Investment Banking

Chapter 1. The Investment Banking Paradigm

1.1 Introduction

Definition:

What is Investment Banking?

Investment banks and Commercial banks perform

primarily different functions. When Mr. Raj needed a loan to buy a car, he

visited a commercial bank. When Nokia needed to raise cash to fund an

acquisition or to build more factories, it made a phone call to its investment

bank.

[1]

“Division of

banking includes

business entities

dealing with

creation of capital

for other companies

. In addition to

acting as agents

or underwriters for

companies in the

process of issuing

securities

,

investment banking

also advise

companies on

matters related to

the issue and

placement of stock”.

Investment Banking

Investment banking is a field of banking that aids companies in

acquiring funds. In addition to the acquisition of new funds, investment

banking also offers advice for a wide range of transaction a company might

engage it.

Through investment banking, an institution generates funds in

two different ways. They may draw on public funds through the capital

market by selling stock in their company, and they may also seek out

private equity in exchange for a stake in their company.

An investment banking firm also does a large amount of

consulting. Investment bankers give companies advice on mergers and

acquisitions, for example. They also track the market in order to give advice

on when to make public offerings and how best to manage the business'

public assets. Some of the consultative activities investment banking firms

engage in overlap with those of a private brokerage, as they will often give

buy & sell advice to the companies to the represent.

Who needs an Investment Bank?

Any firm think about a significant transaction can benefit

from the advice of an investment banking. Although large corporations

often have sophisticated finance and corporate development departments,

an investment banking provides objectivity, a valuable contact network,

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Investment Banking

allows for efficient use of client personnel, and is vitally interested in seeing

the transaction close.

Most small to medium sized companies do not have a

large in-house staff, and in a financial transaction may be at a

disadvantage versus larger competitors. A quality investment banking firm

can provide the services required to initiate and execute a major

transaction, thereby empowering small to medium sized companies with

financial and transaction experience without the addition of permanent

overhead.

What to look for in an Investment Bank?

Investment banking is a service business, and the client should

expect top-notch service from the investment banking firm. Generally only

large client firms will get this type of service from the major Wall Street

investment banking; companies with less than about $100 million in

revenues are better served by smaller investment banking. Some principle

to consider includes:

Experience:

It extremely important that the, senior members of the

investment banking firm will be active in the project on a day-to-day basis.

Depending on the type of transaction, they should preferable to work. The

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Investment Banking

investment bank should have a wide network of relevant contacts, such as

potential investors or companies that could be approached for acquisition.

Record of Success:

Although no reputable investment bank will

guarantee success, the firm must have a demonstrated record of closing

transactions.

Ability to Work Quickly:

Often, investment banking projects have very

specific deadlines, for example when bidding on a company that is for sale.

The investment banking must be willing and able to put the right people on

the project and work diligently to meet critical deadlines.

Fee Structure:

Generally, an investment bank will charge an initial

retainer fee, which may be one-time or monthly, with the majority of the fee

contingent upon successful completion of the transaction.

Ongoing Support:

Having worked on a transaction with the company,

the investment bank will be intimately familiar with the business. After the

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Investment Banking

transaction, an investment bank become as a trusted business advisor that

can be called upon informally for advice and support on an ongoing basis.

1.2 Evolution of American Investment Banking

Commercial banks in USA were preparing for an economic recovery &

consequently to the significant demand for corporate finance at end of

World War I.

It was expected that American companies would shift their dependence

from commercial banks to stock & bond market at lower cost & for long

time.

So presence such market in 1920s commercial banks started to acquire

stock broking business in a bid which boom in capital market.

The first acquisition happened where the National City Bank of New

York Acquired Halsey Stuart & Company in 1916. In 1920s investment

banking meant underwriting and distribution of securities.

In 1920s banks do not want to miss boom opportunity of stock & bond

market. But since they could not underwrite & sell securities directly,

they owned security affiliates through holding companies.

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Investment Banking

Investment banking affiliates made huge profit as underwriting fees,

special segment called ‘Yankee Bond’ issued by overseas issues in US

market.

In the stock market the banks mainly conducted broking operation

through their subsidiaries and lent margin money to customer. But with

the passage of the McFadden act in 1927, banks subsidiaries began

underwriting issues as well.

The stock market got over heated with investment banks borrowing

money from the parent banks in order to speculated in the bank’s stocks

mostly for short selling.

Once the general public joined the frenzy the price earnings ratios

reached absurd limits and the bubble eventually burst in October 1929

wiping out millions of dollars of bank depositor’s funds and brining down

with it banks such as the Bank of United States.

Regulation of the Industry

Banking Act 1933 which was known as Glass-steagall Act passage to

commercial banks that to restricted to engaging in securities

underwriting and taking positions or acting as agent for other securities

transactions.

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Investment Banking

On the other hand investment banks were barred from deposit taking &

corporate lending which were considered the business of commercial

Banks.

Investment Banks becomes one of the most heavily regulated industries

in USA in 1935. The securities Act, 1933 provided for first time

preparation of offer document and registration of new securities with

federal government.

The Securities Exchanges Act 1938 led to establishment of the

securities Exchange Commission.

The Investment Companies Act, 1940 brought mutual fund within the

regulatory ambit & Investment Advisers Act, 1940 regulated the

business of investment advices and wealth manager.

1.3 Global Investment Banks Structure

The Investment Banking industry on a global scale is

oligopolistic in nature ranging from the global leader (known as the

‘Global Bulge Group’) to ‘Pure’ Investment banks. The bulge group

consisting of eight investment banks takes these league tables quite

seriously since they define their position in industry and send a strong

message to their clients about their performance & capabilities.

Through the ranking in the league tables keep changing with time

generally the top firm are more or less the same. The global firm top

ten list gives below:

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Investment Banking

Major Global Investment Banks with Illustrative Market

Shares

Investment Banks Name Percent of total

Merrill Lynch 9.0

Goldman Sachs 7.5

Credit Suisse Barney Boston 7.2

J.P. Morgan 5.5

Lehmann Brothers 3.6

Deutsche Bank 3.5

Bank of America 2.4

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Investment Banking

The banks given in table are ‘Pure Investment

Banks’ i.e. there do not have Commercial banks

connection.

1.4 Evolution of Indian Investment Banking

In India through the existence of this branch of financial

service can be traced to over three decades investment banking was

largely confined to merchant banking service. The forerunners of merchant

banking in India were the foreign banks. Grindlays Banka now merged with

Standard Chartered in India began merchant banking operations in 1967

with a license from the RBI followed by the Citibank in 1970. These two

banks were providing service for syndication of loan and raising of equity

apart from other advisory services.

It was in 1972 that the Banking Commission Report

asserted the need for merchant banking service in India by the public

sector banks. Based on the American experience which led to the passage

of the glass-steagall Act, the commission recommended a separated

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Investment Banking

structure for merchant banks distinct from commercial banks and financial

institution. Merchant banks were meant to manage investments and

provide advisory service.

Following the above recommendation the SEBI set up its

merchant banking division in 1972. Other banks such as the Banks of India,

Central Banks, Bank of Baroda, Syndicated banks etc are suited to set up

their merchant banks outfits. ICICI was first financial institution to setup a

merchant bank in 1973. The later entrants were IFCI & IDBI with the latter

setting up its merchant banking division in 1992. However by the mid

eighties and early nineties most of the merchant banking division of public

sector banks were spun off as separate subsidiaries. SBI set up SBI capital

Market Ltd in 1986. Other such as Canara Bank, BOB, PNB, ICICI and

India Bank created separate merchant banking entities. IDBI created IDBI

Capital, market much later since merchant banking was since banking was

initially formed as a division of IDBI in 1992.

Case Study:Foreign Investment bankers turningTowards India for growth prospects

Investment banking giants are collapsing around the world and

revenues from such activities are shrinking drastically for Indian broking

houses. But these have not dissuaded two foreign institutions from

announcing plans of starting investment banking operations in the country.

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Investment Banking

In February 3, 2009 the US-based Jeffries Group told that it has

received licence from SEBI to set up its merchant banking business here.

Analysts said Indian market seems to be attractive to these

organisations despite the slump.

“These sorts of firms seem to be sniffing around and waiting

till the end of the year to see if something good might turn up. At the

moment they seem to be looking at business development rather than

revenue hunting,” said Mr Saurabh Mukherjea, Head of Indian Equities at

Noble.

Mr Devesh Kumar, Managing Director at Centrum Broking,

said as the Indian economy is growing much faster than most other

countries, cross-border M&A opportunities look good in India.

Case study of Upcoming New Indian

Industry for Investment Banking[11]

Investment Banking

Reliance Capital, the financial services arm of ADA Group, is set

to enter the investment banking business soon. The company has already

launched its PE arm and plans to sell part stake in its life insurance

business to unlock shareholder value, group chairman Anil Ambani told

shareholders on February3, 2009. The company also expects to enter

banking as and when regulations permit.

According to Ambani, in the four years that Rel Cap has

functioned after splitting from the undivided Reliance group, revenues have

risen 14 times, net profit has grown 28 times, total assets nine times and

net worth five times. "At Reliance Capital, we continually scan the horizon

for new business avenues. Over the next year , their plan to take their first

steps in the world of investment banking," Ambani said at the Rel Cap

AGM.

"Given the scale and magnitude of their relationships across

corporate India and the sheer size and reach of their distribution network,

their ideally positioned to create a significant presence in the investment

banking business,” Ambani added.

Ambani said Reliance Life Insurance now ranked among the

top four private life insurers in India and Rel Cap was considering options

to unlock shareholder value by going for a public issue, find a strategic

partner or a combination of both. "A final decision in this matter will be

taken shortly, driven by the sole objective of maximising returns for

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Investment Banking

Company shareholder,” there added.

Rel Cap also looks to expand its PE arm Reliance Equity

Advisors, whose focus will be on growth capital and buyouts.

1.3 Service Portfolio of Indian Investment banks:

The core service provided by Indian investment banks are in the

area of equity market, Debt market and advisory. These are profiled below:

Core Service

I. Merchant Banking, Underwriting and Books Running :

When the primary market are buoyant, Issue

management, book -building and syndicated underwriting form a very

dominants segment of activity for most Indian investment banks. A

segment of primary market is also the private placement market,

especially for government securities and commercial paper and bonds

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Investment Banking

floated by public sector banks and corporation. Investment banks have

been managing the pubic offers and holding them in the private

placements as well. SEBI has gradually been increasing its regulations of

the private placement market as well thereby making merchant bankers

plays a significant role in them.

II. Merger and Acquisitions Advisory:

One of the cream activities of investment banks has

always been M&A advisory. The larger investment banks specialise in

M&A as a core activity. While some of them provide pure Advisory

service in relation to M& A, other holding valid merchant banking

licences from SEBI also manage the open offers arising out of such

corporate events.

III. Corporate Advisory:

Investment Banks in India also have large practices in

corporate Advisory service relating to project financing, corporate

restructuring, capital restructuring through equity repurchases, raising

private equity, Structuring joint-venture and strategic partnerships and

other value added specialized area.

I.3.2 Allied business

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Investment Banking

I. Securities Business:

The universal banks such as SBI, ICICI, UTI Bank and

Kotak Mahindra have their broking and distribution firm in both the equity

& debt segment of the secondary market. In addition several other

investment banks such as the IL & FS and pure investment banks such

as DSP Merrill Lynch and JM Morgan Stanley have a strong presence in

this area of activity. After the introduction of the derivatives segment it

had provided an additional area of specialization for investment banks.

Derivatives trading risk management & structured product offering are

the new segment that are fast becoming the area of future potential for

Indian investment banks. The securities business also provided

extensive research based products & guidance to investors.

II. Asset Management Service:

Most of the top financial groups in India which have

investment banking business such as the ICICI, DSP Merrill Lynch & JM

Morgan Stanley etc also have presence in the asset management business

through separate entities. Mutual fund industry grew significantly in India

from the late nineties and is a force to reckon with in the capital market.

Mutual funds provide the common investor the service of sophisticated fund

management.

Several Indian investment banks have also ventured in to the

business of starting dedicated venture capital & private equity fund. ICICI,

UTI Bank, DSP Merrill Lynch and other have dedicated venture capital and

private equity funds. SEBI is reported in the process of setting up a venture

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Investment Banking

funds. Besides, several investment banks are tying up with foreign funds to

set up India specific private equity funds.

III. Investment Advisory & Wealth Management :

Many reputed investment banks nurture a

separate service segment to manage the portfolio of high net worth

individuals, households, trusts and other types of non-institutional investor.

This can be structured either as a discretionary or non- discretionary

portfolio management .This is a highly regulated activity since it involves

pubic investible funds. However, in several cases, investment banks do not

offer portfolio management service but offer investment advice wherein

the investor is provided good investment recommendations from time-time.

Business Portfolio of Investment Banks

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Core Business Portfolio

Non fund Based

Merchant Banking Service

Management of public offer of equity &

Debt instruments

Rights Issues

Open offer under the Takeover code

Buyback offers

De-listing offers

Advisory & Transaction Service

Project financing

Syndicates loans

Structured finance & Securitisation

Private Equity /Venture capital

Preferential Issue

Qualified Institutional placement

Business Advisory

Financial Restructuring

Asset recovery agency service

Government disinvestment & privatization

Acquisitions, Strategic sale, buyouts & takeover

Corporate re-organisations such as mergers &

demergers, hive-offs, assets sales, divestitures

Fund Based

Underwriting

Market Making

Bought out deals

Proprietary investment & trading in

equities, bonds & derivatives

Investment Banking

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Allied Business

Assets Management ServiceMutual FundsPortfolio managementVenture capital FundsPrivate Equity funds

Secondary Market ServiceSecurities business

BrookingSales & DistributionEquity research

Investment advisoryDerivatives

Support ServiceRegistrars & Share transfer agentsCustodial ServiceOther capital market service

Investment Banking

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Investment Banking

Chapter 2. Underwriting

2.1 Definition:

Underwriting may connote different service obligation

depending upon the way it has evolved as an area of capital market

service. According to SEBI (underwriters) rules 1993 means “a person who

engages in the business of underwriting of an issue of securities of a body

corporate”

In Investment banking, “underwriting is defined as the

transaction between the issuer of the instruments of debt or equity and the

firm which has agreed to liquidate the instruments immediately upon their

issuance”.Underwriting is one of important core function of investment

banking.

2.1.1 Introduction:

Underwriting is always in connection with a proposed issue of

securities by a body corporate. It is not a general underwriting between a

company and an underwriter. The specific underwriting commitment has to

be documented through an Underwriting agreement.

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Investment Banking

Underwriting is an agreement by the underwriter to subscribe

to the securities being issued in case the person to whom they are offered

do not subscribe to them. Therefore , underwriting is a service that consist

of taking a contingent obligation to subscribe to an agreed number of

securities to an agreed number of securities in an issues if such securities

are not subscribe to by the intended by the intended investors.

Underwriting is primarily a fee-based service provided by an

underwriter since there is no fundamental obligation to subscribe to the

underwritten securities. If the issue is fully subscribe to by the investor, the

underwriter has no further obligation to the issues. However if investor do

not subscribe to the issues fully the obligation falls upon the underwriter to

pick up the unsubscribe portion of the issues. In such a situation

underwriting becomes a fund-based service since the underwriter has to

purchase the securities that have remained unsubscribe by investor. It is

due to this reason that underwriting is a risky activity for investment banks

that requires careful assessment of issues before they can be taken up for

underwriting. In addition underwriting requires sufficient resources to be

allocated to such activity.

In investment banking underwriting, the government or

private entity which issues the debt or equity instruments has an immediate

need for cash (specie), and has no interest in waiting to locate buyers for

the instruments at an indeterminate or specified date. The issuer also

usually has no detailed knowledge of the individuals who are capable or

interested in the present or future purchase of the instruments, and (most

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Investment Banking

importantly) what the highest and most fair price for the securities may be

so.

2.2 Underwriting Commission

1. The underwriter’s compensation for the service rendered is the fee that is

paid by the issuer company. The fee, which is known as underwriting

commission, is paid as a percentage of the value of underwriting. (The total

number of securities underwritten multiplied by the offer price per security.)

2. Underwriting commission is payable irrespective of whether the underwriter

ultimately has any requirement to purchase the underwritten securities or

not.

3. The payment of underwriting commission is governed by section76 of

companies Act which stipulates a ceiling of 5% with respect to share and

2.5% with respect to debentures.

4. The government of India (Ministry of finance) fixed a capital 2.5% with

respect to equity share. In case of other securities where in the total issues

size is more than Rs5, 00,000 the applicable ceiling is 1% if the issues is

fully subscribed by investor.

5. In case the issue is under-subscribed the underwriter can be paid an

additional 1% on the securities picked up by them. Within the above ceiling

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Investment Banking

fixed by the government an issuer company is free to negotiate lower rates

of commission with underwrites.

2.3 Underwriting Regulatory Framework

Underwriting activity in India is regulated under the SEBI

(underwriters) Rules 1993 & SEBI (underwriters) regulations1993. The

regulations Framework for underwriting activity a under above mention:

Underwriting business can be taken up by financial institution, Commercial

banks, Mutual funds, Merchant banker registered with SEBI, stock broker

and NBFC’s.

All underwriters shall have necessary infrastructure, past experience,

minimum of two employees and shall comply with the minimum capital

adequacy requirement as stipulated from time-to-time.

Underwriters have to enter into legally binding agreement with the issuer

companies. The underwriting agreements have to be approved by the stock

exchange wherein the shares are proposed to be listed.

In case of financial institution, mutual fund & bank, the issuer company has

to apply separately prior to finalisation of the issuer for underwriting

support.

Underwriting commission cannot exceed the statutory ceiling.

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Investment Banking

All underwriting contract have to be classified as material contract &

disclosed as such in the offer document & filed with the registrar of

companies prior to the issue of the offer document.

Sub-underwriting is permissible provided there are contract to evidence the

same.

2.4 Underwriting In Fixed Price Offers

Underwriting is optional for a fixed price offer, it is present

regulatory framework. Therefore if a issuer company fells that the issue is

strong enough to sell on its merits, it may decide to take the risk and decide

foe not underwriting it

In such case the company only pays brokerage for marketing

its securities to investor and saves on underwriting commission. The

underwriting decision is normally taken in consultation with the lead

manager who has a good understanding of market.

The regulations further stipulate that if a fixed price offer is

underwriting the lead manager managing the issue shall undertake a

minimum obligation of 5% of the total underwritten amount or Rs 25 lakh

whichever is lower. The regulation suppose that in stipulating a mandatory

participation of lead manager in the underwriting risk of the issue, a sense

of responsibility would be inculcated to bring issues to the market.

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Investment Banking

2.5 Book Building

Project funding process in the European countries through mobilization of

money from institution or public is different from the normally adopted

public issue route in India. In countries like U.S.A the fund is collected

from the underwriter to issues through book building.

The India corporate have started adopting the same system while

exploring the international money market at the time of issuance of

Global Depository Receipt. The process necessitates the companies to

tie up the issues amount through road show and in course of this

exercise the book runners note the offered amount from various

underwriters/ institutional investor. The issue price is derived and

constituted out of these offers received and recorded and recorded but

the issue mangers.

Book Building is selling an issues step wise to investors at an acceptable

price with the help of a few intermediaries. The basic philosophy of book

building is based on the fact that the price of any scrip mainly depends

upon the perception of the investors about that corporate. This exercise

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Investment Banking

is normally carried out the issuers with the help of a few intermediaries

who are called as the ‘Book-Runners’.

Book Building is a relatively new optional device to raise ownership

(equity) or borrowed fund (debt) through public issues in the capital

market in India although it has been in vogue in the international financial

market. The system of book-building has been introduced in India as

result of the steps taken by the SEBI to implement the recommendations

of the Malegam Committee, which went into the issue of disclosure

requirement.

Book-Building is an international practice which refers to collecting orders

from investment bankers and larger investors based on an indicative

price range.

Concept

Book Building is a novel concept to India. Under book

building process the issuer is required to tie up the issue amount by way of

private placement. The issues price is not priced in advance, it determined

by offer of potential investor about price which they may be willing to pay

for the issues. To tie up the issue amount the company organises road

shows and various advertisement campaigns. In course of exercise the

book runner notes the amount offered by various investors such as Mutual

funds, Underwriters etc. the price of instrument is weighted average at

which the majority of investors are willing to buy the instrument.

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Investment Banking

In the Book Building process the issuer company ties up with

a selected group of individuals and agencies for private placement. The

entries exercise is done on wholesale basis whereas in the conventional

system, larger number of brokers and underwriters are involved. It is called

“Book Building Process’ because one lead managers builds his order book

by forming a syndicate of eligible potential buyers.

Book Building Process

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Issuer Company

Book runner

Syndicate Members

Mutual Fund

Stock Brokers

Advisors Institutional

Investors

Foreign

Institutional

Investors

Investment Banking

Intermediaries:

Book building refers to the collection of Bids from investor which

is based on an indicative price range, the offer price being fixed after the

Bid closing date. The principal parties/ intermediaries involved in a book

building process are:

o The company

o A Book Running Lead Manager who is a category Merchant banker

registered with SEBI. The Book Running Lead manager is also the lead

Merchant Banker.

o Syndicate members who are intermediaries registered with SEBI and

who are permitted to carry activities as underwriters. Syndicate Member

are appointed by the Book Running Lead manager.

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Clients Clients Clients Clients Clients

Investment Banking

2.5 Brought out Deals

i. BOD refers to the fact that the investment banks buys the entire stock

meant to be issued to the public from the issuer company. Thereafter at

the appropriates time usually within 9-12 months the investment bank

makes an offer for sale to the pubic there by listing the company.

ii. A BOD occurs when an underwriter, such as an investment bank,

purchases securities from an issuer before a preliminary prospectus is

filed. The investment bank (or underwriter) acts as principal rather than

agent and thus actually "goes long" in the security. The bank negotiates

a price with the issuer (usually at a discount to the current market price,

if applicable).

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Investment Banking

iii. The risk in BOD is similar but not exactly the same as that in firm

underwriting. In a firm underwriting for an issues the risk is in term of

being saddled with stock that would be listed but not having demand

with investor.

iv. In a BOD the risk is in term of being saddled with unlisted stock in

case the issue cannot be made due to adverse market trends setting in

after the BOD is done.

v. Due to this risk sometime an investment banks may bring in

syndicate of other investment banks or other investor if it has to spread

the risk. BOD is a recognized route for companies to go public on the

OTC exchange of India.

vi. BODs done to take companies public on other stock exchange have

to comply with the other requirement as applicable to normal IPOs.

vii. BODs were in vogue due to several advantages they offered to

smaller companies in terms of saving in time and expenses of making

retail IPOs.

viii. The advantage of the BODs from the issuer's perspective is that they

do not have to worry about financing risk (the risk that the financing can

only be done at a discount too steep to market price.) This is in contrast

to a fully-marketed offering, where the underwriters have to "market" the

offering to prospective buyers, only after which the price is set.

ix. At the same time the company assured of funds from the investors

that are not guaranteed in a public issue unless it is fully underwritten.

x. Usually the BODs is structured keeping in view the ultimate pubic

offering so that investor are assumed of an expected return with an exit

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Investment Banking

within a given time frame. BODs done in the past had a normal maturity

profile of around 6-12 months.

xi. Generally BODs occur in present day capital market since issues

sizes have significantly and therefore investment banks cannot take

unlimited risk.

xii. However in the Indian context a BOD is more of a mezzanine round

of investment made by an investment bank with a view to take the

company public in a short time therefore.

Advantages and Disadvantage of the bought out deal from

the underwriter’s perspective include:

1. BODs are usually priced at a larger discount to market than fully

marketed deals, and thus may be easier to sell; and

2. The issuer/client may only be willing to do a deal if it is bought (as it

eliminates execution or market risk.)

3. If it cannot sell the securities, it must hold them. This is usually the result

of the market price falling below the issue price, which means the

underwriter loses money.

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4. The underwriter also uses up its capital, which would probably otherwise

be put to better use (given sell-side investment banks are not usually in

the business of buying new issues of securities).

Chapter 3. Issue Management

III.1 Definition and Overview The term ‘issue management ‘ has been defined under the

SEBI (Merchant banker) regulations 1992 as an activity ‘which will inter

alia consist of preparation of prospectus and other information relating to

the issue, determining the financial structure, tie up of final allotment and

refund of the subscriptions’. As per the frame envisaged under the SEBI

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Investment Banking

(Merchant Bankers) rule, 1992 the main activity of a merchant banker is

issue management.

Issue management in India encompasses a wider role for

merchant banker associated with the issue. The merchant banker is also

thrust with a responsibility for ensuring disclosures from the Issuer

Company and statutory compliance with regard to the offer.

In India, through term ‘Merchant Banker’ is used under the

SEBI law the term is used to denote an issue management is ‘lead

manager’ which has been used in the Regulations. If there is more than

one lead manager associated with an issue, the main issue manager

would be called the ‘lead manager’ and other would be know be as the

‘co-lead manager’.

III.1.1 Types of Issues Requiring Issue Manager

The following types of issues of securities by

companies require the mandatory appointment of an issue

manager:

All issues of securities made through a prospectus irrespective of

whether they are new issues of securities or offers for sale and whether

they constitutes IPOs. Provided that in larger issues more than one

issue manager can be appointed subject to the following ceiling:

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Investment Banking

□ If the size of issues is less between than Rs 50 crore, a maximum of two

lead managers.

□ If the size of issues is less between than Rs 50 -100 crore, a maximum

of three lead managers.

□ If the size of issues is less between than Rs 100 -200 crore, a maximum

of four lead managers.

□ If the size of issues is less between than Rs 200-400 crore, a maximum

of five lead managers.

□ If the size of issues is above Rs 400 crore, five or more as may be

approve by SEBI.

All rights issues of a size exceeding Rs 50 lakh should have one issue

manager.

All Qualified Institutional Placement should have lead manager.

III.2 Functions of Merchant Banker in Issues

Management

Management of issues involves marketing of corporate

securities viz., equity share, preference share and debentures or bonds by

offering them to pubic. Merchant banks act as intermediary whose main job

is to transfer capital from those who own it to those who need it.

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Investment Banking

The issue function may be broadly divided into Pre-

issue management and Post issue management. In both the stages, legal

requirement have to be complied with and several activities connected with

the issue have to be co-ordinated.

1) Pre-issue Management the various steps involved

as under:

a) Obtaining stock exchange to MOA & AOA.

b) Taking action as per SEBI guideline.

c) Finalising appointment with co-manager, underwriter, Advertisement

agency, Broker, Printers & redistricted to the issue.

d) Advice to a company to appoint Auditors.

e) Drafting the prospector.

f) Obtaining consent from all parties. Obtaining the approval of draft

prospector from company legal advisor.

g) Approval of prospector from SEBI.

h) Making an application stock exchange for listing of shares.

i) Publicity of issue through advertisement.

j) Approval prospector for Board of Director & signing the same for all

directors

k) To open subscription for issue shares.

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Investment Banking

2) Post issues Management the various steps

include as under:

a) To supervise the allotment procedure as per the stock exchange

guideline

b) To ensure refund order allotment letter are issued at proper time.

c) To report periodically about progress in the mater relating to allotment &

refund.

d) To ensures listing of the stock exchange.

e) To attend the investor grievances regarding the public issue.

For this merchant banker change 0.5% of the amount of

public issues up to Rs25 crores.

0.2% of the amount exceeding of Rs25 crores.

Chapter 4. Private Equity

4.1 Private equity and Investment Banking

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Private equity fund is a pooled investment vehicle used for making investments in various equity (and to a lesser extent debt) securities according to one of the investment strategies associated with private equity. Private equity funds are typically limited partnerships with a fixed term of 10 years (often with annual extensions). At inception, institutional investors make an unfunded commitment to the limited partnership, which is then drawn over the term of the fund.

A private equity fund is raised and managed by investment professionals of a specific private equity firm (the general partner and investment advisor). Typically, a single private equity firm will manage a series of distinct private equity funds and will attempt to raise a new fund every 3 to 5 years as the previous fund is fully invested. Private equity has as a major service area over for investment banks in helping companies to raise equity capital privately.

It may be noted that companies do issues equity capital to their promoter groups, working directors, employees and group companies. Such allotment also amount to private’s placement but they do not concern investment banks per se. Investment Banking are engaged when there is a need to execute transaction. In the context of private equity, it could be bring in external for clients forms a part of transaction advisory service rendered by investment banking.

The various aspect of raising equity capital through private placement is in the context of the following types of transactions:

Raising venture capital- This related to raising equity capital from institutional venture capital investor for startup companies to finance business plans that are at early stages of implementation.

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Investment Banking

Raising private equity in unlisted companies – This related to transaction for raising capital form private equity investors for later stage business plans that require growth financing.

Raising private equity in listed companies (PIPE)- This is about raising equity capital for mature listed companies privately.

Qualified Institutional Placement – A separate channel for listed companies to raise equity capital other than through public offer exclusively from QLBs under the QIP guidelines.

Preferential allotment – Allotment made to strategic investor, business collaborators and joint venture partners wherein the primary motive is not fund raising for the company but to facilitate the entry of investor of investors with business objectives.

4.2 Overview of Arranger’s Service for Private Equity

The investment Banker plays a key advisory role in formulating the

transaction for raising equity and intermediates in the whole process till the

transaction is closed successfully. More specifically arrangement can be

broken down into the following components:

Due Diligence :

It perform comprehensive due diligence services for the

purpose of reviewing and investigating investment opportunities.

Business Planning :

It works closely with company management to develop

actionable strategic business plans.

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Investment Banking

Financial Modeling :

It provide develop full financial projections for emerging

businesses, including income statements, balance sheets, and cash

flow statements.

Market Research :

It performs strategic market research to assess and

validate market opportunities.

Marketing Services :

It create marketing plans, branding strategies, customer

acquisition strategies, and implement integrated internet marketing

consulting services to accelerate business growth.

Exit Planning :

It assists portfolio companies with the development of

realistic paths to liquidity events for company management and

investors.

 

4.3 PIPE (Private Investment in Public Equity)

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Investment Banking

PIPE or Private Investment in Public Equity is one of most

dynamic area of Investment bank. PIPE is a term used when a private

investment or mutual fund buys common stock for a company at a discount

to the current market value per share.

Other Definitions:

[PIPE is when] a private investment firm's, mutual fund's or other

qualified investors' purchase of stock in a company at a discount to the

current market value per share for the purpose of raising capital. There are

two main types of PIPEs - traditional and structured. A traditional PIPE is

one in which stock, either common or preferred, is issued at a set price to

raise capital for the issuer. A structured PIPE, on the other hand, issues

convertible debt (common or preferred shares).

Chapter 5. Buybacks[39]

Investment Banking

5.1 Introduction to Share Repurchase or Share

Buyback

‘Stock repurchase’ or ‘Share repurchase’, commonly known as

‘Share buyback’ refers to the process of a company buying back its own

share from its shareholder. In this sense it is the reverse of an issue of

share and is therefore also one of the way in which an ‘exit’ may be

provided to shareholder.

5.2 Equity Repurchase in India

Till 1998, Indian companies were not allowed to buyback

equity share from their shareholder or from the secondary market. So the

only exit option for the common investor was to sell through the secondary

market. With the amendments to the companies Act, companies were

allowed to buy back their share subject to a lot of statutory restrictions. The

basic framework of a share repurchase mechanism in India is to allow it as

a step to be implemented from time to time by companies. Share

repurchase can be used to meet strategic objectives including distribution

of capital to shareholder but not for treasury operations

Buyback are discussed in the context of investment

banking since statutory regulations provide that appointment of a merchant

banker as a manager to the offer is mandatory for listed companies

intending to make a buyback offer to their shareholders. In such offers, the

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Investment Banking

merchant banker plays a very significant role not only in pricing but in

ensuring compliance with law and in advising the company at every stage.

5.3 General Conditions

The general conditions applicable to all types of companies for

buy –back of securities in term of the provisions of sections 77A and 77B of

the companies Act are listed below:

o The buy back by the company has to be financed out of free reserves or

securities premium account or from proceeds earlier issue of dissimilar

share or other securities.

o The maximum time allowed for completion of buy back process in 12

months from the date of the relevant resolution.

o Two buy back should be a direct purchase by the company and not an

indirect purchase through its subsidiaries or group investment companies

o Two buyback programme shall be separated by a period of 365 days

even if they are for dissimilar securities.

o No company shall make a public issue of a same kind of securities that

have bought back within a period of six months from the conclusion of

the buyback programme.

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Investment Banking

5.3 Investment Banking Perspectives in Share

Buyback

PROCESS OF MAKING A BUY BACK

Under SEBI buy back regulations, it is mandatory to engage a

merchant banker to prepare a L of O and manage buy back offer

Pricing mechanism fixed by the board of companies

Requirement of an escrow account to be opened under the Tender

Offer and the book building methods to the extent specified under

regulations

The offer shall not open before 7 days and not after 30 days from the

specified date and shall be kept open for a minimum of 15 days and a

maximum of 30 days.

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Chapter 6. Corporate Re-Organisation

6.1 Overview of Corporate Re-Organisations Introduction

Corporate Re-organisation is a wide term that encompasses

changes confined to a particular company or to more than one company in

a single transaction. These are done from time to time in response to

business environment and changing business dynamics. As it may be

appreciated, preservation and enhancement of shareholder value is the

primary driver for corporate performance and therefore, companies are

frequently in the process of re-organising their business structure to grow

and enhance value.

Corporate Re-Organisation associated with (a) split-up of an

existing company balance sheet through asset sale sub sidiarisation known

as ‘Corporate Restructuring’.

The other methods of Corporate Re-Organisation are

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(b) integration of two or more corporate balance sheet, popularly known as

‘Merger and Amalgamations’ and (c) Change in the shareholding pattern

of the company resulting in a change in control or ownership known as

‘acquisitions or takeovers’.

Types of Corporate Re-Organisations

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Integration of existing companies

Restructuring of existing companies

Through Transfer of Assets

Merger

Amalgamation

Through Transfer of equity

Acquisition

Takeover

Investment Banking

6.2 What is Corporate Restructuring?

Corporate restructuring is necessary when a company needs to

improve its efficiency and profitability and it requires expert corporate

management. A corporate restructuring strategy involves the dismantling

and rebuilding of areas within an organization that need special attention

from the management.

Most corporate restructuring takes place as a last resort when all

other attempts to manage the business have failed. In short corporate

restructuring can usually be avoided if a company is well managed by a

strategically aware management team. However, there may be exceptions

here where such a company sees opportunities to profitably conduct

merger and acquisition through re-organisation of other

businesses.Corporate Restructuring two types

1. Internal. or

2. External.

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Investment Banking

Internal to a company is without a change in its legal entity.

External process is well with the creation of one or more new entities or by

a process known as a ‘split-up’ of an existing balance sheet. There are

shows in a table as:

Types of Corporate restructuring

[46]

Internal Restructuring

(No change in corporate structure/ control)

Financial restructuring – i. Debt (Debt swap, bail-out, etc) or

ii. Equity (capital reduction and other method)

Operational restructuring ,BPR

Divisionalisation or setting up of SBUs

External restructuring (split ups) [Change in corporate structure / control]

Through transfer of Assets

Management buyout De-merger Sell off

Investment Banking

6.2.1 Internal Restructuring

Internal restructuring consists of Financial

restructuring, Operational restructuring and Divisionalisation.

i. Financial restructuring:

Financial restructuring entails a change in the capital

structure of a company. The might be required from time to time to increase

the efficiency of the capital base to reduce leverage and financial cost to

rationalize equity base and deal with over or under-capitalization. Financial

restructuring divide in to two part (a) Debt (b) Equity. Equity restructuring

Can again the looked at as involving capital reduction and not capital

reduction. Those that involve capital reduction need to go through an

elaborate process prescribed under law since they affect the interest of

shareholders in particular.

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ii. Operational restructuring:

Operational restructuring is either a technical exercise such as

a business process re – engineering or a managerial initiative such as a

change in the organizational structure. Therefore the Operational

restructuring change in the organization and process.

iii. Divisionalisation:

Divisionalisations refer to setting up separate division within

the same company for better operational control and accountability.

6.2.2 External restructuring

External restructuring entails a change in the asset and

liability structure of the company or sometime only in the asset portfolio.

This is achieved through split-ups of the balance sheet of the company

using several methods. This choice of a particular method would depend

upon the fact of a given case, statutory provision, tax considerations and

strategic objective underlying the split-up.

i. Management Buyout:

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Investment Banking

In a management buyout the managers or

directors purchase all or part of the business from its owners. The

management team will take substantial controlling interest from the existing

owners who are having control over the affairs of the company. The

management team may consist of one or more directors one or more

employees with a external associates. It is a method of setting up a

business by the management team itself.

ii. Sell-off:

In a strategic planning process a company can take decision

to concentrate on core business activities by selling off the non core

business division. A sell –off is a sale of part of the organisation to a third

party in the following circumstances:

To concentrated on core business activities.

To improve the profitability of the firm by selling off loss making division.

To reduce the business risk by selling off the high risk activities.

To increase the efficiency of men, machines and money.

iii.Demerger:

For strategic reason a business firm is spitted into two or

more independent separate bodies and asset are transferred to such

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Investment Banking

bodies. A demerger is the opposite of a merger. By spin- off a corporate

body splits in to two or more corporate bodies with separation of

management to make accountability. The main reason may be for making

each division as a profit centered organisaton to make head of the division

to account for profitability.

6.2.3 Investment Banking Role in Corporate Restructuring

Investment Banking provides strategic corporate restructuring for

underperforming businesses.

The impact of corporate restructuring is generally widely felt, touching

shareholders, creditors, investors, employees, suppliers, customers and

the community.

Investment Bank eases this impact by providing strategy consulting and

a comprehensive restructuring plan. Investment bank also place top

level professionals in management positions to turnaround the

company’s financial performance.

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Investment Banking

Investment Banks customized, strategic approach to restructuring limits

financial losses and simultaneously reduces tensions between creditors

and shareholders. By doing so, Banks improve situation and the

company’s competitive position.

Investment Banks Restructuring process includes the following

components:

Discovery:

o Conduct interviews with management, investors, and creditors

o Perform extensive due diligence to ensure company liquidity

during implementation of the restructuring.

Strategy

o Identify areas for potential cost reduction as well as revenue

growth

o Develop a strategic and up-to-date business plan, including

accurate five year working capital financial models

Implementation

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Investment Banking

o Implement the strategic restructuring plan

o Recruit experienced senior executives for management

positions

o Achieve total mediation with creditors and investors

o Secure additional debt and/or equity financing

 

6.3 Merger & Acquisition

6.3.1 Merger and Amalgamation

Definitions:

The dictionary of banking and finance define a merger as “the

joining together of two or more companies”. However in the Indian context

it appears that the world merger is used in common parlance for one

company blending with or getting “absorbed” by another while an

amalgamation is used in the context of more than two companies

combining together.

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Investment Banking

Concepts:

A "merger" or “amalgamation” is often financed by an all stock

deal (a stock swap). An all stock deal occurs when all of the owners of the

outstanding stock of either company get the same amount (in value) of

stock in the new combined company. According to section 2(1b),

amalgamation in relation to companies means the “merger” of one or more

company with another company or the merger of two or more companies to

form one company so that:

All the property of the amalgamation company or companies

immediately before the amalgamation becomes the property of the

amalgamation company by virtue of the amalgamation.

All the liabilities of the amalgamation company or companies

immediately before the amalgamation become the liabilities of the

amalgamation company by virtue of the amalgamation.

Shareholder holding not less than three- fourths value of the share in

the amalgamation company or companies or company become

shareholder if the amalgamation company by virtue of the

amalgamation & not otherwise.

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Investment Banking

6.3.2 Acquisition and Takeover:

Acquisition and Takeover are two mechanisms by which

companies change hands and through transfer of ownership of share or

transfer of control. Which both these word are used almost interchangeably

there is a subtle distinction between the two. Acquisition means the

purchase of or getting access to significant stake in a company, often making

such acquirer a major shareholder in the company. The world Acquisition

has not been defined under any Act. By reading of its description from

various non-statutory sources it may be concluded that “Acquisition is the act

of Acquisition ownership or property”. Therefore an Acquisition of share in

a company only means that a person becomes the owner in such share.

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Investment Banking

However the world ‘takeover’ has of a negative connotation that

convey the intent to displace the existing management and seek control of

affairs through Acquisition of shareholding or by other means .The dictionary

of Banking & Finance define it as ‘an act of buying a controlling interest in a

business by buying more than 50% of its share’ It has to be appreciated that

a takeover does not always entail the necessity to acquire more than 50%

shareholding.

An acquisition (of un-equals, one large buying one small) can

involve a cash and debt combination, or just cash, or a combination of cash

and stock of the purchasing entity, or just stock. In addition, the acquisition

can take the form of a purchase of the stock or other equity interests of the

target entity, or the acquisition of all or substantially of its assets.

6.3.2.1 Regulation of Substantial Acquisition and

Takeover

In India, Regulation of Substantial Acquisition and Takeover is

a codified law under the SEBI Act, 1992 in the form of the SEBI (Substantial

Acquisition of Share and Takeover) Regulation were overhauled in 1997 and

again in 1999. It provides a Regulation procedure for substantial acquisitions

and takeover with respect to listed companies. However the takeover code

does not apply to unlisted companies that continue to be Regulation by the

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provision of the companies Act. Therefore the Indian law on this subject

regulated acquisitions & takeover based on the criterion of listing status and

not on basic of economic power. Unlisted companies have to look for

protection under the companies Act with regard to takeovers.

6.3.3 SEBI Code on Mergers & Acquisitions

1. Any acquirer who acquires share or voting right in a company which when

aggregated with these existing stock of such holding of the acquirer in the

company exceed 5%, 10%,and 14% of the total, shall disclose at every

stage the aggregated of the holding to the company and to the concerned

stock exchange. The stock exchange shall put such information under

public display immediately. The company also has a responsibility to

report such information to the stock exchange.

2. No acquirer shall acquire holding which when aggregated with the

existing of such holding of the acquirer in the company equal or exceed

15% of the total unless such acquirer maker a public announcement to

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Investment Banking

acquire share through a public open offer to the extent of minimum of

20% of the voting capital of the company.

3. No acquire together with person acting in concert can acquire any more

holding in the target company without complying with the open

requirement, if the existing holding have already reached 75%.

4. No acquirer shall gain control of a target without making a public offer

unless such control has been vested through a special resolution passed

by the members voting through a postal ballot.

6.3.4 Types of Mergers and Acquisitions:

(A) Vertical Merger:

A vertical Takeover & Merger is one in which the company

expand backward by takeover of or merger with a company supplying raw

material or expands forward in the direction of the ultimate consumer. Thus

in a vertical merger there is a merging of companies engaged at a different

stages of the production cycle within the same industry. For example the

merger of Reliance Petrochemicals with Reliance Industries Limited is an

example of vertical merger with backward linkage as far as Reliance

Industries Limited is concerned. Similarly, if a cement manufacturing

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Investment Banking

company acquires a company engaged in civil construction it will be a case

of vertical takeover with forward linkage.

(B) Horizontal Merger:

A Horizontal Takeover & Merger happens between

companies engaged in the same business activity and comporting with

each other. For example merger of Tata Oil Mills Company Ltd with

Hindustan Lever Ltd is a horizontal merger. Both the companies have

similar products. A TV manufacturing company taking over a company

manufacturing washing machines will also be horizontal takeover because

both the companies are in the market for consumer durables.

(D) Conglomerate Merger:

Pure Conglomerate Takeover & Merger are between

companies that are in diversified industries with no visible synergy. These

are done basically with the intention of diversifying and de-risking the

expansion and growth of a corporate empire. However, Conglomerate

merger are also seen in companies with related product line or in different

geographical market (Daimler Benz-Chrysler).

6.3.5 Investment Banking Service in Merger & Acquisition

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Investment Banking

Investment Banks have been closely associated with merger

and acquisition activity since a merger or acquisition is a sales opportunity

for the Investment Bank. If the company wants to merge with another, it

must attain a fair market value for its shares to be swapped which would

involve an investment bank. If it wants to buy the other company with

borrowed money, it would most likely borrow directly from investors in the

form of bonds through a private placement, engineered by the investment

bank. Thus, Investment Banks position themselves to act as advisors on

mergers and acquisitions and usually charge large fees for doing so.

Chapter 7. Allied Business

Investment Banking provides a host of services

provide a host of service and are also present in a range of

business that are allied to core investment banking. Allied

business are classify into two broad services.

1. Asset Management.

2.Securities Business.

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Investment Banking

1. Asset Management –

Investment bank share synergies with institutional investing

by Mutual Funds, Portfolio management, Private Equity funds and Venture

capital Funds

2. Securities Business - Stock broking, trading and secondary market operations, marketing and distribution of securities, research activity and investment advisory service in equities, Derivatives are included in Securities business.

7.1 Asset Management

7.1.1 Mutual Fund

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Investment Banking

A mutual fund is a company that pools money from many

investors and invests the money in stocks, bonds, short-term money-

market instruments, other securities or assets, or some combination of

these investments. The combined holdings the mutual fund owns are

known as its portfolio. Each share represents an investor's proportionate

ownership of the fund's holdings and the income those holdings generate.

As it represent below the diagram.

One can define a mutual fund as a trust that pools in the saving

and funds for a large number of investors who have a common financial

goal. Mutual funds issues units to investors, which represent equitable

rights in the assets of the mutual fund.

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Mutual fund by its nature is diversified i.e. its assets are invested in

many different securities. Investments in the mutual fund may be in the

form of stocks, bonds or money market securities or combination of these.

Hence, a mutual fund is nothing but a form of collective investment.

In India, a mutual fund is constituted as Trust and the investor subscribes

to the units issued by the fund. A mutual fund shareholder or unit holder is

a part owner of the fund’s assets.

Classification of Mutual Fund

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Structure Investor Object Non Financial Asset Scheme

Investment Banking

1. Index 1.Gilt edge Fund 1.FOF2. Sector 2. MMF 2.MIP3. Opportunity 3. Liquid Fund

Organization of Mutual Fund

SPONSOR :

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Open –ended fund

Close-Ended fund

Growth Fund

Income Fund

Balanced Fund

Gold Exchange Trade Funds Scheme

Real Estate

Investment Banking

o Person acting alone or in combination with another body corporate

establishes a mutual fund.

o He gets the fund registered with SEBI so sponsor of a fund is similar

to the promoter of the fund.

o He forms the trust.

o He appoints the Board of Trustee and the AMC also.

o He appoints the custodian through the trustees.

o HE must contribute at least 40% of the net worth of the AMC.

TRUSTEES COMPANY:

o Mutual fund is a public trust under Indian Trust Act 1882.

o Sponsor is the settler, contributing the initial capital.

o Unit holders are the beneficiaries of the trust.

o Trustees hold the unit holder money in fiduciary capacity

i.e. they invest on behalf of the unit holders.

TRUSTEES:

o They appoint AMC to manage the portfolio of securities.

o Trust deed is executed by the sponsor in favor of trustees.

o Trust Deed stamped and registered with SEBI.

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o Two third of the trustees shall be independent and not associated

With the sponsors.

ASSET MANAGEMENT COMPANY:

o AMC may be appointed by sponsor or may be appointed by trustees

if trust deed of Mutual fund authorizes.

o To be approved and registered with SEBI.

o AMC needs to have minimum net worth of 10 crores at all times

o AMC cannot act as trustee of any other fund.

o 75% of the unit holder jointly can terminate the AMC appointment.

CUSTODIAN:

o They are called as Safe keeps of securities.

o Participants in clearing system on behalf of the fund.

o Registered with SEBI.

BANKER:

o AMC appoints banker.

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Investment Banking

o Bankers are the distribution channel.

REGISTRERD & TRANSFER AGENTS:

o Issue and redeem units.

o Update investor’s records.

o Prepares transfer document.

7.1.2 Portfolio Management

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Investment Banking

Portfolio refer to investment in different kind of securities

such as share, debenture or bonds is issued by different companies and

securities issued by the government. portfolio management refers to

maintaining proper combination of securities in a manner that they give

maximum return with minimum risk.

Investment bank provided portfolio management service to their

clients. Today the investor is very prudent. Every investor is interested in

safety, liquidity and profitability of his investment. But investor cannot study

and choose the appropriate securities. They need expert guidance.

Investment bankers have role to play in this regard. They have to conduct

regular market and economic surveys to know:

Monetary and fiscal policies of the government.

Financial statements of various corporate sector in which the investment

have to made by the investors.

Secondary market of position, i.e. how the share market is moving.

Changing pattern of the industry.

The investment bankers have to analyses the surveys and help

the prospective investor in choosing the shares. The portfolio managers

generally will have to classify the investors based on capacity and risk they

can take and arrange appropriate investment. Thus portfolio management

plans successful investment strategies for investors.

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Investment Banking

7.2 Securities Business

7.2.1 Investment Advisory Services

Investment bank provides the following

customized advisory services.

oBusiness Valuation :

Investment bank value added advisory and consulting

services to maximize the profit from the sale of a business. Bank

business valuation services include: discounted cash flow analysis,

net present value (NPV), internal rate of return (IRR) analysis, and

synergy valuation.

o Fairness Opinions :

Investment bank offers professional evaluations of a

company to determine whether a merger, acquisition, buyback, spin-

off, or buyout is a fair and viable option for that company. These

services include valuation analysis of a target company, evaluation of

business rationale of a transaction, and opinion as to the legal

fairness of the proposed transaction.

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Investment Banking

o Private Equity and Venture Capital Consulting :

Bank provides consulting services to private equity and

venture capital firms who are planning investments or are seeking to

improve the performance of portfolio companies. Our consulting

services include business plan development, strategic planning,

marketing planning, strategic market research, financial modeling,

marketing services, and exit planning.

7.2.3 Equities Research

Investment Bank research has consistently been recognized as a top

research source for its breadth of coverage, industry knowledge and

quality of work in generating profitable and timely investment ideas.

Bank analytical teams remain committed to identifying trends early and

developing exploitable investment opportunities across the market

capitalization spectrum.

With the continued growth in quantitative and computerized investing

strategies, banks have also developed leading edge quantitative and

technical research products to partner with bank fundamental approach.

Client service is our driving force and bank constantly advance in

offering greater product customization options.

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Investment Banking

Chapter 7. Future of Investment Banking

1. Claw-back Provisions :

In order to make the volatile market of

investment banking more secured from crashes caused by imprudent

individual traders or groups, banks may tighten up the claw-back

provisions. This provision requires those whose trades cause subsequent

losses, to pay back all or part of their bonuses. However, this might result

in the transition of traders from big names to less well-known boutiques, in

order to avoid scrutiny.

2. Emphasis on Equity Derivatives and Currency trading: An equity derivative is an instrument

used by investors to hedge the risks associated with taking a position in

stocks. It consists of underlying assets based on equity securities and limits

the losses incurred by either a short or long position in a company's shares.

In order to derive more benefits, investment banks will be emphasizing

more on currency trading, interest-rate products, equity derivatives and

corporate restructuring.

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Investment Banking

3. Fewer big banks and more small boutiques: As the giant investment banks faced

heavy losses, which in turn affected the government and investors, in future

there will be fewer big banks and more boutiques. This will force the big

shot investment banks to be careful about their position, as they will face

stiff competition from small firms. In any case, the charm of investment

banks is something which will not decrease in near future.

4. Lesser Dependence on Short-Term Funding : Considering the negative impact of the

aggressive strategies of investment banks, in future, there might be lesser

dependence on short-term funding and high leverage. As the investment

banks are largely financed with short-term funding, a massive asset/liability

mismatch is created which is difficult to manage. It is also probable that

more investment banks will be pushed into the arms of banking acquirers

with large and stable deposit bases. This will provide solution to the

investment banks which are generally financed for the good times, not the

bad ones.

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Investment Banking

Chapter 8 Conclusion

An Investment banks operated in a very different

technological, legal, and political environment, the mechanisms just

described are very close to those that underpin modern security offerings.

In this cases, investment banks lever off their relationships to provide

incentives for information production and dissemination, and they are

trusted because they risk their reputational capital every time they

underwrite a fresh deal.

As Investment bank are different for commercial bank and

play a very crucial role in market transactions on behalf investors,

government and corporations and for growing economy in India needs a

helping hand. A helping hand can only be provided by the financial or the

banking industries.

We can say that Investment banks exist because they

maintain an information marketplace that facilitates information-sensitive

security transactions.

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Investment Banking

A recent development in Business sector such as

Development of Debt Market.

Entry of foreign Investor.

Growth of New Issues Market.

Innovation in Financial Instrument. etc

by the investment Banking it have change the lifecycle of business.

Thus bank develop an adequate infrastructure

including expertise in order to provide full range of service to corporate

sector. So, it has great scope and as it related to service sector it is

very useful for fast growing economy.

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Investment Banking

Chapter 10 Abbreviations

USA : United States of America.

ICICI : Industrial Credit & Investment Corporation of India.

IDBI : Industrial Development Bank of India.

SEBI : Securities and Exchange Board of India.

IFCI : Industrial Finance Corporation of India.

IL & FS : Infrastructure Leasing & Finance Company Ltd.

SBI : State Bank of India.

BOB : Bank of Baroda.

PNB : Punjab National Bank.

M&A : Merger & Acquisitions

PE : Private Equity.

AGM : Annual Ger Meeting.

NBFC : Non Banking Financial Company.

BOD : Bought out Deal.

OTC : Over the Counter.

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IPO : Initial Public Offer.

MOA : Memorandum of Association.

AOA : Articles of Association.

PIPE : Private Investment in Pubic Equity.

QIB : Qualified Institutional Buyer.

QIP : Qualified Institutional Placement.

L of O : Letter of Offer.

HDFC : Housing Development Finance Company.

MMF : Money Market Fund.

ELSS : Equity Linked Saving Scheme.

T-bill : Treasury bill.

I.T : Information Technology.

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Chapter 11 Bibliography

Books Referred

Investment Banking

o By Pratap G Subramanyam

Management Accounting & Financial Analysis

o BY Ravi M. Kishore.

Business of Investment Banking

o By Professor K. Thomas Liaw.

Financial Markets & Services

o By E.Gordon and Dr. Natrajan.

Website:

□ www.timeof india.com

□ www.investment bank.com

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Search Engines

Google.

Yahoo.

Wikipedia.

Investopedia.

AltaVista.

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