Module-01

Investment Banking &

Financial services

Investment banking
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Aninvestment bankis a financial institution that assists

individuals,
corporations,
and
governments
in
raisingcapitalbyunderwritingor acting as the client's agent
in the issuance ofsecurities(or both).
An investment bank may also assist companies involved
inmergers and acquisitionsand provide ancillary services
such asmarket making, trading ofderivativesandequity
securities,
and
FICC
services
(fixed
incomeinstruments,currencies, andcommodities).
Unlikecommercial banksandretail banks, investment banks
do not take deposits.

There are two main lines of business in investment

banking.
1.Sell Side:-Trading securities for cash or for other
securities (e.g. facilitating transactions, market-making),
or the promotion of securities (e.g. underwriting, research,
etc.) is the "sell side",
2.Buy Side:- It is a term used to refer to advising
institutions concerned with buying investment services.
Private equity funds, mutual funds, life insurance
companies, unit trusts, andhedge fundsare the most
common types of buy side entities.

Structure of Investment Banking

Investment banks are organized into 3 categories.

Front Office
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Helping customers raise funds in the capital markets and advise

on mergers and acquisitions
professional management of various securities and other assets
Buying and selling financial products with the goal of making
money on each trade
Creating and marketing financial products
Researching industries, companies, and products

Structure of Investment Banking

Middle Office
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Analyzing credit and market risk for the bank

Making sure operations are complying with regulations
Responsible for capital management and risk monitoring

Back Office
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Making sure the bank runs smoothly by submitting trades,

maintaining databases, and transacting required money
transfers
The information technology department

Functions of
Investment Banking
Mergers

and Acquisitions

Advisory services
Corporate

financing

Equity & Debt

Underwriting
Equity

and fixed income

research
Sales

and trading

Importance of
Investment Banking
1.Corporations- raising its capital. It facilitates the
trading of securities thereby, increasing the liquidity
of the securities.
2. For Individuals- It provides investment
opportunities to the individuals or entities.
3.Most of the corporations get advisory services from
the investment banks regarding the mergers,
acquisitions and divestiture.

Investment Banking in India

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Grindlays bank began Investment Banking (Merchant

Banking) in India in 1967 with RBI issuing the second
license to Citi in 1970.
These two banks primarily provided services which
included loan syndication, equity raising and other advisory
services.
In 1972, a Banking Commission report asserted the need
for Merchant Banking services in India by public sector
banks.
The commission recommended the same structure as
American investment banks (Glass-Steagall Act).
Merchant banks were meant to manage investments and
provide advisory services.

Investment Banking in India

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SBI was the first Indian public sector bank to set up its merchant
banking division in 1972.
This was followed by Bank of India, Central Bank of India, Bank
of Baroda and many more.
SBI Caps and IDBI Caps are two prime examples of merchant
banks in India today.
Currently, there are 136 merchant banks registered with SEBI.
Lastly, without holding a certific ate of registration granted by
the Securities and Exchange Board of India, no person can act
as a merchant banker.

Types of Investment banking

Full-Service Firms- These are type of investment
banks who have significant presence in all areas like
underwriting,

distribution,

M&A,

brokerage,

structured instruments, asset management etc.

They are all rounder of the game.
Boutique Firms-These are the type of players
which specialist in particular areas of investment
banking.

Types of Investment banking

Brokerage Firms- These firms offers only trading

services to retail & institutional clients. They have
huge

investor

base

which

is

also

used

by

underwriters to place issues.

Asset Management Firms- These firms offer on
investment services. This includes activities like
fund

management,

wealth

management,

cash

management, portfolio management depending on

the type of investors, tenure of corpus, purpose of
investments, type of instrument invested in etc.

Top 10 Investment Bankers in

India

Vendus Capital

Bajaj Capital

Cholamandalam Investment & Finance Company

ICICI Securities Ltd

IDFC

Kotak Mahindra Capital Company

SBI Capital Markets

TATA Investment Corporation Ltd

Yes Bank

UTI Securities Ltd

Global Investment Bankers

Bank of America (Bank of America Merrill Lynch)

Barclays (Barclays Capital)
BNP Paribas (BNP Paribas CIB)
Citigroup (Citi Institutional Clients Group)
Credit Suisse
Deutsche Bank
Goldman Sachs
HSBC
JPMorgan Chase (J.P. Morgan Investment Bank)
Morgan Stanley
Nomura Holdings
UBS (UBS Investment Bank)
Royal Bank of Canada (RBC Capital Markets)
Royal Bank of Scotland
Wells Fargo (Wells Fargo Securities)

Investment Banking Services

Non- Fund Based
Management of public offers of equity
& debt instruments.
Buy back offers.
Book-running
Advisory & transaction service in
Project financing,
Syndicate loan
Venture capital
Private equity
Private placements of equity & debt
Business advisory & structuring
Financial restructuring
Corporate reorganizations such as
Merger & acquisition, asset sales, sell-off & exit
etc.
Acquisition & takeovers
Government disinvestments & privatization
Asset recovery agency services
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Fund Based
Underwriting
Market making
Bought out deals
Investment in
primary market

Support services
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Non Fund Based

Secondary market services
Stock broking
Derivative product
Portfolio Management
Sales & distribution
Equity research

Fund Based
Venture capital
Private equity
Asset management
Proprietary trading & dealing in
securities.

Merchant Banking
It is a non-baanking financial activity
A combination of Banking and consultancy services.
Consultancy means to provide advice, guidance and
service for a fee.
It helps a businessman to start a business.
It helps to raise (collect) finance.
It helps to expand and modernize or restructuring of a
business.
It helps to revive sick business units.
It also helps companies to register, buy and sell shares at
the stock exchange.

DEFINITION OF MB
According to the SEBI (Merchant Bankers)
Rules, 1992, A merchant banker has been
defined as any person who is engaged in the
business of issue management either by
making arrangements regarding selling,
buying or subscribing to securities or acting
as manager, consultant, adviser or rendering
corporate advisory services in relation to
such issue management.

Services of MB

SEBI Guidelines for

Merchant Bankers
Should have authorization from SEBI, which is based on
Professional Qualification
Infrastructure
Employment of two people
Capital Adequacy
Past track record
Categories of Merchant Bankers
Category -1:- i) merchant bankers can carry on any
activity related to issue management i.e.the
preparation of prospect, tie-up financiers, final allotment
of securities , refund of the subscription and so on. ii)
They could also act as advisors consultants managers
underwriters or portfolio mangers

SEBI Guidelines for Merchant Bankers

Category II :- to act as adviser, consultant, co-manager,
underwriter, portfolio manager.
Category III :- to act as underwriter, adviser or
consultant to an issue
Category IV :- to act only as adviser or consultant to
an issue
Only category 1 merchant bankers could act as lead
managers to an issue
To carry an activities as portfolio mangers & underwriters
they have to obtain separate certificate of registration from
the SEBI

SEBI Guidelines for Merchant Bankers

The capital requirement depends upon the category. The
minimum net worth requirement for acting as merchant
banker is given below:
Category I Rs. 5 crores
Category II Rs, 50 lakhs
Category III Rs. 20 lakhs
Category IV Nil
Should submit half yearly unaudited financial statement to SEBI
Should follow SEBI code of conduct on integrity
SEBI shall supervise, and has powers to suspend/ cancel
authorization
Merchant banker should enter contract with corporate body on
mutual rights, liabilities, obligations etc

Lead Manager
Lead managers are category 1
merchant banker appointed by the
company going public to manage the
IPO issue.

Merchant Banker As lead Manager

Appointment of a lead manager
by a company
S.
No

Size of the issue

Maximum
Number Of
Lead Manager

1.

Less than Rs.50 crores

2.

Rs.50 crores to Rs.100 crores

3.

Rs.100 crores to Rs.200 crores

4.

Rs.200 crores to Rs.400 crores

5.

Above Rs.400 crores

5 or more as
prescribed by
SEBI

ISSUE MANAGEMENT
Management of issues involves marketing of
corporate securities ieequity shares,
preference shares and debentures by offering
them to public.
Broadly divided into
Pre-issue activities:
Post-issue activities:

Pre-Issue Obligations
Appointment of lead merchant banker & exercise of due diligence by
him
Payment of requisite fee, along with draft offer document to be
paid/filed with the SEBI Board.
Documents to be submitted along with the Offer Document by the Lead
Manager
Memorandum of Understanding (MOU)
Inter-se Allocation of Responsibilities
Due Diligence Certificate
Certificates Signed by the Company Secretary or Chartered
Accountant, in Case of Listed Companies Making Further Issue of
Capital
Prescribed Undertaking regarding transactions in securities by the
`promoter' the 'promoter group' and the immediate relatives of the
`promoters during the period between the date of filing the offer
documents with the Registrar of Companies or Stock Exchange as
the case may be and the date of closure of the issue to be reported to
Stock Exchanges within 24 hours of such transactions
List of Promoters Group and other Details

Pre-Issue Obligations
1)Appointment of Intermediaries
I. Appointment of Merchant Bankers
II. Appointment of Co-managers
III. Appointment of Other Intermediaries: The issuer
is responsible to appoint the other intermediaries
(underwriters, other merchant bankers, Registrars,
Banker(s) to the issue etc. in consultation with the
Lead Merchant Banker
2)Underwriting: The Lead merchant banker shall
satisfy themselves about the ability of the
underwriters to discharge their underwriting
obligations.
3)Offer Document to be Made Public: The draft offer
document filed with the Board shall be made public
for a period of 21 days from the date of filing the offer
document with the Board.

Pre-Issue Obligations
1) No Complaints Certificate: To be filed by lead merchant
banker after a period of 21 days from the date the draft
offer document was made public,
2) Mandatory Collection Centres to be arranged
3) Authorised Collection Agents to be appointed
4) Advertisement for Rights Post Issues: Advertisement to
be released in case of a rights issue, giving the date of
completion of despatch of letters of offer,
5)Appointment of Compliance Officer
6)Abridged Prospectus
7)Agreements with depositories
8)Branding of securities

POST-ISSUE OBLIGATIONS
1)Post issue monitoring reports
A) Irrespective of the level of subscription, the
post-issue Lead Merchant Banker shall ensure
the submission of the post-issue monitoring
reports as per formats specified
B) These reports shall be submitted within 3
working days from the due dates.
C) Due diligence certificate to be submitted with the
final post issue monitoring report.

2) Redressal of the investor grievances

The post-issue lead merchant banker shall
actively associate himself with post-issue activities
namely allotment, refund and dispatch and shall
regularly monitor redressal of investor.
3) Coordination with the intermediaries
I. The post-issue lead merchant banker shall
maintain close coordination with the Registrars to
the Issue.
II. Any act of omission or commission on the part
of intermediaries shall be reported to the Board

4) Underwriters
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the lead merchant banker shall satisfy himself that the
issue is fully subscribed before announcing closure of the
issue
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the lead merchant banker shall ensure that the
underwriters honour their commitment within 60 days
from the date of closure of the issue, In case there is a
devolvement on underwriters.
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The lead merchant banker shall furnish information in
respect of underwriters who failed to meet their
underwriting devolvements

5) Bankers to issue
The post-issue lead merchant banker shall
ensure that moneys received pursuant to
the issue are kept in a separate bank &
released by the said bank only after the
listing of the shares
6) Post issue advertisements
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Post- issue lead merchant banker shall ensure
that in all issues, advertisement giving details
relating to over subscription, basis on allotment,
number, value and percentage of application
received etc. is released within 10 days.

7) Basis of allotment
In a public issue of securities , the managing director
of stock exchange along with the lead merchant banker
and the registrar to an issue, shall ensure that basis of
allotments is finalised in a fair and proper manner
8) Proportionate-allotment Procedure
An allotment shall be made on a proportionate basis
within the specified categories . The proportionate
allotments of securities in an issue, that is
oversubscribed shall be subject to reservation for the
retail individual investors as described in the following:

1. A minimum 50% of the net offer of securities to the public

shall initially be made available for the
allotment to
retail individual investors as the case may be .
2.the balance net offer of securities to the public shall be
made available for allotment to:
a) individual applicants other than retail individual investors
b) other investors including corporate bodies/ institutions ,
irrespective of the number of shares, debentures and so on ,
applied for.
3) The unsubscribed portion of the net offer to any one of
the categories may be made available for allotment to
applicants in the other category, if so required

Due Diligence
The term due diligence is used generally refer to the process
of investigating a companys business, legal and financial
affairs
So Due diligence is an investigation of a business or person
prior to signing a contract, or an act with a certain standard of
care.
Done by Underwriters to gain a clear understanding of the
issuer and its business, to assess the risks associated with the
proposed transaction and,perhaps most importantly, to confirm
the statements made in the offering document in order to avoid
liabilities

Due diligence process

The due diligence process will
generally include the investigation on
following elements:

background
business
financial
accounting
legal
corporate governance, if appropriate

Regulatory Framework

Overview of Different Regulatory Authorities

Government of
India

Ministry
of
Finance

Ministry of
Corporate
Affairs

Ministry of
Commerce &
Industry

Department
of Economic
Affairs

FIPB

SEBI

Registrar of
Companies

Department of
Industrial
Policy &
Promotion

RBI

Key Regulatory Authorities

Department of Economic Affairs
Formulates and implements policies relating to the
securities market, including under the Securities
Contracts (Regulation) Act, 1957

Ministry of Corporate Affairs

Responsible for administration of the Companies Act,
1956
Operates the Investor Protection Cell which provides a
mechanism for facilitating the redress of investor
grievances

Slide 39

Key Regulatory Authorities

Reserve Bank of India
The monetary authority of India
Frames policies relating to movement of foreign exchange /
investments by non resident investors

FIPB
Considers and approves foreign direct investment
proposals that do not fall under the automatic route for
foreign investment

Slide 40

Scope of Key Regulatory

Authorities
SEBI

Stock
Exchanges

Broker
Dealers

Clearing
Corporation
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Merchant
Bankers

RBI

Depositories

Depository
Participants

Mutual
Funds

Banks

Registrar
& Transfer
Agents

Primary
Dealers

IMPORTANT SEBI REGULATIONS

SEBI ( ISSUE OF CAPITAL AND DISCLOSURE REQUIREMENTS) Regulations, 2009

SEBI ( ISSUE AND LISTING OF DEBT SECURITIES) Regulations, 2008.
SEBI ( PROHIBITION OF INSIDER TRADING ) Regulations, 1992
SEBI ( MERCHANT BANKERS ) Regulations, 1992
SEBI ( UNDERWRITERS ) Regulations, 1993
SEBI ( REGISTRARS TO AN ISSUE AND SHARE TRANSFER AGENTS )
Regulations, 1993
SEBI ( BANKERS TO AN ISSUE ) Regulations, 1994
SEBI ( SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS ) Regulations
1997 (Takeover Code)
SEBI ( PROHIBITION OF FRADULENT AND UNFAIR TRADE PRACTICES
RELATING TO SECURITIES MARKET ) Regulations, 2003

SEBI Regulations for Portfolio Managers

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No person shall act as portfolio manager unless he holds a

certificate granted by the Board under these regulations
The applicant is a body corporate
The applicant has the necessary infrastructure like
adequate office space, equipments and the manpower to
effectively discharge the activities of a portfolio manager
The applicant has either
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(i) a professional qualification in finance, law,
accountancy or business management or
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(ii) an experience of at least ten years in related activities
in the securities market.
The applicant has in its employment minimum of two
persons who, between them, have at least five years
experience

SEBI Regulations for Portfolio Managers

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Any previous application for grant of certificate made by any person

directly or indirectly connected with the applicant has been rejected by
the Board.
Any disciplinary action has been taken by the Board against a person
directly or indirectly connected with the applicant.
The applicant fulfills the capital adequacy requirements of 2 cr.
The applicant, its director, principal officer or the employee is not
involved in any litigation connected with the securities market
The applicant, its director, principal officer or the employee has at any
time not been convicted for any offence involving moral turpitude or
has been found guilty of any economic offence
grant of certificate to the applicant is in the interest of investor
the applicant is a fit and proper person

SEBI Regulations for Portfolio Managers

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It shall take adequate steps for redressal of grievances of the

investors within one month of the date of the receipt of the
complaint and keep the Board informed about the number,
nature and other particulars of the complaints received
Contract with clients and disclosures.
l The investment objectives and the services to be provided
l type of instruments and proportion of exposure & restriction
l tenure of portfolio investments & terms for early withdrawal of
funds or securities by the clients
l amount to be invested in portfolio is 25 lacs
l Settling procedure & fees payable to PM
l Custody of securities
l The terms of accounts and audit and furnishing of the reports
to the clients

SEBI Regulations for Stock brokers & Sub Broker

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stock broker" means a person having trading rights in any recognised stock
exchange and includes a trading member
sub-broker means any person not being a member of stock exchange who
acts on behalf of a stock broker as an agent or otherwise for assisting the
investors in buying, selling or dealing in securities through such stock brokers
Regulations to be a stock broker
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(a) No person shall act as a stock broker, unless he seeks a certificate of
registration from the Board for each stock exchange in which he seeks to
operate
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and man power to effectively dischargehis activities
l (c) has any past experience in the business of trading or dealing in securities,
as the case may be
l (d) has been subjected to disciplinary proceedings under the rules, and byelaws of a stock exchange, or enforcement action under securities laws, with
respect to his business as a stock-broker involving either himself or any of
his partners, directors or employees

SEBI Regulations for Stock brokers & Sub Broker

e) is a fit and proper person
(f) has any financial liability which is due and payable in
terms of the Act, the Securities Contracts (Regulation) Act,
1956 or rules and regulations thereunder
(g) has obtained certification in terms of SEBI (Certification
of Associated Persons in the Securities Markets)
Regulations, 2007 or as may be specified by the Board;
(h) satisfies the minimum networth and deposit requirements
for the segment for which membership or approval is sought

Conditions of registration for Stock brokers &

Sub Broker
Any registration granted by the Board under regulation shall be subject
to the following conditions, namely,(a) the stock broker holds the membership of any stock exchange
(b) he shall abide by the rules, regulations and bye-laws of the stock
exchange which are applicable to him
(c) where the stock broker proposes change in control, he shall obtain
prior approval of the Board for continuing to act as such after the
change;
(d) he shall pay fees charged by the Board in the manner provided in
these regulations;
(e) he shall take adequate steps for redressal of grievances, of the
investors within one month of the date of receipt of the complaint and
inform the Board as and when required by the Board;
(f) he shall at all times abide by the Code of Conduct
(g) he shall at all times maintain the minimum networth
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Table on Networt & Deposit

Segment Stock
broker

Clearing Self
member clearing
member

networth deposit

networth deposit

networth deposit

Cash

Equity

3 cr

50 lacs

1 cr

50 lacs

1cr

10cr

50 lacs

5 cr

50 lacs

50 lacs

3cr

1 cr

Currenc
y Der
Debt

* As may be specified by the Board from time to time

Clearing Member
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A Clearing Member (CM) of NSCCL has the responsibility of clearing

and settlement of all deals executed by Trading Members (TM) on
NSE, who clear and settle such deals through them.
Primarily, the CM performs the following functions:
l Clearing - Computing obligations of all his TM's i.e. determining
positions to settle.
l Settlement - Performing actual settlement. Only funds settlement is
allowed at present in Index as well as Stock futures and options
contracts
l Risk Management - Setting position limits based on upfront
deposits / margins for each TM and monitoring positions on a
continuous basis.

Clearing Members

Types of Clearing Members

l Trading Member Clearing Member (TM-CM)
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A Clearing Member who is also a TM. Such CMs may clear
and settle their own proprietary trades, their clients' trades as
well as trades of other TM's & Custodial Participants
l Professional Clearing Member (PCM)
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A CM who is not a TM. Typically banks or custodians could
become a PCM and clear and settle for TM's as well as of
the Custodial Participants
l Self Clearing Member (SCM)
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A Clearing Member who is also a TM. Such CMs may clear
and settle only their own proprietary trades and their clients'
trades but cannot clear and settle trades of other TM's.

SEBI Regulations for ISSUE AND LISTING OF

DEBT SECURITIES
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Debt securities means a non-convertible debt securities

which create or acknowledge indebtedness, and include
debenture, bonds and such other securities of a body
corporate but excludes bonds issued by Government or
such other bodies as may be specified by the Board,
security receipts and securitized debt instruments
General conditions
l No issuer shall make any public issue of debt securities if
its promoter, has been restrained or prohibited or
debarred by the Board
l issuer shall choose one of the stock exchange as the
designated stock exchange for listing & obtained inprinciple approval for listing.
l credit rating has been obtained from at least one credit

The issuer shall appoint one or more

merchant bankers to the issue
The issuer shall appoint one or more
debenture trustees
The issuer shall not issue debt securities for
providing loan to or acquisition of shares of
any person who is part of the same group or
who is under the same management.
The draft offer document filed with the
designated stock exchange shall be made

The Lead Merchant Banker shall ensure

that all comments received on the draft offer
document are suitably addressed prior to
the filing of the offer document with the
Registrar of Companies.
A copy of draft and final offer document
along with Due Diligence certificate shall
also be forwarded to the Board for its
records
The debenture trustee shall, prior to the

A public issue of debt securities may be

underwritten by an underwriter registered
with the Board
A trust deed for securing the issue of debt
securities shall be executed by the issuer in
favour of the debenture trustee within three
months of the closure of the issue
For the redemption of the debt securities
issued by a company, the issuer shall create
debenture redemption reserve in

LISTING OF DEBT SECURITIES

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An issuer desirous of making an offer of

debt securities to the public shall make an
application for listing to one or more
recognized stock exchange
The issuer shall comply with conditions of
listing of such debt securities as specified in
the Listing Agreement with the stock
exchange where such debt securities are
sought to be listed