what is merchant banking ? what are its functions, and how many banks are there in india?

Answer 1

Merchant banks, now so called, are in fact the original "banks". These were invented in the Middle Ages by Italian grain merchants. As the Lombardy merchants and bankers grew in stature on the back of the Lombard plains cereal crops many of the displaced Jews who had fled persecution in Spain after 613 entered the trade. They brought with them to the grain trade ancient practices that had grown to normalcy in the middle and far east, along the Silk Road, for the finance of long distance goods trades.

The Jews could not hold land in Italy, so they entered the great trading piazzas and halls of Lombardy, along side the local traders, and set up their benches to trade in crops.

They had one great advantage over the locals. Christians were strictly forbidden the sin of usury. The Jewish newcomers, on the other hand, could lend to farmers against crops in the field, a high-risk loan at what would have been considered usurous rates by the Church. In this way they could secure the grain sale rights against the eventual harvest. They then began to advance against the delivery of grain shipped to distant ports. In both cases they made their profit from the present discount against the future price. This two-handed trade was time consuming and soon there arose a class of merchants, who were trading grain debt instead of grain.

It was a short step from financing trade on their own behalf to settling trades for others, and then to holding deposits for settlement of "billete" or notes written by the people who were still brokering the actual grain. And so the merchant's "benches" (bank is a corruption of the Italian for bench, as in a counter) in the great grain markets became centers for holding money against a bill (billette, a note, a letter of formal exchange, later a bill of exchange, later still, a cheque).

These deposited funds were intended to be held for the settlement of grain trades, but often were used for the bench's own trades in the meantime. The term bankrupt is a corruption of the Italian banca rotta, or broken bench, which is what happened when someone lost his traders' deposits. Being "broke" has the same connotation.

A sensible manner of discounting interest to the depositors against what could be earned by employing their money in the trade of the bench soon developed; in short, selling an "interest" to them in a specific trade, thus overcoming the usury objection. Once again this merely developed what was an ancient method of financing long distance transport of goods.

Islamic banking has the same constraints against usury as Christianity and from the same old testament notions. Whether the insistence that money cannot be earned from deposits held as debt will be relaxed as Islam ages and matures is unknown.

The medieval Italian markets were disrupted by wars and in any case were limited by the fractured nature of the Italian states. And so the next generation of bankers arose from migrant Jewish merchants in the great wheat growing areas of Germany and Poland. Many of these merchants were from the same families who had been part of the development of the banking process in Italy. They also had links with family members who had, centuries before, fled Spain for both Italy and England.

This course of events set the stage for the rise of banking names which still resonate today: Schroders, Warburgs, Rothschilds, even the ill-fated Barings, were all the product of the continental grain trade, and indirectly, the early Iberian persecution of Jews.
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Modern practices

The definition of merchant banking has changed greatly since the days of the Rothschilds. The great merchant banking families dealt in everything from underwriting bonds to originating foreign loans. Bullion trading and bond issuing were some of the specialties of the Rothschild family. The modern merchant banks, however, tend to advise corporations and wealthy individuals on how to use their money. The advice varies from counsel on M&A to recommendation on the type of credit needed. The job of generating loans and initiating other complex financial transactions has been taken over by investment banks and private equity firms.

Today there are many different classes of merchant banks. One of the most common forms is primarily utilized in America. This type initiates loans and then sells them to investors. Even though these companies call themselves "Merchant banks," they have few if any of the characteristics of former Merchant banks.

A more traditional form of Merchant bank is not as widely used. This genre of merchant banking is seen in companies such as Blackstone Group, LCF Rothschild Group, and Goldman Sachs. Their activities include private banking, fund management, and advisory services. Though these organizations are holding companies, their operations are essentially those of the original Merchant banks.

http://en.wikipedia.org/wiki/Merchant_banking

Answer 2

Merchant Banking Definition

Answer 3

Who are merchant bankers ?

-Merchant banks are private financial institution.
-Their primary sources of income are PIPE (Private Investment In Public Entities ) financings and international trade.

-Their secondary income sources are consulting, Mergers & Acquisitions help and financial market speculation.

-Because they do not invest against collateral, they take far greater risks than traditional banks.

-Because they are private, do not take money from the public and are international in scope, they are not regulated.

-Anyone considering dealing with any merchant bank should investigate the bank and its managers before seeking their help.

-The reason that businesses should develop a working relationship with a merchant bank is that they have more money than venture capitalists. Their advice tends to be more pragmatic than venture capitalists.

Some of the functions of Merchant Bankers :

1.Consulting advice on going public and international business.
2. Advice and help in taking your company public. If they are unwilling to supply Investment Banking bridge loans, they have a low cost strategy for taking your company public.
3. They do PIPE (Private Investment in Public Equities) financings.
4. They can advise or help with a company’s M&A strategy.
5. They are essential advisors for companies seeking to become multinational corporations.
6. They off pragmatic general business advice for real world



Merchant banks in India : Most banks have a separate division of merchant banking ex ICICI , SBI etc and other example would be of India Infoline Securities Pvt Ltd


If you are a company seeking to grow, retain Merchant Banker to advise and help you.
If you are an accredited investor, park your wings and become a merchant banker.

Answer 4

RBI is the highest authority on monetary policy in India.It controls the amount of money (currency) floating in the market. 1. It controls the money in the market by dictating the interest rates (Bank Rate etc) 2. Statutory Liquidity Ratio ( amount of money with banks that they have to invest in govt bonds) 3. Cash Reserve Ratio (amount of money banks have to keep in cash and not invest any where) 4. RBI is the Govt's bank. It issues currency on behalf of the govt. 5. It holds the govt's money 6. It buys and sells govt bonds (also used to pull out money from the system by selling the bonds to big investors at attractive prices or to infuse money by buying bonds from market) 7. Controls the exchange rates by buying and selling Rupees to prevent extreme fluctuations in the exchnge rate for the Rupee. 8. It regulates the entire banking sector-issues licences, audits banking operations, monitors banking regulations, suggests and makes changes in banking policies it can control 9. RBI performs the clearing of funds between banks when there is a funds transfer/cheque/drafts and other types of payments by operating clearing houses at major cities and towns. Where RBI clearing house is unavailable, SBI acts as the clearing house. 10. It is also a bank's bank. It lends money to banks.

Answer 5

In late 17th and early 18th century Europe, the largest companies of the world were merchant adventurers. Supported by wealthy groups of people and a network of overseas trading posts, the collected large amounts of money to finance trade across parts of the world. For example, The East India Trading Company secured a Royal Warrant from England, providing the firm with official rights to lucrative trading activities in India. This company was the forerunner in developing the crown jewel of the English Empire. The English colony was started by what we would today call merchant bankers, because of the firm's involvement in financing, negotiating, and implementing trade transactions.

The colonies of other European countries were started in the same manner. For example, the Dutch merchant adventurers were active in what is now Indonesia; the French and Portuguese acted similarly in their respective colonies. The American colonies also represent the product of merchant banking, as evidenced by the activities of the famous Hudson Bay Company. One does not typically look at these countries' economic development as having been fueled by merchant bank adventurers. However, the colonies and their progress stem from the business of merchant banks, according to today's accepted sense of the word.

THE HISTORICAL MERCHANT BANK

Merchant Banking, as the term has evolved in Europe from the 18th century to today, pertained to an individual or a banking house whose primary function was to facilitate the business process between a product and the financial requirements for its development. Merchant banking services span from the earliest negotiations from a transaction to its actual consummation between buyer and seller.

In particular, the merchant banker acted as a capital sources whose primary activity was directed towards a commodity trader/cargo owner who was involved in the buying, selling, and shipping of goods. The role of the merchant banker, who had the expertise to understand a particular transaction, was to arrange the necessary capital and ensure that the transaction would ultimately produce "collectable" profits. Often, the merchant banker also became involved in the actual negotiations between a buyer and seller in a transaction.

THE MODERN MERCHANT BANK

During the 20th century, however, European merchant banks expanded their services. They became increasingly involved in the actual running of the business for whom the transaction was conducted. Today, merchant banks actually own and run businesses for their own account, and that of others.

Since the 18th century, the term merchant banker has, therefore, been considerably broadened to include a composite of modern day skills. These skills include those inherent in an entrepreneur, a management advisor, a commercial and/or investment banker plus that of a transaction broker. Today a merchant banker is who has the ability to merchandise -- that is, create or expand a need -- and fulfill capital requirements. The modern European merchant bank, in many ways, reflects the early activities and breadth of services of the colonial trading companies.

Most companies that come to a U.S. merchant bank are looking to increase their financial stability or satisfy a particular, immediate capital need.

Professional merchant bankers must have: 1) an understanding of the product, its industry and operational management; 2) an ability to raise capital which might or might not be one's own (originally merchant bankers supplied their own capital and thereby took an equity interest in the transaction); 3) and most importantly, effective skills in concluding a transaction - the actual sale of the product and the collection of profit. Some people might question whether or not there are many individuals or organizations who have the abilities to fulfill all three areas of expertise.

THE NORTH AMERICAN VARIANT

Merchant banking services in the U.S., however, have been undertaken by highly specialized "boutiques", where each offers its own specialized service. The typically charge fee income for each service, and transactions are oriented toward short- term deals rather than long-term relationships.

Very few offer the complete range of services that are available through traditional European merchant banks. In fact, most companies that come to a U.S. merchant bank are looking primarily to increase their financial stability or satisfy a particular, immediate capital need. They are not looking for the actual "on-line" operating advice and assistance required to complete the traditional merchant banking process.

CAPITAL ASSISTANCE

In providing financial assistance, merchant banks offer a full understanding of all facets of the capital markets. This includes all types of debt and equity financing available from both the domestic and international markets. A merchant banker, cognizant of capital costs, looks for the best sources of capital, including its restrictions and dollar limitations.

It should be understood that interest rates are not the only definition of capital costs. Restrictions on availability, prepayment terms, and operating effectiveness can often outweigh what might appear to be inexpensive capital with low interest rates. Too often, capital includes costs which force an entrepreneur or a business to undertake undesirable actions. In the short-run, some actions might be necessary, but often in the long-run are detrimental. The traditional merchant banker understands these capital limitations and can structure a transaction which is beneficial to all sides of the table -- not just the capital source.

He also knows how to substitute one type of capital for another, sometimes utilizing internal sources from asset repositioning or cash creation from improvements in working capital. He understands fully the risk versus return elements necessary to complete the capital procurement process.

FINDING A MERCHANT BANK

There are many merchant bankers operating in North America today, both large and small, though only a subset offer a full range of services. Before selecting a merchant banker, one should decide what services are required. Is it capital, general management consulting, supervision of an existing investment, a joint venture, or merger/acquisition assistance to spot and consummate a distribution, product or manufacturing opportunity that one requires?

It is paramount to know who in such an organization is best qualified to fill these needs. Also, selection of the merchant banker depends on whether one needs to satisfy a short or a long-term objective, or both.

In the final analysis, it is the personal relationship between the parties that will determine the chances of success. One may find that the smaller merchant banking companies are both comprehensive in their services and reliable. They may effectively handle all transaction elements, while remaining within one's cost parameters. Moreover, these smaller firms can offer more personalized services, better performance and quicker responses to a client's needs.

Locating a merchant bank that fits a particular need can be as difficult as the transaction itself. Even though there are such directories as that published by the American Bankers' Association, the National Association of Security Dealers and the Directory of Corporate Finance, there are no sources that evaluate the abilities of North American merchant bankers. For each transaction's needs, one must assess the skills of a merchant banker while examining the firm's performance record.

About the author:

Bruce W. Barren has been Group Chairman of the EMCO/Hanover Group since its founding in 1971. EMCO has concluded more than $3 billion in financial transactions worldwide as international merchant bankers.

Mr. Barren has been honored in California by various municipal and county governments as well as the State Assembly and Senate for having helped turn around over 100 businesses. He has written numerous articles on corporate finance, mergers/acquisitions, and on-line management. He has also lectured to professional societies and taught courses in California's Continuing Professional Education program.

Banking list u can avail from rbi website