Merchant Banking

Merchant Banking in India
Introduction
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 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. Even it provides management consulting services to meet the requirements of small and medium sector rather than large sector. Citibank Setup its merchant banking division in 1970. The various tasks performed by this divisions namely assisting new entrepreneur, evaluating new projects, raising funds through borrowing and issuing equity. Indian banks Started banking Services as a part of multiple services they offer to their clients from 1972. State bank of India started the 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. Merchant banking activities is OF course organized and undertaken in several forms. Commercial banks and foreign development finance institutions have organized them through formation divisions, nationalized banks have formed subsidiaries companies and share brokers and consultancies constituted themselves into public limited companies or registered themselves as private limited companies. Some merchant banking outfits have entered into collaboration with merchant bankers abroad with several branches.

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Definition
Merchant bank deals mostly in (but is not limited to) international finance, long-term loans for companies and underwriting. Merchant banks do not provide regular banking services to the general public. An activity that includes corporate finance activities, such as advice on complex dinancings, merger and acquisition advice (international or domestic), and at times direct equity investments in corporations by the banks. An organization that underwrites securities for corporation, advices. Such clients on mergers and is involved in the ownership of commercial ventures . According to Mr.Rosenburg Any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to the securities as manager; consultant advisor; or one rendering corporate advisory services in relation of such activities in the management . According to MOF, India

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History of Merchant Banking in India:
History Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49. TheAllahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India.(Joint Stock Bank: A company that issues stock and requires shareholders to be held liable for the company's debt) It was not the first though. That honor belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Simla. When the American Civil War stopped the supply of cotton to Lancashire from the Confederate States, promoters opened banks to finance trading in Indian cotton. With large exposure to speculative ventures, most of the banks opened in India during that period failed. The depositors lost money and lost interest in keeping deposits with banks. Subsequently, banking in India remained the exclusive domain of Europeans for next several decades until the beginning of the 20th century. Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madrasand Puducherry, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center. The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was

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the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India. Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other infrastructure had improved. Indians had established small banks, most of which served particular ethnic and religious communities. The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock banks were generally under capitalized and lacked the experience and maturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon to observe, "In respect of banking it seems we are behind the times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments." The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India. The fervour of Swadeshi movement lead to establishing of many private banks in Dakshina Kannada and Udupi district which were unified earlier and known by the name South Canara ( South Kanara ) district. Four nationalised banks started in this district and also a
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leading private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking". During the First World War (1914-1918) through the end of the Second World War (1939-1945), and two years thereafter until the independence of India were challenging for Indian banking. The years of the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed between 1913 and 1918 as indicated in the following table: Years Number of banks Authorised capital Paid-up Capital that failed (Rs. Lakhs) (Rs. Lakhs) 274 35

1913 12 1914 42 1915 11 1916 13 1917 9 1918 7

710

109 5 4 25

56 231

76

209

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Merchant Banking in India ² Post Independence:
The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of the Laissezfaire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included:






The Reserve Bank of India, India's central banking authority, was nationalized on January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b).[Reference www.rbi.org.in] In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India." The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.

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Importance & Needs of Merchant Banking:
Important reasons for the growth of merchant banks has been development activities throughout the country, exerting excess demand on the sources of fund for ever expanding industries and trade, thus leaving a widening gap unabridged between the supply and demand of invisible funds. All financial institutions had experienced constrain of resources to meet ever increasing demands for demands for funds frame corporate sector enterprises. In such circumstances corporate sector had the only alternative to avail of the capital market service for meeting their long term financial requirement through capital issue of equity shares and debentures. Growing demand for funds put pressure on capital market that enthused commercial banks, share brokers and financial consultancy firms to enter into the field of merchant banking and share the growing capital market. As a result all the commercial banks in nationalized and public sector as well as in private sector including foreign banks in India have opened their merchant banking windows and competing in this field. Need for merchant banking is felt in the wake of huge public saving lying untapped. Merchant banker can play highly significant role in mobilizing funds of savers to invisible channels assuring promising returns on investment and thus can assist in meeting the widening demand for invisible funds for economic activity. With growth of merchant banking profession corporate enterprises in both private sectors would be able to raise required amount of funds annually from the capital market to meet the growing requirement for funds for establishing new enterprises, undertaking expansion, modernization and diversification of the existing enterprises. This reinforces the need for a vigorous role to be played by merchant banking. In view of multitude of enactment, rules and regulation, gridlines and offshoot press release instructions brought out the government from time to time imposing statutory obligations upon the corporate sector to comply with those entire requirement prescribed there in the need of a skilled agency existed which could provide counseling
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in these matters in a package form. A merchant banker with their skills updated information and knowledge provide this service to the corporate units and advice them on such requirement to be complied with for raising funds from the capital market under different enactment viz. companies act, income tax act, foreign exchange regulation act, securities contracts corporate laws and regulations. Merchant bank advice the investors of the incentives available in the form of tax relief, other statutory relaxation, good return on investment and capital appreciation in such investment to motivate them to invest their savings securities of the corporate sector. Thus merchant banks help industries and trade to rise and the investors to invest their saved money in sound and healthy concern with confidence, safety and expectation for higher yields. Finance is the backbone of business activities. Merchant banker make available finance for business enterprises acting as intermediaries between them raising demand for funds and the supplies of funds besides rendering various other services. The following are some of the reasons why specialist merchant bank have a crucial role to play in India. Growing complexity in rules and procedures of the government. Growing industrialization and increase of technologically advanced industries. Need for encouragement of small and medium industrialists, who require specialist services. Need to develop backward areas and states which require different criteria. Exploring the possibility of joint ventures abroad and foreign market. Promoting the role of new issue market in mobilizing saving from. Where merchant banks function as an independent wing or as subsidiary of various private/central governments/ state government financial institution. Most of the financial institution in India is in public sector and therefore such setup plays a role on the lines of governmental priorities and policies.

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Role of Merchant Banker:
Merchant Bankers play a significant role in the Indian Capital market, especially in placing equity in the primary market through the Public offers route. Public money or savings constitute thousands of rupees every year, which is raised through equity or debt from market. Merchant bankers help corporates to raise capital from market. They ought to possess knowledge and information about the various aspects of capital market, trends prevailing and the psychology of the investors. The must have the ability to evaluate and analyze various aspects concerning the formulation of Industrial project and affecting the viability of the project.

Merchant Bankers helps corporate to raise money from capital market through the issue of shares, debentures, bonds etc. They are designated as managers to the issue. Their main business is to attract public money to capital issue. They also help the companies to determine the capital structure. The pricing of the issue esp. in the public issue is very important. The pricing has to be such that: Investors will be attracted to invest at that price and get suitable returns. And the Company at the same time should get the premium they are looking for, as larger the premium lesser is the requirement for borrowed funds. All issues should be managed by at least one merchant banker functioning as the lead merchant banker. Provided that, in an issue of offer of rights to the existing members with or without the right of renunciation the amount of the issue of the body corporate does not exceed rupees fifty lakhs, the appointment of a lead merchant banker shall not be essential. No merchant banker, other than a bank
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or a public financial institution, who has been granted a certificate of registration under these regulations, shall after June 30th, 1998 carry on any business other than that in the securities market.

The Growth of Merchant Banking in India:
Formal merchant activity in India was originated in 1969 with the merchant banking division setup by the Grind lays Bank, the largest foreign bank in the country. The main service offered at that time to the corporate enterprises by the merchant bank included the management of public issues and some aspects of financial consultancy. Following Grind lays Bank, Citibank set up its merchant banking division in 1970. The division took up the task of assisting new entrepreneurs and existing units in the evaluation of new projects and raising funds through borrowing and equity issues. Management consultancy services were also offered. Merchant bankers are permitted to carry an activities of primary dealers in government securities. Consequent to the recommendation of Banking commission in 1972, that Indian bank should offer merchant banking services as part of the multiple services they could provide their clients. State Bank of India started the 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. The commercial banks that followed State Bank of India were Central Bank of Ina, Bank of India and Syndicate Bank in 1977. Bank of Baroda, Standard charted Bank and Mercantile Bank in 1978 and United Bank of India, United Commercial Bank, Punjab National Bank, Canara Bank and Indian Overseas Bank in late 70s and early 80s. Among the development banks, ICICI started merchant banking activities in 1973 followed by IFCI (1986) and IDBI (1991).

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Organizational set up of Merchant Banking in India:
In India a common organizational set up of merchant bankers to operate is in the form of divisions of Indian and foreign banks and financial in situations, subsidiary companies established by bankers like SBI, Canada Bank, Punjab National Bank, Bank of India, etc. Some firms are also organized by financial and technical consultants and professionals. Securities and Exchanges Board of India has divided the merchant bankers into four categories based on their capital adequacy. Each category is authorized to perform certain functions. From the point of Organizational set up India s merchant banking organizations can be categorized into 4 group on the basis of their linkage with parent activity. They are: a] Institutional Base:Where merchant banks function as an independent wing or as subsidiary of various Private/Central/Governments/State Government financial institutions in India are in public sector and therefore such set up plays a role on the lines of government 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.
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These brokers undertake merchant banking related operating also like providing investment and portfolio management services. d] Private Base:These merchant banking firms are originated in private sectors. These organization 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 in dependently 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 times 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).

Main Objective of Merchant Banking:
Merchant banker render their specialized assistance in achieving the main objective which are presented below: To carry on the business of merchant banking assist in the capital formation, manage advice, underwrite, provide standby assistance, securities and all kinds of investment issued, to be issued or guaranted by any company corporation, society, firm, trust person, government, municipality, civil body, public authority established in India. The main object of merchant banker is to create secondary market for bill and discount or re-discount bill and acts as an acceptance house. Merchant bankers another objective is to set up and provide services for the venture capital technology funds.
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They also provide services to the finance housing schemes for the construction of houses and buying of land. They render the services like foreign exchange dealer, money exchange, and authorized dealer and to buy and sell foreign exchange in all lawful ways in compliance with the relevant laws of India. They will invest in buying and selling of transfer , hypothecate and deal with dispose of shares, stocks, debentures, securities and properties of any other company.

Obligation and Responsibilites:
Code of conduct: Every merchant banker has to abide by the code of conduct as specified below: A merchant banker in the conduct of his business has to observe high standards of integrity and fairness in all his dealings with his clients and other merchant bankers. He ought to render at all times high standards of service, exercise due diligence, ensure proper care and exercise independent professional judgment. He has to, wherever necessary, disclose to the clients, possible sources of conflict of duties and interest, while providing services. He cannot make any statement or become privy to any act, practice unfair competition, which is likely to be harmful to the interest of other merchant bankers or is likely to place such other merchant bankers in a disadvantageous position in relation to him, while competing for or executing any assignments. He should not make any exaggerated statement, whether oral or written, to the client either about his qualification or his capability to render certain services or his achievements in regard to services rendered to other clients.
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A merchant banker has always to endeavor to (1) render the best possible advice to the clients having regard to the clients needs and the requirements and his own professional skill; and (2) ensure that all professional dealings are effected in a prompt, efficient and cost effective manner. He should not (1) divulge to other clients, press or any other party any confidential information about his client which has come to his knowledge; and (2) deal in securities of any client company without making disclosure to the SEBI as required under the regulations and also the board of directors of the client company. He should endeavor to ensure that (1) the investors are provided with true and adequate information without making any misguided or exaggerated claims and are made aware of attendant risks before any investment decision is taken by them: (2) copies of prospectus, memorandum and related literature are made available to the investors; (3) adequate steps are taken for the fair allotment of share application and transfers, listing of securities arrangement of underwriting/sub-underwriting, placing of issues, selection of brokers, bankers to the issue, publicity and advertising agents, printers, etc. In view of the overwhelming importance of merchant bankers in the process of capital issues, it is now mandatory that all public issues should be managed by merchant banker(s) functioning as the lead manager(s). In the case of right issues not exceeding Rs 50 lakh, such appointments may not be necessary. The salient features of the SEBI framework of their operations are summarized in this article. Registration: Compulsory Registration: Merchant bankers are compulsory registered with the SEBI to carry out their activities. They fall in four categories. Category I merchant bankers carry on any activity relating to issue management, i.e. preparation of prospectus and other information relating to the issue, determining financial structure, tieup of financiers and final allotment of securities and refund of the
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subscription. They can also act as advisor, consultant, manager, underwriter or portfolio manager. Category II merchant bankers can act as advisor, consultant co-manager, underwriter, portfolio manager. Category III merchant bankers can act as an underwriter, advisor and consultant to an issue. Thus, only Category I merchant bankers can act as lead managers to an issue. Capital Adequacy Requirement: A merchant banker is granted recognition by the SEBI in different categories on the basis of capital adequacy norms in terms of its net worth comprising of paid-up capital and free reserves. The minimum net worth requirements for each category is: Rs 5 crore (Category I), Rs 0.5 crore (Category II), Rs 0.2 crore (Category III) and for Category IV nil. Apart from minimum capital requirement, the merchant bankers are expected to have the necessary infrastructure like adequate office space, equipment and manpower to effectively discharge their activities. They should employ at least two persons with experience to conduct merchant banking business; they should not be involved in any litigation connected with the securities market, have professional qualification in finance, law or business management and, finally their registration is in the interest of the investors.

Code of Conduct:
1.A Merchant Banker shall make all efforts to protect the interests of investors. 2.A Merchant Banker shall maintain high standards of integrity, dignity and fairness in the conduct of its business. 3.A Merchant Banker shall fulfill its obligations in a prompt, ethical, and professional manner.
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4.A Merchant Banker shall at all times exercise due diligence, ensure proper care and exercise independent professional judgment. 5.A Merchant Banker shall endeavor to ensure thata.Inquiries from investors are adequately dealt with; b.Grievances of investors are redressed in a timely and appropriate manner; c.Where a complaint is not remedied promptly, the investor is advised of any further steps which may be available to the investor under the regulatory system. 6.A Merchant Banker shall ensure that adequate disclosures are made to the investors in a timelymanner in accordance with the applicable regulations and guidelines so as to enable them to makea balanced and informed decision. 7.A Merchant Banker shall endeavor to ensure that the investors are provided with true andadequate information without making any misleading or exaggerated claims or anymisrepresentation and are made aware of the attendant risks before taking any investmentdecision. 8.A Merchant Banker shall endeavor to ensure that copies of the prospectus, offer document, letterof offer or any other related literature is made available to the investors at the time of issue or the offer. 9.A Merchant Banker shall not discriminate amongst its clients, save and except on ethical and commercial considerations. 10. A Merchant Banker shall not make any statement, either oral or written, which wouldmisrepresent the services that the Merchant Banker is capable of performing for any client or hasrendered to any client. 11.A Merchant Banker shall avoid conflict of interest and make adequate disclosure of its interest. 12. A Merchant Banker shall put in place a mechanism to resolve any conflict of interest situationthat may arise in the conduct of its
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business or where any conflict of interest arises, shall takereasonable steps to resolve the same in an equitable manner. 13. A Merchant Banker shall make appropriate disclosure to the client of its possible source orpotential areas of conflict of duties and interest while acting as Merchant Banker which wouldimpair its ability to render fair, objective and unbiased services. 14.A Merchant Banker shall always endeavor to render the best possible advice to the clients having regard to their needs. 15.A Merchant Banker shall not divulge to anybody either orally or in writing, directly or indirectly,any confidential information about its clients which has come to its knowledge, without takingprior permission of its clients, except where such disclosures are required to be made incompliance with any law for the time being in force. 16.A Merchant Banker shall ensure that any change in registration status / any penal action taken bythe Board or any material change in the Merchant Banker s financial status, which may adverselyaffect the interests of clients / investors is promptly informed to the clients and any businessremaining outstanding is transferred to another registered intermediary in accordance with anyinstructions of the affected clients. 17.A Merchant Banker shall not indulge in any unfair competition, such as weaning away the clientson assurance of higher premium or advantageous offer price or which is likely to harm theinterests of other Merchant Bankers or investors or is likely to place such other Merchant Bankersin a disadvantageous position while competing for or executing any assignment. 18.A Merchant Banker shall maintain arms length relationship between its merchant banking activity and any other activity. 19. A Merchant Banker shall have internal control procedures and financial and operationalcapabilities which can be reasonably expected to protect its operations, its clients, investors andother
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registered entities from financial loss arising from theft, fraud, and other dishonest acts,professional misconduct or omissions. 20. A Merchant Banker shall not make untrue statement or suppress any material fact in any documents, reports or information furnished to the Board. 21. A Merchant Banker shall maintain an appropriate level of knowledge and competence and abideby the provisions of the Act, regulations made there under, circulars and guidelines, which maybe applicable and relevant to the activities carried on by it. The merchant banker shall alsocomply with the award of the Ombudsman passed under Securities and Exchange Board of India(Ombudsman) Regulations, 2003. 22. A Merchant Banker shall ensure that the Board is promptly informed about any action, legalproceedings etc., initiated against it in respect of material breach or non compliance by it, of anylaw, rules, regulations, directions of the Board or of any other regulatory body. 23. (a) A Merchant Banker or any of its employees shall not render, directly or indirectly, anyinvestment advice about any security in any publicly accessible media, whether real-time or nonreal-time, unless a disclosure of his interest including a long or short position, in the said security has been made, while rendering such advice. (b) In the event of an employee of the Merchant Banker rendering such advice, the merchantbanker shall ensure that such employee shall also disclose the interests, if any, of himself, hisdependent family members and the employer merchant banker, including their long or shortposition in the said security, while rendering such advice. 24. A Merchant Banker shall demarcate the responsibilities of the various intermediaries appointed by it clearly so as to avoid any conflict or confusion in their job description.

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25. A Merchant Banker shall provide adequate freedom and powers to its compliance officer for the effective discharge of the compliance officer s duties. 26. A Merchant Banker shall develop its own internal code of conduct for governing its internaloperations and laying down its standards of appropriate conduct for its employees and officers incarrying out their duties. Such a code may extend to the maintenance of professional excellenceand standards, integrity, confidentiality, objectivity, avoidance or resolution of conflict ofinterests, disclosure of shareholdings and interests etc. 27. A Merchant Banker shall ensure that good corporate policies and corporate governance are in place. 28.A Merchant Banker shall ensure that any person it employs or appoints to conduct business is fitand proper and otherwise qualified to act in the capacity so employed or appointed (includinghaving relevant professional training or experience) 29. A Merchant Banker shall ensure that it has adequate resources to supervise diligently and doessupervise diligently persons employed or appointed by it in the conduct of its business, in respectof dealings in securities market. 30.A Merchant Banker shall be responsible for the acts or omissions of its employees and agents in respect of the conduct of its business. 31. A Merchant Banker shall ensure that the senior management, particularly decision makers have access to all relevant information about the business on a timely basis. 32.A Merchant Banker shall not be a party to or instrumental for a.Creation of false market; b.Price rigging or manipulation or; c.Passing of unpublished price sensitive information in respect of securities which arelisted and proposed to be listed in any stock exchange to any person or intermediary inthe securities market.
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Guidelines of SEBI:
After the obligations of the CCI, the place was occupied by a legal organ called as Securities and Exchange Board of India . The issue of capital and pricing of issues by companies has become free of prior approval. The SEBI has issued guidelines for the issue of capital by the companies. The guideline broadly covers the requirement of the first issue of a new company set up by the existing company, the first issue by the existing private company and public issue by the existing listing companies. The SEBI is the most powerful organization to control and lead both the primary market and secondary market. The SEBI has announced the new guidelines for the disclosures by the companies leading to the investor protection. They are presented below: a) If any company s other income exceeds 10 per cent of the total income, the details should be disclosed. b) The company should disclose any adverse situation which affects the operations of the company and occurs within one year prior to date filing of the offer document with the register of companies or stock exchange. c) The company should also disclose the information regarding the capacity utilization of the plant for the last 3 years. d) The promoters of the company must maintain their holding at least at 20 per cent of the expanded capital. e) The minimum application money payable should not be less than 25 per cent of the issue price. f) The company should disclose the time normally taken for the disposal of various types of investor s grievances.
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g) The company can make firm allotments in public issues as follows.  Indian mutual funds (20%),  FIIS (24%),  Regular employees of the company (10%)  Financial institution (20%) h) The company should disclose the safety net scheme or buy back arrangements of the shares proposed in public issue. This scheme is applicable to a limited number of 500 shares per allottee and the offer should be valid for a period of at least 6 months from the date of dispatch of securities. i) According to the guidelines, in case of the public issues, at least 30 mandatory collection canters should be established. j) According to the SEBI guidelines regarding rights issue, the company should give advertisement in not less than two newspapers about the dispatch of letter of offer. No preferential allotment may be made along with any rights issue. k) The company should also disclose about the fee agreed between the lead manager and the company in the memorandum of understanding.

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The difference between: Investment bank and Merchant bank
Merchant banks and investment banks, in their purest forms, are different kinds of financial institutions that perform different services. In practice, the fine lines that separate the functions of merchant banks and investment banks tend to blur. Traditional merchant banks often expand into the field of securitiesunderwriting, while many investment banks participate in trade financing activities. In theory, investment banks and merchant banks perform different functions. Pure investment banks raise funds for businesses and some governments by registering and issuing debt or equity and selling it on a market. Traditionally, investment banks only participated in underwriting and selling securities in large blocks. Investment banks facilitate mergers and acquisitions through share sales and provide research and financial consulting to companies. Traditionally, investment banks did not deal with the general public. Traditional merchant banks primarily perform international financing activities such as foreign corporate investing, foreign real estate investment, trade finance and international transaction facilitation. Some of the activities that a pure merchant bank is involved in may include issuing letters of credit, transferring funds internationally, trade consulting and co-investment in projects involving trade of one form or another. The current offerings of investment banks and merchant banks varies by the institution offering the services, but there are a
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few characteristics that most companies that offer both investment and merchant banking share. As a general rule, investment banks focus on initial public offerings (IPOs) and large public and private share offerings. Merchant banks tend to operate on small-scale companies and offer creative equity financing,bridge financing, mezzanine financing and a number of corporate credit products. While investment banks tend to focus on larger companies, merchant banks offer their services to companies that are too big for venture capital firms to serve properly, but are still too small to make a compelling public share offering on a large exchange. In order to bridge the gap between venture capital and a public offering, larger merchant banks tend to privately place equity with other financial institutions, often taking on large portions of ownership in companies that are believed to have strong growth potential. Merchant banks still offer trade financing products to their clients. Investment banks rarely offer trade financing because most investment banking clients have already outgrown the need for trade financing and the various credit products linked to it.

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Merchant bank and Commercial bank
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The main purpose of any bank is to make money. To this end, all banks, both commercial and merchant, provide loans and financial services. The main difference between a commercial bank and a retail bank is the type of clientele it primarily serves. Commercial banks, sometimes referred to as retail banks, tend to focus on the community, i.e., the needs of individuals and small businesses. Merchant banks, also called investment banks, tend to focus on the needs of large corporations.

Function
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When one thinks of a commercial bank, one thinks of such services as checking and savings accounts, loans, credit cards, and lines of credit to businesses and individuals. Commercial banks sell investments, such as certificates of deposit, and provide brokerage services to individuals for buying and selling stocks. Retirement plans, college savings programs and financial planning services are also offered by commercial banks. Merchant banks act as financial consultants to large companies. These banks offer advice to companies seeking to become larger by means of mergers or acquisitions. Rather than making loans, merchant banks often invest their own money into their customers' businesses, back stock transactions and manage large amounts of money for their customers.

How They Make Money
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Commercial banks earn revenue by making auto loans, issuing mortgages, and by providing small business and home improvement loans. When you take out a loan, the interest you pay on the money is income for the bank. In addition, fees on your checking account, ATM charges and safety deposit box rental all contribute to a commercial banks' bottom line. By contrast, a merchant bank makes much of its profit from fees it charges its large customers for the services it provides. Often, these
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banks invest large amounts of capital into growing private companies, then benefit by selling their stake once the company's value has been maximized.

Effect on the Economy
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A commercial bank has an impact on the economy of the local area it serves. Money that is loaned by the bank is spent by consumers for cars, homes and other items that increase business in the community. Commercial banks provide loans to individuals, as well as nearby small- and medium-sized businesses that use the money for expansion and job creation. Merchant banks have an impact on the value of the large corporations they provide services to, which affects the national economy and stock prices.

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Services of merchant bankers in india:
Business planning stage: 1. Project feasibility study 2. Advice on capital structuring 3. Preparation of prospectus and liaison with SEBI 4. Pricing decisions 5. Marketing in the capacity of lead managers 6. Under writers to the issue 7. Post issue management 8. Assistance in ADR/GDR 9. Management of debenture issue 10. Preparation of bankable proposal and syndications of loan 11. Assistance in arranging optimal capital finance 12. Advice on mergers and acquisitions 13. Corporate structuring advice

Equity raising:

Debt raising:

Working capital raising:

Strategic advice:

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Services provided by Merchant banks :(in details).
Merchant banking services in India is the same as merchant banks in UK and other European countries. The following are the services of merchant bankers in India.  Corporate counseling  Project C counseling  Capita l S structuring  Portfolio M management  Issue M management  Credit Syndication  Working capital  Venture capital (i) Corporate counseling: Corporate counseling covers counseling in the form of project counseling, capital restructuring, project management, public issue management, loan syndication, working capital fixed deposit, lease financing, acceptance credit etc., The scope of corporate counseling is limited to giving suggestions and opinions to the client and help taking actions to solve their problems. It is provided to a corporate unit with a view to ensure better performance, maintain steady growth and create better image among investors. (ii) Project counseling: Project counseling is a part of corporate counseling and relates to project finance. It broadly covers the study of the project, offering advisory assistance on the viability and procedural steps for its implementation.

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a. Identification of potential investment avenues. b. A general view of the project ideas or project profiles. c. Advising on procedural aspects of project implementation d. Reviewing the technical feasibility of the project e. Assisting in the selection of TCO s (Technical Consultancy Organizations) for preparing project reports f. Assisting in the preparation of project report g. Assisting in obtaining approvals , licenses, grants, foreign collaboration etc., from government h. Capital structuring i. Arranging and negotiating foreign collaborations, amalgamations, mergers and takeovers. j. Assisting clients in preparing applications for financial assistance to various national and state level institutions banks etc., k. Providing assistance to entrepreneurs coming to India in seeking approvals from the Government of India. (iii)Capital Structure: Here the Capital Structure is worked out i.e., the capital required, raising of the capital, debt-equity ratio, issue of shares and debentures, working capital, fixed capital requirements, etc., (iv)Portfolio Management: It refers to the effective management of Securities i.e., the merchant banker helps the investor in matters pertaining to investment decisions. Taxation and inflation are taken into account while
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advising on investment in different securities. The merchant banker also undertakes the function of buying and selling of securities on behalf of their client companies. Investments are done in such a way that it ensures maximum returns and minimum risks. (v) Issue Management: Management of issues refers to effective marketing of corporate securities viz., equity shares, preference shares and debentures or bonds by offering them to public. Merchant banks act as intermediary whose main job is to transfer capital from those who own it to those who need it. The issue function may be broadly divided in to pre issue and post issue management. a. Issue through prospectus, offer for sale and private placement. b. Marketing and underwriting. c. Pricing of issues. (vi) Credit Syndication: Credit Syndication refers to obtaining of loans from single development finance institution or a syndicate or consortium. Merchant Banks help corporate clients to raise syndicated loans from commercials banks. Merchant banks helps in identifying which financial institution should be approached for term loans. The merchant bankers follow certain steps before assisting the clients approach the appropriate financial institutions. a. Merchant banker first makes an appraisal of the project to satisfy that it is viable b. He ensures that the project adheres to the guidelines for financing industrial projects.

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c. It helps in designing capital structure, determining the promoter s contribution and arriving at a figure of approximate amount of term loan to be raised. d. After verifications of the project, the Merchant Banker arranges for a preliminary meeting with financial institution. e. If the financial institution agrees to consider the proposal, the application is filled and submitted along with other documents. (vii) Working Capital: The Companies are given Working Capital finance, depending upon their earning capacities in relation to the interest rate prevailing in the market. (viii)Venture Capital: Venture Capital is a kind of capital requirement which carries more risks and hence only few institutions come forward to finance. The merchant banker looks in to the technical competency of the entrepreneur for venture capital finance. (ix)Fixed Deposit: Merchant bankers assist the companies to raise finance by way of fixed deposits from the public. However such companies should fulfill credit rating requirements.

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