INVESTMENT BANKING
“INVESTMENT BANKING”
BACHELOR OF COMMERCE BANKING & INSURANCE
SEMESTER V
ACADEMIC YEAR 2009-2010
SUBMITTED BY MITAL. H. CHHEDA ROLL NO.-06
LAXMI CHARITABLE TRUST SHRI CHINAI COLLEGE OF COMMERCE & ECONOMICS ANDHERI (EAST) MUMBAI-400069
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INVESTMENT BANKING
“Investment Banking”
Bachelor of Commerce Banking & Insurance
Semester V
Submitted In Partial Fulfillment of the Requirements For The Award of Degree of Bachelor Of Commerce- Banking & Insurance
By Mital. H. Chheda Roll No.-06
Laxmi Charitable Trust Shri Chinai College of Commerce & Economics Andheri (East) Mumbai-400069
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INVESTMENT BANKING
“Investment Banking”
Bachelor of Commerce Banking & Insurance
Semester V
Submitted In Partial Fulfillment of the Requirements For The Award of Degree of Bachelor Of Commerce- Banking & Insurance
By Mital. H. Chheda Roll No.-06
Laxmi Charitable Trust Shri Chinai College of Commerce & Economics Andheri (East) Mumbai-400069
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INVESTMENT BANKING
Laxmi Charitable Trust Shri Chinai College of Commerce & Economics
CERTIFICATE This is certify that Miss Mital. H. Chheda of B.Com. Banking &Insurance Semester V (2009-2010) has successfully completed the project on “Investment Banking” under the guidance of Prof. Pravin Akolkar.
Course Co-ordinator Principal Project Guide/Internal Examiner
External Examiner
DECLARATION
I Mital. H. Chheda the student of B.Com. Banking & Insurance Semester V (2009-2010)hereby declare that I have completed the project on “Investment Banking”. The information submitted is true and original to the best of my knowledge.
Signature of Student Mital.H.Chheda Roll no.06
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INVESTMENT BANKING
ACKNOWLEDGEMENT
I Have received earnest cooperation & assistance from number of person towards completion of this project. Throughout the writing of this project the influence of my Professor Pravin Akolkar has been a guiding light. I have been greatly benefited by his guidance, profound knowledge of the subject i.e. “Investment Banking” and his continued interest in my work. I shall ever remain indebted & grateful to him, for his deep sense of personal attachment & the ever increasing encouragement which he has given to me. This is special pleasure in acknowledging him under whom I have initiated my work. His intense accuracy in respect of the subject had provided the impetus for the commencement of the study. My professors and friends have inevitable played a crucial role in helping me while preparing the project. I do not have words to thanks them enough. I can only extend my sense of deep hearted affection to all of them. I am highly obliged to acknowledge principal “Mrs. Malini Johari” and co-ordinator Dr.Nishikant Jha for giving me an opportunity to conduct a detail study & analysis of my desirable topic relevant to my full of interest.
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INVESTMENT BANKING
EXECUTIVE SUMMARY Investment Banking encompasses not merely merchant banking but other related capital market activities such as – stock trading, market making, underwriting, and brokering and asset management as well. Besides the above, investment banks also provide a host of specialized corporate advisory services in the areas of project advisory, business and financial advisory and mergers and acquisitions.
Investment banks are different from traditional bank down the street in the sense that it does not keep any deposits with itself to pay us an interest nor does it guarantees the “safekeeping” of your money. An investment bank is more specialized organization that takes in your money and after analyzing the possible risks and economic condition gives us advice to convert it into more money. Investment bankers identify capital opportunities, negotiate and structure deals, and execute private and public financial transactions.
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 structure have blurred, especially as commercial banks have offered more investment banking services.
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INVESTMENT BANKING
Index Sr.no.
Particular
Page no.
1
Introduction
1-2
2
Definition
3
3
Meaning
4-7
4
Evaluation and growth of investment bank
8-9
5
Global industrial structure
10-11
6
Indian scenario
12-14
7
Investment banking & merchant banking
15-16
8
Investment banks as financial intermediary
17-19
9
Organization structure of investment banks
20-22
10
Characteristic of investment bank industry
23-24
11
Types of player in investment bank industry
25
12
Business portfolio of investment banks
26-28
13
Indian investment banking industry
29-31
14
Institutional investing & investment bank
32-33
15
Service portfolio Indian investment banks
34-47
16
Regulatory framework for investment banking
48-50
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INVESTMENT BANKING
INTRODUCTION What is investment banking? Is it investing? Is it banking? Or is it investing in banks? Really, it is neither. Investment banking, or I banking, as it is often called, is the term used to describe the business of raising capital for companies and advising them on financing and merger alternatives. Companies need cash in order to grow and expand their business; investment banks sell securities to public investors in order to raise this cash. These securities can come in the form of stocks or bonds.
At a very micro level, ‘Investment banking’ 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 (the Issuers). Banking and financial institutions on the one hand and the capital market on the other are two broad platforms of institutional intermediation for capital flows in the economy. Therefore, it could be inferred that investment banks are those institutions that are the counterparts of banks and the capital market in the function of intermediation in resource allocation.
From its small beginnings in the seventies and eighties, investment banking unfolded itself as a full-fledged service industry during 1991. From mere public flotation services such as issue management and underwriting, the investment banking industry has evolved to encompass many
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INVESTMENT BANKING
high profile corporate actions. The term ‘Investment Banking’ has a much wider connotation and is gradually becoming more of an inclusive term to refer to all types of capital market activity, both fund-based and non-fund based. Investment Banker provides two general functions: 1. raising funds for clients and, 2. assisting clients in the sale or purchase of securities
Over the decades, backed by evolution and also fuelled by recent technological developments, investment banking has transformed repeatedly to suit the needs of the finance community and thus become one of the most vibrant and exciting segments of financial services. Investment bankers have always enjoyed celebrity status.
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INVESTMENT BANKING
DEFINITION There appears to be considerable confusion today about what does and does not constitute an “investment bank” and “investment banker”. Let us see what is it?
Investment Bank (IB) A financial intermediary that performs a variety of services. This includes underwriting, acting as an intermediary between an issuer of securities and the investing public, facilitating mergers and other corporate reorganizations, and also acting as a broker for institutional clients.
The role of the investment bank begins with pre-underwriting counseling and continues after the distribution of securities in the form of advice.
Investment Banker
A person representing a financial institution that is in the business of raising capital for corporations and municipalities.
An investment banker may not accept deposits or make commercial loans. Investment bankers are the people who do the grunt work for IPO and bond issues.
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INVESTMENT BANKING
MEANING OF INVESTMENT BANKING In the strictest definition, investment banking is the raising of funds;
both in debt and equity, and the division handling this in an investment
bank is often called the "Investment Banking Division" (IBD). However, only a few small firms provide only this service. Almost all investment banks are heavily involved in providing additional financial services for clients, such as the trading of derivatives, fixed income, foreign exchange, commodity, and equity securities. It is therefore acceptable to refer to both the "Investment Banking Division" and other 'front office' divisions such as "Fixed Income" as part of "investment banking," and any employee involved in either side as an "investment banker." Furthermore, one who engages in these activities in-house at a non-investment bank is also considered an investment banker.
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INVESTMENT BANKING
More commonly used today to characterize what was traditionally termed "investment banking" is " sell side." This is trading
securities for cash
or
securities
(i.e.,
facilitating
transactions, market-making), or the promotion of securities (i.e. underwriting, research, etc.).
The " buy side" constitutes the pension funds, mutual funds, hedge funds, and the investing public who consume the products and services of the sell-side in order to maximize their return on investment. Many firms have both buy and sell side components.
Who needs an Investment Bank?
Any firm contemplating a significant transaction can benefit from the advice of an investment bank. Although large corporations often have sophisticated finance and corporate development departments, an investment bank provides objectivity, a valuable contact network, allows for efficient use of client personnel, and is vitally interested in seeing the transaction
close.
Most small to medium sized companies do not have a large inhouse staff, and in a financial transaction may be at a disadvantage versus larger competitors. A quality investment banking firm can provide the services required to initiate and execute a major transaction, thereby empowering small to medium sized companies with financial and transaction experience without the addition of permanent overhead.
What to look for in an Investment Bank?
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INVESTMENT BANKING
Investment banking is a service business, and the client should expect top-notch service from the investment banking firm. Generally only large client firms will get this type of service from the major Wall Street investment banks; companies with less than about $100 million in revenues are better served by smaller investment banks. Some criteria to consider include: •
Services Offered
For all functions except sales and trading, the services should go well beyond simply making introductions, or "brokering" a transaction. For example, most projects will include detailed industry and financial analysis, preparation of relevant documentation such as an offering memorandum or presentation to the Board of Directors, assistance with due diligence, negotiating the terms of the transaction, coordinating legal, accounting, and other advisors, and generally assisting in all phases of the project to ensure successful completion. •
Experience
It extremely important to make sure that experienced, senior members of the investment banking firm will be active in the project on a day-to-day basis. Depending on the type of transaction, it may be preferable to work with an investment bank that has some background in your specific industry segment. The investment bank should have a wide network of relevant contacts, such as potential investors or companies that could be approached for acquisition.
•
Record of Success
Although no reputable investment bank will guarantee success, the firm
must
have
a
demonstrated
record
6
of
closing
transactions.
INVESTMENT BANKING
•
Ability to Work Quickly
Often, investment banking projects has very specific deadlines, for example when bidding on a company that is for sale. The investment bank must be willing and able to put the right people on the project and work diligently to meet critical deadlines.
•
Fee Structure
Generally, an investment bank will charge an initial retainer fee, which may be one-time or monthly, with the majority of the fee contingent upon successful completion of the transaction. It is important to utilize a fee structure that aligns the investment bank's incentive with your own. •
Ongoing Support
Having worked on a transaction for your company, the investment bank will be intimately familiar with your business. After the transaction, a good investment bank should become a trusted business advisor that can be called upon informally for advice and support on an ongoing basis.
Because investment banks are intermediaries, and generally not providers of capital, some executives elect to execute transactions without an investment bank in order to avoid the fees. However, an experienced, quality investment bank adds significant cant value to a transaction and can pay for its fee many times over.
The investment banker has a vested interest in making sure the transaction closes, that the project is completed in an efficient time frame, and with terms that provide maximum value to the client. At the same time, the
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INVESTMENT BANKING
client is able to focus on running the business, rather than on the day-to-day details of the transaction, knowing that the transaction is being handled by individuals
with
experience
in
executing
similar
projects.
EVOLUTION AND GROWTH OF INVESTMENT BANKS At the end of World War I, by which time, commercial banks in the USA were already preparing for an economic recovery and consequently, to the significant demand for corporate finance. It was expected that American companies would shift their dependence from commercial banks to the stock and bond markets wherein funds were available at a lower cost and for longer periods of time. In preparation for a boom in the capital markets in the 1920s, commercial banks started to acquire stock broking business in a bid to have their presence made in such markets. The first of such acquisitions happened when the National City Bank of New York acquired Halsey Stuart and Company in 1916. As in the past, in the entire 1920s, investment banking meant underwriting and distribution of securities.
The stock and bond market boom of the 1920s was an opportunity that banks could not miss. But since they could not underwrite and
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INVESTMENT BANKING
sell securities directly, they owned security affiliates through holding companies. However, they were not maintained like water tight compartments. The affiliates were sparsely capitalized and were financed by the parent banks for their underwriting and other business obligations.
National City Bank, Chase Bank, Morgan and Bank of America were the most aggressive banks present at that time. The stock market got overheated with investment banks borrowing money from the parent banks in order to speculate in the bank’s stocks, mostly for short selling. Once the general public joined the frenzy, the price-earning ratios reached absurd limits and the bubble eventually burst in October 1929 wiping out millions of dollars of bank depositors’ funds and bringing down with its banks such as the Bank of United States.
In order to restore confidence in the banking and financial system, several legislative measures were proposed, which eventually led to the passing of the Banking Act 1933 that restricted commercial banks from engaging in securities underwriting and taking positions or acting as agents for others in security transactions. These activities were segregated as the exclusive domain of investment banks. On the other hand, investment banks were barred from deposit taking and corporate lending, which were considered the exclusive business of commercial banks. The Act thus provided the water tight compartments that were absent before. Since the passing of this Act, investment banking became narrowly defined as the basket of financial services associated with the flotation of corporate securities, i.e. the creation of primary market for securities. It was also extended to mean at a secondary level, secondary market making through securities dealing.
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INVESTMENT BANKING
The range of services offered may cover underwriting services, funds management, insurance products, credit cards, loans (corporate and individual), depository services, advisory services in the areas of corporate restructuring, mergers and acquisitions, fund raising and private equity. On the dealing and trading side, investment banks participate in derivatives market, arbitrage and speculation. In the area of structured finance, investment banks also provide financial engineering through securitization deals and derivative instruments.
GLOBAL INDUSTRIAL STRUCTURE The Investment banking industry on a global scale is oligopolistic in nature ranging from the global leaders (known as the ‘Global Bulge Group’) to ‘Pure’ Investment banks and ‘Boutique’ Investment banks. The bulge group consisting of eight investment banks has a global presence and these firms dominate the league in key business segments. The top ten global firms in terms of their fee billings as in 2001 are listed below: Market shares of Global Investment Banks
Merrill Lynch Goldman Sachs Credit Suisse First Boston Salmon Smith Barney (Citigroup)
10
% of total 9.0 7.5 7.2 6.7
INVESTMENT BANKING
Morgan Stanley J.P. Morgan UBS Warburg Lehman Brothers Deutsche Bank Bank of America
6.3 5.5 4.6 3.6 3.5 2.4
Within the listing given in the table referred to above are the top ‘pure’ investment banks, i.e. which do not have commercial banking connections, which are Merrill Lynch, Goldman Sachs and Morgan Stanley Dean Witter. Listed therein are also the leading European Universal Banks that are called so due to their role in both commercial and investment banking.
Therefore, the global investment banking industry ranges from the acknowledged global leaders listed above to a large number of mid-sized competitors at a national or regional level and the rear end is supported by boutique firms or advisory and sector specialists.
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INVESTMENT BANKING
Investment banking is one of the most global industries and is hence continuously challenged to respond to new developments and innovation in the global financial markets. Throughout the history of investment banking, many have theorized that all investment banking products and services would be commoditized. New products with higher margins are constantly invented and manufactured by bankers in hopes of winning over clients and developing trading know-how in new markets. However, since these can usually not be patented or copyrighted, they are very often copied quickly by competing banks, pushing down trading margins.
THE INDIAN SCENARIO •
Origin
In India, though the existence of this branch of financial services can be traced to over three decades, investment banking was largely confined to merchant banking services.
The forerunners of merchant banking in India were the foreign banks. Grindlays Bank (now merged with Standard Chartered Bank in India) began merchant banking operations in 1967 with a license obtained from the RBI followed by the Citibank in 1970. These two banks were providing
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INVESTMENT BANKING
services for syndication of loans and raising of equity apart from other advisory services. It was in 1972, the Banking Commission Report asserted the need for merchant banking services in India by the public sector banks. Based on the American experience which led to the passing of the Glass Steagall Act, the Commission recommended a separate structure for merchant banks so as to distinct them from commercial banks and financial institutions. Merchant banks were meant to manage investments and provide advisory services.
Following the above recommendation, the SBI set up its merchant banking division in 1972. Other banks such as the – Bank of India, Bank of Baroda, Syndicate Bank, Punjab National Bank, and Canara Bank also followed suit to set up their merchant banking outfits. ICICI was the first financial institution to set up its merchant banking division in 1973. The later entrants were IFCI and IDBI with the latter setting up its merchant banking division in 1992. However, by the mid eighties and early nineties, most of the merchant banking divisions of public sector banks were spun off as separate subsidiaries. SBI set up SBI Capital Markets Ltd. in 1986. Other such banks such as Canara Bank, BOB, PNB, Indian Bank and ICICI created separate merchant banking entities.
•
Growth
Merchant banking in India was given a shot in the arm with the advent of SEBI in 1988 and the subsequent introduction of free pricing of primary market equity issues in 1992. However, post-1992, the merchant banking industry was largely driven by issue management activity which fluctuated with the trends in the primary market. There have been phases of
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INVESTMENT BANKING
hectic activity followed by a severe setback in business. SEBI started to regulate the merchant bankers who registered with SEBI were either in issue management or associated activity such as underwriting or advisor ship. SEBI had four categories of merchant bankers with varying eligibility criteria based on their net worth. The highest number of registered merchant bankers with SEBI as at the end of March 2003 was 124, from a peak of almost thousand in the nineties. In the financial year 2002-2003 itself, the number decreased by 21.
•
Constraints in Investment Banking
Due to the over-dependence on issue management activity in the initial years, most merchant banks perished in the primary market downturn that followed later. In order to stabilize their businesses, several merchant banks diversified to offer a broader spectrum of capital market services. However, other than a few industry leaders, the other merchant banks have not been able to transform themselves into full service investment banks. Going by the service portfolio of the leading full service investment banks in India, it may be said that the industry in India has seen more or less similar development as its western counterparts, though the breadth available in the overseas capital market is still not present in the Indian capital market. Secondly, due to the lack of institutional financing in a big way to fund capital market activity, it is only the bigger industry players who are in investment banking. The third major deterrent has also been the lack of depth in the secondary market, especially in the corporate debt segment.
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INVESTMENT BANKING
INVESTMENT BANKING AND MERCHANT BANKING
Merchant banks and Investment banks in their purest forms are
differ different ent kinds kinds of financ financial ial instit instituti utions ons that that perfor perform m differ different ent servic services. es. In pract practice ice,, the fine fine lines lines that that separa separate te the funct function ionss of merch merchant ant banks banks and investment banks tend to blur. Traditional merchant banks often expand into the field of marketing of securities and have an onerous responsibility towards the inve invest stor orss who who inve invest st in such such secu securi riti ties es.. Whil Whilee many many inve invest stme ment nt bank bankss parti particip cipate ate in trade trade financ financing ing activi activitie ties. s. In theory theory,, invest investmen mentt banks banks and merchant banks perform different functions.
Pure investment banks raise funds for businesses and some
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INVESTMENT BANKING
govern gov ernmen ments ts by regist registeri ering ng and issuin issuing g debt debt or equity equity and sellin selling g it on a market. Traditionally, investment banks only participated in underwriting and sellin selling g securi securitie tiess in large large blocks. blocks. Investment banks facilitate mergers mergers and acquisitions through share sales and provide research and financial consulting
to companies. Traditionally, investment banks did not deal with the general public.
Traditional merchant banks primarily perform international financing activities such as foreign corporate investing, foreign real estate investment, trade finance and international transaction facilitation. Some of the activities that a pure merchant bank is involved in may include issuing letters of credit, transf transfer errin ring g funds funds intern internati ationa onally lly,, trade trade consul consultin ting g and co-inv co-invest estmen mentt in projects involving trade of one for or another. As a general rule, investment banks focus on initial public offerings (IPOs) and large public and private private share share offering offeringss. Merchant
banks banks tend tend to operat operatee on smallsmall-sca scale le compan companies ies and offer offer creati creative ve equity equity financing, bridge financing, financing, mezzanine financing and a number of corporate credit products. While investment banks tend to focus on larger companies, merchant banks offer their services to companies that are too big for venture capital firms to serve properly, but are still too small to make a compelling
public share offering on a large exchange. In order to bridge the gap between venture capital and a public offering, larger merchant banks tend to privately place equity with other financial institutions, often taking on large portions of ownership in companies that are believed to have strong growth potential.
Merchant banks still offer trade financing products to their clients. Investment banks rarely offer trade financing because most investment banking
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INVESTMENT BANKING
clients have already outgrown the need for trade financing and the various credit products linked to it.
But, Investment banking is a term of much wider connotation than Merchant banking as it implies significant fund-based exposure to the capital market. Internationally, Investment banks have progressed in both fund-based and non-fund based segments of the industry.
In India, the dependence has been heavily on Merchant banking more particular with issue management and underwriting. However, downturn in the primary market has forced merchant banks to diversify and become fullfledged Investment banks.
INVESTMENT BANKS AS FINANCIAL INTERMEDIARY Investment bankers facilitate the flow of money. They are financial intermediaries, the critical link between users and providers of capital. They bring together those who need funds with those who have funds, and they make the markets that allocate capital and regulate price in these financial exchanges.
Those who desire to raise capital are called “issuers,” since they issue issue owners ownership hip in their their enterp enterpris rises es (i.e. (i.e. equity equity)) or obliga obligatio tions ns from from their their enterp enterpris rises es (i.e. (i.e. promis promises es to pay debt debt intere interest st and repay repay debt debt princ principa ipal) l) in exchange for cash or cash equivalents; those who provide capital are called
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INVESTMENT BANKING
“investors,” since they must invest cash or cash equivalents in exchange for those rights of ownership or obligation. Investment bankers enable issuers to raise capital (i.e. corporations or companies that sell or “issue” securities for cash) and investors to place capital (i.e. individuals or institutions that buy or invest in those securities) in the most efficient manner for both.
Investment Bank as Financial Intermediaries
Issuers Of Equity or
Investors Of Capital
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INVESTMENT BANKING
Investment banking is a dynamic industry characterized by flux and transformation. Financial instruments have grown more complex as financial intermediaries have become more competitive. Blizzards of innovative instruments are sweeping financial markets. Boundaries among diverse financial institutions are blurring. Barriers between international financial markets are eroding. And, amplifying the complexity and the competition, financial markets, firms, products, and techniques are merging and melding.
Investment banking, long simply synonymous with the domestic underwriting and market making of corporate equity and debt securities, has expanded dramatically. The industry has been transformed new functions (e.g., the prominence of mergers and acquisitions), new products (e.g., rate risk management mechanisms, such as swaps), new techniques (e.g., securitization of illiquid receivables), new markets (e.g., Tokyo, London and India), and new muscle (e.g., merchant banking) have changed the face of contemporary Investment banking.
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ORGANIZATIONAL
STRUCTURE
OF
BANKS
INVESTMENT INVESTMENT BANKING
Division of Investment Banks TYPES OF PLAYER IN THE INVESTMENT BANKING
An investment bank is split into the so-called Front Office, Middle
Office and Back Office. The individual activities are described below: 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 banking may involve
subscribing investors
, or negotiating with a
bidders
to a
merger target
, coordinating with
security issuance
. Other terms for the Investment
Banking Division includes Mergers & Acquisitions
(M&A)
and
Corporate Finance (often pronounced “corpfin”).
Investment Management is the professional management of various securities (shares, bonds, etc.) and other assets (e.g. real estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, , corporations etc.) or private
funds
investors
contracts and more commonly via
pension
(both directly via investment collective
investment
schemes
e.g. Mutual
funds).
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 and take orders.
Sales desks
high-net-worth
investors to suggest trading ideas
then communicate their clients’ orders to the 20
appropriate trading desks, which can price and execute trades, or
INVESTMENT BANKING
BUSINESS PORTFOLIO OF INVESTMENT BANKS Globally, investment banks handle significant fund-based business of their own in the capital market along with their non-fund service portfolio that is offered to clients. However these distinct segments are handled either on the same balance sheet or through subsidiaries and affiliates depending upon the regulatory requirements in the operating environment of each country. All these activities are segmented across three broad platforms – equity market activity, debt market activity and merger and acquisitions (M&A) activity. In addition, given the structure of the market, there is also segmentation based on whether a particular investment bank belongs to a banking parent or is a stand-alone pure investment bank.
In the case of universal banks such as the Citigroup or UBS Warburg, loan products form a significant part of the debt market business portfolio. Pure investment banks such as Goldman Sachs, Merrill Lynch and Morgan Stanley Dean Witter do not have commercial banking in their portfolio and therefore, do not offer loan products. Besides the larger firms, there are a host of other domestic players present in each country and mid-sized investment banks, which either specialize in local markets or in certain product segments. The global mergers & acquisitions business is very large and measures up to trillions of dollars annually. Investment banks play a lead advisory role in this booming segment of financial advisory business. Besides, they come in as investors in management buy-outs and management buy-in transactions. On the other occasions, wherein investment banks manage private equity funds, they also represent their investors in such buy-out deals.
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INVESTMENT BANKING
Some investment banks in the overseas markets also specialize in niche segments such as – management of hedge funds, bullion trade, commodity hedges, real estate and other exotic market. Below given is the diagram, which represents the broad spectrum of global investment activity.
INVESTMENT BANKING
CORE BUSINESS PORTFOLIO
Equity portfolio – Merchant Banking (Issue Management), Private placements.
Equity portfolio – Underwriting, market making .
Debt portfolio – Issue Management, Private placement, structured finance issuances such as securitisation.
Debt portfolio – Underwriting, market making.
M & A – M & A advisory, Corporate advisory, project advisory.
M & A portfolio – Investing in private equity.
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INVESTMENT BANKING
SUPPORT ACTIVITY PORTFOLIO
Equity portfolio – Equity broking, distribution, asset management, custodial services, etc.
Equity portfolio – portfolio investing, managing private equity funds and asset management funds.
Debt portfolio – Debt market broking, research, distribution, asset management, research.
Debt portfolio – Trading, underwriting, market making & investing on own securitised instruments.
Derivative portfolio – Derivative broking, risk management, custodial services.
Derivative portfolio – Proprietary trading, managing hedge funds.
Investment Banking Spectrum From this diagram, it may be appreciated that investment banking encompasses a wide area of capital market based businesses and services and has a significant financial exposure to the capital market. Though investment banks also earn a significant component of their income from nonfund based activity, it is their capacity to support clients with fund-based services, which distinguishes them from pure merchant banks.
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INVESTMENT BANKING
INDIAN INVESTMENT BANKING INDUSTRY
•
CHARACTERISTICS AND STRUCTURE
Investment banking in India has evolved in its own characteristic structure over the years both due to business realities and the regulatory regime.
On the regulatory front, the Indian regulatory regime does not allow all investment banking functions to be performed under one entity for two reasons – to prevent excessive exposure to business risk under one entity and to prescribe and monitor capital adequacy and risk mitigation mechanisms.
Therefore, bankruptcy remoteness is a key feature in structuring the business lines of an investment bank so that the risks and rewards are defined for the investors who provide resources to the investment banks. In addition, the capital adequacy requirements and leveraging capability for each business line have been prescribed differently under relevant provisions of law. On the same analogy, commercial banks in India have to follow the provisions of the Banking Regulation Act and the RBI regulations, which prohibit them from exposing themselves to stock market investments and lending against stocks beyond certain specified limits.
Therefore, Indian investment banks structure their business segments in different corporate entities to be able to meet regulatory norms. For e.g. it is desirable to have merchant banking in a separate company as it requires a separate merchant banking license from the SEBI. Merchant Bankers other than
24
INVESTMENT BANKING
Banks and financial institutions are also prohibited from undertaking any other business other than that in the securities market. However, since banks are subject to the Banking Regulation Act, they cannot perform investment banking to a large extent on the same balance sheet. Asset management business in the form of a mutual fund requires a three-tier structure under the SEBI regulations. Equity research should be independent of the merchant banking business so as to avoid the kind of conflict of interest. Stock broking has to be separated into a different company, as it requires a stock exchange membership apart from SEBI registration. Investment banking in India has also been influenced by business realities to a large extent.
Due to the above reasons, the Indian investment banking industry has a heterogeneous structure. The bigger investment banks have several group entities in which the core and non-core business segments are distributed. Others have either one or more entities depending upon the activity profile.
The heterogeneous and fragmented structure is evident even if Indian investment banks are classified on the basis of their activity profile. Some of them such as – SBI, IDBI, ICICI, IL & FS, Kotak Mahindra, Citibank and others offer almost the entire gamut of investment banking services permitted in India. Among these, the long-term financial institutions are gradually transforming themselves into full service commercial banks 9called ‘universal banking’ in the Indian context. They also have full service investment banking under their fold.
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INVESTMENT BANKING
•
DEVELOPMENTS
Over the subsequent years, two developments have taken place. Firstly, with the downturn in the capital markets, the merchant banking industry has seen tremendous shake out and only about a 10% of them remain in serious business as pointed out earlier. The other development is that due to the gradual regulatory developments in the capital markets, investment banking activities have come under regulations which require separate registration, licensing and capital controls.
Presently, there are no Indian investment banks although there is a bulge bracket of investment banks in India that have some overseas presence to serve Indian issuers and their investors. At the middle level are several niche players including the merchant banking subsidiaries of some public sector banks. Some of these subsidiaries have been either shut down or sold off in the wake of the two securities scams seen in 1993 and in 2000. However, certain banks such as Canara Bank and Punjab National Bank have had successful merchant banking activities. Among the middle level players are also merchant banks structured as non-banking financial services companies such as Rabo India Finance Ltd., Alpic Finance etc. There are also in the middle level, some pure advisory firms such as – Lazard Capital, Ernst & Young, KPMG, Price Waterhouse Coopers etc. At the lower end are several niche players and boutique firms, which focus on one or more segments of the investment banking spectrum.
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INVESTMENT BANKING
INSTITUTIONAL INVESTING AND INVESTMENT BANKING Institutional investors have been a recent phenomenon in the Indian capital market, which till then had the presence of a handful of public financial institutions such as the UTI and the insurance companies. The term lending institutions such as the IDBI and IFCI did not participate in secondary market dealing as a matter of policy. With the advent of liberalization, there are presently a large number of domestic institutional investors in the secondary market apart from approved foreign institutional investors. In addition, institutional investments have risen significantly in the primary markets through venture capital and private equity investments by investors in both the domestic and non-resident categories. Several of the leading investment banks either have dedicated venture funds or private equity funds that invest in primary market.
What does the 'FIG' at an investment bank refer to? The 'FIG' at an investment bank usually refers to the financial institutions group - a group of professionals that provides
27
INVESTMENT BANKING
investment banking and mergers and acquisitions expertise to financial institutions. In order to provide more tailored services, some investment banks further segment their areas of expertise under the financial institutions group into a banking or financial services group, and an insurance group. Some investment banks use these sorts of divisions more as a marketing
technique
than
as
a
representation
of
real
expertise.
Some examples of companies that may represent prospective FIG clients include insurance companies specializing in personal or commercial
insurance
products,
that provide financial services
to
commercial
finance
businesses,
banks,
companies brokerages,
investment dealers, and wealth management companies.
The services that the FIGs may provide to clients include, but are not limited to: private and public equity or debt financing, recapitalization, financial restructurings, mergers, acquisitions, corporate valuations, expert financial
opinion
and
corollary
analysis
and
advisory
services.
Some other investment banking segments include: health care, industrial, media, telecommunications, mining, energy, retail, technology and real estate, although this is by no means an exhaustive list of the business divisions within which investment banks operate.
SERVICE PORTFOLIO OF INDIAN INVESTMENT BANKS The core services provided by Indian investment banks are broadly divided into two categories:
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INVESTMENT BANKING
A)
Management of public offers and private placements.
B)
Corporate advisory services.
These are profiled below:
(A)Management of public offers and private placements
♦
Initial Public Offer The first exposure of a company to the capital market – i.e.
Initial Public Offer. Initial public offering or IPO, in financial market
terminology, is the initial sale of the common shares of a corporation to the public. It represents a primary market. Companies typically issue stock when they first go public through initial public offerings (IPOs), and they may issue stock and bonds periodically to fund such enterprises as research, new product development, and expansion. IPO, which is currently, perceived by entrepreneurs and start-up executives is a good way to secure money to expand the business without over-reliance upon third-party debt.
Before stocks and bonds are issued, investment bankers perform due diligence examinations, which entail carefully evaluating a company's worth in terms of money and equipment (assets) and debt (liabilities). This examination requires the full disclosure of a company's strengths and weaknesses. Investment banks aid companies and governments in selling securities as well as investors in purchasing securities, managing investments, and trading securities. Investment banks take the form of brokers or agents who purchase and sell securities for their clients; dealers or principals who buy and sell securities for their personal interest in turning a profit; and broker-dealers who do both.
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INVESTMENT BANKING
The primary service provided by investment banks is underwriting, which refers to guaranteeing a company a set price for the
securities it plans to issue. If the securities fail to sell for the set price, the investment bank pays the company the difference. Therefore, investment banks must carefully determine the set price by considering the expectations of the company and the state of the market for the securities.
The lessons are clear. IPO is a complex process requiring hard work by a skilled team of investment bank: in the end, the market will punish the ill prepared.
Thus, IPO market is of special significance to investment banking since this is an area that provides statutory exclusivity to them as lead managers. In the days when the public offers market is very vibrant, this area of service forms the main activity for most Indian investment banks.
♦
Rights Issues and Secondary Public Offers
A rights issue is made to the existing shareholders of a company. The ‘right’ herein refers to the entitlement of a shareholder to apply for and receive additional shares in the company. It is a right and not obligation.
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INVESTMENT BANKING
Secondary public offer also known as follow on offering, consists of post-listing public issues, offers for sale and composite issues. A listed company shall be eligible to make rights issue and secondary public offers.
A listed company has to consider many more aspects than an unlisted company in approaching its shareholders or the primary market for funds. From Investment banking prospective too, a listed company has a set of opportunities and limitations as compared to an unlisted company.
Role of Investment Banker in Listed Companies
The functional areas for investment bankers in listed companies are thus listed below: 1) Acting as advisers and arrangers in raising debt and equity finance through the capital market. 2) Acting as advisers and arrangers for private placement of debt and equity. 3) Acting as merchant bankers for transactions relating to rights issues and secondary public offers. 4) Advise companies on pricing and valuation for various types of offers. 5) Advise companies on post-listing issues and offerings. 6) Advise companies on buy backs and act as merchant bankers for such offers.
♦
Private Placement of Equity
Equity capital can be raised through public offers or through private issues. The term ‘private issue of equity’ has to be interpreted in terms of issue of equity
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INVESTMENT BANKING
shares in the non-public route either through a private offering or by other means.
Private placement is distinguished from the “public” offering of securities. Depending upon the category of investors being looked at and the status of the investor company, the private market for raising equity can be broadly classified as INSTITUTIONAL
and NON-INSTITUTIONAL
private
placements.
The institutional investors are Venture Capital funds and Private Equity funds. Investment Bankers also place securities with a limited number of
institutional investors such as insurance companies, investment companies, and pension funds.
•
Venture Capital funds is institutional risk capital that has the mandate of
investing in start-up companies. The investment banker plays a key advisory role in formulating the business of a start-up company and also helps it to raise its finances. Broadly, the investment banker can deliver the following services to a start-up company:
Strategy and business advisory services in formulating the business model for the company’s stated business objective.
Perform a study of the industry landscape and competitor analysis, product pricing strategy and SWOT analysis.
Advise the company on the necessary steps to be taken to make the business model credit worthy and investor friendly.
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INVESTMENT BANKING
Act as the arranger for the company’s debt or equity financing as per the financing plan that includes representation and negotiations.
Raise financing for the company in the most efficient way possible. Considering the fact that investment banks provide transaction-
oriented services, it is found that most of the top line investment banks do not prefer to work with start-ups in pure advisory role unless the company’s business plan is large enough to their linking.
•
Private Equity funds on the other hand, are larger investors investing in
later stage companies. In this area, the role of investment banker is more transaction oriented than in venture capital fund raising. This is because, the business model of the company is more established, the organization is fully in place and the cash flow model is proven. The ‘engagement’ in connection with a private equity transaction can be summarized as follows:
Identify and initiate contact with prospective investors, including road shows, and following up as necessary;
Represent or accompany the company in meetings, presentations and ensuring negotiations with prospective Investors;
Review the outcome of such meetings with the company, and recommend to the company further action as may be required;
Review and advise on proposals/offers from prospective investors; The NON-INSTITUTIONAL investors include high
networth investors (called HNIs), seed stage venture investors (also called ‘angel’ investors), financial and investment companies, other corporate, stock broking companies, portfolio investors, institutional market investors such as mutual funds and, foreign institutional investors and non-resident Indians.
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INVESTMENT BANKING
Private placements in the non-institutional category are generally made through close sources. Such kind of limited private offers are generally made by appointing a suitable agency that can facilitate the fund raising.
While some investment banks specialize only in raising venture capital and private equity, others that have strong investor relationships especially in the HNI category, offer private placements to non-institutional investors as a service. These are boutique investment banks that are often an extension of stock broking houses.
♦
Private Placement of Debt
The private placement market for debt securities essentially consists of medium to long-term debt securities such as debentures and bonds being placed privately with selected investors, mostly institutional or high net worth private investors. As of now, the private placement market which is considered as a market for the informed investor and the placement being made in a close loop, has been hugely popular due to its simple and quick deal process, lack of elaborate disclosures and regulatory clearances.
Private placement of Debt is an important source of funds both for companies under the Companies Act and other types of entities such as public sector corporations, financial institutions and banks. Debt securities issued through private placement can also be listed on the stock exchange to provide them with liquidity. Therefore, there are three main constituents in this market – the issuers, the investors and both these are brought together by the investment banker who acts as the arranger to the placement. The deal process typically
34
INVESTMENT BANKING
starts with the issuer rolling out a plan to raise funds through the private placement route. The first step in this direction would be to appoint the investment bank as an arranger to the whole placement. The first step for the investment banker is to ascertain that the company has taken the necessary approvals from its board, shareholders and existing lenders for the proposed debt and has the necessary powers under its memorandum and articles of association, Sec 293(1)(a) and 293(1)(d) of the Companies Act. The arranger has to then become familiar with the company’s business, the industry space, the financials of the company and the financing requirements. Usually a check-list of the required information is prepared and the information is put together in the form of a private placement memorandum. All the necessary back-up papers and documents are also compiled and kept ready for the requirement of investors. One of the important tasks of the investment banker is to arrive at the instrument in offer and the deal structure. The investment banker has to use his conventional wisdom, ingenuity and market intelligence to arrive at the coupon rate and suitable enhancements if any, required for the instrument. Credit rating is an important process in the deal as it enhances the possibility of closing the deal early by providing all the necessary comfort to investors.
(B)Corporate Advisory Services
♦
Corporate Re-organizations
As a result of liberalization and globalization the competition in the corporate sector is becoming intense. To survive in the
35
INVESTMENT BANKING
competition,
companies
are reviewing
their
strategies,
structure
and
functioning. This has led to corporate restructuring. This is the most important business segment for investment bankers after management of public offers. Globally, in the traditional days of investment banking, this business segment, popularly known as M&A, contributed to a significant share of the bottom line of investment banks, sometimes becoming the largest revenue stream.
In a corporate restructuring involving a split-up or a disinvestment by the promoters, the investment banker prepares the entire feasibility plan, deal structure, identifies the buyers or the sellers as the case may be, conducts the valuation and due diligence and negotiations for arriving at the term sheet. The investment banker also works closely with other professionals such as accountants and legal advisors in order to look at the legal, accounting and tax issues involving such corporate re-organizations.
Thus in all corporate re-organizations, the investment banker performs the pivotal role of transaction service, acting as a catalyst for the entire deal. With a growing number of mergers and acquisitions as well as corporate re-organizations, investment banks have become increasingly
involved in the process of arranging these transactions as part of their primary services.
♦
Project Advisory Services
Probably one of the most fascinating areas in corporate finance is project finance, not only because of its complexity but because of its profound economic significance as well. Project financing has traditionally been a term
36
INVESTMENT BANKING
loan based activity, where investment banks had very little to do unless an element of capital market financing was involved. However, it has now become an integral part of the advisory service portfolio of leading investment banks, especially of those with a Universal Banking background.
Project advisory services relate to all facets of project finance, which begin at the stage of project conceptualization and extend till the completion of financial closures and beyond. Most projects in recent times have used the services of investment banks in this area of high finance. Broadly, the range of services entails the following:
Bid advisory services in projects wherein the project is awarded to a particular consortium through a bidding process
Advise in entering into other key project contacts
Structuring the means of finance for the project
Preparation of Project Report, loan applications and associated documents
Act as ‘arranger’ on behalf of the client for representation and negotiations with lenders and equity investors
Management of private placements/public offers of debt or equity
Achieve financial closure with the best terms and in the best possible time for the project.
♦
Financial Restructuring Advisory
‘Financial Restructuring’ as the term denotes is the art of restating the financial position of a company as reflected by its Balance Sheet as
37
INVESTMENT BANKING
on a given date. In order to achieve such restatement a complex financial and legal process is involved as it concerns several conflicting interests.
Financial Restructuring can be triggered off either from the asset side of the Balance Sheet or the liability side. Therefore, Financial Restructuring encompasses restructuring of debt capital (outside liability) as well as equity capital.
The Investment Banking Services in Debt Restructuring
Investment bankers, of late, have developed a service area in advising and representing companies in debt restructuring programmes. The various steps involved are as follows:
The first stage would be to formulate a viability plan for the company. For this purpose, the investment banker has to understand the business model, present financial position, existing borrowings and their carrying cost, future business opportunities and the resulting cash flow there from.
Once the company’s viability and future operating plan have been formulated, the next step would be to float the ‘Debt Restructuring Scheme’ (DRS). The DRS has to comply with statutory norms and applicable guidelines issued by the RBI.
The investment banker has to use his expert knowledge and prior experience in formulating the scheme, so as to envisage workable terms of sacrifice from lenders and attractive terms of liability and cost reduction for his client.
The next step would be to present the DRS to lenders and represent the client in discussion and negotiations with the consortium of leaders or individual lenders as the case may be.
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INVESTMENT BANKING
The Investment Banking Services in Equity Restructuring
The investment banker plays an important role in the equity restructuring of a company, in the area of share buy-back. More often than not, companies that intend to restructure their equity capital are listed on the stock exchanges and therefore, such restructuring may need to comply with the relevant provisions of the SEBI guidelines. However, the real need for an investment banker in equity restructuring is to play the role of a merchant banker for a proposed share buy-back if any, as part of the restructuring
programme.
Since SEBI guidelines stipulate that share buybacks have to comply with SEBI guidelines, and a merchant banker holding a valid license should manage the offer, it becomes imperative for the company to appoint a merchant banker as manager to the offer.
The major contribution that the merchant banker makes in such assignments, apart from managing the offer, is in advising the company on the proper method to be adopted for the buy-back accordingly.
The pricing becomes critical because if the buy-back is under-priced, the offer may not be successful. On the other hand, if the buy-back is over priced, it may erode shareholders value for those who remain with the company post-buyback. Therefore, the role of the merchant banker becomes extremely
important. ♦
Mergers and Acquisitions Advisory
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INVESTMENT BANKING
In simple words, merger is a combination of two or more companies into a single where one survives and other lose their corporate existence.
M&A advisory firms are referred to by a number of names including: investment banks, bulge bracket firms, middle market M&A firms, business intermediaries and business brokers. As a general rule, business brokers represent client of smaller transactions, middle market firms handle the mid-size transactions and investment banks handle the largest transactions.
M&A have traditionally been the forte of investment banks world over. In the earlier era of investment banking, M&A advisory constituted the only advisory area and accounted for the second largest revenue stream of their business. This service warrants high range of skill in the art of financial deal making that investment banks specialize in. It has become an important advisory area at a time when Indian industry is passing through a transformation to meet the demands of globalization.
The investment banking domain in M&A advisory is mainly in partner search, negotiations and deal structuring, valuation, due diligence and deal closure. M&A advisory is also an area wherein investment banks face competition from pure advisory and professional firms and financial services companies.
The key differentiate or between a firm designated as an investment bank and a firm that operates as an M&A advisor is that an investment bank – in addition to performing an M&A advisory role – may also:
40
INVESTMENT BANKING
Advise companies on matters related to the issue and placement of stock
Act as an underwriter or agent for corporations and municipalities issuing securities
Maintain broker/dealer operations
Maintain markets for previously issued securities
Offer advisory services to investors
Hence some of the services or business segments form the core of investment banking, others provide invaluable support.
Interdependence between Different Verticals of Services
There are different verticals in investment banking and they do enjoy synergies with one another. This inter-independence and complementary existence has been explained below. Merchant banking largely relates to management of public floatation of securities or reverse floatation such as the buy-backs and open offers, underwriting is an inherent part of merchant banking for public issues. While, advisory and transaction services help in maintaining an enduring relationship with clients during those times when merchant banking is not a hot activity due to depressed market conditions. The other segment of primary market activity, i.e. venture capital and private equity has equal synergies with merchant banking. The support business verticals in the secondary market operations also have synergies with those in
41
INVESTMENT BANKING
the primary equity and debt market segment as far as investment banking is concerned. Thus, it may be seen that the growth and success of an investment bank depends on its strengths in each vertical and how well it combines them for synergies. To sum up, investment banking is a business that is very sensitive to the economic and capital market scenario and therefore, the broader the platform of its operations, the more is the likelihood of an investment bank surviving business cycles and sudden shocks from the market.
REGULATORY FRAMEWORK FOR INVESTMENT BANKING
42
INVESTMENT BANKING
Investment banking in India is regulated in its various facets under separate legislation’s or guidelines issued under statute. The regulatory powers are also distributed between different regulators depending upon the constitution and status of the investment bank. Primarily the capital market regulator (SEBI) governs pure investment banks, which do not have presence in the lending or banking business. However, primarily the RBI regulates universal banks and NBFC investment banks in their core business of banking or lending and so far as the investment banking segment is concerned, they are also regulated by SEBI. An overview of the regulatory framework is furnished below: a) At the constitutional level, all investment banking companies incorporated
under the Companies Act 1956 are governed by the provisions of that Act.
b) Investment Banks that are incorporated under a separate statute such as the
SBI or the IDBI are regulated by their respective statute. IDBI is in the process of being converted into a company under the Companies Act.
c) Universal Banks are regulated by the Reserve Bank of India under the RBI
Act 1934 and the Banking Regulations Act which put restrictions on the investment banking exposures to be taken by banks. The RBI has relaxed the exposure limits for merchant banking subsidiaries of commercial banks. Till now, such companies were restricting their exposure to a single entity through the underwriting business and other fund based commitments such as standby facilities etc. to 25% of their net owned funds (NOF). Therefore, these companies are now on par with other investment banks, which can do so upto 20 times their NOF.
43
INVESTMENT BANKING
d) Investment banking companies that are constituted as non-banking financial
companies are regulated operationally by the RBI under chapter III B (sec 45H to 45QB) of the Reserve Bank of India Act, 1934. Under these sections RBI is empowered to issue directions in the area of resource mobilization, accounts and administrative controls. The following directions have been issued by the RBI so far: ♦
Non-Banking Financial Companies Acceptance of Deposits
(Reserve Bank) Directions, 1998. ♦
NBFCs Prudential Norms (Reserve Bank) Directions, 1998.
e) Functionally, different aspects of investment banking are regulated under the
Securities and Exchange Board of India Act, 1992 and the guidelines and regulations issued there under. These are listed below: ♦
Merchant banking business consisting of management of public
offers is a licensed and regulated activity under the Securities and Exchange Board of India (Merchant Bankers) Rules 1992 and SEBI (Merchant Bankers) Regulations 1992. ♦
Underwriting business is regulated under the SEBI (Underwriters)
Rules, 1993 and the SEBI (Underwriters) Regulations 1993. ♦
The activity of secondary market operations including stock
broking are regulated under the relevant by-laws of the stock exchange and the SEBI (Stock brokers and Sub brokers) Rules 1992 and Regulations 1992. Besides, foe curbing unethical trading practices, SEBI has promulgated the SEBI (Prohibition of Insider Trading) Regulations,
44
INVESTMENT BANKING
1992 and the SEBI (Prohibition of Fraudulent and Trade Practices Relating to Securities Markets) Regulations 1995. ♦
The business of asset management as mutual funds is regulated
under the SEBI (Mutual Funds) Regulations 1996. The business of venture capital and private equity by such funds that are incorporated in India is regulated by the SEBI (Venture Capital Funds) Regulations, 1996 and by those that are incorporated outside India is regulated under the SEBI (Foreign Venture Capital Funds) Regulations 2000. ♦
The business of institutional investing by foreign investment banks
and other investors in Indian secondary markets is governed by the SEBI (Foreign Institutional Investors) Regulations 1995. f) Investment banks that are set up in India with foreign direct investment
either as joint ventures with Indian partners or as fully owned subsidiaries of the foreign entities are governed in respect of the foreign investment by the Foreign Exchange Management, 1999 and the Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside India) Regulations 2000 issued there under as amended from time to time through circulars issued by the RBI.
g) Apart from the above specific regulations relating to investment banking,
investment banks are also governed by other laws applicable to all other businesses such as the – tax law, contract law, property law, local state laws, arbitration law and other general laws that are applicable in India.
TREND ANALYSIS OF INVESTMENT BANKING
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INVESTMENT BANKING
The recent trends in investment banking have shifted sources of profitability
•
for firms. ⇒
In the last few years, the major trends in investment banking have been:
⇒
Growth in equity business, particularly IPOs;
⇒
Increase in mergers and acquisitions;
⇒
Dominance of “new-economy” sectors, such as Technology and telecom.
•
The winners in the market have been the bulge bracket
investment banks and highly focused boutiques. •
The growth of investment banking and research costs is
exceeding growth in revenues, especially for second tier major bracket and boutique investment banks. Recent Trends in Investment Banking
One of the trends that have been developing in the past few years in the global and Indian investment banking arena, is the strong emergence of universal banks ahead of pure investment banks as market leaders. These universal banks have the additional financial muscle of their banking arms that add to their pure investment banking strengths. Pure investment banks have found it unmanageable to maintain leadership positions due to difficult market conditions and the economic downturn. The year 2002 has been dubbed as the watershed year in investment banking. Globally, universal banks such as the – Citigroup, JP Morgan Chase and Deutsche Bank are emerging strongly against pure investment banks such as Goldman Sachs and Morgan Stanley. This trend could probably reappear in India as well with the emergence of SBI, ICICI, IDBI and Kotak Mahindra Bank as strong universal banks.
Case study on ICICI Securities Ltd. (I-Sec).
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INVESTMENT BANKING
I-Sec is a part of the ICICI group whose parent company is the ICICI Bank, which till recently was a financial institution that converted itself into a universal bank by its merger with its own commercial bank, the ICICI Bank in 2003. I-Sec, which was initially a joint venture with J. P. Morgan of the US, became fully owned by ICICI after J.P. Morgan exited from the business.
I-Sec is a subsidiary of ICICI Bank, the largest private sector bank in India and operates out of Mumbai with offices in New Delhi, Chennai, Kolkatta, New York, London and Singapore. Under the able leadership of Mr. S Mukherji, Managing Director and CEO, ICICI Sec continues to grow as reflected in its performance over the past couple of years.
Board of Directors of ICICI Sec Ltd.
Mr. K.V. Kamath – Chairman
Ms. Lalita d. Gupte
Ms. Kalpana Morparia
Mr. Uday Chitale
Dr. Nachiket Mor
Mr. S. Mukherji – M.D. and CEO
ICICI Securities Limited (I-SEC), India's leading full service investment banking firm with a dominant position in all segments of its operations – Corporate Finance, Fixed Income and Equities.
Insightful,
Thorough and convincing these three words define everything they have done since the last 25 years and will continue to do so in the years to come.
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INVESTMENT BANKING
Their services provided by them are as follows:
Corporate Finance The window to the world
ICICI Securities Ltd. is a leader across the spectrum of investment banking. They are experienced in every aspect of the business from domestic and international capital markets advisory, to M&A advisory, Private equity raising, Restructuring and infrastructure advisory.
Their unique understanding of the Indian corporate sector and deep relationships with all their relevant stakeholders gives them the ideal platform to consistently provide quality advise and service. They identify and structure transactions for a range of clients including central and state governments, private and public sector corporations and financial institutions. Key transactions handled by ICICI Sec in the recent past have included:
Initial public offerings of Reliance Petroleum and Deccan Aviation,
Delisting of Digital Globalsoft by HP,
Private equity investment in Apar industries.
Acquisition by ICICI Ventures of ACC Refractors
Acquisition of Shaw Wallace by The UB group
Spentex’s acquisitions of Indo Rama Textiles Ltd. and Tashkent-To’yepta Tekstil Ltd. of Uzbekistan.
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INVESTMENT BANKING
ICICI Sec Ltd. was amongst the first Indian investment banks to form a dedicated M&A practice and continues to be a leader by providing innovative and unique solutions to achieve varied objectives of the client. It also has a dedicated practice to assist companies with capital mobilization through the private equity/venture capital route across their life cycle. They assist companies in raising capital during the seed, growth and expansion and acquisition financing.
They are also at the forefront of capital markets advisory having been involved in most major book building and fixed price offerings over the last decade. ICICI Sec is amongst the leading underwriters of Indian equity with unparalleled execution capabilities. It has a dedicated infrastructure vertical focused on assisting clients in identifying and capitalizing on the opportunities thrown up by the all pervasive boom in the Indian infrastructure sector.
Fixed income Of Bonds and Yields
ICICI Sec. Ltd. is an acknowledged leader in the Indian fixed income and money markets, with a strong franchise
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INVESTMENT BANKING
across the spectrum of interest rate products and services – institutional sales and trading, resource mobilization and research. One of the first entities to be granted Primary Dealership license by RBI, I-Sec has made pioneering contributions since inception to debt market development in India.
The Fixed Income Group features desks trading actively in government securities, swaps and corporate bonds markets. The bond research of the Fixed Income team is a benchmark for the industry.
Innovation and insight into rate markets drive I-Sec’s advice to clients. They actively assist clients in designing and marketing interest rate structures to suit their objectives. I-Sec Sales team has developed a strong network of relationships covering institutional investors such as banks, mutual funds, insurance companies, provident funds and non-banking finance companies. These relationships are serviced by a wide distribution network with footprints across the country. I-Sec is also credited with pioneering debt market research in India. Their in-depth research, independent and well-considered market commentaries are widely read and acclaimed.
Equities Dealing with Bulls and Bears
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INVESTMENT BANKING
ICICI Securities Limited assists global institutional investors to make the right decisions through insightful research coverage and a client focused Sales and Dealing team. Mentions in various client survey polls, commending this team for the quality of analysis and client servicing standards, are a testimony to the quality of the team.
So welcome to the world of equities. Where Bulls and Bears often collide, run amuck or even go awry. To survive and excel you need a cool head and an analytical mind. With a combined market experience of over 150 years, the equities team at ICICI Securities comprises some of the finest minds in the country manning the research desk, sales desk and the trading desks.
But don’t take their word for it. Let some of finest equity magazines in the world do the job for them: The only Indian research team to figure in the top ten rankings conducted by Institutional Investor in 2005; Adjudged by Asia money as the Best Brokerage House in 2003.
The equity group leverages research and distribution reach to domestic and foreign institutional investors in case of public offerings. The equity research team tracks over 15 key sectors of the Indian economy and publishes in-depth research reports every year. Coverage of the Indian corporate scene which is at once exhaustive and in-depth.
ICICI Securities Subsidiaries ICICI Sec has wholly owned subsidiary, ICICI Brokerage Services Ltd. (IBSL), whish buys and sells equities for their institutional clients.
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INVESTMENT BANKING
ICICI Sec has a U.S. subsidiary, ICICI Sec Inc., which is a member of the National Association of Securities Dealers, Inc. (NASD). As a result of this membership, ICICI Sec Inc. can engage in permitted activities in the U.S. securities markets. These activities include dealing in securities markets transactions in the United States and providing research and investment advice to US investors.
VISIT TO THE STATE BANK OF INDIA BANK
QUESTIONAIRE
Name :-Pramod Bhoyar
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INVESTMENT BANKING
Post:- Relationship Manager Experience:-16 years
? What is the effect of recession on investment banking?
The loans and advances increased and the public deposit have gone down.
? Where do you invest the money collected from the public?
We provide loans like Education loan, home loan, car loans and invest in stock, bonds etc.
?who are the competitor of your bank?
ICICI and HDFC
?What are your future plan?
To be best bank in the market.
CONCLUSION The Investment Banking industry is come of age and is now growing by leaps and bounds. Investment Banking companies in India has
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INVESTMENT BANKING
joined hands with global majors to adapt to global standards and also to collaborate to work on cross border transactions and participate in international offerings. Hence, given the scope for investment banking in India, the future looks bright for the industry as a whole in India. Many more pure
merchant banks and advisory firms could convert themselves into full service investment banks that would broaden the market and make the service delivery much more efficient. In addition, the technological and market developments shaping the capital market would also provide an added impetus to the growth of investment banking.
The market regulator, Securities Exchange Board of India (SEBI) has continuously played an effective role in increasing transparency and has been able to put adequate safeguards to protect general investor’s interest. This effort has been the single most important factor because investor confidence is supreme and as long as investor confidence is high, both the capital market and
the investment banking industry will continue to do well.
Thus, investment banking can be quoted as – “ Investment Banking – the financial facilitator of market driven capitalism and the economic catalyst of national and international development”
BIBLIOGRAPHY
www.wikipedia.org .
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