Module 1

INVESTMENT BANKING AND FINANCIAL

SERVICES

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  Introduction:
 Definition of investment banking:
A specific division of banking related to the creation of capital
for other companies. Investment banks underwrite new debt
and equity securities for all types of corporations. Investment
banks also provide guidance to issuers regarding the issue and
placement of stock.

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  DEFINITION of 'Investment Bank - IB'
 A financial intermediary that performs a variety of services. Investment
banks specialize in large and complex financial transactions such as
underwriting, acting as an intermediary between a securities issuer and
the investing public, facilitating mergers and other corporate
reorganizations, and acting as a broker and/or financial adviser for
institutional clients. Major investment banks include Barclays, BofA
Merrill Lynch, Warburg's, Goldman Sachs, Deutsche Bank, JP Morgan,
Morgan Stanley, Salomon Brothers, UBS, Credit Suisse, Citibank and
Lazard. Some investment banks specialize in particular industry sectors.
Many investment banks also have retail operations that serve small,
individual customers.

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 Functions of investment banks
 IPOS: initial public offering. Investment banking helps in
raising the capital for both public as well as private company
by providing underwriting securities.
 Investment management: Investment bankers also
provide advice to investors on buying selling and
managing securities(bonds,shares,) like other facilities
like real estate,hedge fund, mutual fund etc.the
investment management division has been divided into
separate division called private wealth management and
private client services.

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  Boutiques: Small investment banking firms providing
financial services are called boutiques. They are mainly
specialised in trading bonds, advising for mergers and
acquisition , and providing technical analysis.
 Mergers and acquisitions:
The company offers mergers and acquisition services.
 Structuring of derivates:
the company needs to focus on structuring derivatives .
Merchant banking :

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  Investment banks help companies and governments
and their agencies to raise money by issuing and selling
securities in the primary market. They assist public and
private corporations in raising funds in the capital
markets (both equity and debt),
 as well as in providing strategic advisory services for
mergers, acquisitions and other types of financial
transactions.

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  Investment banks also act as intermediaries in trading for
clients. Investment banks differ from commercial banks,
which take deposits and make commercial and retail loans.
 In recent years, however, the lines between the two types of
structures have blurred, especially as commercial banks have
offered more investment banking services.
 Investment banks may also differ from brokerages, which in
general assist in the purchase and sale of stocks, bonds, and
mutual funds. However some firms operate as both
brokerages and investment banks; this includes some of the
best known financial services firms in the world.

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  The primary function of an investment bank is buying
and selling products both on behalf of the bank's clients
and also for the bank itself. Banks undertake risk through
proprietary trading, done by a special set of traders who
do not interface with clients and through Principal
Risk.
 Risk undertaken by a trader after he or she buys or sells a
product to a client and does not hedge his or her total
exposure. Banks seek to maximize profitability for a
given amount of risk on their balance sheet.

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  The professional management of various securities
(shares, bonds etc) and other assets (e.g. real estate), to
meet specified investment goals for the benefit of the
investors. Investors may be institutions (insurance
companies, pension funds, corporations etc.)
 private investors (both directly via investment contracts
and more commonly via collective investment schemes,
mutual funds) .

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  Role as an advisor
 Deciding how to raise capital is a major decision for any company
or government. In most cases, they lean on an investment bank –
either a large Wall Street firm or a “boutique” banker – for
guidance.
 Taking into account the current investing climate, the bank will
recommend the best way to raise funds. This could entail selling an
ownership stake in the company through a stock offer or
borrowing from the public through a bond issue. The investment
firm can also help determine how to price these instruments by
utilizing sophisticated financial models.
 In the case of a stock offering, its financial analysts will look at a
variety of different factors – such as earnings potential and the
strength of the management team – to estimate how much a share
of the company is worth. If the client is offering bonds, the bank
will look at prevailing interest rates for similarly rated businesses
to figure out how much it will have to compensate borrowers.

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  Investment banks also offer advice in a merger or acquisition
scenario. For example, if a business is looking to purchase a
competitor, the bank can advise its management team on how
much the company is worth and how to structure the deal in
a way that’s favourable to the buyer

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  Underwriting stocks and bonds:
If an entity decides to raise funds through an equity or debt
offering, one or more investment banks will also underwrite
the securities. This means the institution buys a certain number
of shares – or bonds – at a predetermined price and re-sells
them through an exchange.
 Research – Larger investment banks have large teams that
gather information about companies and offer
recommendations on whether to buy or sell their stock. They
may use these reports internally but can also generate
revenue by selling them to hedge funds and mutual fund
managers.

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  Trading and Sales – Most major firms have a trading
department that can execute stock and bond transactions on behalf
of their clients. (L8) In the past, some banks have also engaged
in proprietary trading, where they essentially gamble their own
money on securities; however, a recent regulation known as
the Volcker Rule has clamped down on these activities.
 Asset Management – The likes of J.P. Morgan and Goldman
Sachs manage huge portfolios for pension funds, foundations and
insurance companies through their asset management department.
Their experts help select the right mix of stocks, debt
instruments, real estate trusts and other investment vehicles to
achieve their clients’ unique goals.

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  Wealth Management – Some of the same banks that perform
investment banking functions for Fortune 500 businesses also cater
to everyday investors. Through a team of financial advisors, they
help individuals and families save for retirement and other long-
term needs
 Securitized Products – These days, companies often pool
financial assets – from mortgages to credit card receivables – and
sell them off to investors as a fixed-income products. An
investment bank will recommend opportunities to “securitize”
income streams, assemble the assets and market them to
institutional investors.

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  The Bottom Line
 While some of their more complex products have given
investment banks a bad name, these firms play an important
role by helping companies and government entities make
educated financial decisions and raise needed capital.

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 Types of investment banks
1. Full service firms: they provide services from
underwriting, mergers and acquisitions, distribution,
brokerage, structured instruments, asset management.
2. Commercial banks:
3. Boutique firms
4. Brokerage firms
5. Asset management firms

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 Merchant Banking services
 Merchant banking services:
 Meaning:
 A bank that deals mostly in (but is not limited to) international
finance, long-term loans for companies and underwriting is merchant
bank. Merchant banks do not provide regular banking services to the
general public.

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 Services of merchant banking
1.Corporate counselling:
Corporate counselling covers the entire field of merchant
banking activities, project counselling, capital restructuring ,
project management
2.Project counselling:
it includes preparation of project reports, deciding upon the
financial pattern to finanace the cost of the project and
appraising the project report with banks
3.Loan syndication- merchant banking provides assistance in
getting loans from banks
4.Issue management-

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  The issue management has been divided into 2:
1. Pre issue management
2. Post issue management
The pre issue management is divided into:
 Issue through prospectus, offer for sale and private placement
 Marketing and underwriting
 Pricing of issues

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 Issue through prospectus-
It is done through sale of securities in private placement, the
investors include LIC,UTI,GIC,SFC.
 Marketing: after despatch of prospectus to SEBI , the
merchant bankers arrange a meeting with company
representatives and advertising agents to finalise
arrangements relating to date of opening and closing of issue,
registration of prospectus , launching publicity campaign.
 Pricing of issues:
The capital issues have opened the capital market to free pricing
of issues.

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  Post issue management :
It consists of collection of application forms and statement of
account received from bankers, screening applications, deciding
allotment procedure ,mailing of allotment letters ,share
application and share certificates and refund orders.
 Underwriting of public issue:
Underwriting is a guarantee given by the underwriter that in
the event of undersubscription , the amount underwritten ,
would be subsrcibed by him.

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  Managers, consultants or advisors to the issue.
The managers to the issue assist in the drafting of prospectus,
application forms and completion of formalities under the companies
act, appointment of registrar for dealing with share applications and
transfer and listing of shares of the company on the stock exchange.
5. Portfolio management:
Portfolio refers to investment in different kinds of securities such as
shares, debentures or bonds issued by different companies and
securities issued by the government.
It is not merely a collection of unrelated assets but a carefully
blended asset combination within a unified framework.
Portfolio management refers to maintaining proper combination of
securities in a manner that they give maximum return with the
minimum risk..

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 6.Advisory service relating to mergers and acquisitions:
It also provides mergers and acquisition services to the clients .
7.Off shore finance: the merchant bankers help their clients in
the following areas involving foreign currency.
1. Long term foreign currency loans
2. Joint ventures abroad
3. Financing exports and imports
4. Foreign collaboration arrangements

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 Changing landscape of investment
banking regulation of the capital
market
 Growth of new issue market: the growth of new issue market
is unprecedented since 1990-91. the amount of annual
average of capital issues by non government public companies
was only about rs 90 crore in the 70s, the same rose to over
rs 1000 crore in the 80s and further to 22,233 crore.
 Entry of foreign investors: an outstanding development in the
history of indian capital market was its opening up in 1992 by
allowing foreign institutional investors to invest in primary
and secondary market and also permitting indian companies
to directly tap foreign capital through euro issues.

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  Changing policy of financial institutions: with the changing
emphasis in the lending policies of financial institutions from
security orientation to project orientation, corporate
enterprises would require the expert services of merchant
bankers for project appraisal, financial management. The
policy of decentralisation and encouragement of small and
medium industries will further increase the demand for
technical and financial services which can be provided by
merchant bankers.

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  Development of debt market- the concept of debt market has
set to work through national stock exchange and over the
counter exchange of India.
 Innovations in financial instruments: the Indian capital
market has witnessed innovations in the introduction of
financial instruments such as non convertible debentures
with detachable warrants, cumulative convertible preference
shares, zero coupon bonds, deep discount bonds, triple
option bonds,secured premium notes, floating rate bonds,
auction rated debentures.

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  Corporate restructuring: as a result of liberalisation and
globalisation, the. competition in the corporate sector is becoming
intense. To survive in the competition, companies are reviewing
their strategies , structure and functioning. This had led to
corporate restructuring including mergers, acquisitions, splits,
disinvestments and financial restructuring.
 Disinvestment-the government raised rs 2000 crore through
disinvestment of equity shares of selected public sector
undertakings in 1993-94. the government proposes to shift the
present method of periodic sale of public sector shares to round
the year offloading of shares directly on the stock exchange from
the year 1995-96

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 SEBI guidelines for merchant bankers
 To protect the investors interest, the SEBI has made it mandatory for
merchant bankers to disclose on their websites the following:
 For each issue the matters to be disclosed are:
1. Three year track record of companies whose IPO’S /FPO s were
managed by them for each issue the matters to be disclosed are :
2. Issue size
3. Extent of over /under subscription
4. The shareholding of the QIBs at the end of each of the three
subsequent financial years.
5. Financials of the company for 3 years
6. Earnings per share and price earning multiple at the end of the each
three financial years
7. Post listing via a vis the peer as well as the industry average.
8. The extent of trading of shares whether active or thin.

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 Brokers and sub brokers
 DEFINITION of 'Broker'
 1. An individual or firm that charges a fee or commission for
executing buy and sell orders submitted by an investor.
 2. The role of a firm when it acts as an agent for a customer
and charges the customer a commission for its services.
 3. A licensed real estate professional who typically represents
the seller of a property. A broker's duties may include:
determining market values, advertising properties for sale,
showing properties to prospective buyers, and advising
clients with regard to offers and related matters.

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 'Broker'
 Traditionally, only the wealthy could afford a broker and
access the stock market. The internet triggered an explosion
of discount brokers, which allow investors to trade at a lower
cost, but don't provide personalized advice. Because of
discount brokers, almost anybody can afford to invest in the
market.

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 Functions of brokers
1.Client registration-
first of all , a trading broker has to enter into an agreement in
the specified format with his client before accepting any orders
on his client’s behalf.
It has to be on stamp paper. The information may release to :
Investors financial profile
Investors risk profile and risk taking ability
Investors social profile

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  The broker has to obtain 3 size photos in case of individual
clients and all partners in the case of partnership firms.
2. Obtaining margin money-it is also mandatory for the broker
to collect margins from his clients in all cases where the margin
in respect in his client in settlement , would work out to be
more than 50000.
3. Execution of orders-the main objective is to execute the
client orders carefully.
4. Supply of necessary slips- on execution of trade , the broker
.i.e. the trading member should inform his client the order
number.

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  Issue of contract note- the broker should then issue a
contract note to his clients for all trades, whether for
purchase or sale of securities , executed with all relevant
details.
This contract note should be issued within 24 hours of the
execution of the contract.
 Statement of particulars in a contract note-
It is mandatory to mention the details of the investors say: the
name, address, and sebi regulation and registration number of
the member broker.

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  Payment/delivery of securities- it is the duty to make the
payment or delivery of securities within 24 hours of time.

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 Registration of sub brokers
 Definition. A 'Sub-Broker' is any person who is not a
Trading Member of a Stock Exchange but who acts on behalf
of a Trading Member as an agent or otherwise for assisting
investors in dealing in securities through such Trading
Members.

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 Apart from the brokers, there are other category of persons
called sub brokers. As a matter of fact, a sub broker is not a
member of stock exchange .
But he is a person who acts as an agent of a stock broker.
 Jobbers- a jobber is a professional independent broker who
deals in securities on his own behalf. His main job is to make
a margin of profit from the price variations of securities.
 Tarawaniwalas- he is an active member in bse.he is similar to
a jobber in the london stock exchange.
 Commission brokers-he buys and sells securities on behalf of
his clients for commission.
 Sub brokers-he is an agent of stock broker. He helps the
clients to buy and sell securities only through the stock
broker.

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