Al Role ot Qanka to , _ Securtllel.

Issuing stocks and bonds is one of the primary ways for a company to raise capital. But executing
t h e s e ~ requires special expertise, from pricing financial instruments In a way that will
maximize revenues to navigating regulatory requirements. That's where an investment bank usually
comes into the picture.

In essence, investment banks are a bridge between large enterprises and the investor. Their main roles
are to advise businesses and governments on how to meet their financial challenges and to help them
procure~- whether it be from stock offerings, bond Issues or ~products.

Role• an 1dv1Nr
Deciding how to raise capital is a major decision for any company or government. In most cases. they
lean on an investment bank - either a large wan.street firm or a 1HH.mQue_· banker - for guidance.

Taking into account the current investing climate, the bank will recommend the best way to raise funds.
This could entail selllng an ownership stake in the company through a stock offer or borrowing from the
publte through a bond Issue. The investment firm can also help determine how to price these instruments
by utilizing sophtstlcatert Uoeosiel roodds

In the case of a stock offering, Its flnancialanaly_s_ts wlll look at a variety of different factors - such
as earnings potential and the strength of the management team - to estimate how much a share of the
company is worth. If the client is offering bonds, the bank will look at prevailing Interest rates for similarty
rated businesses to figure out how much rt will have to compensate borrowers.

Investment banks also offer advice in a aw=or ~scenario. For example, if a business is
looking to purchase a competitor, the bank can advise Its management team on how much the company
Is worth and how to structure the deal in a way that's favorable to the buyer.

Underwriting Stocks and Bonds

If an entjty decides to raise funds through an equity or debt offering, one or more investment banks will
also underwrite t h e ~ . This means the institution buys a certain number of shares - or bonds - at
a predetermined price and re-sells them through an excllange.

Suppose Acme Water Fitter Company hopes to obtain $1 million in an initial public offering Based on a
variety of factors, including the firm's expected earnings over the next few years, F e d e r i c i ~
.flarmaJ determines that Investors will be willing to pay $11 each for 100,000 shares of the company's
stock. As the s o l e ~ of the issue. Federici buys all the shares at $10 apiece from Acme. If it
manages to sell all 100,000 at $11, the bank makes a nice $100,000 proftt (100,000 shares x $1 spread).

However, depending on its arrangement with the issuer, Federici may be on the hook if the public's
appetite is weaker than expected. If rt has to lower the price to an average of $9 a share
tolwwdile I t s ~ . it's /ost$100,000. Therefore, pricing securities can be tricky. Investment banks
generally have to outbid other institutions who also want to handle the transaction on behalf of the issuer.
But if their spread Isn't big enough, they won't be able to squeeze a heahhy return out of the sale.

In reality. the task o f ~ securities often falls on more than one bank. If It's a larger offering, the
managing underwriter will often form a ~ of other banks that sell a portion of the shares. This
way, the firms can market the stocks and bonds to a larger segment of the public and lower their risk. (L9)
The manager makes part of the profrt even if another syndicate member actually sells the security.

Investment banks perform a less glamorous role in stock offerings as well. It's thelr job to create the
documentation that must go to thfo Secudties and Excbnoge G<HDmissinn before the company can sell
 shares. This means compilinp Uoancial statements Information about the company's management and
current ownership and a statement of how the firm plans to use the proceeds.

Olhs-
While advising companies and helping them raise money is an important part of what Wall Street firms do,
most perform a number of other functions as well. In fact most major banks are highly diversified in
terms of the services they offer. Some of their other i~sources include:

• lllriNrarda. Larger Investment banks have large teams that gather information about companies and offer
recommendations on whether to buy or sell their stock. They may use these reports Internally but can
also generate revenue by selling them to ~ a n d mutual fund managers
• ndw llltd s.laa. Most major firms have a trading department that can execute stock and bond
transactions on behalf of their clients. In the past, some banks have also engaged in prpprjet@CY trading
where they essentially gamble their own money on securities; however, a recent regulation known as
the ~ h a s clamped down on these activities.
• AMlt ....,..,,_.,. The likes o f ~ and Goldman Sachs manage huge portfolios for pension_
funds. foundations and Insurance companies through their asset management t:tepartment. Their experts
help select the right mix of stocks, detJt lo:nmments real estate trusts and other Investment vehicles to
achieve their clients' unique goals.
~ ....,..,,_.,. Some of the same banks that perlorm Investment banking functions for f'2nLlnt.
.SDD businesses also cater to retail investors. Through a team of financial advisors, they help individuals
and families save for retirement and other long•term needs.

• Set:ultlad~ . These days, companies often pool Uoaocial assets - from mortgages to w:di1
,Cl(d ~ - and sell them off to investors as OuW·iocnmc prnducts An Investment bank will
recommend opportunities to "acurWzc" income streams, assemble the assets and mar1<et them
to iostiUdiooal investors.

~) What lo ■ M■rch- B■nk?

A merchant bank is a company that conducts underwriting, loan services, financial advising. and
fundraising services for large COfJ)Oratk>ns and high net worth individuals. Unlike retail or commercial
banks, merchant banks do not provide services to the general pu~ic. They do not provide regular banking
services like checking accounts and do not take deposits.

These banks are experts In internaUonal trade, which makes them specialists In dealing with multinational
corporations.

Many of the largest merchant banks in the world include J.P. Morgan, Goldman Sachs. and Citigroup.

Understanding Merchant Banks

The term merchant bank used in the United Kingdom to describe investment banks, but has a more
narrow focus in the United S1ates. They may act like Investment banks in the U.S. but tend to focus on
services tailored to multinational corporations and high net worth Individuals who do business In more
than one country.

Merchant banks in the U.S. are financial institutions that deal with international finance for multinational
corporations. Merchant banks traditionally perform international financing and underwriting including real
estate. trade finance, foreign investment, and other international transactions. They may be involved in
issuing letters of credit and in the transfer of funds. They may also consult on trades and trading
technology.
 Merchant banks typically earn fees charged on the services they provide.

Let's say Company ABC-based in the United States-wants to buy Company XYZ in Germany, it would
hire a merchant bank to facilitate the process. That bank would advise Company ABC on how to structure
the transaction. It may also help ABC in the financing and underwriting process.

Mlldllnlllllk
How Merchant Banks Facilitate Trade
If ,11 m111lioatiooal cocoorntion operates in many different countries, a merchant bank can finance business
operations in all those countries and manage the currency exchanges as funds are transferred and
provide the funds to make the purchase using a letter of credit (LOC).

Using the example above, the sellers in Germany receive an LOC issued by the merchant bank hired by
Company ABC as payment for the purchase. The merchant can also help the Company ABC work through
the leoal and re-gulatory Issues required to do business In Germany.

Key Takeaways

• Merchant banks conduct underwriting loan services. financial advisi'lg, and fundralslng services for large
corporations and high net worth individuals.
• They do not prCNide services for the generti public like checking accounts.
• Examples of the world's l11gest merchant banks include J.P. Morgan. Goldman Sachs, and CWgroup.

Merchant banks use more creattve forms of financing. They typically work with companies that may not
be large enough to raise funds from the public through an lnltlal pyblic offering (IPO). Merchant banks
help corporations Issue securities through private placement which require less regulatory disclosure and
are sold to sophisticated investors.

Investment banks. on the other hand, underwrite and sell securities to the general public through IPOs.
The bank's clients are large corporaUons that are willing to invest the time and money necessary to
r~ister securities for sale to the public. Investment banks also provide advisory services to companies
about mergers and acquisitions and provide investment research to clients.

While merchant banks are fee-based, Investment banks have a two-fold Income structure. They may
collect fees based on the advisory services they provide, but may also be fund-based, meaning they can
eam income from interest and other leases.

Regardless of how a company sells securities, there are some minimum disclosure requirements to
inform investors. Both IPOs and prtvate placements require a company audit by an outside CPA firm,
which provides an opinion on the Ooancial statements. Audited financial statements must include several
years of financial data along with disclosures. Potential investors can use this Information about the risks
and potential rewards of buying the securities

Ra61ing Rnance for Clenta : Merchant Banking helps its clients to raise finance through issue of shares.
debentures, bank loans, etc. It helps its clients to raise finance from the domestic and international
market. This finance Is used for starting a new business or project or for modernization or expansion of
the business.
lrobr ti Slock Exchange: Merchant bankers act as brokers in the stock exchange. They buy and sell
shares on behalf of their clients. They conduct research on equity shares. They also advise their clients
about which shares to buy, when to buy. how much to buy and when to sell. large brokers, Mutual Funds,
Venture .cag,j1a,J companies a n d ~ Banks offer merchant banking services.

Protact Management: Merchant bankers help their clients In the many ways. For e.g. Advising about
location of a project, preparing a project report, conducting feasibility studies, making a plan for financing
the project, finding out sources of finance, advising about concessions and incentives from the
government.

Adwle. Oft Expl!Mla,, and ...,._.Ailtluu : Merchant bankers give advice for expansion and modernization
of the business units. They give expert advice on mergers and amalgamations, acquisition and takeovers,
diversification of business. foreign collaborations and Joint-ventures, technology up-gradation, etc.

W.,... Publlc luue al CompanN : Merchant bank advice and manage the public Issue of companies.
They provide following services:

• Advise on the timing of the public Issue.

• Advise on the size and price of the Issue.

• Acting as manager to the Issue, and helping In acceptlf\9 applications and allotment of secur•ies.

• Help In appointing underwriters and brokers to the issue.

• Listing ofshares on the stock exchange, etc.

Handing Gowrmwwl CollNfft f a r ~ Projecbl : A businessman has to get government permission

for starting of the project. Similarly, a company requires permission for expansion or modernization
activities. For this, many formalities have to be completed. Merchant banks do all this work for their
clients.

Special Assistance to Small Companies and Entrepreneurs: Merchant banks advise small companies
about busiMss opponunltles, govemment policles, Incentives and concessions available. It also helps
them to take advantage of these opportunities, concessions. etc.

Slr\llo11 to Pubic Sector Uritt. : Merchant banks offer many services to public sector units and public
utilities. They help ln raising lono,-term capital, marketing of securities, foreign collaborations and
arranging long-term finance from term 1mding Institutions.

Revival of Sick Industrial Units: Merchant banks help to revive (cure) sick industrial units. It neootiates
with different agencies like banks, term lending Institutions, and BIFR (Board for Industrial and Financial
Reconstruction). It also plans and e)(ecutes the full revival package.

Portfolio Management : A merchant bank manages the ponfollos (investments) of Its cllents. This makes
investments safe, liquid and prontable for the client. It offers e)(pert guidance to its clients for taking
investment decisions.

Cotparata AMtluc:tuing : It includes mergers or acquisitions of existing business units, sale of existing
unit or disinvestment. This requires proper negotiations, preparation of documents and completion of
legal formalities. Merchant bankers offer all these services to their clients.
DETAILED OVERVIEW OF THEIR ROLE:
Advisory Services: Banks provide guidance to companies or
governments seeking to raise capital through securities
issuance. They offer advice on the type of securities to issue,
structuring the offering, pricing strategies, and timing based
on market conditions.
Underwriting: One of the primary roles of banks in the
issuance of securities is underwriting.
► Underwriting involves the bank assuming the risk of
purchasing the securities from the issuer at a
predetermined price and then reselling them to investors.
This guarantees the issuer a certain amount of capital,
even if market conditions are unfavorable.
► Underwriting can take various forms, including firm
commitment underwriting, where the bank agrees to
purchase the entire offering, or best efforts underwriting,
where the bank agrees to sell as much of the offering as
possible but does not guarantee the entire amount.
Due Diligence: Banks conduct due diligence on behalf of
both the issuer and investors to ensure the integrity and
quality of the securities being offered. This involves analyzing
the issuer's financial statements, business operations, and
regulatory compliance to assess risks associated with the
investment.
Marketing and Distribution: Banks leverage their extensive
networks and relationships to market and distribute securities
to potential investors. They organize roadshows, investor
presentations, and other marketing activities to generate
interest in the offering and attract investors.
Custodial Services: Banks offering custodial services for
holding and safeguarding securities on behalf of investors.
Ensuring the safekeeping of physical certificates or electronic
holdings.
Compliance and Due Diligence: Banks playing a crucial role
in ensuring compliance with regulatory requirements.
Conducting due diligence to verify the legitimacy and
financial health of the issuer.
Facilitating Online Offerings: Banks adapting to
technological advancements, facilitating online offerings of
securities. Enhancing accessibility and efficiency in the
issuance process.
Risk Management: Banks assisting issuers in managing risks
associated with securities issuance. Hedging strategies to
mitigate market risks.
Regulatory Compliance: Banks ensuring that the issuance
process adheres to all applicable laws and regulations.
Collaborating with regulatory bodies to secure necessary
approvals.
Post-Issuance Services: Banks providing services post-
issuance, such as dividend payments and shareholder
communication. Maintaining ongoing relationships with both
issuers and investors.