Tuesday, 26 November 2019

Unit 12: Merchant Banking and Venture Capital


                          Unit 12: Merchant Banking and Venture Capital    

Merchant Banking is an important service provided by a number of financial institutions that helps in the growth of the corporate sector which ultimately reflects into the overall economic development of the country.

The activities of the merchant banking in India is very vast in nature of which includes the management of the customers securities, management of the portfolio, the management of projects and counseling as well as appraisal, the management of underwriting of shares and debentures, the circumvention of the syndication of loans and management of the interest and dividend, etc.

Merchant banks were expected to perform several functions like issue management, underwriting, portfolio management, loan syndication, consultant, advisor and host of other activities.

SEBI was also made all powerful to regulate the activities of merchant banks in the best interest of investors and economy.

Indian Financial System     Apart, merchant banking was the necessity of banks themselves which were in need of non-fund based income so as to improve their profitability margins by all means in the changed economic scenario.

Venture capital is the capital provided by firms of professionals who invest alongside management in young, rapidly growing or changing companies that have the potential for high growth.

Venture capital is a form of equity financing especially designed for funding high risk and high reward projects.

A venture capitalist (VC) may provide the seed capital unproven ideas, products, technology oriented or start up firms.

The venture capital involves high degrees of risk.

Venture capital financing is an actual or potential equity participation wherein the objective of venture capitalist is to make capital gain by selling the shares once the firm becomes profitable.

Venture capital financing is a long term investment.

It generally takes a long period to encash the investment in securities made by the venture capitalists.

Venture capital funds take an active interest in the management of the assisted firms.

Venture capital projects generate employment, and balanced regional growth indirectly due to setting up of successful new business.

Venture capital firms usually recognise the following two main stages when the investment could be made in a venture namely Early Stage Financing and Later Stage Financing.

In India the Venture Capital plays a vital role in the development and growth of innovative entrepreneurships.

Management Buyins (MBIs): Management Buy-ins are funds provided to enable an outside group of manager(s) to buy an existing company.

Management Buyouts (MBOs): In Management Buyouts (MBOs) venture capital institutions provide funds to enable the current operating management/ investors to acquire an existing product line/business.

Merchant Banker: A bank that deals mostly in (but is not limited to) international finance, long-term loans for companies and underwriting.

Turnarounds: Such form of venture capital financing involves medium to high risk and a time scale of three to five years.

Underwriting: Underwriting is an agreement, entered into by a company with a financial agency, in order to ensure that the public will subscribe for the entire issue of shares or debentures made by the company.

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