What is a Merchant bank?
Merchant Bank is a company that provides services like fundraising activities like IPOs, FPOs, loans, underwriting, financial advising or market making for big companies and individuals having huge net worth but they do not provide for the basic banking services such as checking accounts, etc.
It provides financial services, including underwriting, loan services, fundraising services, and financial advising to high net-worth individuals and small/mid-sized corporations.
It is not the bank for the general public. It’s similar to the investment bank, but a merchant bank and an investment bank are not the same. This bank provides services only to high net-worth individuals and multinational companiesMultinational CompaniesA multinational company (MNC) is defined as a business entity that operates in its country of origin and also has a branch abroad. The headquarter usually remains in one country, controlling and coordinating all the international branches. that have businesses all around the globe. On the other hand, an investment bank provides finance-related services to individuals, corporations, and government.
Functions of Merchant Bank
- Project Counselling: A project counseling basically by following three steps – preparing the project reports, determining the right financing option, and assessing the merit of the project reports with the banks and financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. . Project counseling also involves filling up application forms and trying to fund the project via banks or financial institutions.
- Issue management: As the name suggests, this deals with issuing equity shares, preference shares, and debenturesAnd DebenturesDebentures refer to long-term debt instruments issued by a government or corporation to meet its financial requirements. In return, investors are compensated with an interest income for being a creditor to the issuer.. Acts as a partner to a high net-worth client by issuing sharesIssuing SharesShares Issued refers to the number of shares distributed by a company to its shareholders, who range from the general public and insiders to institutional investors. They are recorded as owner's equity on the Company's balance sheet. & debentures to the general public.
- Underwriting services: One of the major services of a merchant bank is underwriting servicesUnderwriting ServicesThe underwriters take the financial risk of their client in return of a financial fee. Market Makers like financial institution and large banks ensure that there is enough amount of liquidity in the market by ensuring that enough trading volume is there.. Underwriting is a guarantee given to the client stating that if the subscription is below a specified level, they will subscribe to the said amount.
- Portfolio management: As mentioned earlier, this bank invests in different kinds of investments on behalf of clients; and then manages the whole investments as well.
- Loan Syndication: Syndication of LoanSyndication Of LoanA loan syndication is an arrangement in which multiple lenders pool their resources to lend to a single entity. It is done to meet a borrower's large requirements, and the lenders are typically banks and other financial institutions. in simple terms means, bankers provide term loans to projects that need the money.
List of Top Merchant Banks
There are many banks in the world, and some also provide investment banking services. The below list is taken from Leaderleague.com that ranked USA Merchant Banks in 2016 in the TMT vertical.
- Bank of America Merrill Lynch
- Goldman Sachs
- J.P. Morgan
- Morgan Stanley
- Barclays Capital
- Credit Suisse
- Deutsche Bank AG
Highly Recommended Banks
- Jefferies International Ltd
- RBC Capital Markets
- SG CIB
- UBS Investment Bank
Merchant Bank vs. Investment Bank – Same or Different?
Often, a merchant bank is called an investment bank. But they’re not the same, especially the scope of work for both of these banks are quite different.
The main difference between a merchant and an investment bank is the clients they serve.
A merchant bank works with clients that are not big enough to go for initial public offeringInitial Public OfferingAn initial public offering (IPO) occurs when a private company makes its shares available to the general public for the first time. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock exchange. (IPO) but are privately held. That’s why to helps them in unique ways to raise capital. As for example, we can talk about private placements. Since private placements don’t require a privately held companyPrivately Held CompanyA privately held company refers to the separate legal entity registered with SEC having a limited number of outstanding share capital and shareowners. to disclose as per the Security Exchange & Commission (SEC), it becomes easier for the privately held companies. On the other hand, an investment bank works with huge clients that have the funds large enough to go for IPO, and they are large enough to provide time, effort, money to raise the capital through the traditional means. Plus, an investment bank also helps companies in mergers & acquisitions and also provides investment researchProvides Investment ResearchInvestment research entails analyzing the performance of various financial instruments such as stocks, mutual funds, bonds, debentures, and so on in order to present an investor with a view of how the firm is performing. It also aids in predicting their future performance for price movements. to the clients.
It may often seem that an investment bank is the same because they both serve high net-worth individuals, and they both are not open to the general public. But as their services are different, they don’t have the same name and same bandwidth. Since there’s a very slight difference in scope, merchant banks and investment banks are often synonymous.
This has been a guide to what is Merchant Banks and its meaning. Here we discuss the functions of Merchant Bank along with the list of top 10 and its differences from investment banks. You may also have a look at the following recommended articles on Investment Banking –