Question

What are the corporate and merchant banking products and services offered by citibank. list and explain the advantages and disadvantages of these products and services.

Answer 1

Merchant Banking is a combination of Banking and consultancy services. It provides consultancy to its clients for financial, marketing, managerial and legal matters. Consultancy means to provide advice, guidance and service for a fee. It helps a businessman to start a business. It helps to raise (collect) finance. It helps to expand and modernize the business. It helps in restructuring of a business. It helps to revive sick business units. It also helps companies to register, buy and sell shares at the stock exchange.

In short, merchant banking provides a wide range of services for starting until running a business. It acts as Financial Engineer for a business.

Merchant banking was first started in India in 1967 by Grindlays Bank. It has made rapid progress since 1970.

Functions of Merchant Banking

The important functions of merchant banking are depicted below.

The functions of merchant banking are listed as follows:

1. Raising Finance for Clients : 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.
2. Broker in Stock 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 capital companies and Investment Banks offer merchant banking services.
3. Project 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.
4. Advice on Expansion and Modernization : 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.
5. Managing Public Issue of Companies : 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 accepting applications and allotment of securities.Help in appointing underwriters and brokers to the issue.Listing of shares on the stock exchange, etc.
6. Handling Government Consent for Industrial Projects : 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.
7. Special Assistance to Small Companies and Entrepreneurs : Merchant banks advise small companies about business opportunities, government policies, incentives and concessions available. It also helps them to take advantage of these opportunities, concessions, etc.
8. Services to Public Sector Units : Merchant banks offer many services to public sector units and public utilities. They help in raising long-term capital, marketing of securities, foreign collaborations and arranging long-term finance from term lending institutions.
9. Revival of Sick Industrial Units : Merchant banks help to revive (cure) sick industrial units. It negotiates with different agencies like banks, term lending institutions, and BIFR (Board for Industrial and Financial Reconstruction). It also plans and executes the full revival package.
10. Portfolio Management : A merchant bank manages the portfolios (investments) of its clients. This makes investments safe, liquid and profitable for the client. It offers expert guidance to its clients for taking investment decisions.
11. Corporate Restructuring : 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.
12. Money Market Operation : Merchant bankers deal with and underwrite short-term money market instruments, such as:Government Bonds.Certificate of deposit issued by banks and financial institutions.Commercial paper issued by large corporate firms.Treasury bills issued by the Government (Here in India by RBI).
13. Leasing Services : Merchant bankers also help in leasing services. Lease is a contract between the lessor and lessee, whereby the lessor allows the use of his specific asset such as equipment by the lessee for a certain period. The lessor charges a fee called rentals.
14. Management of Interest and Dividend : Merchant bankers help their clients in the management of interest on debentures / loans, and dividend on shares. They also advise their client about the timing (interim / yearly) and rate of dividend.

Advantages of Merchant Banking

1. You will receive corporate counseling.

Merchant banks will usually provide corporate counseling as part of their service package to corporate units. This is done to evaluate the overall financial performance of a company that is seeking to make a splash in an international market. These evaluations can help a company get feedback that is honest and critical to their success, helping to build a better reputation amongst investors and stakeholders. Suggestions, opinions, and even detailed reports may all be part of the counseling process.

2. You will receive honest project feedback.

Merchant banks will work with your company to develop an idea for a project or review the project profile you’ve already created. You’ll be able to determine an estimated cost for the project, look for financing solutions, and begin to create the action steps that are needed to get the project off the ground. Some merchant banks will even provide help in obtaining government consent to get the project started. You’re going to know if the idea you have is viable at the end of this process.

3. You may be able to restructure your capital.

A merchant bank is able to offer relevant advice to companies about mergers and acquisitions in their industry. They will examine the current capital structure of the company and decide what the current extent of capitalization happens to be. Alternative capital structures may be recommended to ensure regulatory and legal compliance in foreign markets. Disinvestment issues may also be examined here to ensure that any proposed project or investment has the best chance for success.

4. You receive portfolio management.

Services are offered by merchant banks to investors and companies which issue securities. Most clients of a merchant bank are institutional investors, looking to create a secure portfolio that will help to build their wealth over time. You’ll receive the necessary services that are required to provide you with an investment mix that fits your needs, considering any tax bracket issues, objects, and the overall return you’re looking to achieve. Merchant banks will also buy and sell securities for their clients. Some even manage off-share funds and mutual funds too.

5. You’ll receive issue management assistance.

Some merchant banks act as a sponsor for bond issues and other forms of financing that a business may require. They coordinate with other brokers and bankers to publicize the issues, decide whether taking it public is the right course of action to take, and work to select underwriters and agreements which create a relationship that is mutually beneficial for everyone. These banks will also advise on the type of debentures that are to be issued, such as being redeemable or non-redeemable, convertible, or if they should be linked with equity.

6. You can receive immediate debt funding through a merchant bank.

Although a merchant bank often focuses on wealth development over time, businesses can also apply for and receive traditional lending products. You can use short-term and long-term loans from the bank to raise the capital required for a specific project. The application process for lending will usually require a business plan that looks at total costs, expected returns, and the overall credit profile of the company to determine final eligibility.

7. You receive lease financing services.

Merchant banks provide companies with finance facilities and provide leasing to their customers. This gives you the ability to have the use and control over certain assets you may require without the need to take full ownership over them. If you determine that owning is better than leasing, then the banks can help you transition your leasing agreement into an ownership one. They’ll also help you develop options for lease renewals for your projects as well.

8. You are able to protect your IP.

When you work with a merchant bank, you’re working with a partner that creates success for themselves by helping you to be successful. That means they are invested in making sure your intellectual property, patents, and other tangible assets are properly protected. Any information you supply during the merchant banking process is kept confidential. Although you must pursue formalities, such as a prospectus, you’ll still have a source of funding that doesn’t compromise the security of what you value.

9. You can have currency exchanges managed for your company.

Merchant banks provide funds by issuing a letter of credit. If you’re looking to expand internationally, then the letter of credit would be received by the sellers as payment for the purchase you are making. Then you’ll walk through the legal issues required to conduct business in the new market. A merchant bank will also help you to manage currency exchanges as funds are transferred out of international markets

Disadvantages of Merchant Banking

1. Your account will be more expensive than a traditional bank account.

Merchant banks tend to charge higher fees for their services compared to traditional banking services and products. You may be required to have a minimum net worth to work with the bank, have a specific portfolio already developed, or have a strong credit profile with a history of project development to qualify for the bank’s services. Although you may receive the initial consultation or evaluation for free, there is no guarantee your company will be accepted.

2. You have size considerations which must be met.

Thanks to the Internet, any startup or SMB has the potential to enter into an international market. Just because you are present somewhere internationally does not mean that you’re going to qualify for the services a merchant bank provides. There are usually size considerations that must be met, which may include revenue minimums, business structure, and more. If you’re structured as a partnership or sole proprietor, you’re less likely to get the chance to work with a merchant bank on a project unless you’re trying to expand the portfolio of the company.

3. You will always have the risk of a mixed chance for success.

Merchant banks might decide to work with you on a financing package, but that is only one step toward eventual success. Assets are often required for the underwriting process, especially when a business is new to an industry, first getting started, or entering into their first international market. Those assets might need to come from the personal assets of the C-Suite to secure some financing. Merchant banks are like all other banks – they like to invest when they know there is a good chance for a return.

4. You’re not going to receive start-up funding.

Most merchant banks are in the business of helping your company scale upward. The focus is usually on international markets, but in the United States, moving into a new state or community may qualify for banking support. What you’re not going to receive is start-up funding. Your business must have an established record of some success to take advantage of the services which are being offered. And, if you are approved and your business is still young, you’ll have strict repayment guidelines and smaller amounts offered for funding.

5. You have no control over your interest rates or returns.

This issue may be the biggest disadvantage of working with a merchant bank. Most will not provide a guaranteed return if you have them managing your investment portfolio. If you take on a lending product to expand the physical assets of your company, then you have little control over the interest rates assigned to the lending product. Your profile is based on the perceived and real risks that the bank feels are present when working with you. If your company is seen as high-risk, even if it turns out to be a low-risk venture, you’re going to pay more for the services received.

6. You may not receive complete funding.

One way that merchant banks help to spread risk levels around is to provide incomplete funding for leases, expansions, and other investment needs. That forces your company to work with multiple merchant banks instead of one. They benefit because each new contributor lowers their overall risk. You’re stuck making multiple payments for multiple products or paying duplicate fees for similar services until your risk profile can be lowered.

7. You may not have access to every potential product.

Traditional banks may be willing to lend money to you when a merchant bank does not. That is because traditional banks tend to offer a variety of products which lowers their overall risk profile internally, which is a practice that not every merchant bank may follow. If you’re thinking about creating CD ladders and other conservative investments, it may be worthwhile to see what your local bank or credit union could offer, even if your business is classified as a large corporation.

8. You will be investigated as part of the funding process.

It may be marketed as a free evaluation, but what a merchant bank is really doing is a detailed investigation of all your business affairs. They will look at your financial structure, evaluate the security of your assets, and even judge your personal sureties. If something is found to be out-of-order during their investigation, it could impact the credit profile of the company. At the very least, the terms and conditions requested of you may be nearly impossible to meet, which means either changing the structure of your business or looking for funding elsewhere.

9. You do not have a guarantee of a renewal or extension.

When funds are made available through merchant banking, they are generally accessible for a short time period only. Receiving an extension of the agreement, or a renewal, may be uncertain – if not impossible. Long-term funding is sometimes available through merchant banking, but most of the projects that are approved are based on a 5-year period or less. The only exception to this rule involves those who use merchant banks for investment purposes instead of funding purposes.

10. You may have added reporting requirements to meet.

A merchant bank will help you make sure that you’re aware of your regulatory requirements. What they will not do is create the reports for you. When you begin working with a merchant bank, there may be a need for added disclosure to any stakeholders that are associated with your business. There are almost always additional costs associated with added reporting and compliance requirements.