Evolution Of Investment Banking In India

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 Grindlays 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 set back to the industry. Several leading merchant bankers, both in public and private sector were found to be involved in various irregularities. 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 Fairgrowth 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. Investment bankers 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. 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.