With a growing amount of public funds being invested in equity shares, merchant banking has gained popularity as a means of bridging the gap between wealthy investors and business firms that are looking for funding to meet their business needs like expansion, diversification or setting up a new enterprise. A merchant banker has specialized skills in mobilizing funds from private investors, and can help both large institutional investors and small retail investors.
What is the role of a merchant bank?
A merchant bank usually refers to a firm or organization involved in all aspects of issue management. Their services include providing consultancy or advisory services to corporate organizations for issue management, making arrangements for buying, selling or subscribing to shares in an issue or any other consultancy or services such as underwriting, analysis and advice related to mergers and acquisitions, credit syndication and portfolio management.
When owners of public companies want to raise capital through the public and big institutional investors, they acquire the services of a merchant bank to take care of the job. If there is a large offering, the company issuing those shares may need a party as a guarantor who would purchase the remaining shares if not subscribed fully by the public. In such a circumstance, the role of merchant bank becomes eminent as an underwriter. The merchant bank purchases the left over shares which will remain as its own holding in the company.
As an issue manager, a merchant bank helps the capital market to increase the supply of securities. Such a bank helps a public limited company by dealing with the proper authorities and by preparing a prospectus for the public issue of its debentures and shares. The bank will help collect the application money, scrutinize the applications, as well as arrange for the allotment of the debentures and shares.
Portfolio Management Services
Merchant bank also works to provide variety of portfolio management services to their customers. As a layman investor with enough money to invest in stock market but without adequate knowledge to manage his/her investment options, a merchant bank stands up for such an investor. A team of experts and market monitors in the merchant banks helps such an investor to choose which all shares to purchase and which all to sell in a given time. Add to that, managing a portfolio also means keeping a track of which all stocks one currently has in the account. For an investor with a time constraints, a merchant bank would help by keeping its track.
Registrar of shares keep an up-to-date record of all stocks bought, which includes names of individual shareholders, their shareholdings, their addresses, and signatures among other necessary information. As a share registrar, merchant banks are also responsible for paying dividend to qualified shareholders when it falls due. They also transfer shares on behalf of a deceased holders or as per mutual agreement between the involved parties.
Merchant banks also serve as institutions where general public can open their demat accounts which hold their dematerialized shares. A detail list of DPs can be found here
Where does Nepal stand in merchant banking?
Nepal currently has 25 merchant banks (including the recently licensed Aakash Capital
) and few others are joining the industry soon. Out of the existing 25 merchant banks, 3 of them have undergone merger and acquisition with other institutions thereby reducing their number. Kathmandu Capital Market Limited has been acquired by Bank of Kathmandu Limited and Reliable Capital by Global IME Capital whereas Ace Capital has undergone merger with NIBL Capital Markets Limited.
With more and more companies planning to enter the stock market and with the bulging size of our share market, the roles of merchant banks is becoming more and more prominent. Out of 28 commercial banks, half of them already have merchant banks under their wings while few of them are currently under the process to acquiring permission from the regulatory bodies to operate their own merchant banks. This also justifies to what extent the roles of merchant banks have scaled up in the recent years. See the complete list of merchant banks
In such a context, the Securities Board of Nepal (SEBON), the market regulator, has granted permission to add consultancy services to the list of activities in which merchant banks can engage apart from the current functions of sales and issue manager, underwriter, share registrar and investment manager.
Under the category of consultancy services, merchant bankers will be permitted to provide counsel on merger, asset valuation and business plan of corporate bodies, capital restructuring, loan syndication and working capital financing. Likewise, consultancy related to venture capital and wealth management of companies will also be provided by a merchant banker.
With the consultancy added as the list of services of merchant banks, the market regulator has recently revised the paid-up capital for merchant banks. For the Merchant Banks only providing investment and portfolio management services, the paid up capital has been fixed at Rs 5 crore. For those providing all above mentioned 5 functions, SEBON has set the paid up capital of Rs 20 crore.
However, there are few restrictions SEBON has enforced upon these merchant bankers in order to discourage unprofessional practices in share market. It has barred merchant banks from working as issue manager if they are the subsidiary of the parent companies that are intending to float shares. Next, merchant banks cannot perform the task if they happen to hold a major stake in their client companies which is issuing the public shares. Likewise, a single merchant bank cannot perform the work of both issue manager and underwriting while handling shares of their client companies as further directed in SEBON guidelines.