Merchant Banking Advantages and Disadvantages

A promising mid-sized manufacturer wants to raise ₹200 crore through an IPO but has no idea how to structure the offering, price the shares, or navigate SEBI’s disclosure requirements. This is exactly the gap merchant banks exist to fill — specialised financial intermediaries that don’t accept deposits or hand out personal loans, but instead help companies raise capital, execute mergers, and navigate the capital markets for a fee. As of late 2024, India counted 225 SEBI-registered merchant bankers, and SEBI’s 2026 regulatory reforms have significantly tightened who qualifies to operate in this space. Here’s a clear look at what merchant banking actually offers, and where it genuinely falls short.

What Merchant Banking Actually Does?

Before weighing advantages and disadvantages, it helps to understand exactly what falls under a merchant bank’s scope, since it’s genuinely different from both commercial and investment banking.

• Manages the process of issuing securities, including IPOs, rights issues, and private placements
• Provides corporate advisory services around mergers, acquisitions, and business restructuring
• Underwrites new share and debenture issues, ensuring they get fully subscribed
• Arranges loan syndication, coordinating credit facilities from multiple lending institutions
• Offers portfolio and wealth management services to high-net-worth individuals and institutions

Advantage: Access to Specialised Capital-Raising Expertise

The single biggest reason companies turn to merchant banks is access to expertise most businesses simply don’t have in-house.

• Merchant bankers understand SEBI disclosure norms, pricing mechanics, and regulatory timelines that a company’s internal finance team rarely has deep experience with
• They bring established relationships with institutional investors, underwriters, and regulatory bodies that speed up the fundraising process
• For first-time IPO issuers specifically, this expertise often makes the difference between a smooth listing and a rejected or delayed offering
• Their involvement signals credibility to the market, since a reputable merchant banker’s name attached to an issue carries genuine investor confidence

Advantage: Comprehensive, Single-Window Advisory

Rather than juggling separate advisors for fundraising, legal compliance, and strategic decisions, companies can often get most of what they need through one merchant banking relationship.

• Covers fundraising, M&A advisory, debt restructuring, and portfolio management under one coordinated service
• Reduces the coordination burden on a company’s internal management team during complex transactions
• Provides continuity across multiple stages of a company’s growth, from early private placements through eventual public listing
• Particularly valuable during distressed situations, offering CDR, SDR, and IBC-linked debt restructuring advisory

Advantage: Supports Broader Capital Market Efficiency

Beyond individual client benefits, merchant banks play a genuinely important structural role in how India’s capital markets function overall.

• Acts as the intermediary ensuring capital flows efficiently from investors to companies that need it
• Underwriting commitments reduce the risk of an issue failing to find buyers, supporting market stability
• Regulatory compliance enforcement through merchant bankers helps maintain investor protection standards across public offerings
• Their due diligence process filters out weaker or improperly structured issuances before they reach public investors

Disadvantage: High Cost of Services

Merchant banking services don’t come cheap, and this cost genuinely limits who can realistically access them.

• Fees are typically charged as a percentage of the capital raised, which can represent a significant cost for smaller issuances
• Advisory and underwriting fees compound with legal, accounting, and regulatory filing costs during an IPO or major transaction
• Smaller companies or startups may find the cost-to-benefit ratio unfavourable compared to alternative, cheaper fundraising routes
• SEBI’s 2026 reforms introducing minimum revenue conditions for “active player” status may further concentrate services among larger firms, potentially raising costs

Disadvantage: Limited Access for Smaller Businesses

Despite their value, merchant banks primarily serve larger corporations and wealthier clients, leaving a meaningful gap for smaller businesses.

• Merchant bankers generally prioritise clients capable of raising substantial capital, given their fee structures
• Small and micro enterprises often can’t meet the minimum transaction size that makes merchant banking services economically viable for the banker
• This creates a genuine access gap, pushing smaller businesses toward alternative financing routes like bank loans or informal investment
• The 2026 SEBI reforms consolidating the industry toward fewer, stronger players may narrow this access further rather than widen it

Disadvantage: Potential Conflicts of Interest

Given their dual role advising both issuers and sometimes managing broader market relationships, merchant bankers can face genuine conflict-of-interest risks.

• A merchant banker advising on pricing while also underwriting an issue can face pressure to favour outcomes benefiting their own commission structure
• SEBI has specifically tightened rules regarding conflicts of interest in public issues as part of its 2026 regulatory overhaul
• Clients should verify that appropriate “Chinese wall” separations exist between a merchant banker’s various business lines
• The exclusion of valuation services from merchant bankers’ scope under recent SEBI changes reflects regulatory recognition of this exact risk

Disadvantage: Regulatory and Market Dependency

Merchant banking businesses, and by extension their clients, remain genuinely exposed to broader market conditions and regulatory shifts beyond their control.

• A weak IPO market or subdued investor sentiment directly reduces merchant banking activity and fee income
• Regulatory tightening, such as SEBI’s 2026 reforms, can force smaller or weaker merchant banking firms to consolidate or exit
• Companies planning to raise capital may find their timelines significantly affected by broader market cycles, regardless of how well-prepared their merchant banker has them
• This dependency means even excellent merchant banking advice can’t fully insulate a client from unfavourable market timing

Frequently Asked Questions

Q1. Is merchant banking the same as investment banking in India?

They’re closely related but not identical — merchant banking in India typically serves a broader range of clients including SMEs and HNIs, while investment banking usually focuses on large listed corporations and complex global transactions.

Q2. Do merchant banks accept deposits like regular banks?

No, merchant banks earn through fees and commissions for advisory and issue-management services; they don’t accept public deposits or offer savings accounts like commercial banks.

Q3. Who regulates merchant bankers in India?

The Securities and Exchange Board of India regulates all merchant bankers under the SEBI (Merchant Bankers) Regulations, 1992, significantly updated through SEBI’s 2026 reforms.

Q4. Can a small startup realistically use merchant banking services?

It’s possible but often financially challenging, since merchant banker fees are typically structured as a percentage of capital raised, making smaller transactions less attractive for larger, established merchant banking firms.