Investment Banking.docx

Investment Banking CHAPTER I Introduction: Investment banking is a particular form of banking which finances capital requirements of an enterprise. Investment banking assists as it performs IPOs, private placement and bond offerings, acts as broker and carries through mergers and acquisitions. Investment banking is a field of banking that aids companies in acquiring funds. In addition to the acquisition of new funds, investment banking also offers advice for a wide range of transactions a company might engage in. Traditionally, banks either engaged in commercial banking or investment banking. In commercial banking, the institution collects deposits from clients and gives direct loans to businesses and individuals. Through investment banking, an institution generates funds in two different ways. They may draw on public funds through the capital market by selling stock in their company, and they may also seek out venture capital or private equity in exchange for a stake in their company. An investment banking firm also does a large amount of consulting. Investment bankers give companies advice on mergers and acquisitions, for example. They also track the market in order to give advice on when to make public offerings and how best to manage the business' public assets. Some of the consultative activities investment banking firms engage in overlap with those of a private brokerage, as they will often give buy-and-sell advice to the companies they represent. The line between investment banking and other forms of banking has blurred in recent years, as deregulation allows banking institutions to take on more and more sectors. With the advent of mega-banks which operate at a number of levels, many of the services often associated with investment banking are being made available to clients who would otherwise be too small to make their business profitable. At a very macro level, ‘Investment Banking’ as term suggests, is concerned with the primary function of assisting the capital market in its function of capital intermediation, i.e., the movement of financial resources from those who have them (the Investors), to those who need to make use of them for generating GDP (the Issuers). Banking and financial institution on the one hand and the capital market on the other are the two broad platforms of institutional that investment for capital flows in economy. Therefore, it could be inferred that investment banks are those institutions that are counterparts of banks in the capital markets in the function of intermediation in the resource allocation. Nevertheless, it would be unfair to conclude so, as that would confine investment banking to very narrow sphere of its activities in the modern world of high finance. Page 1

Investment Banking Over the decades, backed by evolution

and also fuelled by recent technologies developments, an

investment banking has transformed repeatedly to suit the needs of the finance community and thus become one of the most vibrant and exciting segment of financial services. Investment bankers have always enjoyed celebrity status, but at times, they have paid the price for the price for excessive flamboyance as well. In the words of John F. Marshall and M.E. Eills, “investment banking is what investment banks do”. This definition can be explained in the context of how investment banks have evolved in their functionality and how history and regulatory intervention have shaped such an evolution. Much of investment banking in its present form, thus owes its origins to the financial markets in USA, due o which, American investment banks have banks have been leaders in the American and Euro markets as well. Therefore, the term ‘investment banking’ can arguably be said to be of American origin. What is Investment Banking?  A person or organization sometimes acts as an underwriter or mediator for corporations and municipalities issuing securities.  Most of them also preserve broker-dealer operations to maintain markets for formerly issued securities and suggest advisory services to investors.  Investment banking also has a large role in facilitating mergers and acquisition, private equity placements and corporate restructuring. Few facts about Investment Banking  Unlike traditional banks, investment banks do not accept deposits from and provide loans to individuals also called investment banker.  Investment banks help companies and governments (or their agencies) raise money by issuing and selling securities in the capital market (both equity and debt).  Almost all investment banks also offer strategic advisory services for mergers, acquisition, divestiture or other financial services for clients, such as:  trading of derivatives  fixed income  foreign exchange  commodity  Equity security.

Page 2

Investment Banking  Trading securities for hard cash or securities (i.e., facilitating dealings, market-making), or the endorsement of securities (i.e., underwriting, research, etc.) is referred to as the "sell side".  On the other hand the "buy side" constitutes :  the pension fund,  mutual funds,  hedge funds,  The investing public who use the goods and services of the sell-side with the intention of make best use of their return on investment.  Many firms have both buy and sell side mechanism. Functions of Investment Banking: Investment banks have multilateral functions to perform. Some of the most important functions of investment banking can be jot down as follows:  Investment banking help public and private corporations in issuing securities in the primary market, guarantee by standby underwriting or best efforts selling and foreign exchange management. Other services include acting as intermediaries in trading for clients.  Investment banking provides financial advice to investors and serves them by assisting in purchasing securities, managing financial assets and trading securities.  Investment banking differs from commercial banking in the sense that they don't accept deposits and grant retail loans. However the dividing line between the two fraternal twins has become flimsy with loans and securities becoming almost substitutable ways of raising funds.  Small firms providing services of investment banking are called boutiques. These mainly specialize in bond trading, advising for mergers and acquisitions, providing technical analysis or program trading.

Page 3

Investment Banking Basics of Investment Banking: The banking sector is one of the biggest contributors to a nation's economy, provided it is managed in an innovative and professional environment. Investment banking is one rapidly growing form of banking. An investment bank is a type of financial intermediary that performs a variety of functions such as underwriting, facilitating mergers and acquisitions or brokerage services for institutions. The work of an investment bank begins right from the counseling before the underwriting sessions, and stretches right till the securities are properly handled and distributed. Investment banks play a very crucial role in market transactions on behalf of, or for private and public investors, government and corporations. There are a number of investment banks that also provide highly professional services in assisting their clients with industrial know-how on various parameters. Industries from diverse sectors like media and telecommunications, real estate, industry, finance, health care, consumer products and various such segments are provided assistance by investment banking services. Along with these, an investment bank also deals in the securities, trading services, credit counseling, financial engineering and merchant banking. The primary source of income for investment bankers is the commissions, fees and gain margins on transactions provided for the above mentioned institutions. The role of an investment bank as a mediator is to directly familiarize the nature of the investment and the entity being invested in. In case of conventional banking, people deposit finances in the form of cash, assets and so on with a bank. The bank in turn can lend to a borrower under some standard norms to utilize in his own way. In the case of investment banking, there is a direct familiarization of both the investor and the borrower. This means that an individual or institutional investor has an option to choose his type of investment or division of investment into any given entity looking out for funds. An investment bank can also assist investment in the financial market. Investment banks provide companies with expert guidance and formulate strategies on their behalf for disinvestment, and also to merge or acquire new entities. Good investment banking involves procedures to maintain and upgrade the quality of services and keep a close watch on the emerging trends in the market, where their customer's money can be invested. It also incorporates risk management services in order to streamline the flow of capital, check its overuse, and come up with a detailed analysis of credit risks. Page 4

Investment Banking The investment banking market was increasing leaps and bounds, until the present recession struck. Banks all over the world are trying to recoup the losses. The US is the biggest market for investment banks, followed by Europe, Middle East, Africa and Asia. The global hubs of investment banking are a few economically sound centers like London, New York and Tokyo. However, investment banking is not restricted in its scope to a few regions of the world. It caters to a global community which makes it highly sensitive to global ups and downs, along with innovative fluctuations. Investment Banks: An investment bank is a financial institution that assists corporations and governments in raising capital by underwriting and acting as the agent in the issuance of securities. An investment bank also assists companies involved in mergers and acquisitions, divestitures, etc. Further it provides ancillary services such as market making and the trading of derivatives, fixed income instruments, foreign exchange, commodity, and equity securities. Unlike commercial banks and retail banks, investment banks do not take deposits. Trading securities for cash or securities (i.e., facilitating transactions, market-making), or the promotion of securities (i.e., underwriting, research, etc.) was referred to as the "sell side". Dealing with the pension funds, mutual funds, hedge funds, and the investing public who consumed the products and services of the sell-side in order to maximize their return on investment constitutes the "buy side". Many firms have buy and sell side components. Investment banks help companies and governments and their agencies to raise money by issuing and selling securities in the primary market. They assist public and private corporations in raising funds in the capital markets (both equity and debt). Investment banks also act as intermediaries in trading for clients. Investment banks differ from commercial banks, which take deposits and make commercial and retail loans. In recent years, however, the lines between the two types of structures have blurred, especially as commercial banks have offered more investment banking services. Investment banks may also differ from brokerages, which in general assist in the purchase and sale of stocks, bonds, and mutual funds. However some firms operate as both brokerages and investment banks; this includes some of the best known financial services firms in the world. Definition: “An individual or institution, which acts as an underwriter or agent for corporations and municipalities Page 5

Investment Banking issuing securities. Most also maintain broker/dealer operations, maintain markets for previously issued securities, and offer advisory services to investors. Investment banks also have a large role in facilitating mergers and acquisitions, private equity placements and corporate restructuring. Unlike traditional banks, investment banks do not accept deposits from and provide loans to individuals. Also called investment banker.” Concept of Investment Bank: The banking scenario in India is itself huge, covering the different facets of the economy. By and large, investment banks in India are itself an institution which generates funds in two different ways. The first manner in which it works is by drawing public funds via the capital market by way of selling stock in their company. The other way in which it operates is to seek for venture capital or private equity, as a substitute for a stake in their company. Role of an Investment Bank: The major work of investment banks includes a lot of consulting. For instance, they offer advices on mergers and acquisitions to companies. The role that an investment bank plays sometimes gets overlapped with that of a private brokerage house. The usual advice of buying and selling is also given by investment banks. There is no demarcating line between the investment banking and other forms of banking in India. This has been observed majorly of late. All banks nowadays want to provide their customers the best of services and create a niche for themselves and that is why apart from investment banks, all other banks too are aiming at making it big. At the macro level, investment banking is related with the primary function of assisting the capital market in its function of capital intermediation, i.e., the movement of financial resources from those who have them (the investors), to those who need to make use of them for producing GDP (the issuers). Over the decades, investment banks have always suited the needs of the finance community and thus become one of the most vibrant and exciting segment of financial services. Globally investment banks handle significant fund-based business of their own in the capital market along with their non-fund service portfolio which is offered to the clients. All these activities are broadly segmented across three platforms - equity market activity, debt market activity and merger and acquisitions (M&A) activity. Page 6

Investment Banking Who needs an Investment Bank? Any

firm

contemplating

a

significant

transaction

can

benefit

from

the

advice

of an investment bank. Although large corporations often have sophisticated finance and corporate development departments provide objectivity, a valuable contact network, allows for efficient use of client personnel, and is vitally interested in seeing the transaction close. Most small to medium sized companies do not have a large in-house staff, and in a financial transaction may be at a disadvantage versus larger competitors. A quality investment banking firm can provide the services required to initiate and execute a major transaction, thereby empowering small to medium sized companies with financial and transaction experience without the addition of permanent overhead, an investment bank provides

objectivity,

a

valuable

contact

network,

allows

for

efficient

use

of

client

personnel, and is vitally interested in seeing the transaction close. Most small to medium sized companies do not have a large in-house staff, and in a financial transaction may be at a disadvantage versus larger competitors. A quality investment-banking firm can provide the services. What to Look For In an Investment Bank: Investment banking is a service business, and the client should expect top-notch service from the investment banking firm. Generally only large client firms will get this type of service from the major Wall Street investment banks; companies with less than about $100 million in revenues are better served by smaller investment banks. Some criteria to consider include:  Services Offered: For all functions except sales and trading, the services should go well beyond simply making introductions, or "brokering" a transaction. For example, most projects will include detailed industry and financial analysis, preparation of relevant documentation such as an offering memorandum or presentation to the Board of Directors, assistance with due diligence, negotiating the terms of the transaction, coordinating legal, accounting, and other advisors, and generally assisting in all phases of the project to ensure successful completion.

Page 7

Investment Banking  Experience: It extremely important to make sure that experienced, senior members of the investment banking firm will be active in the project on a day-to-day basis. Depending on the type of transaction, it may be preferable to work with an investment bank that has some background in your specific industry segment. The investment bank should have a wide network of relevant contacts, such as potential investors or companies that could be approached for acquisition.  Record of Success: Although no reputable investment bank will guarantee success, the firm must have a demonstrated record of closing transactions.  Ability to Work Quickly: Often, investment banking projects have very specific deadlines, for example when bidding on a company that is for sale. The investment bank must be willing and able to put the right people on the project and work diligently to meet critical deadlines.  Fee Structure: Generally, an investment bank will charge an initial retainer fee, which may be one-time or monthly, with the majority of the fee contingent upon successful completion of the transaction. It is important to utilize a fee structure that aligns the investment bank's incentive with your own.  Ongoing Support: Having worked on a transaction for your company, the investment bank will be intimately familiar with your business. After the transaction, a good investment bank should become a trusted business advisor that can be called upon informally for advice and support on an ongoing basis. Because investment banks are intermediaries, and generally not providers of capital, some executives elect to execute transactions without an investment bank in order to avoid the fees. However, an experienced, quality investment bank adds significant cant value to a transaction and can pay for its fee many times over. The investment banker has a vested interest in making sure the transaction closes, that the project is completed in an efficient time frame, and with terms that provide maximum

Page 8

Investment Banking value to the client. At the same time, the client is able to focus on running the business, rather than on the day-to-day details of the transaction, knowing that the transaction is being handled by individuals with experience in executing similar projects. What are the different types of groups within an investment bank? Broadly speaking, there are two types of groups within a typical investment bank (or investment banking division): product groups and industry groups (also called sector groups or domains). The three most well known product groups are mergers and acquisitions (M&A), leveraged finance (lev fin) and restructuring.

Bankers in product groups have product knowledge and tend to execute

transactions (respectively, M&A transactions, leveraged buyouts (LBO’s) and restructuring transactions/bankruptcies). Bankers in industry groups cover specific industries and tend to do more marketing activity (pitching). Industry bankers tend also to have more of the relationships with companies’ senior management than do product bankers (though some senior product bankers have excellent relationships as well). Examples of common industry groups include FIG (Financial Institutions Group), Healthcare, Consumer/Retail, Industrials, Energy and Utilities, Natural Resources, TMT (Telecom, Media and Technology), Gaming and Lodging and Real Estate. Often subgroups exist within the broader group. For example, a Healthcare group may be segregated into biotechnology, medical devices, managed care, pharma, etc.

Though not covering a specific

industry, one other group that falls under the category of “industry” groups is Financial Sponsors. Bankers in a Financial Sponsors group cover (have relationships with and market their services to) private equity firms. The Typical Hierarchy/Ladder within an Investment Bank? Just about all investment banks have the same strict hierarchy or ladder of professionals. From junior to senior, the typical hierarchy is (1) Analyst, (2) Associate, (3) Vice President, (4) Senior Vice President/Director and (5) Managing Director. Some banks deviate from this hierarchy a bit, for example having the Senior Vice President and Director be separate positions. Other banks, especially non-U.S. banks, have the same hierarchy but with somewhat different names for each position (Associate Director for Associate, Director for Vice President and Executive Director for SVP). One exception for U.S. banks is that Bear Stearns calls the Senior Vice President/Director position a Managing Director, and calls Managing Directors, Senior Managing Directors. However, Page 9

Investment Banking regardless of the names, the general job functions of each relative position tend to be consistent bank to bank. Role of the Analyst: Analysts are typically men and women directly out of undergraduate institutions who join an investment bank for a two-year program. Top performing Analysts are often offered the chance to stay for a third year, and the most successful Analysts can be promoted after three years to the Associate level. As Analysts are the bottom rung on the investment banking ladder, they do the bulk of the work. Broadly speaking there are three types of work that Analysts do: presentations, analysis and administrative tasks. Presentation work involves the putting together and writing of various PowerPoint presentations including marketing documents and documents for live transactions. The second main task of an analyst is analytical work. Pretty much anything done in Excel is considered “analytical work.” Examples include entering historic company data from public documents, analyzing such data for valuation purposes and projecting a company’s financial statements. Administrative work, being the third type of task, involves things like scheduling and setting up conference calls and meetings, making travel arrangements and keeping a list of deal team members up to date. While on live transactions, Analysts often refer to themselves as “glorified admins,” given all of the administrative work for which they are responsible. Role of the Associate: Associates are typically either folks directly out of top MBA programs or Analysts that have been promoted. Typically, bankers will be at the Associate level for three and a half years before they are promoted to Vice President. Associates are also categorized into class years

In addition to

overseeing the Analyst’s work, the Associate will often help write the text for the presentations as well as do much of the modeling work. Role of the Vice President (VP): The primary role of the Vice President is to be the “project manager,” whether for marketing activities or on a transaction. It is the VP that typically decides the structure of the presentation. On live engagements, the VP is typically the banker “running the deal.” The VP must manage the Page 10

Investment Banking client, manage the senior bankers and manage the Analysts and Associates that are actually doing the work. It is often at the VP level that bankers begin to form valuable relationships with clients. Depending on the individual and also the bank, some VPs will start to play a role in client development and marketing. Role of the Director/Senior Vice President (SVP): Depending on the person (and sometimes the bank), the Director or SVP may either act more like a Managing Director or more like the VP. Sometimes, the Director/SVP’s role will depend also on the specific situation and/or other deal team members. Ultimately, for Director/SVPs to be promoted to Managing Director, they will have to demonstrate that they can form client relationships and have the ability to market and to bring in new business.

Role of the Managing Director: As the senior level banker, the role of the Managing Director (”MD”) is mostly one of client development. The MD will likely be the one with the senior level company relationships and is typically responsible for spearheading marketing efforts. On a live transaction, the MD often plays only a minor role, getting involved when difficulties arise in the deal and during high level negotiations. Investment Bankers: Investment bankers are regarded as those persons who generally give consultation to their valued clients in order to sort out any of their high level issues that may have taken place in their financial organization. Functions of Investment Bankers: Apart from advising the investment bankers also performs various functions such as:  Investment bankers administer the bonds-issuance.  Control the selling of the stock of their organization to the general public.  They also play the role of strategists in order to solve out financial problems of their clients  They also help the clients to develop their financial policies and also apply them. Page 11

Investment Banking  Since all the works are time consuming investment bankers also work for prolong hours.  Investment bankers also emerge new innovative ideas and schemes for developing strategies to pitch to clients  Prepare pecuniary analyses and documents  An investment banker should not accept deposits or make commercial loans.  Even Investment bankers do the grunt work for IPO's and bond issues.

Page 12

Investment Banking Attributes of Investment Bankers:  As the work also involves various fiscal analyses so a well-built background in finance and economics is the prime necessity.  Not only this but also personal and strategic skills are significant for investment bankers.  Need to work for at least 70 hours a week or more and all night sessions before deals close are treated as the norms rather than the exception.  Investment Banker must be efficient and tactful enough to manage all the operation at a single point of time.

Qualification for Investment Bankers  A Masters in Business Administration with 2 years of post-graduate study is essential to grow up in this particular area.  Jobs in entry-level for analyst programs are obtainable to those graduate undergoes who require experience in investment banking profession.  Analysts are essential in making proposals in finance and travel in order to sit with the clients during meetings and sessions where senior bankers discuss ideas to potential customers.  After this comes the requirement of MBA degree holder investment banker.

Page 13

Investment Banking CHAPTER III Organizational Structure of an Investment Bank : Main Activities and Units The primary function of an investment bank is buying and selling products both on behalf of the bank's clients and also for the bank itself. Banks undertake risk through proprietary trading, done by a special set of traders who do not interface with clients and through Principal Risk, risk undertaken by a trader after he or she buys or sells a product to a client and does not hedge his or her total exposure. Banks seek to maximize profitability for a given amount of risk on their balance sheet. An investment bank is split into the so-called front office, middle office, and back office. While large full-service investment banks offer all of the lines of businesses, both sell side and buy side, smaller sell side investment firms such as boutique investment banks and small broker-dealers will 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 in the market. The corporations do not have to spend on resources with which it is not equipped. To the investor, the responsible investment banker offers protection against unsafe securities. The offering of a few bad issues can cause serious loss to its reputation, and hence loss of business. Therefore, investment bankers play a very important role in issuing new security offerings. Core Investment Banking Activities: Front Office:  Investment banking is the traditional aspect of the investment banks which also involves helping customers raise funds in the capital markets and giving advice on M&A's aka mergers and acquisitions. Investment banking may involve subscribing investors to a 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 (M&A). 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, industrials, or technology, and maintain relationships with corporations within the industry to bring in business for a bank. Page 14

Investment Banking  Sales and trading: On behalf of the bank and its clients, the primary function of a large investment bank is buying and selling products. In market making, traders will buy and sell financial products with the goal of making an incremental amount of money on each trade. Sales is the term for the investment banks sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas

and take orders.

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.  Research is the division which reviews companies and writes reports about their prospects, often with "buy" or "sell" ratings. While the research division may or may not generate revenue, 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 in the hopes that these clients will execute suggested trade ideas through the Sales & Trading division of the bank, thereby bringing in revenue for the firm. There is a potential conflict of interest between the investment bank and its analysis in that published analysis can affect the profits of the bank. Other businesses that an investment bank may be involved in:

 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.

 Investment management is the professional management of various securities (shares, bonds, etc.) and other assets (e.g. real estate), to meet specified investment goals for the benefit of the 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

Page 15

Investment Banking management division of an investment bank is generally divided into separate groups, often known as Private Wealth Management and Private Client Services.

 Merchant banking is a private equity activity of investment banks.  Commercial banking sees article commercial bank. Middle Office:

 Risk management involves analyzing the market and credit risk that traders are taking onto the balance sheet in conducting their daily trades, and setting limits on the amount of capital that they are able to trade in order to prevent 'bad' trades having a detrimental effect to a desk overall. Another key Middle Office role is to ensure that the above mentioned economic risks are captured accurately, correctly and on time. In recent years the risk of errors has become known as "operational risk" and the assurance Middle Offices provide now includes measures to address this risk.

 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.

 Corporate strategy, along with risk, treasury, and controllers, often falls under the finance division as well.

 Compliance areas are responsible for an investment bank's daily operations' compliance with government regulations and internal regulations. Often also considered a backoffice division. Back Office: 

Operations involve data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers. While some believe that operations provide the greatest job security and the bleakest career prospects of any division within an

Page 16

Investment Banking investment bank, many banks have outsourced operations. It is, however, a critical part of the bank. 

Technology refers to the information technology department. 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.

Investment Banks Provide Four Primary Services: Raising capital, advising in mergers and acquisitions, executing securities

sales and trading, and

performing general advisory services. Smaller investment banks may specialize in two or three of these categories. 1. Raising Capital: An investment bank can assist a firm in raising funds to achieve a variety of objectives, such as to acquire another company, reduce its debt load, expand existing operations, or for specific project financing. Capital can include some combination of debt, common equity, preferred equity, and hybrid securities such as convertible debt or debt with warrants. Although many people associate raising capital with public stock offerings, a great deal of capital is actually raised through private placements with institutions, specialized investment funds, and private individuals. The investment bank will work with the client to structure the transaction to meet specific objectives while being attractive to investors. 2. Mergers and Acquisitions: Investment banks often represent firms in mergers, acquisitions, and divestitures. Example projects include the acquisition of a specific firm, the sale of a company or a subsidiary of the company, and assistance in identifying, structuring, and executing a merger or joint venture. In each case, the investment bank should provide a thorough analysis of the entity bought or sold, as well as a valuation range and recommended structure.

Page 17

Investment Banking 3. Sales and Trading: These services are primarily relevant only to publicly traded firms, or firms, which plan to go public in the near future. Specific functions include making a market in a stock, placing new offerings, and publishing research reports. 4. General Advisory Services: Advisory services include assignments such as strategic planning, business valuations, assisting in financial restructurings, and providing an opinion as to the fairness of a proposed transaction. Corporate Finance: The bread and butter of a traditional investment bank, corporate finance generally performs two different functions: 1) mergers and acquisitions advisory, and 2) underwriting. On the mergers and acquisitions (M&A) advising side of corporate finance, bankers assist in negotiating and structuring a merger between two companies. If, for example, a company wants to buy another firm, then an investment bank will help finalize the purchase price, structure the deal and generally ensure a smooth transaction. The underwriting function within corporate finance involves shepherding the process of raising capital for a company. In the investment banking world, capital can be raised by selling stocks or bonds (and some more exotic securities) to investors.

Syndicate The hub of the investment banking wheel, the syndicate group is a vital link between salespeople and corporate finance. Syndicate exists to facilitate the placing of securities in a public offering, a knockdown, drag-out affair between and among buyers of offerings and the investment banks managing the process. In a corporate or municipal debt deal, syndicate also determines the allocation of bonds. The most comprehensive and convenient job board for finance professionals. Target your search by area of finance, function and experience level, and find the job openings that you want. No surfing required.

Page 18

Investment Banking Multinational Investment Banking:  A multinational investment banker has banking teams which are led by senior partners who have influence in their clients all over the world, experience and associations with many of the most important market players, regulators and top industry bodies. All listen to their firms' clients and comprehend.  The outcome is the generation of the center of attention on the issues that really matter.  These approaches provide the firm clients with a well established service in their markets.  These give them access to specialized assistance which is characterized by obligation to national markets, and a perceptive of the commercial and cultural differences between countries. Policies of Firm: The firms have different policies to overview the following aspects:  Growth: The investment banks are freshly enjoying an almost extraordinary stage of strong economic conditions and growth, which has enabled them to bring record gain. The industry has greatly stabilized in current years around a handful number of major players, and there have been few latest mergers and acquisitions.  Performance: The prime attention in the investment banking industry has always been on top-line growth, rather than decreasing cost and efficiency. Focus on people and cost control in the current has a very positive phase that suggests that investment banks are learning to control through good times and bad.  Governance: Good quality governance, domestic controls, and reporting are decisive in an industry that thrives on risk. Although there continues to be examples of disastrous breakdowns in controls, leading to major trading sufferings, these tend to turn up more in the hedge funds, as new entities to the market. Many of the more veteran players have implemented policies and initiatives that guard against these losses. The control device continues to claim high values of governance and control.

Page 19

Investment Banking Recent Scenario of Investment Banking:  Struggle for investment banking jobs is severe. Investment banks and financial services firms are hiring, but competition for jobs is fierce.  Knowledge & financial skills are crucial. In particular, greater financial skills and experience are essential for potential applicants to attain an aggressive circumference in the interview and hiring process. List of Top 10 Investment Banks in India: The top 10 Investment Banks in India offers large number of financial advisory services by tracking the economic trends, besides providing financial assistance to corporate and retail customers. Some of them are: 1.

Avendus Capital: An investment bank providing mergers and acquisitions, fixed returns, controlled finance,

calculated advisory facilities and Private Equity Syndication to its customers ranging from investors to corporates. The bank has a powerful research competence which it utilizes to close business deals in hostile circumstances. It presently concentrates on sectors where Indian firms have strategic expansion advantage namely Healthcare, Pharmaceuticals, IT Services, Consumer goods, manufacturing, etc. 2.

Bajaj Capital The Bajaj Capital Group is one of the renowned Investment consultant and Financial Planning

firms in India. It is certified under the Category I of Merchant Bankers by SEBI. Bajaj Capital provides custom-made Fiscal Planning facilities and investment consultation to the investors, organizational investors, corporates, high income patrons and Non-Resident Indians (NRIs). Being one of the biggest distributors of economic goods, Bajaj provides an extensive range of investment schemes such as general insurance, life insurance, mutual funds, etc to both public and private institutions. 3.

Cholamandalam Investment & Finance Company

Page 20

Investment Banking A combined fiscal service provider of three firms namely Cholamandalam DBS Finance Limited (CDFL), DBS Cholamandalam Distribution Limited and DBS Cholamandalam Securities Limited, Cholamandalam DBS operates in 16 international markets. DBS provides an extensive range of facilities to small and medium sized enterprise, corporates, customers and comprehensive banking activities across Middle East and Asia. 4.

ICICI Securities Ltd India's biggest equity house, ICICI Securities Ltd provide back-to-back banking solutions

through its extensive distribution network to cater to the varied needs of its retail and corporate clients. The firm is listed under the Monetary Authority of Singapore (MAS) and Financial Services Authority, UK and has an authoritative place in the core divisions of its functional areas such as consultant services, fiscal good distribution, Equity Capital Markets Advisory Services, etc. 5.

IDFC Initiated in 1997 in Chennai, IDFC undertook the responsibility of providing financial support

to 332 projects accruing a profit of upto Rs 2, 20, 400 million. The sectors under IDFC's financial assistance are infrastructure, agri related business, transportation, healthcare, tourism and others. 6.

Kotak Mahindra Capital Company Initiator and leader in equity capital markets, Kotak Investment Banking has undertaken the

developmental work of most ground breaking advances in the Indian capital markets comprising the launch of book building and Qualified Institutional Placements (QIPs) in India. The investment bank has an impressive track record of controlling various sectors and has played a major role in the government's milestone disinvestments. 7.

SBI Capital Markets SBICAPS is India's foremost investment bank and project consultant, aiding local firms in

capital enlistment endeavors for last many years. The firm started it operations in 1986 and is an entirely owned subordinate of the State Bank of India. Asian Development Bank (ADB) possesses 13.84% stakes in equity segment of SBICAPS. 9657376367

Page 21

Investment Banking 8.

Tata Investment Corporation Limited (TICL)

A non-banking financial company (NBFC), TICL is listed with the Reserve Bank of India under the group of 'Investment Company'. The firm's commercial activities constitute mainly of endowing in long-standing investments in equity of the firms in various sectors. The chief source of return for the firm entails income on investment trading and income accrued on dividend. 9.

Yes Bank

This Investment Banking association is engaged in the classification, arrangement and implementation of deals for their clients in varied sectors and nations. Some of the archetypal transactions incorporate divestitures, private equity syndication, mergers & acquisitions and IPO consultation. 10.

UTI Securities Ltd

Endorsed as a self-regulating professional body in 1994, UTI Securities Ltd., is one of the renowned investment bank of India. After the termination of Unit Trust of India (UTI) Act, the total share fund of UTISEL is now controlled by superintendent of particular enterprise of UTI. The firm has been offering all sorts of investment associated activities which incorporates investment banking and corporate consultation facilities. List of Top 10 Investment Companies in India Top 10 Investment Companies in India attract foreign direct investment through tie ups with financial firms, investment markets, technical partnerships and favored allocations. The Indian investment market is renowned for its massive workforce and diverse sectors that generates better opportunities for both expansion and earning competence. 1.

Bajaj Allianz Collaboration between Bajaj Finserv and Allianz SE, Bajaj Allianz Life Insurance Co. Ltd.

2.

HSBC Asset Management India Pvt Ltd

3.

SMC Investment Solution and Services

4.

Shah Financial Group

5.

Stanrose Mafatlal Investment and Finance Ltd Page 22

Investment Banking 6.

Tata Investment Corporation Ltd.

7.

Toss Financial Services Pvt. Ltd.

8.

Veronica Financial Services Ltd

9.

Indian Investment Centre

10. J.M. Capital Management Private Ltd Role of Investment Banking Companies in India: Investment banking companies generally help their clients to access capital through equity, debt and other kinds of investment products. These firms also trade in equities and derivative products and also help companies with merger and acquisition deals. About a couple of years back, when the world economy was reeling under a recession, many investment banking firms either collapsed or were on the brink of closure. Even a few firms in India were affected by this global downturn. This led to many skeptics writing off the revival of these firms. Challenges: Investment banking is one of the most global industries and is hence continuously challenged to respond to new developments and innovation in the global financial markets. Throughout the history of investment banking, it is only known that many have theorized that all investment banking products and services would be commoditized. New products with higher margins are constantly invented and manufactured by bankers in hopes of winning over clients and developing trading know-how in new markets. However, since these can usually not be patented or copyrighted, they are very often copied quickly by competing banks, pushing down trading margins. For example, trading bonds and equities for customers is now a commodity business structuring and trading derivatives retains higher margins in good times - and the risk of large losses in difficult market conditions, such as the credit crunch that begin in 2007. Each over-the-counter contract has to be uniquely structured and could involve complex pay-off and risk profiles. In addition, while many products have been commoditized, an increasing amount of profit within investment banks has come from proprietary trading, where size creates a positive network benefit. The fastest growing segments of the investment banking industry are private investments into public companies. Such transactions are privately negotiated between companies and accredited investors.

Page 23

Investment Banking The Future of Investment Banking Services in India: Investment banking India has always been very crucial for the smooth flow of market transactions between various investors, companies, firms and the government. These banks will have a role to play even in the future, irrespective of the economic conditions in the country.

Page 24

Investment Banking CHAPTER III Service Portfolio of Indian Investment Banks Core Services Merchant Banking, Underwriting and Book Running The primary market which was quite small in India, was revitalized with the abolition of the Capital Issues (Control) Act 1947 and the passing of the Securities and Exchange Board of India Act, 1992. The SEBI functions as the regulator for the capital markets similar to its counterpart, the SEC in USA. SEBI vide its guidelines dated June 11, 1992 introduced free pricing of securities in public offers for the first time in India. Over the last ten years, there have been two distinct phases of primary market boom –the first between 1992-1996 and the second between 1998-2001. The third wave of primary market issues could shape up in the near future. This market is very closely regulated by SEBI. In the days when the public offers market is very vibrant, this area of service forms the main activity for most Indian investment banks. In the past few years, though public offers have been very few, the private placement market especially in the debt segment has been very active and has served as an important source of funds for prime-rated corporates. Notable among such offerings are related privately placed debentures issued by public sector corporations and leading private companies. Financial institutions have been raising funds via the public offers and hand holding them in the private placements as well. Once the private placement markets also come under regulatory stipulations, investment banks would have a wider role to play in such issuances. Mergers and Acquisitions Advisory The mergers and acquisitions industry was pretty nascent in India prior to 1994 and continues to be tiny compared to the global scale of such transactions. However, two main features that have given a big push to this industry are: 

The forces of liberation and globalization that have forced the Indian industry to consolidate.



The institutionalization of corporate acquisitions by SEBI through its guidelines, popularly known as the Takeover Code.

Page 25

Investment Banking One of the cream activities of investment banks has always been M&A advisory. The larger investment banks specialize in M&A as a core activity. While some of them provide pure advisory services in relation to M&A, others holding valid merchant banking licenses from SEBI also manage the open offers arising out of such corporate events. Corporate Advisory Investment banks in India also have a large practice in corporate advisory services relating to project financing, corporate restructuring, capital restructuring through equity repurchases (including management of buyback offers under section 77A of the Companies Act, 1956), raising private equity, structuring joint-ventures and strategic partnerships and other such value added specialized areas. Support services and Businesses Secondary Market Activities Most of the universal banks such as ICICI, IDBI and Kotak Mahindra have their broking and distribution firms in both the equity and debt segments 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. In the past few years, the derivatives segment has been introduced in Indian capital market and this provides an additional avenue of specialization for investment banks. Derivatives trading, risk management and structured products offerings are the new segments that are fast becoming the areas of future potential for Indian investment banks. The securities business also provides extensive research offerings and guidance to investors. The secondary market services cater to both the institutional and noninstitutional investors. Asset Management Services Most of the top financial groups in India which have investment banking businesses such as the – ICICI, the IDBI, Kotak Mahindra, DSP Merrill Lynch, JM Morgan Stanley, SBI and IL & FS also have their presence in the asset management business through separate entities. As per the three layer structure propounded by SEBI, the parent organization acts as the sponsor of the fund and the Page 26

Investment Banking fund itself is constituted as a trust. The trust is managed by an asset management company and a separate trustee company which oversees the interests of the unit holders in the Mutual Fund. The whole structure has as arm’s length distance from the sponsor’s other businesses and entities. Wealth Management Services (Private Banking) Many reputed investment banks nurture a separate service segment to manage the portfolio of high networth individuals, households, trusts and other types of non-institutional investors. This can be structured either as a pure advisory service wherein the investment manager does not have any access to the funds or as a fund management service wherein the investment manager is given charge of the funds. In the former case, it becomes a non-discretionary portfolio and in the latter case, it becomes a discretionary portfolio. Such activity is regulated under the SEBI guidelines as already discussed. In other cases, wealth management may be restricted to a research based activity wherein the investor is provided good investment recommendations from time to time. Institutional Banking Institutional investors have been a recent phenomenon in the Indian capital market, which till then had the presence of a handful of public financial institutions such as the UTI and the insurance companies. The term lending institutions such as the IDBI and IFCI did not participate in secondary market dealing as a matter of policy. With the advent of liberalization, there are presently a large number of domestic institutional investors in the secondary market apart from approved foreign institutional investors. In addition, institutional investments have risen significantly in the primary markets through venture capital and private equity investments by investors in both the domestic and non-domestic categories. Several of the leading investment banks either have dedicated venture funds or private equity funds that invest in primary market. In addition they make proprietary investments in the secondary market through their dealing and market activities. The business portfolio of Indian Investment Banks has been briefly discussed in Fig.

Page 27

Investment Banking Interdependence between Different Verticals in Investment Banking

As is evident from Figure

, there are different verticals in investment banking and they do enjoy

synergies with one another. While some of the service or business segments form the core of investment banking, others provide invaluable support. This inter-dependence and complementary existence has been explained below. While merchant banking largely relates to management of public floatations of securities or reverse floatations such as buy backs and open offers, underwriting is an inherent part of merchant banking for public issues. Similarly, bought out deals and market making are a part of the process of floating issues on the OTC Exchange of India. The concept of market making has now been introduced for listing of certain scrips in the main stock exchanges as well. Advisory and transaction service have a close linkage with merchant banking as more often than not, such services culminate in a merchant banking assignment for a public issue or a reverse floatation. Such services also help in maintaining an enduring relationship with clients during those times when merchant banking is not a hot activity due to depressed market conditions. The other segment of primary market activity, i.e. venture capital and private equity has equal synergies with merchant banking. Being in venture capital business which enables identification of potential IPO candidates quite early, which helps not only in generating good fee income from merchant banking services, but also good in capital gains for the venture capital invested at earlier rounds of financing in such companies. Similarly, being in private equity business helps in harnessing the potential offered by later stage and listed companies, which may approach an investment bank primarily for merchant banking services. The support business vertical in the secondary market operations also have synergies with those in the primary equity and debt market segment as far as investment banking is concerned. Stock broking and primary dealership in debt markets nurture institutional, corporate and retail clients who can be tapped effectively for asset management, portfolio management, and private equity business. In addition, presence in the equity derivative and foreign exchange derivatives segments can help in offering solutions in treasury management to clients. In addition, the advisory and transaction services vertical can draw expertise from such segments in providing structured financing solutions to its clients. All these verticals are driven by support services such as sales and distribution and also equity research and analysis. Lastly but more importantly, the capability in sales and distribution also determines the success of the merchant Page 28

Investment Banking banking vertical. Thus, it may be seen that the growth and success of an investment bank depends on its strengths in each vertical and how well it combines them for synergies. To sum up, investment banking is a business that is very sensitive to the economic and capital market scenario and therefore, the broader the platform of its operations, the more is likelihood of an investment bank surviving business cycles and sudden shocks from the market.

Regulatory Framework for Investment Banking As discussed above, investment banking in India is regulated in its various facets under separate legislations or guidelines issued under statute. The regulatory powers are also distributed between different regulators depending upon the constitution and status of the investment bank. Pure investment banks which do not have presence in the lending or banking business are governed primarily by the capital market regulator (SEBI). However, universal banks and NBFC investment banks are also regulated primarily by the RBI in their core business of banking or lending and so far as the investment banking segment is concerned, they are also regulated by SEBI. An overview of the regulatory framework is furnished below: 1. At the constitutional level, all investment banking companies incorporated under the Companies Act, 1956 are governed by the provisions of that Act. 2. Investment banks that are incorporated under a separate statute such as the SBI or the IDBI are regulated by their respective statute. IDBI is in the process of being converted into a company under the Companies Act. 3. Universal Banks are regulated by the Reserve Bank of India under the RBI Act 1934 and the Banking Regulation Act which put restrictions on the investment banking exposures to be taken by banks. The RBI has relaxed the exposure limits for merchant banking subsidiaries of commercial banks. Till now, such companies were restricting their exposure to a single entity through the underwriting business and other fund based commitments such as standby facilities etc to 25% of their net owned funds (NOF). Therefore these companies are now on par with other investment banks which can do so up to 20 times their NOF. 4. Investment banking companies that are constituted as non-banking financial companies are regulated operationally by the RBI under Chapter IIIB (sections 45H to 45QB) of the Reserve Bank of India Act, 1934. Under these sections RBI is empowered to issue directions Page 29

Investment Banking in the area of resource mobilization, accounts and administrative controls. The following directions have been issued by the RBI so far: 

Non-Banking Financial Companies Acceptance of Deposits (Reserve Bank) Directions, 1998.



NBFCs Prudential Norms (Reserve Bank) Directions, 1998.

5. Functionally, different aspects of investment banking are regulated under the Securities Exchange Board of India Act, 1992 and the guidelines and regulations issued there under. These are listed below: 

Merchant banking business consisting of management of public offers is a licensed and regulated activity under the Securities and Exchange Board of India (Merchant Bankers) Rules 1992 and Securities Exchange Board of India (Merchant Bankers) Regulations 1992.



Underwriting business is regulated under the SEBI (Underwriters) Rules 1993 and the SEBI (Underwriters) Regulations 1993.



The activity of the secondary market operations including stock broking are regulated under the relevant by-laws of the stock exchange and the SEBI (Stock Brokers and Sub Brokers) Rules 1992 and the (Stock Brokers and Sub Brokers) Regulations 1992. Besides, for curbing unethical trading practices, SEBI has promulgated the SEBI (Prohibition of Insider Trading) Regulations 1992 and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations 1995.



The business of asset management as mutual funds is regulated under the SEBI (Mutual Funds) Regulations 1996.



The business of portfolio management is regulated under the SEBI (Portfolio Managers) Rules, 1993 and the SEBI (Portfolio Managers) Regulations, 1993.



The business of venture capital and private equity by such funds that are incorporated in India is regulated by the SEBI (Venture Capital Funds) Regulations, 1996 and by those that are incorporated outside India is regulated under the SEBI (Foreign Venture Capital Funds) Regulations 2000.

Page 30

Investment Banking 

The business of institutional investing by foreign investment banks and other investors in Indian secondary markets is governed by the SEBI (Foreign Institutional Investors) Regulations 1995.

6. Investments banks that are set up in India with foreign direct investment either as joint ventures with Indian partners or as fully owned subsidiaries of the foreign entities are governed in respect of the foreign investment by the Foreign Exchange Management Act, 1999 and the Foreign Exchange Management (Transfer or issue of Security by a Person Resident Outside India) Regulations 2000 issued there under as amended from time to time through circulars issued by the RBI. 7. Apart from the above specific regulations relating to investment banking, investment banks are also governed by other laws applicable to all other businesses such as the –tax law, property law, state laws, arbitration law and other general laws that are applicable in India.

Regulatory Framework for Merchant Banking Merchant Bankers are governed by the SEBI (Merchant Bankers) Rules 1992 and SEBI (Merchant Bankers) Regulations 1992. According to the SEBI (Merchant Bankers) Rules 1992 a Merchant Banker means ‘a person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management’. Given the fact that Merchant Bankers are entrusted with the responsibility of issue management by law, the regulatory framework is designed to ensure that they sufficient competence and exercise diligence in their work such that the issuers comply with all statutory requirements concerning the issue. At the same time, the merchant banker shall have high levels of integrity so that quality issues alone are brought to the primary market. Keeping these objectives in mind and investor protection as the paramount objective, the SEBI has laid emphasis on ensuring that merchant bankers fulfil the eligibility criteria on an on-going basis and has therefore provided for compulsory registration every three years. All Merchant Bankers need to have a valid registration certificate under the said rules to perform the role of Merchant Bankers to issues. In considering the application for registration, SEBI shall pay regard to the professional qualification in finance, law or business management, adequate office space, manpower, office equipment and other infrastructure, at least two support staff members who have Page 31

Investment Banking the competence to be in the field of merchant banking business, existence of minimum stipulated capital and previous experience to investor grievance redressal. The activities that a Merchant Banker is authorized to do are issue management and associated activities such as advising or providing consultancy or marketing services for the issue, underwriting of issues and portfolio management, though portfolio management alone requires additional registration under the relevant regulations. Merchant Bankers are precluded from carrying on any business or fund-based activity other than that associated with the securities market. Merchant Bankers are also bound by the Code of Conduct prescribed under the Regulations. In addition, Merchant Bankers have to comply with general obligations and responsibilities under the Regulations. Presently there is only one category of Merchant Bankers prescribed by SEBI (Category I) and the minimum stipulated networth for such Merchant Bankers is Rs.five crore. Such Merchant Bankers holding valid certificates of registration are alone qualified to manage public offers. SEBI levies a one-time authorization fee, an annual fee and a renewal fee from each Merchant Banker. Under the regulations, Merchant Bankers have also to submit periodical returns and any other additional information that SEBI might seek from time to time. SEBI also has a right of inspection of the books of account, records and documents of the merchant banker at any time if required. SEBI may suo moto conduct an enquiry or launch an investigation into the working of a Merchant Banker or on receipt of a complaint against such Merchant Banker. SEBI may even appoint an external auditor to inspect the books and report to SEBI. Based on the findings, SEBI is empowered to take appropriate action to award penalty points to the erring Merchant Banker based on the degree of the default or contravention in accordance with the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations 2002. The aggrieved Merchant Banker may prefer to appeal the Central Government under the SEBI (Appeal to Central Government) Rules 2003. It may also be mentioned here that a Merchant Banker is deemed to be a connected person to the issuer under the SEBI (Prohibition of Insider Trading) Regulations, 1992.

Page 32

Investment Banking Anatomy of Some Leading Indian Investment Banks. ICICI Securities Ltd. (I-Sec). I-Sec is a part of the ICICI group whose parent company is the ICICI Bankm which till recently was a financial institution that converted itself into a universal bank by it merger with its own commercial bank, the ICICI Bank in 2003. I-Sec, which was initially a joint venture with J.P. Morgan of the US, became fully owned by ICICI after J.P. Morgan exited from the business. I-Sec is a full service investment bank that provides services across all the segments spanning –debt market, equity market, derivatives and corporate advisory services. It has support services in research and broking. The advisory business focuses on merger and acquisitions, cross border acquisitions, equity and bidding for a number of reputed companies. The equity business offers research, sales and execution services to institutional investors in the secondary market and capital market related services such as execution of public offerings, structuring and regulatory and legal documentation services. In order to assist/provide corporate clients and institutional investors with investment banking services in the USA. I-Sec set up two US based subsidiaries namely ICICI Securities Holding Inc and ICICI Securities Inc. ICICI Securities Inc registered itself with the National Association of Security Dealers Inc as a broker-dealer, empowering it to engage in a variety of securities transactions in the US market. ICICI Brokerage Services Limited, a member of the National Stock Exchange of India Limited, is the domestic broking subsidiary of I-Sec’s distribution and secondary market services are handled by the broking company.

DSP Merrill Lynch Ltd. Originally incorporated as DSP Financial Consultants Ltd, its name was changed to DSP Merrill Lynch (DSP-ML) in 1996 following its conversion into a joint venture with Merrill Lynch of USA, a leading international capital raising financial management and advisory company. Merrill Lynch has a 40% equity stake in DSP-ML. DSP-ML is a part of the DSP group which has been in the securities and brokerage business for 130 years in the Indian market, thus pre-dating even the Bombay Stock Exchange.

Page 33

Investment Banking DSP-ML is a leading full service Investment Bank that provides services across debt market, equity market and corporate advisory segments. It also provides services to private customers on equity and debt products and wealth management. It has a full fledged research team serving the needs of both its institutional and retail clients. The company is among the major players on proprietary account in the debt and equity markets and is also a registered primary dealer in government securities. The functional divisions at DSP-ML consist of the –Investment Banking Group, the Equity Sales Group, the Equity Trading and Dealing Group, Debt Sales Group, the Mergers and Acquisitions Group, the Research Group and the Private Client Group. The investment banking group generates equity and debt products emerging from IPOs, secondary issues and debt market issues as well as private placements. It is also a leading underwriter in both equity and debt products. These products are distributed through the equity sales group and the debt sales group. Both the marketing groups serve a cross section of institutional clients, other non-institutional clients such as trusts and investment companies, retail clients and overseas investors. The sales groups also distribute apart from their own products, the products emerging from other entities such as DSP Merrill Lynch Mutual Fund and other mutual funds. The sales groups are supported by a national distribution networking comprising of approximately 8000 sub-brokers and alliance partners. The trading and dealing groups support the broking activity in equities and the primary dealership activities in the debt market. DSPML, is one of the largest institutional broking firms in India. It is a founding member of The Stock Exchange, Mumbai (BSE) and is an active member of the National Stock Exchange (NSE) of India in both the equity segment and the wholesale debt market segment. It is an accredited primary dealer with the RBI and an active participant in the Government Securities/Treasury bill markets. As a primary dealer, it makes a market for debt securities by offering to buy and sell quotes. These quotes are also available on wire services like Reuters, Crisil Market wire, Bloomberg and Dow Jones Newswires. The mergers and acquisitions advisory has been structured as a separate specialist group that offers their clients financial advice and assistance in restructuring, divestures, acquisitions, demergers, spin-offs, joint ventures, privatization and takeover defense mechanisms. The research group offers products such as –sectoral reports, company reports and special theme analyses, daily, weekly and monthly market views as well as specific policy forecasts. The private client group offers depository, broking and investment advisory services to high net worth individuals, professionals and promoters of business groups, corporate executives, trusts and private companies.

Page 34

Investment Banking JM Morgan Stanley Pvt. Ltd. JM Morgan Stanley (JMMS) is a joint venture between the JM Financial Group and Morgan Stanley Dean Witter of the USA. In 1997, Morgan Stanley which was established in New York in 1935, had acquired Dean Witter, an investment bank founded in 1924 in San Francisco. JM Morgan Stanley commenced operations in April 1999. However, the association of the two partners is limited only to the investment banking area. Both of them have separate asset management companies in India which run independent of mutual fund businesses. Unlike DSP-ML and I-Sec which have an integrated structure, the JM Group has separate companies handling various components of the capital market business. The core functions of investment banking are performed by JMMS. This company focuses on capital raising, mergers and acquisitions, private equity and advisory work for Indian corporations in both the international and domestic capital markets. The function of distribution and marketing securities is handled by two of its wholly owned subsidiaries –JM Morgan Stanley Retail Services Pvt. Ltd. (JMRS) and JM Morgan Stanley Fixed Income Securities Pvt. Ltd. (JMFI). JMRS provides equity distribution services for primary market products, mutual funds, equity sales and marketing support for the group broking activity and wealth management and portfolio management services to high net worth individuals. JMFI offers similar services in fixed income (debt) securities. A third company, JM Morgan Stanley Securities Pvt. Ltd. handles all the broking operations for the group and provides services to institutional clients and others. It also provides research support for both FII and Indian institutional clients.

Page 35

Investment Banking SBI Capital Markets Ltd Founded in 1986 as a hive-off of the SBI Merchant Banking division, SBI Capital Markets Ltd. (SBI Caps) is amongst the oldest players in the Indian capital market. It is a full service investment bank that provides investment, advisory and financial services. In 2001, SBI Caps started its sales and distribution activity along with equity and debt broking services. SBI Caps provides services across the following spectrum: 

Mergers and Acquisitions: This group provides advisory services with regard to disinvestment of the government, valuations, mergers and acquisitions in the corporate sector, financial and business restructuring and other areas.



Project advisory and structure finance: It is arguably one of the leading groups in the company that provides services such as restructuring and privatization advisory for public utilities, policy advisory to Central and State Governments, regulatory bodies and government departments and organizations, project structuring and advisory to the private sector and arranging finance for such projects. SBI Caps has been a major player in governmental work and in the infrastructure sector. The project advisory services consist of hand-holding from the concept to commissioning stage involving project structuring, contract structuring, financial modeling, preparation of information memorandum, syndication of debt and equity and assistance in documentation and financial closure. Other services include appraisals for green-field and brown-field projects, techno-economic appraisal from banks and financial institutions for establishing the viability of corporate restructuring plans, and vetting of contracts, loan documents, project documentation etc.



Capital market: This group provides merchant banking services in connection with public issues, rights issues and public offers for buy-backs and open offers. It also advises clients on the private placements, ADR and GDR issues and overseas bond issues by the SBI.



Treasury and Investments: This group deals with the proprietary investment of the company in the equity, debt and money markets. Resource mobilization and management is also undertaken by this group.



Broking of Equity and Debt: SBI Caps is a registered broker and a member of the NSE in the equity and wholesale debt segments and is also a member in the equity segment. The Page 36

Investment Banking broking group caters to the secondary market needs of financial institutions, FIIs, mutual funds, banks, other corporates, high net worth individuals, non-resident investors and retail investors. The company commenced wholesale debt market broking in 2001. The company expects to have a strong presence in institutional broking. The company plans to open a derivative trading desk soon. 

Sales and Distribution of equity and mutual fund products: SBI Caps has been a leading mobilizer of funds both for public offers and private placements.



Research: This group provides the research support for in-house departments and for institutional clients. Besides regular updates on companies and industries, the research group brings out India Strategy, Debt Market Review and Daily Debt Market review which are circulated to SBI Caps investment banking and broking clients.

In its annual report for the year ending March 31, 2002, SBI Caps reported that is has two business segments –(a) Fee based segment providing merchant banking and advisory services like issue management, underwriting, arranger, project advisory and structured finance. (b) Fund based segment which undertakes deployment of funds in leasing, hire purchase and securities dealing. However, as a result of SEBI directives, fresh lending under leasing and hire-purchase was stopped from 1st July 1998. For the period 2001-02, SBI Caps was ranked first among issue managers by PRIME database. Kotak Mahindra Capital Company Born in 1995 as part of a corporate re-organization as an unlimited company. The Kotak Mahindra Capital Company (KMCC), is the investment banking entity belonging to the Kotak Mahindra Group. It is a strategic joint venture between Kotak Mahindra Bank Limited (KMBL) and the Goldman Sachs Group LLP of USA. KMCC is a full service investment bank whose core business centers on equity issuances and fixed income securities, mergers and acquisitions and advisory services. As an investment bank, KMCC is registered with SEBI and is also registered as a nonbanking financial company with RBI. It is also an active member of the association of Merchant Bankers of India (AMBI). KMCC has two wholly owned subsidiaries –(a) Kotak Mahindra (UK) Limited, which is registered with the Securities and Futures Association, UK and regulated by the Page 37

Investment Banking Financial Services Authority, UK and (b) Kotak Mahindra Inc based in USA, which is registered with the Securities and Exchange Commission, USA. KMCC is the first Indian investment bank to have sought such regulations in USA and UK. A third company called Kotak Mahindra (International) Limited., based in Mauritius provides distribution and other client services to nonresident investors.In KMCC, the Equity Capital Markets group focuses on structuring and executing diverse equity financing transactions in the public and private markets for corporates, banks, financial institutions and the Government. Products include initial public offerings (IPOs), rights offerings, convertible offerings, private placements and private equity for unlisted and listed companies. In the advisory business, the Structured Finance (Project Finance & Advisory Business) Group provides expertise in various vertical segments in the infrastructure sector including power, oil, gas, ports, automobiles, steel & metals and hotels by offering structured finance solutions to clients. The Fixed Income Securities Group at KMCC advises PSUs, Government companies, financial institutions, banks and corporates on raising capital by way of public or private placement of debt. KMCC is credited with innovating on some bond structures in the Indian market. The advisory group on mergers and acquisitions provides complete solutions on strategy formulation identification of targets or buyers, valuation, negotiations and bidding, capital structuring, transaction structuring, assistance in legal documentation and acquisition financing strategies and implementation.KMCC is supported in its functions by Kotak Securities Ltd, a broking firm incorporated in 1995 that is also a joint venture with Goldman Sachs which handles all the broking, distribution and research business of the group. Kotak Securities is a member of the debt segment of the NSE and is also a member of the National Stock Exchange Members Association. Kotak Securities offers services to investors, financial institutions, mutual funds, religious and charitable trusts, insurance companies, etc. The institutional business division has a comprehensive research cell with sectoral analysts covering all the major areas of the Indian economy. In the international arena, it provides brokerage services on the Indian securities to institutional and other investors who are based outside India. Due to its overseas presence, the company has marketing interests in Indian GDR and ADR issues as well.

Page 38

Investment Banking The research products brought out by Kotak Securities include: 

For the institutional clients, a product called AKSESS, which primarily covers secondary market broking. It caters to the needs of foreign and Indian institutional investors in Indian equities (both local shares and GDRs).



The Daily Forex Monitor which tracks the Indian and international foreign exchange markets and opines on currency strategies on a daily basis.



The Weekly Money Market Update which gives the details of the developments in markets and provides a short-term interest rate view along with indicative pricing for Triple A credits.



The CURRENCY WATCH captures the monthly developments in the Indian foreign exchange markets, analyses the key influencing issues, assess future outlook and also recommends hedging strategies.



Monthly FINSEC and FINSEC Focus.

Kotak Securities is also a registered primary dealer with the RBI in the government securities market. As a primary dealer, the company acts as a market maker and also provides two way quotes, acts as retailer and marketing agent, provides underwriting support on government securities issues and participates in auctions held by the RBI. Besides, the above companies, the Kotak Group includes the Kotak Mahindra Bank which was formerly a non-banking finance company that has recently been converted into a bank, the Kotak Mahindra Mutual Fund which is managed by the Kotak Mahindra Asset Management Co. Ltd and the OM Kotak Life Insurance, which is a joint venture with Old Mutual Plc of UK and the Kotak Mahindra Venture Capital Co. which manages the private equity fund of the group.

Page 39

Investment Banking Recent Trends in Investment Banking One of the trends that has been developing in the past few years in the global and Indian investment banking arena, is the strong emergence of universal banks ahead of pure investment banks as market leaders. These universal banks have the additional financial muscle of their banking arms that add to their investment banking strengths. Pure investment banks have found it unmanageable to maintain leadership positions due to difficult market conditions and the economic downturn. The year 2002 has been dubbed as the watershed year in investment banking for over a decade. Globally, universal banks such as the –Citigroup, JP Morgan Chase and Deutsche Bank are emerging strongly against pure investment banks such as Goldman Sachs and Morgan Stanley. This trend could probably reappear in India as well with the emergence of SBI, ICICI, IDBI and Kotak Mahindra Bank as strong universal banks. However, in 2002, pure investment banks such as JM Morgan Stanley and DSP Merrill Lynch still occupied top positions in the investment banking league tables. Some recent developments in the investment banking industry as reported in some financial dailies and other press clippings are listed below: International 

The Wall Street IPO market has seen the fewest number of issues since 1978 in the calendar year 2003, with just five in the first quarter. These have mostly been from insurance and financial services firms and four of them were IPOs.



In 2002, there was a drop of 28% in global equity and equity related issuances according to Thomson Financial. IPOs were the main causality with a drop of 34% to $60.6 billion. European market saw a drop of 53% drop in IPOs and 54% drop in convertible bond issuances. In Europe, the market focus shifted from fund raising through IPOs and public issues to more restructuring deals. These are termed as ‘rescue finance’ deals such as rights issue and fully convertible bond issues by troubled companies. Ericsson, Sonera and Zurich Financial Services are some companies that made rights issues in 2002. According to Dealogic, the volume of rights issues in Europe rose from $20.7 billion to $21.5 billion in 2002. The most popular instrument in USA and Europe has been the ‘mandatory convertible’ (fully convertible) bond which is considered as a forward share sales which is superior in nature to a rights issue. Page 40

Investment Banking 

The Citigroup was Wall Street’s top stock and bond underwriter in 2002. Citigroup affiliates Salomon Smith Barney arranged $414 billion of offerings with a 10.6% market share according to Thomson Financial. Merrill Lynch and CSFB were ranked second and third respectively. However, the total underwriting pie fell by 5% during the same year.



The top IPO investment bank in 2002 was Salomon Smith Barney followed by Goldman Sachs. Goldman arranged the largest IPO of 2002, the $4.6 billion CIT Group Inc. (Tyco International Ltd) unit.



The reported fee of American Investment banks fell by 21% in 2002 to $14.1 billion. Salomon took the highest fee of around $2 billion followed by the other two with around $1.2 billion each. Since April 2001, 78000 jobs were slashed in this industry in USA accounting for about 10% of the total strength.



Global M&A market was also dull in 2002 witnessing a sharp fall of 47% to stand at $996 billion from $1887 billion in the previous year. The biggest deals in 2002 were HPCompaq, Amgen-Immunex Corp, AOL Time Warner-AOL Europe, Bayer-Aventis Crop Science, Comcast Corp-AT&T Broadband, Philips Petroleum-Conoco and Siemens Robert Bosch-Atccs Mannesmann.



Some of the big universal banks such as JP Morgan Chase took major hits in their private equity businesses due to the technology meltdown. Incidentally, JP Morgan, which is one of Wall Street’s largest private equity operators with a fund base of $28 billion, generated $130 million in revenues in private equity in 2001 fuelled mainly by the IPO market boom in technology stocks. Due to the meltdown, many investment banks have felt it necessary to spin off their private equity operations into separate entities. BNP Paribas, Deutsche Bank, HSBC and Zurich Financial Services are some of these banks.



American investors poured more money into debt mutual funds in 2002 accounting to $133 billion and there were few takers for public issues of equity junk bonds and convertible bonds.

National 

During the year 2001, JM Morgan Stanley which acted as adviser to M&A deals worth Rs.16022 crore was rated the top investment bank in India. The other players in the big league were ABN-Amro (Rs.10460 crore), DSP Merrill Lynch (Rs.7130 crore), Arthur Page 41

Investment Banking Andersen (now part of E&Y, Rs.3532 crore), Kotak Mahindra (Rs.1719 crore), Rabo India Finance (Rs.833 crore) and Lazard Capital (Rs.536 crore) –(as reported in the Economic Times 21st November 2001). 

In 2002, there was only one GDR/ADR issue as compared to 6 in 2001 and 9 in 2000. This was made by Mascon Global which raised $10 million through issue of 2.5 million GDRs which are listed at Luxembourg Stock Exchange. In this market, Citibank was the leading depository banks according to Instanex Capital Consultants. This was followed by Bank of New York, Deutsche Bank and JP Morgan.



In the M&A market, the year 2002 saw an increase of around 5% in the value of M&A deals in Inda. Among these, more than 50% were cross-border deals according to a survey conducted by KPMG Corporate Finance. The deals were mostly in the SME segment with average size not exceeding $25 million. The banking, finance and insurance sectors contributed almost one-third of the total volume. Privatization

deals

also

played

a

significant part. 

DSP-ML de-listed from the stock exchange since its promoters, Hemendra Kothari and Merrill Lynch together held more than 90% of the shares. DSP was rated the ‘The Best Domestic Investment Bank’ in India for 2000 by Finance Asia. Euromoney voted it ‘Best Domestic M&A House in India’ as well as ‘Best Domestic Equity House in India’ in 2000. This distinction has returned for three years in a row with DSP-ML being named as the ‘Best Domestic Securities House’ and ‘Best Domestic Investment Bank’ for 2002-2003 by Asiamoney (May 2003 issue) and The Asset (January 2003 issue) magazine respectively.

Page 42

Investment Banking The Conflict of Interest Issue The most burning global issue in the investment banking industry is that of conflict of interest between investment bankers and their research analysis divisions. In the wake of the Enron, Worldcom and other corporate disasters, the issue has gained some significance. The Securities and Exchange Commission in the USA (SEC) have initiated investigations into instances of investment banks issuing over-optimistic research and steering shares in hot IPOs to important clients for vested interests. In such investigations some of the banks have been imposed fines. Merrill Lynch paid up fines to the extent of $100 million in regulatory proceedings in 2002 brought against its misleading research reports. Citigroup’s Salomon Smith Barney is also in the dock and may find itself paying the heaviest fines. CSFB also finds itself in trouble with the regulators. Most of the other top investment banks such as –Goldman Sachs, Lehman Brothers, Bear Sterns, Deutsche Bank, JP Morgan Chase and others also found their names in the fines list in 2002. CSFB was fined for misleading investors on offerings in technology shares. JP Morgan on the other hand, has been under a cloud for its role in the infamous off-balance sheet partnership it had crafted for Enron. Besides, investment banks have also been the target of several lawsuits filed by aggrieved investors. In late 2002, the French luxury goods leader LVMH filed a 100 million euro lawsuit against Morgan Stanley alleging that its research report on LVMH was biased because of the investment bank’s close advisory relationship with LVMH’s arch rival Gucci Group NV. Morgan Stanley was also the underwriter of Gucci’s IPO in 1995. Both the NYSE and NASDAQ came out with ‘research analysts’ conflict of interest rules’ in May 2002 which was subsequently approved by SEC. Market observers have felt that this is a good development from the point of view of addressing conflict of interest, currently a burning issue in the industry. While an investment bank may be advising a client on a buy out, its private equity arm may be in the fray for its purchase. An example of this was the sale of the power storage business of Invensys in 2001 wherein Morgan Stanley was the advisor in the $505 million sale to EnerSys a company owned by Morgan Stanley Capital Partners (Morgan Stanley’s private equity firm). So how does the conflict of interest really arise? Most investment banks have in-house research divisions which act as a support function as discussed earlier. The research divisions perform vital function of tracking corporates and making recommendations to their clients in the secondary market operations or to their own dealing rooms. They also issue reviews and ratings to new issuances hitting the market. The conflict could arise if the research Page 43

Investment Banking analyst promotes a share, the public offering for which is being handled by the merchant bank. Alternatively, it could also be that the analyst is privy to insider information being provided by their merchant banking division and there upon issue recommendations that could amount to fraudulent deceit of investors or gains for select few. Over the years, the ethical wall between merchant bankers and research analysts melted especially in the heat of the IPO and the internet boom. The compensation patterns of the investment bankers and research analyst were also getting complementary to an extent thus undermining their independence. A study was conducted by the SEC in 2001on ‘full service investment banks’ in Wall Street focusing on these conflicting relationships. The study disclosed two main areas of conflict–(a) research recommendations tending to become marketing tools for merchant banking assignments by the same bank and analysts getting paid share of such investment banking gains, (b) ownership of stocks by research analysts in the companies that they recommend or research. The study disclosed that analysts leveraged their position in pumping up recommendations in companies that they are interested in when they went public. In the revised dispensation, one of the main provisions is that analysts have to disclose their interests in their recommendations. In addition, there is sought to be a water tight compartment in the working of the merchant banking departments and research divisions. The third area has been the regulation of compensatory structures for research analysts based on the profits of the merchant banking divisions. The developments in the USA have also resulted in precautionary amendments to regulations made in India by SEBI though such instances of conflict of interest have not surfaced so far. SEBI has amended the regulations that have been in place for Merchant Bankers, Underwriters and for the prohibition of insider trading. As a result, analysts are barred from private trading in shares they analyze. There is still room for more regulation in future in this area of importance for the survival of the investment banking industry. In conclusion, it can be said that the investment banking industry has been through difficult times. On one hand, the economic slow down and the crash of the markets that were propelled to dizzy heights by the new economy stocks have battered their bottom lines and led to a large scale cut back in staff and operations. On the other hand, role of investment banks in corporate scandals and their questionable business practices and ethics have taken a toll on their reputation and image. A large scale cleaning up has to take place in their methods of working and service offerings. Similarly, a major resurrection of their confidence is required through resurgence of the markets, whenever that happens. In the meantime, the industry has to live up to the challenge through appropriate restructuring and consolidation Page 44

Investment Banking CHAPTER IV Finding & Analysis

1) Are you familiar with Kotak Securities? Total No of Person

Yes (%)

No (%)

50

90

10

Kotak Securities

10%

Yes (%) No (%)

90%

Page 45

Investment Banking 2) Do you have an account with Kotak Securities? If No, Than please Specify? Total No of Person

Kotak (%)

HDFC (%)

ICICI (%)

Others (%)

40

40

25

20

15

Others (%) 15% Kotak (%) ICICI (%)

40%

Kotak (%) HDFC (%) ICICI (%)

20% Others (%) HDFC (%) 25%

Page 46

Investment Banking Q3) Are you satisfied with the services provided by Kotak securities?

Total No of Person

Yes (%)

No (%)

40

62

38

No (%) 38%

Yes (%) Yes (%)

No (%)

62%

Page 47

Investment Banking Q4) How do you find the portfolio management services of Kotak securities? How do you rate on the scale below? (1– Good, 5– Worst)

Total No of Person

1 (%)

2 (%)

3 (%)

4 (%)

40

44

23

15

11

5 (%) 7

5 (%) 7% 4 (%) 11%

1 (%)

2 (%)

44% 3 (%)

3 (%) 15%

1 (%)

2 (%) 23%

4 (%) 5 (%)

Page 48

Investment Banking Q5) Which facility of Kotak Securities do you appreciate the most?

Total

No

of Person

40

Easy

Easy

Easy

Easy

Easy

Equity

IPO

Derivatives

Mutual

Insurance

(%)

(%)

(%)

Fund (%)

(%)

13

33

34

13

7

Easy Insurance 7% Easy Mutual Fund 13% Easy Derivative s

Easy Equity 34%

Easy Equity Easy IPO Easy Derivatives

Easy IPO 13%

Easy Mutual Fund Easy Insurance

33%

Page 49

Investment Banking Q6) How do you find the customer relationship management of Kotak? Rate it on the scale below? (1– Good, 5– Worst)

Total No of Person

1 (%)

2 (%)

3 (%)

4 (%)

5 (%)

40

31

27

17

13

12

5 (%) 12%

1 (%) 1 (%)

4 (%) 31%

2 (%)

13%

3 (%) 3 (%) 17%

4 (%) 2 (%)

5 (%)

27%

Page 50

Investment Banking Q8 ) How do you find follow up services of Kotak securities in terms of Monthly reports and others? Rate it on the scale below? (1– Good, 5– Worst)

Total No of Person

1 (%)

2 (%)

3 (%)

4 (%)

5 (%)

40

40

27

10

13

10

5 (%) 10% 4 (%)

1 (%)

1 (%)

13%

40%

2 (%)

3 (%)

3 (%)

10% 4 (%) 2 (%)

5 (%)

27%

Page 51

Investment Banking RECOMMENDATIONS. After studying the working of Kotak Securities for Non-Institutional investors (Investment Banking for general public) and taking into account the survey report they should further improve the quality of services provided by them in regards with transaction statement and the other limitations which are quoted by the public.

Kotak securities should increase their network of branches according to customer database and also area wise. It should be done gradually as it requires lots of capital and it should also not affect the company as a whole.

If the above recommendations are put into action by Kotak Securities, it will improve its profitability and goodwill of the company along with customer satisfaction.

Page 52

Investment Banking Conclusion: Investment banking is a field of banking that aids companies in acquiring funds. In addition to the acquisition of new funds, investment banking also offers advice for a wide range of transactions a company might engage in. Traditionally, banks either engaged in commercial banking or investment banking. In commercial banking, the institution collects deposits from clients and gives direct loans to businesses and individuals. Investment banking is a particular form of banking which finances capital requirements of an enterprise. Investment banking assists as it performs IPOs, private placement and bond offerings, acts as broker and carries through mergers and acquisitions.

Page 53

Investment Banking Bibliography:

Books Referred:

Investment Banking and Securities Trading.

Internet Websites: www.google.com www.wikipedia.org

Page 54

Investment Banking 1) Are you familiar with Kotak Securities? Yes

No

2) Do you have an account with Kotak Securities? If No, Than please Specify? Kotak

HDFC

ICICI

Others

3) Are you satisfied with the services provided by Kotak securities? NO

YES

4) How do you find the portfolio management services of Kotak securities? Rate on the scale below Between 1-5 (1– Good, 5– Worst) 1

2

4

5

3

5) Which facility of Kotak Securities do you appreciate the most? Easy

Easy Mutual Insurance

Equity Derivatives Fund

Easy Easy IPO Easy

Page 55

Investment Banking 6) How do you find the customer relationship management of Kotak? Rate it on the scale below? Between 1-5 (1– Good, 5– Worst) 1

2 4

3

5

7) How do you find follow up services of Kotak securities in terms of Monthly reports and others? Rate it on the scale below between 1- 5? (1– Good, 5– Worst)

1

2

3 4

5

8) Any limitations to Kotak Securities?

Page 56