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Investment Banking

Investment Banking

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  • 1. Investment BankingChapter 1. The Investment Banking Paradigm “Division of banking includes1.1 Introduction business entities dealing withDefinition: creation of capital for other companies . In addition to acting as agents or underwriters for companies in the process of issuing securities , What is Investment Banking? investment banking Investment banks and Commercial banks perform also adviseprimarily different functions. When Mr. Raj needed a loan to buy a car, he companies onvisited a commercial bank.matters Nokia needed to raise cash to fund an When related toacquisition or to build morethe factories, it made a phone call to its investment issue andbank. placement of stock”. [1]
  • 2. Investment Banking Investment banking is a field of banking that aids companies inacquiring funds. In addition to the acquisition of new funds, investmentbanking also offers advice for a wide range of transaction a company mightengage it. Through investment banking, an institution generates funds intwo different ways. They may draw on public funds through the capitalmarket by selling stock in their company, and they may also seek outprivate equity in exchange for a stake in their company. An investment banking firm also does a large amount ofconsulting. Investment bankers give companies advice on mergers andacquisitions, for example. They also track the market in order to give adviceon when to make public offerings and how best to manage the businesspublic assets. Some of the consultative activities investment banking firmsengage in overlap with those of a private brokerage, as they will often givebuy & sell advice to the companies to the represent. Who needs an Investment Bank? Any firm think about a significant transaction can benefit fromthe advice of an investment banking. Although large corporations oftenhave sophisticated finance and corporate development departments, aninvestment banking provides objectivity, a valuable contact network, allowsfor efficient use of client personnel, and is vitally interested in seeing thetransaction close. [2]
  • 3. Investment Banking Most small to medium sized companies do not have alarge in-house staff, and in a financial transaction may be at adisadvantage versus larger competitors. A quality investment banking firmcan provide the services required to initiate and execute a majortransaction, thereby empowering small to medium sized companies withfinancial and transaction experience without the addition of permanentoverhead. What to look for in an Investment Bank? Investment banking is a service business, and the client shouldexpect top-notch service from the investment banking firm. Generally onlylarge client firms will get this type of service from the major Wall Streetinvestment banking; companies with less than about $100 million inrevenues are better served by smaller investment banking. Some principleto consider includes: Experience: It extremely important that the, senior members of theinvestment 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. Theinvestment bank should have a wide network of relevant contacts, such aspotential investors or companies that could be approached for acquisition. [3]
  • 4. Investment Banking Record of Success: Although no reputable investment bank willguarantee success, the firm must have a demonstrated record of closingtransactions. Ability to Work Quickly: Often, investment banking projects have veryspecific 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 onthe project and work diligently to meet critical deadlines. Fee Structure: Generally, an investment bank will charge an initialretainer fee, which may be one-time or monthly, with the majority of the feecontingent 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 thetransaction, an investment bank become as a trusted business advisor thatcan be called upon informally for advice and support on an ongoing basis. [4]
  • 5. Investment Banking1.2 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. 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 [5]
  • 6. Investment Banking 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.  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. [6]
  • 7. Investment Banking 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: [7]
  • 8. Investment Banking Major Global Investment Banks with Illustrative Market SharesInvestment Banks Name Percent of totalMerrill Lynch 9.0Goldman Sachs 7.5Credit Suisse Barney Boston 7.2J.P. Morgan 5.5Lehmann Brothers 3.6Deutsche Bank 3.5Bank of America 2.4 The banks given in table are ‘Pure InvestmentBanks’ i.e. there do not have Commercial banksconnection. 1.4 Evolution of Indian Investment Banking [8]
  • 9. Investment Banking In India through the existence of this branch of financialservice can be traced to over three decades investment banking waslargely confined to merchant banking service. The forerunners of merchantbanking in India were the foreign banks. Grindlays Banka now merged withStandard Chartered in India began merchant banking operations in 1967with a license from the RBI followed by the Citibank in 1970. These twobanks were providing service for syndication of loan and raising of equityapart from other advisory services. It was in 1972 that the Banking Commission Reportasserted the need for merchant banking service in India by the publicsector banks. Based on the American experience which led to the passageof the glass-steagall Act, the commission recommended a separatedstructure for merchant banks distinct from commercial banks and financialinstitution. Merchant banks were meant to manage investments andprovide advisory service. Following the above recommendation the SEBI set up itsmerchant banking division in 1972. Other banks such as the Banks of India,Central Banks, Bank of Baroda, Syndicated banks etc are suited to set uptheir merchant banks outfits. ICICI was first financial institution to setup amerchant bank in 1973. The later entrants were IFCI & IDBI with the lattersetting up its merchant banking division in 1992. However by the mideighties and early nineties most of the merchant banking division of publicsector banks were spun off as separate subsidiaries. SBI set up SBI capitalMarket Ltd in 1986. Other such as Canara Bank, BOB, PNB, ICICI andIndia Bank created separate merchant banking entities. IDBI created IDBI [9]
  • 10. Investment BankingCapital, market much later since merchant banking was since banking wasinitially formed as a division of IDBI in 1992. Case Study: Foreign Investment bankers turning Towards India for growth prospects Investment banking giants are collapsing around the world andrevenues from such activities are shrinking drastically for Indian brokinghouses. But these have not dissuaded two foreign institutions fromannouncing plans of starting investment banking operations in the country. In February 3, 2009 the US-based Jeffries Group told that it hasreceived licence from SEBI to set up its merchant banking business here. Analysts said Indian market seems to be attractive to theseorganisations despite the slump. “These sorts of firms seem to be sniffing around and waitingtill the end of the year to see if something good might turn up. At themoment they seem to be looking at business development rather than [10]
  • 11. Investment Bankingrevenue hunting,” said Mr Saurabh Mukherjea, Head of Indian Equities atNoble. Mr Devesh Kumar, Managing Director at Centrum Broking,said as the Indian economy is growing much faster than most othercountries, cross-border M&A opportunities look good in India. Case study of Upcoming New Indian Industry for Investment Banking Reliance Capital, the financial services arm of ADA Group, is setto enter the investment banking business soon. The company has alreadylaunched its PE arm and plans to sell part stake in its life insurancebusiness to unlock shareholder value, group chairman Anil Ambani toldshareholders on February3, 2009. The company also expects to enterbanking as and when regulations permit. According to Ambani, in the four years that Rel Cap hasfunctioned after splitting from the undivided Reliance group, revenues haverisen 14 times, net profit has grown 28 times, total assets nine times andnet worth five times. "At Reliance Capital, we continually scan the horizonfor new business avenues. Over the next year , their plan to take their first [11]
  • 12. Investment Bankingsteps in the world of investment banking," Ambani said at the Rel CapAGM. "Given the scale and magnitude of their relationships acrosscorporate India and the sheer size and reach of their distribution network,their ideally positioned to create a significant presence in the investmentbanking business,” Ambani added. Ambani said Reliance Life Insurance now ranked among thetop four private life insurers in India and Rel Cap was considering optionsto unlock shareholder value by going for a public issue, find a strategicpartner or a combination of both. "A final decision in this matter will betaken shortly, driven by the sole objective of maximising returns forCompany shareholder,” there added. Rel Cap also looks to expand its PE arm Reliance EquityAdvisors, whose focus will be on growth capital and buyouts.1.3 Service Portfolio of Indian Investment banks: [12]
  • 13. Investment Banking The core service provided by Indian investment banks are in the area of equity market, Debt market and advisory. These are profiled below: Core ServiceI. 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 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. [13]
  • 14. Investment BankingIII. 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 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 [14]
  • 15. Investment BankingMorgan Stanley etc also have presence in the asset management businessthrough separate entities. Mutual fund industry grew significantly in Indiafrom the late nineties and is a force to reckon with in the capital market.Mutual funds provide the common investor the service of sophisticated fundmanagement. Several Indian investment banks have also ventured in to thebusiness of starting dedicated venture capital & private equity fund. ICICI,UTI Bank, DSP Merrill Lynch and other have dedicated venture capital andprivate equity funds. SEBI is reported in the process of setting up a venturefunds. Besides, several investment banks are tying up with foreign funds toset up India specific private equity funds. III. Investment Advisory & Wealth Management : Many reputed investment banks nurture aseparate service segment to manage the portfolio of high net worthindividuals, households, trusts and other types of non-institutional investor.This can be structured either as a discretionary or non- discretionaryportfolio management .This is a highly regulated activity since it involvespubic investible funds. However, in several cases, investment banks do notoffer portfolio management service but offer investment advice whereinthe investor is provided good investment recommendations from time-time. Business Portfolio of Investment Banks Core Business Portfolio [15]
  • 16. Investment Banking Non fund Based Fund Based Underwriting Merchant Banking Service Market Making Management of public offer of equity & Bought out deals Debt instruments Proprietary investment & trading in Rights Issues equities, bonds & derivatives Open offer under the Takeover code Buyback offers De-listing offers Allied BusinessAdvisory & Transaction Service Assets Management Service Mutual FundsProject financing Portfolio management Venture capital FundsSyndicates loans Private Equity fundsStructured finance & SecuritisationPrivate Equity /Venture capital Secondary Market ServicePreferential Issue Securities businessQualified Institutional placement Brooking Sales & DistributionBusiness Advisory Equity researchFinancial Restructuring Investment advisoryAsset recovery agency service DerivativesGovernment disinvestment & privatizationAcquisitions, Strategic sale, buyouts & takeover Support Service Registrars & Share transfer agentsCorporate re-organisations such as mergers & Custodial Service demergers, hive-offs, assets sales, divestitures Other capital market service [16]
  • 17. Investment Banking [17]
  • 18. Investment BankingChapter 2. Underwriting2.1 Definition: Underwriting may connote different service obligationdepending upon the way it has evolved as an area of capital marketservice. According to SEBI (underwriters) rules 1993 means “a person whoengages in the business of underwriting of an issue of securities of a bodycorporate” In Investment banking, “underwriting is defined as thetransaction between the issuer of the instruments of debt or equity and thefirm which has agreed to liquidate the instruments immediately upon theirissuance”.Underwriting is one of important core function of investmentbanking.2.1.1 Introduction: Underwriting is always in connection with a proposed issue ofsecurities by a body corporate. It is not a general underwriting between acompany and an underwriter. The specific underwriting commitment has tobe documented through an Underwriting agreement. [18]
  • 19. Investment Banking Underwriting is an agreement by the underwriter to subscribeto the securities being issued in case the person to whom they are offereddo not subscribe to them. Therefore , underwriting is a service that consistof taking a contingent obligation to subscribe to an agreed number ofsecurities to an agreed number of securities in an issues if such securitiesare not subscribe to by the intended by the intended investors. Underwriting is primarily a fee-based service provided by anunderwriter since there is no fundamental obligation to subscribe to theunderwritten securities. If the issue is fully subscribe to by the investor, theunderwriter has no further obligation to the issues. However if investor donot subscribe to the issues fully the obligation falls upon the underwriter topick up the unsubscribe portion of the issues. In such a situationunderwriting becomes a fund-based service since the underwriter has topurchase the securities that have remained unsubscribe by investor. It isdue to this reason that underwriting is a risky activity for investment banksthat requires careful assessment of issues before they can be taken up forunderwriting. In addition underwriting requires sufficient resources to beallocated to such activity. In investment banking underwriting, the government orprivate entity which issues the debt or equity instruments has an immediateneed for cash (specie), and has no interest in waiting to locate buyers forthe instruments at an indeterminate or specified date. The issuer alsousually has no detailed knowledge of the individuals who are capable orinterested in the present or future purchase of the instruments, and (most [19]
  • 20. Investment Banking importantly) what the highest and most fair price for the securities may be so. 2.2 Underwriting Commission1. 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 [20]
  • 21. 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. [21]
  • 22. 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. [22]
  • 23. 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 [23]
  • 24. 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. [24]
  • 25. Investment Banking In the Book Building process the issuer company ties up witha selected group of individuals and agencies for private placement. Theentries exercise is done on wholesale basis whereas in the conventionalsystem, larger number of brokers and underwriters are involved. It is called“Book Building Process’ because one lead managers builds his order bookby forming a syndicate of eligible potential buyers. Book Building Process Issuer Company Book runner Syndicate Members Foreign Mutual Stock Advisors Institutional Fund Brokers [25] Institutional Investors Investors
  • 26. Investment BankingClients Clients Clients Clients Clients 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 companyo 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. [26]
  • 27. 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). [27]
  • 28. 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 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 issuers 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 [28]
  • 29. 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; and2. 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.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). [29]
  • 30. Investment Banking Chapter 3. Issue ManagementIII.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 (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 [30]
  • 31. Investment Banking 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: □ 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. [31]
  • 32. Investment Banking□ 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 corporatesecurities viz., equity share, preference share and debentures or bonds byoffering them to pubic. Merchant banks act as intermediary whose main jobis to transfer capital from those who own it to those who need it. The issue function may be broadly divided into Pre-issue management and Post issue management. In both the stages, legalrequirement have to be complied with and several activities connected withthe issue have to be co-ordinated. [32]
  • 33. Investment Banking1) 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 directorsk) To open subscription for issue shares.2) Post issues Management the various steps include as under:a) To supervise the allotment procedure as per the stock exchange guideline [33]
  • 34. Investment Bankingb) 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 Equity4.1 Private equity and Investment Banking Private equity fund is a pooled investment vehicle usedfor making investments in various equity (and to a lesser extent debt)securities according to one of the investment strategies associated withprivate equity. Private equity funds are typically limited partnerships with afixed term of 10 years (often with annual extensions). At inception,institutional investors make an unfunded commitment to the limitedpartnership, which is then drawn over the term of the fund. [34]
  • 35. Investment Banking A private equity fund is raised and managed by investmentprofessionals of a specific private equity firm (the general partner andinvestment advisor). Typically, a single private equity firm will manage aseries of distinct private equity funds and will attempt to raise a new fundevery 3 to 5 years as the previous fund is fully invested. Private equity hasas a major service area over for investment banks in helping companies toraise equity capital privately. It may be noted that companies do issues equity capitalto their promoter groups, working directors, employees and groupcompanies. Such allotment also amount to private’s placement but they donot concern investment banks per se. Investment Banking are engagedwhen there is a need to execute transaction. In the context of privateequity, it could be bring in external for clients forms a part of transactionadvisory service rendered by investment banking. The various aspect of raising equity capital throughprivate placement is in the context of the following types of transactions:Raising venture capital- This related to raising equity capital frominstitutional venture capital investor for startup companies to financebusiness plans that are at early stages of implementation.Raising private equity in unlisted companies – This related to transactionfor raising capital form private equity investors for later stage businessplans that require growth financing.Raising private equity in listed companies (PIPE)- This is about raisingequity capital for mature listed companies privately.Qualified Institutional Placement – A separate channel for listed companiesto raise equity capital other than through public offer exclusively from QLBsunder the QIP guidelines. [35]
  • 36. Investment BankingPreferential allotment – Allotment made to strategic investor, businesscollaborators and joint venture partners wherein the primary motive is notfund raising for the company but to facilitate the entry of investor ofinvestors with business objectives.4.2 Overview of Arranger’s Service for Private Equity The investment Banker plays a key advisory role in formulating thetransaction for raising equity and intermediates in the whole process till thetransaction is closed successfully. More specifically arrangement can bebroken 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. • Financial Modeling: It provide develop full financial projections for emerging businesses, including income statements, balance sheets, and cash flow statements. • Market Research: [36]
  • 37. Investment Banking 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) PIPE or Private Investment in Public Equity is one of mostdynamic area of Investment bank. PIPE is a term used when a privateinvestment or mutual fund buys common stock for a company at a discountto the current market value per share.Other Definitions: [37]
  • 38. Investment Banking [PIPE is when] a private investment firms, mutual funds or otherqualified investors purchase of stock in a company at a discount to thecurrent market value per share for the purpose of raising capital. There aretwo main types of PIPEs - traditional and structured. A traditional PIPE isone in which stock, either common or preferred, is issued at a set price toraise capital for the issuer. A structured PIPE, on the other hand, issuesconvertible debt (common or preferred shares). Chapter 5. Buybacks 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 [38]
  • 39. Investment Banking 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 buybackequity share from their shareholder or from the secondary market. So theonly exit option for the common investor was to sell through the secondarymarket. With the amendments to the companies Act, companies wereallowed to buy back their share subject to a lot of statutory restrictions. Thebasic framework of a share repurchase mechanism in India is to allow it asa step to be implemented from time to time by companies. Sharerepurchase can be used to meet strategic objectives including distributionof capital to shareholder but not for treasury operations Buyback are discussed in the context of investmentbanking since statutory regulations provide that appointment of a merchantbanker as a manager to the offer is mandatory for listed companiesintending to make a buyback offer to their shareholders. In such offers, themerchant banker plays a very significant role not only in pricing but inensuring compliance with law and in advising the company at every stage.5.3 General Conditions The general conditions applicable to all types of companies forbuy –back of securities in term of the provisions of sections 77A and 77B ofthe companies Act are listed below: [39]
  • 40. Investment Bankingo 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 companieso 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. 5.3 Investment Banking Perspectives in Share Buyback [40]
  • 41. Investment BankingPROCESS 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. Chapter 6. Corporate Re-Organisation [41]
  • 42. Investment Banking6.1 Overview of Corporate Re-OrganisationsIntroduction Corporate Re-organisation is a wide term that encompasseschanges confined to a particular company or to more than one company ina single transaction. These are done from time to time in response tobusiness environment and changing business dynamics. As it may beappreciated, preservation and enhancement of shareholder value is theprimary driver for corporate performance and therefore, companies arefrequently in the process of re-organising their business structure to growand enhance value. Corporate Re-Organisation associated with (a) split-up of anexisting company balance sheet through asset sale sub sidiarisation knownas ‘Corporate Restructuring’. The other methods of Corporate Re-Organisation are(b) integration of two or more corporate balance sheet, popularly known as‘Merger and Amalgamations’ and (c) Change in the shareholding patternof the company resulting in a change in control or ownership known as‘acquisitions or takeovers’. Types of Corporate Re-Organisations [42]
  • 43. Investment Banking Integration of Restructuring of existing existing companies companies Through Transfer of Assets Through Transfer of equity • Merger • Acquisition • Amalgamation • Takeover6.2 What is Corporate Restructuring? Corporate restructuring is necessary when a company needs toimprove its efficiency and profitability and it requires expert corporate [43]
  • 44. Investment Bankingmanagement. A corporate restructuring strategy involves the dismantlingand rebuilding of areas within an organization that need special attentionfrom the management. Most corporate restructuring takes place as a last resort when allother attempts to manage the business have failed. In short corporaterestructuring can usually be avoided if a company is well managed by astrategically aware management team. However, there may be exceptionshere where such a company sees opportunities to profitably conductmerger and acquisition through re-organisation of otherbusinesses.Corporate Restructuring two types1. Internal. or2. External. Internal to a company is without a change in its legal entity.External process is well with the creation of one or more new entitiesor by a process known as a ‘split-up’ of an existing balance sheet.There are shows in a table as: Types of Corporate restructuring [44]
  • 45. Investment BankingInternal Restructuring External restructuring (split ups) [Change in corporate(No change in corporate structure/ structure / control]control)• Financial restructuring – i. Debt (Debt swap, bail-out, etc) or ii. Equity (capital reduction and other method) Through transfer of• Operational restructuring ,BPR Assets• Divisionalisation or setting up of SBUs • Management buyout • De-merger • Sell off 6.2.1 Internal Restructuring [45]
  • 46. Investment Banking 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.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: [46]
  • 47. Investment Banking 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: 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: [47]
  • 48. Investment Banking 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 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 [48]
  • 49. Investment Banking 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. 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: [49]
  • 50. Investment Banking • 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 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 financing6.3 Merger & Acquisition [50]
  • 51. Investment Banking6.3.1 Merger and AmalgamationDefinitions: The dictionary of banking and finance define a merger as “thejoining together of two or more companies”. However in the Indian contextit appears that the world merger is used in common parlance for onecompany blending with or getting “absorbed” by another while anamalgamation is used in the context of more than two companiescombining together.Concepts: A "merger" or “amalgamation” is often financed by an all stockdeal (a stock swap). An all stock deal occurs when all of the owners of theoutstanding stock of either company get the same amount (in value) ofstock in the new combined company. According to section 2(1b),amalgamation in relation to companies means the “merger” of one or morecompany with another company or the merger of two or more companies toform one company so that: [51]
  • 52. Investment Banking • 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. [52]
  • 53. Investment Banking6.3.2 Acquisition and Takeover: Acquisition and Takeover are two mechanisms by whichcompanies change hands and through transfer of ownership of share ortransfer of control. Which both these word are used almost interchangeablythere is a subtle distinction between the two. Acquisition means thepurchase of or getting access to significant stake in a company, oftenmaking such acquirer a major shareholder in the company. The worldAcquisition has not been defined under any Act. By reading of its descriptionfrom various non-statutory sources it may be concluded that “Acquisition isthe act of Acquisition ownership or property”. Therefore an Acquisition ofshare in a company only means that a person becomes the owner in suchshare. However the world ‘takeover’ has of a negative connotation thatconvey the intent to displace the existing management and seek control ofaffairs through Acquisition of shareholding or by other means .The dictionaryof Banking & Finance define it as ‘an act of buying a controlling interest in abusiness by buying more than 50% of its share’ It has to be appreciated thata takeover does not always entail the necessity to acquire more than 50%shareholding. An acquisition (of un-equals, one large buying one small) caninvolve a cash and debt combination, or just cash, or a combination of cashand stock of the purchasing entity, or just stock. In addition, the acquisition [53]
  • 54. Investment Banking 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. 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 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. [54]
  • 55. Investment Banking 6.3.3 SEBI Code on Mergers & Acquisitions1. 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 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. [55]
  • 56. Investment Banking6.3.4 Types of Mergers and Acquisitions:(A) Vertical Merger: A vertical Takeover & Merger is one in which the companyexpand backward by takeover of or merger with a company supplying rawmaterial or expands forward in the direction of the ultimate consumer. Thusin a vertical merger there is a merging of companies engaged at a differentstages of the production cycle within the same industry. For example themerger of Reliance Petrochemicals with Reliance Industries Limited is anexample of vertical merger with backward linkage as far as RelianceIndustries Limited is concerned. Similarly, if a cement manufacturingcompany acquires a company engaged in civil construction it will be a caseof vertical takeover with forward linkage.(B) Horizontal Merger: A Horizontal Takeover & Merger happens betweencompanies engaged in the same business activity and comporting witheach other. For example merger of Tata Oil Mills Company Ltd withHindustan Lever Ltd is a horizontal merger. Both the companies havesimilar products. A TV manufacturing company taking over a companymanufacturing washing machines will also be horizontal takeover becauseboth the companies are in the market for consumer durables. [56]
  • 57. Investment Banking(D) Conglomerate Merger: Pure Conglomerate Takeover & Merger are betweencompanies that are in diversified industries with no visible synergy. Theseare done basically with the intention of diversifying and de-risking theexpansion and growth of a corporate empire. However, Conglomeratemerger are also seen in companies with related product line or in differentgeographical market (Daimler Benz-Chrysler).6.3.5 Investment Banking Service in Merger & Acquisition Investment Banks have been closely associated with mergerand acquisition activity since a merger or acquisition is a sales opportunityfor the Investment Bank. If the company wants to merge with another, itmust attain a fair market value for its shares to be swapped which wouldinvolve an investment bank. If it wants to buy the other company withborrowed money, it would most likely borrow directly from investors in theform of bonds through a private placement, engineered by the investmentbank. Thus, Investment Banks position themselves to act as advisors onmergers and acquisitions and usually charge large fees for doing so. [57]
  • 58. Investment Banking 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.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. [58]
  • 59. Investment Banking7.1 Asset Management 7.1.1 Mutual Fund A mutual fund is a company that pools money from manyinvestors and invests the money in stocks, bonds, short-term money-market instruments, other securities or assets, or some combination ofthese investments. The combined holdings the mutual fund owns areknown as its portfolio. Each share represents an investors proportionateownership of the funds holdings and the income those holdings generate.As it represent below the diagram. [59]
  • 60. Investment Banking One can define a mutual fund as a trust that pools in the savingand funds for a large number of investors who have a common financialgoal. Mutual funds issues units to investors, which represent equitablerights in the assets of the mutual fund. Mutual fund by its nature is diversified i.e. its assets are invested inmany different securities. Investments in the mutual fund may be in theform 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 subscribesto the units issued by the fund. A mutual fund shareholder or unit holder isa part owner of the fund’s assets. [60]
  • 61. Investment Banking Classification of Mutual Fund Structure Investor Object Non Financial Asset Scheme Gold Exchange RealOpen – Close- Trade Funds Estateended fund Ended fund Scheme Growth Income Balanced Fund Fund Fund1. Index 1.Gilt edge Fund 1.FOF2. Sector 2. MMF 2.MIP3. Opportunity 3. Liquid Fund [61]
  • 62. Investment Banking Organization of Mutual FundSPONSOR: 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. [62]
  • 63. Investment BankingTRUSTEES: 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. 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. [63]
  • 64. Investment BankingBANKER: o AMC appoints banker. o Bankers are the distribution channel.REGISTRERD & TRANSFER AGENTS: o Issue and redeem units. o Update investor’s records. o Prepares transfer document. [64]
  • 65. Investment Banking7.1.2 Portfolio Management Portfolio refer to investment in different kind of securitiessuch as share, debenture or bonds is issued by different companies andsecurities issued by the government. portfolio management refers tomaintaining proper combination of securities in a manner that they givemaximum return with minimum risk. Investment bank provided portfolio management service to theirclients. Today the investor is very prudent. Every investor is interested insafety, liquidity and profitability of his investment. But investor cannot studyand choose the appropriate securities. They need expert guidance.Investment bankers have role to play in this regard. They have to conductregular 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 helpthe prospective investor in choosing the shares. The portfolio managersgenerally will have to classify the investors based on capacity and risk they [65]
  • 66. Investment Bankingcan take and arrange appropriate investment. Thus portfolio managementplans successful investment strategies for investors. 7.2 Securities Business7.2.1 Investment Advisory Services Investment bank provides the followingcustomized advisory services.o Business 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 [66]
  • 67. Investment Banking business rationale of a transaction, and opinion as to the legal fairness of the proposed transaction. 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. [67]
  • 68. Investment Banking Chapter 7. Future of Investment Banking1. Claw-back Provisions: In order to make the volatile market ofinvestment banking more secured from crashes caused by imprudentindividual traders or groups, banks may tighten up the claw-backprovisions. This provision requires those whose trades cause subsequentlosses, to pay back all or part of their bonuses. However, this might resultin the transition of traders from big names to less well-known boutiques, inorder to avoid scrutiny.2. Emphasis on Equity Derivatives and Currency trading: An equity derivative is an instrumentused by investors to hedge the risks associated with taking a position instocks. It consists of underlying assets based on equity securities and limitsthe losses incurred by either a short or long position in a companys shares.In order to derive more benefits, investment banks will be emphasizingmore on currency trading, interest-rate products, equity derivatives andcorporate restructuring. [68]
  • 69. Investment Banking3. Fewer big banks and more small boutiques: As the giant investment banks facedheavy losses, which in turn affected the government and investors, in futurethere will be fewer big banks and more boutiques. This will force the bigshot investment banks to be careful about their position, as they will facestiff competition from small firms. In any case, the charm of investmentbanks is something which will not decrease in near future.4. Lesser Dependence on Short-Term Funding: Considering the negative impact of theaggressive strategies of investment banks, in future, there might be lesserdependence on short-term funding and high leverage. As the investmentbanks are largely financed with short-term funding, a massive asset/liabilitymismatch is created which is difficult to manage. It is also probable thatmore investment banks will be pushed into the arms of banking acquirerswith large and stable deposit bases. This will provide solution to theinvestment banks which are generally financed for the good times, not thebad ones. [69]
  • 70. Investment Banking Chapter 8 Conclusion An Investment banks operated in a very differenttechnological, legal, and political environment, the mechanisms justdescribed are very close to those that underpin modern security offerings.In this cases, investment banks lever off their relationships to provideincentives for information production and dissemination, and they aretrusted because they risk their reputational capital every time theyunderwrite a fresh deal. As Investment bank are different for commercial bank andplay a very crucial role in market transactions on behalf investors,government and corporations and for growing economy in India needs ahelping hand. A helping hand can only be provided by the financial or thebanking industries. We can say that Investment banks exist because theymaintain an information marketplace that facilitates information-sensitivesecurity transactions. [70]
  • 71. 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. etcby the investment Banking it have change the lifecycle of business. Thus bank develop an adequate infrastructureincluding expertise in order to provide full range of service to corporatesector. So, it has great scope and as it related to service sector it isvery useful for fast growing economy. [71]
  • 72. Investment Banking Chapter 10 AbbreviationsUSA : 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 & AcquisitionsPE : Private Equity.AGM : Annual Ger Meeting.NBFC : Non Banking Financial Company.BOD : Bought out Deal. [72]
  • 73. Investment BankingOTC : Over the Counter.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. [73]
  • 74. Investment Banking 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. [74]
  • 75. Investment Banking  Website: □ www.timeof □ www.investment  Search Engines • Google. • Yahoo. • Wikipedia. • Investopedia. • AltaVista. [75]
  • 76. Investment Banking [76]