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INVESTMENT BANKSFUNCTIONS & PROCEDURES

Review

• Link between individual, Financial Institutions and

Markets.

• Capital Market: Primary & Secondary

• Money Market

• Foreign Exchange and Derivatives

• Government Securities

• Credit rating agencies, Clearing houses, DPs.

Concepts of Equity

• At Par, Premium and Discount

• Carry rights

• Preferential shares, warrants

• Performance Indicators: EPS, P/E Ratio,

RONW (PAT/NW), Dividend yield

(DPS/CMP), Dividend Payout Ratio(D/PAT)

• Investors’ and issuer perspective on equity

Concepts of Bonds

• A promissory note (Secured and

Unsecured)

• Coupon rate, yield, yield to maturity

• Convertible and non- convertible , Partly

• Zero coupon Bonds/ Debentures

• Fixed rate and floating rate

• Investors’ and issuer perspective on Bonds

Investment Banks

• Investment banks were essentially created in the

U.S. by the passage of the Glass-Steagall Act.

Prior to this, investment banking activities were

part of large, money-center commercial banks.

• The lines between investment banks and

commercial banks again begins to blur as legal

separation between investment banks and

commercial banks is no longer required.

6

Structure of Investment Banks

Investment Bank

I-Banking

DivisionResearch

Sales &

Trading

Asset

Management

Product

Group

Industry

Group

(Corp Finance)

Manage funds

for institutions

and individuals

EconomicDerivativesFixed

IncomeEquity

Fixed

IncomeEquity

Equity

Capital

Markets

Debt

Capital

Markets

High

Yield

DebtM & A

Consumer Products

Technology

Telecommunications

Real Estate

Utilities

Health Care

Retail

Consumer Products

Technology

Telecommunications

Real Estate

Utilities

Health Care

Retail

Private Client

Services

Industry Groups Product Groups

Where Do You Fit In?

At IB, you will work in either an Industry Group or a Product Group

Consumer Products & Retail

Energy and Power

Financial Institutions

Healthcare

Global Industrial Group

Real Estate

Technology/Media/Telecom

Transportation & Services

Debt Capital Markets Group

Equity Capital Markets Group

Equity Corporate Finance Team

Financial Sponsors

Leveraged Finance

Global Syndicated Finance

Mergers & Acquisitions

Private Equity Placement Group

Composition

The Investment Bank is comprised of...

Revenue

Generators

Support

Services

Investm

en

tBank

Investment Banking

Sales & Trading

Asset Management

Private Equity

Research Analysts

Information

Technology/Operations

General Corporate Services

Investment Banks

• Investment banks perform a variety of

crucial functions in financial markets

– Underwrite the initial sale of stocks and bonds

– Deal maker in mergers, acquisitions, and

spin-offs

– Private broker to the very wealthy

Underwriting Stocks and Bonds


• The process of underwriting a stock or a bond issue requires that the investment banker purchase the entire offering at a predetermined price and then resell the offering (securities) in the market. The services provided during this process include:

– Giving Advice

– Filing Documents

– Underwriting, Best Efforts, or Private Placement


• Giving advice

– Explaining current market conditions in to help

determine why type of security (equity, debt,

etc.) to offer

– Assisting in determining when to issue, how

many, at what price.


• Filing Documents

– SEBI registration (filing) is required for issuers.

– A portion of the registration statement known as the prospectus is made available to the public.

– Debt issues require several additional steps, including acquiring a credit rating, hire a bond counsel, etc.

– For equity issues, the investment banker may also arrange for the securities to appear on one of the exchanges.


• Underwriting (firm commitment)

– The investment banker purchases the entire offering at a fixed price and then resells the offering to the market. (also known as Bought Out Deal) .

– An underwriter may form an underwriting syndicate to diffuse part of the underwriting risk.

Investment Banks

• Best Efforts: An alternative to a firm

commitment, the underwriter does not buy

the issue, but rather makes its ―best effort‖

to sell the entire issue.

• Private Placements: The entire issue is

sold to a small, select group of investors.

This is rarely done with equity issues.

Roadshow

• Tombstone is a written advertisement

placed by investment bankers in a public

offering of a security.

• It gives basic details about the issue and, in

order of importance, the underwriting

groups involved in the deal.

Equity carve-outs/Spin off

• Equity carve-outs: A special IPO in which

a parent company creates a new public

company by selling stock in a subsidiary to

outside investors.

• Parent usually retains controlling interest in

new public company.

• Spin off: Creating Value addition by

separating one unit of company.

• Separate legal entity

Initial Considerations for IPO

• The ability of the management team

• The company’s profitability, growth

prospects and financial condition

• The company’s competitors and competitive

position

• Risk factors relevant to the company

• Legal, accounting and regulatory compliance

obligations of public companies

• Investor’s demands

Costs of IPO

• Underwriters’ fee

• Legal and accounting costs

• Stock exchange listing fees

• SEBI filing fees

• Printing costs etc.

Factors to Consider in

Underwriter Selection

• Track record

• Reputation & experience

• Commitment to the company

• Aftermarket support

• Analyst coverage

• Distribution strength

Role of Legal Counsel and

Auditors

• Legal counsel handles the preparation of

the registration statement, and advises the

company on compliance with related

disclosure requirements

• Auditors help the company comply with its

disclosure obligations relating to financial

statements

12 Pre-IPO Action

• Accounting (whether they meet public company

standards)

• Liquidity rights (whether current stockholders have

a right to sell shares in the IPO)

• Compensation Arrangements (Stock options)

• Board of Directors—Review with an eye toward

public company requirements and needs

• Communications -Establish an internal and

external communications policy

• Corporate Governance

Cont’d..

• Corporate Cleanup- Review and resolve any

issues

• Litigation-resolve any material outstanding

• disputes with employees, stockholders,

customers or business partners

• Due Diligence

• Confidential Treatment

• Drafting- Allocate responsibility for offering

process tasks, and begin preparation of an initial

draft of the prospectus.

IPO Calendar

India’s top 5 IPO’s

• Reliance Power -11,700 crores in 2008

Issue price – 405-450 Current Market Price : Rs. 74

• ONGC : 9500 crores in March 2004

Issue price 680-750. Current Market Price : Rs. 277

• DLF : 9188 crores in 2007

Issue price 500-550. Current market price is : Rs. 157

• Cairn India - 5788 crores in 2006


• TCS – 5420 crores in 2004


Best & Worst

IPO of MAX. Power

• Lot size 65

• Retail portion you are allowed to apply for

maximum 975 shares value 97500/ at cut off rate

• Let us suppose that you have applied for 65 or

130 share. Retail over subscription was 2.96

times.

• On dividing your application quantity entitlement

works out 22 or 44 share respectively

Cont’d

• SINCE MINIMUM ALLOTMENT MAY BE 65 SHARES

ONLY , instead of rejecting your application , you will be

allotted 65 shares by Lottery.

• 195 to 975 shares : if you divide 195 with 2.96 it comes to

66 shares , so 195 share application will be allotted firm

66 shares , similarly you may calculate for all other

applications too.

• few shares may be allotted extra as retail over

subscription may come down due to rejection, low price

bids , cheque bouncing etc

How the lottery system works

• Suppose 100 application made for 1 lot of 65 shares.

• Therefore total demand is 6500 shares in this segment

• Oversubscribed : 2.96 times

• Entitlement of shares for 100 application of 1 lot will be

2200 i.e. (6500/2.96).

• Since minimum allotment has to be 65 in this case , they

will allot 65 shares to 34 lucky applicants by lottery out of

100 applicants to distribute 2200 shares.

Underwriting

• Underwriters’ fee

***“For every minute spent negotiating the gross spread

with the client, we probably spend well over 20 times

negotiating the split of the gross spread among the

various underwriters and co-managers.”

– Timothy Main, head of the equity syndicate desk at

J.P. Morgan

• The gross spread is divided into a management fee, an

underwriting fee, and a selling concession. The split is

typically 20% management fee, 20% underwriting fee,

and 60% selling concession.

Syndicate

• IPOs are normally underwritten by a

syndicate composed of a managing group,

an underwriting group, and a selling group.

The managing group, the underwriting

group, and the selling group, in which

memberships will overlap, are together

known as the syndicate.

Syndicate

• The managing group is composed of a lead

underwriter (also known as the managing

underwriter) and often several co managers.

• The managers, and particularly the lead underwriters,

are responsible for structuring the syndicate.

• The lead underwriter is also responsible for the

structure of the IPO and the due diligence process.

• The lead underwriter bears the greatest responsibility

for the offering and typically receives more than half

of the total fees.

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Documents

investment banker

investment banking activities

moneycenter commercial

equityconcepts of bonds

financial markets

wealthyunderwriting

bondsunderwriting stocks

bonds deal maker