INTRODUCTION OF INVESTMENT BANKING

Investment bankers function as intermediaries in financial transactions. They

are experienced in carrying out projects that, for most companies, take place very
rarely, but are critically important.

What is Investment Banking?

Investment banking is a multi-faceted practice area that involves structuring
financial transactions for private and public companies into developed and emerging
markets. Investment bankers identify capital opportunities, negotiate and structure

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deals, and execute private and public financial transactions. The essential function of
an investment bank is to act as an intermediary between potential investors and those
who seek capital. Investors include individuals, mutual funds, municipalities, public
corporations, and private institutions. Generally, capital is raised through the issuance
of equity (stock), debt (bonds), or through a merger and acquisition (buying and selling
part of a company). Investment bankers perform duties ranging from the preparation of
disclosure documents and marketing materials for public offerings, to analyzing
potential mergers and acquisitions for boards and shareholders. Investment banks offer
many different practice areas that typically fall under broader classifications such as
investment banking, investment management, merchant banking, finance and
operations, information technology, global research, fixed income, risk management,
and equities. Due to high salaries, large potential bonuses and the drama associated
with the financial markets, investment banking has become increasingly popular
among JDs. Generally, those with JD degrees choose positions in corporate finance, M
& A, structured finance, or a more technical discipline.

Investment banking relationship:

Of course, the paper indicated that the investment banking activity affects
the objectivity of research analysts by impacting the quality of their recommendations.
I think that we should list different circumstances when such things occur. The most
usual circumstance is when the research analyst fears to issue a negative
recommendation so as not to lose a potential investment banking contract with a firm.
Another circumstance is when the investment bank department floats a
company and strives to keep the closing price above the initial listing price. Any
negative recommendation stemming from the research department is generally not
welcome by both the issuer and the investment banker.
Another circumstance is when there is a pressure from the commercial
banking activity regarding research recommendations. In some countries, commercial
banks are heavily dominating the investment banking activity. Regulatory bodies are
often unwilling to impose clear “firewall” guidelines between the two activities due to
the heavy lobbying power of the banks. Sometimes, the listed companies and their

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major shareholders are clients of the commercial bank which is reluctant to see any
negative recommendation on the listed companies.

The role of the Investment Bank

Investment banks provide four primary types of services: raising capital,
advising in mergers and acquisitions, executing securities sales and trading, and
performing general advisory services. Most of the major Wall Street firms are active in
each of these categories. Smaller investment banks may specialize in two or three of
these categories.

Raising Capital
An investment bank can assist a firm in raising funds to achieve a variety of
objectives, such as to acquire another company, reduce its debt load, expand existing
operations, or for specific project financing. Capital can include some combination of
debt, common equity, preferred equity, and hybrid securities such as convertible debt
or debt with warrants. Although many people associate raising capital with public stock
offerings, a great deal of capital is actually raised through private placements with
institutions, specialized investment funds, and private individuals. The investment bank
will work with the client to structure the transaction to meet specific objectives while
being attractive to investors.

Mergers and Acquisitions

Investment banks often represent firms in mergers, acquisitions, and
divestitures. Example projects include the acquisition of a specific firm, the sale of a
company or a subsidiary of the company, and assistance in identifying,
structuring, and executing a merger or joint venture. In each case, the investment bank
should provide a thorough analysis of the entity bought or sold, as well as a valuation
range and recommended structure.

Sales and Trading

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 These services are primarily relevant only to publicly traded firms, or firms
which plan to go public in the near future. Specific functions include making a market
in a stock, placing new offerings, and publishing research reports.

General Advisory Services:

Advisory services include assignments such as strategic planning, business
valuations, assisting in financial restructurings, and providing an opinion as to the
fairness of a proposed transaction.

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 in-house 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

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

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 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 of closing transactions.

Ability to Work Quickly

Often, investment banking projects have 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.

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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 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.

Definition
Businesses specializing in the formation of capital. This is done by
outright purchase and sale of securities offered by the issuer, standby
underwriting or "best efforts selling.

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 An individual or institution which acts as an underwriter or agent for
corporations and municipalities issuing securities. Most also maintain
broker/dealer operations, maintain markets for previously issued securities, and
offer advisory services to investors. Investment banks also have a large role in
facilitating mergers and acquisitions, private equity placements and corporate
restructuring. Unlike traditional banks, investment banks do not accept deposits
from and provide loans to individuals. Also called investment banker.

SEBI AND INVESTMENT BANKING

THE sustained Bull Run in the Indian stock markets seems to have
prompted the financial market regulators to cast the net wider to ascertain whether the

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overseas portfolio investment route is being used as a front by some local investors and
promoters.
Sebi and RBI are now in the process of tracking fund flows from foreign
institutional investors (FIIs) into stocks of companies whose net worth has eroded and
also into little-known names.
The Sebi has alerted the RBI about the need to check if investments by FIIs
into stocks of companies whose net worth has been eroded or are garnering losses is
being done on behalf of local investors. Considering the fairly rigorous internal
investment norms of most of the leading FIIs, the regulator’s antenna is up after
evidence of such investment, according to officials.
Already, a probe is underway by the RBI into the equity exposure of Non-
Banking Finance Companies (NBFCs), banks and co-operative banks. The government
and the regulators want to assess whether loans have been diverted for investment in
the stock markets.
A case in point is that of SBI Home Finance. Although the housing finance
regulator — National Housing Bank — had cancelled the licence of SBI Home Finance
since it is no longer a going concern, FIIs had bought into the stock. There are also
other companies that reported a loss and yet have takers among overseas portfolio
investors.
This has prompted regulators to carry out a check on whether the money was
being funneled back into the country by local investors by misusing the FII route. The
concern has been heightened by the fact that many FIIs invest mainly in A group stocks
or in companies with a minimum market capitalizations of say $500m or so. However,
there are now instances of foreign funds taking large stakes in smaller companies,
despite low liquidity in these counters. There is a suspicion is that some FIIs are
fronting for promoters of these companies, who are trying to bring back money into the
country that was stashed away at foreign shores.
According to sources, the Sebi is also looking at companies which have seen
a sharp rise in prices and stocks with high price-earning ratios. The regulator is trying
to ascertain whether the prices have been artificially ramped up.
Also on the Sebi’s scanner, is the movement in penny stocks, which are

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ascending marked by large volumes. According to sources, the Sebi has sought client-
wise trading data on penny stocks from stock exchanges.
The market regulator had also held meetings with both the BSE and the
NSE and discussed surveillance issues. Though any widespread manipulation is ruled
out, officials fear that there could be price manipulations in some individual stocks.

GROWTH OF INVESTMENT BANKING

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 Global emerging economies are experiencing record savings at a time when
the developed world has been witnessing a decline in gross domestic saving rates.
What’s more, these savings are finding their way into capital investments, having a
positive impact on the investment climate in countries like India and China.
The majority of emerging economies have higher gross domestic saving and
gross capital formation rates compared with their developed counterparts. Higher
savings and investment rates eventually help in boosting GDP. This is perhaps another
reason why GDP is growing faster in the emerging world than in the developed world.
Data points to the fact that higher savings rates play a key role in boosting
the investment climate in a country. Y-oy increments in aggregate savings help in
providing capital to a country. This higher capital directly boosts investment activity.
The banking sector is playing a key role in channeling household savings to
investment-projects.
A clear example of it is the recent growth in non-food credit in the country,
which recorded 34% y-o-y increase in the current year so far.
Countries like the US, UK, and the EU have seen a major shift in their
structure of national savings. For instance, almost two-thirds of the fall in savings rate
in the developed world has been due to a fall in household and public savings. On the
other hand, much of emerging Asia’s saving rates have been driven by increases in
both household and public saving rates.
India’s household savings have grown considerably while China’s growth in
public savings has been significant. An IMF report found that a 1% increase in savings
leads to a 0.85% increase in gross domestic saving as a per cent of GDP. The
population demographics in India and most emerging economies is another reason for
the recent trend in higher savings.
The majority of India’s population is young and has a greater incentive to
save compared to retired people who have a much lower incentive to save. This kind of
behaviour is consistent with the Modigliani life cycle hypothesis. The hypothesis states
that there will be little saving in early adult life, high saving at the middle and end of
working life, and then negative saving after retirement.
It is important to note that a large chunk of the population in developed

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countries is close to the retirement age, and has a lesser incentive to save. An IMF
research paper found that a 1% increase in the elderly-dependency ratio in industrial
countries would over time reduce savings by about 1.5% of GDP. This is proof of the
role of demographics in the aggregate saving behaviour in a country.

INVESTMENT BANKING ORGANISATION IN INDIA

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 HSBC's origins in India date back to 1853, when the Mercantile Bank of
India was established in Mumbai. The Bank has since, steadily grown in reach and
service offerings, keeping pace with the evolving banking and financial needs of its
customers.
In India, the Bank offers a comprehensive suite of world-class products and
services to its corporate and commercial banking clients as also to a fast growing
personal banking customer base.

HSBC Group entities in India

• The Hong Kong and Shanghai Banking Corporation Limited (HSBC)
• HSBC Asset Management (India) Private Limited
• HSBC Electronic Data Processing (India) Private Limited
• HSBC Insurance Brokers (India) Private Limited
• HSBC Operations and Processing Enterprise (India) Private Limited
• HSBC Primary Dealership (India) Private Limited
• HSBC Private Equity Management (Mauritius) Limited
• HSBC Professional Services (India) Private Limited
• HSBC Securities and Capital Markets (India) Private Limited
• HSBC Software Development (India) Private Limited

Commercial Banking
The Hong Kong and Shanghai Banking Corporation Limited (HSBC)
Personal banking HSBC offers a wide range of personal financial services, including
personal lending and deposit products, through its branch network in Ahmedabad,
Bangalore, Chennai, Chandigarh, Coimbatore, Gurgaon, Hyderabad, Jaipur, Kochi,
Kolkata, Ludhiana, Mumbai, New Delhi, Noida, Pune, Thane, Trivandrum and
Visakhapatnam. Also offered branch-wide are international Gold and Classic credit
cards from VISA and MasterCard and debit cards from Visa. Customers have access to
24-hour banking services through an extensive network of automated teller machines
(ATMs), an integrated Call Centre, and internet banking - online@hsbc .

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Non Resident Indian banking
HSBC's Non Resident Indian Banking (NRI) centres located in Asia-Pacific,
the Middle East, Europe and North America, together with HSBC's offices worldwide,
provide the international Indian Diaspora access to a range of products and services.
These include NRI related investment (both international and domestic), transactional
and deposit products, together with a full range of personal and private banking
products in India and overseas. Internet banking also provides easy access to HSBC's
services.

Financial planning services

Services include investment and custodian management and access to stock
broking and insurance services, which are offered to resident as well as non-resident
Indians.

Corporate banking
HSBC has well-established, long-term corporate banking relationships with
large domestic Indian corporations and foreign multinationals operating in India.
Services include term and working capital finance, trade facilities, corporate deposits,
syndications, payments and cash management services and factoring.

Business banking
HSBC's Extra Mile Business Banking offers two types of account to small and
medium-sized businesses - The Business Account and the BusinessVantage Account.
Services include Business Phone Banking, Business Doorstep Banking and Multi
Branch Business Banking.

Payments and cash management

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 HSBC provides integrated domestic and regional transaction support to
corporate clients through a sophisticated range of cash management solutions,
including collection and payment services and integration with customer back-end
systems. Operations and client services are ISO 9001 certified. Hexagon, the HSBC
Group's dedicated electronic banking service allows users to perform financial
transactions, obtain international financial markets information, and review details of
their domestic and international accounts, from anywhere in the world, 24 hours a day.

Trade (international and domestic) and factoring services

A wide range of solutions tailored to meet customer's requirements for both
domestic and international businesses is offered. HSBC is also one of the leading banks
involved in the bullion business through its offices in Ahmedabad, Bangalore, Chennai,
Hyderabad, Kolkata, New Delhi and is supported by the Group's global expertise in the
precious metal business. HSBC is the leading provider of trade services in India and its
trade centres are ISO 9002 certified.

Institutional banking
Working closely with Group offices in India and overseas, trade services,
payments and cash management, treasury and capital markets, custody and clearing,
and correspondent and electronic banking activities are offered to banks, financial
institutions, securities houses, insurance companies, asset management companies and
other non-banking companies, non-government and development organisations
operating in India.

Treasury and capital markets

Clients consistently rate HSBC's Treasury business as one of the best in India.
Its dealing room in Mumbai is one of the largest in the country, serving clients in
Mumbai and in the major metropolitan centres across the country. It provides a
comprehensive range of products which include - foreign exchange, money market and
fixed income products and derivatives in both rupees and major currencies.
Custody and clearing

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 The leading custodian in Asia, HSBC's custody and clearing services are
available in 28 markets in Asia-Pacific and the Middle East. With experienced staff and
the latest technology, HSBC is the premier provider of sub-custodian and clearing
services to foreign institutional investors (FIIs) in India. HSBC clients include the
domestic fund management sector in both the retail and institutional segments.
Institutional Fund Services launched by the bank offers a comprehensive suite of
products to domestic mutual funds and insurance companies ranging from custody,
fund administration services, unit distribution and cash management services.

Technology
The HSBC Group develops and applies advanced technology to the efficient
and convenient delivery of banking and related financial services. In India, the Group
provides:
Self-service banking with over 150 in-branch and off-branch ATMs and 24-hour

• Phone banking.
• Trade and corporate banking services with real-time access to a centralized
Information database
• Instantaneous inter-city transactions through online connections between all
branches
• A state-of-the-art treasury dealing system
• A sophisticated card system supporting debit and credit cards, domestic and
International VISA, MasterCard, and co-branded cards
• A dedicated acquiring system for both MasterCard and Visa transactions
• online@hsbc, HSBC's internet banking service, provides customers with an
Integrated and secure platform to access their accounts.
• Internet Payment Gateway handles credit card transactions on the internet

Asset management

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 HSBC Asset Management (India) Private Limited offers mutual funds to its
customers. With the Group's global fund management expertise and investment
capabilities, it is able to deliver quality products to meet customers' investment
objectives.

Global Resourcing
HSBC Electronic Data Processing (India) Private Limited, through its offices
in Hyderabad, Bangalore and Visakhapatnam provides data processing / customer
service facilities for the HSBC Group's overseas operations.

Insurance
HSBC Insurance Brokers (India) Private Limited is licensed by the Insurance
Regulatory Development Authority (IRDA) to operate as a composite insurance
broking company, which will function as a direct and a reinsurance broker.

Data processing
HSBC Operations and Processing Enterprise (India) Private Limited, through
two centres in Mumbai and Chennai, provides operational processing services for
HSBC offices in India.

Primary dealership
HSBC Primary Dealership (India) Private Limited has been authorised by the
Reserve Bank of India to act as a primary dealer in the government securities market.

Private equity
HSBC Private Equity Management (Mauritius) Limited, a subsidiary of
HSBC Private Equity (Asia) Limited in Hong Kong, has a Liaison Office in Mumbai.
The company specialises in the provision of equity capital to unlisted growth
companies in India and Sri Lanka.

Audit Service

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HSBC Professional Services (India) Private Limited provides internal audit services to
the HSBC Group's internal audit units worldwide, with particular emphasis on the IT,
Treasury, Asset Management, Private Banking and Insurance functions.

Investment banking
HSBC Securities and Capital Markets (India) Private Limited has two main
business lines. Its Institutional and proprietary broking business is based in Mumbai
and, has seats on two of India's premier stock exchanges, the Bombay Stock Exchange
and the National Stock Exchange. It deals in Indian securities for both Indian and
international institutions and for select retail clients and is backed by an extensive
research team. The Corporate Finance and Advisory business, with offices in Mumbai
and New Delhi, offers a full range of integrated investment banking services in India
and internationally.

Software development
HSBC Software Development (India) Private Limited has established a
software centre in Pune to develop solutions for HSBC's Group offices worldwide.

ROLE OF INVESTMENT BANKING

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 Indian Banking Sector

Banking in India has its origin as early as the Vedic period. It is believed that
the transitions from money lending to banking must have occurred even before Manu,
the great Hindu Jurist, who has devoted a section of his work to deposits and advances
and laid down rules relating to rates of interest. During the Mogul period, the
indigenous bankers played a very important role in lending money and financing
foreign trade and commerce. During the days of the East India Company, it was the
turn of the agency houses to carry on the banking business. The General Bank of India
was the first Joint Stock Bank to be established in the year 1786. The others which
followed were the Bank of Hindustan and the Bengal Bank. The Bank of Hindustan is
reported to have continued till 1906 while the other two failed in the meantime. In the
first half of the 19th century the East India Company established three banks; the Bank
of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843.
These three banks also known as Presidency Banks were independent units and
functioned well. These three banks were amalgamated in 1920 and a new bank, the
Imperial Bank of India was established on 27th January 1921. With the passing of the
State Bank of India Act in 1955 the undertaking of the Imperial Bank of India was
taken over by the newly constituted State Bank of India. The Reserve Bank which is
the Central Bank was created in 1935 by passing Reserve Bank of India Act 1934. In
the wake of the Swadeshi Movement, a number of banks with Indian management were
established in the country namely, Punjab National Bank Ltd, Bank of India Ltd,
Canara Bank Ltd, Indian Bank Ltd, the Bank of Baroda Ltd, the Central Bank of India
Ltd. On July 19, 1969, 14 major banks of the country were nationalized and in 15 th
April 1980 six more commercial private sector banks were also taken over by the
government. Today the commercial banking system in India may be distinguished into:

Public Sector Banks

a. State Bank of India and its associate banks called the State Bank group
b. 20 nationalized banks

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c. Regional Rural Banks mainly sponsored by Public Sector Banks

Private Sector Banks

a. Old generation private banks
b. New generation private banks
c. Foreign banks in India
d. Scheduled Co-operative Banks
e. Non-scheduled Banks

CO-OPERATIVE SECTOR
The co-operative banking sector has been developed in the country to the
supplement the village money lender. The co-operative banking sector in India is
divided into 4 components
1. State Co-operative Banks
2. Central Co-operative Banks
3. Primary Agriculture Credit Societies
4. Land Development Banks
5. Urban Co-operative Banks
6. Primary Agricultural Development Banks
7. Primary Land Development Banks
8. State Land Development Banks

DEVELOPMENT BANKS
1. Industrial Finance Corporation of India (IFCI)
2. Industrial Development Bank of India (IDBI)
3. Industrial Credit and Investment Corporation of India (ICICI)
4. Industrial Investment Bank of India (IIBI)

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5. Small Industries Development Bank of India (SIDBI)
6. SCICI Ltd.
7. National Bank for Agriculture and Rural Development (NABARD)
8. Export Import Bank of India
9. National Housing Bank

TREASURY
Profile India's largest bank is also home to the country's biggest and most
powerful Treasury, contributing to a major chunk of the total turnover in the money
and forex markets. Through a network of state-of-the-art dealing rooms in India and
abroad, backed by the assured expertise of informed professionals, the SBI extends
round-the-clock support to clients in managing their forex and interest rate exposures.
SBI's relationships with over 700 correspondent banks are also leveraged in extracting
maximum value from treasury operations. SBI's treasury operations are channeled
through the Rupee Treasury, the Forex Treasury and the Treasury Management Group.
The Rupee Treasury deals in the domestic money and debt markets while the Forex
Treasury deals mainly in the local foreign exchange market. The TMG monitors the
investment, risk and asset-liability management aspects of the Bank's overseas offices.

Rupee Treasury
The Rupee Treasury carries out the bank’s rupee-based treasury functions in
the domestic market. Broadly, these include asset liability management, investments
and trading. The Rupee Treasury also manages the bank’s position regarding statutory
requirements like the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR),
as per the norms of the Reserve Bank of India.

Products and Services

 Asset Liability Management (ALM): The ALM function comprises

management

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 of liquidity, maturity profiles of assets and liabilities and interest rate risks.

 Investments: SBI offers financial support through a wide spectrum of

investment products that can substitute the traditional credit avenues of a
corporate like commercial papers, preference shares, non-convertible debentures,
securitized paper, fixed and floating rate products. SBI invests in primary and
secondary market equity as per its own discretion.

 These products allow you to leverage the flexibility of financial markets,

enable efficient interest risk management and optimize the cost of funds. They can
also be customized in terms of tenors and liquidity options.

 SBI invests in these instruments issued by your company, thus providing

you a dynamic substitute for traditional credit options. The Rupee Treasury
handles the bank’s domestic investments.

Trading
The bank’s trading operations are unmatched in size and value in the domestic
market and cover government securities, corporate bonds, call money and other
instruments. SBI is the biggest lender in call.

Forex Treasury (FX)

The SBI is the country’s biggest and most important Forex Treasury, both in
the Interbank and Corporate Foreign Exchange markets, and deals with all the major
corporates and institutions in all the financial centers in India and abroad.

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 The bank’s team of seasoned, skilled and professional dealers can tailor
customized solutions that meet your specific requirements and extract maximum value
out of each market situation.
The bank’s dealing rooms provide 24-hour trading facilities and employs
state-of-the-art technology and information systems. SBI’s relationships with over 700
correspondent banks and institutions across the globe enhance the strength of the Forex
treasury.
The FX Treasury can also structure and facilitate execution of derivatives
including long term rupee-foreign currency swaps, rupee-foreign currency interest rate
swaps and cross currency swaps.

OVERSEAS TREASURY OPERATION

Treasury Management Group

The Treasury Management Group (TMG) is a part of the International Banking Group
(IBG) and functions under the Chief General Manager (Foreign Offices). As the name
implies the department monitors the management of treasury functions at SBI’s foreign
offices including asset liability management, investments and forex operations.

Products and Services

 Asset Liability Management (ALM): The ALM function comprises management of
liquidity, maturity profiles of assets and liabilities and interest rate risks at the foreign
offices.

 Investments: Monitoring of investment operations of the foreign offices of the bank

is one of the principal activities of TMG. The main objectives of investment operations
at our foreign offices, apart from compliance with the regulatory requirements of the
host country, are (a) safety of the funds invested, (b) optimization of profits from
investment operations and (c) maintenance of liquidity. Investment operations are
conducted in accordance with the investment policy for foreign offices formulated by
TMG.

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The activates include appraisal of the performance of the foreign offices broad
parameters such as income earned from investment operations, composition and size of
the portfolio, performance vis-à-vis the budgeted targets and the market value of the
portfolio.
 Forex monitoring: Monitoring of forex operations of our foreign offices is done with
the objective of optimising of returns while managing the attendant risks.

 Forex and Interest rate (Foreign Currency) derivatives: TMG also plays an
important role in structuring, marketing, facilitating execution of foreign currency
derivatives including currency options, long term rupee - foreign currency swaps,
foreign currency interest rate swaps, cross currency swaps and forward rate
agreements. Commodity hedging is one of the recent activities taken up by TMG.

 Reciprocal Lines: The department is also responsible for maintenance of reciprocal

lines with international banks.

Portfolio Management & Custodial Services

The Portfolio Management Services Section (PMS) of State bank of India has
been set up to handle investment and regulatory related concerns of Institutional
investors functioning in the area of Social Security.
The PMS forms part of the Treasury Dept. of State Bank of India, and is based
at Mumbai. PMS was set up exclusively for management of investments of Social
Security funds and custody of the securities related thereto. In the increasingly complex
regulatory and investment environment of today, even the most sophisticated investors
are finding it difficult to address day to day investment concerns, such as
 adherence to stated investment objectives
 security selection quality considerations
 conformity to policy constraints

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 investment returns
The team manning the PMS Section consists of highly experienced officers of
State Bank of India, who have the required depth of knowledge to handle large
investment portfolios and address the concern of large investors. The capabilities of the
team range from Investment Management and Custody to Information Reporting.

INVESTMENT BANKERS CODE OF CONDUCT

CODE OF BUSINESS CONDUCT AND ETHICS

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Introduction
Escalade, Incorporated, and all of its subsidiaries and affiliates, have many
important assets, but one of the most valuable is our established and unquestioned
reputation for integrity. We are judged by our conduct and we must act in a manner
that merits public trust and confidence. Escalade has adopted this Code of Business
Conduct and Ethics to help ensure that it retains its integrity and merits public trust and
confidence.
All officers, directors and employees of Escalade, its subsidiaries and its
affiliates are responsible to become familiar with, follow and promote compliance with
this Code. You shall comply with the spirit of these guidelines and not attempt to
achieve indirectly, through the use of agents or other intermediaries, what is directly
forbidden. This Code is periodically reviewed by Escalade’s Board of Directors.
The Code is a general outline of the standard by which all directors, officers
and employees of Escalade (including Escalade’s Chief Executive Officer, Chief
Financial Officer, Controller and its other executive officers) should conduct
themselves. The Code is not intended to cover every applicable law or provide answers
to all questions that might arise but, is an integral part of the policies and procedures
governing all of us at Escalade. You should read this Code carefully, and if you have
any questions they should be directed to your supervisor. The Code is not intended to
and does not in any way constitute an employment contract or assurance of continued
employment, and does not create any rights in any director, officer, employee, client,
supplier, competitor, shareholder or any other person or entity.
In most situations, our personal values and integrity will guide us to the right
decision. However, we must always keep in mind how our actions affect the
credibility of our organization as a whole, and for this reason, our business ethics must
reflect the values and standards of conduct outlined in this Code. We encourage each
employee to ask questions, seek guidance and express any concerns you may have.
This Code replaces any editions previously provided to you and your adherence to this
Code is required to the same extent as you previously had agreed.

25
Quality of our Products
Escalade’s policy is to produce products of the finest quality for our
customers. The quality standards established by Escalade’s management are intended
to match or exceed recognized good manufacturing practices and to comply with
applicable laws and regulations. Each employee of Escalade is responsible for
maintaining the highest integrity and quality of Escalade’s products and for reporting
to your supervisor any actions that may jeopardize these standards.

Conflicts of Interest
You have a duty of loyalty to the Company and must therefore avoid any
actual or apparent conflict of interest with the Company, its customers, its vendors or
other employees and directors. A conflict situation can arise if you take action or have
an interest that may make it difficult to perform your work objectively and effectively.
Conflicts of interest may also arise if you or a family member receives improper
personal benefits as a result of your position with Escalade.

Corporate Opportunities.
You may not (a) take for yourself personally opportunities that are
discovered through the use of Escalade’s property, information or your position; (b)
use Escalade’s property, information or position for personal gain; or (c) compete with
Escalade. You owe a duty to Escalade to advance the company’s legitimate interests
when the opportunity to do so arises. Without the prior approval of the President of
Escalade, you are not permitted to participate with customers, competitors, or suppliers
in business ventures, or, serve as a director, agent, broker or representative for them.
Additionally, full time officers or executives may not serve as a director or agent for
any “for profit” organization without the prior approval of the President of Escalade.
Gifts or Requests.
Federal law makes it a criminal offense for you (1) to solicit for yourself or for a third
party (other than Escalade) anything of value from anyone in return for any business,
service or confidential information about Escalade or (2) to accept anything of value

26
(other than authorized compensation) from anyone in connection with the business of
Escalade, either before or after a transaction is discussed or consummated. Any gift or
gratuity from present or former customers, suppliers or shareholders should be declined
to avoid any appearance of impropriety or undue influence, with the following
exceptions:

 ordinary business meals;

 modest holiday gifts;
 gifts based upon a family relationship or close personal relationship pre-
dating your involvement with Escalade;
 acceptance of loans from banks or financial institutions on terms generally
available to the public at large; or
 acceptance of discounts or rebates on merchandise or services on terms
generally available to the public at large or on terms generally available to

These permissible gifts or gratuities should only be accepted when it is clear

the donor is not trying to exert any influence over you in connection with a transaction
involving Escalade, and the gift or gratuity is unsolicited. Generally, a gift or gratuity
(or an aggregate of several gifts or gratuities) having a value greater than $100 should
be rejected. Any offer or receipt of a gift, discount or rebate (or an aggregate of
several of the same) of more than $100 should be promptly reported in writing to the
Chief Executive Officer or Chief Financial Officer.

Investments.
You should avoid any substantial investment in the business of a customer,
supplier or competitor unless the security is publicly traded on a national exchange
and there is no possibility for a conflict of interest. You should also avoid any
investment in an initial public offering of any company if one of the underwriters or
other investment banks involved in the offering is providing, has provided, or may
likely provide in the future, products or services to or for Escalade. You should make

27
 personal investments with prudence and avoid situations which might influence one’s
business judgment or advice. In no event should you use confidential or propriety
information or work product developed or acquired during the course of your
employment as a means of making any personal gain.

Employment.
For our full-time employees, outside employment is discouraged and Escalade
reserves the right to prohibit full or part-time employees from engaging in outside
employment where it might subject Escalade to criticism or might interfere with your
employment at Escalade. Exempt salaried employees must notify the President of any
outside employment in which they are presently engaged or desire to accept while
employed by Escalade on a full or part-time basis. After notification, the President will
advise you if there is a potential problem.

Recommendation of Professionals or Products.

When a recommendation is requested from you by customers or business
partners of Escalade for their own use or by other employees, officers or directors of
Escalade for use by Escalade regarding professional services such as accountants,
attorneys, investment bankers, realtors or insurance agents or regarding products to be
leased or purchased, you should avoid recommending someone if you or a family
member receives improper personal benefits as a result of your recommendation. You
should disclose any such relationships to the party requesting the recommendation and
report any possible personal benefits that you or a family member may receive as a
result of your recommendation to the President.

Civic and Charitable Activities.

Before you become a director or trustee of an outside not-for-profit
organization, you must notify the President. Volunteer work and participation in
worthwhile and responsible civic and not-for-profit organizations is encouraged,

28
provided it does not unduly interfere with your employment, pose a conflict of interest
with your duties and responsibilities to Escalade or its customers or impair your ability
to perform at Escalade.

Politics.
You may not use company funds, goods or services as contributions to
political parties, candidates or campaigns, unless specifically authorized in advance in
writing by the President. Escalade understands that you may participate in political
activities through contributions of your own time or money in your individual
capacity. Prior approval, however, must be obtained from the President before you
accept appointment or nomination to any public office or before you become a
candidate for the same.

Business Conduct
You should endeavor to deal honestly, ethically, fairly and in good faith with
Escalade’s customers, shareholders, employees, suppliers, regulators, business
partners, competitors and others. You may not take unfair advantage of anyone
through manipulation, concealment, abuse of privileged or confidential information,
misrepresentation, fraudulent behavior or any other unfair dealing practice.

Compliance with Laws, Rules, Regulations.

You must conduct yourself at Escalade and all of its functions or when acting
on its behalf in a manner which is in full compliance with all applicable domestic and
foreign laws, rules and regulations, as well as with all of Escalade’s other policies and
procedures. Activity or behavior which would be criminally or civilly actionable is
deemed not to be in compliance. Escalade’s senior executives should be consulted
when appropriate. In no case shall an employee, officer or director use illegal (e.g.
theft, bribery, fraud or misrepresentation) or unethical means or methods when acting
on behalf of Escalade.

Company Reporting.

29
 It is of critical importance that Escalade’s filings with the Securities and
Exchange Commission and other regulatory agencies and authorities as well as its other
public communications be full, fair, accurate, timely and understandable. Depending
on your position with Escalade, you may be called upon to provide necessary
information to assure that Escalade’s filings and public reports meet these standards.
Escalade expects employees, officers and directors to take this responsibility very
seriously and to provide prompt, accurate answers to inquiries related to Escalade’s
filing and public disclosure requirements.

Books and Records.

Escalade’s books, records and accounts shall accurately and fairly reflect the
transactions of Escalade in reasonable detail and in accordance with Escalade’s
accounting practices and policies.
For example:
 No false or deliberately inaccurate entries (such as over billing) shall be
made for any reason. Discounts, rebates, credits and allowances do not constitute over
billing when lawfully granted; the reasons for the grant should be documented in
writing in Escalade’s records, including the party requesting the treatment.
Consignment sales are pre-approved by the President and are not recognized as revenue
until title is transferred and the right of return expires.

 No payment shall be made with the intention or understanding that all or any
part of it is to be used for any purpose other than that described by the documents
supporting the payment.

 No undisclosed or unrecorded funds or assets shall be established for any

purpose unless permitted by applicable laws, rules and regulations and applicable
accounting guidelines.

30
 No false or misleading statements, written or oral, shall be made to any
internal or external accountant, auditor, attorney or other representative with respect to
preparation of Escalade’s financial statements or documents to be filed with the
Securities and Exchange Commission or other governmental authorities or regulatory
bodies.
 The Escalade, Inc. “Accounting Principles and Policies” are to be followed.

Questionable or Improper Payments.

The use of any funds or assets of Escalade for any unlawful or improper gifts,
payments to customers, government employees or other third parties is strictly
prohibited.
The Foreign Corrupt Practices Act (“FCPA”) broadly prohibits U.S. firms and
persons from offering money or “anything of value” to any foreign government official
for the purpose of influencing such official. The consequences of violating the FCPA
are extremely severe, including possible civil and criminal penalties for both Escalade
and individuals. In the United States, nothing of value, such as gifts or entertainment,
may be provided to government personnel unless clearly permitted by law and any
applicable regulation.
Therefore, no payment from Escalade’s funds or assets shall be made to or for
the benefit of a representative of any domestic or foreign government (or subdivision
thereof), labor union, or any current or prospective customer or supplier for the purpose
of improperly obtaining a desired government action, or any sale, purchase, contract or
other commercial benefit. This prohibition applies to direct or indirect payments made
through third parties and employees as well as is intended to prevent bribes, kickbacks
or any other form of payoff.
Under the FCPA, so-called “facilitating payments” made in foreign countries
to low-level government employees may be permissible in certain circumstances. All
such payments must be pre-authorized by Escalade‘s Chief Executive Officer or Chief
Financial Officer.
Commercial business entertainment which is reasonable in nature, frequency
and cost is permitted. Reasonable business entertainment would cover for example, a

31
lunch, dinner, or occasional athletic or cultural event, or gifts of nominal value
(approximately $100 or less). At all times we must remain within the limits of the
FCPA.

Loans.
Loans may not be made to employees or directors without the approval of the
Board of Directors. The only exception is that travel advances up to $1,500.00 may be
approved by the President of Escalade, Inc., or its subsidiaries.

Competition.
Any business activities which involve any of our competitors should be
conducted cautiously. Agreements between competitors relating to prices or allocations
of territories or customers is unlawful. Competitive marketing and bidding activities
should be fair and ethical.

Protection and Proper Use of Company Assets.

Company assets, such as information, materials, supplies, time, intellectual
property, software, hardware, and facilities, among other property, are valuable
resources owned, licensed, or otherwise belonging to Escalade. You are expected to
treat the property of Escalade with care and should not remove it from company
premises without a supervisor’s approval. Escalade’s property should only be used for
legitimate business purposes. Any work product of an employee is the property of
Escalade if it is the result of work performed while at work or with company property.

Confidential and Proprietary Information

You have an obligation to maintain the confidentiality of information entrusted
to you by Escalade, its business partners, suppliers, customers or others related to
Escalade’s business. Confidential or proprietary information may not be disclosed to
others except when disclosure is authorized by Escalade or legally required.

32
What Constitutes Confidential Information?
All oral and written communications and information relating to Escalade, or
its customers, suppliers, shareholders and other employees of Escalade, which you
acquire during the scope of your employment and which is not otherwise available to
the general public constitutes confidential information. This includes not only
information you acquire from third parties but also any work product you generate as
an officer, director or employee of Escalade including, for example, customer and
prospect lists, and computer programs. You should assume that any such work product
or materials are confidential information subject to the policies and restrictions on use
and disclosure outlined in this Code.

What Constitutes Proprietary Information?

Certain types of information may not be confidential but may still be
proprietary property of Escalade. You acknowledge that while employed by Escalade
all work products that you produce are and shall remain the sole and exclusive property
of Escalade. Even though information such as customer and prospect names,
presentation materials, marketing materials, product information, business methods of
processes may otherwise be available to the general public, it remains the property of
Escalade and individual employees shall have no personal rights to such information or
products either during or after employment with Escalade.

Customer/Supplier Information.
You also have an obligation to keep confidential any information acquired
with respect to present, past or prospective customers, suppliers, shareholders and other
employees of Escalade. Any such information shall be used solely for banking or
corporate purposes and shall under no circumstances be revealed to unauthorized
persons, whether within or outside of Escalade. Aside from routine credit and personal
inquiries, information concerning a customer, employee, shareholder or a business
transaction may be revealed only with the consent of the individual or entity involved,
or pursuant to proper subpoena, court order or other legal process.

33
Data Security.
You acknowledge that Escalade’s data processing systems and data are private
and confidential, and you may only access or update the systems and data according to
the authority given you. Any unauthorized access, update or use of Escalade systems or
data is strictly prohibited. Furthermore, you acknowledge your responsibility to protect
the integrity of all systems and data for which you are authorized to access or update,
and you will only divulge information related to such systems or data to those having
an authorized business requirement. You will not compromise access to such systems
or data by communicating your identification and/or password to anyone.
You will report all violations or suspected violations of this policy immediately to your
supervisor who then shall report same to Escalade’s Chief Financial Officer.

Prohibitions on Insider Trading

Escalade has a written policy prohibiting directors, officers and employees
from engaging in insider trading and makes those persons responsible for ensuring
compliance by his or her immediate family members of those same restrictions on
trading. The company’s insider trading policy is intended to comply with the securities
laws of the United States which prohibit those covered persons from buying or selling
securities of Escalade while in possession of material confidential information relating
to Escalade or from otherwise improperly using material confidential information in
connection with trading in securities. Material confidential information is any non-
public information that would be significant in making an investment decision.
Escalade’s policy prohibits covered persons from engaging in any action to take
advantage of, or pass on to others, material confidential information. Escalade’s
prohibition applies to material confidential information obtained in the course of your
employment and also relates to customers, vendors and third parties with whom
Escalade conducts business and/or may be considering a transaction. Covered persons
may not buy or sell Escalade securities while in possession of material confidential
information about Escalade. Covered persons are also responsible for the actions of
any person who has received the material confidential information as a “tip”, whether
intentionally or inadvertently.

34
 Escalade requires that directors, officers and employees pre-clear all trades in
Escalade securities with our Chief Financial Officer. We also have adopted certain
time periods in which no trades in Escalade securities will be permitted. In addition to
Escalade’s insider trading policy, the securities laws of the United States also prohibit
the company’s directors and executive officers from engaging in any of the following
activities with respect to Escalade securities:
 “short-swing” trading (i.e. purchase and sale within any six month period);
 short sales (defined as selling non-owned shares at today’s prices in anticipation that
the stock can be purchased at a lower value in the near future); and
 Buying or selling puts or calls.

35
 PROFILE OF IDBI

THE GROWTH PATH

The genesis of "Industrial Development Bank of India Limited" (IDBI Ltd)
can be traced to the establishment of The Industrial Development Bank of India (IDBI),
its predecessor entity, in 1964, by an Act of Parliament to provide credit and other
facilities for the development of Indian industry.
The erstwhile IDBI has played a pioneering role in fulfilling its mission of
promoting industrial growth through financing of medium and long-term projects, in
consonance with national plans and priorities. IDBI has been instrumental not only in
establishing a well-developed, diversified and efficient industrial and institutional
structure but also has added a qualitative dimension to the process of industrial
development in the country.
Over the years, IDBI has enlarged its basket of products and services to
industrial concerns, covering almost the entire spectrum of industrial activities,
including manufacturing and services. IDBI and its successor entity IDBI Ltd provides
financial assistance, both in rupee and foreign currencies, for greenfield projects as also
for expansion, modernisation and diversification purposes.

Promoter of Large Institutions

IDBI Ltd, the tenth largest development bank in the world is a board–
managed institution and has promoted world class institutions in India. A few of such
institutions built by IDBI are The National Stock Exchange (NSE), The National
Securities Depository Services Ltd. (NSDL), Stock Holding Corporation of India

36
(SHCIL), etc. IDBI is a strategic investor in a plethora of institutions, which have
revolutionized the Indian financial markets.

Banking Business
IDBI Ltd entered commercial banking with the incorporation of IDBI Bank
Ltd as a its subsidiary. On April 2, 2005, IDBI Bank Ltd was merged into IDBI Ltd as
per the scheme of amalgamation sanctioned by RBI. The merger seeks to consolidate
business across the value chain and provide economies of scale to the merged entity,
enabling it to offer an array of customer friendly services to its existing and prospective
clients, both within the geographical boundaries of India and, in due course, abroad.

Future Promise
Going forward, IDBI Ltd seeks to emerge as a top-drawer commercial bank,
providing innovative financial and banking solutions for corporates and
individuals. Capitalising on its intimate knowledge of Indian industry and client
requirements and a large retail base, significant benefits are expected to accrue from
the merger.
Now, as a single entity, IDBI Ltd looks confidently into the future to face and
thrive in the intense competitive environment that is emerging. The bank has now
gained experience and has in place the strategies required for gaining a leadership
position. With cutting edge relevant technology, aggressive marketing, innovation,
tight control over costs and with its motivated workforce, the bank is all set to emerge
as a model global corporate citizen in the days ahead

37
 ACTIVITIES OF INVESTMENT BANKING IN IDBI

ICICI Bank is India's largest private sector bank and the second largest bank
in the country, with total assets of over Rs. 1 trillion. ICICI Bank's equity shares are
listed at various stock exchanges in India and its American Depositary Receipts
(ADRs) are listed on the New York Stock Exchange (NYSE). ICICI Bank’s long-term
foreign currency debt is rated one notch higher than the sovereign rating for India by
Moody’s, the international rating agency.
ICICI Bank was originally promoted in 1994 as the banking arm of ICICI
Limited (ICICI), an Indian development financial institution set up in 1955. In the
1990s, ICICI transformed into a diversified financial services group offering a wide
variety of products and services, directly and through a network of subsidiaries and
affiliates. In 1999, ICICI become the first Indian company and the first bank or
financial institution from non-Japan Asia to be listed on the NYSE.
In April 2002, ICICI Group announced a synergistic merger of itself and two
of its retail finance subsidiaries with ICICI Bank to create the new ICICI Bank - India's
first universal bank and a leading financial supermarket.
ICICI Bank is currently active in the areas of corporate finance, commercial
banking, retail and personal banking, corporate finance and investor services with the
specialized activities of insurance, asset management, investment banking and venture
capital being performed by associate companies. The ICICI Group is committed to the
communities in which it operates and supports a diverse range of social projects in the
areas of primary education, healthcare and micro-finance.

38
 A recent entrant in the area of retail assets including mortgages, credit and
debit cards, car loans and consumer loans, ICICI Bank has quickly acquired market
leadership in most of these markets. ICICI Bank is also India’s foremost technology
bank. It pioneered Internet banking in India and today has more than a million retail
customer accounts on the net. ICICI Bank has been following a multi-channel multi-
product retail strategy, which enables it to access and service an ever-growing number
of customers. With a network of about 450 bank branches, 170 ATMs and robust
Internet Banking and Phone Banking channels, ICICI Bank is well positioned to
service its discerning customer base and provide them complete financial fulfillment.

National Stock Exchange

National Stock Exchange (NSE) was promoted by leading Financial

Institutions at the behest of the Government of India and was incorporated in
November 1992 , with the objective of establishing a nation-wide trading facility for
equities, debt instruments and hybrids, by ensuring equal access to investors all over
the country through an appropriate communication network. It also provides a fair,
efficient and transparent securities market to investors using electronic trading systems.
NSE enables shorter settlement cycles and book entry settlements systems, and meeting
the current international standards of securities markets.
The National Stock Exchange is India's leading stock exchange covering 350
cities and towns across the country. NSE provides a modern, fully automated screen-
based trading system with national reach. The Exchange has brought about
unparalleled transparency, speed & efficiency, safety and market integrity. It has set up
facilities that serve as a model for the securities industry in terms of systems, practices
and procedures. NSE has played a catalytic role in reforming the Indian securities
market in terms of microstructure, market practices and trading volumes.

39
 NSE is one of the first de-mutualised stock exchanges in the country, where
the ownership and management of the Exchange is completely divorced from the right
to trade on it. NSE is one of the largest interactive VSAT based stock exchanges in the
world. Today it supports more than 3000 VSATs and is expected to grow to more than
4000 VSATs in the next year. The NSE- network is the largest private wide area
network in the country and the first extended C- Band VSAT network in the world.
Currently more than 9000 users are trading on the real time-online NSE application.
There are over 15 large computer systems which include non-stop fault-tolerant
computers and high end UNIX servers, operational under one roof to support the NSE
applications. This coupled with the nation wide VSAT network makes NSE the
country's largest Information Technology user.

Credit Rating Information Service of India Limited

CRISIL Limited (formerly The Credit Rating Information Services of India

Limited) was incorporated in 1987. CRISIL offers a comprehensive range of integrated
product and service offerings - real time news, analysed data, incisive insights and
opinion, and expert advice - to enable investors, issuers, policy makers de-risk their
business and financial decision making, take informed investment decisions and
develop workable solutions. CRISIL helps to precisely understand, measure and
calibrate myriad risks - financial and credit risks, price and market risks, exchange and
liquidity risks, operational, strategic and regulatory risks.
CRISIL is the only rating agency to operate on the basis of a sectoral
specialization which underpins the sharpness of analysis, responsiveness of the process

40
and large scale dissemination of opinion pieces. CRISIL Ratings continues to play a
stellar role in the development of the debt markets in India. Till March 31, 2003, it has
rated more than 4,400 debt instruments worth over Rs.440,000 crores, for more than
2000 companies.

Combining analytical excellence with strong sector knowledge and in-depth

understanding of the local environment, CRISIL's Advisory businesses provide a range
of policy and transaction level advice to governments and leading organizations across
sectors.

CRISIL is the most comprehensive, independent research & information

services provider in India. Woven around its various subsidiaries and aiding clients to
anticipate and negotiate economic and financial change for sustainable strategies,
CRISIL's information services business encompasses News, Analyzed Data, Research
& Information, Analytical Tools & Benchmarks.

Life Insurance Corporation of India

An Act of Parliament, Life Insurance Corporation of India Act, 1956,

established Life Insurance Corporation of India (LIC). It took over 244 private life
insurance business companies then existing. It is a wholly government owned
organization with an initial capital of Rs.5 Crores contributed by the GOI. Its mission
is to ensure and enhance the quality of life of people through financial security by
providing Life Insurance products and services of high quality, and by providing
resources for economic development. LIC is the largest life insurer in the country.

41
For the year 2002-2003, the Corporation has widened its reach by providing insurance
cover under 2,45,29,946 policies with a Sum Assured of Rs.1,79,683 crore and
Premium Income of Rs.9,688.87 crore, registering the annualized growth of 10.75% on
policies, 20.00% on Sum Assured and 24.41% on Premium Income over the period of
last two years. As regards the settlement of claims LIC has touched the lowest
outstanding claim ration at 0.23% during 2002-03 which matches with the performance
of any such insurance company in the world. For the same period, the growth in the
number of Agents from 7.92 lakh to over 9.60 lakh coupled with appointment of over
110 Corporate Agencies has contributed to the growth in the number of policies. Its
main asset is its staff strength of 1.24 lakh employees and 2,048 branches and over
9.60 lakh agents coupled with the appointment of 110 Corporate Agencies.
LIC has been actively involving itself in the promotion of new development financing
institutions in collaboration with other institutions. It provides resource support to other
institutions by subscribing to their initial and subsequent offers of shares and
debentures. It has subscribed to shares and bonds of IDBI, IFCI, ICICI, IRBI, SIDBI,
EXIM BANK, NHB, REC, etc.

Punjab National Bank

Established in 1895 at Lahore, then undivided India, Punjab National Bank

(PNB) has the distinction of being the first Indian bank to have been started solely with
Indian capital. The bank was nationalized in July 1969 along with 13 other banks.
From its modest beginning, the bank has grown in size and stature to become a front-
line banking institution in India at present. It has more than 4000 branches and over
400 extension counters. Strong correspondent banking relationship, which it maintains
with over 200 leading international banks all over the world, enhances its capabilities

42
to handle transactions worldwide. More than 50 renowned international banks maintain
their Rupee Accounts with PNB.
With its presence virtually in all the important centers of the country, PNB
offers a wide variety of banking services which include corporate and personal
banking, industrial finance, agricultural finance, financing of trade and international
banking. The large presence and vast resource base have helped the bank to build
strong links with trade and industry. At the same time, the bank has been conscious of
its social responsibilities by financing agriculture and allied activities and small-scale
industries.
The bank is committed to maintaining the highest standards of service and
will be covering more offices under this quality movement titled ‘Alliance with
Quality’.

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THE CONCEPT OF INVESTMENT AND MERCHANT BANKING

According to Anthony Sampson “There are two types of bankers who can
sometimes be distinguished by their look and the pace of their walk”

• The men from deposit banks, commercial bankers or clearers are responsible for
millions of bank account in hundreds of branches and they have to look very
dependable.
• The investment bankers (or merchant bankers) make deals between rich
individuals or companies, which do not involve the small saver, and consequently they
are allowed to look more aggressive. They have greater freedom and enterprise.

Commercial banks have made most of their profit from interest. Investment
banks from fees. Therefore an investment banker’s key problem is whether the advice,
which he is giving, can justify the fee. However, this distinction is becoming more
blurred in recent times.

DEFINITION AND BRIEF HISTORY

Merchant bank, originally a British term, describes what in the United States
is referred to as an investment bank to distinguish it from a commercial bank. A
merchant bank specializes in such corporate financing needs as underwriting stocks
and bonds, handling mergers and acquisition and underwriting a range of other
financial advisory services. Its antecedents in Europe, from about the fifteenth century
on, were the initial providers of international banking services before commercial
banks entered the field. The original merchant banks began as commercial trading
companies, which then added banking services.

44
Giovanni Medici (1360-1429) headed an international trading and banking company
that dealt in woolens, silks, furs and leather, invested in and supervised a variety of
domestic industries, financed a miscellany of overseas commercial ventures, and
provided its many clients with most of the foreign exchange, banking and credit
facilities they required. The growth of commerce both in scope and volume made
international traders increasingly dependent upon the safe and efficient transfer of
funds from one principality and kingdom to another. Europe’s great merchant bankers
with branches and agents in distant cities such as Medici, with a half-dozen offices
outside Italy, (headquarters in Florence and branches in Venice, Rome, Milan, Bruges,
Avignon, London and Geneva), enjoyed the confidence of large entrepreneurs and
commanded the machinery to serve them efficiently.
In the 19th century, particularly and even in the 1930’s the larger merchant
bankers had influence and power on a scale unknown today for companies and
governments, internationally and domestically. The French prime ministry in 1818
would say of one of them. “There are six great powers in Europe, England, France,
Prussia, Austria, Russia, and baring brothers”. By the time of the American civil war,
barings war the agent bank for Russia, Norway, Austria, Chile, argentine, Canada,
Australia and the United States.
Many of the international services that were unique to the merchant banks are
now done by commercial banks so that today’s merchant banks are focused on
providing investment-banking expertise that supplements the lending and operational
capabilities of the commercial banks. Within the US some investment and commercial
banks used the name merchant banks as a public relations cachet endeavoring to tap the
glamorous associations of this term. Thus the rapid rise in international investment
banking activities represents a resumption of development in the early 19 th century.
However, the scale and the volume of transactions, the speed at which they are
conducted, and the vast array of products now available are far beyond anything our
financial forefathers could have imagined has grown and become institutionalized.
The great players are no longer small privates banking houses but substantial
financial institutions whose activities span the globe. They come from America as
commercial and investment banks from Europe as merchant banks, banquets de affaires

45
and universal banks and from Japan as long-term credit banks, city banks, trust banks
and securities firms. Though in some countries (e.g. USA and Japan) there are
regulations that require separation between deposits taking and loan making on one
hand and securities underwriting and trading on the other such regulation do not apply
beyond the borders of the countries involved. The world beyond one’s own borders is
often referred to in financial partancea as “offshore” where home country regulations
do not apply. For regulatory purposes, it is a virtually “stateless” world. There the
various types of banks compete in Eurobond and equity securities and investments of
all types.
In recent years, the volume of offshore bond and equity financing involving
transactions between national markets has grown very rapidly: linkages between these
markets have increased to an extent that conditions in one market affect those in others,
leading us to conceive of world financial markets as having become “globalize”. In the
case of major industries countries, barriers to cross-border financial transactions have
declined to almost nothing. Deregulation of the financial services sector in many
countries has led to increased competition and exposure to international markets.
Prodigious improvements in telecommunication have made it possible for markets to
become integrated. These developments have greatly expanded the gange of
alternatives to those from all over the industrial world who seek to raise money or
invest it.
Major markets for securities, foreign exchange and commodities are centered
in New York, London and Tokyo and trading between these markets in almost
instruments goes round the clock. The international securities business has become
large, complex, diverse, highly competitive and risky. In order to survive today’s
players must continue to adapt to changes in the market place, particularly the
international market in which traditional regulatory orderliness does not apply. The
1980’s and the 1990’s have been times of great competitive and strategic repositioning
by the world’s major financial institutions and provides of financial services of all
types.

46
 INVESTMENT BANKING IN JAPAN

During the American occupation of Japan following World War II, the
occupation authorities under Generation Douglas Mac Arthur affected a number of
major reforms to the structure of Japanese industry. The lager industrial and financial
holding companies called Zaibatsu were broken up in the interest of restricting anti-
competitive and politically powerful monopolies. At the same time the equivalent of
the US Glass-Steagall legislation was inserted into the Japanese securities and
Exchange Act of 1948 as Article 65. Accordingly Japanese commercial banking has
since been separate from investment banking, which is conducted exclusively by
securities firms. These were dominated in Japan by four large retail brokerage houses
Normura, Daiwa, Nikko and Yamaichi. The firms had been associated with Zaibatsu
before the war but were later restructured as independent companies. Between them the
“big four” as they are known accounted for approximately 4opercent of commissions
earned and an even higher percentage of underwriting manager ships. Yamaichi has
since collapsed in November 1997. Article 65, like the US Glass-Steagall legislation,
does not apply outside Japan. However the administrative jurisdiction of the ministry
of finance does apply and the activities of banks and securities firms, though liberalized
greatly, are still subject to strict regulation.
It is generally assumed that the amendment or abolition of the Glass-Steagall
Act will result in a similar change in Japan’s Article 65, which has also been subject to
controversy and challenge. Many foreign banks already been able to bypass restrictions
preventing them from participating in the securities business in Japan and this has put
further pressure on the Japanese government to provide similar advantages for their
own banks by amending Article 65. Many new financial services have been introduced
in Japan over the past few years and the banks and securities firms have fought over
who should have right to which businesses. The securities firms have grown more
rapidly than banks.

47
Big Bang (June 1997)
Since the second world, Japan’s financial system has been segmented, for
example banks cannot trade in equities or offer insurance. Much of this, with the
exception of insurance is about to change. On 13th June 1997 the finance ministry
announced the blueprint for its much-heralded financial deregulation, Japan’s Big
Bang. From April 1998, commission on share trading has been mostly deregulated.
From 1999 brokers will be free to set commissions on all equity trades as they see fit.
From April 1999 banks will be able to sell investment trusts (Japan’s version of mutual
funds). Banks and securities firm will no longer have to be licensed by the ministry of
finance, they will be required only to “register”. Foreign banks are expected to be big
winners from the reforms because of their greater adaptability and experience of other
deregulated markets.

MERCHANT BANKING IN THE UNITED KINGDOM

Unlike legal divisions existing in USA and Japan where commercial banks are
not permitted to underwrite corporate securities, the division between clearing banks
and merchant banks in the UK has been by custom rather than law, although
commercial banks have setup their own merchant banking subsidiaries. Banks have
been evolving into financial conglomerates either by purchasing other institutions or by
setting up their own subsidiaries. Foreign and domestic banks have purchased
stockbrokers and jobbers and obtained licenses as primary dealers in gilt. Many foreign
banks set up subsidiaries to underwrite and trade Eurobonds.

The Big-Bang (October 1986)

The UK financial market underwent the most dramatic single restructuring of
any of the major capital markets in October 1986 with the passing of the financial
services Act. The changes that ensured came to be known as the “Big Bang”.

48
Previous stock Exchange rules had permitted the exchange to consider itself a closed
shop. As in the case of “Mayday” in the United States, When negotiated brokerage
commissions were introduced on the New York Stock Exchange on May 1, 1975, the
rule changes was forced by a threat of an antitrust action against the stock Exchange by
the government. Unlike Mayday, however, the Big Bang required that the entire
London Stock Exchange system of dealing in debt and equity securities be scrapped
and rebuilt.
First, negotiated commissions rates were to be required, second, brokers and
jobbers or markets-makers would no longer be restricted to performing only their
respective functions that is acting in a “single capacity”. Members could now act in a
“dual capacity”, if they wished, as both brokers and jobbers. Third, foreign and other
non-member securities firms could join the exchanges and compete for business
against the British firms.
Not only did the Act alter the whole aspect of the stock exchange and gilt
markets but it also had a significant impact on the regulation of the Eurobond market of
which London had become the center. Its effect on the structure of the commercial
banking, merchant banking and broking community has been to create financial
conglomerates along the lines of universal banks seen as an essential development in
order to compete in all areas of financial service and advice.
The clearing banks, in particularly, have acquired securities expertise, either
internally or through the purchase of existing stockbrokers, stock jobbers, investment
managers and merchant banks. Merchant banks have purchased stockbrokers and
jobbers but remain smaller specialized investment banking institutions. With
international banks from all over the world present or expanding their activities in
London, competition among the various institutions is intense.
Explosions similar to Big Bang have been heard around the world, as financial
markets were deregulation in the middle 1980s in Canada, Australia, and France and to
some degree in Germany and Switzerland.

49
 INTERNATIONAL INVESTMENT BANKING SERVICES

There are now a broad range of international investment banking products and
services. Most of these are well integrated with their domestic markets equivalent.
However, it is helpful to make two distinction; (1) the division between home country
clients and foreign clients and (2) the traditional division between services to those
requiring access to capital and those requiring investments for capital.
Home country clients, from the US, Europe and Japan have all seen a
proliferation of financial services, which has considerably widened the range of
alternatives available to them. For example, when planning a debt financing the choice
is no longer between the bond market and a bank loan, it is between several capital
market alternatives in the home market and several additional alternatives from the
international and foreign markets. These latter alternatives include straight debt
financing in one’s own currency, financing in another currency swapped into the home
country currency or floating rate financing converted into fixed-rate financing by
means of an interest rate swap. Bond issues can be sold with detachable warrants that
provide for the purchase by the holder of other securities of the issuer, either additional
debt securities or equity securities, at a fixed price.
The range of issuer whose securities are acceptable to the international
markets has also expanded greatly since 1980. No longer must an issuer be a larger,
well-known corporation to be able to launch a euro-bond offering, in fact, many
alternatives and ideas are provided to all sorts of potential issuers by aggressive
opportunistic bankers. So many alternatives backed by so much competitive energy has
resulted in a great deal of international financing being complete in recent years
particularly in the Euro securities markets.
Many investment bankers believe they must maintain a first rate capital
market team capable of offering a fully internationalized array of financing alternatives
to avoid losing their traditional home country clients. Other, with fewer traditional
clients sees opportunities for themselves in the situation. In any case, as clients have
been drawn to tempting offerings of a globalised market place those bankers who have
missed leading them there have been forced to follow along.

50
 The same has been true of investor clients who, having discovered
international portfolio diversification, require the same type of support services that
they do when investing domestically. Investment research and a willingness to make
secondary market in issues are the most important of these. Institutional investors,
particularly private pension funds have expanded their international investments
enormously in recent years. It has, therefore, become equally important for both
defensive and opportunistic reasons for firms that offer services to investors to
internationalise their business as well.
As bankers regard non-domestic country clients they think in terms of three
types of services (1) executing transactions in the banks home country for the foreign-
based clients, (2) executing transactions in third countries for them and (3) executing
transactions in the foreign clients own national market.
Home country international services are the easiest to provide and probably
the most profitable for investment banks. The competitive field is smaller and the
firm’s domestic reputation is perhaps the most important factor in the awarding of the
business to the bankers. These services have been performed in one form or another for
many years, particularly in the U.S., British merchant banks have also provided foreign
clients with British banking, corporate finance, money management and underwriting
services for many years, although the demand for Bull dog bonds and other strictly
British services has been modest.
The execution of services in third countries particularly the Euro markets is an
important part of the international business of all investment bankers. Originally there
was a significant competitive advantage associated with the arrangement of issues
denominated in the bankers own home currency, eurodollar issues associated with US
firms, euro-Canadian Dollar issues with Canadian firms, euro-yen with Japanese and so
on. Though this remains true on the whole, these divisions are much less adhered to
today. The markets have become exceedingly competitive and participants now quote
activity in all major currencies. Also the arrangement of euro-market transactions for
foreign clients has become quite common. In the level playing field of the euro-market,
anything goes.

51
 The most difficult international securities services for a firm to offer
successfully are those to be executed in national markets of foreign countries. Well-
entrenched, effective national competition is difficult to dislodge. The European banks
permitted to perform investment-banking services in the US have not achieved a
significant market share. In Japan, Germany, France and Switzerland, foreign
competitors have faced much the same story. In British, however, where Big Bang
weakened the hold of British firms a much greater opportunity to offer new and
competitive products and services to clients in the UK, freer and more intense
competition has resulted. Recent deregulation of securities markets in Canada and
Australia may have a similar effect on foreign competition in those markets in the
future.

Mergers and acquisitions advisory services

In addition to raising capital for corporations through the issuance of
debt or equity securities or bank loans corporate financial services include the giving of
advice on a variety of complex matters that a corporation must deal with in order to
evaluate or accomplish a particular transaction.
Few sources of revenue are more attractive to investment and all other types
of bankers than merger and other high-value-added fees.A loan involves a commitment
of bank’s capital and often the risk Of non-repayment. A bond or equity issue requires
the bank’s underwriting Commitment and exposes it to the market risk. A swap
involves booking a Contingent liability or asset. But advisory fees are earned
exclusively, as a result of putting the firm’s skills and knowledge to work ,not as a
result of Committing the firm’s capital. And the fees commensurate with the added
Value of the services, are considerable.
For the us and UK investment banks, providing international advisory services
Has been a natural extension of providing the same services domestically. Whether the
client is a buyer, a reluctant seller or a willing target, tapping the international market
for better terms than can be accessed domestically is often advisable and sometimes
imperative in today’s business environment. Banks with a strong local M & A team

52
and an international preserve – primarily US investment houses – have well positioned
to take advantage of this aspect of globalisation.
The European and Japanese environments have lacked the free wheeling
capital markets and strict legal framework that have fostered the US, M 7 A business.
As globalisation continues however, homogenisation of environment will be
approached. The evolving environment will have more of the US characterized by a
profitable internationalized M & A business.
As an activity generating substantial fees but requiring no direct commitment
of the banks capital, M & A business and related advisory work are irresistible to
many. However, new comers should be warned that M & A activities may not co-exist
easily with relationship banking in the same firm. Managing the M & A department is
highly challenging. One must control the team without stifling it. All demand skills
specific to the M & A Business increasingly projected into an international dimension.

HEAVYWEIGHTS IN INVESTMENT BANKING

The upsurge in the urge to merge among banks and other financial services
firms in recent times, is actuated by a titanic struggle to join a handful of houses with
the size, expertise and global reach to make a fortune selling investment banking
service to the world’s savers and multinational companies.
At the end of 1997 four American houses – (i) Merrill Lynch, (ii) Goldman
Sachs, (iii) the recently merged Salomon smith, Barney, (iv) and Morgan Stanley,
Dean Witer, four others were jostling for position, Union Bank of Switzerland.
Lehman Brothers, Credit Suisse and First Boston (the investment banking division of
credit Suisse) and J.P.Morgan. Then came a queue of smaller banks with big ambitions
–wall street firms such as bear stearns and Donaldson Luffein and Jenrette, plus the
investment – banking divisions of European commercial banks such as Duetsche
Morgan Grenfell, Dresdner Kleinwort Benson and ING Barings.
Banks have been scrambling for partners that can add to their size and reach.
Morgan Stanley announced its merger with Dean Witter, Discover, a securities
brokerage and credit-card group. Bankers trust bought Alex Brown a rival American

53
house. The merger between Swiss Bank corporation and union bank of Switzerland in
july 1998 to form UBS-AG created the world’s biggest financial institution with end-
1997 assets of US$ 699 billion. That ranking was challenged in October 1998 by the
merger of Citibank, America’s second-bigger bank and travelers group, which streches
from property insurance to mutual funds to create citigroup, with assets of US$ 698
billion. In November 1998, Duetsche Bank announced that it was to create the world’s
biggest bank by buying bankers trust, America’s eighth-largest “A global financial
services provider with a translatic platform”.
The hectic merger activity among banks has altered the invesment banking
landscape. According to Euromoney the following was the ranking of investment
banking houses in January 1999 on the basis of their market share of underwriting
trading and advising business.

1. Warburg Dillion Read (the investment banking arm of UBS the sum of two big
Swiss banks-union bank of Switzerland and Swiss Bank corporatio
2. J.P.Morgan
3. Citigroup (includes Saloman Smith Barney, the investment banking arm of
Travelers merged with Citibank).
4. Goldman Sachs
5. Credit Suisse First Boston
6. HSBC
7. Lehman Brother’s
8. Natwest Group
9. Societe Generale
10. Bank of America
11. Commerzbank
12. Bankers Trust Alex Brown
13. Royal Bank of Canada
According to the financial Times (1.3.99) the world’s leading 10 investment
banks have almost doubled their share of fee-based and advisory business in the global

54
capital market since 1990. they now have 77 percent of the market. The growing
concentration of market share in the hands of the top banks has coincided with an
explosion in the global capital market during the 1990’s from total volume of less than
$1500 bn. at the start of the decade to almost $ 4000 bn. at the end of 1998. The top 20
investment banks increased their share of global capital markets business from 80
percent in 1990 to 97 percent in 1998.
This ranking is sure to be reshuffled after the integration of Duetsche Bank
and Bankers Trust slated for completion by the end of the second quarter of 1999 and
the agreed all-share bid made by Societe Generale for Paribas on 1 st February 1999 to
create SG Paribas, second only to UBS in Europe, in terms of assets.

PROFITABILITY OF INVESTMENT BANKING

In theory a glittering prize awaits the victors of this contest. Each of the three
main bits of the global investment banking business –underwriting and selling shares
and bonds to investors who wants to buy and sell them and selling all manner of advice
to big companies and government –seems destined to become one of the great growth
industries of the next century.
The above theory however needs to be set beside a disconcerting fact.Over the
past 15 years, investment banks have been blessed with near-ideal operating
conditions. Yet over the same period, their margins and return on capital have sunk.
Investment banks once made easy money as middleman; they matched buyers
with sellers and charged a big fee for their efforts. That service was useful in a world of
poor communication, scarce information and inefficient capital markets. Today
information about the demand, supply and price of capital moves freely around the
world, increasingly over networked computers. Computers themselves are becoming
ever better at bringing together buyers and sellers and matching their trades
automatically.

55
Against this background, the commissions investment banks earn by organizing share
trades have fallen swiftly by about 40% in USA and UK over the past ten years. Bond-
trading commissions have fallen by 25-50% depending on the currency. Increasingly
big investors are finding ways of avoiding investment bankers commissions’ altogether
.Electronic brokers match up investors’ sales and purchases off-exchange, and then
report their transaction to an exchange once they are completed.
Margins have also come under pressure because wave after wave of
commercial banks have tried to muscle into investment banking. They range from the
British and the American firms that bought Britian’s stock brokers and merchant banks
in the 1980’s to the continental European and American banks that are buying or
building investment –banking divisions today. This extra competition has not only
squeezed the fees investment banks can charge. It has also forced up their staff costs as
the new entrants compete to hire expensive talents.
Investment banks must also live with more powerful customers. Fund –
management firms used to be excellent customers relying on investment banks to buy
and sell the shares and bonds they invest in and supply research on their investments.
But today’s fund managers are huge and many have invested in their own analysis and
traders. They are demanding more and more from investment bankers for less and less
money.
Investment banking has become more and more capital intensive since 1980.
the equity capital of the nine American firms, which the securities industry Association
labels “large investment banks” has grown by more than 1000%.
In the early 1980’s the typical wall street or city firms would have been a
Partnership. Partners had a sharp incentive to control their traders because their own
money was at risk in the markets. As these partnerships were replaced by better-
capitalised publicly owned firms, this incentive weakened. Managers were responsible
for ensuring the safety of their shareholders money, not their own. In today’s financial
conglomerates, that incentive is weaker still, traders answer to managers, managers to
the group’s board , and the board to shareholders. Shareholders have every reason to
worry about the traders gambling their money at the end of this line of command.
Witness the hefty losses incurred by international banks in recent years.

56
 More competition, more capital, more risk; none of this fits well with the
notion that global investment banking is heading assuredly towards everlasting
sunshine. Further consolidation might help. With fewer competitors and higher barriers
to entry investment banks might be able to pay their staff less and wring better fees out
of their customers.
Even if the industry did reach some steady state – a handful of dominant
global firms, high barriers to entry – margins would not necessarily get much fatter.
Disintermediation, the bypassing of middleman, has become the one constant of the
financial services industry. The big companies and fund managers that make up the
investment banker’s customers are becoming more powerful, sophisticated and
demanding as their own industries consolidate.

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 ROLE OF MERCHANT BANKING AND INVESTMENT
BANKING

Indian money market

I] Introduction to Money Market

The money market is a wholesale debt market for low-risk, highly – liquid,
short term instruments. Funds are available in this market for periods ranging from a
single day upto a year. This market is dominated mostly by government, banks and
financial institutions. It is a formal financial market that deals with short-term fund
management.
Though there are a few types of players in money market, the role and the
level of participation by each type of player differs greatly.
Government is an active player in the money market and in most economies; it
constitutes the biggest borrower of this market. Both, Government Securities or G-Secs
and Treasury-Bills or T-Bills are securities issued by RBI on behalf of the Government
of India to meet the latter’s borrowing for financing fiscal deficit. Apart from
functioning as a merchant banker to the government, the central bank also dons upon
itself the role of a regulator of the money market and issues guidelines to govern the
money market operations.
Yet another dominant player in the money market is the banking industry.
Banks mobilize deposits and utilize the same for credit accommodation. However,
banks are not allowed to use the entire amount for extending credit. In order to promote
certain prudential norms for healthy banking practices, most of the developed
economies require all banks to maintain minimum liquid and cash reserves. As such,
banks are required to ensure that these reserve requirements are met before directing on
their credit plans. If banks fall short of these statutory reserve requirements, they can
raise the same from the money market since it is a short-term deficit.

58
Moreover, financial institutions also undertake lending and borrowing of short-term
funds. Due to the large volumes these FIs transact in, they do have a significant impact
on the money market.
Corporates also transact in the money market mostly to raise short-term funds
for meeting their working capital requirements.
Other institutional players like mutual funds (MFS), Foreign institutional
investors (FIIs) etc also transact in money market. However, the level of participation
of these players varies largely depending on the regulations. For instance, the level of
participation of the FIIs in the Indian money market is restricted to investment in
government securities only.

Money Market Instruments:

Just as any other financial market, money market also involves transfer of
funds in exchange of financial assets and due to the nature of the money market, the
instruments used in it represent short-term claims.
It is important to note that the money market instruments do not include any
equities.
Money market instruments mainly include Government securities, securities
issued by banking sector and securities issued by private sector. A brief discussion of
various money market instruments has been given below: -

A. Government Securities:-
All funds raised by the government from the money market are through the
issue of securities by the RBI. Thus, T-Bills and Government dated securities are all
issued by the RBI on behalf of the government. Being risk free securities, they set the
benchmark for the interest rates of the other money market instruments.

a. Treasury Bills:
b. Investors in T-Bills generally include banks and other institutional investors. Being
issued by the government they are considered to be risk free as they are issued by the
Government. As such, they are highly marketable. Investors prefer treasury bills

59
because of high liquidity, assured returns, eligibility for statutory requirements, no
default risk, no capital depreciation etc.
The T-Bills are issued for a minimum amount of Rs. 25,000/- and in multiples of Rs.
25,000. T-Bills are issued at a discount and redeemed at par. Though the yield on
treasury bills are less when compared to other money market instruments, the risk
adverse investors and banks prefer to invest in these securities.
At present, the Government of India (GOI) issues 4 types of T-Bills i.e., 14 day, 91
day, 182 day and 364 day.
Thus, RBI raise funds on behalf of the Government of India by acting as an issuing
agent to meet the latter’s short-term funds requirement.
c. Government dated Securities:-
Investors mainly include banks, FIs, other institutional investors and individuals. These
are medium to long term government securities. These securities carry a coupon rate
and are not issued at a discount. Inspite of being long term instruments, these
government securities form a part of the money market due to their liquidity. The chief
characteristics of the money market instruments other than enabling short term fund
management, is to provide liquidity. Moreover, being government securities these
dated securities have fairly high liquidity and hence form part of the money market.
It also set a benchmark for the long-term interest rates.

A. Banking Sector Securities:-

The transactions taking place in these securities are large in size, both in terms
of amount involved in the transaction and volumes traded. The short-term requirements
of banks vary from a single day up to a year for meeting the reserve requirements and
credit accommodation purposes.
a. Call and Notice Money:
b. The call money market is a part of the money market where, day to day surplus
funds, mostly of banks, are traded. Moreover, the call money market is most liquid of
all short-term money market segments.
The maturity period of call loans vary from 1 to 14 days. The money that is lent for one
day in call money market is also known as ‘overnight money’. The interests paid on

60
call loans are known as the call rates. The call rate is expected to freely reflect the day-
to-day lack of funds. These rates vary from day-to-day and within the day, often from
hour-to-hour. High rates indicate the tightness of liquidity in the financial system while
low rates indicate an easy liquidity position in the market.
In India, call money is lent mainly to even out the short-term mismatches of assets and
liabilities and to meet CRR requirement of banks. The short-term mismatches arise due
to variation in maturities ie, the deposits mobilized are deployed by the bank at a longer
maturity to earn more returns and duration of withdrawal of deposits by customers
vary. Thus, the banks borrow from call money markets to meet short-term maturity
mismatches.
Moreover, the banks borrow from call money market to meet the cash Reserve Ratio
(CRR) requirements that they should maintain with RBI every fortnight and is
computed as a percentage of Net Demand and Time liabilities (NDTL).
On the other hand, funds lent in the notice money market do not have a specified
repayment date when the deal is entered. The lender will simply issue a notice to the
borrower 2-3 days before the funds are to be repaid. On receipt of this notice, the
borrower will have to repay the funds within the given time.
c. Term Money:-
d. The money that is lent for more than 14 days is referred to as ‘Term Money’. Banks
access this term money route for the purpose of bringing greater stability to their short-
term deficits.
e. Certificate of Deposits (CDs)
Certificate of Deposits (CDs) are issued by banks in the form of usance promissory
notes. Due to their negotiable nature, these are also known as negotiable certificate of
Deposits (NCDs)
CDs are issued by commercial banks and six financial institutions – IFCI, IDBI, ICICI,
EXIM Bank, IIB, SIDBI etc.
CDs are considered as virtually riskless instruments as the default risk is almost nil and
investors are sure of receiving the invested amount with interest. CDs are freely
transferable by endorsement and delivery, immediately after the date of issue and can
be traded in secondary market from the date of issue, unlike conventional deposits.

61
 CDs are issued at a discount to face value. The discount rate is freely determined by the
issuing bank considering the prevailing call money rates, treasury bills rate, maturity of
the CD and its relation with the customer, etc.
Banks can issue CDs for a minimum period of 15 days to a maximum of one year
whereas a financial institution can issue CDs for a minimum of 1 year and a maximum
of 3 years.
The minimum size for the issue of CDs is Rs. 5 lakhs (face Value) and thereafter in
multiples of Rs. 1 lakh. It should be taken into consideration that there is no ceiling on
the maximum amount that can be raised by them.

A. Private Sector Securities:-

i. Commercial Papers:-
ii. CPs as a source of short-term finance is used by corporates as an alternative to Bank
finance for working capital. Generally, Corporates prefer to raise funds through this
route when the interest rate on working capital charged by banks is higher than the rate
at which funds can be raised through CP.
CP is a short-term, unsecured usance promissory note issued at a discount to face value
by well known or reputed companies who carry a high credit rating and have a strong
financial background.
Any private sector company, public sector unit, non banking company can raise funds
through commercial paper. CPs are generally open to all the investors – individuals,
banks, corporates and also non-resident Indians (NRIs)
CPs are backed by the liquidity and earning power of the issuer, but are not backed by
any assets. Hence they are unsecured. Investors prefer to invest in CPs due to high
liquidity, varied maturity and high yield when compared to bank deposits. Moreover,
the liquidity is high because it can be transferred by endorsement and delivery.
CPs are issued in multiples of Rs. 5lakhs and the minimum size of each issue is Rs. 5
lakhs. Also CPs have a minimum maturity period of 15 days and a maximum of 1 year.
Unlike CD, the issuer can buy-back its own CP.
The company needs to get the commercial paper credit rated by one of the approved
credit rating agencies like CRISIL/ICRA/DCR, as prescribed by RBI.

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iii. Intercorporate Deposits:-
iv. It is yet an another important source of raising funds that the corporates generally
adopt. It should be taken into consideration that the interest rates of these instruments
are generally higher than the other short-term sources since the risk is higher and is
unsecured in nature.
v. Money Market Mutual Funds(MMMF)
Money Market Mutual Funds are special type of Market Funds that invest primarily in
money market instruments of very high quality and of very short maturities. Like other
mutual funds, MMMFs accumulate the funds from widely scattered investors and
invest the funds in different securities. The returns from the securities are distributed
among the fund participants.
The mutual funds, other than MMMFs, invest funds usually in securities of capital
market. On the contrary, Money market Mutual Funds invest funds primarily in money
market instruments i.e., T-Bills, Commercial Papers, Certificate of Deposits etc.
MMFs can be set up by commercial banks, RBI and public financial institutions. Even
companies in the private sector, at present, are allowed to set up MMMFs based on the
guidelines given by RBI. The guidelines on MMMFs specify a minimum lock-in
period of 30 days during which investor cannot redeem his investment.
All MMMFs should get prior approval from the RBI. However, the MMMFs from
private sector are required to get prior approval from RBI and also from SEBI. Also, all
the MMMFs should invest at least 25 % of their funds in treasury bills.
MMMFs are open not only to individual investors but also to trusts, societies, body
corporates etc. Retail investor normally deposits short term surplus funds into a saving
bank account, the returns from which are relatively low. By investing in the money
market through MMMF the returns earned will be higher than what is obtained by
depositing in a bank. The safety level of these funds will also be high since the
investments will generally be in high quality securities ie, Government, bank and high
rated corporate securities.
Thus, MMMFs represent a low-risk and high-returns avenue to the retail investor in the
money market.

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(III) REPO, at a glance
By repo it implies repurchase obligation. It is an agreement, which involves a
sale of a security with an undertaking to buy-back the same security at a predetermined
price and at a future date. The transaction is called Repo from the point of the seller of
the security whereas the same is viewed as reverse repo from the point of the buyer of
the security.
Repo transactions are basically a contract that is entered into by two parties,
which may include the RBI, a Bank or a NBFC. This transaction raises short-term
funds to the party selling the securities. It essentially results in cash money form the
buyer to the seller at the beginning of the transaction, which will be reversed at the end
of the transaction.
The underlying securities that are bought and sold are generally government
securities. There are no regulations prescribing the minimum or maximum duration for
a repo transaction. Hence the minimum period can be even a day while the maximum
period is normally 14 days, though repos for a longer-term are also seen in the market.
Though there is no statutory limit for this maximum period it normally does not exceed
3 months.
The Government introduced repurchase agreements in order to manage the
excess of liquidity in the system. In a situation where there is excess money supply,
monetary contraction can be made possible by adopting repo transactions. That is, the
Central bank can enter into repo transactions to remove the excess liquidity present in
the system. RBI undertakes repos with banks as a part of its monetary management.
When RBI enters into repo transactions it sells the securities to banks with an
undertaking to buy them back. Thus the liquidity in the system is sucked out for the
term of the Repo. RBI can add liquidity to the system by entering into reverse repos
with Banks.
It is usually the borrower who initiates the transaction and decides the
quantum of the borrowing depending on the requirement. However, there will also be
instances where banks would like to buy the securities for a short term as a part of their
SLR management in which case the size depends on the need for securities to make up
for the SLR shortfall of the bank. It should be taken into consideration that every

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banking company shall maintain in India in cash, gold or unencumbered approved
securities an amount which shall not, at the close of business on any day be less than
such percentage of the total of its demand and time liabilities in India as on the last
Friday of the second preceding fortnight, as the Reserve Bank of India may specify
from time to time. This is referred to as ‘Statutory Liquidity Ratio’
In case of RBI, tenders should be submitted for a minimum amount of Rs. 1
crore (based on face value of securities) and in multiples of Rs. 1 crore. As far as
securities are concerned, RBI announces the nature of securities eligible for Repo
transactions. All the GOI securities and Treasury bills are eligible for Repo transaction.
Even state Government securities have been made eligible for undertaking repos.
The interest rate on the borrowing will be mutually negotiated depending on the term,
amount and the prevailing call money and term money rates.
If a bank borrows the amount to meet their requirements through a repo
transaction the lender will receive a security duly transferred which will be held in his
name till the reversal of the transaction takes place. In contrast, if the bank borrows the
same amount in the call market, it would be unsecured in nature. Considering the
secured nature of borrowing in a repo transaction, the interest rate is likely to be lower
than the rate prevailing in call market. However, the difference is not very conspicuous
since the default risk in a call loan is also significantly low.
To conclude with, Repo transactions involve sale of securities in the first leg
and buy them back later. On the other hand, Reverse Repos involve buying the
securities in the first leg which will be sold back. Hence Repos will involve reduction
in money supply for the period of repo while reverse repo will increase the money
supply.

[IV] Open Market Operations (OMO)

RBI can adjust the liquidity in the system by its open market operations. OMO
basically involves the purchase and sale of government securities (i.e., T-Bills and
Government dated securities) by RBI through is open window. While the open market
purchase of G-secs will ease the liquidity of banks, the open market sale of the same
will contrast their liquidity.

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 As a part of the OMO, Reserve Bank of India may buy or sell specified
government securities at prices determined by RBI. If RBI wants to reduce the money
supply it can offer yields on specified securities which are higher than those prevailing
in the market, which can be an incentive to buy securities from RBI. This in effect
reduces the money supply.
On the other hand, if RBI wants to increase the money supply it can offer to
buy securities at yields lower than the market related rates thus inducing the
participants to sell the securities to RBI which will increase the money supply.
Thus, open market operations help RBI to adjust the liquidity in the system.

66
 ICICI, bank reverse merger an acid test

SIZE, range and low-cost resources have been recurring themes in ICICI's
strategy over the last few years. Ever since Development Financial Institutions (DFIs)
were cut off from concessional funding in the early 1990s and asked to face heightened
competition, ICICI has relentlessly pursued its goal of becoming an universal bank to
survive the changed environment.
Following significant proportion of loans made in the early and mid-1990s
turning bad, a drive to increase its size and range of activity, and thereby cushion the
impact of loans turning bad, have been the defining features of ICICI's strategy.
Currently, the move to embark on a reverse merger with its offspring, ICICI Bank,
seems to be the watershed in its dream of becoming an universal bank.
Simply put, an universal bank means nothing more than carrying out all
aspects of financial intermediation under one roof. For instance, commercial banking,
wholesale lending, retail lending and insurance were traditionally carried out by
unrelated entities. In a new environment where all traditional barriers have vanished, a
universal bank to carry out all kinds of intermediation under one roof as been viewed
as a route to make the best of new opportunities as well as face up to new competition.
In 1998, a committee comprising commercial banks and DFI examined the ways in
which the role played by them could be harmonised. The report clearly pointed towards
institutions and banks looking at mergers -- both within and across different types of
financial intermediaries -- and thereby view size as a strategy to thrive in a more
competitive environment.
Growing competition from other financial intermediaries, a harsher
environment for corporates and withdrawal of concessional funding have left DFIs
most vulnerable. Banks such as SBI have been able to venture into the domain of the
DFIs armed with low-cost deposits.
On the other hand, the foray of DFIs into the domain of banks have been
handicapped by the lack of access to low-cost deposits. In this environment, universal
banking that includes the likelihood of a reverse merger with ICICI Bank has for long
been a strategy proclaimed by ICICI.

67
 The biggest hurdles that the merger is likely to face are smoothening the
difference in regulatory requirements between commercial banks and DFI, and
convincing shareholders. Only early this week did the RBI say that universal banking
should not be viewed as a strategy to address the problems of financial institutions such
as non-performing assets.
In the case of shareholder approval, ICICI Bank' shareholders may not
necessarily be pleased because it enjoys a better equity valuation and a better
perception. ICICI's image has been clouded by speculation on the real extent of bad
loans in its books.
ICICI's shareholding in ICICI Bank is currently around 46 per cent. Both
ICICI and ICICI Bank are listed in New York Stock Exchange (NYSE), thereby
making it easier to handle merger-related issues there.
Though ICICI Bank's balance sheet (as on March 31, 2001) is just 29 per cent
the size of ICICI's balance sheet, it will give ICICI a chance to access lower cost funds
and thereby sharpen its competitive edge in many of its lending businesses.
One area where the impact could be telling is retail consumer financing
business such as commercial vehicle finance, an area dominated by finance companies.
ICICI, recently, entered commercial vehicle financing and the impact on pricing
structure was immediate. In the case of a merger, finance companies will find it almost
impossible to compete with ICICI.
The attempt at reverse merger between ICICI and ICICI Bank will be the first
of its kind in India. However, there have been other path-breaking moves to capitalise
on new opportunities. The most significant being the strategic alliance between LIC
and Corporation Bank after LIC took a 26.8 per cent equity stake in Corporation Bank.
The proposed reverse merger is likely to be a test case in the financial sector. If it goes
through smoothly, there may other such in the making. For example, IDBI and UTI are
two large institutions grappling with critical problems and IDBI in particular needs to
access lower cost funds to stay competitive. All eyes are likely to be glued to the ICICI
group for the moment.

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 IMPORTANCE AND NEED OF INVESTMENT BANKING IN
INDIA

Importance of public investment in infrastructure

ONE of the planks on which the Congress(I) came to power was seeing
greater role for the government in the economy. This is welcome. One only hopes the
party will not get derailed from this policy by the World Bank's advice.
After all, the Prime Minister, Dr Manmohan Singh, has been close to these multilateral
institutions. The World Bank has been teaching India for the last 10 years that it needs
a large amount of foreign capital for investment in infrastructure; that foreign capital
will come only when the domestic economy is stable; that stability will come when
inflation is in control; and that the government will have to reduce its expenditure to
control inflation.
Developing countries have more or less followed the World Bank approach.
In India, for example, inflation has been under 6 per cent for much of the last six years.
This is much lower than the 8-13 per cent inflation of the earlier decade. Yet, foreign
investment in infrastructure in the developing countries has declined instead of
increasing. According to World Bank's Global Development Finance Report 2004, the
share of foreign investors in investment in infrastructure of the developing countries
was 6.2 per cent six years ago. This declined to 3.4 per cent last year.
The World Bank taught India that foreign investment will rise if you maintain
economic stability but exactly the opposite happened. Foreign investments have
dropped in developing country infrastructure because they have not been profitable.
A survey of 32 road projects by Standard & Poor's found that the use of roads was less
than projected in 28 cases. Investors laid excellent roads thinking that many vehicles
would ply on them but this did not happen. Similarly, State Electricity Boards entered
into agreements with foreign investors to buy power at high prices thinking the
increasing demand would make it possible for them to sell expensive power to the
consumers. But demand for power did not materialise and investment in power sector
came to a standstill.

69
 Telecom companies made huge investments in optic fibre cables and 3-
Generation mobile phones across the world. But these investments are yet to return any
profits.
Why did the expected demand for infrastructure not happen? The reply the
World Bank and mainstream economists give is that the fiscal deficit of the
government is still large and deeper economic reforms are required. But they fail to
explain why the positive impact of reforms is not to be seen.
Why is the share of foreign investment in developing country infrastructure
declining? The truth is that the mantra of economic stability works like a double-edged
sword.
On the one hand, investments may increase because private investors have
greater confidence; but on the other, public investment declines because the
government has to control its fiscal deficit. New Delhi was investing 10 per cent of
GDP in the 1980s, according to Economic Survey. This has declined to 5.9 per cent in
2002. This decline in public investment led to a slowdown in the economy. As a result,
the demand for infrastructure did not arise as projected and the foreign investors ran
away. This explains the decline in the share of foreign investors in developing
countries.
The World Bank has indirectly accepted this reality. It has said in its Global
Development Finance report that "public sector support will remain crucial in attracting
private capital, particularly in sectors such as water and road transport." This is strange.
This is precisely what the Government of India was doing in the 1980s. It was
investing 10 per cent of GDP. At that time prices were rising at 8-12 per cent per year.
Infrastructure was being developed. At that time the World Bank got the government to
stop investing saying that it was more important to establish macroeconomic stability.
Now that there is considerable macroeconomic stability, the Bank is saying that the
role of the public sector is important!
The country was moving in the right direction. It was unnecessarily pushed
the wrong way by the World Bank. It is even more unfortunate that the World Bank
continues to harp on the importance of economic stability which practically means that
public investment in infrastructure has to be further reduced. It can be argued that

70
government consumption should be cut so that public investment can rise along with
lowered fiscal deficit. But that is asking for the moon. Salaries constitute a large part of
the revenue expenditures and they are difficult to cut. Moreover, revenue expenditures
in Defence, research, space, law and justice have the positive effect of fostering
economic growth. One question remains. How did China secure high rates of growth
by following the World Bank prescriptions? But this may prove to be short-lived. The
figures may also be suspect. But the more important point is that China is saving 45 per
cent of its national income while India is saving merely 23 per cent. Yet the growth
rates are nearly equal. This means that about 22 per cent savings of China are being
taken away by the MNCs. Thus, India should not get distracted by China's experience.
The role of government in infrastructure is important. It is welcome that the
Congress(I) has adopted this stance. Let us hope that it stays on course.

71
 RELATIONSHIP OF FOREGIN BANK AND INVESTMENT
BANKING

Global Relationship Banking

The Global Relationship Bank (GRB) is a leading provider of financial

services to top-tier multinational clients worldwide, serving the financial needs of the
world's preeminent corporations and financial institutions at both their head offices and
at their subsidiary operations, wherever they may be around the world.
Our organization is defined by the clients we serve, and we're staffed by
relationship bankers whose task is to understand the wide range of banking issues
facing these highly complex institutions. Combined with a keen appreciation for the
broad set of services offered by Citigroup, this understanding forms the basis for the
effective delivery of innovative, value-added solutions for our clients.
Serving companies in over 100 countries, the GRB is organized primarily
along industry lines. This organizational model yields a capability which draws on a
deep understanding of industry trends, as well as market knowledge based on a local
presence which dates back up to 100 years in many of these markets. The result is a
steady stream of innovative cross border and local financial solutions, tailored to the
specific needs of individual clients.
Our global relationship bankers are specialists in a full array of corporate
banking solutions, from cash management, foreign exchange, custody, clearing, and
loans, to capital markets, derivatives, and structured products. Importantly, they also
work in tandem with their investment banking partners to introduce our investment
banking capabilities to their relationship clients.
They can also draw upon the entire spectrum of Citigroup's services beyond
corporate and investment banking to serve the needs of clients and their employees, all
with the ultimate objective of helping their clients succeed in their businesses around
the world.

72
 RBI AND INVESTMENT BANKING
LEARNING FROM INDIA’S FIRST CDO
EXPOSURE: ON WHOM IS THE INVESTORS’ EXPOSURE?

A clarification on whether investing in securitisation instruments is exposure

to the originator or to the SPV is important. It is crucial that the isolation from the
originator be established and for the comfort of the investor clearly stated by the
Reserve Bank of India. In the case of ICCDO most of the major investors have a very
high exposure to ICICI. A clarification to investors from RBI to this effect would be a
necessity if any of the banks were expected to invest in ICCDO.
The method of obtaining this clarification from RBI is as follows: -
 First, an investing bank has to write a letter seeking a clarification
pertaining to exposure for this specific issue.
 A new structure necessitates an explanation of the instrument to
various people at RBI ranging from a Deputy Governor to a Deputy
General Manager.
 The process is time consuming and hence should be done on a
Proactive basis. This time period has to be considered while planning
a market issue where a similar clarification is required from the RBI.
 For ICCDO, subsequent to the letter from a Bank to RBI, it took
around 12-15 days to obtain the clarification. However it should be
noted that the work on this front was started somewhere in the
middle of February.
 In the case of ICCDO, ICICI’s relation with the regulator has played a
major role in expediting the clarifications.

73
In the case of the ICCDO issue, RBI has confirmed that investment in
this particular issue shall not be an exposure on ICICI.

However this issue has not been resolved completely, for the simple reason that
this letter from RBI does not state as to whom the investor is exposed to should he
invest in the ICCDO.
All the same, this letter is very significant as it is the first time that the RBI has
chosen to comment on any securitised instrument. It may be interesting to note what
the RBI working Committee says on this: -
Suggestion in RBI Working Committee Report:
“Banks and Financial Institutio ns investing in the ABS/MBS will get exposed
to the pool of assets/mortgages/obligors underlying such securities. The institutions
therefore, should guard against concentrations of exposures to a particular
industry/sector, institution or geographic area.
In the case of a large number of underlying obligors, the exposure may be
treated against this particular sector to which the pool of assets belong. In case there are
one or two obligors, the exposure may be treated against those obligors. In case there
are a few identifiable obligors, each of whom has the share of 25 per cent or more in
the pool of assets, the exposure may be treated proportional against those borrowers.”

It is to be noted that this is only a recommendation by a committee and does

not have e any regulatory value.

ELIGIBILITY CRITERIA FOR INVESTORS

Co-Operative Banks and Regional Rural Banks Co-operative Banks are not
allowed to invest in Mutual Funds except for schemes floated by UTI. This regulation
did not allow them to invest in the ICCDO. Even RRBs are not allowed to invest in
mutual funds. Co-operative banks cannot invest in corporate paper. RRBs are allowed
to invest in corporate paper with a cap of 5% of their incremental deposits.

74
 Mutual Funds
Mutual Funds preferred to stay aw ay from the issue. The main reason has
been the issuance of the securities in the form of Mutual Fund units. MFs cannot invest
more than 5 % of their Net Asset Value in other mutual funds. If a
Mutual Fund invests in another MF unit they also lose out on AMC fees. If
Mutual Funds had come in as investors into this issue, it would have been a
positive boost for secondary market liquidity of this instrument, as they (MFs)
are the most active traders.

VALUATION OF THE PAPER IN THE BOOKS OF INVESTORS:

A major concern for investors is the valuation of this instrument. The
confusion probably cropped up due to the fact that the instrument is to be traded like a
other bond, however the valuation was to be done as per any other mutual fund unit. Its
NAV was to be declared every week as is mandatory under SEBI rules.
Bank valuation is done on category wise basis, depending on which category
the investment falls under viz. ‘Available for Trading’, ‘Available for Sale’ and ‘Held
To Maturity’. For ‘Available For Trading’ category, the valuation is done on a daily/
weekly basis, as and when the NAV is published.
In ‘Available For Sale’ category, the valuation is done on a quarterly / half
yearly / annual basis and for ‘Held To Maturity’ category, no valuation is required. For
valuation, the price considered is either the NAV or the repurchase price, whichever is
lower.

CONCERN ABOUT THE UNDERLYING POOL OF ASSETS.

The inclusion of certain assets, which has defaulted on interest payments to
institutions, has made investors skeptical about the motive behind this securitisation
transaction. Investors wrongly felt that ICICI is trying to take out bad assets out of its

75
books. The best way to allay these fears is if the Originator continues to hold some
assets of the same Obligors, after securitising a part. If to say that nearly all the assets
continue to remain on ICICI’s books. However, it should be well emphasized to the
investors that since it is very unlikely that all assets would default at the same time, the
cushion in terms of cash reserve and tranching is sufficient to protect investors from
any yield loss to certain extent.

SECONDARY TRADING IN THE PAPER:

ICICI agreed to provide Market Making in this instrument by way of daily
two - way quotes. Besides that, the mutual fund units were also proposed to be listed
on the NSE. However, investors still remained unconvinced about liquidity since this
was a first time transaction, with no precedent to build their comfort level.

MARKETING STRATEGY
The marketing efforts have been stupendous and close to 400 presentations
were made to the whole gamut of prospective investors. In our opinion, this exercise
has increased market awareness of Securitization and particularly CDO’s
tremendously. All the same in hindsight, we can possibly say that the following two
strategies could have positively impacted the overall marketing.
Should the marketing have been top down or bottoms up?
Though both the approaches were taken, in our opinion, a higher and early
concentration on a top-down approach would have worked better.

76
 CASE STUDY

ICICI Bank has successfully implemented Microsoft® BizTalk ™ Server

2002 as an enterprise application integration solution as part of the infrastructure
for its multi-channel banking operations. It helped the bank overcome the
limitations of the then existing infrastructure in terms of scalability and flexibility.
To further enhance its capabilities in this area, it joined the early adopter
program (EAP) for Microsoft BizTalk Server 2004. ICICI Bank wanted to
explore how new features, such as Rules Engine and Business Activity Monitoring
(BAM), would help it meet the increasingly sophisticated demands of its
customers. The results of the trial showed that the bank could achieve much more
flexibility and efficiency in report generation and monitoring. It could also
achieve more complex orchestration of transactions between its channels and
various back-office systems, as well as increased processing capabilities. After the
trial, the migration path to BizTalk 2004 has become much clearer for the bank.

Situation
In the retail banking market, providing a multi-channel experience is no
longer an option for banks, it is a necessity, driven by an ever more competitive
landscape. At the same time, consumers are more informed about financial services and
far more likely to switch between providers. This requires banks to differentiate
themselves from the competition by providing a unique customer experience
ICICI Bank, India’s second largest bank, with total assets of about Rs.112,024
crore, wanted to provide an enriched customer experience that would encourage loyalty
among existing users and help it gain new business. Less than five years ago, banking
in India was primarily restricted to branches. But ICICI Bank has been at the forefront
of change in the country, rolling out a multi-channel strategy that today includes a
network of about 450 branches and offices, 1,750 ATMs, a 1,500-seat call center and
an Internet banking user base of over five million.

77
 The bank offers a wide range of banking products and financial services to
corporate and retail customers in the areas of consumer banking, investment banking,
life and non-life insurance, venture capital and asset management. It found that with a
rapid growth in customer numbers, the proprietary middleware it had built to connect
the multiple channels with the bank’s various back-office systems was no longer
sufficient. It needed a solution that would achieve a high level of integration and the
flexibility to service customers in a more efficient and effective manner.

Jayant Prasad, Manager, Technology Management Group, ICICI Bank, says:

“Our middleware at the time just was not scaling to the kind of volumes we were
beginning to see. It also wasn’t flexible enough for the type of demands that the
business was putting on it, in terms of implementing new transactions and modifying
existing ones.”

After a tendering process, including leading middleware vendors, the bank

implemented an enterprise middleware based on Microsoft® BizTalk™ Server 2002
and Microsoft SQL Server™ 2000. This was implemented by Microsoft Consulting
Services and ICICI Infotech, a group company of ICICI Bank, and completed after
several months. The custom code layer built on top of BizTalk Server 2002 was
originally built using C++, but since then the bank has moved to the Microsoft .NET
Framework and the Visual Studio .NET development environment to take advantage of
native support for XML Web services, component re-use and improved development
efficiency.
The bank has used the business process orchestration capabilities of BizTalk
to create drawings that describe loosely coupled business processes, and the
synchronous and asynchronous linkages between multiple channels and back-office
systems. These processes can then be compiled and executed.
ICICI was satisfied with the progress it made thanks to BizTalk Server 2002.
For this reason, it was keen to investigate BizTalk Server 2004, and signed up to the
early adopter program to evaluate its migration options. It was particularly interested in

78
new features, such as Health Activity Tracking, Rules Engine, Business Activity
Monitoring, and Human Workflow to help increase its customer service capability

Solution
ICICI Bank decided it would use BizTalk Server 2004 in two different
scenarios to explore new enhancements and how they might benefit the bank. As with
the implementation of its original solution, it was supported by Microsoft Consulting
Services and ICICI Infotech
The first scenario was one that the bank already had been testing in its existing
solution, and was tested with BizTalk 2004 to explore how the migration of
orchestrated transactions would work.
In this scenario, customers’ credentials such as credit card number and PIN
are supplied at a front-end channel are sent to the back-end system for validation. Upon
successful validation, the transaction can then be sent to the credit card system for
processing using the orchestration features of BizTalk 2004
A second, new orchestration-based scenario that could potentially run at the
bank’s call centers, related to a customer request for a credit card limit increase. This
provided ICICI Bank’s technology team with a clear understanding of how and where
Microsoft Office InfoPath™ 2003 could play a role within its solution as a forms
engine
The powerful features within BizTalk 2004 provide the ability to expose
orchestrations as Web services as well as call Web services from within orchestrations.
The testing also revealed how property fields could be used to enable correlation
between sets of transactions and promote data fields within XML schemas.
The new business process orchestration capabilities also afforded more power to define
and implement complex pathways for the developers. The use of Business Rules
Composer and InfoPath provided the bank with a flexible, user-friendly front end to
BizTalk 2004. This would enable call center workers to amend and make additions to
forms in the familiar Microsoft Office System environment.

79
Both scenarios meant the developers could use the Health Activity Tracking
functionality within BizTalk 2004 to identify and track the status of an executing
orchestration. Further, the business groups could use the Business Activity Monitoring
(BAM) module for online tracking of processes, as well as the identification of
business milestones.

80
 Conclusion

 Investment banks assist public and private corporations in raising funds in the
Capital Markets (both equity and debt), as well as in providing strategic
advisory services for mergers, acquisitions and other types of financial
transactions. Investment banks differ from Commercial Banks which serve to
directly take deposits and make commercial and retail loans. ...

 Businesses specializing in the formation of capital. This is done by outright

purchase and sale of securities offered by the issuer, standby underwriting, or
"best efforts selling."

 A form of banking done by investment banking firms for corporations , The

bank performs public offerings, acts as a broker, and carries through mergers
and acquisitions.

 It means financing of the capital requirements of an enterprise rather than the

current working capital demand of business.

81
 BIBLIOGRAPHY

The data which I have collected from the two sources

 Internet site i.e.

www.google.com
www.rbi.com

 The book which I have referred i.e.

“INTERNATIONAL BANKING
OPERATIONS”

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