Nakil Investment Banking Final

SUMMER PROJECT REPORT ON: OVERVIEW OF INVESTMENT BANKING IN INDIA UNDER THE GUIDENCE OF:

FALGUNI GAJJAR

PRESENTED BY: NAKIL T PARKAR MMS: 2008-10

2009 RIZVI INSTITUTE OF MANAGEMENT STUDIES & RESEARCH

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Contents

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1. Investment banking………………………………………………………………………03 2. The India Scenario……………………………………………………………………....04 3. Role of Investment Bankers……………………………………………………………..04 4. Functions of Investment Banking………………………………………………………..05 5. Evolution & growth of Investment Banking………………………………………….....06 6. The Global Scenario……………………………………………………………………..08 7. Overall Recent Developments…………………………………………………………...09 8. Service Portfolio of Indian Investment Bank…………………………………………....10 9. Difference between Investment banking & Merchant banking………………………....12 10. Organizational structure of an investment bank...……………………………………….14 11. The Role of the Investment Banker in the IPO Process, exist offers, offers in overseas

capital market…………………………………………………………………………….17 12. Regulatory framework for investment banking………………………………………….21 13. The Role of the Investment Banker in Mergers and Acquisitions……………………….25 14. The Role of the Investment Banker in the Sale of Private Companies…………………..26 15. Investment banking services in debt restructuring……………………………………….32 16. Overview of Corporate Restructuring……………………………………………………34 17. Comparative Analysis of Split-up through Transfer of Assets…………………………..38 18. Corporate Restructuring Case Study……………………………………………………..39 19. Financial restructurings…………………………………………………………………..47 20. Role of investment banking in corporate re-organizations………………………………48 21. Rationale for corporate Re-Organisation………………………………………………...49 22. Conclusion........................................................................................................................51 23. Bibliography……………………………………………………………………………..52

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Investment banking Introduction Investment Banking, branch of finance concerned with the underwriting, distribution, and maintenance of markets in securities issued by business firms and public agencies. Investment bankers are primarily merchants of securities; they perform three basic economic functions: (1) Provide capital for corporations and local governments by underwriting and distributing new issues of securities; (2) maintain markets in securities by trading and executing orders in secondary market transactions; and (3) provide advice on the issuance, purchase, and sale of securities, and on other financial matters. In contrast to commercial banks, whose chief functions are to accept deposits and grant short-term loans to businesses and consumers, investment bankers engage primarily in long-term financing. 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 An investment bank is a financial institution that raises capital, trades in securities and manages corporate mergers and acquisitions. Investment banks profit from companies and governments by raising money through issuing and selling securities in the capital markets (both equity, bond) and insuring bonds (selling credit default swaps), as well as providing advice on transactions such as mergers and acquisitions. A majority of investment banks offer strategic advisory services for mergers, acquisitions, divestiture or other financial services for clients, such as the trading of derivatives, fixed income, foreign exchange, commodity, and securities. 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 "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. 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. 3

The India Scenario In India, though the existence of this branch of financial services can be traced to over 3 decades, investment banking was largely confined to merchant banking services. The forerunners of banking in India were the foreign banks. In the year 1967 Grind lays bank (now merged with standard chartered bank in India) began investment banking operations with license from RBI followed by Citibank in 1970. It was in 1972 that the Banking Commission report asserted the need for merchant banking services in India by the public sector banks of India. SBI set up its merchant banking division in 1972 followed by Bank of India, central bank of India, Bank of Baroda, Syndicate bank, Punjab National Bank, Canara Bank. ICICI was the first financial institution to set up merchant banking division in 1973 next were IFCI and IDBI in year 1992.By the mid eighties and early nineties, most of the merchant banking divisions of public sector spun off as a separate subsidiaries. Characteristics and structure of Indian investment banking industry On the regulatory front, the Indian regulatory regime does not allow an investment banking functions to be performed under one entity for two reasons. (a) To prevent excessive exposure to business risk under one entity. (b) ) To prescribe and monitor capital adequacy and risk mitigation mechanisms. Therefore, Indian investment banks follow a conglomerate structure by keeping their business segments in different entities to meet regulatory norms. Due to the norms, Indian investment banking industry has a heterogeneous structure. The bigger investment banks have several group entities in which the core and non-core business segments are distributed. Role of Investment Bankers Investment bankers provide service and advice to companies, organizations and governments. Investment bankers also assist and advise companies on mergers and acquisitions, which basically means that they act as the buyer or seller (whatever position the company is taking) and negotiate the transaction. In other instances they just provide a strategy for action against an unwelcome bid. Investment bankers provide a wide array of services, including underwriting the issuance of equity or debt to aid a company having financial difficulties. It is the duty of the investment banker to provide advice on issues such as how to raise capital through equity or debt instruments. In addition to the above mention activities, investment bankers also governments deal with the privatization of public entities. For example, when the American government decides to privatize a correctional facility, an investment banker will negotiate with a buyer and advise or act on behalf of the government throughout the entire transaction. Privatization has become a very 4

lucrative focus for investment bankers. Although most popular in the United States and the United Kingdom, it is a growing phenomenon in many governments. An investment banker's main goal is to help clients achieve their goals. Investment bankers will assist their clients with the implementation of their chosen plan, including but not limited to buyouts. Investment bankers also must take charge of their own client load. Investment bankers must identify and secure their own clientele, so they literally have total control of how much or how little work they have. Investment bankers need the function using the most up-to-date news sources, so they must receive real-time market updates. In order to provide clients with the most accurate and effective strategy, investment bankers need access to in-depth information and comprehensive research and financial modeling tools to analyze the market and formulate likely outcomes. An effective investment banker will form close relationships with each client, including devoting numerous hours to client contact, meetings and even travel. Because investment bankers need to secure new clients, it is essential that they look for new opportunities for existing clients. 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 differ 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.

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Evolution & growth of Investment Banking Evidence indicates that ancient civilizations such as Greece and Rome engaged in investmentbanking operations with practices such as extending long-term credits to governments and to certain industries. During the Middle Ages investment banking was concerned largely with financing governments. In the 1100s and 1200s, for example, the Lombard banks in Italy combined trading operations with long-term loans made to various rulers. In Great Britain the earliest investment institutions of any importance were the acceptance houses, or merchant banks. As far back as the 1600s, these concerns financed foreign trade. Later the acceptance houses also floated foreign issues in London and accumulated funds for long-term investment abroad. Also important in the evolution of investment banking were private banks, many of which were family enterprises, and finance companies. One of the former, the House of Rothschild, attained a dominant position in the financial centers of Europe during the 1800s and was still influential in the 1900s. Currently, in Britain, channeling of capital into domestic industry is done mainly through specialized finance or investment companies. In many European countries, however, it is customary for the same institution to carry on both commercial and investment banking. In Germany, in particular, large banks play a leading role in financing industrial development. Investment banks also play a global role. Companies and governments frequently finance their needs in the market in which they can get the very best price and terms—whether that market is in the United States, Europe, or Japan. The fall from grace of investment bankers leading to a radical change in the financial sector's landscape in advanced countries is a significant development having many lessons for India too. Investment banking, or merchant banking as it is called here, has been slow to develop in India. Unlike in the U.S. where Depression era legislation segregated the two activities, banks here did not have any legal constraints. However, there were certain 'non-banking' activities such as hire purchase and leasing that could be done only by subsidiaries, which in course of time resembled the bigger NBFCs which are important niche players. Foreign players in a fix significantly even when universal banking became the flavour of the season & Nash; commercial banks trying to open financial supermarkets & dash; big banks undertook activities such as insurance only through subsidiaries and relied on the brand names of the parent banks. It is not clear whether the universal banking model as it has evolved here has been a help or a hindrance to the promoting bank. In a regulatory sense there has been an overlap. Other than the Reserve Bank of India, the Securities and Exchange Board of India and the Insurance Regulatory and 6

Development Authority are also involved. Of the many similarities between investment banks abroad and in India, the easily noticed one is the higher level of salary compensation paid to investment bankers compared to their more sedate commercial banking counterparts. As in the West, the main investment banking activities in India are mergers, acquisitions, corporate finance and restructuring. Even though some public sector banks are active in the field, the lion's share of the business appears to have been grabbed by the big brokers acting as investment bankers, foreign banks and the branches of the foreign investment banks. Interestingly many big investment banks have had tie ups with broker-firms. Sensing the potential in India many of them had started venturing out on their own. The serious crisis in the U.S. has put paid to their plans in India. In many cases their continuance in India seems to be in doubt. With all their well publicized failings, will the erstwhile foreign investment banks continue to appeal to their major Indian clients? In the last 'big bang' disinvestment, involving ONGC and others, none of the public sector merchant banking subsidiaries had any role. The field was dominated entirely by foreign investment banks. Arcelor Mittal was put together with the help of the (then) big players, all international investment banks. The Tata-Corus deal and the Aditya Birla Group's forays abroad were aided by foreign investment banks. It is too much to expect that India's public sector merchant banking subsidiaries will fill the void. But they can learn important lessons from the failure of investment banking abroad. One clear message for them is not to do a 'regulatory arbitrage' exploiting the lacuna in regulation. Foreign banks could get away. Citibank and others, though named by the JPC as the biggest perpetuators of the 1991-92 securities scam, escaped unscathed. Public sector banks, including the SBI group, have fared far worse. The second message of course is not to emulate the recently failed American investment banks in undertaking activities without fully comprehending the risks. Banks in India have so far disclosed relatively small exposures to 'toxic' securities that have brought down the big names. The same degree of caution will serve them well in any other type of investment banking activity, however glamorous or profitable it may be.

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The Global Scenario Size of industry Global investment banking revenue increased for the fifth year running in 2007, to $84.3 billion. These were up 21% on the previous year and more than double the level in 2003. Despite a record year for fee income, many investment banks have experienced large losses related to their exposure to U.S. sub-prime securities investments. The United States was the primary source of investment banking income in 2007, with 53% of the total, a proportion which has fallen somewhat during the past decade. Europe (with Middle East and Africa) generated 32% of the total, slightly up on its 30% share a decade ago. Asian countries generated the remaining 15%. Over the past decade, fee income from the US increased by 80%.This compares with a 217% increase in Europe and 250% increase in Asia during this period. The industry is heavily concentrated in a small number of major financial centres, including New York City, London and Tokyo. 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 but 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 began in 2007. Each over-thecounter contract has to be uniquely structured and could involve complex pay-off and risk profiles. Listed option contracts are traded through major exchanges, such as the CBOE, and are almost as commoditized as general equity securities. 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 (since the more trades an investment bank does, the more it knows about the market flow, allowing it to theoretically make better trades and pass on better guidance to clients). The fastest growing segment of the investment banking industry is private investments into public companies (PIPEs, otherwise known as Regulation D or Regulation S). Such transactions are privately negotiated between companies and accredited investors. These PIPE transactions 8

are non-rule 144A transactions. Large bulge bracket brokerage firms and smaller boutique firms compete in this sector. Special purpose acquisition companies (SPACs) or blank check corporations have been created from this industry. Overall Recent Developments New reforms in investment banking and the marketing of securities were enacted as the 21st century began. The reforms followed a wave of scandals in 2001 and 2002 involving the lack of safeguards preventing conflicts of interest within an investment bank. Investment bank research analysts who recommended stocks to investors were being compensated for attracting investment-banking clients. Such clients included companies that sought an investment bank’s help in funding an initial stock offering known as an initial public offering (IPO). These investment-banking clients, in turn, expected favorable stock ratings. In some cases analysts were publicly recommending a stock while privately ridiculing the company that issued the stock. In a settlement with the New York State attorney SGeneral and the Securities and Exchange Commission (SEC), ten investment-banking houses in 2003 agreed to pay $1.4 billion in fines and to adopt a variety of reforms aimed at ending these conflicts of interest. For example, research analysts could no longer be rewarded for attracting investment-banking business, and strict limitations were placed on communications between the research department and the investment bankers involved in IPOs. Federal legislation, known as the Sarbanes-Oxley Act, was also enacted in 2002 to help protect small investors jeopardized by biased research from investment banking houses. None of these reform measures, however, anticipated the debacle that would virtually swallow up the independent investment banking industry as the 21st century progressed. Beginning in 2008 two major investment banks, Bear Stearns and Lehman Brothers, failed as a result of their overexposure to financial instruments known as mortgage securities. When a speculative bubble in housing prices burst and housing foreclosures reached record levels, these and other investment banks were left holding securities and other financial instruments known as derivatives that declined drastically in value. In March 2008 the Federal Reserve used $30 billion in taxpayers’ money to offer a line of credit to J.P. Morgan Chase & Co. so that it could acquire Bear Stearns. Then in September the Fed and the Department of Treasury decided not to intervene to rescue Lehman Brothers, one of the oldest investment banks in the country. As a result, Lehman Brothers went into bankruptcy, leaving only three other major investment banks in existence. Bank of America Corporation soon acquired the firm Merrill Lynch. The last two remaining major investment banks, Goldman Sachs and Morgan Stanley, then announced that with the approval of the Federal Reserve, they were becoming bank holding companies so that they could compete with firms like J.P. Morgan, Bank of America, and Citigroup Inc.

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SERVICE PORTFOLIO OF INDIAN INVESTMENT BANKS The core services provided by Indian investment banks are in the areas of equity market, debt market and advisory services. Core service (1) MERCHANT BANKING, UNDERWRITTING AND BOOK RUNNING

The SEBI functions as a regulatory for the capital markets much in the lines of other countries such as SEC in U.S.A .When the primary markets are buoyant, issue management, book building and syndicated underwriting form a very dominant segment of activity for most Indian investment banks. A segment of primary market is also the private placement market, especially for government securities and, commercial paper and bonds floated by public sector banks and corporations. Investment banks have been managing public offers and holding them in private placements as well. (2) MERGERS AND ACQUISTIONS, CORPORATE ADVISORY The two factors that given rise to this industry are: (a) The force of liberalization and globalization that forced Indian industry to consolidate. (b) The institutionalization of corporate acquisitions by SEBI through its guidelines, popularly known as takes over code. (c) Indian investment banks also have a large practice in corporate advisory service

relating to project financing, corporate structuring, capital restructuring through equity repurchases, and raising pvt. Equity, structuring joint-ventures and strategic partnerships and other value added specialized areas.

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Capabilities of an Ideal Investment Banker These capabilities can be identified in the services mostly offered by the investment banks. They include the following: Investment Management/Fund Management The ideal investment bank should possess strong skills in investment management. This generates income for it as well as help in the distribution of new issues In depth Knowledge of Corporate Finance Issues It must have a team of professionals who are well versed in the issues of corporate finance to enable it make valuable inputs into the financial decisions of their clients. It also gives it a competitive advantage when the investment banker is bidding for IPO projects. Pricing of Services The ideal investment banker should be able to deliver its services at a lower cost in order to woo capable businesses interested in going public. Pre-Financing of IPOs IPOs have been identified as very costly for the issuing firms. In order for an investment banker to woo clients, it should be capable of pre-financing the IPO in order to gain a competitive advantage in its market over the years in order to gain dominance in the IPO market. Performing Ancillary Services Other augmenting capabilities include the ability to support the trading of the securities floated. This primarily involves supporting transactions in the security on the secondary market. Registrar and Custodial services are key to the competitive strategies of an investment banker. An advantage of these supplementary services is the future cash streams in fees charged to the issuing firms. This is bundled together with other services when investment banks are pricing their fees. Thus it is cheaper for the issuing firm to outsource the registrar services to the investment banker rather than employ another investment banker to undertake this function. These activities, although may not seem necessary to the performance of the investment banking function, could create competitive advantage for the investment banker possessing them.

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Difference between Investment banking & Merchant banking Merchant banks and investment banks, in their purest forms, are different kinds of financial institutions that perform different services. In practice, the fine lines that separate the functions of merchant banks and investment banks tend to blur. Traditional merchant banks often expand into the field of securities underwriting, while many investment banks participate in trade financing activities. In theory, investment banks and merchant banks perform different functions. Pure investment banks raise funds for businesses and some governments by registering and issuing debt or equity and selling it on a market. Traditionally, investment banks only participated in underwriting and selling securities in large blocks. Investment banks facilitate mergers and acquisitions through share sales and provide research and financial consulting to companies. Traditionally, investment banks did not deal with the general public. Traditional merchant banks primarily perform international financing activities such as foreign corporate investing, foreign real estate investment, trade finance and international transaction facilitation. Some of the activities that a pure merchant bank is involved in may include issuing letters of credit, transferring funds internationally, trade consulting and co-investment in projects involving trade of one form or another. The current offering of investment banks and merchant banks varies by the institution offering the services, but there are a few characteristics that most companies that offer both investment and merchant banking share. As a general rule, investment banks focus on initial public offerings (IPOs) and large public and private share offerings. Merchant banks tend to operate on small-scale companies and offer creative equity financing, bridge financing, mezzanine financing and a number of corporate credit products. While investment banks tend to focus on larger companies, merchant banks offer their services to companies that are too big for venture capital firms to serve properly, but are still too small to make a compelling public share offering on a large exchange. In order to bridge the gap between venture capital and a public offering, larger merchant banks tend to privately place equity with other financial institutions, often taking on large portions of ownership in companies that are believed to have strong growth potential. Merchant banks still offer trade financing products to their clients. Investment banks rarely offer trade financing because most investment banking clients have already outgrown the need for trade financing and the various credit products linked to it. An Investment Banker is total solutions provider as far as any corporate, desirous of mobilizing capital, is concerned. The services range from investment research to investor service on the one 12

side and from preparation of offer documents to legal compliances and post issue monitoring on the other. There exists a long lasting relationship between the Issuer Company and the Investment Banker. A "Merchant Banker" could be defined as "An organization that acts as an intermediary between the issuers and the ultimate purchasers of securities in the primary security market”. Merchant Banker has been defined under the Securities & Exchange Board of India (Merchant Bankers) Rules, 1992 as "any 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". Merchant Banking, as a commercial activity, took shape in India through the management of Public Issues of capital and Loan Syndication. It was originated in 1969 with the setting up of the Merchant Banking Division by ANZ Grindlays Bank. The main service offered at that time to the corporate enterprises by the merchant banks included the management of public issues and some aspects of financial consultancy. The early and mid-seventies witnessed a boom in the growth of merchant banking organizations in the country with various commercial banks, financial institutions, and broker’s firms entering into the field of merchant banking.

. Reform measures were initiated in the capital market from 1992, starting with the conferring of statutory powers on the Securities and Exchange Board of India (SEBI) and the repeal of Capital Issues Control Act and the abolition of the office of the Controller of Capital Issues. These have brought about significant improvement in the functional and regulatory efficiency of the market, enabling the Merchant Bankers shoulder greater legal and moral responsibility towards the investing public.

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Organizational structure of an investment bank Main activities and units On behalf of the bank and its clients, the primary function of the bank is buying and selling products. 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 buys or sells a product to a client and does not hedge his total exposure. Banks seek to maximize profitability for a given amount of risk on their balance sheet. An investment bank is split into the so-called front office, middle office, and back office. Front office Investment banking is the traditional aspect of the investment banks which also involves helping customers raise funds in the capital markets and advise on mergers and acquisitions. These jobs pay well, so are often extremely competitive and difficult to land. On a similar note, they are extremely stressful. Investment banking may involve subscribing investors to a security issuance, coordinating with bidders, or negotiating with a merger target. Other terms for the investment banking division include mergers and acquisitions (M&A) and corporate finance. 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. Product coverage groups focus on financial products, such as mergers and acquisitions, leveraged finance, equity, and high-grade debt and generally work and collaborate with industry groups in the more intricate and specialized needs of a client. 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 management division of an investment bank is generally divided into separate groups, often known as Private Wealth Management and Private Client Services. Asset Management 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 highnet-worth investors to suggest trading ideas (on caveat emptor basis) and take orders. Sales desks then communicate their clients' orders to the appropriate trading desks, which can price and execute trades, or structure new products that fit a specific need. Structuring has been a relatively recent division as derivatives have come into play, with highly technical and numerate employees working on creating complex structured products which typically offer much greater margins and returns than underlying cash securities.

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Merchant banking is a private equity activity of investment banks. Current examples include Goldman Sachs Capital Partners and JPMorgan's One Equity Partners. (Originally, "merchant bank" was the British English term for an investment bank.) Research is the division which reviews companies and writes reports about their prospects, often with "buy" or "sell" ratings. While the research division generates no 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. 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. Therefore in recent years the relationship between investment banking and research has become highly regulated requiring a Chinese wall between public and private functions. Strategy is the division which advises 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. 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 (as per agreement of commercial terms with the counterparty), correctly (as per standardized booking models in the most appropriate systems) and on time (typically within 30 minutes of trade execution). 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. When this assurance is not in place, market and credit risk analysis can be unreliable and open to deliberate manipulation. Finance areas are responsible for an investment bank's capital management and risk monitoring. By tracking and analyzing 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. Compliance areas are responsible for an investment bank's daily operations' compliance with government regulations and internal regulations. Often also considered a back-office division.

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Back office An operation involves 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 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. Some trades are initiated by complex algorithms for hedging purposes. The Players The biggest investment banks include Goldman Sachs, Merrill Lynch, Morgan Stanley Dean Witter, Salomon Smith Barney, Donaldson, Lufkin & Jenrette, J.P. Morgan and Lehman Brothers, among others. Of course, the complete list of I-banks is more extensive, but the firms listed above compete for the biggest deals both in the U.S. and worldwide. While brokers from these firms cover every city in the U.S., the headquarters of every one of these firms is in New York City, the epicenter of the I-banking universe. It is important to realize that investment banking and brokerage go hand-in-hand, but that brokers are one small cog in the investment banking wheel. Brokers sell securities that a firm underwrites and manage the portfolios of retail investors. Each firm listed above certainly can produce reams of paper and data attesting to its dominance, and most have several strengths. But no single firm rules in every aspect of banking. Merrill leads in total underwriting volume, but trails DLJ in high-yield. Goldman Sachs' reputation in equity underwriting and M&A advisory is stellar, but it lags the competition in the asset-backed debt business. The following pages contain the rankings of investment banks (commonly called league tables) in several categories. All in all, every firm has its own pros and cons, and choosing one based on reputation alone would be foolhardy.

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Role of investment banker in IPO follow on offerings, exist offers, offers in overseas capital market General financial advice Investment Banking also involves providing general financial advice on a range of issues, such as funding structure (perhaps the company is too indebted, and should issue shares to raise more money; or does it have too much cash on its balance sheet, just sitting there not earning interest, so that it should consider paying a large dividend to its shareholders or buying back some of its own shares). Capital raising If a company is to grow, it has to invest and, often, that capital comes from external sources. This can be in the form of either "equity", when the company issues more shares to investors, who buy them for cash; or debt, either from banks or - more usually nowadays - directly from investors. Investors may be either institutional (pension funds and the like) or “retail” (individuals). Investment Banks advise on the raising of capital In what form, how much, from whom, timing - and may also charge a fee for arranging the financing or for "underwriting" (guaranteeing to take up any securities that are unsold in the market, so that the issuer knows for sure how much cash it is going to raise and can plan accordingly).

Ways of Raising Capital There are several ways of raising equity capital: These are discussed below: Rights Offerings Most company regulations or charters allow shareholders to have a pre-emptive right in additional stock issues. Thus, anytime the company wants to raise additional equity capital, it must make a formal offer to existing shareholders before it can seek the interest of potential outside investors. Where it sells additional stock issues to existing shareholders, it is called a rights offering. This offer may be renounceable or non-renounceable. A renounceable rights offering gives the shareholder the option to exercise his right to purchase the new shares at the issue price. A non-renounceable rights offering obligates the shareholder to exercise his rights at the issue price.

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Public Offerings Where the corporate charter or regulations are silent on pre-emptive rights of existing shareholders, it may decide to sell new shares or stock through a rights offering or a public offering. Private Placements: This method of selling securities is generally used by companies who are interested in reducing their floatation costs and are interested in a specific group of investors. Under private placements, new stocks are sold to one or a few investors, generally institutional investors who invest in large blocks of shares. Employees Purchase Plans and Employee Share/Stock Ownership Plan In most organizations, the regulations or charter allows employees to purchase the shares of the company usually at predetermined prices based on the financial performance of the entity. This usually affects managerial staff in order to reduce the prevalence of the principal-agency problem. The Role of the Investment Banker in the IPO Process It is clear from the above discussion that, the activities or roles of the investment banker in the IPO process cannot be discounted. The success of the IPO will to a large extent depend on the capabilities of the investment banker selected. However, in the absence of a model to guide issuers of securities in selecting investment banks, how does a company come up with the right investment banker to manage its IPO despite the numerous efforts made by academics to investigate into issues concerning the market for IPOs, not much has been done on the capabilities of investment banks. However by examining critically the roles and responsibilities of investment banks in the IPO process, we can glean some qualities or capabilities an investment banker must possess in order to survive in its market. Roles investment banks play in the IPO process and these include: Underwriting, Distribution and, Advice and Counsel. Underwriting: This is the insurance function of bearing the risk of adverse price fluctuations during the period in which a new issue of securities is being distributed. There are two fundamental ways of doing this, and they are the firm commitment and best efforts underwriting agreements. The firm commitment agreement obligates the investment banker to assume all the risks inherent in the issue. On the other hand, the best efforts agreement absolves the investment banker from any risks in the issue. Under this underwriting agreement, the investment banker undertakes to help sell at least a minimum amount of the issue with any unsold amounts returned to the issuing firm. Where the investment banker is not able to sell the minimum quantity agreed upon, the whole issue is cancelled and reissued when the market is ready to accommodate the issue. 18

Distribution: Another related function to the one described above is the ability of the issuing firm to reach as many investors as possible with its security. Investment banks play a very crucial role here, because of their expertise in doing this relative to the issuing firm assuming this responsibility when issuing securities. Advice and Counsel: This involves the investment banker making valuable inputs into decisions concerning its client ability to succeed in the capital market with an IPO. Its ability to make valuable inputs in this direction may largely depend on its experience in origination and selling of securities. Following are Reasons why investment banks gain importance with their corporate clients. These are: 1. Credibility with the client corporation’s senior management-earned over several years. 2. Understanding the client company’s needs for service and its financial goals and policies. 3. Making useful recommendations to the company over a period of time. 4. Innovating with new financing techniques. 5. Having special expertise in a specific service. 6. Recommending a specific transaction. Credibility with Senior Management His postulation on the role of an investment banker goes beyond the IPO process to include other activities or capabilities of the investment banker, which tends to impact on choice of an investment banker by senior management who are interested in strategic issues of the organisations they are responsible for. Thus if an investment banker’s capabilities fit well with financial strategies of the organisation, it is made an integral part of implementing the financial strategy. Understand Client Company Another reason he finds important to corporate executives is the investment banker’s knowledge of their companies and their operations. More conservative corporate executives rated this as a critical success factor in dealing with investment banks, especially when the investment banking industry in US has over the years survived, by maintaining a relationship with their clients. In his study, 3 of the 4 different industries he studied ranked this variable as the most important of all in dealing with an investment banker. Making Useful Recommendations A more IPO related factor is the ability of the investment banker to make valuable recommendations to the issuing firm over time. This is because it reinforces the reliability and consistency of the investment bank’s capabilities to its corporate clients. In this light an investment banker that is able to consistently make valuable inputs into the financial decisions of a client strengthens the relationship between itself and its client. 19

Expertise in Equity Underwriting Another important IPO related capability is the ability of the investment banker to underwrite securities. In the absence of any model to determine the overall capabilities of an investment banker, this has been one of the criteria for ranking the performance of investment banks. Having Expertise in a Specific Service The competitive wave sweeping the US investment banking industry has caused most investment banks to concentrate on their capabilities where they can gain a competitive advantage. The era where one investment banker was at the centre of a corporate entity’s financial strategy is over. Corporate entities are ‘shopping’ for specific capital market capabilities of investment banks. This has eventually changed the structure of the investment banking industry where size used to be a competitive factor. Supplementing Capabilities Other capabilities such as Euro market capabilities, recommending specific transactions and innovating with new financing techniques are all additives to the more generic functions described above. These capabilities, though not really taken to be very important then are now making very important inputs into the choice of firms by corporate clients. Investment banks have been motivated in various ways to develop capabilities in these areas to expand their clientbase beyond their domestic financial markets.

Regulatory framework for investment banking 20

Underwriting activity in India is regulated under the SEBI Rules 1993 and SEBI regulations 1993. The regulatory framework of underwriting activity under the above said rules and regulations in summarized below: Rule No.1 Capital Adequacy requirement The existing capital adequacy prescribed by regulation 7(1) of the Regulations requires minimum net worth of Rs 20 lacs. Minimum net worth for a merchant banker has gone up from Rs 100 lacs to Rs 500 lacs, while for a broker on The Stock Exchange Mumbai (BSE) it is Rs 50 lacs and on National Stock Exchange (NSE) it is Rs 200 lacs. The method of computation of net worth for each category is distinct from each other. Underwriting being a financial risk, it is imperative for an underwriter to have adequate net worth to finance the risk The Committee recommends that the minimum net worth requirement for underwriters may be increased to Rs 100 lacs. The underwriting capability of merchant bankers, brokers and entities registered with other regulators will be subject to satisfaction of norms prescribed herein. Underwriters shall submit to the lead manager a certificate from a chartered Accountant certifying its net worth and fructified outstanding obligations every time it seeks underwriting. Analysis As it is a risk involved business it's better for an underwriter to be with more liquid assets so that if he is not in a position to promote all the shares he has promised to underwrite he should be in a position to buy those shares. Rule No 2 Computation of net worth The current definition of net worth as per explanation to regulation 7 includes paid up capital and free reserves. It is felt that the current definition is not explicit and specific. For the purposes of underwriting, the liquidity of the underwriter at any point of time is more critical than net worth as on a particular date. The current definition does not give adequate weightage to tangible and liquid assets of the underwriters. Options such as computing net tangible asset or obtaining certificate of liquidity from auditors are available.

Analysis 21

Liquidity is important to a factor to an underwriter because he is involved in high risk business and he should be in a position to subscribe the promised amount of shares at any time if he fails to promote it. The definition of net worth may be tightened and computed more explicitly as follows: Net worth = Capital + Free Reserves Less: Non-allowable assets viz., (a) Fixed assets (b) Unlisted securities (c) Bad deliveries (d) Doubtful debts and advances (e) Prepaid expenses, losses (f) Intangible assets (g) 30% of value of marketable securities and 30% of value Of pledged securities net of outstanding liability Rule No.3 Limit on underwriting obligations The current limit of maximum 20 times net worth as per regulation 15(2) of Regulations was believed to be high in view of the fact that net worth was not explicitly defined. Analysis: It was recognized that capital adequacy requirements of financial intermediaries has been consistently revised upwards in last few years. It was also appreciated that underwriters with higher net worth would be able to arrange financing in a more efficient manner than those with a low net worth. On the other hand, underwriters with low net worth and higher multiple stand a greater risk of default. Therefore, proposal to introduce slabs for limits on underwriting obligations based on net worth of the underwriter was found appropriate. The leverage should be linked to net worth. The following slabs may be adopted for determining the leverage for underwriters. Net worth Multiple of net worth Between Rs 1cr to Rs 5crs

Rule No 4 22

Subscription in case of devolvement The existing limit of 30 days for subscription/procuring subscription by underwriter as per model agreement is at a variance with limit of 45 days as per regulation 15(3) of the Regulations. Analysis: Besides, both the limits are antiquated in the current environment when allotment in fixed price issue gets done within 30 days from issue closure and in book building within 15 days from bid closure. There is a need to review the existing time frame. However, the revised time frame has to also take into the account the time required for the registrar to the issue to co-ordinate with the bankers to the issue in order to determine the extent of under-subscription and the underwriters' obligation. The figures are then to be authenticated by an auditor before notices can be sent out to the underwriters. After receiving the notices, the underwriters should be allowed a fair period of time to fund subscription or procure subscription. Rule No 5 Registration criteria and registration fees -According to rule 3(1) of the Regulations, no person shall act as an underwriter unless he holds a certificate granted by SEBI under the Regulations. One of the criteria for considering application for registration as underwriter, as per regulation 6 and Form A of the Regulations, is necessary infrastructure and past experience in underwriting. However, adequate infrastructure and experience are not clearly defined. Neither do these criteria ensure commitment towards underwriting. It is believed that underwriting involves a financial risk where adequate net worth is critical rather than adequate infrastructure and experience. Analysis Most of the underwriters today are already registered with SEBI for some activity or the other. They may be merchant bankers, stock brokers, mutual funds etc. They are already regulated by SEBI for their actions under different regulations. Seeking one more registration for the same entity, as an underwriter, adds to the administrative burden of SEBI. Such separate registration may be avoided. There could be few underwriters such as banks, financial institutions etc who may not be registered and regulated by SEBI. However they are registered and regulated by some other regulators for e.g. RBI in case of banks and institutions. In such cases the respective regulator could monitor the underwriting activities as part of its regular monitoring of various other activities and if required report its findings to SEBI for necessary action. Thus registration with any regulator would be an eligibility criteria but the underwriter 23

will be governed by the Regulations. In case of any default by the underwriter, the lead managers will report the same to SEBI through the issue monitoring reports. Thus the ability for action against underwriters continues with SEBI. Rule No 6 Agreement with clients Every underwriter shall enter into an agreement referred to in clause (b) of rule 4 with each body corporate on whose behalf he is acting as underwriter and the said agreement shall, amongst other things, provide for the following, namely :-

(i) the period for which the agreement shall be in force; (ii) the amount of underwriting obligations; (iii) the period, within which the underwriter has to subscribe to the issue after being intimated by or on behalf of such body corporate; (iv) the amount of commission or brokerage payable to the underwriter; (v) details of arrangements, if any, made by the underwriter for fulfilling the underwriting obligations. Analysis The agreement acts as a future security to both the underwriter and the client company and also it creates a legal binding between them. So that it makes mandatory to both the parties to execute their responsibilities in a proper manner.

Mergers and Acquisitions (or "M&A") 24

The majority of financial advice relates to M&A. The client company seeks to expand by acquiring another business. There are many possible commercial reasons for this, such as: • • • • •

increasing the range of products increasing the business' geographical footprint complementing existing products integrating vertically (i.e. acquire suppliers, further up the chain, or customers, further down the chain) Protecting a position (for example by preventing a competitor from acquiring the business in question).

In practice therefore, Investment Banking divisions tend to be divided into industry sector teams, who can then familiarize themselves with the principal players, economics and dynamics of the sector.There are also many possible financial reasons for making an acquisition, such as: • • • • • •

raising profitability, and therefore the share price increasing in size followed and more widely invested in; again, likely to have a positive effect on the share price financing growth improving quality of profits - the market likes predictable profit streams, and will value these more highly Shifting the business towards sectors more favorably viewed by the market.

The Investment Bankers' roles in these transactions involve: • •

•

using their knowledge of the industry sector, to help with the identification of potential targets which meet commercial criteria such as those referred to above using their knowledge of the investment market, to advise on valuation, form of consideration (should the sellers be paid in cash - which is likely to involve the buyer borrowing the money - or in the buyer's shares - so that the seller ends up with a stake in the buyer, or a blend of the two?), timing, tactics and structure coordinating the work of the other advisers involved in the transaction - lawyers, who prepare the documentation for the acquisition and help with the "due diligence" to be performed on the business being acquired; accountants, who advise on the financial reporting aspects of the transaction, and tax consequences; brokers, who advise on shareholder aspects (how are the buyer's shareholders likely to view the acquisition?) and how the market as a whole is likely to receive the transaction; and public relations consultants, who ensure that the transaction has a favorable press.

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The Role of the Investment Banker in the Sale of Private Companies Investment bankers help buy or sell companies and raise capital. They are members of a team with attorneys and accountants. The investment banker’s value added comes both from specific technical knowledge as well as from hindsight from the number of times they have been through the process. This article can be an effective way to explain the often incompletely understood role of an investment banker As a financial advisor to numerous middle market private companies, asked exactly what does an investment banker do?” Well, about 30 things come to mind in the context of a sale or merger engagement. The same process applies to financing and acquisition assignments. 11. Obtain Concurrence Of Expectations Of Value And Terms. The investment banker’s first task is to determine that they and their prospective client concur on value, which needs not be a firm number - it may be a range or ratios pending future performance, and will depend on terms. Since no asking price will be used, the market will ultimately determine value, but expectations need to be mutual. 12. Help The Client Understand How A Potential Buyer Will View The Company. Most companies are sensitive to how they are perceived by customers, suppliers, employees and the community, but haven’t focused on the unique perspectives of potential buyers. The investment banker and their client must develop a mutual understanding of why and where a potential buyer will see value. 13. Candidly Assess The Prognosis For Future Challenges. The investment banker must drill down to unearth any issues that could emerge at an inopportune time. If there are any potential problems related to the company and its business, they need to be discussed candidly and early in the process. Even a relatively minor issue can kill a good deal if it crops up at a critical point in the process. 14. Develop, Validate And Document Historical And Projected Financials. The investment banker will help the company recast historical numbers to add back discretionary expenses and model future performance. Projections should be optimistic but realistic - a buyer might predicate his price on them - and must include underlying assumptions as to what capital and other resources will be needed. 1 2 3 26

45. Assist In Recruiting Other Members Of The Team Not Already On Board. A sale transaction requires attorneys and accountants with experience commensurate with the anticipated transaction. Mistakes or oversights can be expensive and/or kill deals. This is not where to cut costs, and you don’t want to wait until there is a deal on the table. The investment banker can help in recruiting or selection. 1 26. Identify And Evaluate Potential Categories Of Buyers. The first task is to determine who is likely to buy the Company at the desired price and terms. There are financial buyers (investment groups) and strategic buyers (companies in related businesses). The “right market” depends on the type, size and location of the business and the desired terms. A lot of time can be wasted chasing the wrong market. 17. Develop Marketing Strategies.

There are three basic M&A marketing strategies: tightly focused to a select few; strategically focused to a limited number; or broadly to a large audience. The selection depends on the type of business, confidentiality and the type of buyers targeted. The investment banker’s goal is to create an auction, or alternately obtain a pre-emptive bid. 18. Identify Specific Potential Buyers The investment banker’s next task is to identify and prioritize specific potential buyers. A strategic buyer 5 to 10 times your size is optimal, but smaller divisions or subsidiaries of even very large companies are often virtually autonomous and should be included, as should financial buyers with other investments in the same industry. 19. Obtain Firsthand Introductions To Potential Buyers Wherever Possible The investment banker’s ideal goal is to obtain personal introductions to senior management of potential buyers. Auditors, attorneys or banks whom they know often will have direct or indirect (e.g. through board members) relationships that can get past the gatekeepers, which is especially useful in approaching large organizations. 110. Prepare Documentation To Market The Company. The investment banker will prepare two marketing documents: a concise summary containing enough to arouse interest without revealing identity; and a comprehensive book or memorandum, which should cover the same ground as a public company “prospectus”, but at the same time must be a marketing document.

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111. Initiate Contact With Potential Buyers The investment banker’s initial approach to potential buyers is critical. Once the prospect has said no, it’s hard to go back. Initial contacts require tenacity and skill. Whether by phone, letter or email, they need sizzle to get attention but also cover the essential facts. The “pitch” must be well honed and get the message across in 30 seconds or less. 112. Obtain Signed Confidentiality Agreements The investment banker’s ensuing objective is to obtain a signed confidentiality or non-disclosure agreement (“CA” or “NDA”) so the next step can be taken. The simpler the CA, the easier it is to get signed. If truly sensitive information is to be disclosed later in the process, a more detailed one can be executed. 113. Provide Prospective Buyers Detailed Information The investment banker’s next step is to send prospects the “book”. Confidentiality agreements notwithstanding, the book should not contain anything truly proprietary and not even identify the company by name. Also, even in this day and age it is preferable to send hard copy. E-mailed documents tend to be disseminated, raising the risk of leaks. 114. Obtain Indications Of Interest And Arrange Site Visits The investment banker’s follow-up starts a week after the book is received. Common responses are requests for more information and/or referrals to other people. After a few rounds the investment banker needs to get the prospective buyer to commit to visit the Company. If they won’t, they are probably low priority prospects. 115. Research and Qualify Interested Potential Buyers And Principals Before a visit the investment banker will dig into the backgrounds of the individuals and the company, its culture and its history, particularly with respect to prior transactions. Such information enables the Company to ask the right questions and understand why the buyer might be interested. If it doesn’t look like a fit, better to find out sooner than later. 1 216. Prepare the Company For The Buyers’ Visits The investment banker will obtain the buyer’s schedule and checklists in advance so as to be prepared and not to take time on issues on which they are not focused. The Company’s participants must be selected and a plan formulated and rehearsed as to what will and will not be said, offered or provided, and how to handle sensitive questions. 28

117. Orchestrate the Buyers’ Visits Don’t assume they have read the “book”. Start with an overview, but most of the time should be spent answering questions, and listening. Requests for information should be noted but not necessarily filled on the spot. The CEO should not dominate the visit. They need to see a team. The investment banker can be active or passive, but should be there. 118. Create The Infrastructure For Maintaining Momentum. Deal momentum is critical. The investment banker must assure that the visit end with a definitive schedule of next steps and agreement as to who is responsible for what. The buyer should designate one accessible point person, ideally either a decision maker or champion. The Company’s CEO should be above the fray and saved for global issues. 1 219. Police The Flow Of Further Information Between Company And Buyers Assuming continuing interest, the next thing that happens is requests for more information. The investment banker should serve as control for incoming requests, which will help identify emerging negotiating issues. Careful consideration must be given to what is provided, especially projections, and records kept as to everything provided. 120. Obtain Indications Of Value And Terms Or Alternately Definitive Declines. Requests for more information can be an un-ending fishing expedition. Within 30 days, the investment banker needs to tell the buyer that the Company needs some form of proposal - term sheet, letter of intent - with at least an indication of value. If more information is required, it should be reduced to a manageable list and timetable. 121. Evaluate Alternative Proposals Proposed payments come in all different forms – cash, stock, notes, non-competes, earn outs, etc. Some may offer to buy assets, others stock. Some may want to leave behind some assets (e.g. real estate) or liabilities. The investment banker’s job is to help evaluate the different deal structures in the context of the seller’s needs and tax circumstances. 122. Negotiate A Term Sheet Or Letter Of Intent (“LOI”) The investment banker will interface with the buyer on an LOI, but the attorneys also need to be involved. Traps to avoid are 1. Agreeing to a no-shopping clause without milestones; 2. Letting an LOI turn into a mini-agreement and 3. Going directly to a full agreement without an LOI or at least a term sheet. 29

123. Prepare Company For Due Diligence Deals die because due diligence drags out. The investment banker should orchestrate the preparation. 90% of what will be needed is predictable and should be located in advance, which is never as easy as first thought. A common practice is to create a “war room” where documents are accumulated and organized for inspection. 124. Organize The Due Diligence Process Due diligence can be disruptive and unproductive. The investment banker can serve as either the quarterback or coach. There must be a program identifying who is responsible for what and sequencing sensitive issues (e.g. talking to customers and discussing retention with management) until after the buyer has signed off on all other items. 125. Manage The Due Diligence Process A key to managing the process requires understanding the buyer’s needs and clarifying what is really required. In addition to seeing documents, buyers want to talk to managers in human resources, IT, production, Q/C, purchasing, marketing, engineering as well as administration and finance. Such managers must be briefed and prepared with answers. 126. Continually Track Progress and Open Issues As due diligence proceeds, additional issues arise which should be tracked and the authority for concessions clearly defined. Significant monetary and legal issues can be allowed to accumulate, but secondary issues should be settled in real time to maintain momentum and avoid deal fatigue resulting from “numerous unresolved issues”. 127. Help Compile The Disclosure Statement.

A disclosure statement is a compilation of documents, e.g. contracts, leases, deeds, patents, asset schedules, shareholder records, insurance policies, orders, etc. Compiling these documents is never easy. Since they are part of the contract, the sellers are warranting that they are correct and complete. An error or omission can be expensive. 128. Help Compile Other Closing Deliverables. The investment banker will also assist in obtaining the numerous other “closing deliverables” from outside sources, e.g. consents of shareholders, lenders, landlords, leasing companies, insurance carriers, customers or government agencies; lien releases; good standing and tax clearance certificates, etc. One missing document can kill a deal. 1 30

229. Assist Negotiating Business And Financing Issues In The Definitive Agreement.

The definitive purchase contract and related documents (notes, security agreements, consulting or employment contracts, non-competes, licenses, leases, etc.) are the purview of the attorneys, but also include personal or financing and deal structure issues on which the investment banker can help their client evaluate options and make decisions. 130. Stay Until The End.

A professional investment banker will remain on the scene, on duty, until the deal finally closes, even if it’s midnight New Years eve. There are many things that can be missing or go wrong at the last minute, and, having been there numerous times before, the investment banker may be just the person to help.

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Investment banking services in debt restructuring Companies use debt restructuring to avoid default on existing debt or to take advantage of a lower interest rate. A company will often issue callable bonds to allow them to readily restructure debt in the future. The existing debt is called and then replaced with new debt at a lower interest rate. Companies can also restructure their debt by altering the terms and provisions of the existing debt issue. Debt restructuring is a process that allows a private or public company - or a sovereign entity facing cash flow problems and financial distress, to reduce and renegotiate its delinquent debts in order to improve or restore liquidity and rehabilitate so that it can continue its operations. Out-of court restructurings, also known as workouts, are increasingly becoming a global reality. A debt restructuring is usually less expensive and a preferable alternative to bankruptcy. The main costs associated with a business debt restructuring are the time and effort to negotiate with bankers, creditors, vendors and tax authorities. Debt restructurings typically involve a reduction of debt and an extension of payment terms. Case of Unitech in restructuring dept Unitech, India’s second largest listed real estate company, is looking at restructuring a Rs 800-crore loan from public sector banks, as it attempts to save itself from sinking under the huge debt burden. The company was pinning its hopes on debt restructuring, asset and stake sales to private equity (PE) funds to pay a debt of Rs 2,500 crore, which was due by March ’09. “Unitech has discuss with public sector banks for rescheduling its loans,” Unitech head of strategy and planning, Another company executive, requesting anonymity, Unitech was seeking to restructure a loan of over Rs 800 crore. The Reserve Bank of India (RBI) allowed banks to restructure loans taken for commercial real estate without turning them into non-performing assets (NPAs). The RBI directive had come following intense lobbying by realty firms, which were finding it difficult to service debt, as sales had dried up and fresh debt was not available.Most developers are hopeful that banks will reschedule their loans. “It makes sense for banks to reschedule loans, as it will help them show lower NPAs on their books. “Land in most cases was over-valued, and prices have been falling since the loans were disbursed. Moreover, in a market, where you have no buyer for land, banks are unlikely to recover even half their cost,” the developer added. Unitech was also expected to pay Rs 200 crore by March for the land it purchased earlier. Mr Nagraju said the company need not pay land dues immediately, as it is yet to get possession of the land.

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Unitech was also banking on the sale of its assets, including hotels, office building and land parcels to raise cash. While any deal on its hotel in Gurgaon or office building in New Delhi was yet to be finalized, the company had reportedly sold off a few land parcels meant for institutional use. The company had sold one school plot for around Rs 30 crore. Unitech was also looking at raising funds through private equity infusion at company and project levels. Unitech was holding an extraordinary general meeting (EGM) on January 19 to seek shareholder approval to raise Rs 5,000 crore by issuing fresh equity or convertible instruments. The RBI had raised the ceiling for FII holdings in Unitech to up to 100% in November 2007. The company has been holding negotiations with multiple PE players to raise between $300$500 million by issuing convertible debentures at the company level and around $200 million by selling stakes in mid-income housing projects. Unitech repays Rs 200-crore loan to India bulls Financial Unitech repays Rs 200-crore loan to India bulls Financial Real estate player Unitech has managed to raise around Rs 200 crore through partial monetization of assets and internal debt restructuring within the group to pay back the 45-day debt taken from Indiabulls Financial Services (IBFSL). The deadline to pay back the debt was November 17. Sources at Unitech revealed that money from the escrow has been handed over to IBFSL.After this, collaterals that Unitech had pledged with Indiabulls to secure the debt has released to the company. With this payment, the company does not have any outstanding debt towards IBFSL. Indiabulls founder Gagan Banga confirmed that Unitech has cleared its loan, which was taken 45 days back (early October) within the stipulated time. “Unitech had pledged some flats and hotels against the loan,” informed Mr. Banga. He, however, did not confirm the amount of loan that was raised. Unitech’s total net debt as of June 30, 2008, was around Rs 7,700 crore. Company had put its 2,00,000 square feet commercial office building in Saket, New Delhi, on the block, which is expected to fetch upwards of Rs 600 crore. Sources said that Unitech is also looking for buyers for it’s under construction hotel in Gurgaon, which is valued close to Rs 300 crore. Unitech stock has dropped from a 52-week high of Rs 546.80 on January 2 to a low of Rs 26.60 on October 24. Its shares closed at Rs 42.75 on the Bombay Stock Exchange, down 6.56% from its previous closing of Rs 45.75. The overall slowdown along with the increased home loan rates has translated into gradual slowing down of sales in the real estate sector. Most real estate developers today are cashstrapped and are looking at avenues of raising capital.With bank lending becoming tight over the months and private equity players getting overcautious, the only way out for real estate companies has been to monetize their assets. Market sources indicate that a number of such deals are in the market, but investor interest is very low at the moment. 33

Overview of Corporate Restructuring The term corporate restructuring connotes the entire process through which an existing process through which an existing company reorients itself as a response to changing business environment & and operational dynamics. Therefore, corporate restructuring encompasses several facts of change according to the circumstances& different methods are adopted for such change to achieve different objectives. Corporate restructuring can be Internal to a company without change in its legal entity. It can be external process as well with the creation of one or more new entities or by process known as a ‘split-up’ of existing balance sheet. The different types of corporate restructuring can be depicted as shown below

Types of Corporate Restructuring

Internal Restructuring (No change in corporate structure control)

External Restructuring

1) Financial restructuring 2) Operational restructuring 3) divisionalisation or set up of SBUs

(Change in corporate structure control)

Operatin

Through transfer of Assets 1) Subsidiarisation 2) Hive off merger

3) SDe-

Through transfer of Equity 1) Divestiture (sell off) 2) Spin off 3) Equity curve out (dilution)

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Internal restructuring consists of a) Financial restructuring b) Operational restructuring c) Divisionalisation or set up of SBUs. Operational restructuring is either a technical exercise such as a business process reengineering or a managerial initiative such as a change in organizational structure. Therefore, operational restructuring is a change brought about to the organization and/or its process. Divisionalisation refers to setting of setting up separate divisions within the same company for better operational control & accountability. Let us now move to examine the whole process of split-ups.

Types of split-up 35

Types of split-up

Through transfer of Equity

Through transfer of Assets

Subsidiarisation 1) Held 100% by the parent company 2) Usually the subsidiary set up a new business with capital contribution from the parents.

De-Subsidiarisation through spin-off De-Subsidiarisation through dilution Offer for sale by parents/issue of new shares by sub.

The parent’s holding in subsidiary is allocated pro-rata to parent’s shareholders.

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Types of splitups Hive-off/asset sale An existing business segment or division is transferred to a new co. or another existing co.

De-merger It is a combination of a hiveoff & a spin-off where in the shareholders of the transferor co. are given shares pro-rata in the transferee company as

Divestiture (sell-off) The transferor retains no future interest in the business or assets sold off. Consideration is usually settled in cash or securities.

The transferee co. is usually a group co, associate or a subsidiary. transferor usually retains strategic interest/control

The buyer is an outsider

Involves transfer of asset (& liabilities if chosen)from the transferor to theup transferee. As we have observed from above diagrams that there are several methods of split both under

the asset root & under the equity root. In addition to the methods mentions there in, based on statutory provisions and industry practices, it is possible to distinguish additional terms that are used to describe split-ups & variants thereof.

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Comparative Analysis of Split-up through Transfer of Assets Issue

Demerger

Procedure

Involves a scheme of arrangement to be sanctioned by the high court under sections 391394 of the Companies Act.

Tax efficiency

Most efficient

Strategic exit from line of business

Does not Provide an exit since consideration has to be settled only through shares of the transferor company. Induction of Enables strategic induction partner/financial separately into investors the demerged

Hive-off/Asset sale Does not involve the necessity of a high court under sanction. It can be approved by the shareholders under section 293 (1) (a) of the Companies Act. Consent of creditors would also be required. Asset sale of undertaking falls within the powers of the Board Carry forward benefits are not available unless it is through the BIFR mechanism. Not mean for exit.

Reconstruction

Carry forward benefits are not available unless it is through the BIFR mechanism. Not mean for exit.

Carry forward benefits are not available unless it is through the BIFR mechanism.

Enables induction separately into the parent

Enables induction into the new company since

Not applicable since these methods are meant for exit

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Requires shareholder sanction under section 293 (1) (a) of the Companies Act & application for voluntary winding up of the transferor company. Consent of creditors would be required

Divestiture/Slump sale Requires shareholder sanction under section 293 (1) (a) of the Companies Act. Consent of creditors would also be required.

Provides exit since consideration is settled in cash

Diversification of business

Representation of shareholders Simplified process of splitup I.

company or the resultant company as desired. Diversified activity would have direct shareholder representation

parent is dissolved.

Yes

company or the hived-off company as desired. Subsidiarisation through hive-off is a good method as it does not have direct shareholder representation Yes

No

Yes

Not mean for this purpose

Not applicable since these methods are meant for exit

Yes

No

No

Yes

Case study:

Case Details: Period: 1994 – 2003, Organization: Sony Corp Pub, Date: 2003, Countries: Japan, Industry: Consumer Electronics Restructuring Sony Abstract: The case discusses the organizational restructuring carried out by the Japanese electronics and communication giant, Sony Corporation (Sony) between 1994 and 2003. Sony's business operations were restructured five times within nine years. The case describes each of the five restructuring exercises in detail and examines their implications for Sony. It also discusses the impact of these structural changes on the financial performance of Sony. Issues: » Understand the rationale behind the restructuring initiatives of large multinational corporations (MNCs) in the consumer electronics industry » Evaluate the costs and the consequences of the frequent restructuring (often accompanied by changes in top management) of large MNCs Background Note 39

For the first quarter ending June 30, 2003, Japan-based Sony Corporation (Sony) stunned the corporate world by reporting a decline in net profit of 98%. Sony reported a net profit of ¥9.3 million compared to ¥1.1 billion for the same quarter in 2002. Sony's revenues fell by 6.9% to ¥1.6 trillion for the corresponding period. Analysts were of the opinion that Sony's expenditure on its restructuring initiatives had caused a significant dent in its profitability. In the financial year 2002-03, Sony had spent a massive ¥100 bn on restructuring. Moreover, the company had already announced in April 2003 about its plans to spend another ¥1 trillion on a major restructuring initiative in the next three years. Analysts criticized Sony's management for spending a huge amount on frequent restructuring of its consumer electronics business, which accounted for nearly two-thirds of Sony's revenues. In 2003, the sales of the consumer electronics division fell by 6.5%. Notably, Sony's business operations were restructured five times in the past nine years. Analysts opined that Sony's excessive focus on the maturing consumer electronics business (profit margin below 1% in 2002-03), coupled with increasing competition in the consumer electronics industry was severely affecting its profitability. However, Sony's officials felt that the restructuring measures were delivering the desired results. According to them, the company had shown a significant jump in its profitability in the financial year 2002-03. Sony reported a net income of ¥115.52 bn in the fiscal 2002-03 compared to ¥15.31 bn in 200102.A statement issued by Sony said, "The improvement in the results was partly due to the restructuring of its electronics business, especially in the components units. At the beginning of the new millennium, Sony faced increased competition from domestic and foreign players (Korean companies like Samsung and LG) in its electronics and entertainment businesses. The domestic rivals Matsushita and NEC were able to capture a substantial market share in the Internet-ready cell phones market. Analysts felt that the US based software giants like Microsoft & Sun Microsystems and the networking major Cisco Systems posed a serious threat to Sony's home entertainment business. On May 7, 1946, Masaru Ibuka (Ibuka) and Akio Morita (Morita) co-founded a company called Tokyo Tsushin Kogyo Kabushiki Kaisha (Tokyo Telecommunications Engineering Corporation) with an initial capital of ¥190,000 in the city of Nagoya, Japan. They gave importance to product innovation and decided to offer innovative, high-quality products to their consumers. The founders introduced many new products like the magnetic tape recorder, the 'pocketable radio,' and more. By the 1960s, the company had established itself in Japan and changed its name to Sony Corporation. During the 1960s, the company focused on globalization and entered the US and European markets. In the 1970s, Sony also set up manufacturing units in the US and Europe. During this period, Sony developed and introduced the Walkman, which was a huge success. It significantly boosted Sony's sales during the 1980s.

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By the mid-1980s, Sony's consumer products were marketed in Europe through subsidiaries in the UK, Germany and France. In 1989, Norio Ohga (Ohga) took over as the chairman & CEO of Sony from Morita. Under Ohga, Sony began to place greater emphasis on process innovations that improved efficiency and controlled product costs. By 1994, Sony's businesses were organized into three broad divisions - Electronics, Entertainment and Insurance and Finance. Each business division was in turn split into product groups. The electronics business division was split into four product groups, which produced a wide variety of products. The entertainment division, which consisted of the music group and the pictures group, made music videos and motion pictures. The finance division consisted of Sony's life insurance and finance business. The company's growth was propelled by the launch of innovative products and by its foray into the music and films business. Restructuring of Electronics Business (1994) Under Ohga's leadership, Sony witnessed negligible growth in sales during 1990 and 1994. Sales and operating revenues improved by only 2% during that period. However, the net income and operating income registered a drastic fall of 87% and 67% respectively. Analysts felt that the stagnation in the electronics industry coupled with factors such as the recession in the Japanese economy and the appreciation of the yen against the dollar led to the deterioration in the company's performance. It was noticed that in the electronics business, the revenues of the video and audio equipment businesses were coming down or were at best stagnant, while the television and 'Others' group were showing signs of improvement. The 'Others' group, which consisted of technology intensive products such as computer products, video games, semiconductors and telecom equipments, was performing very well and had a growth rate of nearly 40% The Ten-Company Structure (1996) In January 1996, a new ten-company structure was announced, replacing the previous eight company structure. Under the new structure, the previous Consumer Audio & Video (A&V) company was split into three new companies - The Display Company, the Home AV Company and the Personal AV Company. A new company, the Information Technology Company, was created to focus on Sony's business interests in the PC and IT industry. The Infocom Products Company and the Mobile Electronics Company were merged to create the Personal & Mobile Communications 41

Company. The other companies formed were the Components & Computer Peripherals Company (formerly called the Components Company), the Recording Media & Energy Company, the Broadcast Products Company, the Image & Sound Communications Company (formerly called the Business & Industrial Systems Company) and the Semiconductor Company. The Implications From 1995 to 1999, Sony's electronics business (on which the restructuring efforts were focused) grew at a compounded annual growth rate (CAGR) of 8.55%. The music business had a CAGR of 10.5% while the pictures business had a CAGR of 17%. Significant gains were, however, recorded by the games and insurance business. The games business registered a CAGR of 215%, while the insurance business registered a CAGR of 31%. In the late 1990s, Sony's financial performance deteriorated. For the financial year 1998-99, its net income dropped by 19.4%. During that period, Sony was banking heavily on its PlayStation computer game machines. It was estimated that the PlayStation (Games business) accounted for nearly 42% of Sony's operating profits and 15% of total sales for the quarter-ended OctoberDecember 1998. In the late 1990s, many companies across the world were attempting to cash in on the Internet boom. The Unified-Dispersed Management Model In April 1999, Sony announced changes in its organization structure. Through the new framework, the company aimed at streamlining its business operations to better exploit the opportunities offered by the Internet. Sony's key business divisions - Consumer Electronics division, Components division, Music division and the Games division - were re-organized into network businesses. This involved the reduction of ten divisional companies into three network companies, Sony Computer Entertainment (SCE) Company and the Broadcasting & Professional Systems (B&PS) Company. SCE Company was responsible for the PlayStation business while the B&PS Company supplied video and audio equipments for business, broadcast, education, industrial, medical and production related markets. The restructuring aimed at achieving three objectives - strengthening the electronics business, privatizing three Sony subsidiaries, and strengthen the management capabilities. Restructuring Efforts in 2001 Sony announced another round of organizational restructuring in March 2001. The company aimed at transforming itself into a Personal Broadband Network Solutions company by launching a wide range of broadband products and services for its customers across the world. Explaining the objective of the restructuring, Idei said, "By capitalizing on this business structure and by having businesses cooperate with each other, we aim to become the leading media and 42

technology company in the broadband era." The restructuring involved designing a new headquarters to function as a hub for Sony's strategy, strengthening the electronics business, and facilitating network-based content distribution. II.

Case study:

HSBC's Restructuring in India Period: 1999-2004 Organization: HSBC India Pub Date: Countries: India Industry: Banking Abstract: The case discusses the operations of HSBC Group in India and the measures taken by HSBC India in recent times to achieve a faster growth. It discusses in detail the reorganization program launched by Booker, the CEO of HSBC India to transform the conservative institution into an aggressive, performance-oriented one. The case discusses in detail various internal reorganization measures including the introduction of new work principles, downsizing, organizational reshuffling and greater focus on potential growth areas. Issues: » The need for old and well-established organizations to change their outlook and the way they operate along with the changing times so as to compete with smaller, nimble-footed competitors successfully » Examine the restructuring program implemented by HSBC India to revive its financial performance » Critically analyze the strategies adopted by Niall SK Booker to make HSBC India an aggressive, performance-oriented organization » Chart a growth strategy for HSBC India in the near future Background The Hong Kong and Shanghai Banking Corporation Limited (HSBC) entered India as early as 1959. Despite being one of the oldest and well-established foreign banks, HSBC had been lagging behind local private sector banks and other foreign banks in India in terms of business network and growth. HSBC's competitors and industry experts regarded it as a conservative bank that lacked competitive spirit.

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Commenting on HSBC, the head of direct sales of one of its rival banks said, "HSBC isn't seen as being as aggressive as its rivals in the market. It has extremely good relationships with its branch customers and serves them very well, but it is just not seen as being aggressive in the rest of the market." HSBC's complacency was reflected in the bank's financial performance. Local private sector banks like ICICI and HDFC were far ahead of HSBC in all business segments. When benchmarked against foreign banks, HSBC fared badly. HSBC's net profits fell by over 25 per cent for two consecutive years in the fiscal 2000-01 and 2001-02, while rival banks like Citibank3 posted a rise of 37 per cent in profits for the same period. On November 2002, Niall S K Booker (Booker) was appointed Group Manager and Chief Executive Officer (CEO) of the HSBC Group in India. Booker soon realized that HSBC India followed a conventional approach to doing business and retained its old bureaucratic structure and culture. He believed that the much criticized laidback work culture was the reason for the lacklustre financial performance of the bank. Booker decided to transform the bank's work culture so that HSBC could shed its bureaucratic and conservative image and gear up to face new challenges. He wanted HSBC India to be proactive and aggressive like its competitors. To achieve this, Booker concentrated on giving the bank a new direction by launching a major restructuring program. HSBC is a leading global player in the banking and financial services industry. It is the third largest bank in the world in terms of market capitalization it provided a comprehensive range of financial services, namely, personal financial services, commercial banking, corporate investment banking, private banking and other related businesses. HSBC was established in 1865 to finance the growing trade between Europe, India and China. Scotland-born Thomas Sutherland (Sutherland), who worked for the Peninsular and Oriental Steam Navigation Company, established the bank. He found that there was considerable demand for local banking facilities in Hong Kong and on the Chinese coast. Sutherland established a bank in Hong Kong in March 1865, and another in Shanghai after a month. The banks' headquarters were at Hong Kong. Soon, the bank opened branches around the world. The emphasis continued to be on strengthening the presence in China and the rest of the Asia-Pacific region. By the end of the century, HSBC emerged as the foremost financial institution in Asia. World War I (1914-1919), however, brought disruption and dislocation for many businesses. The 1920s saw a revival with HSBC opening more branches. During World War II (1941-1945), the bank was forced to close many branches and its head office was temporarily shifted to London. After the war, the headquarters was shifted back to Hong Kong. 44

The post-war political and economic changes in the world compelled the bank to analyze and reorient its strategy for continued business growth. The acquisition of the Mercantile Bankand the British Bank of the Middle East (BBME) in 1959 laid the foundation for the present day HSBC Group HSBC in India HSBC's origins in India could be traced back to October 1853, when the Mercantile Bank of India, London and China was established in Mumbai. Starting with an authorized capital of Rs 5 mn, the Mercantile Bank soon opened offices in London, Chennai (India), Colombo, Kandy, Kolkata (India), Singapore, Hong Kong, Canton and Shanghai. In the next 10 decades, the Mercantile Bank steadily expanded its geographical network and service offerings, keeping pace with the evolving banking and financial needs of customers. The Mercantile Bank was acquired by the HSBC Group in 1959. The head office of Mercantile Bank at the Flora Fountain building in Mumbai continued to be the head office of the HSBC Group in India. In the 1970s, HSBC decided to expand by acquisition and formation of its own subsidiaries. HSBC introduced India's first automated teller machine (ATM) in 1987. In 2001, HSBC opened the first bank branch in Pune (Western India) that remained open all 365 days a year. The Restructuring On his appointment, Booker's approach was to focus on fine-tuning and executing existing strategies, rather than experimenting with new plans. He intended to take it slow and steady without radical changes. He said that "the people issue" was very important to him. Therefore, the key components of the restructuring programmers included introducing new work principles, downsizing, organizational reshuffling and focus on new growth areas. New Work Principles HSBC's work culture was considered most bureaucratic among all foreign banks in India. Reportedly, the top management had a laid-back attitude towards work. An insider said, “There is a bunch of people at the top who aren't very competent and who all play golf together. It is basically an old boys'club.

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The Benefits The impact of the restructuring programme was reflected by the improved financial performance of HSBC (Refer Exhibit IV and V for the financial highlights of HSBC). For the financial year 2003-04, the assets per employee and net profit increased by 30 per cent; operating profit by 31 per cent and cost-to-income ratio came down from 47 to 43 per cent compared to the fiscal 2002-03. Personal financial services accounted for 36 per cent of total advances, against 31 per cent in the previous fiscal. HSBC's retail assets doubled during this period from around a fourth to a third of its total assets. HSBC expected that the retail business would grow by 40 per cent in the fiscal 2004-05. Home loans business grew by 100 per cent; and the branches' contribution comprised 30 per cent Looking Ahead Notwithstanding the benefits reaped from the restructuring, HSBC was still a small player in several financial services businesses including asset management, home loans, stock broking, credit cards and retail banking in India. For instance, HSBC Asset Management (India) Private Ltd. launched in December 2002, had total assets under management amounting to Rs 540 bn by June 2004. Still, it was only the 10th largest asset management company (AMC) in India. The slow growth of advances was another problem for HSBC. In the financial year 2003-04, HSBC's loan disbursals grew by just 4.67 per cent over the financial year 2003 while for the same period, its competitors like Standard Chartered and Citibank loan disbursals grew by 44 per cent and 11 per cent respectively. Moreover, in spite of improved financial performance, the changes introduced by Booker did not go well among top managers.

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Financial restructurings When a company cannot pay its cash obligations - for example, when it cannot meet its bond payments or its payments to other creditors (such as vendors) - it goes bankrupt. In this situation, a company can, of course, choose to simply shut down operations and walk away. On the other hand, if it can also restructure and remain in business. What does it mean to restructure? The process can be thought of as two-fold: financial restructuring and organizational restructuring. Restructuring from a financial viewpoint involves renegotiating payment terms on debt obligations, issuing new debt, and restructuring payables to vendors. Bankers provide guidance to the firm by recommending the sale of assets, the issuing of special securities such as convertible stock and bonds, or even selling the company entirely. From an organizational viewpoint, a restructuring can involve a change in management, strategy and focus. I-bankers with expertise in "reorganization" can facilitate and ease the transition from bankruptcy to viability. Fees in restructuring work Typical fees in a restructuring depend on whatever retainer fee is paid upfront and what new securities are issued post-bankruptcy. When a bank represents a bankrupt company, the brunt of the work is focused on analyzing and recommending financing alternatives. Thus, the fee structure resembles that of a private placement. How does the work differ from that of a private placement? I-bankers not only work in securing financing, but may assist in building projections for the client (which serve to illustrate to potential financiers what the firm's prospects may be), in renegotiating credit terms with lenders, and in helping to re-establish the business as a going concern. Because a firm in bankruptcy already has substantial cash flow problems, investment banks often charge minimal monthly retainers, hoping to cash in on the spread from issuing new securities. Like other public offerings, this can be a highly lucrative and steady business.

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Role of investment banking in corporate re-organizations Corporate re-organization is a wide term that encompasses changes confined to a particular company or to more than one company in a single transaction. These are done from time to time in response to business environment & changing business dynamics. Corporate reorganization forms the core of M & A business portfolio in investment banking. The entire spectrum of corporate re-organization is mapped below

Types of corporate reorganization

Integration of existing companies

Through Transfer of Assets Merger Amalgamation

Restructuring of existing companies with or without a split-up of balance sheet

Through Transfer of Equity Acquisition

mer

Takeover

Types of Corporate Re-Organization

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Rationale for corporate Re-Organisation Mergers, acquisitions & corporate restructuring are a part of business portfolio re-organization by companies that happens on a continuous basis to handle business dynamics. Restructuring is the process by which companies respond to changes in the operating environment and is after a tool for change management. The objectives of corporate restructuring could be many and based on objectives that trigger corporate restructuring and related examples in the Indian context. (a) To create long term holding structures. The Tata group conducted a group

restructuring in the mid-nineties to build cohesiveness in group structure and corporate objectives. (b) To attain or better utilize tax shields & tax write-offs (c) To restructure balance sheet with a view to reflect the asset and liabilities profile better or to increase the asset base or fund base I.

Case study

Mahindra & Mahindra Ltd: Mahindra & Mahindra (M & M) undertook a financial restructuring by amalgamating three of its subsidiaries & writing off deferred revenue expenses up to a maximum of Rs 500 crore against the share premium account. The balance in the premium account (SPA) stood up 819 crore at that time that would have come down to Rs 319 crore after the write-off. The writeoff is on account of product development VRS schemes & minor software expenditure to be incurred on account of product development, and VRS schemes up to march 2002. As a result of the amalgamation of group companies, M & M wrote off the value of investments of its shares in these subsidiaries. This write-off, which was about Rs 500 crore, was in addition to the write-off mentioned earlier. The company’s net worth stood at Rs 2069 crore as on March 31, 2001. The company was expected to earn a profit on revaluation of the shares of M-BT (Mahindra-British telecom) in which one of its merging subsidiaries had a 31.9% stake. As a result of all these measures, the balance sheet of M & M reflected a better picture of its net worth. It also benefited by capturing directly into its balance sheet the appreciation in the value of M-BT. (d) To facilitate distribution of assets & family settlements: Restructuring of companies

through splitting existing companies is necessitated due to family splits or settlement. Recent examples include the Reliance Group, Bajaj Group etc. (e) To exit non-core businesses: In times of increase competition & business volatility,

companies look for sustenance in areas of core competence. This could mean increase

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investments in such areas for which funds are raised through divestiture of non-core businesses. Examples are the sale of Times Bank, TISCO Cement business etc. (f) To facilitate the entry or exit of business partners: Corporate restructuring may be

necessary when there is an entry or exit of a JV partner. Businesses may have to be hived off into separate entities to accommodate the partners in such venture as distinct from the other businesses in the group. Case study for facilitate the entry or exit of business partners is as follows CASE STUDY OF UB GROUP The united Breweries Group hived off its beer division into a separate SPV, which inducted Scottish & Newcastle (S & N) as a strategic partner. The UB Group holds 40%, (S & N) holds 40% and the balance is held by private persons in the SPV. (S & N) invested Rs 250 crore into the SPV for a 40% stake apart from investing another Rs 175 crore into other UB group companies. The investment was used to wipe off UB group’s dept burden of Rs 350 crore. The investment in the SPV of Rs 250 crore came in the form of Rs 200 crore of redeemable optionally convertible preference shares & Rs 50 crore of debt funds. UB intends to convert the entire funds into equity within two to five years at an appropriate valuation. The understanding is to cap S & N’s shareholding at 26% at the time of such conversation.

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Conclusion The fall from grace of investment bankers leading to a radical change in the financial sector's landscape in advanced countries is a significant development having many lessons for India too. Investment banking, or merchant banking as it is called here, has been slow to develop in India. Unlike in the U.S. where Depression era legislation segregated the two activities, banks here did not have any legal constraints. However, there were certain 'non-banking' activities such as hire purchase and leasing that could be done only by subsidiaries, which in course of time resembled the bigger NBFCs which are important niche players. As in the West, the main investment banking activities in India are mergers, acquisitions, corporate finance and restructuring. Even though some public sector banks are active in the field, the lion's share of the business appears to have been grabbed by the big brokers acting as investment bankers, foreign banks and the branches of the foreign investment banks. Interestingly many big investment banks have had tie ups with broker-firms. Sensing the potential in India many of them had started venturing out on their own. The serious crisis in the U.S. has put paid to their plans in India. In many cases their continuance in India seems to be in doubt. With all their well publicized failings, will the erstwhile foreign investment banks continue to appeal to their major Indian clients? In the last 'big bang' disinvestment, involving ONGC and others, none of the public sector merchant banking subsidiaries had any role. The field was dominated entirely by foreign investment banks. Arcelor Mittal was put together with the help of the (then) big players, all international investment banks. The Tata-Corus deal and the Aditya Birla Group's forays abroad were aided by foreign investment banks. It is too much to expect that India's public sector merchant banking subsidiaries will fill the void. But they can learn important lessons from the failure of investment banking abroad. One clear message for them is not to do a 'regulatory arbitrage' exploiting the lacuna in regulation.

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Bibliography

Books: 1. Investment Banking by-Subramanian

2. Merchant banking by- Valentine V. Craig

Internet Access: 1. business.mapsofindia.com/investment-industry 2. http://www.investopedia.com/categories/banking.asp 3. www.icmrindia.org/casestudies/Management

4. economics.about.com 5. www.researchandmarkets.com 6. www.google.co.in

Special thanks to: •

Prof. Kalim Khan

•

Prof. N.K Gupta

•

Prof. Falguni Gajjar

•

Prof. Rajesh Biyani

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