merchant bank.docx - 25 CHAPTER II ORIGIN AND GROWTH OF...

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25 CHAPTER - II ORIGIN AND GROWTH OF MERCHANT BANKING IN INDIA Origin in General : The term Merchant Bank (MB) has its origin in the merchanting activities of the 13th century. During this period, a few families owned and managed firms, which engaged in coastal trade and finance, started spreading throughout the European continent. The first such known firms were ‘Riccardi of Lucca Medici’ and ‘Fugger’1 Principally, these merchants were engaged in overseas trade. They used their own or chartered ships to transport manufactured goods from the developed countries of Europe to the countries of North and South America and Far East. They sold the goods either directly or indirectly through local agents or through their offices set up in those countries. These branches were managed by the merchants" own families.2 Initially, the products were exchanged for the indigenous products under a ‘barter system’ of trading. Over the years, Merchant Bankers developed a network of overseas connections in international trade and started buying on their behalf in Europe.3 Later on, the firms started banking activities in addition to their trading activities. The overseas connections brought them the banking clients, who deposited the sale proceeds of their products in Europe.
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26 Through these merchant bankers, the overseas customers became investors in UK and started investing in shares and bonds of the overseas countries.4 The faith in these traders facilitated the explosion of international investment. Further, these firms also engaged in financing kings of European States , Monarchs and State Governments who engaged in continued wars5 thereby borne all the risks associated with it. Another reason for such a development in those days was that wealth concentrated mostly in the hands of a very few people. Therefore, instead of borrowing the savings of the general public, the kings and princes got their money by arranging loans with big merchant bankers. The high profitability in the initial stages made these merchant bankers to lend aggressively to kings, monarchs, etc. However, the increased incidence of bad debts, denouncement of obligations by debtors, etc., made early beginners, viz., Riccardi, Medici, Fugger, etc,, either to close down or suffer heavy losses.6 However, a few others continued with bitter experiences till 16th century. The concept of Merchant Banking owes its genesis to the Dutch, who were specialised in the trade and finance, during 17th and most of the 18th century. The emergence of ‘British’ as dominant competitors in trade, compelled the Amsterdam traders to shift their capital to financial dealings wherein they developed several financial instruments for facilitating the international trade. With such a shift, the ‘Dutch’
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27 financiers started appointing ‘London Merchants’ as their agents, thereby making the beginning of ‘international houses’ which were instrumental in expanding the international trade in the 19th century.
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  • Spring '18
  • mishra
  • merchant banking

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