MERCHANT BANK

A merchant bank is a kind of non depository institution that primarily offers services in financial advisory, investing and lending. Their main consumers are private entities but some wealthy individuals or HNIs also use a merchant bank’s services. Let us have a closer look at how merchant banks work and how consumers can benefit from the same and what its relationship is with investment banking.

WHAT ARE MERCHANT BANKS?

Sometimes focusing on a particular specific industry, merchant banks play an important role in helping customers raise the capital needed for their growth plans. This often inculcates moving forward with a private equity investment in which the merchant provides funding to the consumers in exchange for company shares and sometimes part of their future profits. With this, the merchant bank would get partial ownership in the funding seeking company. At the same moment, merchant banks can assist with offering business loans and other kinds of fundraising options.

These banks usually also play a key role in helping companies and HNIs make strategic financial decisions. Their advisory role might inculcate helping an Indian company decide whether to sell off some of the assets. They can also assist customers decide how best to raise private capital for their feasibility and needs.

WORKING OF A MERCHANT BANK

Merchant banks work as non depository financial institutions that do not offer services to the public in general. This means they are not like typical commercial and retail banks that allow customers to sign up for savings bank accounts and deposit funds in it. In place of that, merchant banks focus on providing investments, lending and advisory services to private companies and wealthy people. These banks often operate at a multinational level and may exist as segments of investment banks or large commercial banks.

Most often, a merchant bank’s customers are entities that want to raise capital but need an alternative to highly regulated IPOs that larger companies might pursue. Merchant banks can assist such consumers by privately investing in them in exchange for an ownership stake in shares of their company’s share. The ownership interest can be as much as 100% and the merchant bank may also get a portion of future profits and dividends. Providing this funding to the customer might involve the merchant bank tapping into its own funds or using its network of investors and entrepreneurs to obtain it.

Merchant banks will thoroughly evaluate and perform research on the customer before extending any private equity deal. They will take into account the risk level and the return potential in deciding which consumers to invest in.

INVESTMENT BANK VS MERCHANT BANK

Investment Bank	Merchant Bank
Helps with offering advice and raising capital	Helps with offering advice and raising capital
Serves HNIs and larger public companies.	Serves smaller private companies and HNIs
Assists as an intermediary with finding suitable investors	Offers private equity investments
Helps with IPOs	Helps with private placement
Does not take any kind of deposits	Doesn’t take deposits

KEY POINTS TO REMEMBER

These banks target smaller companies inclined toward private placement rather than an IPO.
While investment and merchant banks have similar roles, they differ in terms of the target consumer and investment method used.
Merchant banks are non deposit accepting institutions serving HNIs and serving businesses who need to raise funds, get financial advice or make decisions related to investments.
Merchant banks often provide private equity financing to customers who give a portion of ownership interest to the bank in exchange for the necessary funding.
Businesses and organisations mostly go to a merchant bank to get advice on whether to acquire or merge with another entity, as well as learn of available financing options for the transaction.