You are on page 1of 60

UNIT-01

Investment Banking
Investment banking
An investment bank is a financial institution that assists
individuals, corporations, and governments in
raising capital by underwriting or acting as the client's agent in
the issuance of securities (or both).

An investment bank may also assist companies involved


in mergers and acquisitions and provide ancillary services such
as market making, trading of derivatives and equity securities,
and FICC services (fixed income instruments, currencies,
and commodities).

Unlike commercial banks and retail banks, investment banks


do not take deposits.
What's the Difference

Commercial Bank Investment Bank


1. Individual or small to mid 1. Companies/ Start-ups
sized companies.
2. Loans to buy a house or 2. Borrows to finance the
future education etc. growth of a company.
3. Bank- Creditor & General 3. Investors Creditor &
Public Debtor Companies Debtor
4. Earns money through the 4. Earns money through the
interest charged on loans fees charged for providing
services
Why an Investment Bank
It performs the following functions

Portfolio
Raise Capital
Management

M&A Research
Functions of Investment Banks
Arranges financing for corporations and governments. Such as
Debt, Equity, Convertibles & so on.
Advises on mergers and acquisitions (M&A) transactions.
Asset Management Business
E.g. Offers equity, fixed income, alternative investments,
and money market investment products and services to
individual and institutional clients
For alternative investment products, the firm co-invests
with clients in hedge fund, private equity and real estate funds
Functions 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.
Structure of Investment Banking
Investment banks are organized into 3 categories.
Front Office
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
Analyzing credit and market risk for the organization
Making sure operations are complying with regulations
Responsible for capital management and risk monitoring

Back Office
Operations involves data-checking trades that have
been conducted, ensuring that they are not erroneous, and
transacting the required transfers.
Types of Investment banking
Full-Service Firms- These are type of investment banks who
have significant presence in all areas like underwriting, Merchant
Banking, M&A, Securities services, structured instruments, asset
management etc. They are all rounder of the game.
Examples of such banks include Goldman Sachs, Morgan Stanley,
Credit Suisse, etc
.
Types of Investment banking
Boutique Firm
small investment banks that focus in their business on particular
segments.
In other words, they specialize in specific activities of investment
banking.
Usually they are interested in smaller deals, which are worth less
than a billion dollars or so (i.e., mid-market deals).
They also provide financial advice on mergers and acquisitions
deals, private placements, and initial public offerings.
Typically, boutique investment banks have one or two offices and
may focus on providing advisory services for specific geographic
regions.
They usually have their activities concentrated on the sell side.
Types of Investment banking
Regional Investment Bank
As the name implies, regional investment banks typically focus on
a certain area or region.
These firm will have multiple offices with a national presence.
Some banks may even have operation in many different countries.
Deal for regional investment banks can be comparable in size to
the bulge bracket i-banks but often they will be less than $1 billion.
Typical deal size will be higher than the boutiques and range
between $100 million to $1 billion in enterprise value.
Investment Banking Services
Non- Fund Based
Fund Based
Management of public offers of equity & debt
Underwriting
instruments.
Market making
Buy back offers.
Bought out deals
Advisory & transaction service in Project
Investment in primary market
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
Support services
Non Fund Based Fund Based
Secondary market services Venture capital
Stock broking Private equity
Derivative product Asset management
Portfolio Management Proprietary trading & dealing in
Sales & distribution securities.
Equity research
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.
Merchant Banking

It is a non-banking financial activity


Provide Advice, guidance and service for a fee.
It helps a businessman to start a business.
It helps to raise 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.
Services of MB
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.
4)Dispatch of Issue Material
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

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
These reports shall be submitted within 3 working days
from the due dates.
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


The post-issue lead merchant banker shall maintain close
coordination with the Registrars to the Issue.
Any act of omission or commission on the part of
intermediaries shall be reported to the Board
4) Underwriters
The lead merchant banker shall satisfy himself that the issue
is fully subscribed before announcing closure of the issue.
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.
The lead merchant banker shall furnish information in
respect of underwriters who failed to meet their underwriting
devolvement's.
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 called as Escrow account & released by the said bank
only after the listing of the shares

6) Post issue advertisements


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
Changing landscape of Investment Banking
Till 2008 Investment Banking is a lucrative business. The
revenues during 2007 was around $51bn.
Sub-prime crisis took a toll on entire IB business. The IB
Business is neither under the control of Federal Reserve Bank nor
US Securities & Exchange Commission.
Many Old & Biggest IB collapsed in the wall street because of
financial turmoil.
Bear Stearns acquired by JP Morgan Chase, Lehman Brothers
filed for bankruptcy, Merill lynch was acquired by Bank Of
America, Goldman Sachs and Morgan Stanley converted to bank
holding companies.
The crisis shook up the entire industry, and the ensuing years have
brought a number of new regulations and requirements.
Drop in big deals, fat Fees & revenues
Now IB design new strategy for survival & growth such as
Focusing on key areas,
Exploring new & alternative markets & Market Segments,
Creating alliance with Boutique firms,
Developing strong relationship with existing clients,
Giving quality advise in every stage of their growth.
Promoting ethical behavior.
Regulatory Framework
Overview of Different Regulatory Authorities

Government of India

Ministry of
Finance Ministry of Ministry of
Corporate Commerce & RBI
Affairs Industry
Department of
Economic
Affairs

Department of
Registrar of
Industrial Policy
FIPB SEBI Companies
& Promotion
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 33
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 34
Scope of Key Regulatory Authorities

SEBI RBI

Stock Clearing Mutual


Depositories
Banks
Exchanges Corporations Funds

Registrar &
Broker Merchant Depository Primary
Participants
Transfer
Dealers Bankers Dealers
Agents
SEBI Guidelines for merchant banking
1. The merchant banking activity in India is governed by SEBI
(merchant bankers) regulations, 1992. Registration with SEBI is
mandatory to carry out the business of merchant banking in India.
An applicant should comply with the following norms:
I) The applicant should be a corporate body.
Ii) The applicant should not carry on any business other than those
connected with the securities market.
Iii) The applicant should have necessary infrastructure like office space,
equipment, manpower, etc.
Iv) The applicant must have at least two employees with prior experience
in merchant banking.
V) Any associate company, group company, subsidiary or interconnected
company of the applicant should not have been a registered merchant
banker.
Vi) The applicant should not have been involved in any securities scam or
proved guilt for any offence.
SEBI Guidelines for merchant banking
SEBI has classified the merchant bankers into four categories based on
the nature and range of the activities and the responsibilities.
Category I they are allowed to carry on the activity of issue
management and to act as adviser, consultant, manager, underwriter,
portfolio manager.
Category II they are allowed to act as adviser, consultant, co-
manager, underwriter, portfolio manager.
Category III they are permitted to act as underwriter, adviser or
consultant to an issue.
Category IV they can act only as adviser or consultant to an issue.

CAPITAL ADEQUACY NORMS:


Category I : Rs. 5 crores
Category II : Rs.50 lakhs
Category III : Rs.20 lakhs
Category IV : Nil
SEBI Guidelines for merchant banking
2. Every merchant banker should maintain copies of balance
sheet, Profit and loss account, statement of financial position
3. Half-yearly unaudited result should be submitted to SEBI
4. Merchant bankers are prohibited from buying securities based
on the unpublished price sensitive information of their clients
5. SEBI has been vested with the power to suspend or cancel the
authorization in case of violation of the guidelines
6. Every merchant banker shall appoint a Compliance Officer to
monitor compliance of the Act
7. SEBI has the right to send inspecting authority to inspect
books of accounts, records etc. of merchant bankers
SEBI Guidelines for merchant banking
8. Inspections will be conducted by SEBI to ensure that
provisions of the regulations are properly complied
9. SEBI will give authorization for a merchant banker to
operate for 3 years only. Without SEBIs authorization
,merchant bankers cannot operate

10. An initial authorization fee, an annual fee and renewal


fee may be collected by SEBI

11. A lead manager holding a certificate under category I


shall accept a minimum underwriting obligation of 5% of
size of issue or Rs.25 lakhs whichever is less
12. It is mandatory under SEBI rules that every issuing
company must appoint one or more SEBI registered
merchant bankers as lead manager(s) for the management of
issue
Issue amount No of lead managers
Up to 50 crores not more than Two
50 to 100 crores Three
100 to 200 crores four
200 to 400 crores five
Above 400 Five or more as may be agreed
by the
SEBI

However, the limit to the maximum number of lead


managers to be appointed in a single issue was
omitted through amendment in this regulations on April
19, 2006
SEBI code of conduct for Merchant Bankers

1. Having high integration in dealing with clients.


2. Disclosure of all details to the authorities concerned. Avoiding
making exaggerated statements.
3. Disclosing all the facts to its customers.
4. Not disclosing any confidential matter of the clients to third
parties.
SEBI Regulations for Stock brokers & Sub Broker
A stockbroker, also called as Registered representative,
investment advisor or simply, broker, is a professional individual
who executes buy and sell orders for stocks and other securities
through a stock market, or over the counter, for a fee or
commission. They are members of the stock exchange.

Sub-broker means any person not being a member of stock


exchange but who acts on behalf of a stock broker as an agent or
otherwise for assisting investors in buying, selling or dealing in
securities through such stock brokers.
All Sub-Brokers are required to obtain a Certificate of
Registration from SEBI without which they are not permitted to
deal in securities.
SEBI Regulations for Stock brokers & Sub Broker

Regulations to be a stock broker


1. Seeks a certificate of registration from the Board for each stock
exchange in which he seeks to operate.
2. Following information to be furnished
(a) is eligible to be admitted as a member of a stock exchange;
(b) has the necessary infrastructure like adequate office space,
equipments and man power to effectively discharge his
activities;
(c) has any past experience in the business of buying, selling or
dealing in securities;
(d) is subjected to disciplinary proceedings under the rules,
regulations and bye-laws of a stock exchange with respect to his
business as a stock-broker involving either himself or any of his
partners, directors or employees;
(e) is a fit and proper person
SEBI Regulations for Stock brokers & Sub
Broker
the Board consideration as it deems fit based on following
criteria.
(a) Financial integrity
(b) Absence of convictions or civil liabilities;
(c) Competence;
(d) Good reputation and character;
(e) Efficiency and honesty; and
(f) Absence of any disqualification to act as an intermediary as
stipulated in these regulations.
A person shall not be considered as a" fit and proper person
1. Convicted by a Court for any offence
2. An order for winding up has been passed
3. Has been declared insolvent and has not been discharged;
4. Not financially Sound
Conditions of registration for Stock brokers &
Sub Broker
Any registration granted by the Board under regulation shall be
l

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 to change in constitution, 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 Net worth
Table on Networth & Deposit
The minimum net worth and deposit requirements for the
segment for which membership or approval is sought

Segment Stock Clearing Self


broker 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
Currenc
y Der

Debt 50 lacs * 3cr * 1 cr *


Registration as sub-broker
(1)No sub-broker shall act unless he holds a certificate granted by the
Board.
(2)Apply for Registration to stock exchange through Stock Broker.
(3)The eligibility criteria for registration as a sub-broker shall be as
follows, namely:
(a) the applicant is not less than 21 years of age;
(b) Not been convicted of any offence involving fraud or
dishonesty;
(c) At least passed 12th standard equivalent examination.
(d) the applicant is a fit and proper person.
(4) The applicant has the necessary infrastructure like adequate office
space, equipment and manpower to effectively discharge his activities.
(5) The applicant shall be a person recognized by the Stock Exchange as
a sub-broker affiliated to a member broker of the stock exchange.
SEBI Regulations for Intermediaries
Intermediary means a person mentioned in clauses (b)
and (ba) of sub-section (2) of section 11 and sub-section
(1) and (1A) of section 12 of the Act
which includes an asset management company in
relation to the Securities and Exchange Board of India
(Mutual Funds) Regulations, 1996, a clearing member of
a clearing corporation or clearing house and a trading
member of a derivative segment 2 [or currency
derivatives segment] of a stock exchange but does not
include foreign venture capital investor, mutual fund,
collective investment scheme and venture capital fund.
Main requirements under SEBI (Mutual
Funds) Regulations, 1996
1. The applicant has to fulfil the following, namely:-
a) The sponsor should have a sound track record and general
reputation of fairness and integrity in all his business
transactions. "sound track record" shall mean the sponsor
should,-
1. Be carrying on business in financial services for a period of
not less than five years
2. The net worth is positive in all the immediately preceding
five years
3. The net worth in the immediately preceding year is more
than the capital contribution of the sponsor in the asset
management company
4. The sponsor has profits after providing for depreciation,
interest and tax in three out of the immediately preceding five
years, including the fifth year.
Main requirements under SEBI (Mutual
Funds) Regulations, 1996
b) The applicant is a fit and proper person.
c) In the case of an existing mutual fund, such fund is in the form
of a trust and the trust deed has been approved by the Board
d) The sponsor has contributed or contributes atleast 40% to the
net worth of the asset management company
e) The sponsor or any of its directors or the principle officer to be
employed by the mutual fund not been convicted of an offence
f) Appointment of trustees to act as trustees for the mutual fund in
accordance with the provisions of the regulations
g) Appointment of asset management company to manage the
mutual fund and operate the scheme of such funds in accordance
with the provisions of these regulations
h) Appointment of custodian in order to keep custody of the
securities.
Clearing Member
lA Clearing Member (CM) of NSCCL has the responsibility of
clearing and settlement of all deals executed by Trading Members
(TM) on NSE/BSE, who clear and settle such deals through them.
l Primarily, the CM performs the following functions:

lClearing - Computing obligations of all his TM's i.e.


determining positions to settle.
lSettlement - Performing actual settlement. Only funds
settlement is allowed at present in Index as well as Stock
futures and options contracts
lRisk Management - Setting position limits based on upfront
deposits / margins for each TM and monitoring positions on a
continuous basis.
lClearing Members
Types of Clearing Members
l

lTrading Member Clearing Member (TM-CM)


l 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
lProfessional Clearing Member (PCM)
lA 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
lSelf Clearing Member (SCM)
lA 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 Portfolio Managers

A portfolio manager is a body corporate who, pursuant to


a contract or arrangement with a client, advises or directs
or undertakes on behalf of the client, the management or
administration of a portfolio of securities or the funds of
the client.
An applicant for registration is required to pay a non-
refundable application fee of Rs 1 lakh & Rs 10 lakhs as
registration fee at the time of grant of certificate of
registration by the SEBI.
SEBI Regulations for Portfolio Managers
l Certificate granted by the Board under these regulations
1. The applicant is a body corporate
2. The applicant has the necessary infrastructure like adequate
office space, equipments and the manpower to effectively
discharge the activities of a portfolio manager
3. The applicant has either
1. (i) a professional qualification in finance, law,
accountancy or business management or
2. (ii) an experience of at least ten years in related
activities in the securities market.
4. The applicant has in its employment minimum of two
persons who, between them, have at least five years
experience
SEBI Regulations for Portfolio Managers
5. The applicant fulfills the capital adequacy requirements of 2 cr.
6. The applicant, its director, principal officer or the employee has
at any time not been convicted for any offence
7. The applicant is a fit and proper person
8. Provides Disclosure document at least two days prior to
entering into an agreement with the client.
9. Enters into an agreement in writing with the client, clearly
defining the inter se relationship and setting out their mutual
rights, liabilities and obligations as specified in Schedule IV of
the SEBI (Portfolio Managers) Regulations, 1993.
10. minimum worth of Rs 5 lakhs from the client while opening an
account
11. The portfolio manager shall furnish periodically a report to the
client, not exceeding a period of six months
11. Report should contain
1. the composition and the value of the portfolio,
2. transactions undertaken during the period of report
3. beneficial interest received during that period
4. expenses incurred
5. details of risk foreseen by the portfolio manager
12. Portfolio manager cannot offer/ promise indicative or
guaranteed returns to clients.
Underwriting
Underwriting is an agreement, entered by an issuing company
with a investment bank, in order to ensure that the public will
subscribe for the entire issue of shares or debentures made by the
company and it agrees to buy that part of the company issues
which are not subscribed to by the public in consideration of a
specified underwriting commission.
The Investment Banker is known as the underwriter.
The underwriting agreement, specifies the period during which
the agreement is in force, the amount of underwriting obligations,
the period within which the underwriter has to subscribe to the
issue after being intimated by the issuer, the amount of commission
and details of arrangements, if any.
The underwriting commission may not exceed 5 percent on shares
and 2.5 percent in case of debentures.
issue is undersubscribed, an underwriter is required to
subscribe to the remaining shares. The outstanding
Underwriting
unsubscribed amount devolves onto the underwriter.

This is also known as hard underwriting


issue is beyond the resources of one underwriter or when he
does not want to block up large amount of funds in one issue.
2. Sub-Underwriting:- is one in which an underwriter gets a part
of the issue further underwritten by another agency. This is
done to diffuse the risk involved in underwriting.
3. Firm Underwriting: - is one in which the underwriters apply
for a block of securities. Under it, the underwriters agree to
take up and pay for this block of securities as ordinary
subscribers in addition to their commitment as underwriters.

You might also like