Investment Banking

For layman
• Commercial banks and investment banks
performed completely distinct functions. If you
need a loan to buy a car or house, You will visit a
commercial bank and When you need to raise
cash to fund an acquisition or build your factory
you will call on your investment bank.
 Definition
• “An investment bank is a financial institution that
– raises capital,

– trades in securities and

– manages corporate mergers and acquisitions.

It is an umbrella term for a range of activities:

– underwriting,

– selling, and trading securities (stocks and bonds); providing financial advisory services,
such as mergers and acquisition advice; and

– managing assets.

Investment banks offer these services to companies, governments, non-profit

institutions, and individuals”.  

 
 An Overview
• “Corporate raise capital by issuing securities in the
market. Investment bankers act as intermediaries
between the issuers of capital and the ultimate
investors who purchase the securities”

• “Investment banking can be broadly defined as

financial intermediation that matches the entities that
need capital and those that have capital.”
Investment banking process

Securities

Investment
Issuer Investor
Banker

Cash
Financial Markets Structure
 Terminologies
• Money Market
– the money market is the global financial market for
short-term borrowing and lending. It provides short-term
liquidity funding for the global financial system.

• Call Money Market

– This is the market for very short term funds, known as
money on call. The rate at which funds are borrowed in
this market is called `Call Money rate‘

• Capital Market
– A capital market is a market for securities (both debt
and equity), where business enterprises (companies)
and governments can raise long-term funds
• The primary market
– is that part of the capital markets that deals with the issuance
of new securities. Companies, governments or public sector
institutions can obtain funding through the sale of a new stock
or bond issue. This is typically done through a syndicate of
securities dealers. The process of selling new issues to
investors is called underwriting. In the case of a new stock
issue, this sale is an initial public offering (IPO). Dealers earn a
commission that is built into the price of the security offering,
though it can be found in the prospectus.

o The secondary market,

 also known as the aftermarket, is the financial market where
previously issued securities and financial instruments such as
stock, bonds, options, and futures are bought and sold
• Private placements:
– A private placement (or non-public offering) is a funding round
of securities which are sold without a initial public offering,
usually to a small number of chosen private investors.

• Over the counter transaction:

– Over-the-counter (OTC) trading is to trade
financial instruments such as stocks, bonds, commodities or
derivatives directly between two parties. It is contrasted with
exchange trading, which occurs via facilities constructed for the
purpose of trading (i.e., exchanges), such as futures exchanges
or stock exchanges.
• Rights Issue:
– Under a secondary market offering or
seasoned equity offering of shares to raise money, a
company can opt for a rights issue to raise capital. The
rights issue is a special form of shelf offering or shelf
registration. With the issued rights, existing
shareholders have the privilege to buy a specified
number of new shares from the firm at a specified price
within a specified time.[1] A rights issue is in contrast to
an initial public offering (primary market offering), where
shares are issued to the general public through market
exchanges.
 Functional Areas of Investment
Banking
• Capital Markets –
– Sales, Trading & Research (Equity and Fixed Income)
– Distributes new (primary) security issues to institutional investors/clients
– Transacts blocks of previously issued (secondary) securities through private
placement or negotiation
– Maintains markets for securities already distributed
– Provides research on securities, companies, industries and economies

• Investment Management Services

– Provides investment and financial advisory services
– Focuses on high net worth individuals and mid-sized institutional investors

• Investment Banking
– Provides strategic, financial and valuation advisory services
– Raises capital through the issuance of securities
– Advises companies in merger & acquisition and restructuring transactions
– Offers specialized products and services to meet the needs of corporate and
government client
Roles of Investment Bankers
• Management of debt and equity offerings:
– Instrument designing
– Pricing the issue
– Registration of the offer document
– Underwriting support
– Marketing of the issue
– Allotment and refund &
– Listing on stock exchanges

• Placement and distribution:

– The distribution network of an investment banker can be
classified as institutional and retail

• Corporate Advisory Services:

– Customize solution to the financial problems of the clients
which include financial structuring, rehabilitation and turn
around management
• Project Advisory:
– They assist the companies in conceptualizing the project idea. Once
the idea is conceptualized they carry out the initial feasibility studies
to examine it viability.

• Loan syndication:
– Investment bankers arrange to tie-ups loans for their clients

• Venture capital:
– Identifying the venture funds whose investment policies matches
with the requirement of the company

• Mergers and acquisitions

– Setting up deals where one company buys another is an important
source of fee income for many investment banks

• Divestitures
– Involves sale of assets (tangible & Intangible) or business entities.
• Financial Engineering
– It involves designing development and implementation of
innovative financial instruments and process and the
formulation of creative solution to the problems in finance