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Overview of Merchant Banking History

The document provides background information on the history and definition of merchant banking. It can be summarized as follows: 1. Merchant banking originated in the late 18th/early 19th centuries when merchant houses financed international trade through bills of exchange. They began lending their names to other traders to accept bills and finance trade beyond their own, charging commissions. 2. A second historical role of merchant banks was raising capital for foreign governments. Merchant banks gained confidence through existing trade relationships and raised capital through stock/bond issues. 3. Merchant banks can accept bills, issue stocks/bonds, or do both. Their modern role includes providing most financial services needed by companies, touching all aspects of business operations.

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61 views3 pages

Overview of Merchant Banking History

The document provides background information on the history and definition of merchant banking. It can be summarized as follows: 1. Merchant banking originated in the late 18th/early 19th centuries when merchant houses financed international trade through bills of exchange. They began lending their names to other traders to accept bills and finance trade beyond their own, charging commissions. 2. A second historical role of merchant banks was raising capital for foreign governments. Merchant banks gained confidence through existing trade relationships and raised capital through stock/bond issues. 3. Merchant banks can accept bills, issue stocks/bonds, or do both. Their modern role includes providing most financial services needed by companies, touching all aspects of business operations.

Uploaded by

K-Ayurveda Welex
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

INTRODUCTION

The term Merchant Banking has its origin in the trading methods of countries in the late eighteenth and the
early nineteenth century when trade taking place was financed by bill of exchange drawn by merchanting
houses. At that time the merchants were merely financing their own activities. As international trade grew
and other lesser-known names wanted to import goods from abroad, the established merchants lent their
names to the newcomers by agreeing to accept bills of exchange on their behalf. The acceptance houses
would charge a commission for his service and thus there grew up the business of accepting bill of finance
trade not merely of themselves, but of others. Acceptance business thus became and to a degree always has
been landmark of true Merchant Banks.
The second historical of Merchants banks was the raising of capital for foreign Government. In many cases,
the Merchant Banks have been trading in the countries concerned and gained the confidence of governments
and other authorities in those countries. Thus the second principle ingredient of Merchant Banking became
and still is raising of capital through the issue of stocks and bonds. Therefore, Merchant Banks can be
accepting houses or issuing houses or both. Merchant Banking started in the beginning of 20th century in UK
and USA. More recently, the services offered by Merchant Banks have entered into the other areas of
operations. Their role is wide ranging and they can now provide most of the financial services required by a
company, touching almost all aspects of establishing and running of industrial units on sound financial
footing.
Dictionary meaning of merchant Bank refers to an organisation that underwrites corporate securities and
advises such clients on issues like corporate mergers, etc. involved in the ownership of commercial
ventures. This organisation may be a bank, corporate body, firm or proprietary concern.

Definition of Merchant Banking.


The Notification of the Ministry of Finance defines merchant banker as;
Any person who is engaged in the business of issue management either by making arrangements
regarding selling, buying or subscribing to securities as manager-consultant, adviser or
rendering corporate advisory services in relation to such issue management
The Amendment Regulation specifies that issue management consist of prospectus and other information
relating to issue, determining financial structure, tie-up of financiers and final allotment and refund of the
subscriptions, underwriting and portfolio management services.
In the words of Skully A Merchant Bank could be best defined as a financial institution conducting
money market activities and lending, underwriting and financial advice, and investment services
whose organization is characterized by a high proportion of professional staff able to able to approach
problems in an innovative manner and to make and implement decisions rapidly.

HISTORY OF MERCHANT BANKING


During the seventeenth and the most of the eighteenth century international finance was centered on
Amsterdam. Consequently Amsterdam merchants became the first masters of the various financial
techniques and the developments which in the course of time, became identified with the emergent
profession of Merchant Bankers.
Commercial Banking and Investment Banking are often confused with Merchant Banking. In many ways,
there may be similarities in their functions. However, in certain ways, Merchant Banking is distinctly
different from commercial banking and Investment Banking.
The primary function of a commercial bank is to receive deposits from the public and lend the same to
others. Commercial Banks can undertake some of the merchant banking activities like Issue Management
whereas Merchant Banking units can not undertake commercial banking activities. However, the functions
of Merchant Banking may not widely vary from Investment Banking. The Merchant Banker mainly deals
with Issue management, post issue services, corporate advisor services etc. the Investment Banker
undertaken trading in securities, Investment advises and bought out deals which are not the main activities of
Merchant Bankers.
In todays Scenario the Merchant banker and management consultants undertake advisory services to the
corporate sector. The Merchant Banker advices corporation and firms relating to opening of issues, receiving
loans etc. which the management consultants also do. The management consultants have a wide area
operations like Production, Marketing, Personnel Relations of finance etc. but they lack statutory recognition
to undertake capital market related activities which has enabled the merchant banker to cater to the needs if
the Corporate Sector.
MERCHANT BANKING IN INDIA
In India prior to the enactment of Indian Companies Act, 1956 manging agents acted as issue houses for
securities, evaluated project reports, planned capital structure and to some extend provided venture capital
for new firms. Few share broking firms also functioned as merchant bankers.
The need for specialised merchant banking services was felt in India with the rapid growth in the number
and size of the issues made in the primary market. The merchant banking services were started by foreign
banks, namely the National Grindlays Bank in 1967 and the City Bank in 1970. The Banking Commission in
its report in 1972 recommended the setting up of merchant banking institutions. This marked the beginning
of specialised merchant banking in India.
To begin with, merchant banking services were offered along with other traditional banking services. In the
Mid-Eighties, the Banking Regulation Act was amended permitting commercial banks to offer a wide range

of financial services through the subsidy rule. The State Bank of India was the first India Bank to set up
Merchant Banking Division in 1972. Later ICICI set up its Merchant Banking division followed by Bank of
India, Bank of Baroda, Canada Bank, Punjab National Bank and UCO Bank. The merchant banking gained
prominence during 1983-84 due to new issue boom.

Common questions

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Statutory recognition is crucial for management consultants because it legitimizes their capacity to engage in capital market-related activities, a domain where Merchant Bankers are traditionally recognized. This lacking statutory recognition limits management consultants from performing specialized services like issue management, which Merchant Bankers are qualified to offer, thereby differentiating the two professions despite overlapping areas like advisory services .

According to Skully's definition, a modern Merchant Bank is characterized by conducting money market activities, lending, underwriting, financial advice, and investment services. It is marked by a high proportion of professional staff capable of innovative problem-solving and rapid decision-making. This facilitates the bank's ability to provide comprehensive financial services, leveraging a combination of market activities and professional expertise .

The Merchant Banking boom in the 1980s had a significant impact on Indian financial markets by invigorating the primary market through an increased number and size of issues. This boom led to the establishment of specialized merchant banking divisions by both foreign and Indian banks, addressing the emerging need for more structured financial services in the growing economy. It facilitated greater access to venture capital and contributed to a more sophisticated financial market by driving forward capital market development and sophistication .

The 1972 Banking Commission report was instrumental in establishing Merchant Banking institutions in India by recommending that these specialized services be developed to handle the increasing complexity and variety of issues in the primary market. This led to the creation of dedicated divisions within banks such as the State Bank of India, hence formalizing and expanding the scope of financial services available in the Indian market .

In the eighteenth and early nineteenth centuries, Merchant Banks primarily focused on financing trade through the acceptance of bills of exchange on behalf of lesser-known traders. These banks also played a key role in raising capital for foreign governments by trading in those countries and gaining their confidence .

The Merchant Banking sector in India evolved post the enactment of the Indian Companies Act, 1956, with managing agents initially acting as issue houses. The necessity for specialized services led to foreign banks, National Grindlays Bank in 1967 and City Bank in 1970, initiating these services. The State Bank of India was the first Indian bank to set up a Merchant Banking Division in 1972, followed by ICICI, Bank of India, Bank of Baroda, Canara Bank, Punjab National Bank, and UCO Bank. As the demand for merchant banking services grew, especially during the new issue boom of 1983-84, these services expanded .

Merchant Banking differs from Commercial Banking by focusing on services such as issue management, post-issue services, and corporate advisory, rather than primarily taking deposits and making loans. Unlike Investment Banking, which handles trading in securities and investment advice, Merchant Banks do not focus on bought-out deals as the central activity. However, there are overlaps, such as Commercial Banks undertaking merchant banking tasks under certain conditions, whereas Merchant Banks usually do not engage in standard commercial banking activities .

Key milestones that facilitated Merchant Banking development in the UK and USA during the 20th century included increasing international trade needs which necessitated more sophisticated financial services beyond traditional lending. The integration of a wider array of financial services into their operations allowed Merchant Banks to support industrial growth effectively. The Amendment Regulation and definitions like those provided by the Ministry of Finance helped clearly delineate the activities permissible under Merchant Banking, thus aiding its evolution and acceptance as a distinct financial entity .

Before 1956 in India, managing agents undertook roles that aligned with Merchant Banking functions, such as acting as issue houses for securities, evaluating project reports, planning capital structures, and occasionally providing venture capital. These activities were akin to those of Merchant Bankers, focusing on financial structuring and capital management, thus forming a precursor to more specialized services that would develop later .

Amsterdam played a critical role in the early formation of Merchant Banking due to its status as the center of international finance during the seventeenth and much of the eighteenth century. Amsterdam merchants mastered various financial techniques and developments that later became integral to the profession of 'Merchant Bankers.' The city's proficiency in these practices laid the foundation for the evolution of the Merchant Banking sector .

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