INVE$TMENT BANKING

Group members
• Mayur kedare
• Kunal Sharma
• Kunal tambe
• Dnyaneshwar Dube
• Investment banks help companies and
governments and their agencies to raise money by
issuing and selling securities in the primary market.
• They assist public and private corporations in
raising funds in the capital markets (both equity and
debt),
• as well as in providing strategic advisory services
for mergers, acquisitions and other types of
financial transactions.
 Whats the Difference??
Commercial Bank
• Individual or small to mid
sized companies.
• Loans to buy a house or
future education etc.
• Bank- Creditor & General
Public – Debtor
• Earns money through the
interest charged on loans
Investment Bank
• Companies/ Start-ups
• Borrows to finance the
growth of a company.
• Investors – Creditor &
Companies – Debtor
• Earns money through the
fees charged for providing
services
Why an Investment Bank
It performs the following functions

Portfolio
Raise
Managemen
Capital
t

M&A Research
 Principal Businesses of Investment Banks
• Arranges financing for corporations and governments.
1] Debt
2] Equity
3] Convertibles
• Advises on mergers and acquisitions (M&A) transactions.
• Asset Management Business
1] Offers equity, fixed income, alternative investments, and
money market investment products and services to individual and
institutional clients
2] For alternative investment products, the firm co-invests with
clients in hedge fund, private equity and real estate funds
 Principal Businesses of Investment Banks

• Client Trading
• Sells and trades securities and other financial assets
as intermediary on behalf of investing clients.
• Proprietary Trading Investment activity by the
firm that affects the firm's accounts, but does not
involve investing clients.
 Investment Banking In India
• SBI was the first Indian public sector bank to set up its
investment banking division in 1972.
• ‡SBI Caps and IDBI Caps are two prime examples of
investment banks in India today.
• ‡Currently, there are 300 investment banks registered
with SEBI.
• ‡Currently, without holding a certificate of registration
granted by the Securities and Exchange Board of India,
no person can act as a investment banker.
Trends in Investments in India
16000

14000

12000

10000

8000
Deal Value in Million
6000

4000

2000

Source – www.livemint.com
 • Start-ups
• Mid-sized firms
Companies • Large firms
• Govt. Institutions
• Commercial Banks

• High Networth Ind.

• Venture Capitalists
Investors • Based on age group
• Based on profession
• Based on investing knowhow

• SEBI
• Rating Agencies
• Due Diligence firms
Functioning • Underwriters
• Stock exchange
• Brokerage Firms
 Value Parameters
1] ROI
2] Network
3]Risk factor
4]Fees/Charge/Cost
5]Familiarity/Relationship
6]Experience of the bank & the banker
7]Performance
8] Industry Knowledge
9] Personal Attention
10]Time taken to close a deal

The Banker Sept 2011

Venture Capital n Investment Bank

New Business – Venture Capital

Expansion – Venture Capital with IB acting

as the intermediary

Exit Option – Through IPOs handled by

the IBs
FRONT OFFICE
 Front Office
• Pitching to various clients and institutions
• Setting the terms and conditions for any form of deal
• Trading of securities on behalf of clients
 In the process of market making, traders will buy and
sell financial products with the goal of making an
incremental amount of money on each trade.
 Sales desks communicate their clients' orders to the
appropriate trading desks, who can price and execute
trades, or structure new products that fit a specific need.
 Brokerage Rates
Firm Brokerage for Delivery Brokerage for Intraday trading

SBICAP Securities
0.50% 0.10%
brokerage charges

Sharekhan
0.03% - 0.50% 0.03% - 0.10%
brokerage charges

Motilal Oswal
0.30% - 0.50% 0.03% - 0.15%
brokerage charges

Angel Broking
0.50% 0.02% - 0.03%
brokerage charges

ICICI direct
0.75% 0.15%
brokerage charges

HDFC Securities
0.50% 0.15%
brokerage charges

Religare
0.20% - 0.30% 0.02% - 0.03%
brokerage charges

Reliance Money
0.01% 0.01%
brokerage charges

www.niftyprediction.blogspot.com
• Research is the division which reviews
companies and writes reports about their
prospects, often with "buy" or "sell" ratings.
• Structuring has been a relatively recent
division as derivatives have come into play,
which involves creating complex structured
products which typically offer much greater
margins and returns than underlying cash
securities.
MIDDLE OFFICE
 Middle Office

Middle office usually consists of traders, analysts, and

managers who are knowledgeable of trading activities but
usually don’t engage in market activities themselves.
( Chinese Wall Policy)
Risk Management involves
• analyzing the market and credit risk that traders are taking
onto the balance sheet in conducting their daily trades,
• 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 client) correctly
and on time (typically within 30 minutes of
trade execution).
BACK OFFICE
 Back Office
• Operations involves data-checking trades that have been
conducted, ensuring that they are not erroneous, and
transacting the required transfers.
• Every major investment bank has considerable amounts of in-
house software, created by the Technology team, who are also
responsible for Computer and Telecommunications-based
support.
200
180
160
140
120
Europe
100 USA
80 Asia Pacific
60
40
20
0
2007 2008 2009 2010 2011

IPOs by Region and Globally

Source – The Banker Sept 2011 Issue

 Front End Process (IPO)
1. Company asks for bids
2. Selecting lead managers as per bids
3. Prepare draft offer prospectus document for IPO.
4. Road shows for the IPO
5. Decide the issue date & issue price band with the help of Issuer
Company
6. RHP & IPO Application Forms are printed and posted to syndicate
members; through which they are distributed to investors
7. Investor – Bidding for the public issue
8. Allocation of shares as per demand
9. Stocks listed on the market
 Institutions/Individuals in IPO process
• Lead managers,also known as Book Running Lead Manager and Co
Book Running Lead Managers.
• Registrars.
• Legal advisors.
• Auditors.
• SEBI.
• Credit rating agencies.
• Syndicate members.( generally banks )
• Investors (Retail Individual Investor (RII), High Net worth Individual
(HNI), Non-institutional bidders, Qualified Institutional Bidders
(QIB's).)
• Advertising agencies.
 Back-end process of an IPO
1) Issuer Company - IPO Process Initialization
Appoints lead manager as book runner.
Appoints registrar of the issue.
Appoints syndicate members.
2) Lead Manager's - Pre Issue Role
3) SEBI – Prospectus Review
SEBI reviews draft offer prospectus.
Reverts it back to Lead Manager if needs clarification or
changes.
SEBI approve the draft offer prospectus, the draft offer
prospectus is now become Offer Prospectus.
Back-end process of an IPO contd..
4) IPO should be graded by a CRA
5) Preparation of Red Herring prospectus
6) Investor – Bidding for the public issue
7) Lead Manager – Price Fixing
8) Registrar - Processing IPO Applications
9) Lead manager – Stock Listing
 Fees taken at diff stages of an IPO
SR NO Particulars % of Issue size
1. Lead Managers (0.2 – 1 )%
2. (3-4) %
Syndicate Fees, and Selling Commission

3. (1-2) %
Advertising, and Marketing Expenses

4. (1-2) %
Printing and Stationary Expenses

5. (1-2) %

Miscellaneous Expenses
-Filing Fess With SEBI, BSE & NSE, Registrar’s
Fees, Legal Advisor’s Fees, IPO Grading, Listing
Fees, Others

6. Total (8-10 ) %
 MARKETING OF IPO

 Press Conference
 Investors Conference
The prospective investors are called by invitation. The Promoters
and Lead Managers give presentations. They reply to the
questions of the investors to boost their confidence. HNI are
called. Top brokers are also called.
 Road Shows
Road shows are becoming more and more popular in India.
 MARKETING OF IPO contd..

 Newspaper Advertisements.
Printing – Prospectus.
The company has to print approved prospectus and provide
enough copies to all intermediaries. If any investor asks for a
copy of prospectus it must be provided to him without any fees.
Sufficient quantities should be maintained at the registered office
of the company and with the Lead Managers.

Printing Application Forms

Sufficient number of application forms must be printed much
before the opening of the issue. Each form must contain abridged
prospectus in SEBI approved format. It is compulsory to provide
stationery to all underwriters and brokers. They will arrange
distribution to their sub- brokers and other clients
 MARKETING OF IPO contd..

• The reputation of a merchant banker could

expand a firm’s investor base at a lower cost
than the firm can, since the promotional efforts
of a merchant banker on behalf of the firm
would be more creditable.
 Networking and Promotions
• Customer Relationship Managers building the trust
• Networking via already existing clients
• Pitching by interaction with the CEOs and CFOs of companies
• Hiring people from other firms with strong network and good
customer relationships
• Holding roadshows
• Holding seminars to attract investors
• Structured products and services to attract customers . Eg.
ICICIdirect money Kitchen
 Need Gaps in the IB sector
• Front End
IB is still at a very nascent stage in India and hence needs to be
developed and promoted properly.
The trust factor is still not been built up amongst the
companies and investors. Here there is need of trained analysts
to do the same.
Lack of Investor knowhow
Still concentrated only on the metros. Need to move to the tier-
2 and tier-3 cities to tap in more potential investors.
• Back End
Need to develop more robust risk management systems.
Use of better technology and systems required for 2 main
purposes
1. To keep track of an investor’s database better
2. Bring in faster and more intelligent systems
 Sources of finance

• Internal sources
• External sources
• Longterm sources
• Shorterm sources
Source
Long
Short
of Non-ownership
Ownership
finance
term sourcecapital
capital
 Internal and External Sources
• Internal Sources of Finance
– Come from trading of business
– Day to day cash from sales to customers
– Money loaned from trade suppliers through extended credit
– Reductions in amount of stock held by business
– Disposal (sale) of any surplus assets no longer needed (e.g.
selling a company car)
• External finance
– Comes from individuals or organisations who do not trade
directly with business
– E.g. banks, investors. government
 Internal sources
Personal savings
Ownership capital

External sources
 Short and Long-term Finance
• Short term finance
– Needed to cover day to day running of business
– Paid back in a short period of time, so less risky for
lenders
• Long term finance
– Tends to be spent on large projects which will pay back
over a longer period of time
– More risky so lenders tend to ask for some form of
insurance or security if company is unable to repay loan.
– A mortgage is an example of secured long-term finance
• Short term:finance the business for up to
1 year
• Medium term: finance the business for up
to 5 years
• Long term:finance the business for more
than 5 years
 DEFINITION
• According to S&P “Credit ratings help
investors by providing an easily
recognizable, simple tool that couples a
possibly unknown issuer with an
informative and meaningful symbol of
credit quality”

• According to Moody's “ A rating is an

opinion on the future ability and legal
obligation of the issuer to make timely
payments of principal and interest on a
specific fixed income security. 42
 Importance of credit rating
 To compare the loan on the basis of
quality of credit and loan.
 Credit rating agencies also assist to
portfolio monitoring
 Credit Rating Credit quality of
transparency.
 Credit rating of money market
securities.

43
OVERALL CREDIT SCORE

44
Benefit credit rating to Investors
 Helps in Investment Decision

 Choice of Instrument

 Saves Investor's Time and Effort

45
Benefit credit rating to company

 Improves Corporate Image

 Wider Audience for Borrowing

 Helps in Growth and Expansion

46
Credit Rating Process

47
 CREDIT RATING AGENCY

 CRISIL was set up in the year 1987.

 It was set up in order to rate the firms and then entered into the
field of assessment service for the banks.
 The head office of the company is located at Mumbai and it
has established offices outside India also.
 CRISIL is a global analytical company providing ratings,
research and risk and policy advisory services.
 CRISIL is the largest credit rating agency in India.
 CRISIL’s majority shareholder is STANDARD and
POOR’s.
48
49
CONT.......
2) ICRA: ICRA Limited (formerly Investment Information
and Credit Rating Agency of India Limited) was set up in
1991 by leading financial/investment institutions,
commercial banks and financial services companies as an
independent and professional Investment Information and
Credit Rating Agency.
ICRA's five point IPO Grading Scale
IPO Grade 5 Strong fundamentals
IPO Grade 4 Above-average fundamentals
IPO Grade 3 Average fundamentals
IPO Grade 2 Below-average fundamentals
IPO Grade 1 Poor fundamentals

50
3) CARE (Credit analysis and research limited)

CARE Ratings commenced operations in April 1993 and over nearly

two decades, it has established itself as the second-largest credit rating
agency in India. With the rating volume of debt of around Rs.33,062 bn
(as on June 30, 2011).

4) DCR(Duff & Phelps credit rating india limited)

It was founded in 1932 to provide high quality investment research

services focused on the utility industry. Over the decades, it evolved
into a diversified financial services firm that provides financial
advisory, investment banking, credit rating and investment
management services.

51
 SEBI Issued Guidelines to Credit Rating Agencies

 CRAs should maintain records of the rating committee.

 Information about the historical default rates of their rating
categories.
 CRAs should ensure that its analysts do not participate in any
kind of marketing and business development.
 CRAs while rating structured finance products, are barred
from providing consultancy or advisory services regarding the
design of the structured finance instrument.

52
 Conclusion
 Credit rating is an input for decision making.
 A credit rating is not a recommendation to buy, hold or sell a security. A
rating is one of the inputs that is used by investors to make an investment
decision.
 Investors expect higher returns for lower rated instruments.
 Rating agencies do not comment on the return being offered on a security.
Also, investors use several other factors like level of portfolio
diversification and liquidity levels of the security etc. in making
investment decisions.

53
Internal and external finance

• Finance can be obtained from either

internal or external sources
– Internal means it comes from within the
business
– External means it is obtained from
outwith the business
Internal and external finance

• Finance can be obtained from either

internal or external sources
– Internal means it comes from within the
business
– External means it is obtained from
outwith the business
Internal and external finance

• Finance can be obtained from either

internal or external sources
– Internal means it comes from within the
business
– External means it is obtained from
outwith the business
ADR , GDR
AMERICAN DEPOSITORY RECEIPTS
 Depositary Receipts (DR)
• Type of negotiable (transferable) financial security.

• Traded on a local stock exchange.

• Physical certificate allowing investors to hold shares in equity

of other countries.
 Benefits
 For the Company
1. Raise capital from foreign markets.
2. Increases the share liquidity.

 For the Investor

1. Investors gain the benefits of diversification.
2. Investors will be able to reap the benefits of foreign
(emerging) markets.
Parties to a Depository Receipt

Investment
brokers
banker

depositary Issuer lawyers

Custodian Accountants
American Depository Receipt (ADR)

• The first ADR was introduced by J.P. Morgan in 1927

for the British retailer Selfridges.

• Shares of many non-US companies trade on US stock

exchanges.

• ADRs are denominated and pay dividends in US

dollars and may be traded like regular shares of stock.
Types of ADR programs
 WORKING OF ADR MARKET
• Sponsored ADR program

BROK
INVE E/ US
STOR DEAL EXCH
ER ANGE
3 LEVELS OF SPONSORED PROGRAMS

• Under the sponsored program there are 3 levels and they

are ;

• Level 1- Level 1 depositary receipts are the lowest level of

sponsored ADRs that can be issued. When a company issues
sponsored ADRs, it has one designated depositary who also
acts as its transfer agent.

• Level 1 shares can only be traded on the OTC market and

the company has minimal reporting requirements with the
U.S. Securities and Exchange Commission [SEC]
• Level 2 depositary receipt programs are more complicated
for a foreign company.
• When a foreign company wants to set up a Level 2 program,
it must file a registration statement with the U.S. SEC and is
under SEC regulation.
• The advantage that the company has by upgrading their
program to Level 2 is that the shares can be listed on a U.S.
stock exchange.
• These exchanges include the New York Stock Exchange
(NYSE), NASDAQ, and the American Stock Exchange
(AMEX).
• A Level 3 American Depositary Receipt program is
the highest level a foreign company can sponsor.
Because of this distinction, the company is required
to adhere to stricter rules that are similar to those
followed by U.S. companies.

• Foreign companies with Level 3 programs will often

issue materials that are more informative and are
more accommodating to their U.S. shareholders
because they rely on them for capital
 Unsponsored Programme:

• Unsponsored shares trade on the over-the-

counter (OTC) market

• Unsponsored ADRs are often issued by more

than one depositary bank
 Restricted Programme

 Foreign companies that want their stock to be

limited to being traded by only certain individuals
may set up a restricted program

 ADR programs operating under one of these 2 rules

make up approximately 30% of all issued ADRs
 Privately placed (SEC Rule 144A) ADRs

 ADR program under SEC Rule 144A

 private placement

 restricted stock and may only be issued to or traded

by Qualified Institutional Buyers (QIBs)
 Offshore (SEC Regulation ) ADRs

• Shares are not, and will not be registered with any United
States securities regulation authority

• The shares are registered and issued to offshore, non-US

residents
GLOBAL DEPOSITORY
RECEIPTS
 Global Depository Receipt
(GDR)
• Certificate issued by a depository bank, which
purchases shares of foreign companies.

• Several international banks issue GDRs, such as

JPMorgan Chase, Citigroup, Deutsche Bank, Bank of
New York.

• GDRs are often listed in the Frankfurt Stock Exchange,

Luxembourg Stock Exchange and in the London Stock
Exchange.
 Process

Co/- deposits large

The bank then
no of shares Is receipts are sold
issues receipts
located in country to people of that
underlying the
where it wants to country
shares (2-4)
list.

Behaves exactly
like regular This receipt is
stocks- price then listed on
fluctuation local stock
according to exchanges.
demand & supply
 GDR Market
• London Stock Exchange

• Luxembourg Stock Exchange

• Dubai International Financial Exchange (DIFX)

• Singapore Stock Exchange

• Hong Kong Stock Exchange

Company ADR GDR
Bajaj Auto No Yes
Dr. Reddys Yes Yes
HDFC Bank Yes Yes
Hindalco No Yes
ICICI Bank Yes Yes

Infosys Technologies Yes Yes

ITC No Yes
L&T No Yes
MTNL Yes Yes
Patni Computers Yes No

Ranbaxy Laboratories No Yes

Tata Motors Yes No

State Bank of India No Yes

VSNL Yes Yes

WIPRO Yes Yes