Part 2: Evolution and Historical Growth of Merchant Banking in India

The development of merchant banking in India has evolved from specialized services provided by foreign banks to a highly regulated, full-service financial sector. This growth can be mapped across distinct phases, transitioning from pre-regulatory advisory to public sector dominance, and finally to post-liberalisation market sophistication.

1. Timeline of Historical Growth and Key Milestones

The emergence of structured merchant banking services in India occurred over several decades:

2. Early Pioneers: Foreign Banks (1967–1970)

Prior to the active participation of domestic public sector banks, foreign banking institutions acted as the forerunners of merchant banking in India.

• Grindlays Bank (1967): Grindlays Bank pioneered merchant banking operations in India in 1967 after obtaining a license from the Reserve Bank of India (RBI).
• Citibank (1970): Citibank followed soon after, establishing its Indian merchant banking operations in 1970.
• Early Focus Areas: The primary services of these foreign banks focused on the syndication of loans, raising equity capital, and providing basic corporate advisory services.

3. The Institutional Shift: Banking Commission Report (1972)

As Indian industries began to expand, the lack of domestically owned investment channels became apparent. The turning point for public sector entry occurred in the early 1970s:

• The Recommendation: The Banking Commission Report of 1972 asserted a critical national need for merchant banking services in India and recommended that these services be actively provided by public sector banks.
• The SBI Entry (1972): Acting on the recommendations of this landmark report, the State Bank of India (SBI) established its dedicated Merchant Banking Division in 1972.
• Commercial Bank Adoption: Following SBI’s entry, several other major nationalised commercial banks established their own merchant banking outfits, including:
  • Bank of India
  • Syndicate Bank
  • Punjab National Bank (PNB)
  • Canara Bank

4. Entry of Development Financial Institutions

Domestic development financial institutions (DFIs) soon recognized the need to provide non-fund-based advisory services alongside project finance.

• ICICI (1973): The Industrial Credit and Investment Corporation of India (ICICI) became the first domestic financial institution to set up its merchant banking division in 1973.
• Later Entrants: Other key development financial institutions followed, notably the Industrial Finance Corporation of India (IFCI) and the Industrial Development Bank of India (IDBI).

5. Post-Liberalisation Transformation & Subsidiaries

The post-liberalisation era initiated structural changes in how merchant banks operated, shifting them toward corporate restructuring, market intermediation, and specialized institutional subsidiaries.

The Growth of Corporatised Subsidiaries

To maintain agility, major public and private players eventually spun off their merchant banking divisions into independent corporate subsidiaries:

• SBI Capital Markets (1986): SBI carved out its merchant banking operations into SBI Capital Markets in 1986.
• ICICI Securities (2003): ICICI structured its capital market operations under ICICI Securities in 2003.

Drivers of Modern Growth

The modern Indian merchant banking sector operates under the following dynamics:

• Primary Market Correlation: The industry remains heavily driven by issue management activities, which fluctuate in tandem with the bullish or bearish phases of the primary capital markets.
• Full-Service Scope: Major entities (including SBI, IDBI, ICICI, and Kotak Mahindra) now offer a comprehensive range of investment banking services permitted under Indian law.
• Service Diversification: Beyond simple loan syndication and capital raises, contemporary merchant banks advise on:
  • Mergers, Acquisitions, and Takeovers
  • Asset Valuation
  • Investment Management
  • Promotion of Investment Trusts

6. Key Takeaways and Exam-Relevant Terms

• Grindlays Bank (1967): The first institution to start merchant banking operations in India with an RBI license.
• Banking Commission Report (1972): The regulatory catalyst that initiated the entry of Indian public sector commercial banks into fee-based advisory services.
• SBI (1972) & ICICI (1973): The respective public sector bank pioneer and the first domestic financial institution pioneer in Indian merchant banking.
• Issue Management: The primary operational driver of modern Indian merchant banking, highly correlated with market cycles.