Investment Banking

2021 Batch
Concept of Investment Banking
• Concerned with the primary function of assisting capital market in its
function of capital intermediation.
• Savings by themselves do not create wealth unless they are
channelized into productive uses- Discuss
• How institutional intervention helps in moving investments from
financial assets to real assets?- Explain
• The extent to which institutional intervention can mobilise and
allocate capital would depend on the depth of markets & presence of
legal and regulatory bodies- Elaborate
Evolution
• What was the reason of Great Depression?
✓Boom in capital markets
✓Commercial banks started acquiring stock broking houses/ affiliates
✓Affiliates were thinly capitalized
✓Investment banks borrowed a lot from parent bank
✓Increase in speculation of bank stocks
✓Absurd PE ratio bubble
✓Burst in Oct 1929
Post Great Depression
• Restore confidence in banking- Glass Steagall Act 1933 (Roosevelt)
• Restrictions on commercial banks for engaging in underwriting &
acting as agents
• Restrictions on investment banks from taking deposits & corporate
lending
• So commercial and investment banking were separated- the license
could be given for only one area
• It also gave start to FDIC- Federal Deposit Insurance Corporation
(earlier $2500 and now $250,000)
• JP Morgan and Morgan Stanley- split
• Formation of NASDAQ 1938
Post 1970s
• Shift in investment banking methodology as “transactional banking”
rather than “relationship banking”
• Increase in growth and size, new services. M&As
• Thus post 1970 emergence of Venture Capital and Private Equity firms
• Arrival of academic finance professionals –
✓Modiagliani, Miller, Scholes, Merton, Markowitz
• Sophisticated statistical tools
• Emergence of Derivatives products
1990s
• Structed products
• Arbitrage speculation
• Deal making & risk taking/ management
• LBOs
• Glass Steagall Act was replaced with Gramm Leach Bliley Act of 1999
(Clinton regime)
• Technological developments – vibrant & exciting transformation
• US regulators and politicians backed financial product innovation and
made housing policy liberal
2000
• US investment banking was 22% of its GDP having assets worth $3.1 trillion
(2007)
• Goldman Sachs, Morgan Stanley, Lehman, Bear Sterns, Saloman Smith
(Citigroup), JP Morgan, BOA, Wells Fargo, Washington Mutual Bank
• Wall Street Culture- fat pay packages, astronomical bonuses, high leverage
and risk. Thrill of flamboyance, famous and arrogance.
• Increase in Rogue Traders
• Market Cap from 2002 to 2007 increased from $22.8 trillion to $60.8 trillion
• Excessive credit and outrageous products drove the real economy
• Bond issuance was $1.4 trillion (highest ever)
2008
• Sub-prime mortgage loans increased from 24000 to 2.2 million
• CDS market grew from $1trillion to $60trillion from 2001 to 2007
• Contagion Risk
✓As investment banks could not rely on depositors- they were funded
from capital and the money market- this integration caused a lot of
turmoil
✓Commercial banks, investment banks, insurance companies, and
institutional investors all suffered
• This also led to a liquidity crisis
Post 2008
• Bear Sterns takeover by JP • Merill Lynch merger with BOA at
Morgan- premium of 38%
✓Fed financed $30b to JP. • Goldman Sachs was bailed out
✓Fed did not directly bailed Bear. by Berkshire Hathway
✓JP controlled almost 49.5% of • Morgan Stanley was bailed out
Bear stake. by US Fed
✓7000 people kicked out • Wachovia was bought over by
Wells Fargo
✓Though stock had dived from
$93 to $2; Bear was valued at • AIG was nationalized
$10 • Only Lehman was bankrupted
Relief & Reform
• Financial stimulus- QE
• TARP $800 b – reduced to $475b
• Dodd Frank Wall Street Reform & Consumer Protection Act 2010
➢Registration of private funds with AUM more than $100m
➢OTC regulation with clearing & settlement
➢Systemic stability
➢Mortgage reforms
Dodd Frank Act 2010
• Similar to Glass Steagall
• End “Too Big to Fail”
• Focus on Credit Rating
• Investor Protection (taxpayer money) especially mortgage companies
from financial institutions
• Modified Fed’s lending power to non-depository institutions
• Protect minority and women-oriented
UK Merchant Banks
• 1986- UK merchant banks could not last the onslaught of US
investment banks
• Thus sale of SG Warburg to Swiss Bank Corp (later UBS acquired Swiss)
• 1997- Natwest and Barclays exited investment banking business
• Deutsche acquired Morgan Grefell, Bankers Trust, Alex Brown
• Banks which faced sub-prime heat were- UBS, RBS, Santander, ABN
Amro
Other European banks- HSBC, StanC, Rothschild, BNP, Commerzbank
Indian Origin
• Foreign banks in India started investment banking operations
• Grindlays Bank in 1967 got the first license followed by Citibank 1970
• SBI in 1972, followed by many PSBs
• ICICI in 1973 was first private bank
• IFCI and IDBI got in 1992
• SEBI asks banks to keep investment banking business separated from
their entities
SEBI Guidelines
• Payment of Rs 50000 for application fee
• Initial registration fee Rs 20 lacs (validity of 5 years).
• Permanent registration fee Rs 9 lacs (every 3 years)
Category
1. Category I
These merchant bankers can act as issue manager, advisor, consultant, underwriter and portfolio
manager. Minimum networth Rs 5 crore
2. Category II
Such merchant bankers can act as advisor, consultant, underwriter and portfolio manager. They cannot
act as issue manager of their own but can act co-manager. Minimum networth Rs 50 lakhs
3. Category III
They are allowed to act as underwriter, advisor and consultant only. They can neither undertake issue
management of their own nor they act as co-manager. They cannot undertake the activities of portfolio
management also. Minimum networth Rs 20 lakhs
4. Category IV
A category IV merchant banker can merely act as consultant or advisor to an issue of capital.
SEBI classification
• Based on activities classification
• SBI, ICICI, Kotak, HDC, Axis, IDBI, PNB, BOB- offer all services
• Foreign players- Citi, Deutsche, JP, HSBC, StanC
• NBFCs- Tata Capital, ILFS, L&T, IIFL Securities, Reliance Capital
• Mid-sized Indian banks- Edelweiss, Religare, DSP, JM Financial,
Avendus, Karvy, Anand Rathi
• Recent Addition- MAPE Advisory, Spark Capital, Veda Advisors, Ripple
Wave, O3
Full Service Investment Banks
• Equity Capital Market: raising equity, underwriting, private
placement, derivatives, proprietary trading & broking, equity research
etc.
• Debt Capital Market: bond issue & placement, underwriting,
derivatives, proprietary trading & broking, fixed income research etc.
• M&A: Advisory, arranging acquisition finance, co-investing, LBOs, due
diligence, valuation, restructuring
• Egs- Universal banks + Investment banks: HSBC, JP, BOA, Citi, Wells
Fargo, UBS, Deutsche
Investment Banking Services

Core Allied
• Public Offers • Asset Management
• Private Placements • Securities
• Advisory • Proprietary Trading
• M&A • Risk management
• Structured Products • Wealth Management
• Mezzanine financing • Forex, commodity and financial
derivatives
 Core Functions
Non-Fund Based Fund Based
• Merchant Banking Services • Underwriting
Public Issue, Rights Issue, Buy-Buy, Delisting, • Bought out deals
Takeover • Market making
• Advisory & Transaction Services • Proprietary
✓QIP, Preferential Issue Investments in
✓Project Financing, Loan Syndication secondary markets
✓Structured Finance, Securitization
✓Capital Restructuring, Turnaround financing
✓Acquisitions, disinvestments, divestures
Types of Equity Issues
Other Capital Market Instruments-
• Raising Finance from Overseas-
• ADR
• GDR
• ECB (FCCB)
• Overseas Investment in India
• FII (Participatory Notes/ P-Notes)
• Qualified Financial Investor
• IDR
TYPES of PROSPECTUS
• Offer Document
• Draft Offer Document
• Red Herring
• Shelf Prospectus
• Abridged Prospectus
• Statement in lieu of Prospectus
Bond Market

Basic Terminology Inverse Relationship

Face Value
Price
Maturity
Coupon Rate
Interest Rate
Yield
Example:
Bond of 10 years 6% Rs.10000 for 10 years
Coupon is Rs 600.
Suppose for the above-mentioned Existing Price should be in the market
bond the redemption will take = 10000/ (1 + 0.06) = 10000/1.06
place next year, then how much
will you pay for the bond today? = Rs 9433
Calculate the existing price of the
bond in the 9th year with @6%
interest. If Interest becomes 7%, price changes to
= 10000/ (1 + 0.07) = 10000/1.07
What will be the price if interest is = Rs 9345
7% (increase of rate)
If Interest becomes 5%, price changes to
What will be the price is interest if
5% (decrease of rate) = 10000/ (1 + 0.05) = 10000/1.05
= Rs 9523
 Accrued Interest
• Semi-annual coupons
• Also called- Broken Period Interest
• Market convention to quote without accrued interest but buyer agrees to pay the
same.
• Invoice Price= Quoted Price + Accrued Interest
OR
• Dirty Price= Clean Price + Accrued Price
• Accrued Interest = Interest Due in Full Period * No of Days since last coupon date
----------------------------------------------
No of Days between coupon payments
Day Count Conventions (DCC)
1. 30/365
2. 30/360
3. Actual/ 360
4. Actual/ 365
5. Actual/ Actual
According to RBI website Bond market DCC is 30/ 360 and Money
Market Actual/ 365
• Q.1 Calculate Accrued Interest according to all DCC for a bond of Face
Value Rs 100 and a coupon Rate 10%
• Last Interest Payment date= 15/10/2010
• Next Interest payment date= 15/4/2011
• Settlement date= 20/01/2011

30 days: Oct + Nov + Dec + Jan (15 + 30 + 30 + 20) = 95

Actual Days= 16+ 30 + 31+ 20 = 97 days

• Q.2 Calculate the accrued interest for a bond of Face Value Rs 500
and a coupon Rate 10%
• Last Interest Payment date= 15/01/2008
• Next Interest payment date= 15/07/2008
• Settlement date= 05/04/2008
Q.3) Calculate the accrued interest for a bond of Face Value Rs 5000 and a
coupon Rate 8%
• Last Interest Payment date= 01/01/2020
• Next Interest payment date= 01/07/2020
• Settlement date= 12/05/2020
Yield to Maturity
Realized Yield
If the bond is not held till maturity, the yield is called as realized yield.

RY= Final Proceeds 1/n

-------------------- -1 OR (FV/PV)1/n-1
Purchase Price

Final Proceeds/ Future Value =

Coupons Received + Market Value of Bond + Reinvested Coupons.
Eg- What is the Realized Yield of a bond of par
value Rs 100 having coupon of 10% maturing after
5 years but sold after 4th year. The rate of interest
in the market is 8%

Purchase C1 C2 C3 C5+ Redemption Value

(Rs 100) Rs 10 Rs 10 Rs 10 Rs 10 +Rs 100

C4
Rs 10
Future Value = Coupons Received + Market
Value of Bond + Reinvested Coupons.
Coupons Received = (Rs 10 * 4) = Rs 40
Market Value = PV of Remaining Coupons + PV of Redemption Value
= Rs 10*PVF (1yr, 8%) + Rs 100*PV (1 yr,8%)
= Rs 101.85
Reinvested Coupons =
C1= Rs10* FVF (3yrs, 8%) = 12.59
C2= Rs10* FVF (2yrs, 8%) = 11.64
C3= Rs 10*FVF (1yr, 8%) = 10. 08
-----------------------
Rs 35.06
(-) Rs 30.00
-----------------------
Rs 5.06
Thus, Future Value
= Coupons Received + Market Value of Bond + Reinvested Coupons
= 40 + 101.85 + 5.06
= 146.911

RY = 7.99%
Q2) Calculate the Realized Yield for an Rs 2500 bond
having a coupon of 8% maturing after 8 years but sold
in the 6th year. The current interest rate is 10%
 Future Value = Coupons Received + Market
Value of Bond + Reinvested Coupons.
Coupons Received = (Rs 200 * 6) = Rs 1200
Market Value
= PV of Remaining Coupons + PV of Redemption Value
= C8Rs 200*PVF (2yrs, 10%) + C7Rs 200*PVF (1yr, 10%) +Rs 2500*PV (2 yrs,
10%)
= (Rs200 * 0.8264) + (Rs200* 0.9090) + (Rs 2500 * 0.8264)
= Rs 165.28 + Rs 181.80 + Rs 2066
= Rs 2413.08
Reinvested Coupons =
C1= Rs200* FVF (5yrs, 10%) = Rs 200 * 1.6105= Rs 322.10
C2= Rs 200* FVF (4yrs, 10%) = Rs 200 * 1.4641= Rs 292.82
C3= Rs 200* FVF (3yrs, 10%) = Rs 200 * 1.3310= Rs 266.20
C4= Rs 200* FVF (2yrs, 10%) = Rs 200 * 1.2100= Rs 242.00
C5= Rs 200* FVF (1yr, 10%) = Rs 200 * 1.1000= Rs 220.00
-------------------------------------
Rs 1343.123
(-) Rs 1000.000
-------------------------------------
Rs 343.123
Thus, Future Value
= Coupons Received + Market Value of Bond + Reinvested Coupons
= 1200 + 2413.08 + 343.123
= 3956.203

RY = (FV/PV)1/n-1
= (1.5824)^0.125-1
= 1.0590-1
= 5.90%
Q) Calculate the Realized Yield of a 10 year 9%
coupon bond with par value of Rs 5000, sold in the
7th year. Assume the rate of interest in the market
for the first 3 years at 8%, the next 4 years at 10%
and after that at 11%.
Coupons Received = (Rs 225 * 14) = Rs 3150

Market Value = PV of Remaining Coupons + PV of Redemption Value

= Rs 225*PVAF (6yr, 5.5%) + Rs 5000*PVF (3yr, 11%)
= (Rs225 * 4.9955) + (Rs5000 * 0.7311)
= Rs 1123.99 + Rs 3655.95
= Rs 4779.94
 Reinvested Coupons =
Step 1) Annuity for 1- 6 coupons when interest rate is 8%
= Rs 225 * FVAF (6 years, 4%)
= Rs 225* 6.6330
= Rs 1492.425

Step 2) Annuity for 7-14 coupons when interest rate is 10%

= Rs 225 * FVAF (8 years, 5%)
= Rs 225 * 9.5491
= Rs 2148.5475
Step 3) Lumpsum Compounding 1-6 coupons from 3rd year to 7th year
= Answer of Step 1*FVF(4 years, 10)
= Rs 1492.425* 1.4641
= Rs 2185

Step 4) Reinvested Amount = Step 2 + Step 3 – Coupons Received

= Rs 2148.5475 + Rs 2185.0594 – Rs 3150
= Rs 1183

Thus, Future Value = Coupons Received + Market Value of Bond +

Reinvested Coupons
= Rs 3150 + Rs 4780 + Rs 1183.6069
= Rs 9113
Q2) Calculate the Realized Yield of an 8 year 10% coupon bond with par value of Rs
3000, sold in the 6th year. Assume the rate of interest in the market for the first 3 years
at 8%, the next 4 years at 10% and after that at 11%.

Purchase Y1 Y2 Y3 Y4 Y5 Y7 Y8Coupon+ Sale Value

Y6
C12

C0 C1 C2 C3 C4 C5 C6 C7 C8 C9 C10 C11 C13 C14 C15 C16 +Rs 3000

8% 10% 11%
Coupons Received = (Rs 150 * 12) = Rs 1800

Market Value = PV of Remaining Coupons (Year8) + PV of Remaining Coupons (Year7) +

PV of Redemption Value

= Rs 150* (2yr, 5.5% PVAF & 1yr, 10% PVF) + Rs 150*PVAF (2yr, 5%)

+ Rs 3000*PVF (1yr, 11% & 1yr,10%)

= [Rs 150 *1.8459 = 277 * 0.9091 = 252]+ [Rs150 * 1.8500 = 277] +

[Rs 3000 *0.9009 = 2702 *0.9091 = 2457]

= 252 + 277 + 2457

= Rs 2986
Reinvested Coupons
Step 1) Annuity for 1- 6 coupons when interest rate is 8%= Rs 150 * FVAF (6 years, 4%)
= Rs 150* 6.6330
= Rs 995

Step 2) Annuity for 7-12 coupons when interest rate is 10%= Rs 150 * FVAF (6 years, 5%)
= Rs 150 * 6.8019
= Rs 1020

Step 3) Lumpsum Compounding 1-6 coupons from 3rd year to 6th year
= Answer of Step 1* FVF (3 years, 10%)
= Rs 995 * 1.3310
= Rs 1324

Step 4) Reinvested Amount = Step 2 + Step 3 – Coupons Received

= Rs 1020 + Rs 1324 – Rs 1800
= Rs 544
Future Value = Coupons Received + Market Value of Bond + Reinvested
Coupons
= Rs 1800 + Rs 2986 + Rs 544
= Rs 5330
RY = 5330 1/8
----------- - 1
3000

= 1.0744 - 1
RY = 7.44 %
Q3) Calculate the Realized Yield of a 10 year 9% coupon bond with par value of Rs
5000, sold in the 7th year. Assume the rate of interest in the market for the first 2 years at
8%, the next 3 years at 8.5%, next 3 years is 9.5% and after that at 10%.

Purchase Y1 Y2 Y3 Y4 Y5 Y6 Y8 Y9 Y10Coupon+ Sale

Value

C0 C1 C2 C3 C4 C5 C6 C7 C8 C9 C10 C11 C12 C13 C15 C16 C17 C18 C19 C20 +Rs 5000

8% 8.5% 9.5% 10%

PVAF = 1- 1 FVAF = (1+r)t -1

(1+r)t r
r
TOTAL RETURN OF A BOND
Yield of a bond is in percentage and the return on a bond is in value.
The return of a bond is a combination of-
• Total Coupon Interest
• Reinvestment of Coupons Interest
• Capital Gain/ Loss
Q) Calculate the Realized Yield of a 10 year 9% coupon bond with par
value of Rs 5000, sold in the 7th year. Assume the rate of interest in the
market for the first 3 years at 8%, the next 4 years at 10% and after that
at 11%.
In this problem if the bond was purchased for Rs 4500 and sold for Rs
4800 then what was the return on the bond?

• Total Coupon Interest= (225*14) = Rs 3150

• Reinvestment of Coupons Interest = Rs 1183
• Capital Gain/ Loss = Purchase-Sale = Rs 300
• Return of the bond= 3150 + 1183 + 300 = Rs 4633
Q) Calculate the Realized Yield for an Rs 2500 bond having a coupon of
8% maturing after 8 years but sold in the 6th year. The current interest
rate is 10%
In this problem calculate the return on the bond in case it was purchased
for Rs 2100 and sold for Rs 2350.

Ans
• Total Coupon Interest= Rs 1200
• Reinvestment of Coupons Interest = Rs 343
• Capital Gain/ Loss = Purchase-Sale = Rs 250
• Return of the bond= 1200+ 343 + 250= Rs 1793
PRICING OF A BOND
• Price = PV of Coupons + PV of Redemption Value at Maturity
• Eg- At what price can I buy a bond of Face Value Rs 1000 of coupon
10% maturing after 5 years giving a return of 15%?
= [50 * PVAF (10yrs, 7.5%) ] + [1000 * PVF (5 yrs, 15%)]
= [50 * 6.864] + [ 1000*0.4971]
= 840
Eg- At what price can I buy a bond of Face Value Rs
5000 of coupon 12% maturing after 8 years.
Assume the market interest rate is 14%
• Price = PV of Coupons + PV of Redemption Value at Maturity
= [300 * PVAF (16yrs, 7%) ] + [5000 * PVF (8 yrs, 14%)]
= [300 * 9.4466] + [ 5000 * 0.3506]
= 2833.98 + 1753
= 4586.98
Combined problem-
Calculate the Realized Yield of a 10 year 7% coupon bond with par
value of Rs 20000, sold in the 7th year. Assume the rate of interest in
the market for the first 3 years at 6%, the next 4 years at 8% and after
that at 10%.
Also calculate the return of the bond in case the bond was purchased
for Rs 14000 and sold for Rs 17000.
At what price is the investor ready to buy the bond in the 7th year?
Future Value = Coupons Received + Market Value of Bond + Reinvested
Coupons
Coupons Received = (Rs 700 * 14) = Rs 9800
Market Value = PV of Remaining Coupons + PV of Redemption Value
= Rs 700*PVAF (6yr, 5%) + Rs 20000*PVF (3yr, 10%)
= (Rs 700*5.0757) + Rs (20000* 0.7513)
= Rs 3552.99+ Rs 15026
= Rs 18579
 Reinvestment Coupons-
Step 1) Annuity for 1- 6 coupons when interest rate is 6%= Rs 700 * FVAF (6 years, 3%)
= Rs 700* 6.4684
= Rs 4527.88

Step 2) Annuity for 7-14 coupons when interest rate is 8%= Rs 700*FVAF (8 years, 4%)
= Rs 700 * 9.2142
= Rs 6449.94
Step 3) Lumpsum Compounding 1-6 coupons from 3rd year to 7th year
= Answer of Step 1* FVF (4 years, 8%)
= Rs 4527.88 * 1.3605
= Rs 6158.82
Step 4) Reinvested Amount = Step 2 + Step 3 – Coupons Received
= Rs 6449.94 + Rs 6158.82– Rs 9800
= Rs 2808.72
Thus, Future Value = Coupons Received + Market Value of Bond +
Reinvested Coupons
= Rs 9800 + Rs 18578 + Rs 2808
= Rs 31186
RY = (FV/PV) 1/10 -1
Horizon Analysis
• Total Return vs Yield
• Investment Horizon
• Evaluate the bond swaps
Bond Coupon % Maturity YTM
P 10 4 9.0
Q 12 15 8.6
R 15 10 9.2
S 8 5 8.0

• Assuming all four bonds have equal credit quality, which bond is most
attractive?
RISK ASSESSMENT & MEASUREMENT OF FIS
• Measures of Bond Price Volatility-
1. Duration-
Price sensitivity of a bond to interest rate changes. It is the average
time required to pay back the original investment. i.e. the time is taken
to recover the present value of all future cash flows.
2. Convexity-
It is a non-linear relationship measurement of bond prices to interest
rates. It is the slope of the tangent becoming steeper as interest rates
fall.
Duration

Duration is the slope of the line drawn tangent to price- yield curve & shows % change in bond price
for a given change in the yield.
Duration

Macaulay Modified
Q1. Calculate the Macaulay and Modified Duration of a 5 year
Rs 100 9 % coupon bond selling to yield 9% par value of Rs 100.
n CashFlows @ PVCF @ 4.5% PVCF * n
4.5%
1 Rs 4.5 4.3062 4.3062
Macaulay Duration
2 Rs 4.5 4.1207 8.2915
= 826.8789 / 100 = 8.27 years
3 Rs 4.5 3.9433 11.8300 Macaulay Duration (Years)
4 Rs 4.5 3.7735 15.0941 = 8.27/2 = 4. 13 years
5 Rs 4.5 3.6110 18.0551

6 Rs 4.5 3.4555 20.7331 Modified Duration = 4.13 / 1+y

7 Rs 4.5 3.3067 23.1470
= 4.13 / 1.0450
= 3.96 years
8 Rs 4.5 3.1643 25.3146

9 Rs 4.5 3.0280 27.2526

10 Rs 104.5 67.2904 672.9044

TOTAL 100.0000 826.8789

Q2. Calculate Macaulay and Modified duration of an 8
year Rs 1000 6% coupon bond selling to yield 10%.
n CashFlows @ 3% PVCF @ 5% PVCF * n
1 Rs 30 28.57 28.57
2 Rs 30 27.21 54.42
3 Rs 30 25.91 77.73
4 Rs 30 24.68 98.72
5 Rs 30 23.51 117.55
6 Rs 30 22.38 134.28
7 Rs 30 21.32 149.24
8 Rs 30 20.31 162.48
9 Rs 30 19.34 174.06
10 Rs 30 18.42 184.20
11 Rs 30 17.54 192.94
12 Rs 30 16.71 200.52
13 Rs 30 15.91 206.83
14 Rs 30 15.15 212.10
15 Rs 30 14.43 216.45
16 Rs 1030 471.85 7549.60
TOTAL 783.0000 9759.69
Macaulay Duration (Half Years) = 9759.69 / 783 = 12.46 years

Macaulay Duration (Years) = 12.46/2 = 6.23 years

Modified Duration = 6.23 / 1+y

= 6.23/ 1.0500

= 5.93 years
Portfolio Duration
• Duration of the portfolio is simply the weighted average duration of
the bonds in the portfolio.
• Portfolio Duration = Weight of Issue in Portfolio * Duration of Issue
• Q. Calculate portfolio duration of a portfolio having 4 bonds A,B,C and
D having market value Rs 10 lacs, Rs 40 lacs, Rs 30 lacs and Rs 20 lacs
and duration of 4, 7, 6 and 2 years respectively.
Bond MV of Bond Weight in Duration Portfolio
Portfolio Duration
A 10,000,000 0.10 4 0.40
B 40,000,000 0.40 7 2.80
C 30,000,000 0.30 6 1.80
D 20,000,000 0.20 2 0.40
Total 100,000,000 1.00 5.40
Q. Calculate duration of a portfolio consisting of treasury bills having 0.295 weightage in
the portfolio with duration of 7.25 years; government securities with weightage of 0.036
and duration of 1.94 years; corporate bonds with weight of 0.379 and duration of 4.85
years and mortgage backed securities with duration of 5.17 years.

Sector Weight in Portfolio Duration Portfolio Duration

Treasury Bills 0.295 7.25 2.14

Govt Securities 0.036 1.94 0.07
Corporate Bonds 0.379 4.85 1.84
Mortgage backed Sec 0.290 5.17 1.50

Total 1.000 5.55

Fixed Income Portfolios
• Portfolio need to have proper asset mix
• Rebalance when necessary
John Maginn & Donald Tuttle (2007)- process for fixed income
portfolio:
1. Setting investment objectives
2. Development & implementation of portfolio manager strategy
3. Continuous monitoring
4. Necessary adjustment whenever required
Step 1: Setting investment objectives
1. Return Objective
Return structure depends on the liability structure: source of money
Thus has concerns like:
• Sufficient & timely cash inflows to meet the liability
• Higher cost of funds will have difficulty in managing investments with
the desired rate of return
• Uncertainty of the amount & time of future cash inflows
• MV of investments under all circumstances must be at least equal to
actual investments. (immune to unfavorable market)
• Perception toward market
• Maximum permissible exposure to sector, country, entity
2. Risk Objective
Risk Absorption capacity
Risk related concerns:
• Setting maximum & reasonable limit
• Asset & Liability mismatch due to buckets
• Uneven changes within the yield on investments of different
maturities
• Provisioning for risky assets
Step 2: Development & implementation of
portfolio manager strategy
• Right mix of strategy in the given constraints (policy etc.)
• Composition of portfolio: government bonds (central, state, municipality)
or non-government (PSU, Bank, NBFCs, corporate), short term money
market or long term fixed income, exchange traded or OTC
• Consideration for developing & implementing
➢Develop a policy- update & revise as per goal of bank
➢Selection of assets in right proportion in line with norms & constraints
➢Necessary hedging instruments (IRF, FRA, IRS)
➢Right trading & management strategy
➢Tracking & collecting markets inputs for construction of optimum portfolio
Passive Strategy
• Motive is to ensure a desired performance
• Only necessary adjustments as & when required- minor alterations
• Minimize transaction cost
• Avoid adverse consequences of failing to anticipate market
• Low management cost
• Allows for high diversification
• Passive believe in – efficient market hypothesis
• EMH- incorporate & reflect all available information
Passive strategy
• Meet regulations
• Investment of surplus funds in liquid assets
• HTM
• Focus to earn rather than beat market

Ways of managing:
1. Bond Indexing
2. Cash Flow Matching
3. Classical Immunization
Bond Indexing
• Construction of a bond portfolio whose returns over time replicate
the returns of a concerned bond index.
• Bond Indices: Generalized, Specialized Index, Customized Index
• In India CCIL provides broad index consisting of top traded 20
government securities
• Strategy can be
1. Pure Bond Index (replicates the weight of bond)
2. Enhanced Bond Index (replicates risk factor of the index)
Problem is Pure Bond is that if there are 500 bonds- the transaction
cost will go up
Cash Flow Matching
• To start with there is a financial liability at a point in time and you
work backwards to generate cash inflows to match the cash outflows.
• Most important is to estimate the right volume of funds.
• Assumption- There will be no default of coupon & principal and thus
a steady cash inflow
Classical Immunization
• This strategy involves interest rate risk management.
• How can one eliminate reinvestment risk?
1. Selection of high grade bonds
2. Zero coupon bonds
• Used by pension fund houses, insurance companies and banks with
structured cash flows
• Classical immunization involves rebalancing the portfolio after every
change in interest rates.
• Rebalancing is necessary to maintain equality between the duration of the
immunized portfolio and the duration of the liability.
• Immunization can be achieved by equating the duration of assets &
liabilities
• The strategy is used to fund single and or multiple liabilities.
Pros & Cons of Passive
• Advantages of passive strategy – straight forward, easy,
diversification, reduced transaction cost, less decision making,
limiting risk profile to index, avoids problems with statistical models.
• Disadvantages of passive strategy- cannot outperform market,
omission of risk index can be costly, needs regular rebalancing &
monitoring, yield curves are rarely parallel.
Active Strategy
• Continuous repositioning
• Maximize total return
• Forecasting interest rates
• 2 Strategies
1. Market Timing (Interest Rate Predictions)
2. Bond Pricing (Market Imperfections)
News & Bond Impact
• Hike in crude oil price
• OMO purchase by RBI
• Rise in growth estimates
• Insufficient credit growth in economy
• Downgrade of sovereign rating
• Reduction in budget deficit
• Change in policy rates (repo)
• Change in FII flows
• Appreciation of INR against USD
• Change in global economic condition
Convexity
• Convexity is another measure of bond risk.
• Duration applies to only small changes in yield. The relationship
between the bond prices and yield is not linear but convex.
• As convexity decreases, the exposure to the market interest rate
decreases.
• A high convexity is when a given positive or negative change in yield a
bond’s percentage rise in price is greater than the percentage price
loss. High convexity bond is more sensitive to interest rate change.
TYPES OF YIELD CURVE

• Why yield curve is important?

• It measures bond investors' feelings about risk
• What is it?
• It is a graphical representation of the yields available for bonds of equal credit quality
and different maturity dates
• Generally- the longer the maturity of the bond, the higher the risk to the investor, and
so the higher the yield.
• The yields of bonds of equal credit quality but different maturities can be plotted and
joined up into a curve
• Investors often use the yield curve of a country’s government bonds to tell them how
the economy of that country is expected to behave.
Flat Yield (Curve)
• What is the usage of yield curves?
• Interpreting the yield curve
• India Latest on Yield Curves
Yield Curve Shifts
Non- Parallel Shifts- Twists
Non- Parallel Shifts- Butterfly
Term Structure
• Developing a sharp intuition about Theories-
the shape of the yield curve and 1. Pure/ Expectations Theory
factors that determine the same is
term structure of interest rates. 2. Liquidity Preference Theory
• It refers to the relationship 3. Market Segmentation Theory
between YTM of default free Zero 4. Preferred Habitat Theory
coupon securities and their
maturities.
• The difference between the spot
and forward rates is referred to as
“term premium”.
Fixed Income Derivatives-

• Interest Derivatives-
a)Forward Rate Agreement (FRA)
b)Interest Rate Futures (IRF)
c)Interest Rate Swaps (IRS)
• Credit Derivatives-
a)Collateralized Debt Obligations (CDO)
b)Credit Default Swaps (CDS)
c)Credit Linked Notes (CLN)
CORPORATE BOND MARKET CHALLENGES-
• Equity Finance is easy
• Lack of Transparency for retail
• Lack of Information for retail
• Less Liquid (Higher denomination)
• No depth in secondary market
• Lack of Derivative instruments
• Limited Foreign Investments
• Limited Infrastructure
• Bank loans are preferred over bonds
• Differential Tax rates
DEVELOPING A CORPORATE BOND MARKET-
• Trading Platforms on BSE and NSE
• Introduce repo in corporate bond market
• Benchmark Index (I-Bex)
• Reduce lot size from Rs 10 lacs to Rs 1 lac
• Establish different Regulatory Body- currently SEBI for corporate and
RBI for repos. FIMMDA is only an association
• FII and FDI rules favorable
• Derivative instruments (CDS was allowed by RBI since 2013)
Allied Services
• Asset Management Services
Mutual Funds, PMS, AIFs, PE and VC funding
• Secondary Markets
Broking, wealth management, equity and fixed income research,
derivatives- ET and OTC
• Support Services
Custodial, depositary participant
Asset Management (Allied Service)
Types of Asset Management-
• Mutual Funds
• Hedge Funds
• Private Banking
• Private Equity
• Investment Trusts (REITs)
• Fund of Funds (FoFs)
AIF
• SEBI AIF 2012- AIF means any fund established or incorporated in
India in form of trust or a company or a LLP or a body corporate-
which is privately pooled investment vehicle which collects funds
from investors (Indian or Foreign) for investing in accordance which
defined investment policy for benefit of investors and is not covered
under SEBI fund management activities.
• SEBI has defined 3 category of AIF
1. Category I- VC
2. Category II- PE
3. Category III- Hedge Funds
SEBI AIF Criteria
• Minimum corpus Rs 20 crore.
• Fund manager investment of 2.5% or Rs 5 crore whichever is less
• No more than 1000 investors
• Individual investment restricted to Rs 1 crore minimum
• Category I and II shall not invest more than 25% in one company, but
category III is only limited to 10%
Venture Capital (Allied Service)
• SEBI VC- AIF which invests primarily in unlisted securities of start-ups,
emerging or early stage undertakings mainly involved in new products,
new services, technology or intellectual property right based activities
or a new business model. (shall include angel fund)
• From SEBI perspective VC will be more risky.
• K.B. Chandrashekhar Committee of 2000 revised guidelines and
changed taxation
• E-Commerce sector “unicorns” wrote a new chapter in VC
• Top Players- Sequoia, Accel, Insight, Greycroft, Bessmer Ventures
Private Equity(Allied Service)
• SEBI PE- AIF which invests primarily in equity or equity linked instruments or
partnership interests of investee companies according to the stated objective
of the fund.
• Largest PE- Blackstone Group, Carlyle Group, KKR & Co, TPG Capital, Warbug
Pincus,
• India- Warburg Pincus investment of $292 million in Bharti Televentures was a
characteristic investment.
• Earlier PE investment in 1990s was only in IT later in 2000 changed
• Profit & Loss Sharing Mechanism of PE- debate between general and limited
partners
✓Limited partners take 80% & general 20%
✓Losses are allocated to limited partners after setting off general partners
contribution.
• SWF operate in private equity space
Hedge Funds (Allied Service)
• First hedge fund in 1949
• What is it?-
• Invest across different asset classes like financial, commodities, real
estate and precious metals taking long and short positions and
leverage.
• Thus they are highly speculative and susceptible to risk.
• SEBI – AIF which employs diverse or complex trading strategies and
invests & trades in securities having diverse risks or complex products
including listed and unlisted securities.
• Famous hedge funds- Worlds largest hedge fund- Bridgewater
Associates, Man Group, Renaissance Technologies
Fund of Funds
• It is an investment strategy of holding a portfolio of other investment
funds rather than directly investing in any asset.
• A FoF shall not invest in another FoF; but FoF can invest in another
AIF
• Thus the fees of FoF are higher as it comprises the charges of the
underlying fund as well as the FoF management charges
 Securities- Broking & Trading (Allied Service)
Global investment banks famous for this service- Wells Fargo Fidelity, Franklin
Templeton, Northern Trust and Principal

• Broking & Dealing: Fee-based • Trading: Taking positions with an intent to

make profits
income or commissions
• Trading operations is to take risks in
• Dealers are not for earning maintaining position
profits but accrue transaction • Investment banks run businesses in trading
based income both proprietary & institutional purposes
• Some specialize in particular segments like
• Thus traders are different than fixed income, arbitrage, synthetic
dealers instruments etc.
• E.g.- Salomon Brothers in bond trading
• Securities department keep
dealers and traders separate • Thus investment bankers recruit statisticians,
mathematicians and physicists
Other Allied Services
• Institutional Sales
• Quantitative Research-
Sectoral, Company, Economic Analysis
• Advisory & Wealth Management-
Also known as private banking
Conflict of Interest
• Research Division and Investment Bank personnel
• SEC investigation- Findings of over optimistic research by research
team given to clients for vested interest.
• Thus in 2002 many clients paid fines for misleading reports
• Citigroup, Goldman, J.P Morgan, Lehman, Bear Sterns, Merrill Lynch
$100 million
• J.P Morgan for its infamous deal with Enron
• Revision-
1. Disclose the investment in the IPO/deal
2. Compensation structure
Dark Side of Investment Banking
2008 Leverage • Using assets for short selling
• Merrill Lynch 46 times • Obnoxious pay packages
• Fannie Mac/ Freddie Mae 45 times • Insider Trading (Rajat Gupta)
• Lehman 34 times
• Bear Sterns 31 times
• Morgan Stanley 30 times
• Goldman 26 times
• Citigroup 19 times
• J.P Morgan 14 times
• Bank of America 12 times
Silicon Valley Bank Crisis
• Assumptions went wrong- why interest rate risk was not considered...
Interest rates expectations were low and assumed as if could not go high..

• SVB sold HFT &AFS assets at a loss due to withdrawals from tech Cos...
But why there were long term fixed interest bonds in liquid portfolio?
Strategy went wrong
If these bonds would have been HTM.. The duration risk concerns would not
have been there

• Concentration risk- only IT deposits and loans to start ups

• Since Aug 2022 to Jan 2023 no CRO in critical times of major macro
economic changes. CAO of SVB was CFO of Lehman
 SVB- Regulatory Issue
• Why SVB assumed- as Fed said inflation was transitory..and then when Fed realised the mistake to
make up for lost time.. Started raising rates at faster rates in 2022
• On Supervisory committee there was CEO of SVB

• CFO, CEO, CMO combined 4.4m sold shares before the decline and paid bonus to employees
before crash
• CEO lobbied assets of less than 250b should be kept outside DoddFrank and Congress agreed

• Contagion- Only regional banks impact..not global banks as no issue of concentrated deposits
• Actually regional fails - shift of customer base to global
•
IT Sector- due to high interests will face issues and now short term liquidity is impacted.. and now
will fail.. leading to layoffs. And eventually bankruptcy. Will this set back innovative ideas by avg
CEO age of 28 years?! Chinese startups also face the brunt .
• Overall 65k startups impact. SVB 50% startups are engaged by Bank
• Vimeo, Vox
• HSBC buys UK arm@1 dollar
Regulatory & Business Challenges
• Dodd Frank • Curtailed Revenue generating capacity
• Volker’s Rule • Increase cost of asset holding, financing,
• Basel III maintaining under Basel III
• Credit valuation adjustments for OTC for
reducing counter-party risk will increase
cost of customers and reduce returns.
Investment banks as Issue Managers
• This is a core business vertical for investment bank
• Intermediation service: IPO, FPO and Rights Issue
• Issue Lead Manager or Book Running Lead Manager (BRLM) or Co-BRLM
• Asses market factors, dilution of promoter equity, lock-in period, pre-marketing
• Co-ordinate with registrar, bankers, advertisement agency, broker to issue,
underwriters, auditors, company secretary, legal advisor, any experts, printers
and couriers etc.
• There are no norms on the no.of merchant bankers for issue
• 3 considerations for IPO listing
1. Strategic Decision
2. Financial Decision
3. Investment Banking Decision
Strategic Decision
• Maruti Udyog was privately held till 2003 with Rs92.71b sales
• Bennet Coleman & Co is presently unlisted
• IPO opens large open window
• If company can be equity sourced and from debt is it wise to dilute?
• Sometime private companies generate higher returns on networth
than its listed peers
• That’s a corporate philosophy
Financial & Investment banking decision
• Capital intensive industries • Merchant banks take a call on
• Cement, steel, shipping, energy, business strategy and financials
transportation, pharma, • In strong market conditions
refineries, heavy engineering, merchant bankers tend to be
automobiles etc. aggressive and push companies to
• Even green-field business go public.
• Sometimes even of companies do
not need they raise finance and
keep it for future
• Eg- Satyam & Wipro raised from
US markets
Regulations
• SEBI – Issue of Capital & Disclosure Requirement (ICDR) regulations of
2012 – now 2018
• ICDR restrictions on issue of “general corporate purpose” – this
purpose can be only 25% of the size offer
• SCRA & LODR regulations are also applicable for issue
• Securities Contract Regulations Rules of 1957
• Listing Obligations & Disclosure Requirements 2015
Pre-Issue Process
• All due diligence – statutory compliance to be followed
• Role of advisor, external agency, event manager, co-Ordinator.
• Write the Management Discussion & Analysis (MDA) really well
• Ensure underwriters are not over-exposing themselves
• Issue marketing- road shows, journalist meet, investor associations
• As per ICDR a public offer or rights issue of more than Rs 50 lakh shall
not be made unless draft offer document filed with SEBI though lead
manager 30 days prior to registering of prospectus/ red-herring/ shelf
with ROC.
 Post-Issue Process
• Finalizing basis of allotment in fair & proper manner lies with Executive
Director/ MD of stock exchange with post issue lead manager and
registrar.
• Post issue LM also needs to co-ordinate process of collection of
subscription figures from bankers to issue, processing applications,
dispatch of allotment letters, refund orders, attending grievances and
ensure listing.
• In 2010 SEBI decreased time from 12 days to 7 days for closure and
listing.
• The lead manager has to ensure that any modifications from SEBI are
adhered to quickly in the post-issue period of 6 days for getting the
listing approval.
 Lower Band
Pricing of IPO Weighted average EPS * average PE
The weighted EPS
• Fixed Price- 100% retail = (3*7.10) + (2*4.59) + (1*2.68)
• Free pricing since 1992 = 33.16/6
• Pricing vs Valuation = So lower band= 5.52 * 18.60 = Rs 103
• Pricing and valuation have different
purposes Upper Band
• But before the issue the company As many companies within the sector do
has to be valued not have the highest PE- its
• Eg- If the EPS for an unlisted unnecessarily exorbitant the upper PE is
company for last 3 years is 7.10; rationalized
4.59 and 2.68. The highest PE is So upper band
32.5; the lowest PE is 3.5 and
average PE in same time period is = highest EPS * highest PE
18.6. Then how will be the IPO = 24 * 7.10 = Rs 170
priced?
• ICDR regulations- price band cannot extend to more than 20%
• Price band is usually 85-90% mark of the price range. Why?
• To provide for listing gains. This is known as “Flippers Margin”
• FPO pricing is similar but depends on the market for the company
• Eg- Tata Steel FPO of Rs 3477 crore in 2011. The price band was Rs
594-610 and existing price was Rs 608.
• As per offer document PE translated to 10.6 against industry average
of 10.9.
• Due to QIB enthusiasm the listing day closing was Rs 625
• Over the time market corrected- to Rs 550 – 575. Why?
• Pricing was almost same to existing, and PE was almost at par with
industry but as additional shares were added to the free float the
price corrected.
 Underwriting
• SEBI underwriters regulation 1993 • Underwriting agreement is signed
• SEBI- An agreement with or between the issuer company and
without conditions to subscribe to the lead underwriter only.
the securities of a body corporate • Thus the risk is taken by the lead
when the existing shareholders of underwriter.
such body corporate or the public • Second contract is between the
do not subscribe to the securities mutual obligations between the
offered to them. different underwriters.
• Sub- underwriting may be used to • The third contract is the dealers
spread the risk. agreement- a distribution
• Underwriting of fixed price offer is agreement akin to a brokerage
optional but it is mandatory for contract.
book- built offers.
Underwriting compensation
• Its primarily “Fee based” service.
• But underwriting becomes a “fund based” service when they
purchase under subscribed investment.
• Underwriting commission is paid as a percentage of the value of
underwriting.
• In US the compensation is- the spread between the price to investor
and price issued. As in US the dealer purchases the securities as a
discount price and then sells them.
• In US alongwith the spread, there is also manager’s fee, selling
commission and an underwriting allowance.
Devolvement
• It is the amount of financial support to be provided by an underwriter
in an under-subscribed issue of securities.
• Issuer company within 30 days of subscription closure communicate
in writing to the underwriter the total no. of securities remaining
unsubscribed.
• The underwriter on being satisfied about extent of devolvement shall
within 30 days after receipt of devolvement notice, make or procure
the applications to subscribe the securities and submit them.
• The issuer company has to enforce the devolvement on underwriters.
Safety Net
• Mechanism which provides the investors the buyback facility for securities
subscribed for the same price at which the investor bought the same.
• SEBI restrictions of safety net-
➢Only for small investors
➢Limited upto 1000 securities
➢Available only to original resident individual
• It is an additional protection given by issuer company as a marketing effort.
• Infotech Enterprises had issued safety net through its lead merchant
banker cum underwriter IDBI Bank.
• Recently RBI has refrained from these services but not barred.
• Matured markets do not provide safety nets- as they make informed
decisions.
Risk in Underwriting
• Capital
• SEBI Regulation 7 states that minimum capital adequacy should be Rs
20 lakh and Regulation 15 states that maximum underwriting cannot
exceed 20 times the net worth
• Thus a underwriting firm having a net worth of Rs 25 lakh can do a
maximum underwriting of Rs 500 lakh.
• If the devolvement probability of the above firm is 25%; and the
quantum of devolvement is 50%; the firm falls short of capital. And
needs to source debt from outside to keep the firm viable.
Particulars
Networth 25
Maximum Underwriting 500
Devolvement Probability (25%) 125
Devolvement Quantum (50%) 62.5
Loan Financing (Shortfall) (62.50- 25.00) 37.50
Cost of Debt
Underwriters commission
Bought out Deals
• BOD is an alternative to straight IPO
• The company places stock with the investment banker with an
understanding that it would make the company public by making a
secondary offer within a specified time frame .
• The time frame is usually 9-12 months.
• The investment banker makes an OFS after the time frame
• Smaller companies earlier used to prefer this route for saving time and
expenses of retail IPO.
• After 1996 market collapse, BODs attractiveness came down as investment
banks took the shares but there were no takers for OFS.
• India there is rare occurrence, but in US it is still prevalent.
• First BOD in US was GM in 1981 for $100 million
 Global Capital Raising
• Equity as well as Debt
• Magnitude of finance raised has increased
• International visibility
• 2 fold role of investment banker- home jurisdiction and place of offer
jurisdiction
• Responsible for coordination with market regulator and stock exchange
authorities
• NYSE, NASDAQ
• LSE- 2 segments. One is main and another is Alternative Investment Market
(AIM) for smaller growing companies across the world. Vedanta is listed on
AIM.
• Luxemburg, Frankfurt
• Tokyo, Singapore, Hongkong, Abu Dhabi
 International Bond Market
• Compliance with local regulations- maturity, rating, size, underwriting and
documentation.
• US Bonds – Investment banks managing this issue need to comply with
SEC 144A
• Euro Bonds- Investment banks managing this need to understand that the
trade in the country of issue could result in withholding tax. Thus the
bond structure is to neutralize the incidence of the tax on income
distribution and capital gains. Usually an intermediary vehicles in a tax
friendly nation like British Virgin Islands or Netherlands Antilles are used
to float the issue.
FCCBs
• Comply with FDI policy, FEMA, • As few companies were not big
Companies Act, SEBI and SCRA enough to issue DRs they preferred
• Only through reputed investment FCCBs.
banker- need to give proper advice • Conversion rates were fixed at 25%
on coupon and conversion terms. to 150% higher than the prevailing
• Denominated in any foreign market price.
currency but underlying shares are • These bonds were maturing after
in Rupee terms. the 2008 crisis.
• Boom from 2003-07: 201 • Share prices had fallen for 70% of
companies raised Rs 72000 crore the companies and were trading
• This reduced the borrowing cost 5% to 60% lower than the
and offered low coupon rates. conversion price.
Depository Receipts

• 1927- originated for enabling US investors to participate in non listed US

securities
• DR = ADR
• 1983: SEC regulations for ADR: not possible to issue without registering
under Securities Act 1933
• Thus there were 2 sets of ADRs- one for US and another for non –US called
IDRs
• 1990- Amendment in SEC Rule 144A- Thus GDR was born.
• 144A rule for DR is a private placement route for securities in India.
• GDR= It’s a DR issued in US under 144A and elsewhere too
• ADR= Issued through public issue with complying US securities law.
• In India: M.S Sahoo Committee Report 2014
• Investment bankers need to ensure that the conversion of the receipt
to shares, transfers from trades, dividend distribution is done
properly.
• DR creates 2 securities-
1. One pool that of issued shares
2. Other being of the receipts representing those shares
• Every DR has different underlying no.of shares which are issued by
the local issuer company. These shares are not tradeable in domestic
market and are administered by a custodian. Global investors do not
get the shares. The shares are issued to the global depository.
• The global investors subscribe to the allotted instruments (whose
underlying are shares) in the global depository. These investors are
not direct owners and hence do not get voting rights.
• DR are listed and traded on exchanges as well as OTC.
Issue of
a DR
Types of DR
• Unsponsored DR: issued without involvement of the company
without having any formal agreement
• Sponsored Level I DR: Simplest and thus fastest. Traded on US OTC
market. GAAP compliance not necessary.
• Sponsored Level II DR: Listed on US exchange without complying with
SEC listing but must register under Exchange Act by filing with SEC a
form.
• Sponsored Level III DR: Full SEC requirements and compliance with
GAAP. Listed on NYSE, AMEX and NASDAQ.
Fungibility of DRs
• Exit of DR an happen either sale of GDR in overseas market or through sale
of underlying asset in domestic market.
• Fungibility makes the DR homogenous and convertible into underlying
shares
• Investor uses “fungibility” route for exit.
• Fungibility makes the prospects for investor better by making use of the
price differential in DR and shares.
• ADR became fungible in US in 1990.
• Investment Bankers now-a-days have a cool off period of 45-180 days in
which the DR is not fungible.
• Re-issue of these DRs are subject to host of regulations w.r.t FDI caps
permitted by RBI under FEMA.
IDRs
• Foreign companies listed overseas may make public offers in India
through issue of IDRs.
• Must be listed in home country with good track record
• IDR Rules of 2004 u/s 695A of Companies Act
• Issue not less than Rs 50 crore
• Each applicant to apply for minimum Rs 20000
• 50% allocated to institutional investors and 30% to retail
Private Placements
• With whom do companies privately place?
• Mutual Funds, Insurance companies, banks, pension funds, DIIs, registered
FPIs
• PP gives faster access to funds, less market uncertainties and is a cost
effective way for raising funds for the issuer.
• In India only investment grades and above rating can be privately placed.
• Companies Act u/s 42- Means an offer of securities or invitation to
subscribe securities to a select group of persons by a company through
issue of private placement letter.
• What is not PP is- Issue of Bonus, Issue of sweat equity, ESOP, Rights Issue,
Issue of DR
Category of Private Placement

PP with fund raising objectives PP with Control & Strategic Objective

• Seed or Angel investors • Promoters & family
• Institutional VC and PE • Business Associates
• Institutional & Non-institutional • Strategic Investors
domestic placement • JV partners
• International capital markets • Technical collaborators
• Persons acting in concert (have
an agreement as per voting
rights)
Investment Banking & Business Valuation
• Corporate Value vs Investment Value • Special Cases
• Valuation vs Pricing (pg 437) 1. Bank
• Drivers for Value Creation 2. SPV
• Approaches to Valuation 3. Insurance
1. Asset Based 4. Holding Company
2. Cash Flow Based 5. SOTP
3. Economic Profit Model 6. Intangible
4. Relative Valuation Model 7. Start-ups
5. Contingent Claim Valuation 8. Technology
6. Enterprise Value Approach • Valuation in Restructuring
• M&A Valuation (Varsha Maam)
• PE Valuation
• VC Valuation