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Merchant bank

Financial regulation

v d e

In banking, a merchant bank is a financial institution primarily engaged in offering financial services and

advice to corporations and to wealthy individuals. The term can also be used to describe the private

equityactivities of banking.[1]

The chief distinction between an investment bank and a merchant bank is

that a merchant bank invests its own capital in client companies, whereas an investment bank performs

its capital-raising role by distributing and trading the securities of such companies. Both merchant banks

and investment banks provide fee-based corporate advisory services, including those in mergers andacquisitions

History

Merchant banks, now so called, are in fact the original "banks". These were invented in the Middle

Agesby Italian grain merchants. As the Lombardy merchants and bankers grew in stature based on the

strength of the Lombard plains cereal crops, many displaced Jews fleeing Spanish persecution were

attracted to the trade. They brought with them ancient practices from the Middle and Far East silk routes.

Originally intended for the finance of long trading journeys, these methods were now utilized to financethe production of grain.

The Jews could not hold land in Italy, so they entered the great trading piazzas and halls of Lombardy,

alongside 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, defined as lending at interest. 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 usurious rates by the Church; but the Jews were not subject to 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.

The Jewish trader performed both financing (credit) and underwriting (insurance) functions. Financing

took the form of a crop loan at the beginning of the growing season, which allowed a farmer to develop

and manufacture (through seeding, growing, weeding, and harvesting) his annual crop. Underwriting in



the form of a crop, or commodity, insurance guaranteed the delivery of the crop to its buyer, typically a

merchant wholesaler. In addition, traders performed the the merchant function by made arrangements to

supply the buyer of the crop through alternative sources --- grain stores or alternate markets, for instance

--- in the event of crop failure. He could also keep the farmer (or other commodity producer) in business

during adrought or other crop failure, through the issuance of a crop (or commodity) insurance against the

hazard of failure of his crop.

Merchant banking progressed from financing trade on one's own behalf to settling trades for others and

then to holding deposits for settlement of "billette" or notes written by the people who were still brokering

the actual grain. And so the merchant's "benches" (bank is derived from the Italian for bench, banca, 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 and 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 usuryobjection. Once again this merely developed what was an ancient

method of financing long-distance transport of goods.

Islam makes similar condemnations of usury as Christianity.

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. These and other greatmerchant-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.

Definitions of Merchant Banking on the Web:



y In banking, a merchant bank is a financial institution primarily engaged in offeringfinancial services and advice to corporations and to wealthy individuals. The termcan also be used to describe the private equity activities of banking.

y A form of banking where the bank arranges credit financing, but does not hold loans untilmaturity. A merchant bank invests its own capital in leveraged buyouts, corporate

acquisitions and other structured finance transactions. ..

Contents: Preface. 1. Merchant banking in India. 2. Conceptual frame work. 3. Regulation of merchant banks. 4. Analysisand interpretation of data. 5. Environmental conditions and their impact on Merchant banking. 6. Major finding and

recommendation. Bibliography.

"Merchant Banking is an important service provided by a number of financial institutions that helps in the growth of the

corporate sector which ultimately reflects into the overall economic development of the country. Merchant banks were

expected to perform several functions like issue management, underwriting, portfolio management, loan syndication,

consultant, advisor and host of other activities. SEBI was also made all powerful to regulate the activities of merchant

banks in the best interest of investors and economy. Apart, merchant banking was the necessity of banks themselves

which were in need of non-fund based income so as to improve their profitability margins by all means in the changed

economic scenario. Now, it could be anybody's anxiety to know whether merchant banks are performing their duties

honestly as they were expected to do. What duties they performs most and in what capacity. Whether merchant banking

business helped banks themselves to improve their overall profitability. Does the socio, political and economic

environment prevailing today sufficiently warrant, the growth of merchant banking or otherwise? An honest attempt is

being made to seek answer of these questions and also to suggest remedial measures wherever possible on the basis of

empirical study done, the writing of which appears in the form of this book." (jacket)

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