From medieval Italian trade financiers to SEBI-registered IPO managers â how merchant banking evolved into modern India's corporate finance backbone. Covers definition & history, development in India, Merchant vs Commercial Banking, licensing, SEBI (Merchant Bankers) Regulations 1992, activities, key policy requirements and the Code of Conduct â with 50 exam-style MCQs with hidden answers.
đ Updated: September 2026 • 29 min read
đ At a Glance
đī¸
Origin
Medieval European trade financiers (e.g., the Medici) â merchants who became bankers.
đŽđŗ
India's Pioneer
Grindlays Bank set up India's first merchant banking division in 1967.
đ
Regulator
SEBI, under the SEBI (Merchant Bankers) Regulations, 1992.
1 Definition & Historical Background
đī¸
From Trade Finance to Corporate Advisory
A Merchant Bank is a financial institution that provides corporate finance and advisory services â managing public issues, underwriting, mergers & acquisitions advisory, portfolio management â without accepting public deposits like a commercial bank.
The term traces back to medieval European trading houses â Italian merchant families (most famously the Medici) who financed international trade by accepting bills of exchange and advancing credit against goods in transit, gradually evolving into dedicated financial intermediaries who advised on and arranged capital, rather than trading goods themselves.
2 Development of Merchant Banking in India
1967Grindlays Bank sets up India's first merchant banking division, managing capital issues for corporate clients.
1970Citibank follows with its own merchant banking division.
1972State Bank of India establishes a merchant banking division (later SBI Capital Markets) â the first Indian bank to do so.
1974ICICI follows suit.
1992 â Formal RegulationSEBI (Merchant Bankers) Regulations, 1992 bring the sector under formal, unified regulatory oversight, coinciding with post-liberalisation capital-market growth.
No entity can carry on merchant banking business in India without a Certificate of Registration from SEBI, issued under the SEBI (Merchant Bankers) Regulations, 1992.
JAIIB tip: Originally, SEBI recognised four categories (I-IV) of merchant bankers with graded activity permissions; since 1997, only Category I registration is granted â the single category authorised to act as issue manager/adviser/consultant/underwriter/co-manager for capital issues.
âš5 CrMinimum net worth for Category I registration
5 SEBI (Merchant Bankers) Regulations, 1992
This is the principal regulatory framework governing merchant bankers in India, covering:
Registration eligibility and the mandatory Certificate of Registration.
Minimum net worth/capital adequacy requirements.
Obligations in managing public issues â including the mandatory due diligence certificate confirming the accuracy/adequacy of an offer document.
A statutory Code of Conduct (Section 8 below).
SEBI's powers of inspection, suspension and cancellation of registration for violations.
6 Activities of Merchant Banks
đ
Issue Management
Managing IPOs/FPOs/Rights Issues as the Book Running Lead Manager.
đĄī¸
Underwriting
Committing to subscribe to any unsubscribed portion of an issue.
Maintain the prescribed minimum net worth at all times (âš5 crore for Category I).
Submit half-yearly net worth certificates to SEBI.
Appoint a designated Compliance Officer.
Maintain proper books of accounts and records, available for SEBI inspection.
Provide adequate, accurate disclosures to investors in every offer document.
8 Key Codes of Conduct under SEBI Regulations
âī¸
Integrity & Due Diligence
Exercise high standards of integrity, and due diligence in every assignment.
đĢ
No Misleading Statements
Never make false or misleading statements to clients or investors.
đ
Conflict of Interest Disclosure
Disclose any conflicts of interest before undertaking an assignment.
đ
Confidentiality
Maintain strict confidentiality of client/issuer information.
đ¤
Fair Competition
Avoid unfair competitive practices in the market.
â
Quality of Service
Render high-quality, professional service to all clients.
JAIIB tip: The Code of Conduct exists to protect the investing public â since a merchant bank's due-diligence signature on an IPO prospectus is effectively a professional certification investors rely on.
â Key Takeaways
Merchant banking traces back to medieval European trade financiers; India's first merchant banking division was set up by Grindlays Bank in 1967.
Merchant banks provide advisory/issue-management services, unlike commercial banks' deposit-taking/lending core.
Merchant banking requires SEBI registration; since 1997, only Category I (min. âš5 crore net worth) is granted.
The SEBI (Merchant Bankers) Regulations, 1992 govern registration, net worth, disclosures and conduct.
A statutory Code of Conduct mandates integrity, disclosure of conflicts, confidentiality and high-quality service.
đ Top 50 JAIIB-Style MCQs on Merchant Banking Services
Test your understanding with these 50 practice MCQs, closely modelled on the JAIIB (IE & IFS) exam pattern. Each question has 5 options â the correct answer is hidden by default; tap "Show Answer" to reveal it along with a short explanation.
đī¸ Definition & History
1 The term "merchant banking" originally traces back to:
A. 20th-century American investment banks
B. Medieval European trade financiers
C. Post-independence Indian banks only
D. Ancient Roman tax collectors
E. Modern cryptocurrency exchanges
Answer: B. Merchant banking originates from medieval European trade financiers.
2 The famous Italian family historically associated with early merchant banking is the:
A. Medici
B. Tata
C. Rockefeller
D. Rothschild only
E. Vanderbilt
Answer: A. The Medici family is historically associated with early merchant banking.
3 A defining feature of a merchant bank is that it:
A. Accepts public deposits like a commercial bank
B. Does not accept public deposits; provides corporate finance and advisory services
C. Issues currency notes
D. Is regulated exclusively by IRDAI
E. Focuses only on retail savings accounts
Answer: B. Merchant banks don't accept deposits; they provide advisory/issue-management services.
đŽđŗ Development in India
4 India's first merchant banking division was set up by:
A. SBI
B. Grindlays Bank
C. ICICI
D. Citibank
E. RBI
Answer: B. Grindlays Bank set up India's first merchant banking division in 1967.
5 Grindlays Bank established India's first merchant banking division in:
A. 1956
B. 1967
C. 1972
D. 1992
E. 1982
Answer: B. Grindlays Bank started in 1967.
6 The first Indian bank to establish a merchant banking division was:
A. Citibank
B. SBI
C. Grindlays
D. HSBC
E. Standard Chartered
Answer: B. SBI (1972) was the first Indian bank with a merchant banking division.
7 Formal, unified SEBI regulation of merchant banking in India began with the:
A. SEBI (Merchant Bankers) Regulations, 1992
B. RBI Act, 1934
C. Banking Regulation Act, 1949
D. Companies Act, 1956
E. IRDA Act, 1999
Answer: A. SEBI (Merchant Bankers) Regulations, 1992 brought formal regulation.
âī¸ Merchant vs Commercial Banking
8 Merchant banking is regulated by:
A. RBI
B. SEBI
C. IRDAI
D. PFRDA
E. NABARD
Answer: B. SEBI regulates merchant banking.
9 Commercial banking's core activity, unlike merchant banking, is:
A. Deposit-taking and lending
B. Corporate advisory only
C. Issue management only
D. Underwriting IPOs only
E. Insurance underwriting
Answer: A. Deposit-taking/lending is commercial banking's core.
10 A merchant bank's client relationship is typically:
A. An ongoing deposit account relationship
B. Project/transaction-based and advisory
C. Identical to a savings bank account
D. Always a 20-year loan relationship
E. Regulated exclusively by NABARD
Answer: B. Merchant banking relationships are transaction/project-based.
đĒĒ Licensing
11 No entity can carry on merchant banking business in India without:
A. A Certificate of Registration from SEBI
B. An RBI banking licence
C. An IRDAI insurance licence
D. Approval from a state government
E. No approval is needed at all
Answer: A. SEBI registration is mandatory for merchant banking.
12 Since 1997, SEBI grants merchant banker registration only under which category?
A. Category IV
B. Category III
C. Category II
D. Category I
E. There are no categories
Answer: D. Only Category I registration has been granted since 1997.
13 The minimum net worth requirement for a Category I merchant banker is:
A. âš50 lakh
B. âš1 crore
C. âš5 crore
D. âš50 crore
E. âš100 crore
Answer: C. Category I requires a minimum net worth of âš5 crore.
14 A Category I merchant banker is authorised to act as issue manager/adviser/consultant/underwriter/co-manager for:
A. Capital issues
B. Only insurance policies
C. Only currency notes
D. Only chit funds
E. Only reinsurance treaties
Answer: A. Category I handles capital issue management roles.
đ SEBI Regulations
15 The principal regulatory framework governing merchant bankers in India is:
A. SEBI (Merchant Bankers) Regulations, 1992
B. Banking Regulation Act, 1949
C. RBI Act, 1934
D. Insurance Act, 1938
E. FEMA, 1999
Answer: A. SEBI (Merchant Bankers) Regulations, 1992 is the principal framework.
16 The certificate a merchant banker must furnish confirming the accuracy/adequacy of an offer document is the:
A. Due diligence certificate
B. Insurance certificate
C. Fair Practices certificate
D. NOF certificate
E. Credit rating certificate
Answer: A. A due diligence certificate confirms offer document adequacy.
17 SEBI's powers over a registered merchant banker for violations include:
A. Inspection, suspension and cancellation of registration
B. No power at all
C. Only issuing a verbal warning
D. Only imposing an income tax penalty
E. Only referring the matter to IRDAI
Answer: A. SEBI can inspect, suspend or cancel registration.
đŧ Activities of Merchant Banks
18 Managing a company's IPO as Book Running Lead Manager is an example of:
A. Issue Management
B. Deposit-taking
C. Currency issuance
D. Reinsurance
E. Chit fund operation
Answer: A. This is Issue Management, a core merchant banking activity.
19 A merchant bank committing to subscribe to any unsubscribed portion of an issue is performing:
A. Underwriting
B. Portfolio management
C. Loan syndication
D. Project counselling
E. Reinsurance
Answer: A. This describes underwriting.
20 Advising a company on a merger or acquisition falls under:
A. Corporate Advisory Services
B. Deposit mobilisation
C. Reinsurance
D. Insurance repository services
E. Bill rediscounting
Answer: A. M&A advisory is a Corporate Advisory Service.
21 Managing investment portfolios for high-net-worth clients is known as:
A. Portfolio Management Services (PMS)
B. Loan syndication
C. Project counselling
D. Underwriting
E. Factoring
Answer: A. PMS covers portfolio management for wealthy clients.
22 Arranging a large loan by bringing together multiple lenders is called:
A. Loan Syndication
B. Underwriting
C. Reinsurance
D. Deposit mobilisation
E. Bill rediscounting
Answer: A. Loan Syndication brings together multiple lenders.
23 Advising on a new project's feasibility, financing structure and approvals is called:
A. Project Counselling
B. Reinsurance
C. Chit fund operation
D. Deposit-taking
E. Currency printing
Answer: A. This is Project Counselling.
đ Key Policy Requirements
24 Registered merchant bankers must submit net worth certificates to SEBI:
A. Once every 10 years
B. Half-yearly
C. Never
D. Only upon initial registration, never again
E. Daily
Answer: B. Net worth certificates are submitted half-yearly.
25 A merchant banker is required to appoint a:
A. Compliance Officer
B. Insurance Ombudsman
C. Debenture Trustee, in every case
D. Reinsurance manager
E. No specific officer is required
Answer: A. A Compliance Officer must be appointed.
đ Code of Conduct
26 The SEBI Code of Conduct for merchant bankers requires:
A. High standards of integrity and due diligence
B. Making misleading statements when convenient
C. Ignoring conflicts of interest entirely
D. Disclosing client confidential information freely
E. Engaging in unfair competitive practices
Answer: A. Integrity and due diligence are core Code of Conduct requirements.
27 Under the Code of Conduct, a merchant banker discovering a conflict of interest on an assignment must:
A. Hide it from all parties
B. Disclose it before undertaking the assignment
C. Ignore it entirely
D. Resign from SEBI registration permanently
E. Report it only to a competitor
Answer: B. Conflicts of interest must be disclosed upfront.
28 Maintaining strict confidentiality of client/issuer information is a requirement under the:
A. Code of Conduct
B. Fiscal Policy framework
C. FRBM Act
D. Reinsurance guidelines
E. Insurance Repository rules
Answer: A. Confidentiality is a Code of Conduct requirement.
29 Why does the Code of Conduct particularly emphasise honest disclosure in offer documents?
A. Because investors rely on the merchant banker's professional due diligence certification
B. Because offer documents have no impact on investors
C. Because SEBI never reviews offer documents
D. Because disclosure is legally optional
E. Because merchant bankers bear no responsibility for offer documents
Answer: A. Investors rely on the merchant banker's due diligence certification.
𧊠Mixed / Comprehensive
30 Which of the following best distinguishes a merchant bank from a commercial bank in terms of risk profile?
A. Merchant banks take underwriting/reputational risk on transactions; commercial banks take credit risk on loans
B. Both carry identical risk profiles
C. Merchant banks take no risk whatsoever
D. Commercial banks take no risk whatsoever
E. Neither carries any risk
Answer: A. This correctly distinguishes their risk profiles.
31 A company seeking to raise capital through an IPO would primarily engage a merchant banker to act as:
A. Book Running Lead Manager
B. Debenture Trustee only
C. Reinsurer
D. Chit fund manager
E. Insurance intermediary
Answer: A. A merchant banker typically acts as Book Running Lead Manager for an IPO.
32 Which of the following would NOT be a typical merchant banking activity?
A. Accepting public savings deposits
B. Issue management
C. Underwriting
D. Corporate advisory
E. Loan syndication
Answer: A. Accepting public deposits is a commercial banking function, not merchant banking.
33 Which pre-1992 institutions pioneered merchant banking in India, before formal SEBI regulation?
A. Grindlays Bank, Citibank, SBI and ICICI
B. Only foreign insurance companies
C. Only NABARD
D. Only the Planning Commission
E. Only RBI itself
Answer: A. These banks pioneered merchant banking in India before 1992.
34 Why did SEBI narrow merchant banker registration to only Category I after 1997?
A. To simplify and strengthen the regulatory framework around a single, well-capitalised category
B. To eliminate merchant banking entirely
C. To transfer regulation to RBI
D. Because Category I had the lowest capital requirement
E. Because IPOs were banned in 1997
Answer: A. Consolidating to Category I simplified and strengthened regulation.
35 Which of the following statements about a merchant bank's underwriting role is correct?
A. It guarantees the issuer will receive the full issue amount even if public subscription falls short
B. It has no financial commitment whatsoever
C. It applies only to bonus issues
D. It replaces the need for a Registrar
E. It is identical to reinsurance
Answer: A. Underwriting commits the merchant banker to cover any shortfall.
36 A merchant bank advising a client on the ideal capital structure (debt vs equity) for a new project is engaged in:
A. Project counselling / corporate advisory
B. Deposit mobilisation
C. Reinsurance underwriting
D. Chit fund management
E. Currency issuance
Answer: A. This is project counselling/corporate advisory.
37 Which of the following best describes the relationship between merchant banks and stock exchanges?
A. Merchant banks manage issues that ultimately get listed and traded on stock exchanges
B. Merchant banks and stock exchanges are entirely unrelated
C. Merchant banks regulate stock exchanges directly
D. Stock exchanges cannot list any issue managed by a merchant bank
E. Merchant banks replace the need for stock exchanges
Answer: A. Merchant banks manage issues that then list/trade on exchanges.
38 Which SEBI power ensures ongoing accountability of a registered merchant banker, beyond the initial registration?
A. Periodic inspection and net worth certification requirements
B. No ongoing oversight exists
C. Only a one-time registration with no follow-up
D. Oversight only by the merchant banker itself
E. Oversight transferred entirely to IRDAI
Answer: A. Ongoing inspection/certification ensures continued accountability.
39 A merchant bank's Portfolio Management Service (PMS) is most similar in concept to:
A. Managing investments on behalf of a client, tailored to their objectives
B. Accepting fixed deposits
C. Issuing currency
D. Underwriting insurance policies
E. Settling reinsurance claims
Answer: A. PMS is tailored, client-specific investment management.
40 Which of the following best reflects why merchant banking activity surged after 1991 in India?
A. Post-liberalisation capital market growth increased demand for issue management and advisory services
B. All merchant banks were shut down after 1991
C. India banned foreign investment entirely after 1991
D. The Companies Act was abolished in 1991
E. Merchant banking had no connection to the capital markets
Answer: A. Post-1991 capital market growth drove merchant banking activity.
41 Which of the following is a plausible consequence of a merchant banker violating the SEBI Code of Conduct?
A. SEBI may suspend or cancel its Certificate of Registration
B. Nothing happens; the Code of Conduct is purely advisory with no consequences
C. The violation is automatically forgiven after one year
D. Only a private apology to the client is required
E. RBI takes over the merchant banker's operations
Answer: A. SEBI can suspend/cancel registration for Code of Conduct violations.
42 Which of the following correctly distinguishes "issue management" from "underwriting" as merchant banking activities?
A. Issue management covers the overall process of bringing an issue to market; underwriting is a specific financial commitment to cover any shortfall
B. They are identical activities with no distinction
C. Underwriting covers the overall process; issue management is the financial commitment
D. Neither activity involves any risk or process
E. Issue management applies only to debt, underwriting only to equity
Answer: A. Issue management is the overall process; underwriting is the specific financial commitment.
43 A company seeking to restructure its debt through negotiations with multiple lenders would most likely engage a merchant bank for:
A. Corporate advisory/restructuring services
B. Reinsurance
C. Insurance repository services
D. Chit fund management
E. Deposit mobilisation
Answer: A. Debt restructuring falls under corporate advisory services.
44 Which of the following is TRUE about merchant banks and public deposits?
A. Merchant banks are prohibited from accepting public deposits like a commercial bank
B. Merchant banks are the primary deposit-taking institutions in India
C. Merchant banks issue DICGC-insured deposits
D. Merchant banks maintain CRR/SLR on deposits
E. There is no distinction from commercial banks on this point
Answer: A. Merchant banks cannot accept public deposits.
45 A retail investor relying on a prospectus's accuracy for an IPO is implicitly relying on which professional's due diligence?
A. The merchant banker (BRLM)
B. A random stranger
C. A chit fund operator
D. A currency dealer
E. A reinsurance broker
Answer: A. Investors rely on the merchant banker's due diligence certification.
46 Which of the following correctly captures the "high-level" purpose of the SEBI (Merchant Bankers) Regulations, 1992?
A. To ensure only fit, financially sound, ethically conducted intermediaries manage capital-raising for the investing public
B. To eliminate merchant banking entirely
C. To make merchant banking identical to commercial banking
D. To remove SEBI's regulatory role over capital issues
E. To regulate only foreign merchant banks
Answer: A. The regulations aim to ensure sound, ethical intermediaries protect investors.
47 Which of the following would be the LEAST likely activity for a merchant bank to undertake?
A. Managing an FPO
B. Accepting a customer's savings account deposit
C. Advising on a merger
D. Underwriting a rights issue
E. Syndicating a large corporate loan
Answer: B. Accepting savings deposits is a commercial bank function, not merchant banking.
48 Which two entities among Grindlays, SBI, ICICI and Citibank were the FIRST foreign and FIRST Indian institutions, respectively, to establish merchant banking divisions?
A. Grindlays (foreign, 1967) and SBI (Indian, 1972)
B. Citibank (foreign) and ICICI (Indian)
C. SBI (foreign) and Grindlays (Indian)
D. ICICI (foreign) and Citibank (Indian)
E. None of the above pairs is correct
Answer: A. Grindlays was first (foreign, 1967); SBI was first among Indian banks (1972).
49 Which of the following best describes why merchant banking's regulatory home is SEBI rather than RBI?
A. Merchant banking activities (issue management, capital markets) fall within SEBI's securities-market mandate, not RBI's banking-regulation mandate
B. RBI has no regulatory powers of any kind
C. SEBI regulates only insurance
D. Merchant banking is unrelated to securities markets
E. There is no meaningful distinction between RBI and SEBI's mandates
Answer: A. Merchant banking's securities-market focus places it under SEBI.
50 Overall, which statement best summarises the merchant banking ecosystem covered in this guide?
A. A SEBI-regulated (since 1992), non-deposit-taking corporate finance industry offering issue management, underwriting, advisory, PMS, loan syndication and project counselling, bound by a strict Code of Conduct
B. An unregulated industry with no history or oversight
C. A deposit-taking business identical to commercial banking
D. An industry that emerged only after 2000 with no historical roots
E. A business regulated exclusively by IRDAI
Answer: A. This correctly captures the full merchant banking ecosystem.
Disclaimer: This article is prepared for educational and exam-preparation purposes only, summarising merchant banking regulation as of September 2026. Candidates should cross-check the latest official IIBF syllabus and SEBI's current regulations before the exam.