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Merchant Banking

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Merchant banking primarily involves

financial advice and services for largecorporations and wealthy individuals.

Merchant banks invest their own capital in

client companies and provide fee-basedadvice services for mergers and

acquisitions, among other services they

provide.

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Functions of Merchant Banker

Corporate Counseling Project Counseling

Credit Syndication or Loan Syndication

Issue Management

Underwriting Of Public Issue Portfolio Management

Financing Working Capital

Negotiate In Merger and Acquisition

Venture Financing and Lease Financing Foreign Currency Financing

Other Functions

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Corporate Counseling

Broadly speaking, corporate counselingcovers all the financial activities of a

merchant banker. It refers to the activities

undertaken to ensure effectiveness and

efficiency in a clients performance. A

merchant banker offers suggestions and

opinions on various aspects like

organizational size, locational factors,financial reporting, working capital

management obtaining soft loans.

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Project counseling

Project counseling is a corporatecounseling related to project finance. Itincludes preparing project reports,decisions related to financial structure of

the project appraisal, suggesting on thefeasibility and implementation of theprojects, arranging foreign collaboration etc.(Merchant helps client in identifying a

potential project and getting it approved byIndian government). The projects can beappraised based on its location, technical,commercial ability.

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Credit Syndication or LoanSyndication Credit syndication function covers loan

procurement and project financing through

syndicates or consortium. Merchantbankers helps in estimating the total cost of

a project by considering the location, sites

and promoters interest in the project and

advise on the financial institutions to beapproached.

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Issue Management

Issue management concerns all theactivities related to the management of thepublic issue of the clients corporatesecurities that is equity shares, preference

shares, debentures, bonds etc. It involvespre-issue management and post-issuemanagement.

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Underwriting of Public Issue

Merchant bankers also functions asunderwriters and aid in raising capitalthrough external resources. Issuesunderwritten by reputed underwriters are

easily subscribed and service highpremium. Merchant bankers can underwriteup to 15% of an issue. The lead managersshould underwrite a minimum of 5% of a

issue or Rs. 2.5 lakhs whichever is less.

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Portfolio Management

Portfolio management refers to themanagement of investment in differentkinds of securities of different companies.Merchant bankers function as portfolio

managers and advise clients on closinginvestment mix, based on the clientsobjectives and tax bracket. They analyzemarket and economic surveys and plan

accordingly for profitable investmentstrategies.

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Financing Working Capital

Merchant bankers also provide workingcapital finance to their clients. They alsoaccept credit and discount bills for theirclients to ensure that funds are not blocked.

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Negotiate in Merger andAcquisition

Merchant bankers also perform specializedfunctions like advising on mergers andacquisitions. They play the role of

middlemen and help in negotiationsbetween their clients and other parts of themerger. They conduct auditing and SWOTanalysis before advising on the mergers

and acquisitions. They explore globalcompanies and examines pros and cons ofacquisition proposals.

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Venture Financing and Lease

Financing

Merchant bankers also offers venture

financing and lease financing services totheir special clients. They advise on theliability of lease deal and help in preparinglease deed and other documents.

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Foreign Currency Financing

Merchant bankers also finance foreigntrade transactions. They aid in export-

import trade finance compliance with lawobtaining different types of foreign currencyloans and managing exchange risk. Thisfunctions also includes arranging for the

syndication of different forms of guarantees,letters of credit, bridge loans etc.

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Other Functions

Merchant bankers also provide variousother services acting as mangers,

consultants or advisers. They offerinvestment advisory services to the foreigninvestors and NRIs, even providesassistance in off-shore financier (joint

ventures, foreign collaborations etc.)

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Merchant Bank vs. Investment Bank

Merchant Banks Investment Banks

Traditional merchant banks primarilyperform international financing activitiessuch as foreign corporate investing,foreign real estate investment, trade

finance and international transactionfacilitation.

Focus on Small Scale Companies andoffer Creative Equity Financing, Bridge& Mezzanine Financing.

Some of the activities that a puremerchant bank is involved in mayinclude issuing letters of credit,transferring funds internationally, tradeconsulting and co-investment inprojects involving trade of one form oranother.

Pure investment banks raise funds forbusinesses and some governments byregistering and issuing debt or equity andselling it on a market.

Focus on IPOs (Initial Public Offerings),

and Large Public and Private ShareOfferings.

Investment banks facilitate mergers andacquisitions through share sales andprovide research and financial consultingto companies.

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Conclusion

The merchant banker plays a vital role inchannelizing the financial surplus of thesociety into productive investment avenues.

Hence before selecting a merchant banker,one must decide what the services forwhich he is being approached. Selectingthe right intermediary who has the

necessary skills to meet the requirements ofthe client will ensure success.