Project Report on

‘Investment Banking in India’

Submitted in Partial Fulfillment of the

Requirements for the Diploma
Of
[Post Graduate Diploma in Management]

By

Smriti Singh

09/105

Institute of Computer & Business Management

School of Business Excellence

2009-2011

1
 ACKNOWLEDGEMENT

I owe a great many thanks to a great many people who helped and supported me during the
writing of this Project Report.

The project as it stands today is the sincere contributions of a few spirited individuals and the
help of some of my friends. I take this opportunity to express my sincere gratitude to MR.
Praveen, RELIGARE ENTERPRISES LTD., for their valuable suggestion, constant
encouragement, silent support & unwavering confidence, without which this project would not
have been possible. It was they who motivated for this cause (to do something entirely new) and
always was present with their expert guidance and disciplined ideas.
I am sincerely indebted to our Director Mr. Jitendra Govindani, Principal Prof. S. Zarar and
Mrs. Ritu Zarar. And Finance Department Head Mrs. Sai Rani and my mentor Mr. Ramesh
Babu and Mrs. Annie Kavita for his outstanding and undeniable considerations. I would also
like to thank all my friends who have bore with me during this project, apart from that, those
who have helped up in some way or the other. Last but not the least I would like to extend my
heartfelt thanks to my parent, who were with me when I was some expensive about the project.
Their help and encouragement also proved to be a handful.

SMRITI SINGH

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 DECLARATION

I, SMRITI SINGH, student of PGDM from ICBM-School of

Business Excellence hereby declare that I have completed this

project on “investment banking” in the academic year 2009-

11. The information submitted is true and original to the best of

knowledge.

Signature of student

Smriti Singh

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 CERTIFICATE OF GUIDE

This is to certify that the work incorporated in this Project Report

entitled “A Project Report on Investment Banking in India With
reference to Religare Enterprises Ltd” submitted by Smriti Singh is
her original work and completed under my supervision.

Date: Guide Signature:

Place: Hyderabad

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 CERTIFICATE OF COMPANY

This is to certify that the work incorporated in this Project Report

entitled “Investment Banking in India With reference to Religare
Enterprises Ltd” submitted by Smriti Singh is his original work and
completed under my supervision.

Date: Guide Signature:

Place: Hyderabad

5
 Table of content

Chapter No. Particular Page No.

 INTRODUCTION

Chapter-1  OBJECTIVES OF THE STUDY 7-11

 NEED OF THE STUDY

 LIMITATIONS OF STUDY

Chapter-2 EXECUTIVE SUMMARY 12-13

Chapter-3 COMPANY PROFILE 14-23

 FINDINGS

Chapter-4  SUGGESTIONS 24-70

 CONCLUSION

BIBLIOGRAPHY 71-72
Chapter-5

ANNEXURE 73-75
Chapter-6

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Executive
Summary

7
In the current economic scenario interest rates are falling and fluctuation in the share market has
put investors in confusion. One finds it difficult to take decision on investment. This is primarily,
because of investments are risky in nature and investors have to consider various factors before
investing in investment avenues. At a very macro level, ‘Investment Banking’ as term suggests,
is concerned with the primary function of assisting the capital market in its function of capital
intermediation, i.e., the movement of financial resources from those who have them (the
Investors), to those who need to make use of them for generating GDP (the Issuers). Banking and
financial institution on the one hand and the capital market on the other are the two broad
platforms of institutional that investment for capital flows in economy. Therefore, it could be
inferred that investment banks are those institutions that are counterparts of banks in the capital
markets in the function of intermediation in the resource allocation. Nevertheless, it would be
unfair to conclude so, as that would confine investment banking to very narrow sphere of its
activities in the modern world of high finance. Over the decades, backed by evolution and also
fuelled by recent technologies developments, an investment banking has transformed repeatedly
to suit the needs of the finance community and thus become one of the most vibrant and exciting
segment of financial services. Investment bankers have always enjoyed celebrity status, but at
times, they have paid the price for the price for excessive flamboyance as well.

8
Introduction

9
 Investment banking
Introduction

Investment Banking, branch of finance concerned with the underwriting, distribution, and
maintenance of markets in securities issued by business firms and public agencies. Investment
bankers are primarily merchants of securities; they perform three basic economic functions:

(1) Provide capital for corporations and local governments by underwriting and distributing new
issues of securities; (2) maintain markets in securities by trading and executing orders in
secondary market transactions; and (3) provide advice on the issuance, purchase, and sale of
securities, and on other financial matters. In contrast to commercial banks, whose chief functions
are to accept deposits and grant short-term loans to businesses and consumers, investment
bankers engage primarily in long-term financing.

Investment banking is a field of banking that aids companies in acquiring funds. In addition to
the acquisition of new funds, investment banking also offers advice for a wide range of
transactions a company might engage in. Traditionally, banks either engaged in commercial
banking or investment banking. In commercial banking, the institution collects deposits from
clients and gives direct loans to businesses and individuals

An investment bank is a financial institution that raises capital, trades in securities and manages
corporate mergers and acquisitions. Investment banks profit from companies and governments
by raising money through issuing and selling securities in the capital markets (both equity, bond)
and insuring bonds (selling credit default swaps), as well as providing advice on transactions
such as mergers and acquisitions. A majority of investment banks offer strategic advisory
services for mergers, acquisitions, divestiture or other financial services for clients, such as the
trading of derivatives, fixed income, foreign exchange, commodity, and securities. Trading
securities for cash or securities (i.e., facilitating transactions, market-making), or the promotion
of securities (i.e., underwriting, research, etc.) was referred to as the "side”. Dealing with the
pension funds, mutual funds, hedge funds, and the investing public who consumed the products
and services of the sell-side in order to maximize their return on investment constitutes the "buy
side". Many firms have buy and sell side components. An investment banking firm also does a
large amount of consulting. Investment bankers give companies advice on mergers and
acquisitions, for example. They also track the market in order to give advice on when to make
public offerings and how best to manage the business' public assets. Some of the consultative
activities investment banking firms engage in overlap with those of a private brokerage, as they
will often give buy-and-sell advice to the companies they represent. The line between investment
banking and other forms of banking has blurred in recent years, as deregulation allows banking
institutions to take on more and more sectors. With the advent of mega-banks which operate at a
number of levels, many of the services often associated with investment banking are being made
available to clients who would otherwise be too small to make their business profitable.

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 Objective of the study

 To study about Investment Banking in India with reference to Religare Enterprises Ltd.

 To compare Investment banking with Merchant banking and Commercial banking

 To discuss about origin and growth and future of Investment Banking.

 To study the various product and services offered by Investment Banking.

 To analyze Investment banking as a better alternative to raise capital.

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 Need of the study

This will help to understand about the investment Banking and its opportunity in India. This will
help to know the current scenario of the Investment Banking in India and Globally. This project
also gives the information about the origin, function, role, future, growth and advantage of
Investment Banking in India,

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 Limitations

1. The scope of the study was only restricted in the India.

2. Time period was very less for this study. Time period was 45 days only.
3. Topic is very broad which covers very large area.
4. Unwillingness of respondents to provide the information.

13
Company Profile

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Religare is driven by ethical and dynamic process for wealth creation. Based on this, the
company started its Endeavour in the financial market.
Religare Enterprises Limited (A Ranbaxy Promoter Group Company) through Religare
Securities Limited, Religare Finevest Limited, Religare Commodities Limited and Religare
Insurance Advisory Services Limited provides integrated financial solutions to its corporate,
retail and wealth management clients. Today, we provide various financial services, which
include Investment Banking, Corporate Finance, Portfolio Management Services, Equity &
Commodity Broking, Insurance and Mutual Funds. Plus, there’s a lot more to come your way.
Religare is proud of being a truly professional financial service provider managed by a highly
skilled team, who have proven track record in their respective domains. Religare operations are
managed by more than 2000 highly skilled professionals who subscribe to Religare philosophy
and are spread across its country wide branches. Today, we have a growing network of more
than 150 branches and more than 300 business partners spread across more than 180 cities in
India and a fully operational international office at London. However, our target is to have 350
branches and 1000 business partners in 300 cities of India and more than 7 International offices
by the end of 2006.Unlike a traditional broking firm, Religare group works on the philosophy of
partnering for wealth creation. We not only execute trades for our clients but also provide them
critical and timely investment advice. The growing list of financial institutions with which
Religare is empanelled as an approved broker is a reflection of the high level service standard
maintained by the company. Religare Enterprises Limited group comprises of Religare Securities
Limited, Religare Commodities Limited, Religare Finevest Limited and Religare Insurance
Advisory Limited which deal in equity, commodity and financial services business.

Religare Securities Limited

RSL is one of the leading broking houses of India and are dealing into Equity Broking,
Depository Services, Portfolio Management Services, Institutional Equity Brokerage &
Research, Investment Banking and Corporate Finance. Extension of services has been a constant
feature in Religare to regard the needs of our clients. Consequently, company is soon going to
launch Internet Trading and Merchant Banking. This would take care of different investment
needs of different classes of investors to facilitate free and fare trading process Religare is a
member of major financial institutions like, National Stock Exchange of India, Bombay Stock

15
Exchange of India, Depository Participant with National Securities Depository Limited and
Central Depository Services (I) Limited, and a SEBI approved Portfolio Manager. RSL serves a
platform to all segments of investors to avail the opportunities offered by investing in Indian
equities either on their own or through managed funds in Portfolio Management.

Religare Commodities Limited

Religare is a member of NCDEX and MCX and provides platform for trading in commodities,
which is an online facility also. RCL provides platform to both agro and non-agro commodity
traders to derive the actual price of the commodity and also to trade and hedge actively in the
growing commodity trading market in India. With this realization, Religare Commodities is
coming up with its branches at 42 Mandy locations. It is a flagship effort from our team which
would be helpful in facilitating trade and speculating price of commodities in future.

Religare Finevest

Religare Finevest Limited (RFL), a Non Banking Finance Company (NBFC) is aggressively
making a name in the financial services arena in India. In a fast paced, constantly changing
dynamic business environment, RFL has delivered the most competitive products and services.
RFL is primarily engaged in the business of providing finance against securities in the secondary
market. It also provides finance for application in Initial Public Offers to non-retail clients in the
primary market. RFL is also planning to initiate personal loan portfolio as fund based activity
and mutual fund distribution as fee based activities. Along with this, the company also
undertakes non-fund based advisory operations in the field of Corporate Financing in the nature
of Credit Syndication which includes inter alia, bills discounting, inter corporate deposit,
working capital loan syndication, placement of private equity and other structured products.

16
Religare Insurance Advisory Ltd.
Religare has been taking care of financial services for long but there was a missing link.
Financial planning is incomplete without protective measure i.e. structured products to take care
of event of things that may go wrong. Consequently, Religare is soon coming up with Religare
Insurance Advisory Services Limited. As composite insurance broker, we would deal in both
insurance and reinsurance, providing our clients risk transfer solutions on life and non-life sides.
This service will take benefit of Religare’s vast business empire spread throughout the country --
providing our valued clients insurance services across India. We aim to have a wide reach with
our services – literally! That’s why we are catering the insurance requirements of both retail and
corporate segments with products of all the insurance companies on life and non-life side. Still,
there is more in store. We also cater individuals with a complete suite of insurance solutions,
both life and general to mitigate risks to life and assets through our existing network of over 150
branches – expected to reach 250 by the end of this year! For corporate clients, we will be
offering value based customized solutions to cover all risks which their business is exposed to.
Our clients will be supported by an operations team equipped with the best of technology
support. Religare Insurance Advisory aims to provide neutral, transparent and professional risk
transfer advice to become the first choice of India.

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 Investment Banking of Religare

Our Investment Banking business offered through Religare Capital Markets Limited (RCML), a
wholly owned subsidiary of the holding company, Religare Enterprises Limited, deals in
merchant banking, transaction advisory and corporate finance servicing the Corporate,
Entrepreneurs and Investors.

Supported by a dynamic team of professionals with proven track record, our Investment Banking
division is backed by in-depth understanding of the regulatory systems. With our expertise, we
create customized capital structures that are aligned to the customers, business plan and
stakeholder objectives.

Through its diligent processes in Investment Banking, Religare wishes to partner with the
midcaps, be it for Transaction Advisory services, Private Equity placements, Debt Syndication or
even entering the Primary Market, ECB, FCCB, GDR/ADR, etc. Religare's Investment Banking
is a one-stop shop for all these services.

At Religare, our constant endeavor is to forge strong relationships and our innovation and
uncompromising ethical standards that have enabled us to develop global distribution &
execution capabilities.

The Religare Edge

 Excellent track record in deal closing and capital raising

 End-to-End solution delivery capability and in-depth understanding of the
regulatory systems.
 Global presence with offices operating in nine countries besides India.
 Pan India presence in 1550 locations across more than 460 cities & towns.
 Powerful research and analytics supported by a pool of highly skilled Research
Analysts
 Ethical business practices
 Part of a large diversified Indian trans-national promoter group

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 Group structure

Religare Enterprises Limited

Religare AMC Limited (100%) Religare Finvest Limited (100%)

 Asset Management Business  Lending and Distribution business

 Portfolio Management

Religare Insurance Broking Limited (100%)

AEGON Religare Life Insurance Co. Ltd. (44%)
 Life Insurance Broking Business
 Life Insurance Company, JV with  Non-Life Insurance Broking Business
Aegon(26%),
     Religare(44%), and Bennett &
Coleman(30%) Religare Arts Initiative Limited

 Business of Art
Religare Macquarie Wealth Mgmt. Ltd. (50%)  Gallery launched - arts-i

 JV with Macquarie for Wealth Management

Business Religare Venture Capital Limited

 Private Equity and Investment Manager

Religare Securities Limited (100%)

 Retail Equity Broking Vistaar Religare Capital Advisors Ltd. (74%)

 Online Investment Portal
 Depository Services  JV with Vistaar Entertainment Ventures for
film fund
 India's first ever film fund
Religare Commodities Limited (100%)
Religare - Milestone (50%)
 Retail Commodity Broking Business
 JV with Milestone Capital to manage a
healthcare and education fund

Religare Capital Markets Limited (100%) Religare Finance Ltd.

 PE and M&A Advisory  Capital Market Financing

 Institutional Broking

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 Investment Banking

Competitors of Religare Enterprises Ltd.

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Few Major competitors of Religare Enterprises are:
 India bulls
 Anand Rathi securities
 ICICI Securities.
 Sharekhan
 Kotak Securities
 India Infoline

India Infoline Ltd:

India Infoline Ltd is listed on both the leading stock exchanges in India, viz. the Stock Exchange,
Mumbai (BSE) and the National Stock Exchange (NSE). The India Infoline group, comprising
the holding company, India Infoline Ltd and its subsidiaries, straddles the entire financial
services space with offerings ranging from Equity research, Equities and derivatives trading,
Commodities trading, Portfolio Management Services, Mutual Funds, Life Insurance,
Fixed deposits and other small savings instruments to loan products and Investment banking.
India Infoline also owns and manages the websites. India Infoline Limited is listed on both the
leading stock exchanges in India, viz. the Stock Exchange, Mumbai (BSE) and the National
Stock Exchange (NSE) and is also a member of both the exchanges. It is engaged in the
businesses of Equities broking, Wealth Advisory Services and Portfolio Management Services. It
offers broking services in the Cash and Derivatives segments of the NSE as well as the Cash
segment of the BSE. It is registered with NSDL as well as CDSL as a depository participant,
providing a one-stop solution for clients trading in the equities market. It has recently launched
its Investment banking and Institutional Broking business.

India Infoline Securities Pvt Ltd:

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India Infoline Securities Pvt Ltd is a 100% subsidiary of India Infoline Ltd, which is engaged in
the businesses of Equities broking and Portfolio Management Services. It offers broking services
in the Cash and Derivatives segments of the NSE as well as the Cash segment of the BSE.

Sharekhan Securities:
Sharekhan was created when SSKI Investor Services Pvt. Ltd., a company in the securities and
equities segment decided to harness the power of the Internet and offer services to its customers
through an online stock trading portal. Sharekhan brings and provides a user-friendly online
trading facility. They also have an extensive all-India ground network of franchisees across the
country.
The company offers its services through a combination of online and offline channels. The
online model comprises a portal, chat facilities, and 'speed trade' terminals. And the offline
model uses a combination of an IVR infrastructure and a team of customer agents to receive
orders over the telephone.
( www. sharekhan .com )

ICICI Securities;
ICICI Securities, A subsidiary of ICICI Bank, was set up in February 1993 to provide investment
banking services to investors in India. As on date ICICI Bank holds 99.9% of the share capital of
ICICI Securities.
ICICI Securities Limited is India’s leading full service investment bank with a dominant position
in all segments of its operations –
 Corporate Finance
 Fixed Income
 Equities.
( www . icicisecurities.com )

Kotak Securities:
Kotak Securities Limited, a 100% subsidiary of Kotak Mahindra Bank, is the stock broking and
distribution arm of the Kotak Mahindra Group. Kotak Mahindra is one of India's leading

22
financial institutions, offering complete financial solutions that encompass every sphere of life.
From commercial banking, to stock broking, to mutual funds, to life insurance, to investment
banking, the group caters to the financial needs of individuals and corporate.
Kotak also offers stock broking through the branch and Internet, Investments in IPO, Mutual
funds and Portfolio management service.

The Kotak Mahindra Group;

Kotak Mahindra is one of India's leading financial conglomerates, offering complete financial
solutions that encompass every sphere of life. From commercial banking, to stock broking, to
mutual funds, to life insurance, to investment banking, the group caters to the financial needs of
individuals and corporate. The group has a net worth of over Rs. 5,609 crore, employs around
17,100 people in its various businesses and has a distribution network of branches, franchisees,
representative offices and satellite offices across 344 cities and towns in India and offices in New
York, London, Dubai, Mauritius and Singapore. The Group services around 3.6 million customer
accounts. Kotak Securities has 195 branches servicing more than 2, 20,000 customers and
coverage of 231 Cities. Kotaksecurities.com, the online division of Kotak Securities Limited
offers Internet Broking services and also online IPO and Mutual Fund Investments.

Indiabulls:
Indiabulls is India’s leading Financial Services and Real Estate Company having over 640
branches all over India. Indiabulls serves the financial needs of more than 4,50,000 customers
with its wide range of financial services and products from securities, derivatives trading,
depositary services, research & advisory services, consumer secured & unsecured credit, loan
against shares and mortgage & housing finance. Indiabulls Financial Services Ltd is listed
on the National Stock Exchange, Bombay Stock Exchange.

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Research methodology

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Secondary Data:       

 Secondary data is data that is neither collected directly by the user nor specifically for the
user, often under conditions not known to the user Secondary data is cheaper and more
quickly available than primary data, but likely to need processing before it is useful.

 The secondary data was collected from the website and employee of the company about
the company and its products. The data was collected to know about the Investment
banking in India. This data was collected to know about the Investment banking in India
and its origin, growth, function, role.

 Secondary was also collected from the news paper and magazines.

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About investment banking

26
 The Indian Scenario of Investment Banking

In India, though the existence of this branch of financial services can be traced to over 3
decades, investment banking was largely confined to merchant banking services. The
forerunners of banking in India were the foreign banks. In the year 1967 Grind lays bank (now
merged with standard chartered bank in India) began investment banking operations with license
from RBI followed by Citibank in 1970. It was in 1972 that the Banking Commission report
asserted the need for merchant banking services in India by the public sector banks of India. SBI
set up its merchant banking division in 1972 followed by Bank of India, central bank of India,
Bank of Baroda, Syndicate bank, Punjab National Bank, Canara Bank. ICICI was the first
financial institution to set up merchant banking division in 1973 next were IFCI and IDBI in year
1992.By the mid eighties and early nineties, most of the merchant banking divisions of public
sector spun off as a separate subsidiaries.

Characteristics and structure of Indian investment banking industry

On the regulatory front, the Indian regulatory regime does not allow an investment banking
functions to be performed under one entity for two reasons.

(a) To prevent excessive exposure to business risk under one entity.

(b) ) To prescribe and monitor capital adequacy and risk mitigation mechanisms.

Therefore, Indian investment banks follow a conglomerate structure by keeping their business
segments in different entities to meet regulatory norms. Due to the norms, Indian investment
banking industry has a heterogeneous structure. The bigger investment banks have several group
entities in which the core and non-core business segments are distributed.

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 Origin of Investment Banking

The origin of investment banking in India can be traced back to the 19th century when European
merchant banks set-up their agency houses in the country to assist in the setting of new projects.
In the early 20th century, large business houses followed suit by establishing managing agencies
which acted as issue house for securities, promoters for new projects and also provided finance
to Greenfield ventures. The peculiar feature of these agencies was that their services were
restricted only to the companies of the group to which they belonged. A few small brokers also
started rendering Merchant banking services, but theirs was limited due to their small capital
base.
In 1967, ANZ Grind lays bank set - up a separate merchant banking division to handle new
capital issues. It was soon followed by Citibank, which started rendering these services. The
foreign banks monopolized merchant banking services in the country. The banking committee, in
its report in 1972, took note of this with concern and recommended setting up of merchant
banking institutions by commercial banks and financial intuitions. State bank of India ventured
into this business by starting a merchant banking bureau in 1972.
In 1972, ICICI became the first financial institution to offer merchant banking services. JM
finance was set-up by Mr. Nimesh Kampani as an exclusive merchant bank in 1973. The growth
of the industry was very slow during this period. By 1980, the number of merchant banks rose to
33 and was set-up by commercial banks, financial institutions and private sector.
The capital market witnessed some buoyancy in the late eighties. The advent of economic
reforms in 1991 resulted in sudden spurt in both the primary and secondary market. Several new
players entered into the field. The securities scam in may, 1992 was a major setback to the

28
industry. Several leading merchant bankers, both in public and private Sector was found to be
involved in various irregularities. Some of the prominent public sector players involved in the
scam were can bank financial services, SBI capital markets, Andhra bank financial services, etc.
leading private sector players involved in the scam included Fair growth financial services and
Champaklal investments and finance (CIFCO). The market turned bullish again in the end of
1993 after the tainted shares problem was substantially resolved. There was a phenomenal surge
of activity in the primary market. The registration norms with the SEBI were quite liberal. The
low entry barriers coupled with lucrative opportunities lured many new entrants into this
industry. Most of the new entrants were undercapitalized with little or no expertise in merchant
banking. These players could hardly afford to be discerning and started offering their services to
all and sundry clients. The market was soon flooded with poor quality paper issued by companies
of dubious credentials. The huge losses suffered by investors in these securities resulted in total
loss of confidence in the market. Most of the subsequent issues started failing and companies
started deferring their plans to access primary markets. Lack of business resulted in a major
shake out in the industry. Most of the small firms exited from the business. Many foreign
investment banks started entering Indian markets. These firms had a huge capital base, global
distribution capacity and expertise. However, they were new to Indian markets and lacked local
penetration. Many of the top rung Indian merchant banks, who had string domestic base, started
entering into joint ventures with the foreign banks. This energy resulted in synergies as their
individual strength complemented each other.

29
 Evolution & growth of Investment Banking

Evidence indicates that ancient civilizations such as Greece and Rome engaged in investment-
banking operations with practices such as extending long-term credits to governments and to
certain industries. During the Middle Ages investment banking was concerned largely with
financing governments. In the 1100s and 1200s, for example, the Lombard banks in Italy
combined trading operations with long-term loans made to various rulers.

In Great Britain the earliest investment institutions of any importance were the acceptance
houses, or merchant banks. As far back as the 1600s, these concerns financed foreign trade. Later
the acceptance houses also floated foreign issues in London and accumulated funds for long-term
investment abroad.

Also important in the evolution of investment banking were private banks, many of which were
family enterprises, and finance companies. One of the former, the House of Rothschild, attained
a dominant position in the financial centers of Europe during the 1800s and was still influential
in the 1900s.

Currently, in Britain, channeling of capital into domestic industry is done mainly through
specialized finance or investment companies. In many European countries, however, it is
customary for the same institution to carry on both commercial and investment banking. In
Germany, in particular, large banks play a leading role in financing industrial development.
Investment banks also play a global role. Companies and governments frequently finance their
needs in the market in which they can get the very best price and terms—whether that market is
in the United States, Europe, or Japan.

The fall from grace of investment bankers leading to a radical change in the financial sector's
landscape in advanced countries is a significant development having many lessons for India
too. Investment banking, or merchant banking as it is called here, has been slow to develop in
India. Unlike in the U.S. where Depression era legislation segregated the two activities, banks
here did not have any legal constraints. However, there were certain 'non-banking' activities such

30
as hire purchase and leasing that could be done only by subsidiaries, which in course of time
resembled the bigger NBFCs which are important niche players. Foreign players in a fix
significantly even when universal banking became the flavor of the season & Nash; commercial
banks trying to open financial supermarkets & dash; big banks undertook activities such as
insurance only through subsidiaries and relied on the brand names of the parent banks. It is not
clear whether the universal banking model as it has evolved here has been a help or a hindrance
to the promoting bank. In a regulatory sense there has been an overlap. Other than the Reserve
Bank of India, the Securities and Exchange Board of India and the Insurance Regulatory and
Development Authority are also involved. Of the many similarities between investment banks
abroad and in India, the easily noticed one is the higher level of salary compensation paid to
investment bankers compared to their more sedate commercial banking counterparts. As in the
West, the main investment banking activities in India are mergers, acquisitions, corporate
finance and restructuring. Even though some public sector banks are active in the field, the lion's
share of the business appears to have been grabbed by the big brokers acting as investment
bankers, foreign banks and the branches of the foreign investment banks. Interestingly many big
investment banks have had tie ups with broker-firms. Sensing the potential in India many of
them had started venturing out on their own. The serious crisis in the U.S. has put paid to their
plans in India. In many cases their continuance in India seems to be in doubt. With all their well
publicized failings, will the erstwhile foreign investment banks continue to appeal to their major
Indian clients? In the last 'big bang' disinvestment, involving ONGC and others, none of the
public sector merchant banking subsidiaries had any role. The field was dominated entirely by
foreign investment banks. Arcelor Mittal was put together with the help of the (then) big players,
all international investment banks. The Tata-Corus deal and the Aditya Birla Group's forays
abroad were aided by foreign investment banks. It is too much to expect that India's public sector
merchant banking subsidiaries will fill the void. But they can learn important lessons from the
failure of investment banking abroad. One clear message for them is not to do a 'regulatory
arbitrage' exploiting the lacuna in regulation. Foreign banks could get away. Citibank and others,
though named by the JPC as the biggest perpetuators of the 1991-92 securities scam, escaped
unscathed. Public sector banks, including the SBI group, have fared far worse. The second
message of course is not to emulate the recently failed American investment banks in
undertaking activities without fully comprehending the risks. Banks in India have so far
disclosed relatively small exposures to 'toxic' securities that have brought down the big names.

The same degree of caution will serve them well in any other type of investment banking
activity, however glamorous or profitable it may be.

31
 Future of Investment Banking

Investment banks have played and will continue to play a very crucial role in market transactions
on behalf investors, government and corporations.
These were the famous words of Warren Buffett, regarding the downfall of economic system and
investment banking. The investment banks generally deal in corporate finance and help their
client companies to raise capital through equity, debt or other types of offerings. They also assist
mergers and acquisitions and trade in equities or derivatives. After the world faced a major
economic recession in the second half of 2008, many scholars and think tanks were skeptical
about the restoration of the economy. However, as the market has its own share of ups and
downs, the positive aspects and financial strength of investment banks cannot be neglected. The
future of investment banking might comprise the following:

More Stringent Laws and Restrictions

After considering the Wall Street crash and the credit crisis in America, it is very much possible
that the regulators and politicians will impose stringent laws and restrictions on investment
banks. The laws and restrictions will be made with an intention to curtail the aggressive market
strategies of these banks, as well as to come up with a better risk management scheme.
Claw-back Provisions
In order to make the volatile market of investment banking more secured from crashes caused by
imprudent individual traders or groups, banks may tighten up the claw-back provisions. This
provision requires those whose trades cause subsequent losses, to pay back all or part of their
bonuses. However, this might result in the transition of traders from big names to less well-
32
known boutiques, in order to avoid scrutiny.
Emphasis on Equity Derivatives and Currency trading
An equity derivative is an instrument used by investors to hedge the risks associated with taking
a position in stocks. It consists of underlying assets based on equity securities and limits the
losses incurred by either a short or long position in a company's shares. In order to derive more
benefits, investment banks will be emphasizing more on currency trading, interest-rate products,
equity derivatives and corporate restructuring.

Fewer big banks and more small boutiques

As the giant investment banks faced heavy losses, which in turn affected the government and
investors, in future there will be fewer big banks and more boutiques. This will force the big shot
investment banks to be careful about their position, as they will face stiff competition from small
firms. In any case, the charm of investment banks is something which will not decrease in near
future.

Lesser Dependence on Short-Term Funding

Considering the negative impact of the aggressive strategies of investment banks, in future, there
might be lesser dependence on short-term funding and high leverage. As the investment banks
are largely financed with short-term funding, a massive asset/liability mismatch is created which
is difficult to manage. It is also probable that more investment banks will be pushed into the arms
of banking acquirers with large and stable deposit bases. This will provide solution to the
investment banks which are generally financed for the good times, not the bad ones.

Some people think that investment banks have already hit the bottom of a swimming pool, that
too head-on. However, there is a possibility that this may be a case of things getting worse before
they improve. After the improvement of economy, tougher regulations and stringent laws will
make the small firms more influential and bring them on par with their giant counterparts. Then
it will all depend on the investors and their capability to break into finance and investment
banking, in the near future.

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 Role of Investment Bankers

Investment bankers provide service and advice to companies, organizations and governments.
Investment bankers also assist and advise companies on mergers and acquisitions, which
basically means that they act as the buyer or seller (whatever position the company is taking) and
negotiate the transaction. In other instances they just provide a strategy for action against an
unwelcome bid. Investment bankers provide a wide array of services, including underwriting the
issuance of equity or debt to aid a company having financial difficulties. It is the duty of the
investment banker to provide advice on issues such as how to raise capital through equity or debt
instruments.

In addition to the above mention activities, investment bankers also governments deal with the
privatization of public entities. For example, when the American government decides to privatize
a correctional facility, an investment banker will negotiate with a buyer and advise or act on
behalf of the government throughout the entire transaction. Privatization has become a very
lucrative focus for investment bankers. Although most popular in the United States and the
United Kingdom, it is a growing phenomenon in many governments.

An investment banker's main goal is to help clients achieve their goals. Investment bankers will
assist their clients with the implementation of their chosen plan, including but not limited to
buyouts. Investment bankers also must take charge of their own client load. Investment bankers
must identify and secure their own clientele, so they literally have total control of how much or
how little work they have.

Investment bankers need the function using the most up-to-date news sources, so they must
receive real-time market updates. In order to provide clients with the most accurate and effective
strategy, investment bankers need access to in-depth information and comprehensive research
and financial modeling tools to analyze the market and formulate likely outcomes.

34
An effective investment banker will form close relationships with each client, including devoting
numerous hours to client contact, meetings and even travel. Because investment bankers need to
secure new clients, it is essential that they look for new opportunities for existing clients.

Functions of Investment Banking

Investment banks have multilateral functions to perform. Some of the most important functions
of investment banking can be jot down as follows:

 Investment banking help public and private corporations in issuing securities in the
primary market, guarantee by standby underwriting or best efforts selling and foreign
exchange management. Other services include acting as intermediaries in trading for
clients.

 Investment banking provides financial advice to investors and serves them by assisting in
purchasing securities, managing financial assets and trading securities.

 Investment banking differ from commercial banking in the sense that they don't accept
deposits and grant retail loans. However the dividing line between the two fraternal twins
has become flimsy with loans and securities becoming almost substitutable ways of
raising funds.

 Small firms providing services of investment banking are called boutiques. These mainly
specialize in bond trading, advising for mergers and acquisitions, providing technical
analysis or program trading.

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 The Global Scenario
Global investment banking revenue increased for the fifth year running in 2007, to $84.3 billion.
These were up 21% on the previous year and more than double the level in 2003. Despite a
record year for fee income, many investment banks have experienced large losses related to their
exposure to U.S. sub-prime securities investments.

The United States was the primary source of investment banking income in 2007, with 53% of
the total, a proportion which has fallen somewhat during the past decade. Europe (with Middle
East and Africa) generated 32% of the total, slightly up on its 30% share a decade ago. Asian
countries generated the remaining 15%. Over the past decade, fee income from the US increased
by 80%.This compares with a 217% increase in Europe and 250% increase in Asia during this
period. The industry is heavily concentrated in a small number of major financial centers’
including New York City, London and Tokyo.

Investment banking is one of the most global industries and is hence continuously challenged to
respond to new developments and innovation in the global financial markets. Throughout the
history of investment banking, it is only known that many have theorized that all investment
banking products and services would be commoditized. New products with higher margins are
constantly invented and manufactured by bankers in hopes of winning over clients and
developing trading know-how in new markets. However, since these can usually not be patented
or copyrighted, they are very often copied quickly by competing banks, pushing down trading
margins.

For example, trading bonds and equities for customers is now a commodity business but
structuring and trading derivatives retains higher margins in good times - and the risk of large
losses in difficult market conditions, such as the credit crunch that began in 2007. Each over-the-
counter contract has to be uniquely structured and could involve complex pay-off and risk

36
profiles. Listed option contracts are traded through major exchanges, such as the CBOE, and are
almost as commoditized as general equity securities.

In addition, while many products have been commoditized, an increasing amount of profit within
investment banks has come from proprietary trading, where size creates a positive network
benefit (since the more trades an investment bank does, the more it knows about the market flow,
allowing it to theoretically make better trades and pass on better guidance to clients).

The fastest growing segment of the investment banking industry is private investments into
public companies (PIPEs, otherwise known as Regulation D or Regulation S). Such transactions
are privately negotiated between companies and accredited investors. These PIPE transactions
are non-rule 144A transactions. Large bulge bracket brokerage firms and smaller boutique firms
compete in this sector. Special purpose acquisition companies (SPACs) or blank check
corporations have been created from this industry.

Overall Recent Developments

New reforms in investment banking and the marketing of securities were enacted as the 21st
century began. The reforms followed a wave of scandals in 2001 and 2002 involving the lack of
safeguards preventing conflicts of interest within an investment bank. Investment bank research
analysts who recommended stocks to investors were being compensated for attracting
investment-banking clients. Such clients included companies that sought an investment bank’s
help in funding an initial stock offering known as an initial public offering (IPO). These
investment-banking clients, in turn, expected favorable stock ratings. In some cases analysts
were publicly recommending a stock while privately ridiculing the company that issued the
stock. In a settlement with the New York State attorney S General and the Securities and
Exchange Commission (SEC), ten investment-banking houses in 2003 agreed to pay $1.4 billion
in fines and to adopt a variety of reforms aimed at ending these conflicts of interest. For
example, research analysts could no longer be rewarded for attracting investment-banking
business, and strict limitations were placed on communications between the research department
and the investment bankers involved in IPOs. Federal legislation, known as the Sarbanes-Oxley
Act, was also enacted in 2002 to help protect small investors jeopardized by biased research from
investment banking houses.

None of these reform measures, however, anticipated the debacle that would virtually swallow
up the independent investment banking industry as the 21st century progressed. Beginning in
2008 two major investment banks, Bear Stearns and Lehman Brothers, failed as a result of their
overexposure to financial instruments known as mortgage securities. When a speculative bubble
in housing prices burst and housing foreclosures reached record levels, these and other
investment banks were left holding securities and other financial instruments known as
derivatives that declined drastically in value.

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In March 2008 the Federal Reserve used $30 billion in taxpayers’ money to offer a line of credit
to J.P. Morgan Chase & Co. so that it could acquire Bear Stearns. Then in September the Fed and
the Department of Treasury decided not to intervene to rescue Lehman Brothers, one of the
oldest investment banks in the country. As a result, Lehman Brothers went into bankruptcy,
leaving only three other major investment banks in existence. Bank of America Corporation soon
acquired the firm Merrill Lynch. The last two remaining major investment banks, Goldman
Sachs and Morgan Stanley, then announced that with the approval of the Federal Reserve, they
were becoming bank holding companies so that they could compete with firms like J.P. Morgan,
Bank of America, and Citigroup Inc.

SERVICE PORTFOLIO OF INDIAN INVESTMENT BANKS

The core services provided by Indian investment banks are in the areas of equity market, debt
market and advisory services.

Core service

(1) MERCHANT BANKING, UNDERWRITTING AND BOOK RUNNING

The SEBI functions as a regulatory for the capital markets much in the lines of other countries
such as SEC in U.S.A .When the primary markets are buoyant, issue management, book building
and syndicated underwriting form a very dominant segment of activity for most Indian
investment banks. A segment of primary market is also the private placement market, especially
for government securities and, commercial paper and bonds floated by public sector banks and
corporations. Investment banks have been managing public offers and holding them in private
placements as well.

(2) MERGERS AND ACQUISTIONS, CORPORATE ADVISORY

The two factors that given rise to this industry are: -

(a) The force of liberalization and globalization that forced Indian industry to
consolidate.

(b) The institutionalization of corporate acquisitions by SEBI through its guidelines,

popularly known as takes over code.

(c) Indian investment banks also have a large practice in corporate advisory service
relating to project financing, corporate structuring, capital restructuring through

38
 equity repurchases, and raising pvt. Equity, structuring joint-ventures and strategic
partnerships and other value added specialized areas.

Capabilities of an Ideal Investment Banker

These capabilities can be identified in the services mostly offered by the investment banks. They
include the following:

Investment Management/Fund Management

The ideal investment bank should possess strong skills in investment management. This
generates income for it as well as help in the distribution of new issues

In depth Knowledge of Corporate Finance Issues

It must have a team of professionals who are well versed in the issues of corporate finance to
enable it make valuable inputs into the financial decisions of their clients. It also gives it a
competitive advantage when the investment banker is bidding for IPO projects.

Pricing of Services

The ideal investment banker should be able to deliver its services at a lower cost in order to woo
capable businesses interested in going public.

Pre-Financing of IPOs

IPOs have been identified as very costly for the issuing firms. In order for an investment banker
to woo clients, it should be capable of pre-financing the IPO in order to gain a competitive
advantage in its market over the years in order to gain dominance in the IPO market.

Performing Ancillary Services

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Other augmenting capabilities include the ability to support the trading of the securities floated.
This primarily involves supporting transactions in the security on the secondary market.
Registrar and Custodial services are key to the competitive strategies of an investment banker.
An advantage of these supplementary services is the future cash streams in fees charged to the
issuing firms. This is bundled together with other services when investment banks are pricing
their fees. Thus it is cheaper for the issuing firm to outsource the registrar services to the
investment banker rather than employ another investment banker to undertake this function.
These activities, although may not seem necessary to the performance of the investment banking
function, could create competitive advantage for the investment banker possessing them.

Difference between Investment banking & Merchant banking

Merchant banks and investment banks, in their purest forms, are different kinds of financial
institutions that perform different services. In practice, the fine lines that separate the functions
of merchant banks and investment banks tend to blur. Traditional merchant banks often expand
into the field of securities underwriting, while many investment banks participate in trade
financing activities.

In theory, investment banks and merchant banks perform different functions. Pure investment
banks raise funds for businesses and some governments by registering and issuing debt or equity
and selling it on a market. Traditionally, investment banks only participated in underwriting and
selling securities in large blocks. Investment banks facilitate mergers and acquisitions through
share sales and provide research and financial consulting to companies. Traditionally, investment
banks did not deal with the general public.

Traditional merchant banks primarily perform international financing activities such as foreign
corporate investing, foreign real estate investment, trade finance and international transaction
facilitation. Some of the activities that a pure merchant bank is involved in may include issuing
letters of credit, transferring funds internationally, trade consulting and co-investment in projects
involving trade of one form or another. 

The current offering of investment banks and merchant banks varies by the institution offering
the services, but there are a few characteristics that most companies that offer both investment
and merchant banking share.

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As a general rule, investment banks focus on initial public offerings (IPOs) and large public and
private share offerings. Merchant banks tend to operate on small-scale companies and offer
creative equity financing, bridge financing, mezzanine financing and a number of corporate
credit products. While investment banks tend to focus on larger companies, merchant banks offer
their services to companies that are too big for venture capital firms to serve properly, but are
still too small to make a compelling public share offering on a large exchange. In order to bridge
the gap between venture capital and a public offering, larger merchant banks tend to privately
place equity with other financial institutions, often taking on large portions of ownership in
companies that are believed to have strong growth potential. Merchant banks still offer trade
financing products to their clients.

Investment banks rarely offer trade financing because most investment banking clients have
already outgrown the need for trade financing and the various credit products linked to it. An
Investment Banker is total solutions provider as far as any corporate, desirous of mobilizing
capital, is concerned. The services range from investment research to investor service on the one
side and from preparation of offer documents to legal compliances and post issue monitoring on
the other. There exists a long lasting relationship between the Issuer Company and the
Investment Banker. A "Merchant Banker" could be defined as "An organization that acts as an
intermediary between the issuers and the ultimate purchasers of securities in the primary security
market”.

Merchant Banker has been defined under the Securities & Exchange  Board of India (Merchant
Bankers) Rules,  1992  as "any person who is engaged in the business of issue  management
either by making arrangements regarding selling, buying or subscribing to securities as manager,
consultant, advisor or rendering corporate advisory service in relation to such issue
management". Merchant Banking, as a commercial activity, took shape in India through the
management of Public Issues of capital and Loan Syndication. It was originated in 1969 with the
setting up of the Merchant Banking Division by ANZ Grind lays Bank. The main service offered
at that time to the corporate enterprises by the merchant banks included the management of
public issues and some aspects of financial consultancy.  The early and mid-seventies witnessed
a boom in the growth of merchant banking organizations in the country with various commercial
banks, financial institutions, and broker’s firms entering into the field of merchant banking.

41
Reform measures were initiated in the capital market from 1992, starting with the conferring of
statutory powers on the Securities and Exchange Board of India (SEBI) and the repeal of Capital
Issues Control Act and the abolition of the office of the Controller of Capital Issues. These have
brought about significant improvement in the functional and regulatory efficiency of the market,
enabling the Merchant Bankers shoulder greater legal and moral responsibility towards the
investing public.

Difference between Investment banking and Commercial banking

While regulation has changed the business in which commercial and investment banks may now
participate, the core aspects of these different businesses remain intact. In other words, the
difference between how a typical investment bank and a typical commercial operate bank is
simple. A commercial bank takes deposits for checking and saving accounts from consumers
while an investment bank does not. We shall begin examining what this means by taking a look
at what commercial banks do.

Commercial Banks
A commercial bank may legally take deposits for current and savings account from consumers.
The typically commercial banking process is fairly straight forward. You deposit money into
your bank, and the bank loans that money to consumers and companies in need of capital (cash).
You borrow to buy a house, finance a car, or finance an addition to your home.

Private Contracts
Importantly, loans from commercial banks are structured as private legally binding contracts
between two parties, the bank and you (or the bank and a company). Banks work with their
clients to individually determine the terms of the loans, including the time to maturity and the

42
interest rate charged. Your individual credit history (or credit risk profile) determines the amount
you can borrow and how much interest you are charged.
Let’s take an example to understand how a bank makes its money. On most loans, commercial
banks earn interest earn anywhere from 5-14 percent. Ask yourself how much your bank pays
you on your deposits, the money that it uses to make loans. You probably earn a paltry 1 percent
on a current account, if anything, and may be 2 to 3 percent on a saving account. Commercial
banks thus make goals of money, taking advantage of the large spread between their cost of
funds and their return on funds loaned.

Investment Banks

An investment bank operates differently. An investment bank does not have an inventory of cash
deposits to lend as a commercial bank does. In essence, an investment bank acts as an
intermediary, and matches sellers of stocks and bonds with buyer of stock and bonds.
However, that companies use investment banks toward the same end as they use commercial
banks. If a company needs capital, it may get a loan from a bank, or it may ask an investment
bank to sell equity or debt. Because commercial banks already have funds available from their
depositors and an investment bank does not, an investment bank must spend considerable time
finding investor in order to obtain capital for its client.

Public Securities
Investment banks typically sell public securities (as opposed private loan agreements).
Technically, securities such as Microsoft stock or Ford AA Bonds, represent government
approved stocks or bonds that are traded either on a public exchange or through an approved
dealer. The dealer is the investment bank.

43
Investment Opportunity In India

44
Fixed Deposits – They cover the fixed deposits of varied tenors offered by the commercial
banks and other non-banking financial institutions. These are generally a low risk prepositions as
the commercial banks are believed to return the amount due without default. By and large these
FDs are the preferred choice of risk-averse Indian investors who rate safety of capital & ease of

45
investment above all parameters. Largely, these investments earn a marginal rate of return of 6-
8% per annum.

Government Bonds – The Central and State Governments raise money from the market through
a variety of Small Saving Schemes like national saving certificates, Kisan Vikas Patra, Post
Office Deposits, Provident Funds, etc. These schemes are risk free as the government does not
default in payments. But the interest rates offered by them are in the range of 7% - 9%.

Money-back insurance - Insurance in India is mostly sold and bought as investment products.
They are preferred because of their add-on benefits like financial life-cover, tax-savings and
satisfactory returns. Even if one does not manage to save money and invest regularly in financial
instruments, with insurance, the policyholder has no choice. If he does not pay his premiums on
time, his insurance cover will lapse. Money-back Insurance schemes are used as investment
avenues as they offer partial cash-back at certain intervals. This money can be utilized for
children’s education, marriage, etc.

Endowment Insurance – These policies are term policies. Investors have to pay the premiums
for a particular term, and at maturity the accrued bonus and other benefits are returned to the
policyholder if he survives at maturity.

Bullion Market – Precious metals like gold and silver had been a safe haven for Indian investors
since ages. Besides jeweler these metals are used for investment purposes also. Since last 1 year,
both Gold and Silver have highly appreciated in value both in the domestic as well as the
international markets. In addition to its attributes as a store of value, the case for investing in
gold revolves around the role it can play as a portfolio diversifier.

Stock Market – Indian stock markets particularly the BSE and the NSE, had been a preferred
destination not only for the Indian investors but also for the Foreign investors. Although Indian
Markets had been through tough times due to various scams, but history shows that they
recovered very fast. Many types of scrip had been value creators for the investors. People have

46
earned fortunes from the stock markets, but there are people who have lost everything due to
incorrect timings or selection of fundamentally weak companies.

Real Estate- Returns are almost guaranteed because property values are always on the rise due
to a growing world population. Residential real estate is more than just an investment. There are
more ways than ever before to profit from real estate investment.

Mutual Funds - There is a collection of investors in Mutual funds that have professional fund
managers that invest in the stock market collectively on behalf of investors. Mutual funds offer a
better route to investing in equities for lay investors. A mutual fund acts like a professional fund
manager, investing the money and passing the returns to its investors. All it deducts is a
management fee and its expenses, which are declared in its offer document.
Unit Linked Insurance Plans - ULIPs are remarkably alike to mutual funds in terms of their
structure and functioning; premium payments made are converted into units and a net asset value
(NAV) is declared for the same. In traditional insurance products, the sum assured is the corner
stone; in ULIPs premium payments is the key component.

Why Do Companies Invest Overseas?

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Companies choose to invest in foreign markets for a number of reasons, often the same reasons
for expanding their operations within their home country. The economist John Dunning has
identified four primary reasons for corporate foreign investments:

Market seeking: Firms may go overseas to find new buyers for goods and services. The top
executives or owners of a company may realize that their product is unique or superior to the
competition in foreign markets and seek to take advantage of this opportunity. Thus, market
seeking may happen when producers have saturated sales in their home market, or when they
believe investments overseas will bring higher returns than additional investments at home. This
is often the case with high technology goods. As one analyst noted, "The minimum size of
market needed to support technological development in certain industries is now larger than the
largest national market" (Sutherland 1998).

Resource seeking: Put simply, a company may find it cheaper to produce its product in a foreign
subsidiary—for the purpose of selling it either at home or in foreign markets. The foreign facility
may be able to obtain superior or less costly access to the inputs of production (land, labor,
capital, and natural resources) than at home.

Strategic asset seeking: Firms may seek to invest in other companies abroad to help build
strategic assets, such as distribution networks or new technology. This may involve the
establishment of partnerships with other existing foreign firms that specialize in certain aspects
of production.

Efficiency seeking: Multinational companies may also seek to reorganize their overseas holdings
in response to broader economic changes. For example, the creation of a new free trade
agreement among a group of countries may suddenly make a facility located in one of those
countries more competitive, because of access for the facility to lower tariff rates within the
group. Fluctuations in exchange rates may also change the profit calculations of a firm, leading
the firm to shift the allocation of its resources.

Organizational structure of an investment bank

48
Main activities and units

On behalf of the bank and its clients, the primary function of the bank is buying and selling
products. 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
buys or sells a product to a client and does not hedge his total exposure. Banks seek to maximize
profitability for a given amount of risk on their balance sheet. An investment bank is split into
the so-called front office, middle office, and back office.

Front office

Investment banking is the traditional aspect of the investment banks which also involves
helping customers raise funds in the capital markets and advise on mergers and acquisitions.
These jobs pay well, so are often extremely competitive and difficult to land. On a similar note,
they are extremely stressful. Investment banking may involve subscribing investors to a security
issuance, coordinating with bidders, or negotiating with a merger target. Other terms for the
investment banking division include mergers and acquisitions (M&A) and corporate finance. The
investment banking division (IBD) is generally divided into industry coverage and product
coverage groups. Industry coverage groups focus on a specific industry such as healthcare,
industrials, or technology, and maintain relationships with corporations within the industry to
bring in business for a bank. Product coverage groups focus on financial products, such as
mergers and acquisitions, leveraged finance, equity, and high-grade debt and generally work and
collaborate with industry groups in the more intricate and specialized needs of a client.

Investment management is the professional management of various securities (shares, bonds,

etc.) and other assets (e.g. real estate), to meet specified investment goals for the benefit of the
investors. Investors may be institutions (insurance companies, pension funds, corporations etc.)
or private investors (both directly via investment contracts and more commonly via collective
investment schemes e.g. mutual funds). The investment management division of an investment
bank is generally divided into separate groups, often known as Private Wealth Management and
Private Client Services. Asset Management market making, traders will buy and sell financial
products with the goal of making an incremental amount of money on each trade. Sales is the
term for the investment banks sales force, whose primary job is to call on institutional and high-
net-worth investors to suggest trading ideas (on caveat emptor basis) and take orders. Sales desks
then communicate their clients' orders to the appropriate trading desks, which can price and
execute trades, or structure new products that fit a specific need.

Structuring has been a relatively recent division as derivatives have come into play, with highly
technical and numerate employees working on creating complex structured products which
typically offer much greater margins and returns than underlying cash securities.

49
Merchant banking is a private equity activity of investment banks. Current examples include
Goldman Sachs Capital Partners and JPMorgan's One Equity Partners. (Originally, "merchant
bank" was the British English term for an investment bank.)

Research is the division which reviews companies and writes reports about their prospects, often
with "buy" or "sell" ratings. While the research division generates no revenue, its resources are
used to assist traders in trading, the sales force in suggesting ideas to customers, and investment
bankers by covering their clients. There is a potential conflict of interest between the investment
bank and its analysis in that published analysis can affect the profits of the bank. Therefore in
recent years the relationship between investment banking and research has become highly
regulated requiring a Chinese wall between public and private functions.

Strategy is the division which advises external as well as internal clients on the strategies that
can be adopted in various markets. Ranging from derivatives to specific industries, strategists
place companies and industries in a quantitative framework with full consideration of the
macroeconomic scene. This strategy often affects the way the firm will operate in the market, the
direction it would like to take in terms of its proprietary and flow positions, the suggestions
salespersons give to clients, as well as the way structures create new products.

Middle office

Risk management involves analyzing the market and credit risk that traders are taking onto the
balance sheet in conducting their daily trades, and setting limits on the amount of capital that
they are able to trade in order to prevent 'bad' trades having a detrimental effect to a desk overall.
Another key Middle Office role is to ensure that the above mentioned economic risks are
captured accurately (as per agreement of commercial terms with the counterparty), correctly (as
per standardized booking models in the most appropriate systems) and on time (typically within
30 minutes of trade execution). In recent years the risk of errors has become known as
"operational risk" and the assurance Middle Offices provide now includes measures to address
this risk. When this assurance is not in place, market and credit risk analysis can be unreliable
and open to deliberate manipulation.

Finance areas are responsible for an investment bank's capital management and risk monitoring.
By tracking and analyzing the capital flows of the firm, the Finance division is the principal
adviser to senior management on essential areas such as controlling the firm's global risk
exposure and the profitability and structure of the firm's various businesses.

Compliance areas are responsible for an investment bank's daily operations' compliance with
government regulations and internal regulations. Often also considered a back-office division.

Back office

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An operation involves data-checking trades that have been conducted, ensuring that they are not
erroneous, and transacting the required transfers. While some believe that operations provide the
greatest job security and the bleakest career prospects of any division within an investment bank,
many banks have outsourced operations. It is, however, a critical part of the bank.

Technology refers to the information technology department. Every major investment bank has
considerable amounts of in-house software, created by the technology team, who are also
responsible for technical support. Technology has changed considerably in the last few years as
more sales and trading desks are using electronic trading. Some trades are initiated by complex
algorithms for hedging purposes.

The Players
The biggest investment banks include Goldman Sachs, Merrill Lynch, Morgan Stanley Dean
Witter, Salomon Smith Barney, Donaldson, Lufkin & Jenrette, J.P. Morgan and Lehman
Brothers, among others. Of course, the complete list of I-banks is more extensive, but the firms
listed above compete for the biggest deals both in the U.S. and worldwide. While brokers from
these firms cover every city in the U.S., the headquarters of every one of these firms is in New
York City, the epicenter of the I-banking universe. It is important to realize that investment
banking and brokerage go hand-in-hand, but that brokers are one small cog in the investment
banking wheel. Brokers sell securities that a firm underwrites and manage the portfolios of retail
investors. Each firm listed above certainly can produce reams of paper and data attesting to its
dominance, and most have several strengths. But no single firm rules in every aspect of banking.
Merrill leads in total underwriting volume, but trails DLJ in high-yield. Goldman Sachs'
reputation in equity underwriting and M&A advisory is stellar, but it lags the competition in the
asset-backed debt business. The following pages contain the rankings of investment banks
(commonly called league tables) in several categories. All in all, every firm has its own pros and
cons, and choosing one based on reputation alone would be foolhardy.

Role of investment banker in IPO follow on offerings, exist offers, offers in

overseas capital market

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General financial advice

Investment Banking also involves providing general financial advice on a range of issues, such
as funding structure (perhaps the company is too indebted, and should issue shares to raise more
money; or does it have too much cash on its balance sheet, just sitting there not earning interest,
so that it should consider paying a large dividend to its shareholders or buying back some of its
own shares).

Capital raising

If a company is to grow, it has to invest and, often, that capital comes from external sources. This
can be in the form of either "equity", when the company issues more shares to investors, who
buy them for cash; or debt, either from banks or - more usually nowadays - directly from
investors. Investors may be either institutional (pension funds and the like) or “retail”
(individuals).

Investment Banks advise on the raising of capital

In what form, how much, from whom, timing - and may also charge a fee for arranging the
financing or for "underwriting" (guaranteeing to take up any securities that are unsold in the
market, so that the issuer knows for sure how much cash it is going to raise and can plan
accordingly).

Ways of Raising Capital

There are several ways of raising equity capital: These are discussed below:

Rights Offerings
Most company regulations or charters allow shareholders to have a pre-emptive right in
additional stock issues. Thus, anytime the company wants to raise additional equity capital, it
must make a formal offer to existing shareholders before it can seek the interest of potential
outside investors. Where it sells additional stock issues to existing shareholders, it is called a
rights offering. This offer may be renounceable or non-renounceable. A renounceable rights
offering gives the shareholder the option to exercise his right to purchase the new shares at the
issue price. A non-renounceable rights offering obligates the shareholder to exercise his rights at
the issue price.

Public Offerings

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Where the corporate charter or regulations are silent on pre-emptive rights of existing
shareholders, it may decide to sell new shares or stock through a rights offering or a public
offering.

Private Placements:
This method of selling securities is generally used by companies who are interested in reducing
their floatation costs and are interested in a specific group of investors. Under private
placements, new stocks are sold to one or a few investors, generally institutional investors who
invest in large blocks of shares.

Employees Purchase Plans and Employee Share/Stock Ownership Plan

In most organizations, the regulations or charter allows employees to purchase the shares of the
company usually at predetermined prices based on the financial performance of the entity. This
usually affects managerial staff in order to reduce the prevalence of the principal-agency
problem.

The Role of the Investment Banker in the IPO Process

53
It is clear from the above discussion that, the activities or roles of the investment banker in the
IPO process cannot be discounted. The success of the IPO will to a large extent depend on the
capabilities of the investment banker selected. However, in the absence of a model to guide
issuers of securities in selecting investment banks, how does a company come up with the right
investment banker to manage its IPO despite the numerous efforts made by academics to
investigate into issues concerning the market for IPOs, not much has been done on the
capabilities of investment banks. However by examining critically the roles and responsibilities
of investment banks in the IPO process, we can glean some qualities or capabilities an
investment banker must possess in order to survive in its market. Roles investment banks play in
the IPO process and these include: Underwriting, Distribution and, Advice and Counsel.

Underwriting: This is the insurance function of bearing the risk of adverse price fluctuations
during the period in which a new issue of securities is being distributed. There are two
fundamental ways of doing this, and they are the firm commitment and best efforts underwriting
agreements. The firm commitment agreement obligates the investment banker to assume all the
risks inherent in the issue. On the other hand, the best efforts agreement absolves the investment
banker from any risks in the issue. Under this underwriting agreement, the investment banker
undertakes to help sell at least a minimum amount of the issue with any unsold amounts returned
to the issuing firm. Where the investment banker is not able to sell the minimum quantity agreed
upon, the whole issue is cancelled and reissued when the market is ready to accommodate the
issue.
Distribution: Another related function to the one described above is the ability of the issuing
firm to reach as many investors as possible with its security. Investment banks play a very
crucial role here, because of their expertise in doing this relative to the issuing firm assuming this
responsibility when issuing securities.
Advice and Counsel: This involves the investment banker making valuable inputs into decisions
concerning its client ability to succeed in the capital market with an IPO. Its ability to make
valuable inputs in this direction may largely depend on its experience in origination and selling
of securities.
Following are Reasons why investment banks gain importance with their corporate clients.
These are:
1. Credibility with the client corporation’s senior management-earned over several years.
2. Understanding the client company’s needs for service and its financial goals and
policies.
3. Making useful recommendations to the company over a period of time.
4. Innovating with new financing techniques.
5. Having special expertise in a specific service.
6. Recommending a specific transaction.
Credibility with Senior Management
His postulation on the role of an investment banker goes beyond the IPO process to include other
activities or capabilities of the investment banker, which tends to impact on choice of an
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investment banker by senior management who are interested in strategic issues of the
organisations they are responsible for. Thus if an investment banker’s capabilities fit well with
financial strategies of the organisation, it is made an integral part of implementing the financial
strategy.

Understand Client Company

Another reason he finds important to corporate executives is the investment banker’s knowledge
of their companies and their operations. More conservative corporate executives rated this as a
critical success factor in dealing with investment banks, especially when the investment banking
industry in US has over the years survived, by maintaining a relationship with their clients. In
his study, 3 of the 4 different industries he studied ranked this variable as the most important of
all in dealing with an investment banker.

Making Useful Recommendations

A more IPO related factor is the ability of the investment banker to make valuable
recommendations to the issuing firm over time. This is because it reinforces the reliability and
consistency of the investment bank’s capabilities to its corporate clients. In this light an
investment banker that is able to consistently make valuable inputs into the financial decisions of
a client strengthens the relationship between itself and its client.

Expertise in Equity Underwriting

Another important IPO related capability is the ability of the investment banker to underwrite
securities. In the absence of any model to determine the overall capabilities of an investment
banker, this has been one of the criteria for ranking the performance of investment banks.

Having Expertise in a Specific Service

The competitive wave sweeping the US investment banking industry has caused most investment
banks to concentrate on their capabilities where they can gain a competitive advantage. The era
where one investment banker was at the centre of a corporate entity’s financial strategy is over.
Corporate entities are ‘shopping’ for specific capital market capabilities of investment banks.
This has eventually changed the structure of the investment banking industry where size used to
be a competitive factor.

Supplementing Capabilities
Other capabilities such as Euro market capabilities, recommending specific transactions and
innovating with new financing techniques are all additives to the more generic functions
described above. These capabilities, though not really taken to be very important then are now
55
making very important inputs into the choice of firms by corporate clients. Investment banks
have been motivated in various ways to develop capabilities in these areas to expand their client-
base beyond their domestic financial markets.

Role of Investment Banker in Mergers and Acquisitions (or "M&A")

The majority of financial advice relates to M&A. The client company seeks to expand by
acquiring another business. There are many possible commercial reasons for this, such as:

56
  increasing the range of products
 increasing the business' geographical footprint
 complementing existing products
 integrating vertically (i.e. acquire suppliers, further up the chain, or customers, further
down the chain)
 Protecting a position (for example by preventing a competitor from acquiring the
business in question).

In practice therefore, Investm ent Banking divisions tend to be divided into industry sector
teams, who can then familiarize themselves with the principal players, economics and dynamics
of the sector. There are also many possible financial reasons for making an acquisition, such as:

 raising profitability, and therefore the share price

 increasing in size
 followed and more widely invested in; again, likely to have a positive effect on the share
price
 financing growth
 improving quality of profits - the market likes predictable profit streams, and will value
these more highly
 Shifting the business towards sectors more favorably viewed by the market.

The Investment Bankers' roles in these transactions involve:

 using their knowledge of the industry sector, to help with the identification of potential
targets which meet commercial criteria such as those referred to above
 using their knowledge of the investment market, to advise on valuation, form of
consideration (should the sellers be paid in cash - which is likely to involve the buyer
borrowing the money - or in the buyer's shares - so that the seller ends up with a stake in
the buyer, or a blend of the two?), timing, tactics and structure
 coordinating the work of the other advisers involved in the transaction - lawyers, who
prepare the documentation for the acquisition and help with the "due diligence" to be
performed on the business being acquired; accountants, who advise on the financial
reporting aspects of the transaction, and tax consequences; brokers, who advise on
shareholder aspects (how are the buyer's shareholders likely to view the acquisition?) and
how the market as a whole is likely to receive the transaction; and public relations
consultants, who ensure that the transaction has a favorable press.

The Role of the Investment Banker in the Sale of Private Companies

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Investment bankers help buy or sell companies and raise capital. They are members of a team
with attorneys and accountants. The investment banker’s value added comes both from specific
technical knowledge as well as from hindsight from the number of times they have been through
the process. This article can be an effective way to explain the often incompletely understood
role of an investment banker

As a financial advisor to numerous middle market private companies, asked exactly what does an
investment banker do?” Well, about 30 things come to mind in the context of a sale or merger
engagement. The same process applies to financing and acquisition assignments.

1. Obtain Concurrence Of Expectations Of Value And Terms.

The investment banker’s first task is to determine that they and their prospective client concur on
value, which needs not be a firm number - it may be a range or ratios pending future
performance, and will depend on terms. Since no asking price will be used, the market will
ultimately determine value, but expectations need to be mutual.

2. Help The Client Understand How A Potential Buyer Will View The Company.

Most companies are sensitive to how they are perceived by customers, suppliers, employees and
the community, but haven’t focused on the unique perspectives of potential buyers. The
investment banker and their client must develop a mutual understanding of why and where a
potential buyer will see value.

3. Candidly Assess The Prognosis For Future Challenges.

The investment banker must drill down to unearth any issues that could emerge at an
inopportune time. If there are any potential problems related to the company and its business,
they need to be discussed candidly and early in the process. Even a relatively minor issue can kill
a good deal if it crops up at a critical point in the process.

4. Develop, Validate And Document Historical And Projected Financials.

The investment banker will help the company recast historical numbers to add back discretionary
expenses and model future performance. Projections should be optimistic but realistic - a buyer
might predicate his price on them - and must include underlying assumptions as to what capital
and other resources will be needed.

5. Assist In Recruiting Other Members Of The Team Not Already On Board.

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A sale transaction requires attorneys and accountants with experience commensurate with the
anticipated transaction. Mistakes or oversights can be expensive and/or kill deals. This is not
where to cut costs, and you don’t want to wait until there is a deal on the table. The investment
banker can help in recruiting or selection.

6. Identify And Evaluate Potential Categories Of Buyers.

The first task is to determine who is likely to buy the Company at the desired price and terms.
There are financial buyers (investment groups) and strategic buyers (companies in related
businesses). The “right market” depends on the type, size and location of the business and the
desired terms. A lot of time can be wasted chasing the wrong market.

7. Develop Marketing Strategies.

There are three basic M&A marketing strategies: tightly focused to a select few; strategically
focused to a limited number; or broadly to a large audience. The selection depends on the type of
business, confidentiality and the type of buyers targeted. The investment banker’s goal is to
create an auction, or alternately obtain a pre-emptive bid.

8. Identify Specific Potential Buyers

The investment banker’s next task is to identify and prioritize specific potential buyers. A
strategic buyer 5 to 10 times your size is optimal, but smaller divisions or subsidiaries of even
very large companies are often virtually autonomous and should be included, as should financial
buyers with other investments in the same industry.

9. Obtain Firsthand Introductions To Potential Buyers Wherever Possible

The investment banker’s ideal goal is to obtain personal introductions to senior management of
potential buyers. Auditors, attorneys or banks whom they know often will have direct or indirect
(e.g. through board members) relationships that can get past the gatekeepers, which is especially
useful in approaching large organizations.

10. Prepare Documentation To Market The Company.

The investment banker will prepare two marketing documents: a concise summary containing
enough to arouse interest without revealing identity; and a comprehensive book or memorandum,
which should cover the same ground as a public company “prospectus”, but at the same time
must be a marketing document.

11. Initiate Contact With Potential Buyers

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The investment banker’s initial approach to potential buyers is critical. Once the prospect has
said no, it’s hard to go back. Initial contacts require tenacity and skill. Whether by phone, letter
or email, they need sizzle to get attention but also cover the essential facts. The “pitch” must be
well honed and get the message across in 30 seconds or less.

12. Obtain Signed Confidentiality Agreements

The investment banker’s ensuing objective is to obtain a signed confidentiality or non-disclosure

agreement (“CA” or “NDA”) so the next step can be taken. The simpler the CA, the easier it is to
get signed. If truly sensitive information is to be disclosed later in the process, a more detailed
one can be executed.

13. Provide Prospective Buyers Detailed Information

The investment banker’s next step is to send prospects the “book”. Confidentiality agreements
notwithstanding, the book should not contain anything truly proprietary and not even identify the
company by name. Also, even in this day and age it is preferable to send hard copy. E-mailed
documents tend to be disseminated, raising the risk of leaks.

14. Obtain Indications Of Interest And Arrange Site Visits

The investment banker’s follow-up starts a week after the book is received. Common responses
are requests for more information and/or referrals to other people. After a few rounds the
investment banker needs to get the prospective buyer to commit to visit the Company. If they
won’t, they are probably low priority prospects.

15. Research and Qualify Interested Potential Buyers And Principals

Before a visit the investment banker will dig into the backgrounds of the individuals and the
company, its culture and its history, particularly with respect to prior transactions. Such
information enables the Company to ask the right questions and understand why the buyer might
be interested. If it doesn’t look like a fit, better to find out sooner than later.

16. Prepare the Company For The Buyers’ Visits

The investment banker will obtain the buyer’s schedule and checklists in advance so as to be
prepared and not to take time on issues on which they are not focused. The Company’s
participants must be selected and a plan formulated and rehearsed as to what will and will not be
said, offered or provided, and how to handle sensitive questions.

17. Orchestrate the Buyers’ Visits

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Don’t assume they have read the “book”. Start with an overview, but most of the time should be
spent answering questions, and listening. Requests for information should be noted but not
necessarily filled on the spot. The CEO should not dominate the visit. They need to see a team.
The investment banker can be active or passive, but should be there.

18. Create The Infrastructure For Maintaining Momentum.

Deal momentum is critical. The investment banker must assure that the visit end with a definitive
schedule of next steps and agreement as to who is responsible for what. The buyer should
designate one accessible point person, ideally either a decision maker or champion. The
Company’s CEO should be above the fray and saved for global issues.

19. Police The Flow Of Further Information Between Company And Buyers

Assuming continuing interest, the next thing that happens is requests for more information. The
investment banker should serve as control for incoming requests, which will help identify
emerging negotiating issues. Careful consideration must be given to what is provided, especially
projections, and records kept as to everything provided.

20. Obtain Indications Of Value And Terms Or Alternately Definitive Declines.

Requests for more information can be an un-ending fishing expedition. Within 30 days, the
investment banker needs to tell the buyer that the Company needs some form of proposal - term
sheet, letter of intent - with at least an indication of value. If more information is required, it
should be reduced to a manageable list and timetable.

21. Evaluate Alternative Proposals

Proposed payments come in all different forms – cash, stock, notes, non-competes, earn outs, etc.
Some may offer to buy assets, others stock. Some may want to leave behind some assets (e.g.
real estate) or liabilities. The investment banker’s job is to help evaluate the different deal
structures in the context of the seller’s needs and tax circumstances.

22. Negotiate A Term Sheet Or Letter Of Intent (“LOI”)

The investment banker will interface with the buyer on an LOI, but the attorneys also need to be
involved. Traps to avoid are
1. Agreeing to a no-shopping clause without milestones;
2. Letting an LOI turn into a mini-agreement and
3. Going directly to a full agreement without an LOI or at least a term sheet.
23. Prepare Company For Due Diligence

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Deals die because due diligence drags out. The investment banker should orchestrate the
preparation. 90% of what will be needed is predictable and should be located in advance, which
is never as easy as first thought. A common practice is to create a “war room” where documents
are accumulated and organized for inspection.

24. Organize The Due Diligence Process

Due diligence can be disruptive and unproductive. The investment banker can serve as either the
quarterback or coach. There must be a program identifying who is responsible for what and
sequencing sensitive issues (e.g. talking to customers and discussing retention with management)
until after the buyer has signed off on all other items.

25. Manage The Due Diligence Process

A key to managing the process requires understanding the buyer’s needs and clarifying what is
really required. In addition to seeing documents, buyers want to talk to managers in human
resources, IT, production, Q/C, purchasing, marketing, engineering as well as administration and
finance. Such managers must be briefed and prepared with answers.

26. Continually Track Progress and Open Issues

As due diligence proceeds, additional issues arise which should be tracked and the authority for
concessions clearly defined. Significant monetary and legal issues can be allowed to accumulate,
but secondary issues should be settled in real time to maintain momentum and avoid deal fatigue
resulting from “numerous unresolved issues”.

27. Help Compile The Disclosure Statement.

A disclosure statement is a compilation of documents, e.g. contracts, leases, deeds, patents, asset
schedules, shareholder records, insurance policies, orders, etc. Compiling these documents is
never easy. Since they are part of the contract, the sellers are warranting that they are correct and
complete. An error or omission can be expensive.

28. Help Compile Other Closing Deliverables.

The investment banker will also assist in obtaining the numerous other “closing deliverables”
from outside sources, e.g. consents of shareholders, lenders, landlords, leasing
companies,insurance carriers, customers or government agencies; lien releases; good standing
and tax clearance certificates, etc. One missing document can kill a deal.

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29. Assist Negotiating Business And Financing Issues In The Definitive Agreement.

The definitive purchase contract and related documents (notes, security agreements, consulting
or employment contracts, non-competes, licenses, leases, etc.) are the purview of the attorneys,
but also include personal or financing and deal structure issues on which the investment banker
can help their client evaluate options and make decisions.

30. Stay Until The End.

A professional investment banker will remain on the scene, on duty, until the deal finally closes,
even if it’s midnight New Years eve. There are many things that can be missing or go wrong at
the last minute, and, having been there numerous times before, the investment banker may be
just the person to help.

Regulatory framework for investment banking

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Underwriting activity in India is regulated under the SEBI Rules 1993 and SEBI regulations
1993. The regulatory framework of underwriting activity under the above said rules and
regulations in summarized below:

Rule No.1

Capital Adequacy requirement

The existing capital adequacy prescribed by regulation 7(1) of the Regulations requires minimum
net worth of Rs 20 lacs. Minimum net worth for a merchant banker has gone up from Rs 100 lacs
to Rs 500 lacs, while for a broker on The Stock Exchange Mumbai (BSE) it is Rs 50 lacs and
on National Stock Exchange (NSE) it is Rs 200 lacs. The method of computation of net worth for
each category is distinct from each other. Underwriting being a financial risk, it is imperative for
an underwriter to have adequate net worth to finance the risk The Committee recommends that
the minimum net worth requirement for underwriters may be increased to Rs 100 lacs. The
underwriting capability of merchant bankers, brokers and entities registered with other regulators
will be subject to satisfaction of norms prescribed herein. Underwriters shall submit to the lead
manager a certificate from a chartered Accountant certifying its net worth and fructified
outstanding obligations every time it seeks underwriting.

Analysis
As it is a risk involved business it's better for an underwriter to be with more liquid assets so
that if he is not in a position to promote all the shares he has promised to underwrite he
should be in a position to buy those shares.

Rule No 2

Computation of net worth

The current definition of net worth as per explanation to regulation 7 includes paid up capital and
free reserves. It is felt that the current definition is not explicit and specific. For the purposes of
underwriting, the liquidity of the underwriter at any point of time is more critical than net worth
as on a particular date. The current definition does not give adequate weightage to tangible and
liquid assets of the underwriters. Options such as computing net tangible asset or obtaining
certificate of liquidity from auditors are available.

Analysis

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Liquidity is important to a factor to an underwriter because he is involved in high risk
business and he should be in a position to subscribe the promised amount of shares at any
time if he fails to promote it.
The definition of net worth may be tightened and computed more explicitly as follows:
Net worth = Capital + Free Reserves
Less: Non-allowable assets viz.,
(a) Fixed assets
(b) Unlisted securities
(c) Bad deliveries
(d) Doubtful debts and advances
(e) Prepaid expenses, losses
(f) Intangible assets
(g) 30% of value of marketable securities and 30% of value
Of pledged securities net of outstanding liability

Rule No.3

Limit on underwriting obligations

The current limit of maximum 20 times net worth as per regulation 15(2) of
Regulations was believed to be high in view of the fact that net worth was not
explicitly defined.

Analysis:

It was recognized that capital adequacy requirements of financial intermediaries has been
consistently revised upwards in last few years. It was also appreciated that underwriters with
higher net worth would be able to arrange financing in a more efficient manner than those with a
low net worth. On the other hand, underwriters with low net worth and higher multiple stand a
greater risk of default. Therefore, proposal to introduce slabs for limits on underwriting
obligations based on net worth of the underwriter was found appropriate. The leverage should be
linked to net worth. The following slabs may be adopted for determining the leverage for
underwriters. Net worth Multiple of net worth Between Rs 1cr to Rs 5crs

Rule No 4

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Subscription in case of devolvement

The existing limit of 30 days for subscription/procuring subscription by underwriter as per

model agreement is at a variance with limit of 45 days as per regulation 15(3) of the
Regulations.

Analysis:
Besides, both the limits are antiquated in the current environment when allotment in fixed
price issue gets done within 30 days from issue closure and in book building within 15 days

from bid closure. There is a need to review the existing time frame.

However, the revised time frame has to also take into the account the time required for the
registrar to the issue to co-ordinate with the bankers to the issue in order to determine the
extent of under-subscription and the underwriters' obligation. The figures are then to be
authenticated by an auditor before notices can be sent out to the underwriters. After receiving
the notices, the underwriters should be allowed a fair period of time to fund subscription or
procure subscription.

Rule No 5

Registration criteria and registration fees -According to rule 3(1) of the Regulations, no
person shall act as an underwriter unless he holds a certificate granted by SEBI under the
Regulations. One of the criteria for considering application for registration as underwriter, as per
regulation 6 and Form A of the Regulations, is necessary infrastructure and past experience in
underwriting. However, adequate infrastructure and experience are not clearly defined. Neither
do these criteria ensure commitment towards underwriting. It is believed that underwriting
involves a financial risk where adequate net worth is critical rather than adequate infrastructure
and experience.

Analysis
Most of the underwriters today are already registered with SEBI for some activity or the
other. They may be merchant bankers, stock brokers, mutual funds etc. They are already
regulated by SEBI for their actions under different regulations. Seeking one more registration
for the same entity, as an underwriter, adds to the administrative burden of SEBI. Such
separate registration may be avoided. There could be few underwriters such as banks, financial
institutions etc who may not be registered and regulated by SEBI. However they are registered
and regulated by some other regulators for e.g. RBI in case of banks and institutions. In such
cases the respective regulator could monitor the underwriting activities as part of its regular
monitoring of various other activities and if required report its findings to SEBI for necessary
action. Thus registration with any regulator would be an eligibility criteria but the underwriter

66
will be governed by the Regulations. In case of any default by the underwriter, the lead managers
will report the same to SEBI through the issue monitoring reports. Thus the ability for action
against underwriters continues with SEBI.

Rule No 6

Agreement with clients Every underwriter shall enter into an agreement referred to in clause
(b) of rule 4 with each body corporate on whose behalf he is acting as underwriter and the
said agreement shall, amongst other things, provide for the following, namely :-

(i) the period for which the agreement shall be in force;

(ii) the amount of underwriting obligations;
(iii) the period, within which the underwriter has to subscribe to the issue after being intimated
by or on behalf of such body corporate;
(iv) the amount of commission or brokerage payable to the underwriter;
(v) details of arrangements, if any, made by the underwriter for fulfilling the underwriting
obligations.

Analysis

The agreement acts as a future security to both the underwriter and the client company and
also it creates a legal binding between them. So that it makes mandatory to both the parties to
execute their responsibilities in a proper manner.

Advantage of Investment banking in India

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 India has a 20 million-strong scientific and technical manpower, more than the
population of Taiwan. The number of literates in India is more than the combined
population of France and Japan.

 India has a vast domestic market - a 300 million-strong middle class population with
substantial purchasing power and another 700 million-strong population whose capacity
to purchase is gradually increasing. Being a vibrant democracy with a large democratic
set-up supplemented by a broad-based legal framework including arbitration and an
independent judicial system, it boasts of a vast network of bank branches, financial
institutions and well-organized capital and money markets. These attributes make India a
favorable destination for NRI investments.

 India also has a huge network of technical and management institutions of the highest
international standard for development of excellent human resources.

 The strong and vibrant small-scale sector is good enough for establishing strategic
alliances with its foreign counterparts. The strategic location of the country in the context
of the third world markets particularly the rapidly growing South and South-East Asian
markets together with a supportive infrastructure base help in promoting a healthy
environment for NRI inflows into the country.

 India has more billionaires than China. This year there are 15 billionaires in China but
last year in India, there were 20 billionaires, according to the Forbes magazine.

 India has emerged as the world's fastest growing wealth creator, thanks to a buoyant
stock market and higher earnings.

 A number of Indian companies surpassed last year's net profit in just six months of the
current fiscal, reflecting accelerating corporate earnings. 44% percent of the top.

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 100 of the Fortune 500 companies are present in India. With its manufacturing and
service sector on a searing growth path, India's economy may soon touch the coveted 10
percent figure.

 Government has always wooed non-resident Indians assiduously to attract more inflows.
Apart from the money transfer business, which compared to money invested in India is
smaller; the Centre is trying its best to persuade NRIs to pump money into the country
like never before. And, it has seen superlative success in re-cent years.

 The Prime Minister of India has announced dual citizenship for people of Indian origin. It
has given a big boost to the NRI community across the world. With recruitment levels for
overseas jobs skyrocketing, there is scope for more money coming into India. According
to a recent Business Standard report, in the last three years, 850,000 people went to West
Asia alone. And even as the official figure for Indians living in the US is put at 2 million,
unofficial estimates put it at 3.5 million. And emigration to Canada and Australia
continues to grow.

 The ministries concerned have made sure that rules and regulations are simplified to
make inflows easier. Where does the government see money being invested? Investment
in bank deposits and company deposits may be made by NRIs. They are subject to
different rules; investments with and without repatriation facilities are permitted under
the schemes. As of now,

 NRIs are permitted to make direct investment in partnership and proprietorship firms in
the country. This, the NRIs can do by way of subscription for shares or debentures of
Indian companies. Further, they can also now place funds in company deposits. NRIs
who undertake not to seek at any time repatriation of the capital invested in India and the
income earned thereon are permitted to invest on non-repatriation basis.

 NRIs also have the option of investing in mutual funds floated by domestic public sector
and private sector mutual funds on non-repatriation basis.

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 Findings

1- After the study of Investment Banking in India, I observe that there is many advantage
of investment banking in India. Those investors are investing in India are getting
benefits because India is having huge population which is having strong scientific and
technical manpower, a vast domestic market, many new policies for NRIs and
government of India also support foreign investors.
2- India is a good place to invest because 100 companies in the Fortune list out of 500
companies are present in India.
3- It is also found that role of Investment banking is very important in different sectors
like IPOs, Merger and Acquisition, raising capitals, etc.
4- There are many opportunity of investment in India like Mutual funds, bonds, stock
market, real estate, post offices and many more. And this are fruitful investment options
in India.

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 Conclusion
Investment banking is one of the most successful global industries and is hence continuously
challenged to respond to new developments and innovation in the global financial markets.
Throughout the history of investment banking, it is only known that many have theorized that all
investment banking products and services would be commoditized. New products with higher
margins are constantly invented and manufactured by bankers in hopes of winning over clients
and developing trading know-how in new markets. However, since these can usually not be
patented or copyrighted, they are very often copied quickly by competing banks, pushing down
trading margins. For example, trading bonds and equities for customers is now a commodity
business structuring and trading derivatives retains higher margins in good times - and the risk of
large losses in difficult market conditions, such as the credit crunch that begin in 2007. Each
over-the-counter contract has to be uniquely structured and could involve complex pay-off and
risk profiles. In addition, while many products have been commoditized, an increasing amount of
profit within investment banks has come from proprietary trading, where size creates a positive
network benefit (since the more trades an investment bank does, the more it knows about the
market flow, allowing it to theoretically make better trades and pass on better guidance to
clients).
The fastest growing segments of the investment banking industry are private investments into
public companies. Such transactions are privately negotiated between companies and accredited
investors. Special purpose acquisition companies (SPACs) or blank check corporations have
been created from this industry.

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Universal banks appear to offer clear advantages to both shareholders and regulators. Yet some
of those advantages are illusory. For regulators, larger, diversified institutions may be more
stable than investment banks but they pose an even greater systemic risk. And deposit funding is
cheaper than wholesale funding in part because those deposits are insured. Measures to protect
customers may end up allowing banks to take on risks that endanger customers.

Bibliography

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Internet Access:
1. business.mapsofindia.com/investment-industry

2. http://www.investopedia.com/categories/banking.asp

3. www.icmrindia.org/casestudies/Management

4. www.researchandmarkets.com

5. www.google.co.in

6. www.wekkipedia.com

7. www.economics.about.com

8. http://www.accountancy.com.pk/newsgen.asp?newsid=789

9. http://www.religare.in/admin/images/uploads/Doc1.pdf

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Annexure

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 Case study: - Reason for Collapse of Lehman Brothers
In 2003 and 2004, with the U.S. housing boom well under way, Lehman acquired five mortgage
lenders, including subprime lender BNC Mortgage and Aurora Loan Services, which specialized
in Alt-A loans (made to borrowers without full documentation). Lehman's acquisitions at first
seemed prescient; record revenues from Lehman's real estate businesses enabled revenues in the
capital markets unit to surge 56% from 2004 to 2006, a faster rate of growth than other
businesses in investment banking or asset management. The firm securitized $146 billion of
mortgages in 2006, a 10% increase from 2005. Lehman reported record profits every year from
2005 to 2007. In 2007, the firm reported net income of a record $4.2 billion on revenue of $19.3
billion
Lehman's Colossal Miscalculation
In February 2007, the stock reached a record $86.18, giving Lehman a market capitalization of
close to $60 billion. However, by the first quarter of 2007, cracks in the U.S. housing market
were already becoming apparent as defaults on subprime mortgages rose to a sevenyear high. On
March 14, 2007, a day after the stock had its biggest one-day drop in five years on concerns that
rising defaults would affect Lehman's profitability, the firm reported record revenues and profit
for its fiscal first quarter. In the post-earnings conference call, Lehman's chief financial officer
(CFO) said that the risks posed by rising home delinquencies were well contained and would
have little impact on the firm's earnings. He also said that he did not foresee problems in the
subprime market spreading to the rest of the housing market or hurting the U.S. economy.
The Beginning of the End

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As the credit crisis erupted in August 2007 with the failure of two Bear Stearns hedge funds,
Lehman's stock fell sharply. During that month, the company eliminated 2,500 mortgagerelated
jobs and shut down its BNC unit. In addition, it also closed offices of Alt-A lender Aurora in
three states. Even as the correction in the U.S. housing market gained momentum, Lehman
continued to be a major player in the mortgage market. In 2007, Lehman underwrote more
mortgage-backed securities than any other firm, accumulating an $85-billion portfolio, or four
times its shareholders' equity. In the fourth quarter of 2007, Lehman's stock rebounded, as global
equity markets reached new highs and prices for fixed-income assets staged a temporary
rebound. However, the firm did not take the opportunity to trim its massive mortgage portfolio,
which in retrospect, would turn out to be its last chance.
Hurtling Toward Failure
Lehman's high degree of leverage - the ratio of total assets to shareholders equity - was 31 in
2007, and its huge portfolio of mortgage securities made it increasingly vulnerable to
deteriorating market conditions. On March 17, 2008, following the near-collapse of Bear
Stearns - the second-largest underwriter of mortgage-backed securities - Lehman shares fell
as much as 48% on concern it would be the next Wall Street firm to fail. Confidence in the
company returned to some extent in April, after it raised $4 billion through an issue
of preferred stock that was convertible into Lehman shares at a 32% premium to its price at
the time. However, the stock resumed its decline as hedge fund managers began questioning
the valuation of Lehman's mortgage portfolio.
On June 9, Lehman announced a second-quarter loss of $2.8 billion, its first loss since being
spun off by American Express, and reported that it had raised another $6 billion from
investors. The firm also said that it had boosted its liquidity pool to an estimated $45 billion,
decreased gross assets by $147 billion, reduced its exposure to residential and commercial
mortgages by 20%, and cut down leverage from a factor of 32 to about 25.

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