What Is Merchant Banking? Definition, Functions, Services, Roles, and Advantages

Merchant banking refers to specialized financial services designed to support business expansion, including capital raising, fund management, and strategic advisory. In India, such institutions are crucial for corporate success. Continue reading to discover their functions, services, roles, and vital benefits.

What Is a Merchant Bank?

A merchant bank is a financial institution that offers services such as capital raising, corporate advisory, and investment management. Unlike traditional venues, they do not accept deposits or offer savings accounts. Leading merchant banks in India now include SBI Capital Markets, ICICI Securities, Kotak Investment Banking, Axis Capital, JM Financial, and Edelweiss, along with global firms like JP Morgan, Goldman Sachs, and Morgan Stanley. These institutions help companies raise capital through IPOs, private placements, and strategic financing.

Difference Between Merchant Bank and Commercial Bank

Merchant and commercial banks serve different financial needs. Here is a quick comparison:

Overall, merchant banks support business growth, while commercial banks handle everyday banking for people and small firms.

How Does Merchant Banking Work?

Merchant banking operates by providing issuer and acquirer services to businesses. These include raising funds, advising on mergers, and overseeing investments. 

Key Features of Merchant Banking

Unlike general financial institutions, merchant banks focus exclusively on business clients and do not offer retail banking services. Here are the key features:

• Special services. They offer customized financial solutions for companies.
• Corporate focus. Perfect options for large companies and entrepreneurs.
• Expert advice. Great chance to get guidance for complex financial matters.
• SEBI-compliant. Their operations follow updated SEBI regulations, particularly the 2024 amendments, which introduced stricter compliance requirements, minimum net worth thresholds, and a mandate to separate non-core activities into distinct legal entities.

You can make merchant banking and payment infrastructure – including a solid understanding of the merchant account vs payment gateway dynamic – an important partner for your success.

Activities Performed by Merchant Bankers

Merchant banking professionals perform a range of specialized financial tasks, including:

• Issue management. Managing public issues like IPOs and rights issues.
• Underwriting. Guarantees for buying shares on favorable terms.
• Corporate restructuring. Help during mergers, acquisitions, and organizational restructuring.
• Loan syndication. Arranging large loans from multiple lenders within the open banking system. Following SEBI’s 2024 regulatory reforms, merchant banks participating in SME IPOs must operate certain advisory services – such as valuation and consulting – through separate legal entities to avoid conflicts of interest.

This way, your business can make smart financial decisions and grow rapidly.

Key Functions of Merchant Banking

Merchant banks in India play an important role in supporting businesses by providing a range of specialised services. Their primary responsibilities include assisting businesses in expanding, managing risks, and making smart financial decisions. Below, you can discover key areas where such services have an impact.

1. Fundraising and Capital Structuring

Merchant banks assist businesses in raising capital by issuing equity shares, debentures, or bonds. They also advise on the optimal capital structure for balancing debt and equity. A bank can help a company raise INR 50 crore through a private placement or public offering to fund expansion.

2. Underwriting and Loan Syndication

Merchant banking underwrites public offerings, guaranteeing that the company receives the necessary money even if not fully subscribed. They also arrange huge loans through loan syndication, which involves a group of banks. For example, they could syndicate an INR 500 crore loan for a major infrastructure project.

3. Advisory and Consultancy Services

These banks offer expert assistance on business strategy, payment aggregators, risk management, and financial decisions. They help businesses in improving their performance and making informed strategic decisions. A developing company may engage with merchant banking to explore finance possibilities or restructure operations for greater efficiency.

4. M&A and Business Restructuring Support

Merchant banks help with corporate restructuring, mergers, and acquisitions. They find prospects, do valuations, and manage agreements. For example, during a merger of two Indian companies, the bank may do due diligence and verify regulatory compliance under SEBI norms.

5. Portfolio and Asset Management

Some merchant banks provide investment services to high-net-worth individuals and businesses. They develop and help with portfolio management to achieve financial objectives. For instance, this financial organisation may invest INR 200 crore in equities, debt, and mutual funds to maximise profits.

Merchant Banking Services in India

Merchant banks provide a variety of services targeted at certain clients. These include fundraising, consulting, and restructuring options. Their services are critical to corporations, small enterprises, government agencies, and financial institutions. Here is a closer look at how such banks help various industries.

Services for Corporates and SMEs

Such organisations provide vital financial support to corporations and small medium enterprises. Their services help businesses grow, manage risk, and raise capital effectively:

• Capital raising. Support for IPOs, private placements, and debt issues.
• Project financing. Assistance in planning and funding large business projects.
• Debt restructuring. Help in reorganising existing loans to improve cash flow.
• Financial advisory. Guidance on strategic decisions, including expansion or diversification.

These services help corporates and SMEs remain competitive and financially smart.

Services for Government and Financial Institutions

This banking type supports government agencies and financial institutions in managing large-scale financial operations and strategic investments:

• Disinvestment advisory. Assist in selling government holdings in public sector units.
• Public issue management. Handling bond or share issues by government bodies.
• Investment consultancy. Advice about managing money and increasing returns.
• Infrastructure financing. Establishing long-term finance for public initiatives.

These services strengthen public finances and promote economic development.

Role and Importance of Merchant Bankers

Merchant banking plays a crucial role in India’s financial system. Their involvement helps boost economic development and strengthens capital markets.

Role in Economic Development

Merchant banking promotes industrial progress by assisting businesses in obtaining capital, restructuring operations, and managing investments. Their services promote employment creation, increased productivity, and infrastructure development. They play a vital role in driving India’s overall economic success and expansion.

Importance in Capital Markets

Merchant banking serves as a go-between for businesses and investors in the financial markets. They handle public concerns, guarantee regulatory compliance, and boost investor trust. Their position in underwriting and advice contributes to market stability, transparency, and growth.

Advantages of Merchant Banking

This type of banking offers many benefits to businesses, especially in a complex financial environment like India. These banks provide expert support, reduce financial risks, and help companies make informed decisions.

Strategic Financial Guidance

Merchant banks provide personalized financial advice to businesses. This way, they can plan growth, raise capital, and structure their operations. They evaluate the company’s objectives and market conditions to develop tailored financial strategies. For example, they may advise a company on whether to try debt or private equity financing.

Risk Reduction and Expert Support

Merchant banking uses their extensive market expertise to assist clients in identifying and mitigating risks through effective planning. They manage complex operations such as mergers, IPOs, and corporate restructuring. This decreases the risk of failure and guarantees regulatory compliance.

The Future of Merchant Banking in India

The future of merchant banking in India is promising, driven by economic growth, digital transformation, and rising business needs. As more startups, SMEs, and government projects seek expert financial support, these organisations will play a more central role. Their evolving services will continue to support innovation, investment, and long-term economic progress.