Project Report On

Investment Banking
Bachelor of commerce
Banking & insurance
semester v
2015-2016
Submitted
In Partial Fulfillment of the requirement for the Award of
Degree
of Bachelor of Commerce-Banking &Insurrance
By
Mohd. Sohail Shaikh
ROLL NO :30

SREE NARAYAN GURU COLLEGE OF COMMERCE

P.L Lokhande Marg, Chembur, Mumbai-400089

DECLARATION

I Mohd. Sohail Shaikh, the student of B.Com. Banking and

Insurance semester v ( 2015 2016), hereby
Declare that I have completed the project on Investment
Banking.

The information submitted through this project is true and

original to the best of my knowledge.
DATE:
PLACE:MUMBAI

SIGNATURE:
Mohd. Sohail Shaikh
ROLL NO: 30

CERTIFICATE

This is to certify that MR. Mohd. Sohail Shaikh ,ROLL NO. 30 of

B.com.
Banking and Insurance Semester v ( 2015 - 2016 ) has successfully
completed the project on
''Investment Banking''
Under the guidance of MR. Krishnan Ramchandran

COURSE COORDINATOR

PRINCIPAL

PROJECT GUIDE/INTERNAL EXAMINER

EXTERNAL EXAMINER

DATE:
PLACE: MUMBAI

ACKNOWLEDGENT
All these years we have just studying and passing. But this time we have got an
opportunity to make such a project study . So it is very obvious for me to thank all
those people associated with the making of the project .
I owe a great many thanks to my project guide Mr. Krishnan

Ramchandran, Who has been constant support and guidance throughout the
making of my project and for monitoring my project with attention and care.
Shehas taken the pains to go through the project and make necessary correction as
needed.

I would also like to thank our course coordinator

MRS. KARISHMA .K for being a moral support to us during a project.

I express thanks to my college principal Dr. RAVINDRAN KARATHADI

for extending her support.

And last but not least I would take the opportunity to thank my parents
without whom the project would have been a distant reality. Sincere thanks to all
my fellow mates and well-wisher.

Executive Summary
Investment banking encompasses not mearly merchant
banking but other related capital market activities such as
Stock trading market making, underwriting, and broking and
asset management as well. Besides the above, investment banks
also provides a host of specialized corporate advisory services in
the areas of project advisory, Business and financial advisory
and mergers and aqusitions.
Investment banks are from traditional down the street in
the sence that it does not keep any deposits with itself to pay us
an interest nor does it graduates the safekeeping of your
money. An take deposits and make commercial and retail loans.
In real years, However, the lines between the two types of
structure have blurred especially as commercial banks have
offered more investment banking services.

Introduction
At a very macro level, Investment Banking as the
t e r m s u g g e s t s , i s concerned with the primary function of
assisting the capital market in its functions of capital intermediation,
i.e. the movement of financial resourcesfrom those who have them (the
Investors), to those who need to make us of them for generating GDP
(the Issuers). As already discussed banking and financial
institutions on the one hand and the capital market on the other arethe
two broad platforms of institutional intermediation for capital
flows inthe economy. Therefore, it could be inferred that investment
banks
are
thosei n s t i t u t i o n s t h a t a r e t h e c o u n t e r p a r t s o
f b a n k s i n t h e f u n c t i o n o f intermediation
in
resource allocation. Nevertheless, it would be unfair
toconclude so, as that would confine investment banking to a
very
narrows p h e r e o f i t s a c t i v i t i e s i n t h e m o d e r n w o r l d o
f h i g h f i n a n c e . O v e r t h e decades, backed by evolution
a n d a l s o f u e l l e d b y r e c e n t t e c h n o l o g i c a l developments,
investment banking has transformed repeatedly to suit the
needs of the finance community and thus become one of the
most vibrant and exciting segment of financial services. Investment
bankers have always enjoyed celebrity status, but at times they have paid
the price for excessive flamboyance as well. To c o n t i n u e f r o m t h e
a b o v e , i n t h e w o r d s o f J o h n F. M a r s h a l l a n d M . E . Ellis,
investment banking is what investment banks do. This definition
can be explained in the context of how investment banks have evolved i
n their functionality and how history and regulatory intervention have
shaped such as evolution. Much of investment banking in its present
form thus owes its

origin to the financial market in USA, due to which, American

investment banks have been leaders in the American and Euro markets
as well.T h e r e f o r e , t h e t e r m i n v e s t m e n t b a n k i n g c a n
a r g u a b l y b e s a i d t o b e o f American origin. Their counterparts in
UK were termed as merchant banks since they had confined
themselves to capital market intermediation until the US investment
banks entered the UK and European markets and extended the
scope of such businesses.

investment Banking and Merchant Banking Distinguished

At this stage, it would be relevant therefore, to draw a fine line of
distinction between the terms Investment Banking and Merchant Bank
ing as boththese terms are extensively used in this
project. Merchant Banking as the t e r m s u g g e s t s , i s t h e
function of intermediation in the capital market. It
consists of assisting issuers to raise capital by placement of securities
issued by them with investors. However, merchant banking is not merely
aboutmarketing securities in an agency capacity. The Merchant
Banker has an onerous responsibility towards the investors who
invest in such securities. The regulatory authorities require the
merchant banking firms to promote quality issues, maintain
integrity an ensure compliance with the law on own account and on
behalf of the issuers as well. Therefore, merchant banking is a fee based
service management of public offers; popularly know as issue
management and for private placement of securities in the capital
market. In India, the Merchant Banker leading a public offer is also
called as the
LeadManager.O n t h e o t h e r h a n d , t h e t e r m , I n v e s t m e n
t B a n k i n g h a s a m u c h w i d e r connotation and is gradually
becoming more of an inclusive term to refer toall types of capital
market activity, both fund-based and non-fund
based.T h i s d e v e l o p m e n t h a s b e e n d r i v e n m o r e b
y t h e w a y t h e A m e r i c a n investment banks have evolved
over the past century. Given this situation,investment banking
encompasses not merely merchant banking but
other r e l a t e d c a p i t a l m a r k e t a c t i v i t i e s s u c h a s s t o c k
t r a d i n g , m a r k e t m a k i n g , underwriting, broking and asset
management as well. Besides the above,
i n v e s t m e n t b a n k s a l s o p ro v i d e a h o s t o f s p e c i a l
i z e d c o r p o r a t e a d v i s o r y services in the areas of
project advisory, business and financial advisory

andm e r g e r s a n d a c q u i s i t i o n s . T h e a c t i v i t y p
r o fi l e o f i n v e s t m e n t b a n k s i s discussed in more
in detail later in this chapter

Evolution of American Investment Banks

The earliest events that are relevant for this
discussion can be traced to theend of World War I,
by which time, commercial banks in the USA
werea l r e a d y p r e p a r i n g f o r a n e c o n o m i c r e c o
v e r y a n d c o n s e q u e n t l y , t o t h e signifi cant
demand for corporate fi nance. It was expected that
Americancompanies would shift their dependence
from commercial banks to stock a n d b o n d m a r ke t s
w h e re i n f u n d s w e re a v a i l a b l e a t a l o w e r c o s t
a n d f o r longer periods of time. In preparation for a
boom in the capital markets inthe 1920s, commercial
banks started to acquire stock broking businesses in
a bid to have their presence made in such markets. The fi
rst of suchacquisitions happened when the National City
Bank of New York acquiredH a l s e y S t u a r t a n d
C o m p a n y i n 1 9 1 6 . A s i n t h e p a s t , i n t h e e n t i re
1 9 2 0 s , investment banking meant underwriting and
distribution of securities.The stock and bond market
boom in 1920s was as opportunity that banksc o u l d
not miss. But since they could not underwrite
and sell
s e c u r i t i e s d i r e c t l y , t h e y o w n e d s e c u r i t y a ffi l i
a t e s t h r o u g h h o l d i n g c o m p a n i e s . However,
t h e y w e re n o t m a i n t a i n e d l i ke w a t e r t i g h t
c o m p a r t m e n t s . T h e affiliates were sparsely capitalized
as were financed by the parent banks for their
underwriting and other business obligations. While
the boom
lasted,i n v e s t m e n t b a n k i n g a ffi l i a t e s m a d e h u g e
p ro fi t s a s u n d e r w r i t i n g f e e s , specially in the
segment called Yankee Bonds issued by overseas issuers
inU S m a r k e t . I n t h e s t o c k m a r k e t , t h e b a n k s
m a i n l y c o n d u c t e d b r o k i n g operations through

their subsidiaries and lent margin money to

customers.But with the passage of the McFadden Act in
1927, bank subsidiaries began
underwriting stock issues as well. National City Bank,
Chase Bank, Morganand Bank of America were the most
aggressive banks present at that time.The stock market
got over-heated with investment banks borrowing
moneyfrom the parent bank in order to speculate in
the banks stock, mostly for short selling. Once the
general public joined the frenzy, the priceearningratios reached absurd limits and the bubble
eventually burst in October 1929wiping out millions of
dollars of bank depositors funds and bringing downwith it
banks such as Bank of United States/In order to restore
confi dence in the banking and fi nancial system,
severallegislation measure were proposed, which
eventually led to the passing of the Banking Act 1933
(popularly know as Glass-Steagall Act) that
restrictedc o m m e rc i a l b a n k s f ro m e n g a g i n g i n s e c
u r i t i e s u n d e r w r i t i n g a n d t a k i n g positions or acting
as agents for others in securities transactions. Theseactivi
ties were segregated as the exclusive domain of
investment banks.
Ont h e o t h e r h a n d , i n v e s t m e n t b a n k s w e r e b a r re
d f ro m d e p o s i t t a k i n g a n d c o r p o r a t e l e n d i n g ,
which were considered the exclusive busine
s s o f commercial bank. The Act thus provided the water
tight compartments
thatw e r e n e e d e d b e f o re . S i n c e t h e p a s s i n g o f t h
i s Ac t , i n v e s t m e n t b a n k i n g became
narrowly defined as the basket of financial services
associated withthe floatation of corporate securities, i.e.
the creation of primary market for s e c u r i t i e s . I t w a s
a l s o ex t e n d e d t o m e a n a t a s e c o n d a r y l e v e l ,

s e c o n d a r y market making through securities dealing.B y

1935, investment banking became one of the
m o s t h e a v i l y re g u l a t e d industries in USA. The
Securities Act, 1933 provided for the fi rst time the

preparation of offer documents and registration of new s

ecurities with thef e d e r a l g o v e r n m e n t . T h e S e
c u r i t i e s E x c h a n g e A c t , 1 9 3 4 l e d t o t h e es
tablishment of the Securities Exchange Commission. The
Maloney Act of 1938 led to the formation of the
NASDAQ, the Investment Company Act,1 9 4 0 , w h i c h
b ro u g h t m u t u a l f u n d s w i t h i n t h e re g u l a t o r y
ambit and
theI n v e s t m e n t A d v i s e r s A c t , 1 9 4 0 w h i c h a l s
o r e g u l a t e d t h e b u s i n e s s o f investment advisers
and wealth managers.After the passing of the GlassStreagall Act of the 1930s, until the beginningof the 21
st
century, investment banking had been through several
phases of transformation which had broken down the
water tight compartments to ag re a t ex t e n t . D u e
t o t h e 1 9 7 3 A r a b o i l e m b a rg o , w o r l d e c o n o m i e s
w e re under pressure and inflation and interest rate
volatility became disturbing.
Itw a s a t t h i s t i m e t h a t i n s t i t u t i o n a l i n v e s t o r
s m a d d e r t h e i r a d v e n t i n t o securities markets.
It was also the time when the industrial and
fi nancials e r v i c e s e c t o r s w e r e b e g i n n i n g t o e
x p a n d a n d g l o b a l i z e . D u e t o t h e s e developm
e n t s , i n v e s t m e n t b a n k i n g a n d c o m m e rc i a l b a n k
i n g o n c e a g a i n became constrained by the very legisla
tion that was meant to clean up thesystem in the
1930s. This led to several relaxations over the
years such asthe Securities Acts Amendments, 1975
which had permitted commercial banks to have
subsidiaries (called section 20 subsidiaries) that
were allowedto underwrite and trade in securities. In
1990, J.P. Morgan was the first bank to open a section 20

subsidiary. Since the Glass-Streagall Act did not applyt o

f o re i g n s u b s i d i a r i e s o f U S b a n k s , t h e y
continued to underwrite in
theE u r o b o n d m a r ke t a n d b y 1 9 8 4 , t h e y h a d
a 5 2 % m a r k e t s h a r e i n t h a t business. But there
was stiff competition from Japanese banks in this
marketand by 1987, they underwrote only 25% of the
Eurobond issuances
During the economic growth and globalization of
the 1980s,
investment banking expanded to several new areas and
services which had includedc u r re n c y t r a d i n g , re a l e s
t a t e , fi n a n c i a l f u t u re s , b r i d g e l o a n s , m o r t g a g e backed securities and several others. But the stock marke
t crash of 1987once again brought the focus back to core
areas of specialization. Similarly,the ambitious expansion
that took place on a global scale was also halted tosome
extent. However due to technological advancements in
the 1990s andthe availability of global access
through the revolution in
communicationt e c h n o l o g i e s f u e l l e d t h e g l o b a l
g r o w t h a g a i n . B u t t h i s t i m e t h o u g h , investmen
t banking is no more restricted to underwriting new
issuances
ands e c u r i t y d e a l i n g . T h e s h i ft i s m o re t o w a rd s p
ro v i d i n g ex p e r t i s e i n n e w products and risks. Apart f
rom these activities, investment banking alsoencompass
es a considerable spectrum of advisory services in
the areas of corporate restructuring, mergers and
acquisitions and LBOs, fund
raisinga n d p r i v a t e e q u i t y. O n t h e d e a l i n g a n d t r
a d i n g s i d e , i n v e s t m e n t b a n k s participate in derivati
ves market, arbitrage and speculation. In the area of s t r u
c t u re d fi n a n c e , i n v e s t m e n t b a n k s a l s o p ro v i d e

fi n a n c i a l e n g i n e e r i n g through securitization deals

and derivative instruments

European Investment Banks

In continental Europe (excluding UK), the concept of
a Universal Bankhad been the undercurrent since
the late nineteenth century, when most
of t h e s e b a n k s w e r e s e t u p . T h e t e r m u n i v e
r s a l b a n k i n g m e a n t t h e c o - existence of
commercial banking (lending activity) along with
investment banking (investment and distribution
activity). Their universality was in thesense of harnessing
the vast retail customer base that these banks enjoyed
tomarket security issuances by their investment
banking arms. These issueswere mostly in the local
markets designated in the local currencies.
FrancesBanques daffiars and Germanys
Universalbanken are good examples.The United
Kingdom, which is considered as Europes largest
investment banking market, had its own structure evolv
ed from history. The oldestm e r c h a n t b a n k i n L o n d o
n was Barings Brothers which had played a
prominent role in the nineteenth century. Securities distri
bution was thefunction of stock brokers, secondary
market trading was held by jobbers andadvisory
services were provided by merchant bank. The term
merchant bank was evolved so as to distinguish
between commercial banks and thosethat provided
capital market advice. However, the breaking down
of
such barriers in 1986 by allowing banks to own broking o
utfits led to ac o n s o l i d a t i o n a n d m o s t o f t h e
b ro k i n g fi r m s g o t a b s o r b e d b y l a rg e r
a n d diversifi ed entities. Around the same time, the
US too was witnessing thedisappearance of distinction
between pure broking entities restricted to
thes e c o n d a r y m a r ke t s a n d i n v e s t m e n t b a n k i n g

e n t i t i e s i n v o l v e d w i t h t h e primary markets. The US i

nvestment banks with their integrated global business mo
del entered UK and Europe and later into Japan.

introduction of the Euro currency in 1999, helped the US

invasion further byneutralizing the local currency
advantages enjoyed by European
universal banks. By 2001, the US bulge group garnered
29.7% of the investment banking fee generated in Europe
as compared to 16.3% by the Europeanuniversal
banks.Po s t - 1 9 8 6 , t h e m e rc h a n t b a n k s a n d
c o m m e rc i a l b a n k s i n U K c o u l d n o t m a t c h u p t o
the US onslaught which ultimately led to
the sale of
S G Wa r b u r g , t h e m e r c h a n t b a n k t o S w i s s B a
n k C o r p o r a t i o n ( w h i c h w a s acquired by UBS later)
in 1995. In 1997, Natwest Bank and Barclays Bank exited
investment banking business. Morgan Grenfell, a
merchant bank wass o l d t o D e u t s c h e B a n k i n 1 9 9 0 .
I n t h i s u p h e a v a l , n i c h e p l a y e r s s u c h a s Drexel
Burnham and Barings Bank also collapsed with internal
deficiencies.This led to cross border M&A between
European banks inter-se and their American
counterparts to create bigger investment banks.
UBS Warburgw a s b o rn o u t o f m e rg e r o f U BS a n d
S w i s s B a n k C o r p o r a t i o n w h i c h h a d earlier acquired
SG Warburg. Deutsche Bank acquired Bankers Trust.

Global Industry Structure

The investment banking industry on a global scale is
oligopolistic in natureranging from the global leaders
(known as the Global Bulge Group) toPure
investment banks and Boutique investment banks. The
bulge groupconsisting of eight investment banks has
a global presence and these fi rmsdominate the
league tables in key business segments. The top
ten globalfirms in terms of their fee billing as in 2001 are
listed in TableWi t h i n t h e l i s t i n g g i v e n i n t h e t a b l e
re f e r re d t o a b o v e a re t h e t o p p u re 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 calledso due
to their role in both commercial and investment
banking. The fi veleading universal banks in the world
and their important group affiliates aregiven in
TableT h e r e f o r e , t h e g l o b a l i n v e s t m e n t b a
n k i n g i n d u s t r y r a n g e s f o r m t h e acknowledge
d global leaders to a larger number of mid-sized
competitors ata national or regional level and the rear
end is supported by boutique firmsor advisory and
sectoral specialists.

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 whichis offered to clients.
However, these distinct segments are handled either
onthe same balance sheet or through subsidiaries and
affiliates depending uponthe regulatory requirements
in the operating environment of each
country.A l l t h e s e a c t i v i t i e s a re s e g m e n t e d a c ro s
s t h re e b ro a d p l a t f o r m s e q u i t y market activity,
debt market activity and merger and acquisition
(M&A)a c t i v i t y. I n a d d i t i o n , g i v e n t h e s t r u c t u
r e o f t h e m a r k e t , t h e r e i s a l s o a segmentation
based on whether a particular investment bank
belongs to a banking parent or is a stand-alone pure
investment bank. Figure representsthe broad spectrum of
global investment
acitivity.F r o m t h i s d i a g r a m , i t m a y b e a p p r
e c i a t e d t h a t i n v e s t m e n t b a n k i n g encompas
ses a wide area of capital market based businesses
and
servicesa n d h a s a s i g n i fi c a n t fi n a n c i a l ex p o s u re
t o t h e c a p i t a l m a r ke t . T h o u g h investment banks
also earn a signifi cant component of their income
fromnon-fund based activity, it is their capacity to
support clients with
fund- based services, which distinguishes them from pur
e merchant banks. In theUS capital market, investment
banks underwrite issues or buy them
outrighta n d s e l l t h e m l a t e r t o r e t a i l i n v e s t o r s
t h e r e b y t a k i n g u p o n t h e m s e l v e s significant
financial exposure to client companies. Besides, being
such

largefi n a n c i a l p o w e r h o u s e s t h e m s e l v e s , t h e g l o
b a l i n v e s t m e n t b a n k s p l a y a major role as
institutional investors in trading and having large
holdings of capital market securities. As dealers they take
positions and make a marketfor many securities both in
equity and derivative segments. They hold large

inventories and therefore infl uence the direction of

the market. GoldmanSachs, Salomon Brothers, Merrill
Lynch, Schroeders, Rothschild and other significant
Market Investors both on their own account and on behalf
of the billions dollars of funds under their
management.The global mergers and acquisitions
business is very large and measures upto trillions of
dollars annually. Investment banks play a lead advisory
role inthis booming segment of financial advisory
business. Besides, they come inas investors in
management buy-outs and management buy-in
transactions.On other occasions, wherein investment
banks manage private equity funds,they also represent
their investors in such buy-out deals.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.
Purei n v e s t m e n t b a n k s s u c h a s G o l d m a n S a c h s ,
M e r r i l l Ly n c h a n d M o r g a n Stanley Dean Witter do not
have commercial banking in their portfolio andtherefore,
do not off er loan products. Besides the larger fi rms,
there are
ah o s t o f o t h e r d o m e s t i c p l a y e r s p r e s e n t i n
e a c h c o u n t r y a n d m i d - s i z e d investment
b a n k s , w h i c h e i t h e r s p e c i a l i z e i n l o c a l m a r ke t s
o r i n c e r t a i n product segments.S o m e i n v e s t m e n t
b a n k s i n t h e o v e r s e a s m a r ke t s a l s o s p e c i a l i z e
i n n i c h e segments such as management of hedge
funds, bullion trade, commodityhedges, real estate
and other exotic markets.

The Indian ScenarioOrigin

In India, though the existence of this branch of
fi nancial services can betraced to over three
decades, investment banking was largely confi ned
tomerchant banking services. The forerunners of
merchant banking in
Indiaw e r e t h e f o r e i g n b a n k s . G r i n d l a y s B a n k
( n o w m e r g e d w i t h S t a n d a r d Chartered Bank in
India) began merchant banking operations in 1967 with
alicense obtained from the RBI followed by the Citibank in
1970. These two banks were providing services for
syndication of loans and raising of equityapart from other
advisory services.It was in 1972, that the Banking
Commission Report asserted the need for merchant
banking services in India by the public sector banks.
Based on theAmerican experience which led to the
passing of the Glass-Streagall Act, theCommission
recommended a separate structure for merchant banks
so as todistinct them from commercial banks and
fi nancial institutions. Merchant banks were meant
to manage investments and provide advisory
services.Following the above recommendations, the SBI
set up its merchant bankingdivision in 1972. Other
banks such as the Bank of India, Central Bank
of India, Bank of Baroda, Syndicate Bank, Punjab National
Bank, Canara Bank also followed suit to set up their
merchant banking outfi ts. ICICI was thefirst financial
institution to set up its merchant banking division in
1973. Thelater entrants were IFCI and IDBI with the
latter setting up its merchant

banking division in 1992. However, by the mid eighties an

d 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 s u c h b a n k s s u c h a s C a n a r a B a n k , BO B ,
P N B , I n d i a n b a n k a n d i c i c i c re a t e d s e p r a t e
m e rc h a n t b a n k i n g e n t i t i e s .

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
primarymarket equity issues in 1992. However, post
1992, the merchant bankingindustry was largely
driven by issue management activity which
fluctuatedw i t h t h e t re n d s i n t h e p r i m a r y m a r ke t .
T h e s e h a v e b e e n p h a s e s o f h e c t i c activity
followed by a severe setback in business. SEBI
started to
regulatet h e m e rc h a n t b a n k i n g a c t i v i t y i n 1 9 9 2 a
n d a m a j o r i t y o f t h e m e rc h a n t bankers who register
ed with SEBI were either in issue management or a s s o c i
ated activity such as underwriting or advisorsh
i p . S E B I h a d f o u r categories of merchant bankers
with varying eligibility criteria based ontheir
networth. The highest number of registered
merchant bankers withSEBI was seen in the midnineties, but the numbers have dwindled
since,d u e t o t h e i n a c t i v i t y i n t h e p r i m a r y m
a r k e t . T h e n u m b e r o f r e g i s t e r e d merchant
bankers with SEBI as at the end of March 2003 was
124, from
a peak of almost a thousand in the nineties. In the financi
al year 2002-03 itself. The number decreased by 21.

Constraints in Investment Banking

Due to the over dependence on issue
m a n a g e m e n t a c t i v i t y i n t h e i n i t i a l years, most
merchant banks perished in the primary market
downturn thatfollowed later. In order to stabilize their
businesses, several merchant banksdiversified to offer a
broader spectrum of capital market services.
However,other than a few industry leaders, the other
merchant banks have not beenable to transform
themselves into full service investment banks.
Going bythe service portfolio of the leading full service
investment banks in India,
itm a y b e s a i d t h a t t h e i n d u s t r y i n I n d i a
h a s s e e n m o r e o r l e s s s i m i l a r development
as its western counterparts, though the breadth available
in theo v e r s e a s c a p i t a l m a r ke t i s s t i l l n o t p re s e n t
i n t h e I n d i a n c a p i t a l m a r ke t . S e c o n d l y , d u e t o
t h e l a c k o f i n s t i t u t i o n a l fi n a n c i n g i n a b i g w a y
t o f u n d c a p i t a l m a r ke t a c t i v i t y , i t i s o n l y t h e
b i g g e r i n d u s t r y p l a y e r s w h o a re i n i n v e s t m e n t
b a n k i n g . T h e t h i rd m a j o r d e t e rre n t h a s a l s o
b e e n t h e l a c k o f depth in the secondary
market, especially in the corporate debt segment.

Characteristics and Structure of Indian Inv

e s t m e n t B a n k i n g Industry
Investment banking in India has evolved in its own
characteristics structureover the years both due to
business realities and the regulatory regime.O n t h e
re g u l a t o r y f ro n t , t h e I n d i a n re g u l a t o r y re g i m e
does not allow allinvestment banking functions
t o b e p e r f o rm e d u n d e r o n e e n t i t y f o r
t w o reasons(a) to prevent excessive exposure to
business risk under one
entitya n d ( b ) t o p re s c r i b e a n d m o n i t o r c a p i t a l a
d e q u a c y a n d r i s k m i t i g a t i o n mechanisms. Therefore
bankruptcy remoteness is a key feature in structuringthe
business lines of an investment bank so that the
risks and rewards aredefined for the investors who
provide resources to the investment banks. Inaddition,
the capital adequacy requirements and leveraging
capability for each business line have been prescribed
differently under relevant provisionsof law. On the same
analogy, commercial banks in India have to follow
the provisions of the Banking Regulation Act and the RBI r
egulations, which prohibit them from exposing themselve
s to stock market investments andlending against stocks
beyond certain specified
limits.T h e re f o re , I n d i a n i n v e s t m e n t b a n k s s t r u c t
u re t h e i r b u s i n e s s s e g m e n t s i n different corporate
entities to be able to meet regulatory norms. For e.g. it
isdesirable to have merchant banking is a separate
company as it requires aseparate merchant banking
license from the SEBI. Merchant bankers other than
banks and fi nancial institutions are also prohibited
from undertakingany other business other than that
in the securities market. However, since

banks are subject to the Banking Regulation Act, they can

not performi n v e s t m e n t b a n k i n g t o a l a r g e ex t e n t
on the same balance sheet. Assetmanagement
b u s i n e s s i n t h e f o r m o f a m u t u a l f u n d re q u i re s
a t h re e - t i e r structure under the SEBI regulations.
Equity research should be independento f t h e
m e rc h a n t b a n k i n g b u s i n e s s s o a s t o a v o i d t h e
k i n d o f c o n fl i c t o f interest as faced by American
investment banks. Stock broking has to
bes e p a r a t e d i n t o a d i ff e r e n t c o m p a n y a s
i t r e q u i r e s a s t o c k e x c h a n g e membership a
p a r t f r o m S E B I re g i s t r a t i o n . A c o m p l e t e o v e r v i e
w o f t h e regulatory framework for investment banking
is furnished later.Investment banking in India has also
been influenced by business realities toa large extent.
The fi nancial services industry in India till the early
1980sw a s d r i v e n l a rg e l y b y d e b t s e r v i c e s i n t h e
f o r m o f t e r m fi n a n c i n g f ro m fi nancial institutions
and working capital fi nancing by commercial
banksand non-banking fi nancial companies (NBFCs).
Capital market serviceswere mostly restricted to stock
broking activity which was driven by a noncorporate unorganized body industry. M
e r c h a n t b a n k i n g a n d a s s e t management
services came up in a big way only with the opening up of
thecapital markets in the early nineties. Due to the
primary market boom duringthat period, many
fi nancial business houses such as fi nancial
institutions, banks and NBFCs entered the merchant
banking, underwriting and

advisory business. While most institutions and commercia

l banks floated merchant banking divisions and
subsidiaries, NBFCs combined their existing businesswith
that of merchant banking.Over the subsequent years,
two developments have taken place. Firstly, withthe
downturn in the capital markets, themerchant banking
industry has seen
tremendous shake out and only about a 10% of
them remain in
serious business as pointed out earlier. The other develo
pment is that due to thegradual regulatory developments
in the capital markets, investment bankingactivities
have come under regulations which require
separate registration,licensing and capital
controls.D u e t o t h e a b o v e re a s o n s , t h e I n d i a n
investment banking industry has
a heterogeneous structure. The bigger investment
banks have several groupentities in which the core
and non-core business segments are
distributed.Others have either one or more entities
depending upon the activity
profile.T h e h e t e ro g e n e o u s a n d f r a g m e n t e d s t r u c t
u re i s e v i d e n t e v e n i f I n d i a n investment banks are
classified on the basis of their activity profile. Some
of them such as SBI, IDBI, ICICI, IL & FS, Kotak
Mahindra, Citibank
ando t h e r s o f f e r a l m o s t t h e e n t i r e g a m u t o f
i n v e s t m e n t b a n k i n g s e r v i c e s permitted in India.
Among these, the long term financial institutions areg r a d

u a l l y t r a n s f o rm i n g t h e m s e l v e s i n t o f u l l s e r v i c e
c o m m e rc i a l b a n k s ( c a l l e d u n i v e r s a l b a n k i n g i n
t h e I n d i a n c o n t ex t ) . T h e y a l s o h a v e f u l l service
investment banking under their fold. Other entities
such as NBFCs or subsidiaries of public sector banks
mainly offer merchant banking and other capital market
services. There are also several others who are providing
onlyc o r p o r a t e a d v i s o r y s e r v i c e s b u t p r e f e r t
o h o l d m e r c h a n t b a n k i n g o r underwriting
registrations.Presently, there are no global Indian
investment banks although there is a bulge bracket
of investment banks in India that have some overseas
presenceto serve Indian issuers and their investors.
At the middle level are several
niche players including the merchant banking
subsidiaries of some publicsector banks. Some of
these subsidiaries have been either shut down or soldoff
in the wake of two securities scam seen in 1993 and in
2000. However,c e r t a i n b a n k s s u c h a s C a n a r a B a n k
a n d Pu n j a b N a t i o n a l B a n k h a v e h a d successful
merchant banking activities. Among the middle level
players arealso merchant banks structured as nonbanking financial services companiessuch as Rabo India
Finance Ltd, Alpic Finance etc. There are also in
themiddle level, some pure advisory fi rms such as
Lazard Capital, Ernst &Young, KPMG, Price Waterhouse
Coopers etc. At the lower end are severalniche players
and boutique firms, which focus on one or more segments
of the investment banking spectrum.

Service Portfolio of Indian Investment BanksCore Services

Merchant Banking, Underwriting and Book RunningThe
primary market which was quite small in India, was
revitalized with theabolition of the Capital Issues
(Control) Act 1947 and the passing of theSecurities
and Exchange Board of India Act, 1992. The SEBI
functions asthe regulator for the capital markets
similar to its counterpart, the SEC inUSA. SEBI vide
its guidelines dated June 11, 1992 introduced free
pricingo f s e c u r i t i e s i n p u b l i c o ff e r s f o r t h e fi r s t
t i m e i n I n d i a . O v e r t h e l a s t t e n years, there have
been two distinct phases of primary market boom the
first between 1992-1996 and the second between 19982001. The third wave of primary market issues could
shape up in the near future. This market is veryclosely
regulated by SEBI. In the days when the public offers
market is
veryv i b r a n t , t h i s a r e a o f s e r v i c e f o r m s t h e
m a i n a c t i v i t y f o r m o s t I n d i a n investment banks.
In the past few years, though public offers have been
veryfew, the private placement market especially in
the debt segment has beenvery active and has
served as an important source of funds for primeratedc o r p o r a t e s . N o t a b l e a m o n g s u c h o ff e r i n g s
a re re l a t e d p r i v a t e l y p l a c e d d e b e n t u r e s i s s u e d
by public sector corporations and leading p
r i v a t e c o m p a n i e s . Fi n a n c i a l i n s t i t u t i o n s h a v e b e
e n r a i s i n g f u n d s v i a t h e p u b l i c off ers and hand
holding them in the private placements as well.
Once
the private placement markets also come under regulator
y stipulations,investment banks would have a wider role
to play in such issuances.

Mergers and Acquisitions Advisory

The mergers and acquisitions industry was pretty
nascent in India prior
to1 9 9 4 a n d c o n t i n u e s t o b e t i n y c o m p a r
e d t o t h e g l o b a l s c a l e o f s u c h transactions.
However, two main features that have given a big push to
thisindustry are:

The forces of liberation and globalization that have forced

the Indianindustry to consolidate.

The institutionalization of corporate acquisitions by SEBI

through itsguidelines, popularly known as the Takeover
Code.O n e o f t h e c re a m a c t i v i t i e s o f i n v e s t m e n t
b a n k s h a s a l w a y s b e e n M & A advisory. The larger
investment banks specialize in M&A as a core
activity.While some of them provide pure advisory
services in relation to M&A,others holding valid
merchant banking licenses from SEBI also manage
theopen offers arising out of such corporate events.

Mergers and Acquisitions Advisory

The mergers and acquisitions industry was pretty
nascent in India prior
to1 9 9 4 a n d c o n t i n u e s t o b e t i n y c o m p a r
e d t o t h e g l o b a l s c a l e o f s u c h transactions.
However, two main features that have given a big push to
thisindustry are:

The forces of liberation and globalization that have forced

the Indianindustry to consolidate.

The institutionalization of corporate acquisitions by SEBI

through itsguidelines, popularly known as the Takeover
Code.O n e o f t h e c re a m a c t i v i t i e s o f i n v e s t m e n t
b a n k s h a s a l w a y s b e e n M & A advisory. The larger
investment banks specialize in M&A as a core
activity.While some of them provide pure advisory
services in relation to M&A,others holding valid
merchant banking licenses from SEBI also manage
theopen offers arising out of such corporate events.

Support services and BusinessesSecondary Market Activities

Most of the universal banks such as ICICI, IDBI and Kotak
Mahindra havetheir broking and distribution firms in both
the equity and debt segments of the secondary market.
In addition several other investment banks such as theI L
& FS a n d p u re i n v e s t m e n t b a n k s s u c h a s D S P
M e r r i l l Ly n c h a n d J M Morgan Stanley have a strong
presence in this area of activity. In the pastfew
years, the derivatives segment has been introduced
in Indian
capitalm a r k e t a n d t h i s p r o v i d e s a n a d d i t i o n a
l a v e n u e o f s p e c i a l i z a t i o n f o r investment ba
nks. Derivatives trading, risk management and
s t r u c t u re d products offerings are the new
segments that are fast becoming the areas of future
potential for Indian investment banks. The
securities business
also provides extensive research offerings and guidance t
o investors. Thes e c o n d a r y m a r k e t s e r v i c e s c
ater to both the institutional and noninstitutional investors.
Asset Management Services
Most of the top fi nancial groups in India which have
investment banking businesses such as the
ICICI, the IDBI, Kotak Mahindra, DSP MerrillLynch, JM
Morgan Stanley, SBI and IL & FS also have their presence
in theasset management business through separate
entities. As per the three layer structure propounded by
SEBI, the parent organization acts as the sponsor of the
fund and the fund itself is constituted as a trust. The trust
is managed by

an asset management company and a separate

t r u s t e e c o m p a n y w h i c h oversees the interests of
the unit holders in the Mutual Fund. The
wholestructure has as arms length distance from
the sponsors other businessesand entities.
Wealth Management Services (Private Banking)
M a n y re p u t e d i n v e s t m e n t b a n k s n u r t u re a s e p a
r a t e s e r v i c e s e g m e n t t o manage the portfolio of
high networth individuals, households, trusts
andother types of non-institutional investors. This can be
structured either as
a pure advisory service wherein the investment manager
does not have anyaccess to the funds or as a fund
management service wherein the investmentmanager is
given charge of the funds. In the former case, it becomes
a non-d i s c re t i o n a r y p o r t f o l i o a n d i n t h e l a t t e r
case, it becomes a
d i s c re t i o n a r y portfolio. Such activity is regulated under
the SEBI guidelines as alreadydiscussed. In other cases,
wealth management may be restricted to
a research based activity wherein the investor is provided
good investmentrecommendations from time to time.
Institutional Banking
Institutional investors have been a recent phenomenon in
the Indian capitalm a r ke t , w h i c h t i l l t h e n h a d t h e
p re s e n c e o f a h a n d f u l o f p u b l i c
fi n a n c i a l institutions such as the UTI and the insurance
companies. The term lendingi n s t i t u t i o n s s u c h a s t h e
IDBI and IFCI did not participate in
s e c o n d a r y market dealing as a matter of policy. With the
advent of liberalization, there

a re p re s e n t l y a l a rg e n u m b e r o f d o m e s t i c i n s t i t
u t i o n a l i n v e s t o r s i n t h e secondary market apart
from approved foreign institutional investors.
Inaddition, institutional investments have risen
signifi cantly in the primarymarkets through venture
capital and private equity investments by investorsin
both the domestic and non-domestic categories.
Several of the leadinginvestment banks either have
dedicated venture funds or private equity fundsthat
invest in primary market. In addition they
make proprietary investmentsin the secondary market
through their dealing and market activities.
The business portfolio of Indian Investment Banks has
been briefly discussed inFig.

I n t e r d e p e n d e n c e b e t w e e n D i ff e r e n t Ve r t i c a l
s i n I n v e s t m e n t Banking
As is evident from Figure , there are diff erent
verticals in investment banking and they do enjoy syne
rgies with one another. While some of theservice or
business segments form the core of investment
banking, others provide invaluable support. This interdependence and complementaryexistence has been
explained below.While merchant banking largely relates
to management of public
floatationso f s e c u r i t i e s o r re v e r s e fl o a t a t i o n s s u c
h a s b u y b a c k s a n d o p e n o ff e r s , u n d e r w r i t i n g i s
a n i n h e re n t p a r t o f m e rc h a n t b a n k i n g f o r p u b l i c
i s s u e s . Similarly, bought out deals and market
making are a part of the process of fl o a t i n g i s s u e s
o n t h e O TC E xc h a n g e o f I n d i a . T h e c o n c e p t o f
m a r ke t making has now been introduced for listing
of certain scrips in the mains t o c k exc h a n g e s a s
w e l l . Ad v i s o r y a n d t r a n s a c t i o n s e r v i c e h a v e a
closel i n k a g e w i t h m e r c h a n t b a n k i n g a s m o r
e o f t e n t h a n n o t , s u c h s e r v i c e s culminate in a
merchant banking assignment for a public issue or a
reversefl oatation. Such services also help in
maintaining an enduring relationshipwith clients
during those times when merchant banking is not a hot
activitydue to depressed market conditions. The
other segment of primary marketa c t i v i t y , i . e .
v e n t u re c a p i t a l a n d p r i v a t e e q u i t y h a s e q u a l
s y n e rg i e s
withm e r c h a n t b a n k i n g . B e i n g i n v e n t u r e c a p
i t a l b u s i n e s s w h i c h e n a b l e s identification of
potential IPO candidates quite early, which helps not
onlyin generating good fee income from merchant

banking services, but alsogood in capital gains for

the venture capital invested at earlier rounds of

fi nancing in such companies. Similarly, being in

private equity businesshelps in harnessing the
potential offered by later stage and listed
companies,which may approach an investment bank
primarily for merchant bankingservices.The support
business vertical in the secondary market operations also
havesynergies with those in the primary equity and debt
market segment as far asinvestment banking is
concerned. Stock broking and primary dealership indebt
markets nurture institutional, corporate and retail
clients who can betapped effectively for asset
management, portfolio management, and privateequity
business. In addition, presence in the equity
derivative and foreignexchange derivatives
segments can help in off ering solutions in
treasurymanagement to clients. In addition, the
advisory and transaction
servicesv e r t i c a l c a n d r a w ex p e r t i s e f ro m s u c h s
e g m e n t s i n p r o v i d i n g s t r u c t u re d fi nancing
solutions to its clients. All these verticals are driven
by supportservices such as sales and distribution and
also equity research and analysis.Lastly but more
importantly, the capability in sales and distribution
alsodetermines the success of the merchant banking
vertical.T h u s , i t m a y b e s e e n t h a t t h e g ro w t h
a n d s u c c e s s o f a n i n v e s t m e n t b a n k 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 sensitiveto the economic and
capital market scenario and therefore, the broader

the platform of its operations, the more is likelihood of an

investment bank surviving business cycles and
sudden shocks from the market.

Regulatory Framework for Investment Banking

As discussed above, investment banking in India
is regulated in its variousfacets under separate
legislations or guidelines issued under statute.
Ther e g u l a t o r y p o w e r s a r e a l s o d i s t r i b u t e d b
e t w e e n d i ff e r e n t r e g u l a t o r s depending upon
the constitution and status of the investment bank.
Purei n v e s t m e n t b a n k s w h i c h d o n o t h a v e
p re s e n c e i n t h e l e n d i n g o r
b a n k i n g business are governed primarily by the capital
market regulator (SEBI).However, universal banks and
NBFC investment banks are also regulated primarily
by the RBI in their core business of banking or
lending and so far as the investment banking segment is
concerned, they are also regulated bySEBI. An overview
of the regulatory framework is furnished
below:1 . A t t h e c o n s t i t u t i o n a l l e v e l , a l l i n
v e s t m e n t b a n k i n g c o m p a n i e s incorporated
u n d e r t h e C o m p a n i e s Ac t , 1 9 5 6 a re g o v e rn e d
b y t h e provisions of that Act.2.Investment banks that
are incorporated under a separate statute such as
the SBI or the IDBI are regulated by their respective
statute.
IDBIi s i n t h e p r o c e s s o f b e i n g c o n v e r t e d i n t o
a c o m p a n y u n d e r t h e Companies Act.3.Universal
Banks are regulated by the Reserve Bank of India
under theRBI Act 1934 and the Banking Regulation Act
which put restrictionson the investment banking
exposures to be taken by banks. The RBIhas relaxed
the exposure limits for merchant banking subsidiaries
of commercial banks. Till now, such companies were
restricting their

ex p o s u re t o a s i n g l e e n t i t y t h ro u g h t h e
u n d e r w r i t i n g b u s i n e s s a n d other fund based
commitments such as standby facilities etc to 25%
of their net owned funds (NOF). Therefore these
companies are now on par with other investment
banks which can do so up to 20
times their NOF.4 . I n v e s t m e n t b a n k i n g c o m p a n i e s
t h a t a re c o n s t i t u t e d a s n o n - b a n k i n g fi n a n c i a l
c o m p a n i e s a re re g u l a t e d o p e r a t i o n a l l y b y t h e R
B I u n d e r Chapter IIIB (sections 45H to 45QB) of the
Reserve Bank of IndiaAct, 1934. Under these sections
RBI is empowered to issue
directionsi n t h e a re a o f re s o u rc e m o b i l i z a t i o n , a c
c o u n t s a n d a d m i n i s t r a t i v e controls. The following
directions have been issued by the RBI so far:

Non-Banking Financial Companies Acceptance of Deposit

s(Reserve Bank) Directions, 1998.

NBFCs Prudential Norms (Reserve Bank) Directions,

1998.5 . Fu n c t i o n a l l y , d i ff e re n t
a s p e c t s o f i n v e s t m e n t b a n k i n g a re re g u l a t e d u n
d e r t h e S e c u r i t i e s E xc h a n g e B o a r d o f I n d i a Ac t ,
1 9 9 2 a n d t h e guidelines and regulations issued there
under. These are listed below:

Merchant banking business consisting of management

of publicoff ers is a licensed and regulated activity
under the Securitiesand Exchange Board of India
(Merchant Bankers) Rules 1992and Securities
Exchange Board of India (Merchant
Bankers)Regulations 1992.

 Underwriting business is regulat

e d u n d e r t h e S E B I ( U n d e r w r i t e r s ) Ru
l e s 1 9 9 3 a n d t h e S E B I ( U n d e r w r i t e r s ) Reg
ulations 1993.

The activity of the secondary market operations including

stock broking are regulated under the relevant by-laws of
the stock exchange and the SEBI (Stock Brokers and Sub
Brokers) Rules1 9 9 2 a n d t h e ( S t o c k B ro ke r s a n d
S u b B ro ke r s ) Re g u l a t i o n s 1992. Besides, for curbing
unethical trading practices, SEBI
has promulgated the SEBI (Prohibition of Insider Trading)R
egulations 1992 and the SEBI (Prohibition of Fraudulent
andU n f a i r Tr a d e P r a c t i c e s R e l a t i n g t o S e
c u r i t i e s M a r k e t s ) Regulations 1995.

The business of asset management as mutual funds is

regulatedunder the SEBI (Mutual Funds) Regulations
1996.

The business of portfolio management is regulated

under theSEBI (Portfolio Managers) Rules, 1993 and
the SEBI (PortfolioManagers) Regulations, 1993.

T h e b u s i n e s s o f v e n t u re c a p i t a l a n d p r i v a t e e q
u i t y b y s u c h funds that are incorporated in India is
regulated by the SEBI(Venture Capital Funds)
Regulations, 1996 and by those
thata re i n c o r p o r a t e d o u t s i d e I n d i a i s re g u l a t e d
u n d e r t h e S E B I (Foreign Venture Capital Funds)
Regulations 2000.

The business of institutional investing by foreign

investment banks and other investors in Indian secondar

y markets isg o v e r n e d b y t h e S E B I ( F o r e i g n I
n s t i t u t i o n a l I n v e s t o r s ) Regulations 1995.

6.Investments banks that are set up

i n I n d i a w i t h f o r e i g n d i r e c t investment
either as joint ventures with Indian partners or as
fullyowned subsidiaries of the foreign entities are
governed in respect of the foreign investment by
the Foreign Exchange Management Act,1999 and
the Foreign Exchange Management (Transfer or
issue of Security by a Person Resident Outside India)
Regulations 2000 issuedthere under as amended from
time to time through circulars issued bythe
RBI.7 . A p a r t f r o m t h e a b o v e s p e c i fi c r e g u l a t i
o n s r e l a t i n g t o i n v e s t m e n t banking, investment
banks are also governed by other laws applicableto all
other businesses such as the tax law, property law, state
laws,arbitration law and other general laws that are
applicable in India.

Regulatory Framework for Merchant Banking

M e rc h a n t B a n ke r s a re g o v e r n e d b y t h e S E B I
( M e rc h a n t B a n ke r s ) Ru l e s 1992 and SEBI
(Merchant Bankers) Regulations 1992. According to
theSEBI (Merchant Bankers) Rules 1992 a Merchant
Banker means a personw h o i s e n g a g e d i n t h e
business of issue management either by
m a k i n g a rr a n g e m e n t s re g a rd i n g s e l l i n g , b u y i n g
or subscribing to securities asmanager, consult
a n t , a d v i s o r o r re n d e r i n g c o r p o r a t e a d v i s o r y s e
r v i c e i n relation to such issue management.Given the
fact that Merchant Bankers are entrusted with the
responsibility of issue management by law, the
regulatory framework is designed to ensurethat
they suffi cient competence and exercise diligence
in their work suchthat the issuers comply with all
statutory requirements concerning the issue.At the same
time, the merchant banker shall have high levels of
integrity sothat quality issues alone are brought to
the primary market. Keeping theseobjectives in
mind and investor protection as the paramount
objective,
theS E B I h a s l a i d e m p h a s i s o n e n s u r i n g t h a t
m e r c h a n t b a n k e r s f u l fi l t h e e l i g i b i l i t y c r i t e r i a
o n a n o n - g o i n g b a s i s a n d h a s t h e re f o re
p ro v i d e d f o r compulsory registration every three
years. All Merchant Bankers need tohave a valid
registration certificate under the said rules to perform the
role of Merchant Bankers to issues. In considering the
application for registration,SEBI shall pay regard to the
professional qualifi cation in fi nance, law
or business management, adequate office space, manpo
wer, office equipmentand other infrastructure, at
least two support staff members who have

thecompetence to be in the fi eld of merchant

banking business, existence of

minimum stipulated capital and previous

experience to investor
grievanceredressal.T h e a c t i v i t i e s t h a t a M e r c
hant Banker is authorized to do are issu
e management and associated activities suc
h a s a d v i s i n g o r p r o v i d i n g consultancy or
marketing services for the issue, underwriting of issues
and portfolio management, though portfolio management
alone requiresadditional registration under the relevant
regulations. Merchant Bankers
are precluded from carrying on any business or fundbased activity other thanthat associated with the
securities market. Merchant Bankers are also
bound by the Code of Conduct prescribed under the Regul
ations. In addition,M e r c h a n t B a n k e r s h a v e t
o comply with general obligations an
d responsibilities under the Regulations.Pre s e n t l y
t h e re i s o n l y o n e c a t e g o r y o f M e rc h a n t B a n ke r s
p re s c r i b e d b y SEBI (Category I) and the minimum
stipulated networth for such MerchantBankers is Rs.five
crore. Such Merchant Bankers holding valid certificatesof
registration are alone qualifi ed to manage public
off ers. SEBI levies ao n e - t i m e a u t h o r i z a t i o n f e e ,
a n a n n u a l f e e a n d a re n e w a l f e e f ro m
e a c h Merchant Banker.
Under the regulations, Merchant Bankers have also
to submit periodicalreturns and any other additional
information that SEBI might seek from timeto time. SEBI
also has a right of inspection of the books of account,

recordsand documents of the merchant banker at

any time if required. SEBI maysuo moto conduct an
enquiry or launch an investigation into the working of a
M e rc h a n t B a n ke r o r o n re c e i p t o f a c o m p l a i n t
a g a i n s t s u c h M e rc h a n t .

Banker. SEBI may even appoint an external auditor to

inspect the books
andr e p o r t t o S E B I . B a s e d o n t h e fi n d i n g s
, S E B I i s e m p o w e r e d t o t a k e appropriate
action to award penalty points to the erring
Merchant
Banker based on the degree of the default or contravent
ion in accordance with theSEBI (Procedure for Holding
Enquiry by Enquiry Offi cer and ImposingPenalty)
Regulations 2002. The aggrieved Merchant Banker
may prefer
toa p p e a l t h e C e n t r a l G o v e r n m e n t u n d e r
t h e S E B I ( A p p e a l t o C e n t r a l Government)
Rules 2003. It may also be mentioned here that a
MerchantB a n ke r i s d e e m e d t o b e a c o n n e c t e d
p e r s o n t o t h e i s s u e r u n d e r t h e S E B I (Prohibition of
Insider Trading) Regulations, 1992.

Anatomy of Some Leading Indian Investment Banks.ICICI

Securities Ltd. (I-Sec).
I-Sec is a part of the ICICI group whose parent company is
the ICICI Bankmwhich till recently was a fi nancial
institution that converted itself into auniversal bank
by it merger with its own commercial bank, the ICICI
Bank in 2003. I-Sec, which was initially a joint
venture with J.P. Morgan of
theU S , b e c a m e f u l l y o w n e d b y I C I C I a f t e r J . P
. M o r g a n e x i t e d f r o m t h e business.I-Sec is a full
service investment bank that provides services
across all thesegments spanning debt market,
equity market, derivatives and
corporatea d v i s o r y s e r v i c e s . I t h a s s u p p o r t s e r v i
c e s i n re s e a rc h a n d b ro k i n g . T h e a d v i s o r y b u s i
ness focuses on merger and acquisitions, c
r o s s b o r d e r acquisitions, equity and bidding for a
number of reputed companies. Theequity business
offers research, sales and execution services to
institutionalinvestors in the secondary market and capital
market related services such
ase x e c u t i o n o f p u b l i c o ff e r i n g s , s t r u c t u r
i n g a n d r e g u l a t o r y a n d l e g a l documentation
services.In order to assist/provide corporate clients
and institutional investors
withi n v e s t m e n t b a n k i n g s e r v i c e s i n t h e U S A
. I - S e c s e t u p t w o U S b a s e d subsidiaries namely
ICICI Securities Holding Inc and ICICI Securities
Inc.I C I C I S e c u r i t i e s I n c re g i s t e re d i t s e l f w i t h t h e
National Association of

Security Dealers Inc as a broker-dealer, empowering it to

engage in a varietyof securities transactions in the US
market.I C I C I B r o k e r a g e S e r v i c e s L i m i t e d , a m
e m b e r o f t h e N a t i o n a l S t o c k Exchange of India
Limited, is the domestic broking subsidiary of ISecsd i s t r i b u t i o n a n d s e c o n d a r y m a r ke t s e r v i c e
s a re h a n d l e d b y t h e b ro k i n g company.
DSP Merrill Lynch Ltd.
Originally incorporated as DSP Financial Consultants
Ltd, its name waschanged to DSP Merrill Lynch (DSPML) in 1996 following its conversioni n t o a j o i n t
v e n t u re w i t h M e r r i l l Ly n c h o f U S A , a l e a d i n g
i n t e r n a t i o n a l capital raising financial management and
advisory company. Merrill Lynchhas a 40% equity stake
in DSP-ML. DSP-ML is a part of the DSP group which
has been in the securities and brokerage business for 130
years in theIndian market, thus pre-dating even the
Bombay Stock Exchange.DSP-ML is a leading full
service Investment Bank that provides
servicesacross debt market, equity market and
corporate advisory segments. It
also provides services to private customers on equity and
debt products andwealth management. It has a full
fledged research team serving the needs
of both its institutional and retail clients. The company is
among the major players on proprietary
account in the debt and equity markets and is also aregist
ered primary dealer in government securities.

The functional divisions at DSP-ML consist of the

Investment BankingGroup, the Equity Sales Group, the
Equity Trading and Dealing Group, DebtSales Group, the
Mergers and Acquisitions Group, the Research Group
andthe Private Client Group. The investment
banking group generates equityand debt products
emerging from IPOs, secondary issues and debt
marketissues as well as private placements. It is also a
leading underwriter in bothequity and debt products.
These products are distributed through the equitys a l e s
g ro u p a n d t h e d e b t s a l e s g ro u p . B o t h t h e
m a r ke t i n g g ro u p s s e r v e a cross section of
institutional clients, other non-institutional clients
such astrusts and investment companies, retail
clients and overseas investors. Thes a l e s g ro u p s
a l s o d i s t r i b u t e a p a r t f ro m t h e i r o w n p ro d u c t s ,
t h e p ro d u c t s emerging from other entities such as
DSP Merrill Lynch Mutual Fund andother mutual funds.
The sales groups are supported by a national
distributionnetworking comprising of approximately 8
000 sub-brokers and alliance partners.The trading and
dealing groups support the broking activity in equities
andthe primary dealership activities in the debt market.
DSP-ML, is one of thelargest institutional broking
fi rms in India. It is a founding member of TheStock
Exchange, Mumbai (BSE) and is an active member
of the
NationalS t o c k E x c h a n g e ( N S E ) o f I n d i a i n
b o t h t h e e q u i t y s e g m e n t a n d t h e wholesale
debt market segment. It is an accredited primary dealer
with theRBI and an active participant in the
Government Securities/Treasury billm a r ke t s . A s a
p r i m a r y d e a l e r , i t m a ke s a m a r ke t f o r d e b t
s e c u r i t i e s b y o ff e r i n g t o b u y a n d s e l l q u o t e s .

T h e s e q u o t e s a re a l s o a v a i l a b l e o n
w i re s e r v i c e s l i k e R e u t e r s , C r i s i l M a r k e t w i r e
, B l o o m b e r g a n d D o w J o n e s Newswires.

T h e m e rg e r s a n d a c q u i s i t i o n s a d v i s o r y h a s
b e e n s t r u c t u re d a s a s e p a r a t e specialist group
that off ers their clients fi nancial advice and
assistance inrestructuring, divestures, acquisitions, demergers, spin-offs, joint
ventures, privatization and takeover defense mechanisms
. The research group offers products such as sectoral rep
orts, company reports and special themeanalyses, daily,
weekly and monthly market views as well as specific
policyforecasts. The private client group offers depository,
broking and investmentadvisory services to high net
worth individuals, professionals and promotersof business
groups, corporate executives, trusts and private
companies.In 1996, the DSP group fl oated a separate
equity broking company calledDSP Securities Ltd.
which is a member of the BSE.

JM Morgan Stanley Pvt. Ltd.

JM Morgan Stanley (JMMS) is a joint venture
between the JM FinancialG ro u p a n d M o rg a n
S t a n l e y D e a n Wi t t e r o f t h e U S A. I n 1 9 9 7 ,
M o rg a n Stanley which was established in New York
in 1935, had acquired DeanWitter, an investment
bank founded in 1924 in San Francisco. JM
MorganStanley commenced operations in April 1999.
However, the association of the two partners is limited
only to the investment banking area. Both of themhave
separate asset management companies in India which
run independentof mutual fund businesses.Unlike DSP-ML
and I-Sec which have an integrated structure, the
JM Grouphas separate companies handling various
components of the capital
market business. The core functions of investment bankin
g are performed byJMMS. This company focuses on
capital raising, mergers and
acquisitions, private equity and advisory work for Indian c
orporations in both theinternational and domestic capital
markets. The function of distribution andmarketing
securities is handled by two of its wholly owned
subsidiaries JMMorgan Stanley Retail Services Pvt.
Ltd. (JMRS) and JM Morgan StanleyFixed Income
Securities Pvt. Ltd. (JMFI). JMRS provides equity
distributions e r v i c e s f o r p r i m a r y m a r k e t p r o d u c
t s , m u t u a l f u n d s , e q u i t y s a l e s a n d marketing
support for the group broking activity and wealth
managementa n d p o r t f o l i o m a n a g e m e n t s e r v i c e s
t o h i g h n e t w o r t h i n d i v i d u a l s . J M F I off ers similar
services in fi xed income (debt) securities. A third
company,JM Morgan Stanley Securities Pvt. Ltd.
handles all the broking operationsfor the group and
provides services to institutional clients and others. It

also provides research support for both FII and

Indian institutional clients.

SBI Capital Markets Ltd

Founded in 1986 as a hive-off of the SBI Merchant
Banking division, SBICapital Markets Ltd. (SBI Caps) is
amongst the oldest players in the Indiancapital market. It
is a full service investment bank that provides
investment,a d v i s o r y a n d fi n a n c i a l s e r v i c e s . I n
2 0 0 1 , S B I C a p s s t a r t e d i t s s a l e s a n d distribution
activity along with equity and debt broking services.SBI
Caps provides services across the following spectrum:

Mergers and Acquisitions

: This group provides advisory serviceswith regard to
disinvestment of the government, valuations,
mergersa n d a c q u i s i t i o n s i n t h e c o r p o r a t e s e c
t o r , fi n a n c i a l a n d b u s i n e s s restructuring and
other areas.

Project advisory and structure fi nance

: I t i s a rg u a b l y o n e o f
thel e a d i n g g r o u p s i n t h e c o m p a n y t h a t p
r o v i d e s s e r v i c e s s u c h a s restructuring and pr
ivatization advisory for public utilities, policyadviso
ry to Central and State Governments, regulatory
bodies andgovernment departments and
organizations, project structuring andadvisory to the
private sector and arranging finance for such projects.SBI
Caps has been a major player in governmental work
and in theinfrastructure sector. The project advisory
services consist of hand-holding from the concept
to commissioning stage involving
projectstructuring, contract structuring, fi nancial m
odeling, preparation of i n f o r m a t i o n m e m o r a n d u
m , s y n d i c a t i o n o f d e b t a n d e q u i t y a n d assist
a n c e i n d o c u m e n t a t i o n a n d fi n a n c i a l c l o s u re . O

t h e r s e r v i c e s include appraisals for green-fi eld and

brown-fi eld projects, techno-economic

a p p r a i s a l f r o m b a n k s a n d fi n a n c i a l i n s t i
t u t i o n s f o r establishing the viability of corporate
restructuring plans, and vettingof contracts, loan
documents, project documentation etc.

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

Treasury and Investments

: T h i s g ro u p d e a l s w i t h t h e
p ro p r i e t a r y investment of the company in the
equity, debt and money markets.Resource
mobilization and management is also undertaken by
thisgroup.

Broking of Equity and Debt

: SBI Caps is a registered broker and amember of the
NSE in the equity and wholesale debt segments and
isalso a member in the equity segment. The broking
group caters to thesecondary market needs of financial
institutions, FIIs, mutual
funds, banks, other corporates, high net worth individuals
, non-residentinvestors and retail investors. The
company commenced wholesaledebt market
broking in 2001. The company expects to have a
strong presence in institutional broking. The company pl
ans to open aderivative trading desk soon.

Sales and Distribution of equity and mutual

fund products
: S B I Caps has been a leading mobilizer of funds both for
public offers and private placements.

Research
: T h i s g ro u p p ro v i d e s t h e re s e a rc h s u p p o r t f o r i
n - h o u s e departments and for institutional clients.
Besides regular updates on
companies and industries, the research gro
u p b r i n g s o u t I n d i a Strategy,
Debt Market Review and Daily Debt Market
review whichare circulated to SBI Caps investment
banking and broking clients.I n i t s a n n u a l r e p o r t
for the year ending March 31, 2002, SBI
Capsreported that is has two business seg
m e n t s ( a ) F e e b a s e d s e g m e n t providing merch
ant banking and advisory services like issuemanagemen
t, underwriting, arranger, project advisory and struc
turedfinance. (b) Fund based segment which undertakes
deployment of fundsin leasing, hire purchase and
securities dealing. However, as a result
of S E B I d i re c t i v e s , f re s h l e n d i n g u n d e r l e a s i n g
a n d h i re - p u rc h a s e w a s stopped from 1
st
July 1998. For the period 2001-02, SBI Caps was
rankedfirst among issue managers by PRIME database

Kotak Mahindra Capital Company

B o rn i n 1 9 9 5 a s p a r t o f a c o r p o r a t e re o rg a n i z a t i o n a s a n
u n l i m i t e d c o m p a n y. T h e K o t a k M a h i n d r a C a p i
t a l C o m p a n y ( K M C C ) , i s t h e investment banking
entity belonging to the Kotak Mahindra Group. It is
astrategic joint venture between Kotak Mahindra Bank
Limited (KMBL)a n d t h e G o l d m a n S a c h s G ro u p L L P
o f U S A. K M C C i s a f u l l s e r v i c e investment bank
whose core business centers on equity issuances
andfixed income securities, mergers and acquisitions and
advisory services.A s a n i n v e s t m e n t b a n k , K M C C
i s r e g i s t e r e d w i t h S E B I a n d i s a l s o registered
as a non-banking fi nancial company with RBI. It is
also anactive member of the association of Merchant
Bankers of India (AMBI).KMCC has two wholly owned
subsidiaries (a) Kotak Mahindra (UK)Limited, which
is registered with the Securities and Futures
Association,UK and regulated by the Financial Services
Authority, UK and (b) Kotak Mahindra Inc based in USA,
which is registered with the Securities andExchange
Commission, USA. KMCC is the first Indian investment
bank to have sought such regulations in USA and UK. A
third company calledKotak Mahindra (International)
Limited., based in Mauritius providesdistribution and
other client services to non-resident investors.In KMCC,
the Equity Capital Markets group focuses on structuring
andexecuting diverse equity financing transactions in the
public and privatemarkets for corporates, banks, financial
institutions and the
Government.P r o d u c t s i n c l u d e i n i t i a l p u b l i c o ff
e r i n g s ( I P O s ) , r i g h t s o ff e r i n g s , convertible
offerings, private placements and private equity for

unlistedand listed companies. In the advisory

business, the Structured Finance

( P ro j e c t Fi n a n c e & Ad v i s o r y B u s i n e s s ) G ro u p p r
o v i d e s ex p e r t i s e i n various vertical segments in
the infrastructure sector including power, oil,gas, ports,
automobiles, steel & metals and hotels by offering
structuredfi n a n c e s o l u t i o n s t o c l i e n t s . T h e Fi xe d I
n c o m e S e c u r i t i e s G ro u p a t KMCC advises PSUs, Go
vernment companies, fi nancial institutions, banks an
d corporates on raising capital by way of public or private
placement of debt. KMCC is credited with innovating on s
ome bonds t r u c t u re s i n t h e I n d i a n m a r ke t . T h e
a d v i s o r y g ro u p o n m e rg e r s
anda c q u i s i t i o n s p r o v i d e s c o m p l e t e s o l u t i o n
s o n s t r a t e g y f o r m u l a t i o n identifi cation of
targets or buyers, valuation, negotiations and
bidding,c a p i t a l s t r u c t u r i n g , t r a n s a c t i o n s t
r u c t u r i n g , a s s i s t a n c e i n l e g a l documentation
and acquisition financing strategies
and implementation.KMCC is supported in its
functions by Kotak Securities Ltd, a broking firm
incorporated in 1995 that is also a joint venture with
Goldman Sachswhich handles all the broking,
distribution and research business of thegroup. Kotak
Securities is a member of the debt segment of the NSE
andis also a member of the National Stock Exchange
Members Association.Kotak Securities offers services to
investors, financial institutions,
mutualf u n d s , re l i g i o u s a n d c h a r i t a b l e t r u s t s , i n s
u r a n c e c o m p a n i e s , e t c . T h e institutional business
division has a comprehensive research cell
withsectoral analysts covering all the major areas
of the Indian
economy. Int h e i n t e r n a t i o n a l a re n a , i t p ro v i d e s
b ro ke r a g e s e r v i c e s o n t h e I n d i a n securities to
institutional and other investors who are based outside

India.D u e t o i t s o v e r s e a s p re s e n c e , t h e c o m p a n y
h a s m a r ke t i n g i n t e re s t s i n Indian GDR and ADR
issues as well.

The research products brought out by Kotak Securities

include:

Fo r t h e i n s t i t u t i o n a l c l i e n t s , a p ro d u c t c a l l e d A
K S E S S , w h i c h primarily covers secondary market broki
ng. It caters to the needsof foreign and Indian
institutional investors in Indian equities (bothlocal shares
and GDRs).

The Daily Forex Monitor which tracks the Indian and

internationalforeign exchange markets and opines on
currency strategies on adaily basis.

The Weekly Money Market Update which gives the details

of thedevelopments in markets and provides a shortterm interest rateview along with indicative pricing for
Triple A credits.

The CURRENCY WATCH captures the monthly

developments inthe Indian foreign exchange markets,
analyses the key
influencingi s s u e s , a s s e s s f u t u r e o u t l o o k a n d a
l s o r e c o m m e n d s h e d g i n g strategies.

Monthly FINSEC and FINSEC Focus.Ko t a k S e c u r i t i e s i s

a l s o a re g i s t e re d p r i m a r y d e a l e r w i t h t h e R B I i n
t h e government securities market. As a primary
dealer, the company acts as
am a r k e t m a k e r a n d a l s o p r o v i d e s t w o w a y q
u o t e s , a c t s a s r e t a i l e r a n d marketing agent,
provides underwriting support on government
securitiesissues and participates in auctions held by the
RBI.B e s i d e s , t h e a b o v e c o m p a n i e s , t h e K o t a
k G r o u p i n c l u d e s t h e K o t a k Mahindra Bank

which was formerly a non-banking fi nance company

thathas recently been converted into a bank, the
Kotak Mahindra Mutual Fund

which is managed by the Kotak Mahindra Asset

Management Co. Ltd andthe OM Kotak Life Insurance,
which is a joint venture with Old Mutual Plco f U K a n d
t h e Ko t a k M a h i n d r a Ve n t u re C a p i t a l C o. w h i c h
m a n a g e s t h e private equity fund of the group.

Recent Trends in Investment Banking

One of the trends that has been developing in the
past few years in theglobal and Indian investment
banking arena, is the strong emergence of universal
banks ahead of pure investment banks as market leaders.
Theseuniversal banks have the additional fi nancial
muscle of their bankingarms that add to their
investment banking strengths. Pure
investment banks have found it unmanageable to maint
ain leadership positions dueto difficult market conditions
and the economic downturn. The year 2002has been
dubbed as the watershed year in investment banking for
over adecade. Globally, universal banks such as the
Citigroup, JP MorganChase and Deutsche Bank are
emerging strongly against pure
investment banks such as Goldman Sachs and Morgan St
anley. This trend could probably reappear in India as well
with the emergence of SBI, ICICI,IDBI and Kotak Mahindra
Bank as strong universal banks. However,
in2 0 0 2 , p u r e i n v e s t m e n t b a n k s s u c h a s J M M
o r g a n S t a n l e y a n d D S P M e r r i l l Ly n c h s t i l l o c c u
p i e d t o p p o s i t i o n s i n t h e i n v e s t m e n t b a n k i n g lea
gue
tables.S o m e r e c e n t d e v e l o p m e n t s i n t h e i n v e
s t m e n t b a n k i n g i n d u s t r y a s reported in some
fi nancial dailies and other press clippings are
listed below:
International

The Wall Street IPO market has seen the fewest number
of issuess i n c e 1 9 7 8 i n t h e c a l e n d a r y e a r 2 0 0 3 ,
w i t h j u s t fi v e i n t h e fi r s t

q u a r t e r. T h e s e h a v e m o s t l y b e e n f ro m i n s u r a n c
e a n d fi n a n c i a l services firms and four of them were
IPOs.

In 2002, there was a drop of 28% in global

e q u i t y a n d e q u i t y related issuances according
to Thomson Financial. IPOs were them a i n c a u s a l i t y
w i t h a d ro p o f 3 4 % t o $ 6 0 . 6 b i l l i o n .
E u ro p e a n m a r k e t s a w a d r o p o f 5 3 % d r o
p i n I P O s a n d 5 4 % d r o p i n convertible
bond issuances. In Europe, the market focus
shiftedf r o m f u n d r a i s i n g t h r o u g h I P O s a n d
p u b l i c i s s u e s t o m o r e restructuring deals. These
are termed as rescue finance deals
sucha s r i g h t s i s s u e a n d f u l l y c o n v e r t i b l e b o
n d i s s u e s b y t r o u b l e d companies.
Ericsson, Sonera and Zurich Financial Services
ares o m e c o m p a n i e s t h a t m a d e r i g h t s i s s u e s i n
2 0 0 2 . Ac c o r d i n g t o Dealogic, the volume of rights
issues in Europe rose from
$20.7 billion to $21.5 billion in 2002. The most popular in
strument inU S A a n d E u ro p e h a s b e e n t h e m a n d a t
ory convertible (fullyconvertible) bond which
i s c o n s i d e re d a s a f o r w a rd s h a re s a l e s which is
superior in nature to a rights issue.

The Citigroup was Wall Streets top stock and bond

underwriter in2002. Citigroup affi liates Salomon
Smith Barney arranged
$414 billion of offerings with a 10.6% market share accor
ding toThomson Financial. Merrill Lynch and CSFB were
ranked secondand third respectively. However, the total
underwriting pie fell by5% during the same year.

The top IPO investment bank in 2002 was Salomon Smith

Barneyfollowed by Goldman Sachs. Goldman arranged
the largest IPO of
2 0 0 2 , t h e $ 4 . 6 b i l l i o n C I T G ro u p I n c . ( Ty c o
I n t e rn a t i o n a l L t d ) unit.

T h e re p o r t e d f e e o f A m e r i c a n I n v e s t m e n t b a n k s
f e l l b y 2 1 % i n 2002 to $14.1 billion. Salomon took
the highest fee of around
$2 billion followed by the other two with around $1.2 billi
on each.Since April 2001, 78000 jobs were slashed in this
industry in USAaccounting for about 10% of the total
strength.

Global M&A market was also dull in 2002 witnessing a

sharp fallof 47% to stand at $996 billion from $1887
billion in the
previousy e a r. T h e b i g g e s t d e a l s i n 2 0 0 2 w e r e
H P - C o m p a q , A m g e n - Immunex Corp, AOL Time
Warner-AOL Europe, BayerAventisC r o p S c i e n c e , C o m c a s t C o r p AT & T B ro a d b a n d , P h i l i p s P e t r o l e u m C o n o c o a n d S i e m e n s Ro b e r t B o s c
h - A t c c s Mannesmann.

Some of the big universal banks such as JP Morgan

Chase took major hits in their private equity businesses
due to the technologymeltdown. Incidentally, JP Morgan,
which is one of Wall Streetslargest private equity
operators with a fund base of $28
billion,g e n e r a t e d $ 1 3 0 m i l l i o n i n re v e n u e s i n p r i
v a t e e q u i t y i n 2 0 0 1 fuelled mainly by the IPO market

boom in technology stocks. Dueto the meltdown, many

investment banks have felt it necessary tospin off their
private equity operations into separate entities.
BNPParibas, Deutsche Bank, HSBC and Zurich Financial
Services aresome of these banks.


American investors poured more money into debt mutual
funds in2 0 0 2 a c c o u n t i n g t o $ 1 3 3 b i l l i o n a n d
t h e re w e re f e w t a ke r s f o r public issues of equity
junk bonds and convertible bonds.
National

During the year 2001, JM Morgan Stanley which

acted as adviser toM&A deals worth Rs.16022 crore
was rated the top investment
bank i n I n d i a . T h e o t h e r p l a y e r s i n t h e b i g l e
ague were ABN-Amro(Rs.10460 crore), DSP
M e r r i l l Ly n c h ( R s . 7 1 3 0 c r o r e ) , A r t h u r A n d e r
s e n ( n o w p a r t o f E & Y , R s . 3 5 3 2 c ro re ) , Ko t a
k M a h i n d r a ( R s . 1 7 1 9 c r o r e ) , R a b o I n d i a Fi n a
n c e ( R s . 8 3 3 c r o r e ) a n d L a z a r d Capital (Rs.53
6 c ro re ) ( a s re p o r t e d i n t h e E c o n o m i c Ti m e s
21
st
November 2001).

I n 2 0 0 2 , t h e re w a s o n l y o n e G D R / A D R i s s u e a s
c o m p a re d t o 6 i n 2001 and 9 in 2000. This was
made by Mascon Global which raised$ 1 0 m i l l i o n
t h ro u g h i s s u e o f 2 . 5 m i l l i o n G D R s w h i c h a re
listed
atL u xe m b o u r g S t o c k E x c h a n g e . I n t h i s m a r k
e t , C i t i b a n k w a s t h e leading depository banks
according to Instanex Capital Consultants. T h i s w a s
f o l l o w e d b y B a n k o f N e w Yo r k , D e u t s c h e B a n k
a n d J P Morgan.

In the M&A market, the year 2002 saw an increase

of around 5% inthe value of M&A deals in Inda.

Among these, more than 50% werec r o s s border deals according to a survey conduct
e d b y K P M G Corporate Finance. The deals were
mostly in the SME segment withaverage size not
exceeding $25 million. The banking, fi nance and
insurance sectors contributed almost one-third of
the total volume.Privatization deals also played a
significant part.

D S P- M L d e - l i s t e d f ro m t h e s t o c k ex c h a n g e
s i n c e i t s p ro m o t e r s , Hemendra Kothari and Merrill
Lynch together held more than 90% of the shares. DSP
was rated the The Best Domestic Investment
Banki n I n d i a f o r 2 0 0 0 b y F i n a n c e A s i a . E
u r o m o n e y v o t e d i t B e s t Domestic M&A
House in India as well as Best Domestic
E q u i t y House in India in 2000. This distinction has
returned for three yearsin a row with DSP-ML being
named as the Best Domestic
SecuritiesH o u s e a n d B e s t D o m e s t i c I n v e s t m e n t
Bank for 2002-2003 byAsiamoney (May 2003
issue) and The Asset (January 2003
i s s u e ) magazine respectively

The Conflict of Interest Issue

The most burning global issue in the investment banking
industry is that of confl ict of interest between
investment bankers and their research
analysisdivisions. In the wake of the Enron, Worldcom
and other corporate
disasters,t h e i s s u e h a s g a i n e d s o m e s i g n i fi c a
n c e . T h e S e c u r i t i e s a n d E x c h a n g e Commission
in the USA (SEC) have initiated investigations into
instances of investment banks issuing over-optimistic
research and steering shares in hotIPOs to important
clients for vested interests. In such investigations some
of the banks have been imposed fines. Merrill Lynch paid
up fines to the
extento f $ 1 0 0 m i l l i o n i n r e g u l a t o r y p r o c e e d i
n g s i n 2 0 0 2 b r o u g h t a g a i n s t i t s misleading
research reports. Citigroups Salomon Smith Barney
is also inthe dock and may find itself paying the heaviest
fines. CSFB also finds itself in trouble with the regulators.
Most of the other top investment banks sucha s
G o l d m a n S a c h s , Le h m a n B ro t h e r s , B e a r S t e rn s ,
D e u t s c h e B a n k , J P Morgan Chase and others also
found their names in the fi nes list in 2002. CSFB was
fined for misleading investors on offerings in technology
shares.J P M o rg a n o n t h e o t h e r h a n d , h a s b e e n
u n d e r a c l o u d f o r i t s ro l e i n t h e infamous offbalance sheet partnership it had crafted for
Enron.Besides, investment banks have also been the
target of several lawsuits filed by aggrieved investors. In
late 2002, the French luxury goods leader LVMHfi led a
100 million euro lawsuit against Morgan Stanley
alleging that itsresearch report on LVMH was biased
because of the investment banks closeadvisory

relationship with LVMHs arch rival Gucci Group NV.

MorganStanley was also the underwriter of Guccis IPO in
1995

Both the NYSE and NASDAQ came out with research

analysts conflict of i n t e re s t r u l e s i n M a y 2 0 0 2
w h i c h w a s s u b s e q u e n t l y a p p ro v e d b y
S E C . Market observers have felt that this is a good
development from the point of v i e w o f a d d re s s i n g
c o n fl i c t o f i n t e re s t , c u rre n t l y a b u rn i n g i s s u e i n
t h e industry. While an investment bank may be
advising a client on a buy out,its private equity arm
may be in the fray for its purchase. An example of
thisw a s t h e s a l e o f t h e p o w e r s t o r a g e b u s i n e s s
o f I n v e n s y s i n 2 0 0 1 w h e re i n M o rg a n S t a n l e y
was the advisor in the $505 million sale to
E n e r S y s a company owned by Morgan Stanley
Capital Partners (Morgan Stanleys private equity
firm).So how does the confl ict of interest really
arise? Most investment banksh a v e i n house research divisions which act as a su
p p o r t f u n c t i o n a s discussed earlier. The research
divisions perform vital function of trackingcorporates
and making recommendations to their clients in the
secondarymarket operations or to their own dealing
rooms. They also issue reviewsand ratings to new
issuances hitting the market. The confl ict could
arise if the research analyst promotes a share, the public
offering for which is beinghandled by the merchant bank.

Alternatively, it could also be that the analystis privy to

insider information being provided by their
merchant
bankingd i v i s i o n a n d t h e r e u p o n i s s u e r e c o m
m e n d a t i o n s t h a t c o u l d a m o u n t t o fraudulent
deceit of investors or gains for select few. Over the
years,
thee t h i c a l w a l l b e t w e e n m e r c h a n t b a n k e r s a
n d r e s e a r c h a n a l y s t s m e l t e d especially in the
heat of the IPO and the internet boom. The
compensation patterns of the investment bankers and r
esearch analyst were also gettingcomplementary to an
extent thus undermining their independence.
A study was conducted by the SEC in 2001on
f u l l s e r v i c e i n v e s t m e n t banks in Wall Street
focusing on these conflicting
relationships. The studydisclosed two main areas of
conflict(a) research recommendations tendingto
become marketing tools for merchant banking
assignments by the
same bank and analysts getting paid share of such invest
ment banking gains, (b)o w n e r s h i p o f s t o c k s b y r e
search analysts in the companies that they
recommend or research. The study disclosed that
analysts leveraged
their position in pumping up recommendations in compa
nies that they areinterested in when they went public.In
the revised dispensation, one of the main provisions is
that analysts haveto disclose their interests in their
recommendations. In addition, there iss o u g h t t o b e
a water tight compartment in the working of
the

m e rc h a n t banking departments and research divisions.

The third area has been theregulation of compensatory
structures for research analysts based on
the profits of the merchant banking divisions. The develo
pments in the USAhave also resulted in precautionary
amendments to regulations made in
India by SEBI though such instances of conflict of interest
have not surfaced sofar. SEBI has amended the
regulations that have been in place for MerchantBankers,
Underwriters and for the prohibition of insider trading. As
a result,analysts are barred from private trading in shares
they analyze. There is stillroom for more regulation in
future in this area of importance for the survivalof the
investment banking industry.In conclusion, it can be
said that the investment banking industry has
beenthrough difficult times. On one hand, the economic
slow down and the crashof the markets that were
propelled to dizzy heights by the new economy

Stock have battered their bottom lines and led to

large scale cut back in staff and operation on the
other hand, role of investment banks in corporate
scandals and their questionable business practices
and ethics have taken a toll on their reputation and
image. A large scale cleaning up has to take place
in their method of working and services off ering.
Similarly, a major resurrection of their confi dence is
required through resurgence of the market,
wherever that happens. In the meantime, the
industry has to live up to the challenge through
appropriate restructuring and consolidation.

Conclusion
Given the scope for investment banking in India, the
future looks bright for t h e i n d u s t r y a s a w h o l e i n
I n d i a . M a n y m o re p u re i n v e s t m e n t b a n k s
a n d advisory firms could convert themselves into full
service investment banksthat would broaden the
market and make the service delivery much
moreeffi cient. In addition, the technological and
market developments shapingt h e c a p i t a l m a r ke t
a s d i s c u s s e d w o u l d a l s o p ro v i d e a n a d d e d
i m p e t u s t o growth of investment banking. Better
regulatory supervision and stricter enforcement of
the code of conduct of market intermediaries would
ensurethat better quality issuers come to the
market and existing issuers wouldfollow enhanced
standards of corporate governance. In the long run, all
thesedevelopments would ensure fair return to investors,
and bring back investor s u p p o r t t o t h e m a r ke t . T h i s
w o u l d a u g u r w e l l f o r t h e c a p i t a l m a r ke t
i n general and investment banking in particular.