What is Merchant Banking? Meaning, Functions & Services in India

Merchant banking refers to financial services provided to companies and large investors, especially during mergers, IPOs, or fundraising. These bankers offer expert advice, manage public issues, and help in capital restructuring and portfolio management.

Most founders and even established firms struggle to manage these on their own. That is why they go for Merchant Banking.

For example, Nikhil runs a logistics startup in Pune. He wants to raise ₹10 crore through an IPO but doesn’t know how to handle valuation, regulations, or investors. So, he hired merchant banking services. 

Here’s the result:
 

Merchant banking sounds fascinating, right? You might think, ‘Aur kya karte hai ye pyaare log?’ Let’s answer this question in this blog. Here, we will explain what Merchant Banking is, what functions they perform, and why they are essential.

What Is Merchant Banking? 

‘Kisko Kidhar Takleef hai?’

If you have any physical pain, you should go to a doctor. Similarly, if your company is not doing good, you go to a merchant banker. 

Merchant banking isn’t about everyday banking services like savings accounts or home loans. Instead, it focuses on helping businesses grow by raising capital, advising on mergers, and making strategic financial decisions. By 2025, the global merchant banking services market is projected to reach USD 66.7 billion (₹5824 crores), a nearly 20% rise from the previous year (2024).

These bankers guide companies during IPOs, mergers, or while planning a big expansion. In India, merchant banking services are regulated by SEBI (Securities and Exchange Board of India). 

What Do Merchant Bankers Actually Do? 

By now, you know that we are not talking about just money managers here. Merchant Bankers are the expert advisors who guide companies through big financial moves. From raising funds to handling mergers, they do all the heavy lifting. Let’s see a few of their functions with examples in this section.

1. Help Raise Money

If a company wants to raise money from investors (through IPOs, FPOs, or debt instruments), merchant bankers help plan, manage, and execute the process. They even guarantee the sale of some shares if needed, and that is called underwriting.

For example, Burger King India’s IPO (Dec 2020):

Merchant bankers Kotak Mahindra Capital, Edelweiss, JM Financial, and CLSA managed the ₹810 crore IPO. They handled investor outreach, pricing, regulatory filings, and ensured the IPO was fully subscribed within hours. Showcasing the pivotal role of merchant banking in capital raising.

2. Provide Business Advice 

If we can have ‘Mahasangams’ in TV serials, then why not in the business world? If any company thinks of merging with another company or selling its business, it first goes to a merchant banker. They offer expert advice on how to go about it legally, financially, and strategically.

For example: Avendus takeover (2024):

KKR was prepared to sell its 63% stake in Avendus, which is a major financial services firm in India. Merchant bankers helped in valuation, structuring, and negotiation. They also participated in critical tasks such as large-scale M&A deals.

3. Manage Investments for Big Clients

Merchant bankers can also act like personal CFOs for wealthy individuals or big companies. They offer portfolio management, tax planning, and asset growth strategies.

For example, Private wealth services by merchant banks:

High-net-worth individuals or company promoters often hire banks like Motilal Oswal or Kotak Securities. They do so to manage investment portfolios, tax planning, and capital growth strategies.

4. Arrange Loans for Big Projects

If anyone is starting a new factory or launching a new project, solid funding is required.  Merchant bankers can arrange loans from multiple banks (called loan syndication) and even help with long-term leasing plans.

For example, SBI Capital Markets & Road Infrastructure (₹15,137 crore loan)

SBI Capital Markets served as the Lead Arranger and Financial Advisor for a massive ₹15,137 crore syndicated loan. The amount was used to fund the Sudharit Hybrid Annuity Project, which is a major road reconstruction initiative in Maharashtra. 

5. Handle Regulatory Work

Merchant Bankers also handle all the SEBI filings, compliance checks, and financial paperwork. This is crucial when raising funds or doing mergers.

For example, Hella Infra Market fundraise (2025):

HSBC led a $300–350 million international bond issue (dollar-denominated bonds) on behalf of India Infra Buildco. Merchant bankers arranged investor roadshows and underwriting, ensuring smooth issuance across markets. 

Regulatory Framework & SEBI Rules

Merchant banking in India is regulated by SEBI (Securities and Exchange Board of India). Here’s how the rules work:

1. SEBI (Merchant Bankers) Regulations, 1992

To become a licensed merchant banker in India, a company must:

• Register with SEBI

• Have a minimum net worth (₹5 crore or more)

• Follow strict rules for disclosures, ethics, and operations

2. 2024-25 Rule Updates for SME Listings

As more small companies are listing on stock markets, SEBI has made new rules. Merchant bankers must:

• Separate advisory and underwriting services

• Follow stricter disclosure norms.

• Handle only a limited number of IPOs at a time.

SEBI made new rules as many SME IPOs had weak disclosures, misused funds, or showed unusual price hikes after listing. Now, merchant bankers must clearly separate their roles, share more details publicly, and handle only a limited number of IPOs

Why Are Merchant Bankers Crucial Today?

We know what merchant bankers do, but are their roles crucial in today’s world? Let’s answer this question in the following segment.

1. IPO Boom Ki Jai!

India is leading the world in IPO activity. In 2024 alone, 338 IPOs were launched, that is, 44% more than in 2023, bringing in around US$20.99 billion (₹1830.39 crores).

But what makes all this possible? Merchant bankers manage the whole process, from valuation, SEBI filings, and pricing shares to investor promotion. Because of them, there is a smooth and successful launch.

2. Startup & SME Growth

There are over 1.4 lakh DPIIT-recognised startups as of June 2024. These generate 1.55 million+ jobs. These businesses often need money to grow but don’t know how to raise it.

Merchant bankers connect startups and SMEs with investors, structure deals, and help them raise growth capital without taking on debt.

3. Handling Regulation & Risk

SEBI, RBI, and other authorities have strict rules. If a company makes a mistake, it can face fines or delays. Merchant bankers know all the rules and make sure the company doesn’t break any. They save time and avoid trouble.

How Does Merchant Banking Work? 

Merchant banking isn’t random. It is a well-organised process. Here’s how a merchant banker works:

1. Initial Onboarding & Assessment

Merchant bankers begin by understanding your business model, financial goals, and why you need funds, be it for an IPO, merger, or debt raise.

2. Proposal & Strategic Structuring

They create a personalised financial roadmap based on your business goals and current standing. This plan includes several expert activities:

1. Performing a company valuation

2. Identifying investors

3. Ensuring SEBI/RBI compliance 

4. Crafting a capital structure.

These steps make it easier for your business to get funds and avoid legal trouble. It’s about growing safely and smartly.

3. Execution & Underwriting

This stage involves:

1. Conducting due diligence

2. Drafting legal documents

3. Arranging underwriting or loan syndication

4. Coordinating with regulators and ensuring compliance

For instance, SBI appointed six merchant banks (including Kotak and ICICI Securities) to manage its recent ₹25,000 crore QIP. It is India’s largest-ever share placement.

4. Marketing & Investor Outreach

Merchant bankers actively engage with institutional investors, run roadshows, and generate demand for the issue. 

SBI’s QIP was oversubscribed over 3 times, with bids reaching nearly ₹1 lakh crore. This was definitely a sign of strong success.

5. Post-Deal Support

After completion, they assist with SEBI filings, compliance updates, and investor reporting. Here, they need to ensure that the deal stays clean and reliable over time.

Here is a quick summary of the steps discussed above:
 

Every business has its own set of ambitions and goals. It becomes a success when efficient Merchant Bankers are hired. They combine strategy, legal precision, investor connections, and execution.

Conclusion

‘Jis ka kaam usi ko chaaje, aur kare to thenga baaje’

Can you find a cure for Parkinson’s? Can you ask my manager to increase my salary? No, right? Not every problem needs to be solved by you. There are designated professionals to find a cure, merge IPOs, give legal advice, and lure investors. 

Merchant bankers are the financial problem-solvers for businesses. They have solutions for problems related to raising funds, managing risks, and growing smoothly in today’s complex markets. Let professionals handle what you can’t! 

Frequently Asked Questions

Can an individual become a merchant banker?
No, only SEBI-registered entities (like firms or banks) can become official merchant bankers in India.

How is merchant banking different from investment banking?
Merchant banking focuses on advisory and capital raising; investment banking includes trading, asset management, and global services.

What is a Category I Merchant Banker?
Category I can manage public issues, advisory services, and portfolio management. It’s the highest classification by SEBI.

Are merchant bankers liable if IPOs fail?
No, they are not financially liable, but SEBI can penalise them for negligence or misrepresentation in filings.

Do merchant bankers help with SME IPOs?
Yes, they play a vital role in guiding small companies through listing on SME platforms like NSE Emerge or BSE SME.

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?