Introduction
Merchant banking combines financial expertise and advisory services to help businesses raise capital, manage investments and navigate complex transactions.
In India, merchant banks are SEBI-registered institutions critical for startups and corporations seeking funds through IPOs, M&As or FDI.
This guide answers “what is merchant banking”, explores the features, benefits and risks of merchant banks and highlights their role in India’s financial ecosystem.
Whether you’re a startup seeking funding or a business planning global expansion, understanding merchant banking is key to success.
What is Merchant Banking?
Merchant banking involves specialized financial services that go beyond traditional banking, blending investment banking, advisory and capital market expertise. Regulated by SEBI under the Merchant Bankers Regulations, 1992, merchant banks in India support:
- Capital Raising: Underwriting IPOs, bonds or private equity deals.
- Advisory Services: Guiding M&As, restructuring or FDI compliance.
- International Finance: Managing cross-border transactions and currency risks.
Example: SBI Capital Markets, a leading merchant bank, helped a tech startup raise ₹20 crore via an NSE Emerge IPO, ensuring SEBI compliance.
Features of Merchant Banks
- Industry Specialization: Focus on sectors like tech, manufacturing or healthcare, offering tailored solutions.
- Equity Investment: Invest risk capital in startups or SMEs, sharing growth potential.
- Consultative Approach: Provide strategic advice on capital structure, investments and M&As.
- Global Reach: Facilitate FDI, international trade and currency hedging for cross-border deals.
- Financial Innovation: Develop new instruments (e.g., structured bonds) to meet market needs.
Functions of Merchant Banks
- Corporate Financing: Arrange equity or debt funding, optimizing capital structures for startups or corporates.
- Securities Underwriting: Guarantee subscription for IPOs or bond issues (e.g., 15% mandatory for SME IPOs under SEBI ICDR Regulation 261).
- Strategic Advisory: Advise on M&As, restructuring or valuations for FDI (FEMA Rule 11).
- Project Evaluation: Assess project viability, analyzing risks and returns before funding.
- Currency Services: Manage foreign exchange risks for international transactions.
- Portfolio Management: Oversee investments for clients, aligning with financial goals.
Case Study: A fintech startup partnered with Novam Legal to engage Axis Capital for a ₹15 crore private equity deal, with a merchant banker valuation ensuring FEMA compliance.
How Merchant Banking Works
- Client Onboarding: Understand the client’s goals (e.g., IPO, M&A) and risk profile.
- Financial Analysis: Review financial statements, cash flows and project feasibility.
- Tailored Strategy: Propose solutions like underwriting, valuations or loan syndication.
- Service Execution: Implement services (e.g., managing SME IPOs, securing FDI).
- Ongoing Monitoring: Track market trends and adjust strategies to ensure success.
- Fintech Integration: Use AI tools (e.g., Capital IQ) and blockchain for transparency in valuations or portfolio management.
Indian Context: SEBI mandates merchant banks to file DRHPs for IPOs, ensuring compliance with ICDR Regulations, 2018.
Benefits of Merchant Banking
- Expert Guidance: Strategic advice for fundraising, M&As or valuations, leveraging SEBI expertise.
- Capital Access: Facilitate startup funding through IPOs, private equity or bonds.
- Global Transactions: Support FDI and currency hedging for cross-border deals.
- Risk Mitigation: Manage market, credit and currency risks with hedging strategies.
- Innovation: Offer tailored financial instruments for complex needs.
Risks of Merchant Banking
- Market Volatility: Economic shifts impact investment returns or IPO performance.
- Credit Risk: Defaults on loans or underwritten securities can lead to losses.
- Regulatory Compliance: Non-compliance with SEBI or FEMA risks penalties (e.g., fines up to ₹25 lakh).
- Operational Risks: System failures or governance issues harm credibility.
- Liquidity Constraints: Illiquid markets can limit asset conversion to cash.
Merchant Banks vs. Investment Banks
| Aspect | Merchant Banks | Investment Banks |
| Scope | Broad, including trade finance, valuations | Focused on underwriting, securities trading |
| Client Base | Startups, SMEs, corporates, individuals | Primarily corporates, institutional investors |
| Risk Capital | Often invest equity in clients | Rarely provide risk capital |
| Services | Advisory, project finance, FDI valuations | Underwriting, M&A advisory, trading |
| Global Operations | Strong focus on international finance | Focused on global capital markets |
Merchant Banking Services in India
- Portfolio Management: Manage investments for clients, optimizing returns.
- M&A Advisory: Guide deal structuring, valuations and negotiations.
- Capital Raising: Underwrite IPOs or arrange private equity for startup funding.
- Valuations: Provide SEBI-compliant valuations for FDI (FEMA Rule 11) or tax (Rule 11UA).
- Project Financing: Secure loans or equity for infrastructure or startup projects.
- Loan Syndication: Coordinate with multiple lenders for large-scale funding.
Market Size: India’s merchant banking sector supports over 200 SEBI-registered firms, with the global market valued at $42.1 billion in 2022, projected to reach $232.2 billion by 2032 (18.9% CAGR, Allied Market Research).
Merchant Banking and Startups
Merchant banks are vital for Indian startups, offering:
- Valuations: SEBI-compliant FDI valuations or Rule 11UA tax valuations.
- Fundraising: Facilitate angel, VC or IPO funding (e.g., NSE Emerge).
- Advisory: Guide ESOPs, M&As or restructuring for growth.
Case Study: A healthtech startup engaged Novam Legal to work with Kotak Mahindra Capital for a ₹10 crore angel funding round, using a DCF-based valuation for investor trust.
Historical Interest Rate Context
Merchant banks’ financing costs are influenced by market conditions and RBI policies. Historically:
- 2010–2015: High interest rates (8–10% repo rate) increased borrowing costs for merchant bank clients.
- 2016–2020: Rates fell (6–7%), easing loan syndication for startups.
- 2021–2025: Repo rates stabilized at 6.5% (as of June 2025), supporting affordable project financing.
Note: Interest rates vary by deal structure (e.g., equity vs. debt), with merchant banks negotiating competitive terms.
Conclusion
Merchant banks in India, regulated by SEBI, are key partners for startups and businesses seeking merchant banking services like IPO underwriting, FDI valuations and M&A advisory.
Despite risks like market volatility, their expertise drives startup funding and global expansion. Novam Legal connects you with SEBI-registered merchant banks for tailored solutions.
Need merchant banking services? Contact Novam Legal for expert guidance on fundraising and compliance.
Frequently Asked Questions
Q1. What is merchant banking?
Ans1. Merchant banking combines banking and investment services, offering capital raising, advisory and valuations for startups and corporates, regulated by SEBI in India.
Q2. What is a merchant bank?
Ans2. A merchant bank is a SEBI-registered institution providing underwriting, M&A advisory, FDI valuations and project financing for businesses and startups.
Q3. How does merchant banking differ from commercial banking?
Ans3. Merchant banking focuses on underwriting, advisory and investments, while commercial banking handles deposits and loans for individuals and firms.
Q4. How do merchant banks help startups raise funds?
Ans4. They underwrite IPOs, arrange private equity or angel funding and provide FEMA-compliant FDI valuations (Rule 11).
Q5. What are the key services of merchant banks?
Ans5. Portfolio management, M&A advisory, capital raising, underwriting, valuations, project financing and loan syndication.
Q6. What are the benefits of merchant banking?
Ans6. Expert advice, capital access, global transaction support, risk mitigation and innovative financial solutions.
Q7. What risks are associated with merchant banking?
Ans7. Market volatility, credit defaults, regulatory penalties, operational failures and liquidity issues.
Q8. How do merchant banks differ from investment banks?
Ans8. Merchant banks offer broader services (e.g., valuations, project finance) and invest equity, while investment banks focus on underwriting and trading.
Q9. What is the role of SEBI in merchant banking?
Ans9. SEBI regulates merchant banks under the Merchant Bankers Regulations, 1992, ensuring compliance for IPOs, valuations and advisory services.
Q10. How do merchant banks support FDI in India?
Ans10. They provide valuations for share transfers under FEMA Rule 11, ensuring arm’s length pricing for unlisted companies.
