking meaning can be understood as financial banking for individuals with high net worth. The directly benefiting individuals here are entrepreneurs and investors. It helps them achieve their financial goals. A professional service, encompassing functions of merchant banking, aims to fulfil financial needs and conduct financial advising, fundraising, portfolio management, and loan services to the corporate world and not to the general public. The article helps you know merchant banking meaning, importance, and functions of merchant banking.

Merchant Banking: Definition

Learning Merchant banking meaning it is the financial platform supporting large corporations and high-net-worth individuals. The intention is to support their ideas and businesses that aid in the country’s economic growth and development. The central idea in merchant banking is financial counselling involving all the financial aspects crucial for the sustainability of the business and the thriving of the business person.

Merchant Banking: Key Features

Here are some popular characteristics of merchant banking:

• Dynamic and inventive organisational structure
• Quick decision-making
• Strong network with huge data collection
• Customer centred
• Focussed on short and medium-term engagements
• Offers solutions at both local and global scales, which includes national and international services
• The funding source includes commissions and charges
• The target audience includes businesses and millionaires
• Poor profit sharing but high liquidity indicators

Functions Of Merchant Banking

Established in 1992, Securities and Exchange Boards of India (SEBI) regulations govern the function of merchant banking. Accordingly, the functions of merchant banking are decided to be the following points:

• Raising funds: Merchant banking buys security for their clients by aiding in raising funds from international or domestic markets. They rent equipment and resources, capital underwriting, allocate stocks, credit facilities and much more.
• Promotional activities: In the early working phases, merchant banking assists business institutions’ development process. Further, they aid in securing approval for the organisation from the government.
• Portfolio management: Merchant banking helps provide valuable insights on investment to guide them in the right direction and make accurate decisions leading to their growth. They trade securities on the organisation’s behalf by offering portfolio management assistance.
• Leasing service: Clients are provided with leasing services by merchant banking.
• Equity underwriting: Offered as a premium service, the function here is stock distribution. The action is based on price levels and involves risk.
• Loan syndication: Merchant banking helps raise credits from financial firms or banks for the clients.
• Issue management: They aid in dealing with issues like preference and equity shares, debentures and other security issues.

Types of Merchant Banking

After understanding different aspects of merchant banking, we head to the categories of merchant banking. There are three types of merchant banking:

Full Service Global Merchant Banks

The ‘global’ indicates a worldwide presence offering a ‘full’ or complete range of services to the customers. Encompassing the wide spectrum, these are the large financial groups. Global giants and multi-national companies specifically leverage the services of such banks. The common examples providing services of full-service global merchant banks are Kotak Investment Banking, JP Morgan Chase & Co., Goldman Sachs and others.

Boutique Investment Banks

These are the small-sized banks operating in specific or local areas. Their customers also belong to specific industries or products. The boutique investment banks are proficient in their area of expertise, which may include mergers and acquisitions, among others. Acting as the partners of companies, their area of expertise determines the quality of their demand. The boutique investment banks are the right choice for personalised suggestions for financial needs. The common examples of these banks are Lazard, Blackstone, Spark Capital and many others.

Regional Investment Banks

Alternatively called ‘specialty investment banks’, they serve the companies of a particular region. The banks boast of local expertise in domains like regulator requirements, economic trends and local business. Holding strong relationships with regulators, businesses, investors and key stakeholders, their helping hands extend to small and medium-sized enterprises. The common examples of regional investment banks include BNP Paribas, CLSA, Nomura Holdings and others.

Conclusion

Merchant banking provides assistance to large corporations and businesses to gain expertise in their projects. They are important in providing assistance through tricky paths and finalising decisions concerning economic growth and financial security through their excellent command over the domains of expertise. If you want to raise your idea into a valuable project, take the route of success through the assistance of merchant banking.

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