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Investment banking


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Investment banking

  1. 1. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 1 | P a g e CHAPTER 1 INTRODUCTION An investment bank is a financial institution that assists individuals, corporations, and governments in raising capital by underwriting or acting as the client's agent in the issuance of securities (or both). An investment bank may also assist companies involved in mergers and acquisitions and provide ancillary services such as market making, trading of derivatives and equity securities, and FICC services (fixed income instruments, currencies, and commodities). Unlike commercial banks and retail banks, investment banks do not take deposits. From 1933 (Glass–Steagall Act) until 1999 (Gramm–Leach–Bliley Act), the United States maintained a separation between investment banking and commercial banks. Other industrialized countries, including G8 countries, have historically not maintained such a separation. As part of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act of 2010), Volcker Rule asserts full institutional separation of investment banking services from commercial banking. There are two main lines of business in investment banking.  The "sell side" involves trading securities for cash or for other securities (e.g. facilitating transactions, market-making), or the promotion of securities (e.g. underwriting, research, etc.).  The "buy side" involves the provision of advice to institutions concerned with buying investment services. Private equity funds, mutual funds, life insurance companies, unit trusts, and hedge funds are the most common types of buy side entities.
  2. 2. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 2 | P a g e An investment bank can also be split into private and public functions with an information barrier which separates the two to prevent information from crossing. The private areas of the bank deal with private insider information that may not be publicly disclosed, while the public areas such as stock analysis deal with public information. An advisor who provides investment banking services in the United States must be a licensed broker-dealer and subject to Securities & Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) regulation. Sales and trading On behalf of the bank and its clients, a large investment bank's primary function is buying and selling products. In market making, traders will buy and sell financial products with the goal of making money on each trade. Sales is the term for the investment bank's sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas (on a caveat emptor basis) and take orders. Sales desks then communicate their clients' orders to the appropriate trading desks, which can price and execute trades, or structure new products that fit a specific need. Structuring has been a relatively recent activity as derivatives have come into play, with highly technical and numerate employees working on creating complex structured products which typically offer much greater margins and returns than underlying cash securities. In 2010, investment banks came under pressure as a result of selling complex derivatives contracts to local municipalities in Europe and the US. Strategists advise external as well as internal clients on the strategies that can be adopted in various markets. Ranging from derivatives to specific industries, strategists place companies and industries in a quantitative framework with full consideration of the macroeconomic scene. This strategy often affects the way the firm will operate in the market, the direction it would like to take in terms of
  3. 3. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 3 | P a g e its proprietary and flow positions, the suggestions salespersons give to clients, as well as the way structures create new products. Banks also undertake risk through proprietary trading, performed by a special set of traders who do not interface with clients and through "principal risk"—risk undertaken by a trader after he buys or sells a product to a client and does not hedge his total exposure. Banks seek to maximize profitability for a given amount of risk on their balance sheet. The necessity for numerical ability in sales and trading has created jobs for physics, computer science, mathematics and engineering Ph.D.s who act as quantitative analysts.
  4. 4. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 4 | P a g e Definition of 'Investment Banking’ A specific division of banking related to the creation of capital for other companies. Investment banks underwrite new debt and equity securities for all types of corporations. Investment banks also provide guidance to issuers regarding the issue and placement of stock. Investopedia explains 'Investment Banking’ In addition to the services listed above, investment banks also aid in the sale of securities in some instances. They also help to facilitate mergers and acquisitions, reorganizations and broker trades for both institutions and private investors. They can also trade securities for their own accounts.
  5. 5. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 5 | P a g e CHAPTER 2 THE HISTORY OF INVESTMENT BANKING JP Morgan Undoubtedly, investment banking as an industry in the United States has come a long way since its beginnings. Below is a brief review of the history 1896-1929 Prior to the great depression, investment banking was in its golden era, with the industry in a prolonged bull market. JP Morgan and National City Bank were the market leaders, often stepping in to influence and sustain the financial system. JP Morgan (the man) is personally credited with saving the country from a calamitous panic in 1907. Excess market speculation, especially by banks using Federal Reserve loans to bolster the markets, resulted in the market crash of 1929, sparking the great depression. 1929-1970 During the Great Depression, the nation’s banking system was in shambles, with 40% of banks either failing or forced to merge. The Glass-Steagall Act (or more specifically, the Bank Act of 1933) was enacted by the government with the intent of rehabilitating the banking industry by erecting a wall between commercial banking and investment banking. Additionally, the government sought to provide the separation between investment bankers and brokerage services in order to avoid the conflict of interest between the desire to win investment banking business and duty to provide fair and objective brokerage
  6. 6. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 6 | P a g e services (i.e., to prevent the temptation by an investment bank to knowingly peddle a client company’s overvalued securities to the investing public in order to ensure that the client company uses the investment bank for its future underwriting and advisory needs). The regulations against such behavior became known as the "Chinese Wall." 1970-1980 In light of the repeal of negotiated rates in 1975, trading commissions collapsed and trading profitability declined. Research-focused boutiques were squeezed out and the trend of an integrated investment bank, providing sales, trading, research, and investment banking under one roof began to take root. In the late 70’s and early 80’s saw the rise of a number of financial products such as derivatives, high yield an structured products, which provided lucrative returns for investment banks. Also in the late 1970s, the facilitation of corporate mergers was being hailed as the last gold mine by investment bankers who assumed that Glass-Steagall would someday collapse and lead to a securities business overrun by commercial banks. Eventually, Glass-Steagall did crumble, but not until 1999. And the results weren’t nearly as disastrous as once speculated. 1980-2007 In the 1980s, investment bankers had shed their stodgy image. In its place was a reputation for power and flair, which was enhanced by a torrent of mega-deals during wildly prosperous times. The exploits of investment bankers lived large even in the popular media, where author Tom Wolfe in “Bonfire of the
  7. 7. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 7 | P a g e Vanities” and movie-maker Oliver Stone in “Wall Street” focused on investment banking for their social commentary. Finally, as the 1990s wound down, an IPO boom dominated the perception of investment bankers. In 1999, an eye-popping 548 IPO deals were done – among the most ever in a single year -- with most going public in the internet sector. The enactment of the Gramm-Leach-Bliley Act (GLBA) in November 1999 effectively repealed the long-standing prohibitions on the mixing of banking with securities or insurance businesses under the Glass-Steagall Act and thus permitted “broad banking.” Since the barriers that separated banking from other financial activities had been crumbling for some time, GLBA is better viewed as ratifying, rather than revolutionizing, the practice of banking
  8. 8. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 8 | P a g e INVESTMENT BANKING HISTORY IN THE 20th CENTURY In the mid-20th century, large investment banks were dominated by the dealmakers. Advising clients on mergers and acquisitions and public offerings was the main focus of major Wall Street partnerships. These “bulge bracket” firms included Goldman Sachs, Morgan Stanley, Lehman Brothers, First Boston and others. That trend began to change in the 1980s as a new focus on trading propelled firms such as Salomon Brothers, Merrill Lynch and Drexel Burnham Lambert into the limelight. Investment banks earned an increasing amount of their profits from proprietary trading. Advances in computing technology also enabled banks to use more sophisticated model driven software to execute trades and generate a profit on small changes in market conditions. In the 1980s, financier Michael Milken popularized the use of high yield debt (also known as junk bonds) in corporate finance and mergers and acquisitions. This fueled a boom in leverage buyouts and hostile takeovers (see History of Private Equity). Filmmaker Oliver Stone immortalized the spirit of the times with his movie, Wall Street, in which Michael Douglas played the role of corporate raider Gordon Gekko and epitomized corporate greed. Investment banks profited handsomely during the boom years of the 1990s and into the tech boom and bubble. When the tech bubble burst, it precipitated a string of new legislation to prevent conflicts of interest within investment banks. Investment banking research analysts had been actively promoting stocks to investors while privately acknowledging they were not attractive investments. In other instances, analysts gave favorable stock ratings to corporate clients in the hopes of attracting them as investment banking clients and handling potentially lucrative initial public offerings.
  9. 9. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 9 | P a g e These scandals paled by comparison to the financial crisis that has enveloped the banking industry since 2007. The speculative bubble in housing prices along with an overreliance on sub-prime mortgage lending trigged a cascade of crises. Two major investment banks, Bear Stearns and Lehman Brothers, collapsed under the weight of failed mortgage-backed securities. In March, 2008, the Federal government began using a variety of taxpayer-funded bailout measures to prop up other firms. The Federal Reserve offered a $30 billion line of credit to J.P. Morgan Chase to that it could acquire Bear Sterns. Bank of America acquired Merrill Lynch. The last two bulge bracket investment banks, Goldman Sachs and Morgan Stanley, elected to convert to bank holding companies and be fully regulated by the Federal Reserve. Moving forward, the recent financial crisis has weakened both the reputation and the dominance of U.S. investment banking organizations throughout the world. The growth of foreign capital markets along with an increase in pools of sovereign capital is changing the landscape of the industry. The growing international flow of capital has also opened up opportunities for investment banking in new financial centers around the world, including those in developing countries such as India, China and the Middle East.
  10. 10. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 10 | P a g e EVOLUTION OF INVESTMENT BANKING IN INDIA The origin of investment banking in India can be traced back to the 19th century when European merchant banks set-up their agency houses in the country to assist in the setting of new projects. In the early 20th century, large business houses followed suit by establishing managing agencies which acted as issue house for securities, promoters for new projects and also provided finance to Greenfield ventures. The peculiar feature of these agencies was that their services were restricted only to the companies of the group to which they belonged. A few small brokers also started rendering Merchant banking services, but theirs was limited due to their small capital base. In 1967, ANZ Grind lays bank set - up a separate merchant banking division to handle new capital issues. It was soon followed by Citibank, which started rendering these services. The foreign banks monopolized merchant banking services in the country. The banking committee, in its report in 1972, took note of this with concern and recommended setting up of merchant banking institutions by commercial banks and financial intuitions. State bank of India ventured into this business by starting a merchant banking bureau in 1972. In 1972, ICICI became the first financial institution to offer merchant banking services. JM finance was set-up by Mr. Nimesh Kampani as an exclusive merchant bank in 1973. The growth of the industry was very slow during this period. By 1980, the number of merchant banks rose to 33 and was set-up by commercial banks, financial institutions and private sector. The capital market witnessed some buoyancy in the late eighties. The advent of economic reforms in 1991 resulted in sudden spurt in both the primary and secondary market. Several new players entered into the field. The securities scam in may, 1992 was a major setback to the industry. Several leading merchant bankers, both in public and private sector were found to be involved in various irregularities.
  11. 11. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 11 | P a g e Some of the prominent public sector players involved in the scam were Can bank financial services, SBI capital markets, Andhra bank financial services, etc. leading private sector players involved in the scam included Fair growth financial services and Champaklal investments and finance (CIFCO). The market turned bullish again in the end of 1993 after the tainted shares problem was substantially resolved. There was a phenomenal surge of activity in the primary market. The registration norms with the SEBI were quite liberal. The low entry barriers coupled with lucrative opportunities lured many new entrants into this industry. Most of the new entrants were undercapitalized with little or no expertise in merchant banking. These players could hardly afford to be discerning and started offering their services to all and sundry clients. The market was soon flooded with poor quality paper issued by companies of dubious credentials. The huge losses suffered by investors in these securities resulted in total loss of confidence in the market. Most of the subsequent issues started failing and companies started deferring their plans to access primary markets. Lack of business resulted in a major shake out in the industry. Most of the small firms exited from the business. Many foreign investment banks started entering Indian markets. These firms had a huge capital base, global distribution capacity and expertise. However, they were new to Indian markets and lacked local penetration. Many of the top rung Indian merchant banks, who had string domestic base, started entering into joint ventures with the foreign banks. This energy resulted in synergies as their individual strength complemented each other.
  12. 12. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 12 | P a g e CHAPTER 3 FUNCTIONS OF INVESTMENT BANKS Investment bankers play an important role in the issue management process. Lead managers (category I merchant bankers) have to ensure correctness of the information furnished in the offer document. They have to ensure compliance with SEBI rules and regulations as also guidelines for disclosures and investor protection. To this effect, they are required to submit to SEBI a due diligence certificate conforming that the disclosures made in the draft prospectus or letter of offer are true, fair and adequate to enable the prospective investors to make a well informed investment decision. The role of merchant bankers in performing their due diligence functions has become even more important with the strengthening of the disclosure requirements and with the SEBI giving up the vetting up of prospectus. SEBIs various operational guidelines issued during the year to merchant bankers primarily addressed the need to enhance the standard of disclosures. It was felt that a further strengthening of the criteria for registration of merchant bankers was necessary, primarily through an increase in the net worth requirements, so that the capital would be commensurate with the level of activities undertaken by them. With this in view, the net worth requirement or category I merchant bankers was raised in 1995-96 to Rs.5 crore. In 1996-96, the SEBI (merchant bankers) regulations, 1992 were amended to require the payment of fees for each letter of offer or draft prospectus that is filed with SEBI.
  13. 13. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 13 | P a g e UNDERWRITERS Underwriters are required to register with SEBI in terms of the EBI (Underwriters) Rules and Regulations, 1993. In addition to underwriters registered with SEBI in terms of these regulations, all registered merchant bankers in categories I, II and III and stock brokers and mutual funds registered with SEBI can function as underwriters. 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 banks. An investment bank is more specialized organization that takes in your money and after analyzing the possible risks and economic conditions gives you advice to convert it into more money. Typically, an investment banking group nowadays provides world-wide some or all of the following services, either in divisions of the bank or in associated companies within the group: 1. Mergers and Acquisition Advisory 2. Private Placement of Debt and Equity 3. Securities Underwriting 4. Management of Capital issues 5. Management of Buyback and takeovers
  14. 14. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 14 | P a g e 6. Corporate Advisory Services 7. Project Advisory Services 8. Other services like Restructuring/Sales, Real Estate, Loan Syndication and so on. 9. Structured finance 10. Business plan 11. Litigation Services The core services provided by the Investment banks are in the areas of debt market, equity market and advisory services. MERGER AND ACQUISITION ADVISORY The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity. In business or economics a merger is a combination of two companies into one larger company. Merger is a tool used by companies for the purpose of expanding their operations often aiming at an increase of their long term profitability.
  15. 15. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 15 | P a g e An acquisition, also known as a takeover, is the buying of one company (the ‘target’) by another. An acquisition may be friendly or hostile. Acquisition usually refers to a purchase of a smaller firm by a larger one. In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer. Historically, Investment Banks have been closely associated with merger and acquisition activity since a merger or acquisition is a sales opportunity for them. Mergers and Acquisitions is one of the most admitted departments in Investment Banking. It is fee-based advisory services that assist the companies in acquiring other companies. In a merger, the key function of investment banker is the search and identification of the other party to the deal and other critical functions relating to preparation and circulation of the information memorandum, deal structuring and negotiation with party to the deal. In acquisitions and takeovers involving open offers, the investment banker plays the dual role of an investment bank as well as the merchant bank. Their role is in managing the public offer and ensuring the compliance with the SEBI takeover code. Investment Banker are always at the forefront of the acquisition process. They offer strategic and tactical advice, valuation and deal structuring, valuation of shares, etc. Investment banker is appointed by both the parties of the deal and the plan prepared by two bankers are compared together. It helps the firm in indentifying its strategic objectives and helps it in achieving those objectives. Valuation of business is the most critical aspect of M&A exercise and has an
  16. 16. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 16 | P a g e impact on cash-flows, profitability and taxability. It helps in optimizing these aspects. Thus, Investment Banks position themselves to act as advisors on Mergers and Acquisitions. PRIVATE PLACEMENT OF DEBT AND EQUITY Debt is that which is owed; usually referencing assets owed. Some companies and corporations use debt as a part of their overall corporate finance strategy. At the start of a business, owners put some funding into the business to finance assets. In accounting terms, ownership equity is the remaining interest in all assets after all liabilities are paid. Equity capital is defined as the amount of capital provided by the company's owner(s). Providing new equity (an "issuance" of new equity) gives the firm new capital and increases owners' equity by the same amount and time needed. The private placement market for debt securities essentially consists of medium and the long term debt securities such as debentures and bonds being placed privately with select investors. In India, private placement of securities is preferred to public issue since the placement costs are lower and the investors are mostly financial institutions. There are three main constituents in this market-issuers, the investors and both these are brought together the investment banker who acts as the arranger to the Placement. The deal process starts with the issuer rolling out with the plan to raise fund through the private placement route. The first step in this direction would be to appoint an investment bank as an arranger to the whole placement.
  17. 17. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 17 | P a g e The arranger or the placement agent, as the investment banker may called, is short-listed and the finalized usually through talks and invitation of quotation. The issuer then furnishes a brief profile of itself and the proposed fund raising programmed. Based on such information, the investment bank put in bids for raising the founds quoting the fees for the same. The arranger will finalized based on the bid and other qualitative parameters. The investment banker is to ascertain that the company has taken the necessary approvals from its board. The investment banker also help in obtaining the rating for the issues, to make the allotments and receives the funds from the investors, documentation of private placement, collect the receipt of commitment letters from the investors and the acceptance thereof by the issuers. After receiving commitment letter, the issue is treated as closed and issuer puts up the letter of intent for consideration by its board of directors and the investment bankers has to scrutinize the letter of intent before it is put up to company’s board. The placement part of the deal itself is a limited purpose exercise that has no road shows or publicity campaign as in the public issues. It is largely accomplished through the network of the investment bankers and the strength of the relationship with the investor community. Most of the companies, both listed and unlisted categories, make the issue of equity shares to different shareholders without making a public offer. Such issue can be called as the term private issue of equity. In the area of private equity financing, the role is more transaction oriented. The value addition of the investment banker in such a deal is in the valuation and transactions advisory. However, there are certain caveats that the investment banker has to fully aware of while raising the private equity for the listed companies.
  18. 18. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 18 | P a g e These primarily relate to the disclosures of information to the potential investors. However, in private equity deal, the disclosure is for the purpose of enabling the potential investors to take an informed investment decision. In this context, the whole process has to be handled with extreme confidentiality and through suitable documentation. The investment banker has to structure the offer literature including the information memorandum keeping this issue in mind. The offer literature has to captures the true value proposition of the company and provides an investor friendly offer structure. It also provides the other services deemed to ensure a successful outcome to this engagement. This way they are as good as publicly issued instruments but can be placed easily saving a lot of time and floatation costs. The engagement of investment banker in connection with a private equity transaction can be summarized as follows: Identify and initiate contact with the prospective investors, represent or accompany the company in meetings, presentations and ensuring negotiation with prospective investors, Assists the company in coordinating due diligence program, Review and advise on proposals/offers from investors and provide necessary services deemed to ensure a successful outcomes to this engagement. Therefore, as far as issuers are concerned, private placement is more convenient and an efficient way of raising finance and the investment bank play a major role in this regards. FAIRNESS OPINIONS The need for independent financial advice at the board level never has been greater. Conflicted investment bankers with contingent fee arrangements,
  19. 19. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 19 | P a g e related-party transactions, and the lack of market-clearing mechanisms in certain deals all elevate board member scrutiny. An independent fairness analysis and opinion is a critical component of the board deliberation process. At Duff & Phelps, fairness opinions are not an add-on service but a core practice. The vast majority of our opinions are rendered in situations where Duff & Phelps is not the banker, and we are comfortable rendering opinions involving minority interests, debt securities, and limited market checks. With a reputation built over decades, Duff & Phelps’ Fairness Opinion Practice delivers high quality financial advice and opinions that withstand the most rigorous scrutiny. As published in Thomson Reuters’ “Full Year 2013 Mergers and Acquisitions Review,” Duff & Phelps ranked first for number of announced fairness opinions in the Americas in 2013. This is the second year in a row Duff & Phelps achieved first place. Duff & Phelps also tied for second place in announced global fairness opinions for 2013. Duff & Phelps is a globally recognized leader in fairness opinions. Since 2005, Duff & Phelps has rendered over 430 fairness opinions for transactions with an aggregate deal value of nearly $129 billion. FAIRNESS ADVISORY SERVICES Duff & Phelps advises boards of directors, special committees, trustees and other fiduciaries on fairness issues in a variety of corporate transactions. In addition to providing fairness opinions on M&A transactions, we are experts in advising and opining on transactions absent a market-clearing mechanism. Representative situations include:  Sell-side/buy-side mergers & acquisitions  Spin-offs, split-ups, divestitures
  20. 20. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 20 | P a g e  Going-private transactions  Related-party transactions  Down-round financing, minority investments, and other financing transactions  Requirements pursuant to certain bond indentures and credit agreements  Any transaction requiring a shareholder vote  ESOP/ERISA transactions SOLVENCY OPINIONS State laws impose certain duties on boards of directors with respect to dividends, distributions and other transfers. Dividends must be paid from surplus, and cannot leave the company insolvent or with insufficient capital. A solvency analysis and opinion helps companies and their boards of directors steer clear of fraudulent transfers and illegal dividends or distributions. A solvency opinion makes determinations as to whether, after giving effect to a transaction:  The company’s assets exceed its debts;  The company should be able to pay its debts as they come due;  The company is not left with unreasonably small assets or capital; and  There is sufficient surplus to effect a distribution. These determinations arise from fraudulent transfer statutes and dividend prerequisites in state laws. Solvency analysis also provides a board and company management with valuable insight as to the equity and cash flow cushion with respect to its ongoing business. Duff & Phelps is a globally recognized leader in solvency opinions. Since 2005,
  21. 21. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 21 | P a g e Duff & Phelps has rendered over 230 solvency opinions in transactions, aggregating to more than $1.1 trillion in deal value. SOLVENCY ADVISORY SERVICES A solvency analysis and opinion can enhance the company’s or board’s analysis of any leveraged transaction or contemplated distribution. The types of applicable transactions include:  Spin-offs and split-offs  Dividend recapitalizations  Leveraged buyouts  Debt refinancing  Intercompany restructurings  Large stock buybacks COMMERCIALLY REASONABLE DEBT OPINIONS Duff & Phelps helps clients structure and issues opinions regarding the commercial reasonableness of debt that companies issue to related parties for various types of transactions. Boards of directors and trustees of income funds as well as tax attorneys and other tax advisors have relied on Duff & Phelps' opinions to assist in supporting their view that a debt should be characterized as such for income tax purposes. Duff & Phelps offers debt opinions for intercompany and other related party transactions, including:
  22. 22. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 22 | P a g e  Acquisitions  Recapitalizations  Canadian Income Fund transactions  Income security offerings, such as IDS, IPS and EIS issuances ESOP AND ERISA ADVISORY Duff & Phelps’ ESOP/ERISA practice, with over 25 years’ experience, is a leading valuation and corporate finance advisor to companies and ERISA fiduciaries. Broad and deep experience advising private and public companies makes Duff & Phelps the firm of choice for structuring and raising financing as well as valuing stock in employee stock ownership plan (ESOP) transactions and nonpublic assets, including employer securities held by ESOPs and ERISA pension plans. A pioneer in ESOP planning and transaction execution, Duff & Phelps guides principals, companies and fiduciaries through the complex financial and valuation implications of the financial, regulatory and tax aspects of these transactions. ESOP and ERISA Advisory services include:  Transaction Design, Structuring, and Financing  Fairness Opinions  Feasibility Studies  Valuations  Sustainability Consulting  Mergers & Acquisitions  Valuations of Illiquid Assets held in ERISA Plans  Assisting Fiduciaries in Monitoring Investments
  23. 23. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 23 | P a g e  Advising ERISA Fiduciaries in Transactions, including IPOs Capital Raising is provided by Duff & Phelps Securities, LLC. EXPERTISE Advanced Valuation Topics at the ESOP Association’s National Conference Elyse Bluth, Managing Director at Duff & Phelps, spoke at the ESOP Association’s National conference held in Washington DC on May 10, 2012. Her presentation “Advanced Valuation Topics, Not the Basics” addressed challenges in annual valuations, second stage transactions and valuation nuances of selling an ESOP company. Elyse explained in detail many of the nuances of ESOP valuation. Read the summary. STRUCTURED FINANCE Structured finance is a broad term used to describe a sector of finance that was created to help transfer risk using complex legal and corporate entities. This transfer of risk, as applied to the securitization of various financial assets (mortgages, credit card receivables, auto loans, etc.), has helped provide increased liquidity or funding sources to markets like housing and to transfer risk to buyers of structured products; it also permits financial institutions to remove certain assets from their balance sheets as well as provides a means for investors to gain access to diversified asset classes.[1] However, it arguably contributed to the degradation in underwriting standards for these financial assets, which helped give rise to both the inflationary credit bubble of the mid- 2000s and the credit crash and financial crisis of 2007–9
  24. 24. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 24 | P a g e Securitization Securitization is the method utilized by participants of structured finance to create the pools of assets that are used in the creation of the end product financial instruments. Reasons for securitization  Better utilization of available capital  Alternative funding  Cheaper source of funding, especially for lower-rated originators  Reducing credit concentration  Risk management interest rates and liquidity  Risk transfer Tranching Tranching, which refers to the creation of different classes of securities (typically with different credit ratings) from the same pool of assets, is an important concept in structured finance because it is the system used to create different investment classes for the securities created. Tranching allows the cash flow from the underlying asset to be diverted to various investor groups. The Committee on the Global Financial System explains tranching as follows: "A key goal of the tranching process is to create at least one class of securities whose rating is higher than the average rating of the underlying collateral pool or to create rated securities from a pool of unrated assets. This is accomplished through the use of credit support (enhancement), such as prioritization of payments to the different tranches."
  25. 25. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 25 | P a g e Credit enhancement Credit enhancement is key in creating a security that has a higher rating than the underlying asset pool. Credit enhancement can be created, for example, by issuing subordinate bonds. The subordinate bonds are allocated any losses from the collateral before losses are allocated to the senior bonds, thus giving senior bonds a credit enhancement. As a result, it is possible for defaults to occur in repayment of the underlying assets without affecting payments to holders of the senior bonds. Also, many deals, typically those involving riskier collateral, such as subprime and Alt-A mortgages, use over-collateralization as well as subordination. In over-collateralization, the balance of the underlying assets (e.g., loans) is greater than the balance of the bonds, thus creating excess interest in the deal which acts as a "cushion" against reduction in value of the underlying assets. Excess interest can be used to offset collateral losses before losses are allocated to bondholders, thus providing another credit enhancement. A further credit enhancement involves the use of derivatives such as swap transactions, which effectively provide insurance, for a set fee, against a decrease in value. Monoline insurers play a critical role in modern day Credit Enhancements; they are more effective in (a) off-balance-sheet models creating synthetic collateral, (b) sovereign ratings' enhancement with built-in asset derivatives and (c) cross border loans with receivables and counterparties in the domain and jurisdiction of the monoline insurer. The decision whether to use a monoline insurer or not often depends upon the cost of such cover vis-a-vis the improvement in pricing for the loan or bond issue by virtue of such credit enhancement.
  26. 26. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 26 | P a g e Credit ratings Ratings play an important role in structured finance for instruments that are meant to be sold to investors. Many mutual funds, governments, and private investors only buy instruments that have been rated by a known agency, like Moody's or Standard & Poor's. New rules in the U.S. and Europe have tightened the requirements for ratings agencies (perhaps in light of previous credit crises). These are reflected in Europe by a body of regulations relating to the use of credit agencies BUSINESS PLAN A business plan is a formal statement of a set of business goals, the reasons they are believed attainable, and the plan for reaching those goals. It may also contain background information about the organization or team attempting to reach those goals. Business plans may also target changes in perception and branding by the customer, client, taxpayer, or larger community. When the existing business is to assume a major change or when planning a new venture, a 3 to 5 year business plan is required, since investors will look for their annual return in that timeframe LITIGATION SERVICES The essential goal of litigation support is to organize, analyze, and present case materials through computer systems. In federal criminal defense cases, there are three primary ways that litigation support is used by Federal Defender Office (FDO) staff and Criminal Justice Act (CJA) panel attorneys. One is in conducting electronic courtroom presentations. Another is management and analysis of paper documents and their electronic equivalents. The third is the
  27. 27. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 27 | P a g e identification, collection, preservation, processing, review, analysis and production of electronically stored information (ESI). Litigation support is the marriage of project management and technology. We believe that while every district is different and every case is unique, there are certain standards to follow in order to ensure that the data involved in a case is handled in a cost effective and time efficient manner allowing for good organization, easy retrieval and effective client representation. Both federal defender offices and CJA panel attorneys are often faced with the challenge of limited resources and staffing. Litigation support technology can help to make up that deficit by allowing data to be intelligently collected, processed, organized, reviewed, analyzed and presented. While there may not be a single piece of technology to address all the challenges you face, the National Litigation Support Team can help you to navigate through the process of evaluating your choices and in deciding what solutions best meet the needs of your case.
  28. 28. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 28 | P a g e CHAPTER 4 CORE INVESTMENT BANKING ACTIVITIES Investment banking has changed over the years, beginning as a partnership form focused on underwriting security issuance, i.e. initial public offerings (IPOs) and secondary offerings, brokerage, and mergers and acquisitions, and evolving into a "full-service" range including securities research, proprietary trading, and investment management. In the modern 21st century, the SEC filings of the major independent investment banks such as Goldman Sachs and Morgan Stanley reflect three product segments: (1) Investment banking (fees for M&A advisory services and securities underwriting); (2) Asset management (fees for sponsored investment funds), and (3) Trading and principal investments (broker-dealer activities including proprietary trading ("dealer" transactions) and brokerage trading ("broker" transactions). In the United States, commercial banking and investment banking were separated by the Glass–Steagall Act, which was repealed in 1999. The repeal led to more "universal banks" offering an even greater range of services. Many large commercial banks have therefore developed investment banking divisions through acquisitions and hiring. Notable large banks with significant investment banks include JPMorgan Chase, Bank of America, Credit Suisse, Deutsche Bank, Barclays, and Wells Fargo. After the financial crisis of 2007–2008 and the subsequent passage of the Dodd-Frank Act of 2010, regulations have limited
  29. 29. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 29 | P a g e certain investment banking operations, notably with the Volcker Rule's restrictions on proprietary trading. The traditional service of underwriting security issues has declined as a percentage of revenue. As far back as 1960, 70% of Merrill Lynch's revenue was derived from transaction commissions while "traditional investment banking" services accounted for 5%. However, Merrill Lynch was a relatively "retail-focused" firm with a large brokerage network. FRONT OFFICE Front office is generally described as a revenue generating role. There are two main areas within front office: Investment Banking and Markets, which includes: Sales; Trading; Research; Structuring. Investment Banking involves advising the world's largest organizations on mergers, acquisitions, as well as a wide array of fund raising strategies. This is, on average, the most prestigious and highest paid department in the bank with first year analysts typically making £60,000 upwards (depending on individual, team and firm performance). Markets are then split into further divisions; sales, trading, some research and also structuring. Though the average investment banker will make considerably more than the average trader, the best trader will make significantly more than the best investment banker. INVESTMENT BANKING Corporate finance is the traditional aspect of investment banks which also involves helping customers raise funds in capital markets and giving advice on mergers and acquisitions (M&A). This may involve subscribing investors to a
  30. 30. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 30 | P a g e security issuance, coordinating with bidders, or negotiating with a merger target. Another term for the investment banking division is corporate finance, and its advisory group is often termed "mergers and acquisitions". A pitch book of financial information is generated to market the bank to a potential M&A client; if the pitch is successful, the bank arranges the deal for the client. The investment banking division (IBD) is generally divided into industry coverage and product coverage groups. Industry coverage groups focus on a specific industry – such as healthcare, public finance (governments), FIG (financial institutions group), industrials, TMT (technology, media, and telecommunication) – and maintains relationships with corporations within the industry to bring in business for the bank. Product coverage groups focus on financial products – such as mergers and acquisitions, leveraged finance, public finance, asset finance and leasing, structured finance, restructuring, equity, and high-grade debt – and generally work and collaborate with industry groups on the more intricate and specialized needs of a client. The Wall Street Journal, in partnership with Dialogic, publishes figures on investment banking revenue such as M&A in its Investment Banking Scorecard. SALES AND TRADING On behalf of the bank and its clients, a large investment bank's primary function is buying and selling products. In market making, traders will buy and sell financial products with the goal of making money on each trade. Sales is the term for the investment bank's sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas (on a caveat emptor basis) and take orders. Sales desks then communicate their clients' orders to the appropriate trading desks, which can price and execute trades, or structure new products that fit a specific need. Structuring has been a relatively recent activity as derivatives have come into play, with highly technical and numerate employees working on creating complex structured products which
  31. 31. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 31 | P a g e typically offer much greater margins and returns than underlying cash securities. In 2010, investment banks came under pressure as a result of selling complex derivatives contracts to local municipalities in Europe and the US. Strategists advise external as well as internal clients on the strategies that can be adopted in various markets. Ranging from derivatives to specific industries, strategists place companies and industries in a quantitative framework with full consideration of the macroeconomic scene. This strategy often affects the way the firm will operate in the market, the direction it would like to take in terms of its proprietary and flow positions, the suggestions salespersons give to clients, as well as the way structures create new products. Banks also undertake risk through proprietary trading, performed by a special set of traders who do not interface with clients and through "principal risk"—risk undertaken by a trader after he buys or sells a product to a client and does not hedge his total exposure. Banks seek to maximize profitability for a given amount of risk on their balance sheet. The necessity for numerical ability in sales and trading has created jobs for physics, computer science, mathematics and engineering Ph.D.’s who act as quantitative analysts. RESEARCH The equity research division reviews companies and writes reports about their prospects, often with "buy" or "sell" ratings. Investment banks typically have sell-side analysts which cover various industries. Their sponsored funds or proprietary trading offices will also have buy-side research. While the research division may or may not generate revenue (based on policies at different banks), its resources are used to assist traders in trading, the sales force in suggesting ideas to customers, and investment bankers by covering their clients. Research also serves outside clients with investment advice (such as institutional investors and high net worth individuals) in the hopes that these clients will execute suggested trade ideas through the sales and trading division of the bank,
  32. 32. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 32 | P a g e and thereby generate revenue for the firm. Research also covers credit research, fixed income research, macroeconomic research, and quantitative analysis, all of which are used internally and externally to advise clients but do not directly affect revenue. All research groups, nonetheless, provide a key service in terms of advisory and strategy. There is a potential conflict of interest between the investment bank and its analysis, in that published analysis can affect the bank's profits. RISK MANAGEMENT Risk management involves analyzing the market and credit risk that an investment bank or its clients take onto their balance sheet during transactions or trades. Credit risk focuses around capital markets activities, such as loan syndication, bond issuance, restructuring, and leveraged finance. Market risk conducts review of sales and trading activities utilizing the VaR model and provides hedge-fund solutions to portfolio managers. Other risk groups include country risk, operational risk, and counterparty risks which may or may not exist on a bank to bank basis. Credit risk solutions are key part of capital market transactions, involving debt structuring, exit financing, loan amendment, project finance, leveraged buy-outs, and sometimes portfolio hedging. Front office market risk activities provide service to investors via derivative solutions, portfolio management, portfolio consulting, and risk advisory. Well-known risk groups in JPMorgan Chase, Goldman Sachs and Barclays engage in revenue- generating activities involving debt structuring, restructuring, loan syndication, and securitization for clients such as corporates, governments, and hedge funds. J.P. Morgan IB Risk works with investment banking to execute transactions and advise investors, although its Finance & Operation risk groups focus on middle office functions involving internal, non-revenue generating, operational risk controls. Credit default swap, for instance, is a famous credit risk hedging solution for clients invented by J.P. Morgan's Blythe Masters during the 1990s.
  33. 33. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 33 | P a g e The Loan Risk Solutions group within Barclays' investment banking division and Risk Management and Financing group housed in Goldman Sach's securities division are client-driven franchises. However, risk management groups such as operational risk, internal risk control, legal risk, and the one at Morgan Stanley are restrained to internal business functions including firm balance-sheet risk analysis and assigning trading cap that are independent of client needs, even though these groups may be responsible for deal approval that directly affects capital market activities. Risk management is a broad area, and like research, its roles can be client-facing or internal. MIDDLE OFFICE This area of the bank includes treasury management, internal controls, and internal corporate strategy. Corporate treasury is responsible for an investment bank's funding, capital structure management, and liquidity risk monitoring. Financial control tracks and analyzes the capital flows of the firm the finance division is the principal adviser to senior management on essential areas such as controlling the firm's global risk exposure and the profitability and structure of the firm's various businesses via dedicated trading desk product control teams. In the United States and United Kingdom, a financial controller is a senior position, often reporting to the chief financial officer. Internal corporate strategy tackling firm management and profit strategy, unlike corporate strategy groups that advise clients, is non-revenue regenerating yet a key functional role within investment banks.
  34. 34. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 34 | P a g e This list is not a comprehensive summary of all middle-office functions within an investment bank, as specific desks within front and back offices may participate in internal functions. BACK OFFICE OPERATIONS This involves data-checking trades that have been conducted, ensuring that they are not wrong, and transacting the required transfers. Many banks have outsourced operations. It is, however, a critical part of the bank. TECHNOLOGY Every major investment bank has considerable amounts of in-house software, created by the technology team, who are also responsible for technical support. Technology has changed considerably in the last few years as more sales and trading desks are using electronic trading. Some trades are initiated by complex algorithms for hedging purposes. Firms are responsible for compliance with government regulations and internal regulations. OTHER BUSINESSES  Global transaction banking is the division which provides cash management, custody services, lending, and securities brokerage services to institutions. Prime brokerage with hedge funds has been an especially profitable business, as well as risky, as seen in the "run on the bank" with Bear Stearns in 2008.  Investment management is the professional management of various securities (shares, bonds, etc.) and other assets (e.g., real estate), to meet
  35. 35. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 35 | P a g e specified investment goals for the benefit of investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes e.g., mutual funds). The investment management division of an investment bank is generally divided into separate groups, often known as private wealth management and private client services.  Merchant banking can be called "very personal banking"; merchant banks offer capital in exchange for share ownership rather than loans, and offer advice on management and strategy. Merchant banking is also a name used to describe the private equity side of a firm. Current examples include Defoe Fournier & Cie. and JPMorgan's One Equity Partners and the original J.P. Morgan & Co. Rothschild’s, Barings, Warburg’s and Morgan’s were all merchant banks. (Originally, "merchant bank" was the British English term for an investment bank.) ORGANIZATIONAL STRUCTURE  Investment banking is split into front office, middle office, and back office activities. While large service investment banks offer all lines of business, both "sell side" and "buy side", smaller sell-side investment firms such as boutique investment banks and small broker-dealers focus on investment banking and sales/trading/research, respectively.  Investment banks offer services to both corporations issuing securities and investors buying securities. For corporations, investment bankers offer information on when and how to place their securities on the open market, an activity very important to an investment bank's reputation. Therefore, investment bankers play a very important role in issuing new security offerings
  36. 36. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 36 | P a g e CHAPTER 5 INDUSTRY PROFILE There are various trade associations throughout the world which represent the industry in lobbying, facilitate industry standards, and publish statistics. The International Council of Securities Associations (ICSA) is a global group of trade associations. In the United States, the Securities Industry and Financial Markets Association (SIFMA) is likely the most significant; however, several of the large investment banks are members of the American Bankers Association Securities Association (ABASA)[13] while small investment banks are members of the National Investment Banking Association (NIBA). In Europe, the European Forum of Securities Associations was formed in 2007 by various European trade associations. Several European trade associations (principally the London Investment Banking Association and the European SIFMA affiliate) combined in 2009 to form Association for Financial Markets in Europe (AFME). In the securities industry in China (particularly mainland China), the Securities Association of China is a self-regulatory organization whose members are largely investment banks. GLOBAL SIZE AND REVENUE MIX Global investment banking revenue increased for the fifth year running in 2007, to a record US$84.3 billion, which was up 22% on the previous year and more than double the level in 2003. Subsequent to their exposure to United States sub-prime securities investments, many investment banks have experienced
  37. 37. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 37 | P a g e losses. As of late 2012, global revenues for investment banks were estimated at $240 billion, down about a third from 2009, as companies pursued less deals and traded less. Differences in total revenue are likely due to different ways of classifying investment banking revenue, such as subtracting proprietary trading revenue. In terms of total revenue, SEC filings of the major independent investment banks in the United States show that investment banking (defined as M&A advisory services and security underwriting) only made up about 15-20% of total revenue for these banks from 1996 to 2006, with the majority of revenue (60+% in some years) brought in by "trading" which includes brokerage commissions and proprietary trading; the proprietary trading is estimated to provide a significant portion of this revenue. The United States generated 46% of global revenue in 2009, down from 56% in 1999. Europe (with Middle East and Africa) generated about a third while Asian countries generated the remaining 21%. The industry is heavily concentrated in a small number of major financial centers, including City of London, New York City, Frankfurt, Hong Kong and Tokyo. According to estimates published by the International Financial Services London, for the decade prior to the financial crisis in 2008, M&A was a primary source of investment banking revenue, often accounting for 40% of such revenue, but dropped during and after the financial crisis. Equity underwriting revenue ranged from 30% to 38% and fixed-income underwriting accounted for the remaining revenue. Revenues have been affected by the introduction of new products with higher margins; however, these innovations are often copied quickly by competing banks, pushing down trading margins. For example, brokerages commissions
  38. 38. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 38 | P a g e for bond and equity trading is a commodity business but structuring and trading derivatives has higher margins because each over-the-counter contract has to be uniquely structured and could involve complex pay-off and risk profiles. One growth area is private investment in public equity (PIPEs, otherwise known as Regulation D or Regulation S). Such transactions are privately negotiated between companies and accredited investors. Banks also earned revenue by securitizing debt, particularly mortgage debt prior to the financial crisis. Investment banks have become concerned that lenders are securitizing in-house, driving the investment banks to pursue vertical integration by becoming lenders, which is allowed in the United States since the repeal of the Glass-Steagall Act in 1999 TOP 10 BANKS List of investment banks The ten largest investment banks as of December 31, 2013, are as follows (by total fees from all advisory). The list is just a ranking of the advisory arm of each bank and does not include the generally much larger portion of revenues from sales and trading and asset management. Rank Company Fees ($m) 1. J.P. Morgan & Co. 6,271.74 2. Bank of America Merrill Lynch 5,685.59 3. Goldman Sachs 5,053.21 4. Morgan Stanley 4,452.88 5. Citigroup 3,952.09 6. Deutsche Bank 3,616.12
  39. 39. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 39 | P a g e 7. Credit Suisse 3,545.45 8. Barclays 3,454.73 9. Wells Fargo 2,277.88 10. RBC Capital Markets 2,041.80 World's biggest banks are ranked for M&A advisory, syndicated loans, equity capital markets and debt capital markets. The Financial Times, The Wall Street Journal and Bloomberg often cover mergers and acquisitions and capital markets. League tables are also available:  Investment Banking Review, The Financial Times.  Investment Banking Scorecard, The Wall Street Journal.  Global M&A Financial Advisory Rankings, Bloomberg.  Global Capital Markets League Tables, Bloomberg.
  40. 40. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 40 | P a g e CHAPTER 6 FINANCIAL CRISIS OF 2008 The 2008 financial credit crisis led to the notable collapse of several banks, notably including the bankruptcy of large investment bank Lehman Brothers and the hurried sale of Merrill Lynch and the much smaller Bear Stearns to banks which effectively rescued them from bankruptcy. The entire financial services industry, including numerous investment banks, was rescued by government loans through the Troubled Asset Relief Program (TARP). Surviving U.S. investment banks such as Goldman Sachs and Morgan Stanley converted to traditional bank holding companies to accept TARP relief. Similar situations occurred across the globe with countries rescuing their banking industry. Initially, banks received part of a $700 billion TARP intended to stabilize the economy and thaw the frozen credit markets. Eventually, taxpayer assistance to banks reached nearly $13 trillion, most without much scrutiny, lending did not increase and credit markets remained frozen. The crisis led to questioning of the business model of the investment bank without the regulation imposed on it by Glass-Steagall. Once Robert Rubin, a former co-chairman of Goldman Sachs, became part of the Clinton administration and deregulated banks, the previous conservatism of underwriting established companies and seeking long-term gains was replaced by lower standards and short-term profit. Formerly, the guidelines said that in order to take a company public, it had to be in business for a minimum of five years and it had to show profitability for three consecutive years. After deregulation, those standards were gone, but small investors did not grasp the full impact of the change. A number of former Goldman-Sachs top executives, such as Henry Paulson and Ed Liddy were in high-level positions in government and oversaw the
  41. 41. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 41 | P a g e controversial taxpayer-funded bank bailout. The TARP Oversight Report released by the Congressional Oversight Panel found that the bailout tended to encourage risky behavior and "corrupted the fundamental tenets of a market economy". Under threat of a subpoena, Goldman Sachs revealed that it received $12.9 billion in taxpayer aid, $4.3 billion of which was then paid out to 32 entities, including many overseas banks, hedge funds and pensions. The same year it received $10 billion in aid from the government, it also paid out multi-million dollar bonuses; the total paid in bonuses was $4.82 billion. Similarly, Morgan Stanley received $10 billion in TARP funds and paid out $4.475 billion in bonuses.
  42. 42. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 42 | P a g e CHAPTER 7 MAJOR INVESTMENT BANKS IN INDIA An investment bank is a financial institution that assists individuals, Corporations and governments in raising capital by underwriting and/or acting as the client’s agent in the issuance of securities eg: IPO/ FPO work is handled by investment banks. An investment bank also assist companies in mergers and acquisitions, and provide ancillary services such as market making, trading of derivatives, fixed income instruments, foreign exchange, commodities, and equity securities. The following is the list of major indian investment banks based out of India. Avendus Avendus is an investment bank based in India with offices in Mumbai and Bangalore. The firm was founded in 1999 by three investment bankers Ranu Vohra, Gaurav Deepak and Kaushal Kumar, who had worked for large global financial institutions and wanted to offer knowledge and research oriented capital raising and M&A solutions to international firms with a strong India connection. Website url : Bajaj Capital Bajaj Capital’s Investment Banking Service is a step ahead in that direction. Bajaj Capital offers you unparalleled capital raising solutions for your business. With over 120 offices in 50 cities all over the country and a network of over 10,000 Advisor Associates, we can connect you to potential investors all over
  43. 43. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 43 | P a g e the country. Website url : Barclays India Barclays unveiled its Global Retail and Commercial Banking division in India over the past year as part of its plan to be a leading global bank. In a very short time, Barclays is already making waves in one of the world’s fastest growing countries. web site url : Cholamandalam Investment & Finance Company Cholamandalam Investment & Finance Company Limited is the financial services arm of the USD 880 million Murugappa Group. Incorporated in 1978, it is one of the leading Financial Services Company in the country. The products and services include vehicle finance, capital market finance, mutual funds, securities broking, depository services, and insurance and distribution services. web site url : ICICI Securities Ltd A subsidiary of ICICI Bank – the largest and most recognized private bank in India ICICI Securities Ltd is premier Indian Investment Bank, with a dominant position in its core segments of its operations – Corporate Finance including Equity Capital Markets Advisory Services, Institutional Equities, Retail and Financial Product Distribution. Website url :
  44. 44. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 44 | P a g e ICRA Limited ICRA Limited (an Associate of Moody’s Investors Service) was incorporated in 1991 as an independent and professional company. ICRA is a leading provider of investment information and credit rating services in India. ICRA’s major shareholders include Moody’s Investors Service and leading Indian financial institutions and banks. Website url : IDFC IDFC’s mission is to be the financier and advisor of choice for infrastructure in India. IDFC is positioned as a special financial institution which is focused on project finance and investment banking activities in infrastructure. Going forward, IDFC will focus on establishing stable fee revenues from innovative infrastructure initiatives in financial markets, asset management, project development and advisory along with growing its balance sheet at a significant pace. Website url : IDFC Private Equity. IDFC Private Equity (IDFC PE) was set up in 2002 as a 100% subsidiary of the Infrastructure Development Finance Company (IDFC). IDFC PE manages two funds with a current corpus of INR 1,734 crore (USD 400 million). – India Development Fund and IDFC Private Equity Fund II. Both these funds provide growth capital to promising enterprises in the area of infrastructure in India. web site url :
  45. 45. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 45 | P a g e Industrial Development Bank of India The Industrial Development Bank of India (IDBI) was established in 1964 under an Act of Parliament. It was initially set up as a wholly owned subsidiary of the Reserve Bank of India (RBI) with a mandate of providing credit and other facilities for balanced industrial development. In 1976, the ownership of IDBI was transferred to the Government of India and it was accorded the status of principal financial institution in the country for co-ordinating the working of institutions, engaged in financing, promoting and developing industry, and also assisting in the development of such institutions. Following amendment to IDBI Act in October 1994 to permit public ownership up to 49% of its issued capital, IDBI went in for a public issue in July 1995. The shareholding of Government of India in IDBI currently stands at 58.47%. web site url : Industrial Finance Corporation of India (IFCI) IFCI, the first Development Finance Institution in India, was set up in 1948, as a Statutory Corporation, to pioneer institutional credit to medium and large industries IFCI was also the first institution in the financial sector to be converted into a Public Limited Company. IFCI’s record of performance has broadly run parallel to the course of industrial and economic development of the nation. IFCI’s principal operations include – Project financing, Financial services & Comprehensive corporate advisory services. web site url : Kotak Investing Banking Kotak Mahindra Capital Company (KMCC) helps leading Indian corporations, banks, financial institutions and government companies access domestic and international capital markets. KMCC has the most current understanding of investor appetite, having been the leading book runner/lead manager in public
  46. 46. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 46 | P a g e equity offerings in the period FY 2002-06. web site url : Kotak Mahindra Capital Company As a full service Investment Bank, Kotak Investment Banking’s core business areas include Equity Issuances, Mergers & Acquisitions, Advisory Services and Fixed Income Securities and Principal Business. web site url : SBI Capital Markets SBI Capital Markets Ltd. is amongst the oldest players in the Indian Capital Market, offering an entire range of Investment Banking Services. With strong fund mobilization strengths, we are one of the leading players in the areas of fund raising through Capital Market Issues / Private Placement. web site url : S.E Investments Limited SEIL’s philosophy on corporate governance envisages commitment to ensure customer satisfaction through better services. The company is committed to good corporate governance & continuously reviews various relationship measures with a view to enhance shareholder’s value. SEILprovides detailed information on various issues concerning the company’s business and financial performance. SEIL respects the rights of its share holders to information on performance of the company and believes that the best corporate governance promotes transparency and helps mitigate the risks associated with the business. web site url :
  47. 47. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 47 | P a g e Small Industries Development Bank of India Small Industries Development Bank of India (SIDBI) was established in April 1990 under an Act of Indian Parliament. SIDBI has completed 12 years of service to the small scale sector. Consequent upon, amendment in the SIDBI Act, the Bank has been delinked from SIDBI with effect from March 27, 2000. The SIDBI (Amendment) Act, 2000 has changed the provisions relating to capital structure, share holding pattern, management, business, borrowings, etc. The amended Act provides for divesting of 51% of the equity share capital of Rs.4.5 billion Subscribed and held by IDBI in favour of Life Insurance Corporation of India, General Insurance Corporation of India, Public Sector Banks and other Institutions owned or controlled by the Government of India. web site url : SSKI Group SSKI is a leading India-based financial services group that offers Institutional Equities and Investment Banking services. SSKI Investment Banking is a full- service investment bank with a strong research bias. Our team members bring deep domain knowledge, spanning a number of sectors, that we are able to leverage to meet the varied corporate finance needs of our clients. We provide a full range of services, from private placements of equity and debt, public offerings, project advisory to mergers and acquisitions. web site url : Tata Investment Corporation Limited (TICL) TICL is a non-banking financial company (NBFC) registered with the Reserve Bank of India under the ‘Investment Company’ category. The company’s activities comprise primarily of investing in long-term investments in equity shares and other securities of companies in a wide range of industries. The
  48. 48. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 48 | P a g e major sources of income for the company consist of dividend income and profit on sale of investments. web site url : UTI Securities Ltd UTI Securities Ltd., was promoted as an independant professional entity in June 1994. With the repealing of Unit Trust of India (UTI) Act, the entire share capital of UTISEL is now held by Administrator of specified undertaking of Unit Trust of India since 1st February 2003. UTISEL has been providing all kinds of Investment related activities which include investment banking and corporate advisory services. web site url : Yes Bank Yes Bank’s Investment Banking group is involved in the identification, structuring and execution of transactions for our clients in diverse industries and geographies. Some of the typical transactions include mergers & acquisitions, divestitures, private equity syndication and IPO advisory.
  49. 49. M.D.COLLEGE TYFM INVESTMENT BANKING B.COM(FINANCIAL MARKETS ) 49 | P a g e CHAPTER 8 CONCLUSION The investment banker plays a vital role in channelizing the financial surplus of the society into productive investment avenues. Hence before selecting a investment banker, one must decide what the services for which he is being approached are. Selecting the right Intermediary who has the necessary skills to meet the requirements of the client will ensure success. It can be said that this project helped me to understand every details about Investment Banking and in future how it’s going to get emerged in the Indian economy. Hence, Investment Banking can be considered as essential financial body in Indian financial system. Market development is predicated on a sound, fair and transparent regulatory framework. To sustain the growth of the market and crystallize the growing awareness and interest into a committed, discerning and growing awareness and interest into an essential to remove the trading malpractice and structural inadequacies prevailing in the market, and provide the investors an organized, well regulated market place in future.