What is Merchant Banking? Meaning, Functions, and Benefits

What is a merchant bank?

A merchant bank is a financial institution that provides a range of banking and advisory services to businesses, corporations, and high-net-worth individuals. Unlike traditional banks that focus on retail banking, merchant banks specialise in corporate finance, investment management, and underwriting services. These banks play a crucial role in helping businesses raise capital, expand operations, and manage financial risks.

Merchant banks assist companies in issuing securities, managing mergers and acquisitions, and offering strategic financial advice. They are particularly beneficial for businesses looking for funding beyond conventional loans, as they provide equity financing and private placement services. These banks do not offer standard banking services such as savings and current accounts but focus on more complex financial transactions.

Merchant banks operate under financial regulations, ensuring they adhere to legal and ethical standards. In India, they are regulated by the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI). Their expertise in capital markets, risk assessment, and investment strategies makes them valuable partners for growing businesses and investors looking for professional financial guidance.

How merchant banks work

Capital raising: Merchant banks help businesses raise funds through private placements, venture capital, and debt financing.

Underwriting services: They underwrite securities, ensuring businesses can issue shares and bonds with reduced financial risk.

Advisory services: They provide expert advice on mergers, acquisitions, and restructuring to optimise business growth.

Equity investments: Merchant banks invest in private companies and startups to generate long-term financial returns.

Wealth management: They manage investment portfolios for high-net-worth individuals and institutions, ensuring profitable financial growth.

Trade financing: These banks facilitate international trade by offering letters of credit and other financial instruments.

Functions of a merchant bank

Corporate finance advisory: Provides financial guidance on investment decisions, mergers, and acquisitions.

Project financing: Assists companies in obtaining funding for large infrastructure and development projects.

Securities underwriting: Guarantees the sale of stocks and bonds issued by corporations to raise capital.

Private equity and venture capital: Offers investment opportunities to startups and established businesses.

Risk management: Helps businesses identify, analyse, and mitigate financial risks.

International business support: Facilitates cross-border transactions, foreign exchange services, and trade financing.

Benefits of merchant banking

Access to capital: Helps businesses secure funding from investors, venture capitalists, and private equity firms.

Expert financial guidance: Provides strategic advice on investment, expansion, and financial restructuring.

Risk mitigation: Helps businesses manage financial risks through well-structured investment strategies.

Enhanced business growth: Assists in business expansion by offering tailored financial solutions.

Facilitates trade and investment: Supports businesses in conducting international trade with efficient financial services.

Example of merchant banking

Merchant bank	Services offered	Notable clients
Bajaj Finserv BBPS	Bill payments, financial advisory, investment management	Small businesses, corporations, high-net-worth individuals
ICICI Securities	Investment banking, equity financing, trading services	Institutional investors, corporate clients
Kotak Investment Banking	Mergers and acquisitions, capital market solutions	Startups, mid-sized enterprises
Axis Capital	Private equity, financial restructuring	Large-scale industries, retail investors

Difference between merchant banking and investment banking

Feature	Merchant banking	Investment banking
Target clients	Businesses, corporations, high-net-worth individuals	Large corporations, governments, financial institutions
Services	Private equity, venture capital, underwriting, trade finance	Stock issuance, bond trading, merger & acquisition advisory
Regulatory authority	SEBI, RBI	SEBI, RBI
Business model	Long-term capital investment and financial advisory	Short-term capital market transactions and investment solutions
Key focus	Business funding, trade finance, equity investment	Corporate finance, securities trading, IPOs

Conclusion

Merchant banks play a significant role in corporate finance, offering tailored financial solutions to businesses and high-net-worth individuals. Their expertise in capital raising, risk management, and advisory services makes them an essential part of the financial ecosystem.

Unlike traditional banks, they focus on investment strategies, helping businesses expand and manage their financial resources efficiently. Institutions such as Bajaj Finserv BBPS serve as examples of modern merchant banking services, supporting businesses with structured financial solutions. Understanding merchant banking is essential for companies looking to enhance their financial strategies and growth prospects.