Investment Banking Project
Investment Banking Project
Investment Banking Project
At a very macro level, Investment Banking as term suggests, is concerned with the primary
function of assisting the capital market in its function of capital intermediation, i.e., the
movement of financial resources from those who have them (the Investors), to those who need to
make use of them for generating GDP (the Issuers). Banking and financial institution on the one
hand and the capital market on the other are the two broad platforms of institutional that
investment for capital flows in economy. Therefore, it could be inferred that investment banks are
those institutions that are counterparts of banks in the capital markets in the function of
intermediation in the resource allocation. Nevertheless, it would be unfair to conclude so, as that
would confine investment banking to very narrow sphere of its activities in the modern world of
high finance. Over the decades, backed by evolution and also fuelled by recent technologies
developments, an investment banking has transformed repeatedly to suit the needs of the finance
community and thus become one of the most vibrant and exciting segment of financial services.
Investment bankers have always enjoyed celebrity status, but at times, they have paid the price
for the price for excessive flamboyance as well.
To continue from the above words of John F. Marshall and M.E. Eills,
investment banking is what investment banks do. This definition can be explained in the
context of how investment banks have evolved in their functionality and how history and
regulatory intervention have shaped such an evolution. Much of investment banking in its present
form, thus owes its origins to the financial markets in USA, due o which, American investment
banks have banks have been leaders in the American and Euro markets as well. Therefore, the
term investment banking can arguably be said to be of American origin. Their counterparts in
UK were termed as merchant banks since they had confined themselves to capital market
intermediation until the US investments banks entered the UK and European markets and
extended the scope of such businesses.
Investment banks help companies and governments and their agencies to raise money by issuing
and selling securities in the primary market. They assist public and private corporations in raising
funds in the capital markets (both equity and debt), as well as in providing strategic advisory
services for mergers, acquisitions and other types of financial transactions. Investment banks also
act as intermediaries in trading for clients. Investment banks differ from commercial banks,
which take deposits and make commercial and retail loans. In recent years however, the lines
between the two types of structures have blurred, especially as commercial banks have offered
more investment banking services. In the US, the Glass-Steagall Act, initially created in the wake
of the Stock Market Crash of 1929, prohibited banks from both accepting deposits and
Definition
An individual or institution, which acts as an underwriter or agent for corporations and
municipalities issuing securities. Most also maintain broker/dealer operations, maintain markets
for previously issued securities, and offer advisory services to investors. Investment banks also
have a large role in facilitating mergers and acquisitions private equity placements and corporate
restructuring. Unlike traditional banks, investment banks do not accept deposits from and provide
loans to individuals.
Issue
r
2
Securities
Issuer
Investment
Banker
Investor
Cash
issuance. The market also has grown dramatically in recent years, increasing from approximately
$4.7 billion in 1980 to its 1999 figure. Despite this tremendous growth, the private equity market
is extremely small compared with the public equity market, which was approximately $17 trillion
at year-end 1999
In India merchant banker can be segregated as follows, depending on the sector to which they
belong.
1. Public sector Merchant bankers
a. Commercials banks.
b. National Financial Institutions.
c. State financial institutions.
2. Private sector Merchant Bankers
a. Foreign Bankers
b. Indian private Banks
c. Leasing Banks.
d. Financial and Investment companies.
The current of the investment banking industry is in state of flux. The current transition phase is
witnessing a paradigm shift in the nature and composition of this industry. The industry was
hitherto synonymous with issue management and underwriting. Investment bankers have stared
diversifying into new function such M&A, new products, new techniques.
Front Office
Investment Banking is the traditional aspect of investment banks which involves helping
customers raise funds in the Capital Markets and advising on mergers and acquisitions.
Investment bankers prepare idea pitches that they bring to meetings with their clients,
with the expectation that their effort will be rewarded with a mandate when the client is
ready to undertake a transaction. Once mandated, an investment bank is responsible for
preparing all materials necessary for the transaction as well as the execution of the deal,
which 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 & Acquisitions (M&A) and Corporate Finance (often
pronounced "corpfin").
Financial Markets is split into four key divisions: Sales, Trading, Research and
Structuring.
Sales and Trading is often the most profitable area of an investment bank ,
responsible for the majority of revenue of most investment banks In the process of
market making, traders will buy and sell financial products with the goal of making
an incremental amount of money on each trade. Sales is the term for the investment
banks sales force, whose primary job is to call on institutional and high-net-worth
investors to suggest trading ideas (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.
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. In
recent years the relationship between investment banking and research has become
highly regulated, reducing its importance to the investment bank.
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.
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 include 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.
Back Office
Operations involve data-checking trades that have been conducted, ensuring that they are
not erroneous, and transacting the required transfers. While it provides the greatest job
security of the divisions within an investment bank, it is a critical part of the bank that
involves managing the financial information of the bank and ensures efficient capital
markets through the financial reporting function. The staff in these areas are often highly
qualified and need to understand in depth the deals and transactions that occur across all
the divisions of the bank.
project if necessary;
2. Preparation of economic, technical and financial feasibility reports;
3. Initial project preparation, pre-investment survey, and market studies;
4. Help in raising rupee resources from financial institutions and commercial banks;
5. Underwriting and also for subscription, if necessary, to the new issues or syndication
of loans, etc;
6. Assistance in raising foreign exchange resources so as to enable the industrial
concerns to import machinery and technical know-how and secure foreign
collaboration.
7. Advice on setting up turnkey project s in foreign countries and locating foreign
markets;
8. Help in financial management and in designing proper capital structure and debtequity ratio, etc, for the company.
9. Advice on restructuring of capital, amalgamation, mergers, takeovers, etc;
10. Management of investment trust, charitable trusts etc;
11. Management aid and entrepreneurial aid (management audit providing designs of the
complete system, operational research and management consultancy); and
12. Recruitment (selection of technical and managerial personnel), etc.
The distribution network can be used to distribute various financial products like:
Equity
Debt Instruments
retail investors
Fixed deposits
retail investors
Insurance products
retail investors
Commercial paper
institutional investors
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3. Corporate advisory Services - investment bankers offers customized solutions to the financial
problem of their clients. One of the key areas for advisory role is financial structuring. The
process includes determining the appropriate level of gearing and advising the company whether
to leverage, de-leverage or maintain its current debt-equity levels. The asset turnover ratios may
be analyzed to study whether the company is over trading or under trading. The companys
working capital practices are studied and alternative working capital policies are suggested. The
investment banker may also explore the possibility of refinancing high cost funds with alternative
cheaper funds. They play advisory role in securitization of receivables. They also help their cash
rich clients in deployment of their short-term surpluses.
4. Project Advisory - investment bankers are associated with their clients from the early stage of
their project. They assist the companies in conceptualizing the project idea when it is at nebulous
stage. Once the project is conceptualized, they carry out the initial feasibility studied to examine
its viability. Investment bankers provide inputs to their clients in preparation of the detailed
project report. They also offer project appraisal services to clients.
4. Loan syndication - investment bankers arrange to tie up loans for their clients. The first step
involves analyzing the clients cash flow pattern so that terms of borrowing can be defined to suit
the cash flow requirements. The important loan parameters include amount, currency, tenure,
drawdown, moratorium and the amortization. The investment bankers then prepare the detailed
loan memorandum. The loan memorandum is then circulated to various banks and financial
institutions and they are invited to participate in the syndicate.
The banks indicate the amount of exposure of service they are willing to take and the interest
rates thereon. The terms are further negotiated and fine- tuned to the satisfaction of both parties.
The final allocation is done to the various members of the syndicate. The investment banker also
helps the clients in loan documentation procedures.
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5. Research Services - Nearly all banks have a staff of research analysts who study economic
trends and news, individual company stocks, and industry developments to provide proprietary
investment advice to institutional clients and in-house groups, such as the sales and trading
divisions. Until recently, the research division has also played an important role in the
underwriting process, both in wooing the client with its knowledge of the clients industry and in
providing a link to the institutions that own the clients stock once its publicly traded. Indeed, in
many cases, research analysts compensation was tied to investment banking revenues. However,
in recent times banks have faced public and regulatory outcries over conflicts of interest inherent
in having bankers and researchers work hand in hand. As a hypothetical example, consider Bank
A, which counts Company X, which is facing financial difficulties, among its banking clients.
Should Bank As research team pan Company Xs stock, which would benefit investors who
subscribe to Bank As research, but might upset Company X to the point that it drops Bank A and
hires another firm to be its investment banker? Or should it recommend the purchase of Company
X stock, which would help Company X financially and keep the banking revenues from
Company X rolling inand pump up research analysts bonuses, which are based in part on the
success of Bank As banking operations? In an effort to end the legal scrutiny of their operations,
investment banks are now attempting to reinforce the separation between their banking and
research arms. You can certainly count on research playing a lesser role in selling banking deals.
Also, independent research houses (e.g., Needham & Co., Sidoti & Co., and JMP Securities) are
benefiting in a big way from a settlement between the investment banking industry and regulators
that requires investment banks to spend a total $432.5 million over 5 years to give clients
independent research. And as the full service investment banks move to purchase independent
research, as theyre required to do by regulators, certain research specialistsStandard & Poors
and BNY Jay hawk (which actually aggregates research from more than 100 research
organizations)are looking like theyre going to make out handsomely.
6. Venture capital - Venture capital is risks money, which is used in risky enterprises either as
equity or debt capital. It may be in new sunshine industries or older risk enterprises. The funds,
which finance such risky, are called venture capital funds. Venture capital is a post-war
phenomenon in the business world, mainly developed as a sideline activity of the rich in USA. To
connote the risk & adventure & some element of investment, the generic name of venture
capital was coined. In the late 1960s a new breed of professional investors called venture
capitalists emerged whose specialty was to combine risk capital with entrepreneurial management
& to use advance technology to launch new products and companies in the markets place.
Undoubtedly, it was venture capitalists astute ability to assess and manage enormous risks &
export from them tremendous returns that changed the face of America. In developed countries,
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this capital came from pension funds, insurance companies & even large banks. Some large
companies with excess funds may provide this capital to achieve diversification, market
expansion & window on technology or to share in this result of R&D of others.
In India, as the majority of the above institutions are in the public sector, only the
government or public financial institutions can provide the funds for venture capital. Venture
capital is a post-war phenomenon in the business world, mainly developed as a sideline activity
of the rich in USA. To connote the risk & adventure & some element of investment, the generic
name of venture capital was coined. In the late 1960s a new breed of professional investors
called venture capitalists emerged whose specialty was to combine risk capital with
entrepreneurial management & to use advance technology to launch new products and companies
in the markets place. Undoubtedly, it was venture capitalists astute ability to assess and manage
enormous risks & export from them tremendous returns that changed the face of America.
Innovative, hi-tech ideas are necessarily risky. It is here that the concept of venture capital
steps in. Venture Capital provides long start up costs to high risks & returns project. Typically,
these projects have mortality rates and therefore are unattractive to risks-averse bankers & private
sectors companies.
Venture Projects
Proposals come to the venture capitalists in the form of business plans. He appraises the
same, giving due regard to the credentials of the founders, the nature of the product or services to
be developed, the market to be saved & the financing required. If satisfied, he will invest his own
money in the equity shares of the new company, known as the assisted company. In addition to
money, managerial & marketing assistance may also be provided that is, the venture capitalist not
only provides funds but also on line operational advice. In short, he identifies himself with the
project as much as the innovator promoter & as such works hard to accomplish ambitious targets
& consequents higher appreciation of his capital.
Indian Position in venture capital
In India, most project financing schemes require at least 25 per cent of the project
cost to be contributed by the promoters, while the latter can raise barely 5-10 percent. For long,
there were a few agencies such as IFCIs subsidiary company, Risks Capital And Technology
Foundation of India, which provides finance to bridge the shortfall in the promoter contribution,
but they could fulfill the requirements of a great many budding entrepreneurs. As results of
promoters not being able to bring in those vital initial inputs of money, many of their good
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projects were hanging fire. Venture capital could remedy this situation as well.
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2. Private Agencies:- One Venture Capital fund set up the private sector in India is Credit
Capital Venture Capital (India) or CVF for the short, the principal shareholders of which
are Credit Capital Finance Corporation, Bank of India, Asian Development Bank, and
Commonwealth Development Corporation. Another set up in the private sector jointly by
the ICICI 20th Century Finance Corporation, bank of Baroda, Asian development Bank
and Asian Finance and investment Corporation is the 20th Century Venture Capital
Corporation Ltd. One reason why private capitalists are generally shy may be the high
rate of capital gains tax applicable to the profit of Venture Capital Funds. Though the
guidelines provide for a concessional rate of capital gains tax, the move can hardly be
deemed as a concession in view of the enormous risks involved in the activity.
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1999-2000. The Government has allowed a free hand and transparency for I.T. Venture Funds
Foreign Funds are allowed freely into these Funds.
Difficulties in India
Fundamentally, there are no private pools of the capital of finance risk ventures in
India. The financial institutions perforce occupy a dominant position in the provision of long-term
capital to Indian industry. They and the State development agencies do provide limited amount of
equity finance to assist the development of new business but there is no private, professionally
managed investment capital sources. There are no private sector insurance companies or the
pension funds gathering regular premium income and virtually no private banks willing to devote
a small portion of their resources to the venture capital niche. It is unlikely that such enterprises
will be created in the foreseeable future to mobilize private saving for investments. As an answer
the situation, mutual funds and investment trusts are permitted to set up and to commit the part of
their resources to the venture capital area. As a part of the broader equity investment fund, given
suitable standards of the valuation for unquoted investments, it should be possible for the fund
managers to commit the portion of there portfolios to venture capital situations. The participation
of the private sector in venture capital funding, as it has come to be defined in the narrow Indian
context, is not possible in isolation from the opportunity to develop a broadly spread investment
business.
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Budget for 2000-01 the income of the Venture Capital Fund is taxed at the rate of 20%, although
the dividends declared in the hands of the investors are tax-free.
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5. The Government have set up a separate ministry of I.T and started an I.T Venture Fund of
Rs.100crores for the financing new start up I.T projects.
6. Venture Funds were set up by ICICI, UTI, IDBI, Tatas etc.
7. Merger and acquisitions M&A are becoming increasingly significant in term of services
offered by the investment bankers in India. During the licensing era, several companies had
indulged in unrelated diversifications depending on the availability of the licenses. The
companies thrived in spite of their inefficiencies because the total capacity in the industry was
restricted due to licensing. The companies over a period of time became unwieldy conglomerates
with suboptimal portfolio of assorted business. The policy of decontrol and liberalization coupled
with globalization of the economy has exposed the corporate sector to serve domestic and global
competition. The industry is passing through a transitory phase of restructuring. The mergers and
acquisitions group provides advice to companies that are buying another company or are those
selves being acquired. M&A work can seem very glamorous and high profile. At the same time,
the work leading up to the headline-grabbing multibillion-dollar acquisition can involve a
Herculean effort to crunch all the numbers, perform the necessary due diligence, and work out the
complicated structure of the deal. As one insider puts it, You have to really like spending time in
front of your computer with Excel. Often, the M&A team will also work with a corporate
finance industry group to arrange the appropriate financing for the transaction (usually a debt or
equity offering). In many cases, all this may happen on a very tight timeline and under extreme
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secrecy. M&A is often a subgroup within corporate finance; but in some firms, it is a stand-alone
department. M&A can be one of the most demanding groups to work for.
Financial:
I. Benefits on account of tax shield.
II. Restructuring and strengthening the balance sheet.
III. Profiting from leveraged buyouts.
IV. Investment of surplus cash.
Marketing
I. Increase in market share.
II. Elimination of competition.
III. Diversification of risks.
IV. Growth without increase in the capacity.
Production
I. Horizontal and vertical integration.
II. Acquisition of new technology.
Classifications of mergers
Horizontal mergers take place where the two merging companies produce similar
product in the same industry.
Vertical mergers occur when two firms, each working at different stages in the
production of the same good, combine.
Con-generic merger/concentric mergers occur where two merging firms are in the
same general industry, but they have no mutual buyer/customer or supplier
relationship, such as a merger between a bank and a leasing company. Example:
Prudential's acquisition of Bache & Company.
Conglomerate mergers take place when the two firms operate in different industries.
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(ii) Approaching the target: - This is one of the most critical roles played by the investment
bankers in the deal. There are broadly two methods of approaching the targets- passive
strategy i.e. no aggressive approach is used and active strategy i.e. acquisition may be
friendly or hostile.
(iii) Valuation: - valuation of the target company is the most critical task performed by the
investment banker. A conservative valuation can result in collapse of the deal while an
aggressive valuation may create perpetual problems for the acquiring company. The
commonly used valuation methods are
(a) Discounted cash flow method.
(b) Comparable companies method
(c) Book value method
(d) Market value method
(iv) Negotiation: - This is the process of formulating the structure of the deal. The investment
banker plays a vital role in closing the financial side of the negotiation. From a financial
standpoint, the key elements of negotiations are the price and the form of consideration.
Both the elements are interrelated and affect the attractiveness of the deal. The merchant
banker must ensure that the final price paid should not exceed the perceived value of the
targets to the acquirer.
(v) Acquisition finance: - once the negotiation is over and the price is finalized, the merchant
banker has to assist the acquirer in arranging the required finance. The consideration can be
paid in the form of cash, debt securities or equity of the acquiring company. Cash may be
raise from the internal accruals, sale of assets, etc. It may also be refinanced by bank
borrowing, public issue or private placement of debt and equity.
8. Initial Public Offerings: - Initial Public Offerings (IPO) is the first time a company sells its
stock to the public. Sometimes IPOs are associated with huge first-day gains; other times, when
the market is cold, they flop. It's often difficult for an individual investor to realize the huge
gains, since in most cases only institutional investors have access to the stock at the offering
price. By the time the general public can trade the stock, most of its first-day gains have already
been made. However, a savvy and informed investor should still watch the IPO market, because
this is the first opportunity to buy these stocks.
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can either take on debt or sell partial ownership. If the corporation chooses to sell ownership to
the public, it engages in an IPO. Corporations choose to "go public" instead of issuing debt
securities for several reasons. The most common reason is that capital raised through an IPO does
not have to be repaid, whereas debt securities such as bonds must be repaid with interest. Despite
this apparent benefit, there are also many drawbacks to an IPO. A large drawback to going public
is that the current owners of the privately held corporation lose a part of their ownership.
Corporations weigh the costs and benefits of an IPO carefully before performing an IPO.
Going Public
If a corporation decides that it is going to perform an IPO, it will first hire an
investment bank to facilitate the sale of its shares to the public. This process is commonly called
"underwriting"; the bank's role as the underwriter varies according to the method of underwriting
agreed upon, but its primary function remains the same.
In accordance with the SEBI act, the corporation will file a registration statement with the
Securities Exchange Board of India (SEBI).The registration statement must fully disclose all
material information to the SEBI including a description of the corporation, detailed financial
statements, biographical information on insiders, and the number of shares owned by each
insider. After filing, the corporation must wait for the SEBI to investigate the registration
statement and approve of the full disclosure.
During this period while the SEBI investigates the corporation's filings, the underwriter will try to
increase demand for the corporation's stock. Many investment banks will print "tombstone"
advertisements that offer "bare-bones" information to prospective investors. The underwriter will
also issue a preliminary prospectus, or "red herring", to potential investors. These red herrings
include much of the information contained in the registration statement, but are incomplete and
subject to change. An official summary of the corporation, or prospectus, must be issued either
before or along with the actual stock offering.
After the SEBI approves of the corporation's full disclosure, the corporation and the
underwriter decide on the price and date of the IPO; the IPO is then conducted on the determined
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date. IPOs are sometimes postponed or even withdrawn in poor market conditions.
Performance
The aftermarket performance of an IPO is how the stock price behaves after the day of its
offering on the secondary market (such as the BSE or the NSE). Investors can use this
information to judge the likelihood that an IPO in a specific industry or from a specific lead
underwriter will perform well in the days (or months) following its offering. The first-day gains
of some IPOs have made investors all too aware of the money to be had in IPO investing.
Unfortunately, for the small individual investor, realizing those much-publicized gains is nearly
impossible. The crux of the problem is that individual investors are just too small to get in on the
IPO market before the jump. Those large first-day returns are made over the offering price of the
stock, at which only large, institutional investors can buy in. The system is one of reciprocal back
scratching, in which the underwriters offer the shares first to the clients who have brought them
the most business recently. By the time the average investor gets his hands on a hot IPO, it's on
the secondary market, and the stock's price has already shot up.
ii.
iii.
iv.
v.
vi.
Value added services like providing bridge loans against public issue proceeds
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SEBI has set certain limits on the maximum no of intermediaries associated with the
issue
Size of the issue
No of lead managers
2
3
Rs 100cr to Rs 200cr
Rs 200cr to Rs 400cr
Above Rs 400cr
The no of co managers cannot exceed no of lead managers appointed for that issue.
There can be only one advisor or consultant to the issue. There is no limit on the no of
underwriters to the issue. An associate company of the issuer company cannot be
appointed either as lead manager or Co manager to the issue. However they can be
appointed as Underwriter or Advisor/Consultant to the issue. The lead investment banker
enters into a MOU with the issuer company. The no of co managers cannot exceed no of
lead managers appointed for that issue. There is no limit on the no of underwriters to the
issue. An associate company of the issuer company cannot be appointed either as lead
manager or Co manager to the issue. However they can be appointed as Underwriter or
Advisor/Consultant to the issue. The lead investment banker enters into a MOU with the
issuer company. MOU specifies the mutual rights, obligations and liabilities relating to
the issue. The lead investment banker has to ensure that copy of MOU is submitted to the
board along with the draft offer document. In case of more than one lead manager is
appointed, all lead managers have a meeting and the entire issue related work is
distributed among them. This agreement is called as Inter-se Allocation of
Responsibilities. Once the lead manager(s) is/are appointed, the other intermediaries are
appointed in consultation with them. The selection of the intermediary is based on their
past records, ranking, previous relationship with the issuer company, fees charged etc
The other intermediaries appointed are:
a. Registrar to the issue
b. Bankers to the issue
c. Underwriters to the issue
d. Debenture trustees (if applicable)
e. Brokers to the issue
f.
Advertising agencies
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10. Foreign currency finance: - Of late, India has become increasingly active in the
international money markets, and this trend is likely to continue. For import of capital
goods and services from overseas, the arrangement of various kinds of export credits
from different countries is also required.
In addition to this wide range of services, some of the larger banks are also involved in
areas such as the arrangement of lease finance, and assistance in acquisitions and mergers
etc.
11. Underwriting: - Underwriting refers to the process that a large financial service provider
(bank, insurer, investment house) uses to assess the eligibility of a customer to receive their
products (equity capital, insurance, mortgage or credit). This is a way of placing a newly issued
security, such as stocks or bonds, with investors. A merchant banker underwrites the transaction,
which means they have taken on the risk of distributing the securities. Should they not be able to
find enough investors, they will have to hold some securities themselves. Underwriters make their
income from the price difference (the "underwriting spread") between the price they pay the
issuer and what they collect from investors or from broker-dealers who buy portions of the
offering. When a dealer bank purchases Treasury securities in a quarterly Treasury bond auction,
it acts as underwriter and distributor. Treasury securities purchased by a primary dealer are held
in a dealer bank's trading account assets portfolio, and they are often resold to other banks and to
private investors. The main work of merchant banks relates to underwriting of new issues and
rising of new capital for the corporate sector. Of the amount underwritten, some part devolves on
the underwriters, which varies depending on the state of the capital market, and the intrinsic
worth of the project. The SEBI has made underwriting Compulsory for all issues offered to
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Public first but later it was made optional. SEBI made it necessary for merchant bank to
undertake or make a firm commitment for 5% of issued amount to the public.
13. Securitization:- is a structured finance process, which involves pooling and repackaging of
cash-flow-producing financial assets into securities that are then sold to investors. The name
"securitization" is derived from the fact that the forms of financial instruments used to obtain
funds from the investors are securities. All assets can be securitized so long as they are associated
with cash flow. Hence, the securities which are the outcome of securitization processes are termed
asset-backed securities (ABS). From this perspective, securitization could also be defined as a
financial process leading to an issue of an ABS.
Securitization often utilizes a special purpose vehicle (SPV), alternatively known as
a special purpose entity (SPE) or special purpose company (SPC), in order to reduce the risk of
bankruptcy and thereby obtain lower interest rates from potential lenders. A credit derivative is
also generally used to change the credit quality of the underlying portfolio so that it will be
acceptable to the final investors.
A very basic example would be as follows. XYZ Bank loans 10 people $100,000 a piece,
which they will use to buy homes. XYZ has invested in the success and/or failure of those 10
home buyers- if the buyers make their payments and pay off the loans, XYZ makes a profit.
Looking at it another way, XYZ has taken the risk that some borrowers won't repay the loan. In
exchange for taking that risk, the borrowers pay XYZ interest on the money they borrow.
From the perspective of XYZ, those loans are 10 different assets. They have value- one, if the
loan fails, XYZ takes ownership of the house. Two, if the loan succeeds, XYZ gets their money
back along with the interest they charge. XYZ can do two things with those loans. They can hold
them for 30 years and, they would hope, make a profit on their investment. Or they could sell
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them to some other investor, and walk away. In doing this, they would make less profit than if
they held onto them long term, but they would benefit in that they make some profit while also
getting their original investment back. They give up some of the reward (profit) in exchange for
not having the risk.
So XYZ Bank decides they'd rather have the cash now. They could sell those 10 loans to 10
investors. Each investor would be taking a risk in buying those loans, because if any loan
defaults, that one investor loses. Naturally, investors would not be willing to pay very much for
those loans, knowing the risk involved. XYZ wants to sell those loans for the best price they can
get, so they decide to securitize those loans. They combine the 10 loans into one entity, and then
they split that one entity into 10 equal shares. Each investor still pays the same $100,000, but
instead of owning one loan, they will own 10% of all 10 loans. If one loan fails, every investor
loses 10%.
The result is that XYZ bank is able to sell their assets for more money, and investors
are insulated from the volatility of directly owning individual mortgages. However, if a majority
of the mortgages in the asset pool act in the same way ( Correlation ) then the risk is similar to
owning one mortgage. Investors incur some of the volatility and there is no inherent "insurance"
against major loss.
Structure of Securitization
Pooling and transfer
The originator initially owns the assets engaged in the deal. This is typically a company
looking to raise capital, restructure debt or otherwise adjust its finances. Under traditional
corporate finance concepts, such a company would have three options to raise new capital: a loan,
bond issue, or issuance of stock. However, stock offerings dilute the ownership and control of the
company, while loan or bond financing is often prohibitively expensive due to the credit rating of
the company and the associated rise in interest rates.
A suitably large portfolio of assets is "pooled" and sold to a "special purpose vehicle" or "SPV"
(the issuer), a tax-exempt company or trust formed for the specific purpose of funding the assets.
Once the assets are transferred to the issuer, there is normally no recourse to the originator. The
issuer is "bankruptcy remote," meaning that if the originator goes into bankruptcy, the assets of
the issuer will not be distributed to the creditors of the originator. In order to achieve this, the
governing documents of the issuer restrict its activities to only those necessary to complete the
issuance of securities.
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Since the structural issues is very complex, an investment bank facilitate (the arranger) the
originator in setting up the structure of the transaction.
Issuance
To be able to buy the assets from the originator, the issuer SPV issues tradable securities
to fund the purchase. Investors purchase the securities, either through a private offering (targeting
institutional investors) or on the open market. The performance of the securities is then directly
linked to the performance of the assets. Credit rating agencies rate the securities which are issued
in order to provide an external perspective on the liabilities being created and help the investor
make a more informed decision.
In transactions with static assets, a depositor will assemble the underlying collateral, help
structure the securities and work with the financial markets in order to sell the securities to
investors. The depositor typically owns 100% of the beneficial interest in the issuing entity and is
usually the parent or a wholly owned subsidiary of the parent which initiates the transaction. In
transactions with managed (traded) assets, asset managers assemble the underlying collateral,
help structure the securities and work with the financial markets in order to sell the securities to
investors. Some deals may include a third-party guarantor which provides guarantees or partial
guarantees for the assets, the principal and the interest payments, for a fee.
The securities can be issued with either a fixed interest rate or a floating rate. Fixed rate set the
coupon (rate) at the time of issuance, in a fashion similar to corporate bonds. Floating rate
securities may be backed by both amortizing and non amortizing assets. In contrast to fixed rate
securities, the rates on floaters will periodically adjust up or down according to a designated
index such as a U.S. Treasury rate, or, more typically, the London Interbank Offered Rate
(LIBOR). The floating rate usually reflects the movement in the index plus an additional fixed
margin to cover the added risk.
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receive cash flows to which they are entitled, and thus causes the securities to have a higher credit
rating than the originator. Some securitizations use external credit enhancement provided by third
parties, such as surety bonds and parental guarantees (although this may introduce a conflict of
interest). Individual securities are often split into tranches, or categorized into varying degrees of
subordination. Each tranches has a different level of credit protection or risk exposure than
another: there is generally a senior (A) class of securities and one or more junior subordinated
(B, C, etc.) classes that function as protective layers for the A class. The senior classes
have first claim on the cash that the SPV receives, and the more junior classes only start receiving
repayment after the more senior classes have repaid. Because of the cascading effect between
classes, this arrangement is often referred to as a cash flow waterfall. In the event that the
underlying asset pool becomes insufficient to make payments on the securities (e.g. when loans
default within a portfolio of loan claims), the loss is absorbed first by the subordinated tranches,
and the upper-level tranches remain unaffected until the losses exceed the entire amount of the
subordinated tranches. The senior securities are typically AAA rated, signifying a lower risk,
while the lower-credit quality subordinated classes receive a lower credit rating, signifying a
higher risk.
The most junior class (often called the equity class) is the most exposed to payment risk. In some
cases, this is a special type of instrument which is retained by the originator as a potential profit
flow. In some cases the equity class receives no coupon (either fixed or floating), but only the
residual cash flow (if any) after all the other classes have been paid.
Credit enhancements affect credit risk by providing more or less protection to promised cash
flows for a security. Additional protection can help a security achieve a higher rating, lower
protection can help create new securities with differently desired risks, and these differential
protections can help place a security on more attractive terms.
In addition to subordination, credit may be enhanced through
A reserve or spread account, in which funds remaining after expenses such as principal
and interest payments, charge-offs and other fees have been paid-off are accumulated,
and can be used when SPE expenses are greater than its income.
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Cash funding or a cash collateral account, generally consisting of short-term, highly rated
investments purchased either from the seller's own funds, or from funds borrowed from
third parties that can be used to make up shortfalls in promised cash flows.
Servicing
A servicer collects payments and monitors the assets that are the crux of the structured financial
deal. The servicer can often be the originator, because the servicer needs very similar expertise to
the originator and would want to ensure that loan repayments are paid to the Special Purpose
Vehicle. The servicer can significantly affect the cash flows to the investors because it controls
the collection policy, which influences the proceeds collected, the charge-offs and the recoveries
on the loans. Any income remaining after payments and expenses is usually accumulated to some
extent in a reserve or spread account, and any further excess is returned to the seller. Bond rating
agencies publish ratings of asset-backed securities based on the performance of the collateral
pool, the credit enhancements and the probability of default.
When the issuer is structured as a trust, the trustee is a vital part of the deal as the
gate-keeper of the assets that are being held in the issuer. Even though the trustee is part of the
SPV, which is typically wholly owned by the Originator, the trustee has a fiduciary duty to protect
the assets and those who own the assets, typically the investors.
Repayment structures
Unlike corporate bonds, most securitizations are amortized, meaning that the principal amount
borrowed is paid back gradually over the specified term of the loan, rather than in one lump sum
at the maturity of the loan. Fully amortizing securitizations are generally collateralized by fully
amortizing assets such as home equity loans, auto loans, and student loans. Prepayment
uncertainty is an important concern with full amortization. The possible rate of prepayment varies
widely with the type of underlying asset pool; so many prepayment models have been developed
in an attempt to define common prepayment activity.
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14. Portfolio management services:- A list of all those services and facilities that are
provided by a portfolio manager to its clients, relating to the management and administration of
portfolio of securities or the funds of clients, is referred to as portfolio management services.
The term portfolio means the total holdings of securities belonging to any person.
Portfolio Manager: - According to SEBI, Portfolio Manager means any person who pursuant to
contract or arrangements with a clients, advices or directs or undertakes on behalf of the clients
the management or administration of a portfolio of securities or the funds of client, as the case
may be
Discretionary Portfolio Manager:- According to SEBI, discretionary portfolio manager means a
portfolio manager who exercises or may, under a contract relating to portfolio management,
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FUNCTIONS
The objective of portfolio management is to develop a portfolio that has maximum
return at whatever level of risk the investor deems appropriate.
(A) Risk Diversification - An essential function of portfolio management is spread risk akin to
investment of assets. Diversification could take place across different securities and across
different industries. Diversification achieved in different industries is an effective way of
diversifying the risk in an investment. Simple diversification reduces risk within categories of
stocks that all have the same quality rating. The portfolio managers could as well adopt the
Markotiwz model whereby portfolio risk are sought to be reduced through combining assets,
which are less than perfectly positively correlated.
(B) Efficient Portfolio: -A portfolio manager aims at building dominant investment called
efficient portfolio. An efficient portfolio consists of combination of assets that maximizes return
and maximizes the risk level of expected return. The objective of portfolio management is to
analyze different individual assets and delineate efficient portfolios. A group of portfolio of
efficient portfolios is called efficient set of portfolios. The efficient set of portfolio comprises
efficient frontier.
(C) Asset allocation: - An important function of portfolio management is asset allocation. It deals
with attaining proportion of investments from categories. Portfolio managers basically aim at
stock-bond mix. For this purpose equally weighted categories of assets are used.
(D) Beta Estimation: - Another important function of a portfolio manger is to make an estimate of
beta coefficient. It measures and ranks the systematic risk of different assets. Beta coefficient is
an index of the systematic risk. This is useful in making ultimate selection of securities for
investment by portfolio manager.
(E) Rebalancing Portfolios: - Rebalancing of portfolio involves the process of periodically
adjusting the portfolios to maintain the original conditions of portfolio. The adjustments may be
made either by way of constant proportion portfolio or by way of constant beta portfolio. In
constant proportion portfolio, adjustments are made in such a way as to maintain the relative
weighting in portfolio components according to the change in prices. Under the constant beta
portfolio, adjustments are made to accommodate the values of component betas in the portfolio.
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STRATEGIES
A Portfolio manager may adopt any of the following strategies as part of an efficient
management:
(A) Buy and Hold Strategy: - Under the buy and hold strategy, the portfolio manager builds a
portfolio of stock, which is not disturbed at all for a long period of time. This practice is
common in case of perpetual securities such as common stock.
(B) Indexing: - Another strategy employed by portfolio managers is indexing. Indexing involves
an attempt to replicate the investment characteristics of a popular measure of the bond
market. Securities that are held in best-known bond indexes are basically high-grade issues.
(C) Laddered Portfolio: - Under the laddered portfolio, bonds are selected in such a way that
their maturities are spread uniformly over a long period of time. This way a portfolio
manager aims at distributing the funds throughout the yield curve.
(D) Barbell Portfolio: - under this portfolio strategy, less investment of funds is made in middle
maturities.
15. Sales & Trading: - Make trades in securities for the primary and secondary markets
For currencies, stocks, bonds, derivatives, futures, commodities, asset-backed treasuries etc on
Behalf of institutional clients (mutual and pension funds), individual investors and for the
Banks themselves. Sales are another core component of any investment bank. Salespeople take
the form of:
1) The classic retail broker
2) The institutional salesperson, or
3) The private client service representative.
Brokers develop relationships with individual investors and sell stocks and stock advice to the
average Joe. Institutional salespeople develop business relationships with large institutional
investors. Institutional investors are those who manage large groups of assets, for example
pension funds or mutual funds. Private Client Service (PCS) representatives lie somewhere
between retail brokers and institutional salespeople, providing brokerage and money management
services for extremely wealthy individuals. Salespeople make money through commissions on
trades made through their firms.
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In trading traders also provide a vital role for the investment bank. Traders facilitate the
buying and selling of stock, bonds, or other securities such as currencies, either by carrying an
inventory of securities for sale or by executing a given trade for a client. Traders deal with
transactions large and small and provide liquidity (the ability to buy and sell securities) for the
market. (This is often called making a market.) Traders make money by purchasing securities and
selling them at a slightly higher price. This price differential is called the "bid-ask spread.
SEBI Guidelines
The Government has setup Securities Exchange Board of India
(SEBI) in April 1988. For more then three years, it had no statutory powers. Its
interim functions during the period were:
i.
To collect information and advise the Government on matters relating to Stock and
Capital Markets.
ii.
iii.
To prepare the legal drafts for regulatory and developmental role of SEBI and
iv.
The need for setting up independent Government agency to regulate and develop the Stock and
Capital Market in India as in many developed countries was recognized since the Seventh Five
Year was launched (1985) when some major industrial policy changes like opening up of the
economy to out side the world and greater role to the Private Sector were initiated. The rampant
malpractices noticed in the Stock and Capital Markets stood in the way of infusing confidence of
investors, which is necessary for mobilization of large quantity of funds from the public, and help
the growth of the industry. The malpractices were noticed in the case of companies, Merchant
Bankers and Brokers who are all operating in Capital Markets. The security industry in India has
to develop on the right lines for which a competent Government agency as in UK (SIB) or in
USA (SEC) is needed.
A few examples of malpractices in the primary market are as follows:
a) Too may self styled Investment Advisers and Consultants.
b) Grey Market or unofficial premiums on the new issues.
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Objectives of SEBI
The SEBI has been entrusted with both the regulatory and development function.
The objectives of SEBI are as follows:a)
Investor protection, so that there is a steady flow of savings into the Capital
Markets.
b) Ensuring the fair practices by the issuers of securities, namely, companies so that
SEBI POWERS
The SEBI powers on stock exchanges and their member brokers and sub brokers were exercised
under SEBI (stock brokers and sub brokers) Regulations of October 23 1992. These relate to
registration, licensing, code of conduct, and inspection of books accounts, etc. These powers were
exercised under Section 12 of SEBI Act.
SEBI was delegated more powers of administration of SC (R) Act in respect of many
provisions including recognition of stocks exchanges (Sec.3, 4&5) and control and regulation of
stocks exchanges under Sections 7, 13, 18, 22 and 28 etc., These were concurrent powers wielded
by both Government and SEBI, effective from September1993.
Subsequently, by an ordinance in January 1995, the SEBI was given further powers to
impose penalties on insider trading and capital markets intermediaries for violation of SEBI
34
regulations and companies for not complying with listing agreement. In particular penalties can
be imposed in monetary terms, for failure to furnish books of accounts, failure to enter into
agreements with clients, failure to redress investor grievances, defaults in case of mutual funds,
and non-disclosures of acquisition of shares and take over etc.
Venture capital funds like mutual funds were brought under the control of SEBI. Earlier
to that, the SEBI has started licensing and regulations the underwriters, debenture trustees,
collecting bankers, and all intermediaries in the capital market.
SEBI in the New Millennium:
SEBI has got all the needed powers to regulate the Capital Market including all affairs of
listed Companies, Venture Funds, MFs, etc. Already it has been regulating the foreign
agencies or a body operating in the capital market and it has announced guidelines for all
players in markets, including a code of conduct.
(a) Authorization
Any person or body proposing to engage in the business of Merchant Banking would
need authorization by SEBI in the prescribed format. This will apply to those presently
engaged in the Merchant Banking activity, including as Manager, Consultants or Advisers
to issues.
(b) Authorized Activity
(i) Issue Management
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No. of Lead
Not
Not
Not
Managers
More than 2
More than 3
More than 4
(iv) The Merchant Bankers shall exercise due diligences independently verifying the
contents of the prospectus. The Merchant Bankers of the issues shall certify to this
effect to SEBI.
(v) In respect of issues managed by the Merchant Bankers, they would be required to
a minimum 5% underwriting obligation for issue subject to a ceiling of Rs.25lakh.
(vi) The merchant bankers involvement will continue till the complete on of essential
to follow-up steps including listing of the shares and dispatch of certificates.
(vii) The Merchant Banker shall make available to SEBI such information, returns and
reports as may be called for.
(viii) Merchant Bankers shall adhere to the code of conduct which shall prepared by
SEBI.
(ix) Merchant Bankers to ensure that Publicity / Advertisement material accompanying
the application form to the issue meets the requirement of GOI/SEBI.
(x) SEBI shall be informed well before the opening of the issue the Inter allocation of
activities/sub-activities, among lead managers to the issue.
(xi) Merchant Bankers performing or planning to perform portfolio management services
shall furnish the details in the prescribed format.
(f)
Grading of Prospectus
Grading of Prospectus will be done by SEBI using the following parameters:(i) Objective description of the project, its status and implementation.
(ii) Track record of the promoters and their competence.
(iii) Disclosure about Demand - Supply position, Market and Marketing
36
Nature
Penalty points
II
II
III
IV
General defaults
Minor defaults
Major defaults
Serious defaults
1
2
3
4
Commercial banks
A commercial bank may legally take deposits for checking and savings accounts from consumers.
The federal government provides insurance guarantees on these deposits through the Federal
Deposit Insurance Corporation (the FDIC), on amounts up to $100,000. To get FDIC guarantees,
commercial banks must follow a myriad of regulations. The typical commercial banking process
is fairly straightforward. You deposit money into your bank, and the bank loans that money to
consumers and companies in need of capital (cash). You borrow to buy a house,
Finance a car, or finance an addition to your home. Companies borrow to finance the growth of
their company or meet immediate cash needs. Companies that borrow from commercial banks
can range in size from the dry cleaner on the corner to a multinational conglomerate.
Investment banks
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An investment bank operates differently. An investment bank does not have an inventory of cash
deposits to lend as a commercial bank does. In essence, an investment bank acts as an
intermediary, and matches sellers of stocks and bonds with buyers of stocks and bonds.
Note, however, that companies use investment banks toward the same end as they use
commercial banks. If a company needs capital, it may get a loan from a bank, or it may ask an
investment bank to sell equity or debt (stocks or bonds). Because commercial banks already have
funds available from their depositors and an investment bank does not, an I-bank must spend
considerable time finding investors in order to obtain capital for its client.
Every industry functions in an environment, which to a great extent determines the strategies to
be adopted by it for survival. The term environment includes both internal as well as external
factors, such as the level of competition within the industry, the level of technology used,
government policy, etc., which could affect its ability to function effectively. These forces and the
interplay amongst them constitute the structure of the industry.
Five forces which determine collectively the profit potential of the industry and are measured in
terms of the long run return on invested capital are:
1. Threat of entry
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2. competition
3. pressure from substitute
4. bargaining power of buyers
5. bargaining power of suppliers
1. Threat of entry - new entrant into the industry may pose a threat to the existing players.
Major threats to entry into industry depend on:
Economies of scale
Product differentiation
Capital requirement
Switching cost
Government policy
Efficiency of employees
39
Liquidity risk - is the risk of negative effects on the financial result and capital of the
bank caused by the banks inability to meet all its due obligations .
Credit risk - is the risk of negative effects on the financial result and capital of the bank
caused by borrowers default on its obligations to the bank.
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Exposure risks - include risks of banks exposure to a single entity or a group of related
entities, and risks of banks exposure to a single entity related with the bank.
Investment risks - include risks of banks investments in entities that are not entities in
the financial sector and in fixed assets.
Risks relating to the country of origin of the entity to which a bank is exposed (country risk) is the risk of negative effects on the financial result and capital of the bank
due to banks inability to collect claims from such entity for reasons arising from
political, economic or social conditions in such entitys country of origin. Country risk
includes political and economic risk, and transfer risk.
Operational risk - is the risk of negative effects on the financial result and capital of the
bank caused by omissions in the work of employees, inadequate internal procedures and
processes, inadequate management of information and other systems, and unforeseeable
external events.
Legal risk it is the risk of loss caused by penalties or sanctions originating from court
disputes due to breach of contractual and legal obligations, and penalties and sanctions
pronounced by a regulatory body.
Reputational risk - is the risk of loss caused by a negative impact on the market
positioning of the bank.
The primary goal of risk management is to ensure that a financial institutions trading, position
taking, credit extension, and operational activities do not expose it losses that could threaten the
viability of the firm. As risk taking is an integral Part of the investment banking business, it is not
surprising that investment bank have been risk management ever since they have been
established. The only thing which has change is the complexity.
It involves following steps
Developing guidelines for new products and including new exposures within the current
frame work
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43
technical experts etc. The issue house, which is a merchant bank also, requires, plant,
management, labor, competitors, profit margins, taxations, etc. They have to keep ready all the
information needed in the form of dossiers with respect to the affairs of the company generally
enquired into by the investing public, lending financial institutions and the government.
Secondly, a merchant bank has to suggest an appropriate time of issue and provisional
terms. Once these terms are settled the share certificates, prospectus and other
documents are drafted by the merchant bank with the assistance of lawyers, accountants
and others. They have to satisfy the Companies Act and other SS requirements of law.
Subsequently, the merchant bank may have to get ready the application to the SEBI for
the public issues. This requires familiarity with the regulations under the Companies Act
and the SEBI guidelines and the procedures to be followed and the authorities to be
approached. The provisions under the MRTP Act regulating monopoly practices and
other activities of big industrial houses should also be looked into.
Thirdly, they may have to make an application to the appropriate stock exchange for
quotation and satisfy the stock exchange authorities with respect to the terms of issue and
prospectus. Listing requirements are to be observed and familiarity with the stock
exchange rules and bye-laws as well as the provisions of the Securities Contracts
Regulations) Act would be essential. They may have to advise on the desirability or
otherwise of listing on the stock exchange as well as help the companies go through the
process of getting their shares listed. Advertisements containing all the information
legally required to be given in the prospectus must be published in all the leading
proposed date of opening and closing, a summary of the companys business history,
balance sheet, etc, to which a reference was made earlier. Once the issue made, the work
of the merchant bank relates to arranging for the allotment of shares in consultation with
the company and the stock exchange authorities with the help of Registrars.
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the SEC in the United States) require that banks impose a Chinese wall which prohibits
communication between investment banking on one side and research and equities on the other .
Some of the conflicts of interest that can be found in investment banking are listed here:
Historically, equity research firms were founded and owned by investment banks. One
common practice is for equity analysts to initiate coverage on a company in order to
develop relationships that lead to highly profitable investment banking business. In the
1990s, many equity researchers allegedly traded positive stock ratings directly for
investment banking business. On the flip side of the coin: companies would threaten to
divert investment banking business to competitors unless their stock was rated favorably.
Politicians acted to pass laws to criminalize such acts. Increased pressure from regulators
and a series of lawsuits, settlements, and prosecutions curbed this business to a large
extent following the 2001 stock market tumble
Many investment banks also own retail brokerages. Also during the 1990s, some retail
brokerages sold consumers securities which did not meet their stated risk profile. This
behavior may have led to investment banking business or even sales of surplus shares
during a public offering to keep public perception of the stock favorable.
Since investment banks engage heavily in trading for their own account, there is always
the temptation or possibility that they might engage in some form of front running.
45
technology, or financing vehicle. Regional, as the name implies, focus on financing and
investment services in a particular geographic region. These labels are still used (although the
smaller firms scorn the boutique image), but as the rapid pace of mergers and acquisitions
continues to alter the landscape, the traditional categories are becoming less and less meaningful.
Large commercial banks that have acquired investment banks are bringing large amounts of
capital to the playing field, along with a mix of financial services more varied than ever before.
Some of the major players on investment banking are:
1.
Bank of America Securities LLC -Bank of America Securities is the U.S. investment
banking arm of Bank of America, one of the biggest commercial banks around. Together
with Bank of Americas U.K. investment banking subsidiary, Banc of America Securities
Ltd., it offers a full range of investment banking and brokerage services. The company
was created in 1998, when its parent bank acquired Montgomery Securities. Later, Bank
of America was acquired by NationsBank, and the combined entity took on the Bank of
America name. Banc of America Securities main offices are in San Francisco, New York,
and Charlotte. It employs people in areas including corporate and investment banking, the
global markets group (debt capital raising, sales, trading, and research), portfolio
management, e-commerce, global treasury services, and asset management. Banc of
America Securities offers full-time and summer associate and analyst programs in the
United States and in Europe.
2.
Credit Suisse first Boston LLC - Credit Suisse First Boston is the result of the 1988
merger of the investment bank First Boston and Credit Suisse, a European commercial
bank. In 2000, the firm acquired Donaldson, Lufkin & Jenrette, and a leading underwriter
of high-yield bonds with a golden reputation in research. A bulge-bracket bank, CSFB
ranked fifth among all banks in 2003 in terms of global debt, equity, and equity-related
issuance. CSFB has experienced trouble in recent years, with business slackening in key
areas (e.g., IPO underwriting) and regulatory trouble (the firm paid a $200 million fine in
2002 for research improprieties and another $100 million in 2002 to settle charges that it
received kickbacks in the form of higher commissions from clients to whom it allocated
hot IPO sharesand in the process rock-star tech banker Frank Quattrone resigned and
eventually was convicted of criminal charges). The firm has also been losing key bankers
in recent times; epitomizing this trend, the CEO of the investment bank, John Mack,
announced plans to leave the firm in the summer of 2004, reportedly due to the fact that
his desire to merge Credit Suisse with another firm was not in line with the desires of the
majority of the directors of Credit Suisse. After that announcement, the firms head in
46
China announced plans to leave the firm, and as this guide goes to press the firm must
surely be worried that an exodus of the firms talent in Asia will ensue.
3.
Deutsche Banc Securities Inc. - Deutsche Banc Securities is the full-service North
American investment banking arm of German financial services giant Deutsche Bank
AG. It includes Deutsche Bank Alex. Brown, which provides M&A, acquisition finance,
and project finance advisory to clients in the health-care, media, real estate, technology,
and telecom sectors. The bank has been undergoing some changes, with some key
employees leaving the firm and the addition of a number of senior-level hires. In March
2004, Deutsche announced it was laying-off 50 employees in the equity group, including
nine senior research analysts, dropping coverage of 100 of the 731 companies it used to
cover in the process. Observers report that layoffs could continue as the bank cuts back
on research coverage, a common trend on the Street. Overall, though, Deutsche Bank has
been focused on building its presence in North America.
4.
The Goldman Sachs Group, Inc. - Goldman Sachs was founded in 1869 when Marcus
Goldman, an immigrant from Europe, began a small enterprise to provide an alternative
to expensive bank credit. In the 1950s, Goldman played a lead role in establishing the
municipal bond market, and in the 1970s the firm formed the first official M&A and real
estate departments on Wall Street. Today it continues to sit at or near the top in most areas
of investment banking advisory, sales, and trading. In the first 6 months of 2004,
Goldman ranked second in global equity and equity-related business, second in global
IPO underwriting, fourth in global investment-grade corporate debt, fourth in
underwriting, and first in M&A advisory. Perhaps even more significant, it is probably
considered by the majority of people in the industry as the gold standard in terms of the
quality of its employees (a belief thats especially true among Goldman employees,
naturally), what an investment bank should be, and how a bank should do business. (A
fact thats a bit ironic given that Goldman has faced as much scrutiny as any other bank
as the SEC and other regulators try to clean up Wall Street in the wake of the early-2000s
banking scandalsand has had to pay a pretty penny to settle charges of misdeeds
brought against it.)
5.
J.P Morgan & Co. - This firm was formed by a mega-merger when Chase Manhattan,
one of the largest commercial banks around, paid $33 billion to join with J.P. Morgan,
one of the oldest and most prestigious commercial and investment banks in the world.
Subsidiaries include J.P. Morgan Fleming Asset Management, which serves institutional
47
investors; J.P. Morgan Partners, a private-equity house; J.P. Morgan H&Q, an investment
banking arm focused on areas like tech and health care; and J.P. Morgan Private Bank,
which serves wealthy private clients. And now, with the 2004 acquisition of Bank One,
its getting even bigger. (However, the acquisition probably wont have a major effect on
the way things are done in the investment bank, J.P. Morgan.) J.P. Morgan is a major
player in terms of debt and equity issuance worldwide; in the first half of 2004, it was
third in the league tables in global equity underwriting, in U.S. IPO underwriting, and in
overall debt underwriting. It is also a player in M&Afifth best in the business, in terms
of worldwide announced deals in the first half of 2004.
6.
Merill Lynch & Co., Inc. - Merrill was founded in 1914, when Charles Merrill opened
the first U.S. retail brokerage firm, winning his company the nickname the firm that
brought Wall Street to Main Street. He was joined a year later by his friend Edmund
Lynch. In recent years, the company has worked to increase its presence in the global
market place. The firms strength lays in its vast retail brokerage network and large asset
management business, as well as its position near the top of the global underwriting and
advisory league tables. All has not been rosy for Merrill of late. Poor performance has
forced the firm to drop thousands of employees over the past several years. In 2002, the
firm was forced to pay $100 million to New York State after evidence supporting
allegations of fraudulent stock recommendations by Merrill research analysts came to
light. Also in 2002, the firm was one of a number of major banks paying between $80
million and $125 million as part of a $1.335 billion settlement with regulators for
research misdeeds. In 2003, the firm was charged by the SEC with helping Enron
fraudulently pump up its profits in 1999, and Merrill agreed to pay $80 million to settle.
48
investment banks, insurers, and securities brokerages to offer one anothers services. As I-banks
add retail brokerage and lending to their offerings and commercial banks try to build up their
investment banking services, the industry is undergoing some serious global consolidation,
allowing clients to invest, save, and protect their money all under one roof. These mergers have
added a downward pressure on employment in the industry, as merged institutions make an effort
to reduce redundancy.
The Industry One of the biggest issues was the fact that banks overrated the investment
potential of client companies stocks intentionally, deceiving investors in the pursuit of favorable
relationshipsand ongoing banking revenue opportunitieswith those companies. Firms also
came under fire for the methods by which they allocated stock offerings (specifically, for whether
they charged excessive commissions to clients who wanted to purchase hot offerings), as well as
for possible manipulation of accounting rules in the course of presenting clients financial info to
potential investors. By now, almost all of the important investment banks have paid fines totaling
in the billions of dollars to settle allegations against them, and the scrutiny of regulators remains
sharp. And banks are paying millions to purchase independent research to provide to their
customers.
The Industry
Conclusion
For the past couple of years the investment banking industry has been shrinking and the current
scenario calls for combined efforts by the regulators and the industry itself to take measures for
improving the situation. At present the industry is going through changes. Many non banking
finance companies are focusing on becoming multi business entities so that they can remain
commercially viable. The corporate sector has perennial needs for services such as investment
advisory, corporate restructuring, distressed assets acquisition and equity and debt financing. And
as the economy improves the need for these services will further intensify. This indicates good
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prospects for the investment banks proficient in these areas of business. It is time for the
investment banks to focus on developing competitive advantages in the form of wider outreach
and ability to mobilize national savings with greater efficiency.
In this scenario, investment banks have had to increase their international presence in order to
retain existing clients and to generate new business. They have been achieving these offices
abroad as well as by acquiring or merging with foreign investment banks. Similarly investment
banks from other countries have been strengthening their ties with American investment banks.
The industry has been witnessing consolidation across geographical functional-supermarket,
where all the financial need of all types of clients can be fulfilled. With the abolition of glassSteagell act, it is possible for bank to convert itself into a supermarket that offers all types of
financial services to issuers and investors, at both retail and wholesale level. The range of
services offered may cover underwriting services, fund, management, insurance products, credit
cards, loans, depository services. Corporate advisory services, trust services etc.
The rapid technology changes have started affecting the industry. As various commercial
banking and investment banking activities have become digitalized, the established players are
facing challenge on pricing front from all small new players. This is big forcing big banks to find
means of turning the digitalization to their advantage and reducing cost. Today they are focusing
more on lower cost, better quality services, innovative products and new service channel so that
can have deeper penetration in the market. During the downturn in the economy the demand for
the industries services declines equally fast. The earning in the industry are extremely volatile as
they depend upon extremely volatile factors like interest rates, exchange rates., inflation etc. they
need to stay big enough at all times to be able to satisfy suddenly increasing demand, yet be
flexible enough to be able to downsize quickly in a declining market.
Bibliography
Websites
1. www.google.com
2. www.wikipedia.org
3. www.pfoo.com
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4. www.financeconnectsingapore.com
Books
1. Investment Banking(ICFAI)
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