2.3 Role of Merchant Bank: (CITATION Gau11 /L 1033)

2.
3 Role of Merchant Bank

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.[ CITATION Gau11 \l 1033 ]
Merchant banking has an essential role to play in today’s economy. They assist companies in
numerous ways. All businesses aim at generating the most income out of their funds. Merchant
bankers help these companies to utilize their funds properly and grow. A merchant banker
issues advice on the expansion and modernization of a company. They provide possible
expansion options like takeovers, mergers, acquisitions, amalgamations, joint ventures or other
diversification actions.
Merchant bankers offer loans to such struggling individuals in a country. They are providing a
unique perspective on a country’s economy. Merchant loans assist many small businesses and
individuals in overcoming difficult times. They use these funds to better position themselves
and take full advantage when the economy recovers.
Merchant bankers have an essential role in the economy. They boost the economy by offering
top financial advice and solutions to both big and small firms. Understanding the three
important things about Merchant banking will compel you to remove yourself from that
difficult financial situation.[ CITATION Rob19 \l 1033 ]
Merchant banks play a vital role in bringing good companies to the capital market, thus,
increasing market depth and liquidity. Therefore, these institutions have to find good
companies that can provide fair and sustainable returns to shareholders. Furthermore,
merchant banks should also groom prospective companies and teach them to practice proper
corporate governance before entering the market through IPO (initial public offering).
Bringing a company to general investors through IPO is challenging, as it forces companies to be
accountable to those investors. Sometimes, we have to provide practical suggestions to shape
regulations related to our scope of services. Apart from that, merchant banks have a crucial role
in promoting financial literacy among investors so that they can make correct decisions, and
also provide professional portfolio management services. [ CITATION Nia19 \l 1033 ]
The Role of merchant banking are listed as follows:
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.
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.
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.
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.
Managing Public Issue of Companies: Merchant bank advice and manage the public issue of
companies. They provide following services:
i. Advise on the timing of the public issue.

ii. Advise on the size and price of the issue.
iii. Acting as manager to the issue, and helping in accepting applications and
allotment of securities.
iv. Help in appointing underwriters and brokers to the issue.
v. Listing of shares on the stock exchange, etc.
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.
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.
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.
Money Market Operation: Merchant bankers deal with and underwrite short-term money
market instruments, such as:
vi. Government Bonds.

vii. Certificate of deposit issued by banks and financial institutions.
viii. Commercial paper issued by large corporate firms.
ix. Treasury bills issued by the Government (Here in India by RBI).
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.
2.4 Role of Investors Behavior
Investor’s behavior is the more important for the future of the companies in the stock market.
The personal views of the investors is always affecting the stock markets environment as well as
the financial condition of the economy. Most of the studies shows the relationship of the
investors and stock market by considering the demographic of the investor. Those demographic
overview are age, gender, educational qualification etc. have a positive impact in the stock
market success.
Most of the investors in stock market are investing according to their own interest in the stock
market. Investors are not to force to invest in, however they are interest to involve in the
equity market. Investor’s behavior is most influential for the stock market situation. They invest
in primary market to the listed securities which is enlisted through IPO.The share enter for
transaction in the secondary market. They also invest the secondary market for their wealth
maximization which belongs to higher risk for higher return.
The Role of Investor Behaviors are listed as given below
Mental Accounting Behaviors
Humans have a tendency to place particular events into mental compartments, and the difference
between these compartments sometimes impacts our behavior more than the events themselves.
An investing example of mental accounting is best illustrated by the hesitation to sell an

investment that once had monstrous gains and now has a modest gain. During an economic
boom and bull market, people get accustomed to healthy, albeit paper, gains. When the market
correction deflates investor's net worth, they're more hesitant to sell at the smaller profit
margin. They create mental compartments for the gains they once had, causing them to wait
for the return of that profitable period.
Prospect- and Loss-Aversion
It doesn't take a neurosurgeon to know that people prefer a sure investment return to an
uncertain one—we want to get paid for taking on any extra risk. That's pretty reasonable.
Here’s the strange part. Prospect theory suggests people express a different degree of emotion
towards gains than towards losses. Individuals are more stressed by prospective losses than
they are happy from equal gains. Prospect theory also explains why investors hold onto losing
stocks: people often take more risks to avoid losses than to realize gains. For this reason,
investors willingly remain in a risky stock position, hoping the price will bounce back.
Investor Anchoring Behaviors
In the absence of better or new information, investors often assume that the market price is
the correct price. People tend to place too much credence in recent market views, opinions and
events, and mistakenly extrapolate recent trends that differ from historical, long-term averages
and probabilities.
In bull markets, investment decisions are often influenced by price anchors, which are prices
deemed significant because of their closeness to recent prices. This makes the more distant
returns of the past irrelevant in investors' decisions.
Over- and Under-Reacting
Investors get optimistic when the market goes up, assuming it will continue to do so.
Conversely, investors become extremely pessimistic during downturns. A consequence of
anchoring, or placing too much importance on recent events while ignoring historical data, is an
over- or under-reaction to market events, which results in prices falling too much on bad news
and rising too much on good news.
At the peak of optimism, investor greed moves stocks beyond their intrinsic values. When did it
become a rational decision to invest in stock with zero earnings and thus an infinite price-to-
earnings (P/E) ratio (think dotcom era, circa the year 2000)?
Investor Overconfidence
People generally rate themselves as being above average in their abilities. They also
overestimate the precision of their knowledge and their knowledge relative to others.Many
investors believe they can consistently time the market, but in reality, there's an overwhelming
amount of evidence that proves otherwise. Overconfidence results in excess trades, with
trading costs denting profits.
Is Irrational Behavior an Anomaly?
As we mentioned earlier, behavioral finance theories directly conflict with traditional finance
academics. Each camp attempts to explain the behavior of investors and the implications of
that behavior. So, who's right?
The theory that most overtly opposes behavioral finance is the efficient market hypothesis
(EMH), associated with Eugene Fama (University of Chicago) & Ken French (MIT). Their theory
that market prices efficiently incorporate all available information depends on the premise that
investors are rational. MH proponents argue that events like those dealt with in behavioral
finance are just short-term anomalies or chance results and that over the long term, these
anomalies disappear with a return to market efficiency.
References
Akrani., G. (2011, August 10). KALYAN CITY LIFE.
Niaz mahmud, D. t. (2019, January 31st). Merchant banks play a vital role in bringing good companies to
the stock market'. (C. a. Hassan Zabed Chowdhury, Interviewer)
Perez, R. (2019). Sustainable Community Network.

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2.

3 Role of Merchant Bank

i. Advise on the timing of the public issue.

vi. Government Bonds.

An investing example of mental accounting is best illustrated by the hesitation to sell an

Prospect- and Loss-Aversion

Over- and Under-Reacting

Is Irrational Behavior an Anomaly?

Perez, R. (2019). Sustainable Community Network.

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