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UIAMS, Panjab University , Chandigarh
Dated 31st
August, 2013
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Introduction
Investment banks play a significant role in the financial servicessector. However, Investment banking, as advisory financial services,emerged rather late.
Formal Investment banking service in India originated with thesetting up of the Investment banking division by the Grind lays Bank
in 1969 for undertaking management of public issue and financialconsultancy, followed by other foreign banks.
Pursuant to the recommendations of the Banking Commission(1972), State Bank of India started Investment banking service in1973. The ICICI Ltd was the first development finance institution toinitiate such service in 1974.
The period following the mid-seventies witnessed a boom in thegrowth of Investment banking organizations in the country whichwere sponsored by banks, financial institutions, NBFCs Brokers andso on.
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An investment bank is a financial institution that assists
individuals, corporations and governments in raising capital by
underwriting and/or acting as the client's agent in the
issuance of securities. An investment bank may also assist
companies involved in mergers and acquisitions, and provideancillary services such as market making, trading of
derivatives, fixed income instruments, foreign exchange,
commodities, and equity securities.
Definition
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Established on June 16, 1933
It had a stronger impact on US banking regulation
The Banking act 1933 was a law that established the Federal Deposit InsuranceCorporation (FDIC) in the United States and introduced banking reforms, someof which were designed to control speculation.
GlassSteagall Act was a reaction to the collapse of a large portion of the
American commercial banking system in early 1933. It introduced theseparation of bank types according to their business (commercial andinvestment banking).
The Glass-Steagall Act prohibited any one institution from acting as anycombination of an investment bank, a commercial bank, and/or an insurance
company.
History: GlassSteagall Act
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Enacted on November 12, 1999
The Gramm-Leach-Bliley Act allowed commercial banks, investmentbanks, securities firms and insurance companies to consolidate.
Large financial-services conglomerates combine commercial banking
and investment banking, and sometimes insurance. Such
combinations were common in Europe but illegal in the United States
prior to passage of the Gramm-Leach-Bliley Act of 1999.
The Gramm-Leach-Bliley Act
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SEBI Rules 1992 define Investment Banking as: A person who is
engaged in the business of issue management either by making
arrangements regarding selling, buying, or subscribing to securities asmanager, Consultant, Advisor or rendering corporate advisory services in
relation to such issue management.
Investment Banking in India
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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.
A few small brokers also started rendering Merchant banking services, but
theirs demand was limited due to their small capital base.
Evolution of investment
banking in India
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It was soon followed by Citibank, which started rendering these services.
In 1967, ANZ Grindlays bank set - up a separate merchant banking
division to handle new capital issues.
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.
Contd
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By 1980, the number of merchant banks rose to 33 and was set-up by
commercial banks, financial institutions and private sector.
JM finance was set-up by Mr. Nimesh Kampani as an exclusive merchant
bank in 1973.
In 1972, ICICI became the first financial institution to offer merchant
banking services.
Contd
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Underwriting (Public offering of securities)
Trading of Securities
Mergers and Acquisitions Private Placement of Securities
Merchant Banking
Securitization of Assets
Trading and Creation of Risk Control Instruments Money Management
ACTIVITIES OF INVESTMENT
BANKERS
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REGISTRATION OF INVESTMENT
BANK
Compulsory Registration:
Investment bankers require compulsory registration with
the SEBI to carry out their activities. They fall under four
Registration categories
Category I
Investment bankers can carry on any activity relatedto issue management, that is , the preparation of prospectus and
other information relating to the issue, determining the financial
structure, tie up of financiers, final allotment of securities, refund
of the subscription and also act as advisors, consultants,
managers, underwriters or portfolio Managers.
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Category II Investment bankers can act as advisors, consultants ,
co-managers, underwriters and portfolio Mangers.
Category III Investment bankers can act as underwriters, advisors
and consultants to an issue.
Category IV Investment bankers can act only as adviser or
consultant to an issue.
Thus, only category I Investment bankers could act as lead managers
to an issue. With effect from December 9, 1997, however, only
Category I Investment bankers are registered by the SEBI. To carry on
activities as portfolio managers, they have to obtain separate
certificate of registration from the SEBI.
Net worth requirement for Registration is as follow:
Category I : Rs. 5,00,00,000
Category II : Rs. 50, 00, 000
Category III :Rs. 20, 00, 000
Category IV : Nil
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OFFERING & SERVICES OF
INVESTMENT BANKS
Project Counselling: Project counselling includes preparation
of project reports, deciding upon the financing pattern to
finance the cost of the project and appraising the project
report with the financial institutions or banks. It also includes
filling up of application forms with relevant information forobtaining funds from financial institutions and obtaining
government approval.
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Issue Management: Management of issue involves marketing
of corporate securities viz. equity shares, preference shares
and debentures or bonds by offering them to public.Investment banks act as an intermediary whose main job is to
transfer capital from those who own it to those who need it.
After taking action as per SEBI guidelines, the Investment
banker arranges a meeting with company representatives and
advertising agents to finalize arrangements relating to date ofopening and closing of issue, registration of prospectus,
launching publicity campaign and fixing date of board meeting
to approve and sign prospectus and pass the necessary
resolutions. Pricing of issues is done by the companies in
consultant with the Investment bankers.
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Underwriting of Public Issue: Underwriting is a guarantee
given by the underwriter that in the event of under
subscription, the amount underwritten would be subscribed
by him. Banks/Investment banking subsidiaries cannotunderwrite more than 15% of any issue.
Managers, Consultants or Advisers to the Issue: The
managers to the issue assist in the drafting of prospectus,
application forms and completion of formalities under the
Companies Act, appointment of Registrar for dealing with
share applications and transfer and listing of shares of the
company on the stock exchange. Companies can appoint one
or more agencies as managers to the issue.
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Portfolio Management: Portfolio refers to investment in
different kinds of securities such as shares, debentures or
bonds issued by different companies and governmentsecurities. Portfolio management refers to maintaining proper
combinations of securities in a manner that they give
maximum return with minimum risk.
Advisory Service Relating to Mergers and Takeovers: A
merger is a combination of two companies into a singlecompany where one survives and other loses its corporate
existence. A takeover is the purchase by one company
acquiring controlling interest in the share capital of another
existing company. Investment bankers are the middlemen in
setting negotiation between the two companies.
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Off Shore Finance: The Investment bankers help their clients
in the following areas involving foreign currency. (a) Long term
foreign currency loans (b) Joint Ventures abroad (c) Financingexports and imports (d) Foreign collaboration arrangements
Non-resident Investment: The services of Investment banker
includes investment advisory services to NRI in terms of
identification of investment opportunities, selection of
securities, investment management, and operational serviceslike purchase and sale of securities.
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Loan Syndication: Loan syndication refers to assistance
rendered by Investment bankers to get mainly term loans for
projects. Such loans may be obtained from a singledevelopment finance institution or a syndicate or consortium.
Investment bankers help corporate clients to raise syndicated
loans from banks or financial institutions.
Corporate Counseling: Corporate counseling covers the entire
field of Investment banking activities viz. project counseling,capital restructuring, public issue management, loan
syndication, working capital, fixed deposit, lease financing
acceptance credit, etc.
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Merchant Banking
DEFINITION: In banking, a merchant bank is a financial institution primarily
engaged in offering financial services and advice to corporations and
wealthy individuals on how to use their money.
The Notification of the Ministry of Finance defines a merchant
banker 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.
I n short, merchant bankers assist in raising capital and advice on
related issues.
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Merchant bankers assist corporate in raising capital. They assist in
issue of Shares, syndicating loans, public issue of debentures.
They also actively arrange working capital.
Projects scrutinize & persuade merger proposals.
In BRITAIN merchant bankers & investment bankers are
synonymous.
In the U.S., Merchant bank means as investment bank which is
well-equipped to handle multinational corporations.
In INDIAmerchant bankers is a body corporate who carries on anyactivity of the issue management, which consist of preparing
prospectus & other information relating to the issue. Merchant
banks in India are not allowed to conduct any business other than
that related to securities market.
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Difference between investment
and merchant banking
Investment Banking Merchant Banking
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.
Investment banks only participated in
underwriting and selling securities in
large blocks.
Merchant banks perform international
financing activities such as foreign
corporate investing.
Investment banks rarely offer trade
financing products to their clients.
Merchant banks still offer trade
financing products to their clients.
In practice, the fine lines that separate the functions of merchant banks and
investment banks tend to blur.
In theory, investment banks and merchant banks perform different functions.
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Services provided by merchant bank
1. Corporate Counseling It includes a whole range of financial services provided by a
merchant banker to a corporate unit a view to ensure better
performance, maintain steady growth and create a better image
among investors.
It covers the entire field of merchant banking activities i.e., projectcounseling, capital restructuring, portfolio management and the full
range of financial engineering including public issue management,
loan syndication, working capital, fixed deposits, lease financing,
acceptance credit, etc.
A merchant banker finds out the problems of enterprise, which
shall include organizational goals for the enterprise, size of the
organization and operational scales, choice of a product, pricing,
etc, and suggests ways and means to solve those problems.
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2. Project Counseling
Project counseling is an important merchant banking service
which includes preparation of project reports, deciding upon thefinancing pattern to finance the cost of the project, appraising
the project report with the financial institutions/banks.
Project reports are prepared to obtain government approval of
the project, for procuring financial assistance from financial
institutions and banks, for ensuring market for the proposedproduct, for planning public issues, etc.
Financing the project cost is an important aspect of project
counseling.
Merchant banker has to decide the financing mix of the internaland external sources of funds
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3. Credit Syndication
Once the client company has decided about the project proposed
to be undertaken, the next step is looking for the sourceswherefrom the funds could be procured to implement the project.
Merchant banker has to locate the sources of funds and comply
the formalities required to procure the funds. This service
rendered by the merchant banker in arranging and procuring
credit from financial institutions, banks and other lending and
investment organizations for financing the clients' project cost or
meeting working capital requirement is referred to as loan
syndication or credit syndication.
Credit syndication in case of domestic borrowings is with theinstitutional lenders and banks.
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4. Issue Management
Management of capital issues is a professional service rendered by
the skilled and experienced merchant bankers. Public issue management involves marketing of corporate securities
by offering the securities to the public, procuring private
subscription to the securities and offering securities to existing
shareholders of the company.
A merchant bankers post issue activities include final allotment
and/or refund of subscription amount, calculation of underwriters
liability in case of under subscription and complying the necessary
statutory requirements for listing of securities on the stock
exchange.
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5. Under writing of public issue
A fully underwritten public issue spells confidence to the investingpublic, which ensures a good response to the issue. Keeping this inview companies, which float a public issue usually, desire a fullunderwriting of the issue.
Underwriting is only the guarantee given by the underwriter that inthe event of under subscription, the amount underwritten wouldbe subscribed in proportion by the underwriter.
6. Bankers to the Issue
The merchant banker can automatically become the banker tothe issue in the following cases:
The bank is a broker to the company
It has given underwriting commitments.
It acts as a manger to the issue
The function of a banker to the issue is to accept applicationforms from the public together with subscription money andtransfer them to the account of the controlling branch.
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7. Portfolio Management
Portfolio refers to investment in different types of marketable
securities or investment papers like shared, debentures anddebenture stocks, bonds etc. from different companies or
institutions held by individuals firm or corporate units.
Portfolio management refers to managing efficiently the investment
in the securities held by professionals to others.
Merchant bankers take up management of a portfolio of securities
on behalf of their clients, providing special services with a view to
ensure maximum return by such investments with a minimum risk
of loss of return on the money invested in securities.
A merchant banker while performing the services of portfoliomanagement has to enquire of the investment needs of the client,
the tax bracket, ability to bare risk, liquidity requirements, etc.
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8. Advisory Services Relating To Mergers and Takeovers
Merchant bankers are the middlemen settling negotiations between the
offered and the offeror. Their role is specific and specialized in handling
the mergers and taker over assignments. Being a professional expert, the
merchant banker is apt to safeguard the interest of the shareholders in
both the companies and as such his assistance is useful for both the
companies, i.e. the acquirer as well as the acquired company.
Once the merger partner is proposed the merchant banker has to
appraise the merger/takeover proposal with respect to financial
viability and technical feasibility.
He has to negotiate with the parties and decide the purchase
consideration and mode of payment.
He has to comply with the legal formalities like getting approvalfrom the Government/ RBI; drafting the scheme of amalgamation;
getting approval of company Board, financial institution, high court
if required; arranging for the meeting etc.
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9. Venture Capital Financing
Financing an emerging high-risk project is called venture
capital financing.
Many merchant bankers are entering into this area by also
financing viable upcoming projects.
The financing is by subscription to the equity capital, while
repayment is by selling the equity through stock market when
the shares are listed.
10. Leasing
Leasing is an another lucrative area of financing where merchant
bankers are turning.
Leasing is a viable source of financing while acquiring capital assets.
The services include arrangement for lease finance facilities for
leasing companies, legal; documents and tax consultancy.
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11. Non Resident Investment
To attract NRI investments in the primary and secondary markets, the
merchant bankers provide investment advisory services to the NRIs in
terms of identification of investment opportunities, selection of securities,portfolio management, etc.
They also take care of operational details like purchase and sale of
securities securing the necessary clearance from RBI under FERA.
12. Arranging Offshore Finance The merchant bankers also help their clients in the following areas
involving foreign currency financing:
Financing Of Exports And Imports
Long Term Foreign Currency Loans
Joint Ventures Abroad
Foreign Collaboration Arrangements
The assistance rendered as in the case of financial services covers
appraisals, negotiations, compliance with procedural and legal aspects etc.
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13. Management of Fixed Deposits of Companies
Recently, merchants bankers have begun to structure and mobilizefixed deposits for their corporate clients.
They take care of the procedural and legal aspects, and also mangethe collection and subsequent servicing of the deposits.
Advice with regard to the amount to be raised, interest charges,terms of deposits and other related issues are also offered to theclient.
14. Relief to Sick IndustriesThe services offered by merchant bankers to sick industries can besummarized as follows:
Assessment of capital requirements and counseling on capitalrestructuring;
Appraisal of technological, environmental, financial and other factorscausing sickness;
Preparations of programs and packages for rehabilitation of sick units;
Providing necessary assistance where the rehabilitation package involvesmergers or amalgamation;
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Example of banks providing
merchant banking services
These Banks are registered with SEBI as CategoryI Merchant
Banker for providing all the major Merchant Banking services. Citibank was the first merchant bank in India.
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