Merchant Banking: History, Regulations and Government Policy

These activities lead to the creation of larger, more efficient entities that can compete more effectively in the global market. Banking in India traces its roots from ancient barter systems, evolving through community trust-based practices to formal banking institutions. The establishment of the Bank of Hindustan in 1770 marked a significant transition, with British colonial regulations shaping the sector. Post-independence, nationalisation efforts aimed at promoting inclusive growth, while 1990s reforms opened the sector to private banks, enhancing competition and formal merchant banking activity in india was originated in customer services. The FERA regulations in 1973, which required a large number of foreign companies to dilute their shareholdings in India, gave a boost to the merchant banking activities in India.

By leveraging their expertise in financial management, merchant banks help companies optimize their capital structure, enhance their market value, and achieve strategic objectives. The 1990s marked a period of economic reforms, which led to the liberalisation of the banking sector. Private banks emerged alongside public sector banks, increasing competition and enhancing customer services. Numerous new financial institutions, including regional rural banks, were established to cater to underserved populations. The introduction of foreign banks further diversified the sector, introducing modern banking practices and technology. Additionally, the rise of non-banking financial companies (NBFCs) provided alternative financing options, contributing to a more robust financial ecosystem.

Private Sector Banks

Further, a merchant banker to keep registration in force shall pay renewal fee of Rs. 2.5 lakhs every three years from the fourth year from the date of initial registration. To obtain the certificate of registration, one had to apply in the prescribed form and fulfill two sets of norms (i) operational capabilities and (ii) capital adequacy norms. From the point of view of liberalization of the economy, SEBI has taken a retrograde step. A market economy flourish through bigger markets, higher sales and lesser profits.

Essay: Evolution of merchant banking in India and the future

Hence, the Thesis focuses on the challenges and advantages, which India gets and will get in future by merchant banking activities. The researcher exposed several services provided by Merchant Bankers & the role of Merchant bankers in providing those services to the business world. In addition to supporting corporate growth, merchant banks also promote foreign investments. They act as intermediaries between foreign investors and Indian businesses, providing advisory services that help navigate the regulatory environment and identify attractive investment opportunities. By attracting foreign capital, merchant banks contribute to the overall economic development of the country, fostering job creation, and enhancing infrastructure. Furthermore, merchant banks play a critical role in the development of new and emerging industries by providing the necessary financial support and strategic guidance.

Post Independence Period (1947-

Since then, a number of development banks and financial institutions such as IFCI and IDBI have also entered this field. The need for specialized merchant banking services was felt in India with the rapid growth in the number and size of the issues made in the primary market. The merchant banking services were started by foreign banks, namely the National Grindlays Bank in 1967 and the City Bank in 1970. The Banking Commission in its report in 1972 recommended the setting up of merchant banking institutions. The inception of merchant banking in India can be traced back to the early 1960s when the need for sophisticated financial advisory services became apparent.

1. This includes sectors such as technology, renewable energy, and biotechnology, which are essential for sustainable economic growth.
2. Today, merchant banks play a crucial role in the Indian financial market, offering a wide array of services that cater to the complex needs of modern businesses.
3. The Reserve Bank of India is another regulatory authority that oversees financial institutions.
4. Once the banks were established in the country, regular monitoring and regulations need to be followed to continue the profits provided by the banking sector.
5. They play a crucial role in providing financial support to small-scale industries and self-help groups.
6. These banks follow the cooperative principles of democratic control and shared benefits.

Today, merchant banking is an integral part of the Indian economy and is important for facilitating corporate finance and capital market transactions. This article will provide an overview of merchant banking in India, its objectives and functions. Merchant Bankers are classified into 4 categories as shown in the above table according to their nature and range of activities and their responsibilities to SEBI, investors and issuers of securities. The first category comprises merchant bankers who carry on any activity of issue management, determining financial structure, tie-up of financiers, advisor or consultant to an issue, portfolio manager and underwriter. The second category consists of those authorized to act in the capacity of co-manager/advisor, consultant, and underwriter to an issue or portfolio manager. The third category consists of those authorized to act as underwriter, advisor or consultant to an issue.

Banks engaged in merchant banking activities must comply with the prudential exposure norms and statutory limits outlined in Section 19(2) & (3) of the Banking Regulation Act, 1949, as prescribed by RBI. Private banks began to re-emerge following the economic liberalisation initiated in 1991. The government allowed new private banks to register, fostering an environment conducive to entrepreneurial growth. Institutions like HDFC Bank in 1994 and ICICI Bank in 1994 exemplified this trend, focusing on customer-centric services and advanced technology to enhance banking experiences. These banks challenged public sector banks, offering tailored products and competitive interest rates, thereby significantly improving service delivery in India’s banking system.

From its roots in barter systems to the sophisticated digital landscape of today, banking has continually transformed to meet the needs of its diverse population. The interplay of colonial influences and post-independence reforms has shaped a robust banking framework, fostering inclusivity and accessibility. Understanding this evolution highlights the resilience and adaptability of the Indian banking system, playing a significant role in supporting the nation’s economic development. The history of banking in India is a fascinating journey that mirrors the country’s economic evolution. From ancient barter systems to the establishment of modern banks, it showcases the dynamic interplay between culture, commerce, and finance. These banks follow the cooperative principles of democratic control and shared benefits.