ORIGINS AND EARLY HISTORY
The origins of Merchant Banking go back to the middle of the 18th.Century, when an epoch making event - the Industrial Revolution - took place. Interestingly, at about the same time, there was an important development on the theoretical front. Adam Smith's pioneering effort, also acknowledged as the first major work in the field of Economics, 'An Inquiry Into The Nature and Causes of the Wealth Of Nations' made its appearance. What Adam Smith had propounded two centuries ago, namely - do only what you can do best - technically called the Theory of Comparative Advantage, is now being rehashed as the Core Competency theory by management gurus.
Then as now, the basic document for import-export, was the Bill of Exchange. However importers found that the exporters were not willing to execute documents 'accepted' by everyone. Only the 'acceptances' of a few established merchants were acceptable. Thus, these established merchants, were signing documents on behalf of others - naturally for a small fee. Soon these merchants found that this was a business that had immense potential and established 'Acceptance Houses' exclusively to handle this activity. These Acceptance Houses, set up by renowned names such as Hambros, Warburg, Rothschilds and others, were the ancestors of the current merchant and investment banks.
From the foregoing, the main characteristics that still distinguish the merchant banking business can be described:
1. Reputation, credibility and trust are the hallmarks of a merchant banker
2. A merchant banker rarely invests his own funds. If at all, it is only for a short duration.
3. Merchant Banking is essentially a fee based business.
As the scope of what constituted business expanded, the products a merchant banker dealt with increased. Soon another pre-requisite became vital - knowledge. This automatically translated into the ability to research, evolve, design and forecast.
At this point, the term Investment Banking came into being, thus reflecting the divers activities that erstwhile merchant bankers took up. However both the terms are used for one another, and in practical terms there is as much difference between them as between an astronaut (American) and a cosmonaut (Russian)!
The activities of investment banking have largely remained within what may be termed as the economic sphere of business. Thus areas such as personnel, HRD, accounting and the legal aspects of business have remained outside its purview. However given the synthesis developing in other businesses, it may not be too far ahead in time, when a merchant banker takes on these activities also. At present, when necessary, investment bankers, outsource these requirements. An illustrative, but not exhaustive list of activities, undertaken by merchant bankers, is given below. There may be variations from country to country, depending on the legal framework obtaining therein.
- Acceptance Credit and Bill Discounting
- Bankers to the Issue (only commercial banks)
- Corporate Counselling
- Credit Syndication and Project Finance
- Fixed Deposit Broking
- International Finance
- Investment Research
- Issue Management
- Management of Mutual Funds
- Mergers & Acquisitions
- NRI Counselling and Management (only Indian investment banks)
- Pension Fund Management
- Portfolio Management
- Rehabilitation & Restructuring of Sick Companies
- Venture Capital Financing