m
 

 An investment banking is a financial institution

that raises capital, trades securities and
manages corporate mergers and acquisitions.

 Another term for investment banking is

corporate finance.
 ‘m 
1. Glass²Steagall Act

whe Banking act 1933 was a law that established the Federal
Deposit Insurance Corporation (FDIC) in the United States and
introduced banking reforms, some of which were designed to
control speculation It is most commonly known as the Glass²
Steagall Act, after its legislative sponsors, Carter Glass and Henry
B. Steagall.

Glass²Steagall Act was a reaction to the collapse of a large

portion of the American commercial banking system in early
1933. It introduced the separation of bank types according to
their business (commercial and investment banking),

whe Glass-Steagall Act prohibited any one institution from acting

as any combination of an investment bank, a commercial bank,
and/or an insurance company.

it had a stronger impact on US banking regulation

It was established on June 16, 1933

 History contd«..
! ‘
‘m


whe Gramm-Leach-Bliley Act allowed commercial banks,

investment banks, securities firms and insurance
companies to consolidate. For example, Citicorp (a
commercial bank holding company) merged with wravelers
Group (an insurance company) in 1998 to form the
conglomerate Citigroup.

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.

whe Gramm-Leach-Bliley Act (GLBA), also known as the

Financial Services Modernization Act of 1999

enacted on November 12, 1999

mm


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

JPMorgan Chase (J.P. Morgan Investment Bank)

Morgan Stanley

Nomura Holdings Inc

UBS (UBS Investment Bank)

RBS (RBS Global Banking and Markets)

Wells Fargo Securities


m  m
m

 m  m
 m
 m
  m
 
mm   

ABN Amro

Bank of Montreal (BMO Capital Markets)

BNP Paribas (BNP Paribas CIB)

Fortis

HSBC

ING Group

KBC Bank

Kotak Mahindra Bank

Nomura Securities Co.

Royal Bank of Canada (RBC Capital Markets)

Royal Bank of Scotland Group (RBS Securities)

Standard Bank

Standard Chartered Bank


m m
 
 whe m

m m m
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 was limited due to their small
capital base.
 

It was soon followed by Citibank, which started rendering
these services.

whe 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.

In 1967, ANZ Grindlays bank set - up a separate merchant
banking division to handle new capital issues.
  

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.
Activities of investment banking
ACTIVITIES OF INVESTMENT
BANKERS

Underwriting (Public offering of securities)

wrading of Securities

Private Placement of Securities

Mergers and Acquisitions

Merchant Banking

Securitization of Assets

wrading and Creation of Risk Control

Instruments

Money Management
xNDERWRITING
Function:-

 Public offering of securities.

 Helping firms raise funds thru stocks or

bond issues.

 It is a traditional activity -- "sponsoring.´

xNDERWRITING INVOLVES

R





 
   
 and how much) and timing of the
offering

 


 
 

‰ IBs buy securities from issuers and re-sell them to

customers.
‰ If demand is lower than expected, IBs take loss.
 

§
    
‰ IBs may act as a dealer later, giving the issue extra liquidity.

‰ Investors are more willing to buy the issue if they know there will
be a market later.

ë  




‰ IBs have built up regular network to sell securities.

‰ Often, a syndicate is often organized by the lead or co-lead

underwriters (or co-managers) to share the capital risk.
TRADING OF SECxRITIES

whe trading arm of an investment bank provides

important input for the pricing of a security, the
selling of the issue, and the subsequent liquidity
for the issue.

IBs must take a principal position in a transaction.

Revenue from trading is generated via

‰ bid-ask spread, and
‰ appreciation of the price of the securities held in
inventory
ŒRIVATE ŒLACEMENT OF
SECxRITIES

Investment banks assist the placement of
securities with a limited number of
institutional or wealthy individual investors.

Fee for private placement:
Size (in million) fee

$ 5 - 10 1.5 - 4.0%

10 - 15 1.0 - 3.0%

25 - 50 0.7 - 2.0%

over 50 0.5 - 1.5%

MERGERS AND
ACQxISITIONS
Role of investment banking in M&A


 §

 

‰ vertical merger
‰ horizontal merger

‰ use for excess cash/way to expand

‰ find undervalued business (bad management?)

‰ access to another market

3


 


   


 
 and nonprice terms of an
exchange or help target firms fend off an
unfriendly takeover attempt.












MERCHANT BANKING

Merchant banking refers to a transaction in which

an investment banking firm commits its own funds
by either taking an equity interest or creditor
position in companies.

An example is 
 





 
firm loans funds to a client to
consummate a takeover. Bridge financing is not
only important for its potential source of interest
income, but also to attract clients who are
considering an LBO.
SECxRITIZATION OF ASSETS

Securitization of assets refers to the issuance
of securities that have a pool of assets as
collateral.

Example: Citibank and Cheung Kong Holding's
Mortgage-backed securities.

Revenue from securitization:
‰ whe underwriting of an issue
‰ Price difference
TRADING AND CREATION OF
RISK CONTROL INSTRxMENTS

where are risk control instruments which an

investment banking firm creates for its clients and
in which it acts as a counterpart to the agreement.

Examples of contracts that can be used to control

risk for both investors and issuers include futures,
options, interest rate swaps, and customized
interest rate agreements.

Risk control instruments are also used by

investment banking firms to protect their own
position in transactions
 MONEY MANAGEMENT

Investment banking firms have created

subsidiaries that manage funds for either
individual investors or institutional investors
such as pension funds.
mm
 Investment banking firms are facing competition from:

‰ Commercial banks with the virtual elimination of Glass-Steagall

‰ New trading technology that is allowing institutional investors to
execute trades without employing investment banking firms as
intermediaries.
‰ Direct purchase by institutional investors of publicly registered
securities from issuers.
‰ some of the more sophisticated corporations themselves who
are establishing in-house groups to perform some of the
activities traditionally done by investment banking firms.
mm  

Global investment banking revenue increased for the fifth
year running in 2007, to $84.3 billion. whis was up 22% on
the previous year and more than double the level in 2003.
Despite a record year for fee income, many investment
banks have experienced large losses related to their
exposure to U.S. sub-prime securities investments.

whe United States was the primary source of investment
banking income in 2007, with 53% of the total, a proportion
which has fallen somewhat during the past decade. Europe
(with Middle East and Africa) generated 32% of the total,
slightly up on its 30% share a decade ago. Asian countries
generated the remaining 15%.