SYMBIOSIS INSTITUTE OF MANAGEMENT

STUDIES

RETAIL BANKING AND WEALTH MANAGEMENT

INVESTMENT BANKING

Submitted to: Submitted by:

Prof. Anish Dey
Dated: 8th Feb 2011
Harsheen Sandhu, C4
Gurleen Kaur, C10
Ekta Singh, C11
Aditi Bhandari, C13
Anisha Deb, C20
Neha Lande, C29
Faisal Khan, C 36
Arzoo Singh, C56
INVESTMENT BANKING
INVESTMENT BANKING

An investment bank is a financial institution which raises capital, trades securities, and
manages corporate mergers and acquisitions. Another term used for investment banking is
corporate finance.

Investment banks work for companies and governments, and profit from them by raising
money through the issuance and selling of securities in capital markets (both equity and
debt) and insuring bonds (for example selling credit default swaps), and providing the
necessary advice on transactions such as mergers and acquisitions. Most of investment
banks provide strategic advisory services for mergers, acquisitions, divestiture or other
financial services for clients, like the trading of derivatives, commodity, fixed income,
foreign exchange, and equity securities.

Investment banking is a form of banking which finances the capital requirements of

enterprises. Investment banking assists as it performs IPOs, private placement and bond
offerings, acts as broker and helps in carrying out mergers and acquisitions.

An Investment Banker can be considered as a total solutions provider for any corporate,
desirous of mobilizing its capital. The services provided range from investment research to
investor service on the one hand and from preparation of the offer documents to legal
compliances & post issue monitoring on the other. A long lasting relationship exists between
the Issuer Company and the Investment Banker.

THE TOOLS OF INVESTMENT BANKING

Investment banks can raise money from the stock markets or they can raise money for
corporations using advanced products called derivatives. Investment banks can invest their
own money directly into a company, project, etc., as a direct investment for which they
carry the full risk (known as merchant banking). An investment bank can raise money for the
corporation from a high net worth individual and that investment is known as private
equity. An investment bank can raise money for a corporation from a hedge fund that is
dedicated to making direct investments in corporations, which is usually referred to as
venture capital, or as loans with collateral as security to reduce risk. A combination of equity
and loans also exist, such as mezzanine.

FUNCTIONS OF INVESTMENT BANKING

Investment banks carry out multilateral functions. Some of the most important functions of
investment banking are as follows:

 Investment banking helps public and private corporations in issuance of securities in

the primary market. They also act as intermediaries in trading for clients.
 Investment banking provides financial advice to investors and helps them by
assisting in purchasing and trading securities as well as managing financial assets
 Investment banking differs from commercial banking as investment banks don't
accept deposits neither do they grant retail loans.
 Small firms which provide services of investment banking are called boutiques. They
mainly specialize in bond trading, providing technical analysis or program trading as
well as advising for mergers and acquisitions

INVESTMENT BANKING: AN INTRODUCTION, HISTORY AND RECENT TRENDS

Investment banking involves raising money (capital) for companies and governments,
usually by issuing securities. Securities or financial instruments include equity or ownership
instruments such as stocks where investors own a share of the issuing concern and
therefore are entitled to profits. They also include debt instruments such as bonds, where
the issuing concern borrows money from investors and promises to repay it at a certain date
with interest. Companies typically issue stock when they first go public through initial public
offerings (IPOs), and they may issue stock and bonds periodically to fund such enterprises as
research, new product development, and expansion. Companies seeking to go public must
register with the Securities and Exchange Commission and pay registration fees, which cover
accountant and lawyer expenses for the preparation of registration statements. A
registration statement describes a company's business and its plans for using the money
raised, and it includes a company's financial statements.

Before stocks and bonds are issued, investment bankers perform due diligence
examinations, which entail carefully evaluating a company's worth in terms of money and
equipment (assets) and debt (liabilities). This examination requires the full disclosure of a
company's strengths and weaknesses. The company pays the investment banker after the
securities deal is completed and these fees often range from 3 to 7 percent of what a
company raises, depending on the type of transaction.
Investment banks aid companies and governments in selling securities as well as investors in
purchasing securities, managing investments, and trading securities. Investment banks take
the form of brokers or agents who purchase and sell securities for their clients; dealers or
principals who buy and sell securities for their personal interest in turning a profit; and
broker-dealers who do both.

The primary service provided by investment banks is underwriting, which refers to

guaranteeing a company a set price for the securities it plans to issue. If the securities fail to
sell for the set price, the investment bank pays the company the difference. Therefore,
investment banks must carefully determine the set price by considering the expectations of
the company and the state of the market for the securities. In addition, investment banks
provide a plethora of other services including financial advising, acquisition advising,
divestiture advising, buying and selling securities, interest-rate swapping, and debt-for-stock
swapping. Nevertheless, most of the revenues of investment banks come from
underwriting, selling securities, and setting up mergers and acquisitions.

When companies need to raise large amounts of capital, a group of investment banks often
participate, which are referred to as syndicates. Syndicates are hierarchically structured and
the members of syndicates are grouped according to three functions: managing,
underwriting, and selling. Managing banks sit at the top of the hierarchy, conduct due
diligence examinations, and receive management fees from the companies. Underwriting
banks receive fees for sharing the risk of securities offerings. Finally, selling banks function
as brokers within the syndicate and sell the securities, receiving a fee for each share they
sell. Nevertheless, managing and underwriting banks usually also sell securities. All major
investment banks have a syndicate department, which concentrates on recruiting members
for syndicates managed by their firms and responding to recruitments from other firms.

A variety of legislation, mostly from the 1930s, governs investment banking. These laws
require public companies to fully disclose information on their operations and financial
position, and they mandate the separation of commercial and investment banking. The
latter mandate, however, has been relaxed over the intervening years as commercial banks
have entered the investment banking market.

HISTORY AND DEVELOPMENT OF INVESTMENT BANKING

Investment banking began in the United States around the middle of the 19th century. Prior
to this period, auctioneers and merchants—particularly those of Europe—provided the
majority of the financial services. The mid-1800s were marked by the country's greatest
economic growth. To fund this growth, U.S. companies looked to Europe and U.S. banks
became the intermediaries that secured capital from European investors for U.S.
companies. Up until World War I, the United States was a debtor nation and U.S. investment
bankers had to rely on European investment bankers and investors to share risk and
underwrite U.S. securities. For example, investment bankers such as John Pierpont (J. P.)
Morgan (1837-1913) of the United States would buy U.S. securities and resell them in
London for a higher price.
During this period, U.S. investment banks were linked to European banks. These
connections included J.P. Morgan & Co. and George Peabody & Co. (based in London);
Kidder, Peabody & Co. and Barling Brothers (based in London); and Kuhn, Loeb, & Co. and
the Warburgs (based in Germany).

Since European banks and investors could not assess businesses in the United States easily,
they worked with their U.S. counterparts to monitor the success of their investments. U.S.
investment bankers often would hold seats on the boards of the companies issuing the
securities to supervise operations and make sure dividends were paid. Companies
established long-term relationships with particular investment banks as a consequence.

In addition, this period saw the development of two basic components of investment
banking: underwriting and syndication. Because some of the companies seeking to sell
securities during this period, such as railroad and utility companies, required substantial
amounts of capital, investment bankers began under-writing the securities, thereby
guaranteeing a specific price for them. If the shares failed to fetch the set price, the
investments banks covered the difference. Underwriting allowed companies to raise the
funds they needed by issuing a sufficient amount of shares without inundating the market
so that the value of the shares dropped.

Because the value of the securities they underwrote frequently surpassed their financial
limits, investment banks introduced syndication, which involved sharing risk with other
investment banks. Further, syndication enabled investment banks to establish larger
networks to distribute their shares and hence investment banks began to develop
relationships with each other in the form of syndicates.

The syndicate structure typically included three to five tiers, which handled varying degrees
of shares and responsibilities. The structure is often thought of as a pyramid with a few
large, influential investment banks at the apex and smaller banks below. In the first tier, the
"originating broker" or "house of issue" (now referred to as the manager) investigated
companies, determined how much capital would be raised, set the price and number of
shares to be issued, and decided when the shares would be issued. The originating broker
often handled the largest volume of shares and eventually began charging fees for its
services.

In the second tier, the purchase syndicate took a smaller number of shares, often at a
slightly higher price such as I percent or 0.5 percent higher. In the third tier, the banking
syndicate took an even smaller amount of shares at a price higher than that paid by the
purchase syndicate. Depending on the size of the issue, other tiers could be added such as
the "selling syndicate" and "selling group." Investment banks in these tiers of the syndicate
would just sell shares, but would not agree to sell a specific amount. Hence, they functioned
as brokers who bought and sold shares on commission from their customers.

From the mid-i800s to the early 1900s, J. P. Morgan was the most influential investment
banker. Morgan could sell U.S. bonds overseas that the U.S. Department of the Treasury
failed to sell and he led the financing of the railroad. He also raised funds for General
Electric and United States Steel. Nevertheless, Morgan's control and influence helped cause
a number of stock panics, including the panic of 1901.

Morgan and other powerful investment bankers became the target of the muckrakers as
well as of inquiries into stock speculations. These investigations included the Armstrong
insurance investigation of 1905, the Hughes investigation of 1909, and the Money Trust
investigation of 1912. The Money Trust investigation led to most states adopting the so-
called blue-sky laws, which were designed to deter investment scams by start-up
companies. The banks responded to these investigations and laws by establishing the
Investment Bankers Association to ensure the prudent practices among investment banks.
These investigations also led to the creation of the Federal Reserve System in 1913.

Beginning about the time World War I broke out, the United States became a creditor
nation and the roles of Europe and the United States switched to some extent. Companies
in other countries now turned to the United States for investment banking. During the
1920s, the number and value of securities offerings increased when investment banks began
raising money for a variety of emerging industries: automotive, aviation, and radio. Prior to
World War 1, securities issues peaked at about $ 1 million, but afterwards issues of more
than $20 million were frequent.

The banks, however, became mired in speculation during this period as over 1 million
investors bought stocks on margin, that is, with money borrowed from the banks. In
addition, the large banks began speculating with the money of their depositors and
commercial banks made forays into underwriting.

The stock market crashed on October 29, 1929, and commercial and investment banks lost
$30 billion by mid-November. While the crash only affected bankers, brokers, and some
investors and while most people still had their jobs, the crash brought about a credit crunch.
Credit became so scarce that by 1931 more than 500 U.S. banks folded, as the Great
Depression continued.

As a result, investment banking all but frittered away. Securities issues no longer took place
for the most part and few people could afford to invest or would be willing to invest in the
stock market, which kept sinking. Because of crash, the government launched an
investigation led by Ferdinand Pecora, which became known as the Pecora Investigation.
After exposing the corrupt practices of commercial and investment banks, the investigation
led to the establishment of the Securities and Exchange Commission (SEC) as well as to the
signing of the Banking Act of 1933, also known as the Glass-Steagall Act. The SEC became
responsible for regulating and overseeing in-vesting in public companies. The Glass-Steagall
Act mandated the separation of commercial and investment banking and from then—until
the late 1980—banks had to choose between the two enterprises.

Further legislation grew out of this period, too. The Revenue Act of 1932 raised the tax on
stocks and required taxes on bonds, which made the practice of raising prices in the
different tiers of the syndicate system no longer feasible. The Securities Act of 1933 and the
Securities Exchange Act of 1934 required investment banks to make full disclosures of
securities offerings in investment prospectuses and charged the SEC with reviewing them.
This legislation also required companies to regularly file financial statements in order to
make known changes in their financial position. As a result of these acts, bidding for
investment banking projects became competitive as companies began to select the lowest
bidders and not rely on major traditional companies such as Morgan Stanley and Kuhn,
Loeb.

The last major effort to clean up the investment banking industry came with the U.S. v.
Morgan case in 1953. This case was a government antitrust investigation into the practices
of 17 of the top investment banks. The court, however, sided with the defendant
investment banks, concluding that they had not conspired to monopolize the U.S. securities
industry and to prevent new entrants beginning around 1915, as the government
prosecutors argued.

By the 1950s, investment banking began to pick up as the economy continued to prosper.
This growth surpassed that of the 1920s. Consequently, major corporations sought new
financing during this period. General Motors, for example, made a stock offering of $325
million in 1955, which was the largest stock offering to that time. In addition, airlines,
shopping malls, and governments began raising money by selling securities around this
time.

During the 1960s, high-tech electronics companies spurred on investment banking.

Companies such as Texas Instruments and Electronic Data Systems led the way in securities
offerings. Established investment houses such as Morgan Stanley did not handle these
issues; rather, Wall Street newcomers such as Charles Plohn & Co. did. The established
houses, however, participated in the conglomeration trend of the 1950s and 1960s by
helping consolidating companies negotiate deals.

The stock market collapse of 1969 ushered in a new era of economic problems which
continued through the 1970s, stifling banks and investment houses. The recession of the
1970s brought about a wave of mergers among investment brokers. Investment banks
began to expand their services during this period, by setting up retail operations, expanding
into international markets, investing in venture capital, and working with insurance
companies.

While investment bankers once worked for fixed commissions, they have been negotiating
fees with investors since 1975, when the SEC opted to deregulate investment banker fees.
This deregulation also gave rise to discount brokers, who undercut the prices of established
firms. In addition, investment banks started to implement computer technology in the
1970s and 1980s in order to automate and expedite operations. Furthermore, investment
banking became much more competitive as investment bankers could no longer wait for
clients to come to them, but had to endeavour to win new clients and retain old ones.
CORE ACTIVITIES OF INVESTMENT BANKING

 Investment banking: is the traditional aspect of investment banks that involves

helping customers raise funds in the capital markets and advise them on mergers
and acquisitions. Investment banking can also involve subscribing investors to a
security issuance, negotiating with a merger target and coordinating with bidders.

 Sales and trading: Depending on the needs of the bank and its clients, the main
function of a large investment bank is buying and selling products. In market making,
the traders will buy and sell securities or financial products with the goal of earning
an incremental amount of money on every trade. Sales is the term that is used for
the sales force, whose primary job is to call on institutional and high-net-worth
investors to suggest trading ideas and take orders

 Research: Two categories of research are Equity Research (Stock) and Fixed Income

Research (Bonds). Research analyst reviews the company for its financial strength
and ability to meet its obligations and promises. Each analyst covers 10-15
companies in a particular industry segment or sub-segment. The aim of the equity
research undertaken on a company is to come up with a fair price of the company
 share. Depending upon the prevailing market price, the analyst will issue “Buy”,
“Hold” or “Sell” rating. Fixed income research, deals with corporate bonds, though
the considerations are almost similar as in equity, however, there is a little difference
in the approach to accommodate the differences in the characteristics of the
instruments i.e., debt vs. equity. 

Bank makes money by publishing these researches and selling them for a price. Research
analysts also advise high net worth clients on investments. 

An investment bank may be involved in providing both advisory services and conducting
research on a company for example, same investment bank may be lead underwriter for a
company’s next public issue and the company may also covered by bank’s research analyst.
As is suspected there is possible situation for conflict of interest. In absence of regulations,
research will issue high recommendations for the issue that is underwritten by the bank. To
avoid such situation there are strict regulations and a “Chinese Wall” is put up between
research and advisory services desks of the bank i.e. there is no communication in any way
between these two businesses. Investment banks follow these regulations religiously
without any fail.

 On the basis of what kind of employer employs the analysts, research could be “Buy-side”
or “Sell-side”.

“Buy-side”: analysts are usually employed by mutual funds, hedge funds, pension funds, etc.
The objective with which buy-side analysts undertake research is to determine how
promising investment in a particular company will be and how it fits the investment strategy
and goals of the money manager. The analysts hired are paid for by the fund and these
researches are not generally available for use by other parties.

“Sell-side”: analysts work for brokerage firms, involved in managing individual accounts and
issue recommendations regarding the performance of the stock or bond they are covering.
The purpose of the research is to help their clients make knowledgeable decision to buy or
sell a security.

DEVELOPMENT OF THE INVESTMENT BANK

Investment bankers originated in the Middle Ages, when governments and kings received
long-term loans for conducting wars and maintaining courts. Notable among the early
money lenders were the Hansa merchants who supplied funds to many of the European
kings and emperors, but usually with assurance of return. The ruler received a certain sum
of money in the form of gold or silver bullion, and in return he gave the lender the rights
over revenue derived from tariffs or taxes for a certain period of years. Loans were also
extended on real property such as mines, fisheries, and forests owned by the government,
and the products of the mines were applied to the payment of principal and interest. These
early magnates were also merchants, and they were able to use their own money directly in
granting loans, and in this way they differed from the modern investment bankers who act
as intermediaries in gathering the funds of others for making advances to borrowers. With
the close of the Napoleonic wars financial supremacy shifted from Amsterdam and the
Continent to London and with this change the modern investment bank as an intermediary
institution between borrower and lender was developed.

The same general evolution was repeated in the financial history of the United States.
During the first quarter of the nineteenth century American states and municipalities
secured whatever capital they needed from merchants. During the second quarter, the
westward movement caused an extension of such internal improvements as canals and
railroads, and capital for these purposes was raised mainly from investors in England and in
other European countries. Securities marketed in this country consisted largely of municipal
bonds which were sold, usually without public notice, to local bankers who in turn marketed
them among insurance companies, savings banks, and private investors. In order to secure a
better price for bonds, municipalities began to advertise their new issues and their sales
were conducted on a competitive basis. Blocks of these bonds were purchased by
individuals for the purpose of selling them on a retail basis, and these individuals thus
performed in a small way the mediation function of the modern investment bankers.

The development of free banking encouraged the organization of many banks, and until the
opening of the Civil War there was considerable investment of capital in bank stock. After
the Civil War the growth of transcontinental railways led to the issue of large blocks of
bonds which were absorbed by American and European investors, whose contributions of
capital made possible also the organization and development of great industrial trusts at the
opening of the twentieth century. The war changed the movement of capital between
Europe and America. At first a large proportion of American railroad and industrial securities
held abroad were repurchased, and later the war obligations of the European governments
found a market in the United States.

FUNCTIONS OF AN INVESTMENT BANK

As already indicated, the types of investment banks considered perform in general one or
more of the following functions: (1) investigating proposals, (2) forming syndicates for
underwriting, (3) selling securities. In addition, investment houses may render the public
such services as advice in selecting securities, information to customers, and protection in
case of failure of the corporation issuing the securities.
Functions of Investment Banking:

Investment banks have multilateral functions to perform. Some of the most important
functions of investment banking can be jot down as follows:

 Investment banking help public and private corporations in issuing securities in the
primary market, guarantee by standby underwriting or best efforts selling and
foreign exchange management. Other services include acting as intermediaries in
trading for clients.
 Investment banking provides financial advice to investors and serves them by
assisting in purchasing securities, managing financial assets and trading securities.
 Investment banking differs from commercial banking in the sense that they don't
accept deposits and grant retail loans. However the dividing line between the two
fraternal twins has become flimsy with loans and securities becoming almost
substitutable ways of raising funds.
 Small firms providing services of investment banking are called boutiques. These
mainly specialize in bond trading, advising for mergers and acquisitions, providing
technical analysis or program trading.

Financial Advisory Services:

An investment bank is involved heavily in financial advisory services. Investment banks give
companies advice on mergers and acquisition, when and how capital should be raised,
tracking the market for the best possible time to offer an IPO or secondary offering etc.

 Apart from advisory services, investment bank operates extensively in Capital

Markets arena. The term capital markets, relates to equity and bond markets, both
domestic and international, as well as cover derivatives and other financial instruments.
Over years with development of securitization and derivatives market a whole new segment
of Structured Transaction has surfaced in investment banking business.

 To work in research and financial advisory services area of Investment Banks, one requires
expertise in excel based financial modelling and valuation. Though, a job in capital market
groups will require in-depth knowledge of functioning of capital markets, analytics of
various financial instruments like convertible securities, derivatives etc and excel based
modelling skills.

 There are certain other banking related activities that might be undertaken by an
investment bank itself or by firms specializing in these areas, for example Private Equity,
Venture Capital etc.

 
Private Equity:

Private equity implies equity investment in companies that are not traded
publically.  Private equity investment may be in the form of Leveraged Buy-Outs, Venture
Capital or Distressed Financing.

 Private Equity capital is very risky investment with huge payout potential. However, each
kind of private equity investment has different risk return profile.

 In case of leveraged buyouts, private equity fund buys a large portion of a publically traded
company and takes it private, turns it around by taking over management and a complete
operational overhaul. The investment horizon is generally 5-9 years, at the end of which
company is taken public again and the private equity fund gets it investment back along
with huge returns.

CLASSES OF INVESTMENT BANKS

Investment institutions may be divided into three general groups - wholesale houses, large
retail houses, and small retail, or bond, houses. The first group is composed of about a
dozen large banking firms with many correspondent connections abroad. These houses
undertake the marketing of the larger issues of railroads and of foreign governments,
exceeding at times $100,000,000 in amount, by selling them, usually not. to the public
directly, but indirectly through other houses. As wholesale houses are engaged mainly in the
purchase of securities, the organization of their buying department is of special importance,
and so it usually retains the services of engineers, accountants, lawyers, and other experts
for the complete evaluation of the properties on the basis of which the securities are issued.

For the selling of these securities the wholesale houses in most cases associate themselves
with the large retailers, who are much more numerous. These usually have their home
office in New York City, in some other Eastern money center, or in Chicago, and operate in
other important cities through their own branches or through partnerships and corporations
which are independently organized, but always closely affiliated with the home office. The
securities companies of national banks and the bond departments of trust companies are, of
course, not permitted to organize branches, but instead operate correspondent offices
which perform about the same activities as private investment banks. The large retailers will
purchase securities for their own account directly from the issuing corporations to a limited
extent only, and for relatively small amounts. In the case of large issues, the retailers will not
usually assume the responsibility alone, but join with others in a syndicate or group of
houses, of which each takes over a portion of the securities. As the main task of a large retail
house is the disposing of securities, the sales department is the most important unit in its
organization.

Large retail houses may be grouped according to the form of the securities or the nature of
the issues in which they are interested. Thus there are houses specializing in bonds or
stocks, or in both forms of securities. Other firms handle only such issues as government
bonds, railroad, public utility, or industrial securities. While most investment banks naturally
press the sale of their own specialties or issues, at the same time they will also execute
orders to buy and sell other stocks and bonds either directly as members of the various
stock exchanges or indirectly through brokers.

The branches and the affiliated offices of the large retailers throughout the country come
into active competition with the bond houses or small retailers. These are of several classes,
such as small banks and brokerage houses dealing in all kinds of securities, or handling
specialties such as Standard Oil stocks, equipment bonds, and issues of local corporations.
The organization of the small investment house is quite similar to that of the large retail
firm, but on a more limited scale, for usually the buying and selling departments are
conducted by only one person, who controls the entire business. The small bond house at
times finds difficulty in obtaining high-grade securities, for those yielding a satisfactory profit
are handled by the large retail houses themselves, which allow only a small commission on
these sales.

ROLE OF AN INVESTMENT BANK

The major work of investment banks includes a lot of consulting. For instance, they offer
advices on mergers and acquisitions to companies. The other arena where they give advice
are tracking the market and determining when should a company come out with a public
offering and what is the best possible way to manage the public assets of businesses. The
role that an investment bank plays sometimes gets overlapped with that of a private
brokerage house. The usual advice of buying and selling is also given by investment banks.

There is no demarcating line between the investment banking and other forms of banking in
India. This has been observed majorly of late. All banks nowadays want to provide their
customers the best of services and create a niche for themselves and that is why apart from
investment banks, all other banks too are aiming at making it big.

At the macro level, investment banking is related with the primary function of assisting the
capital market in its function of capital intermediation, i.e., the movement of financial
resources from those who have them (the investors), to those who need to make use of
them for producing GDP (the issuers). Over the decades, investment banks have always
suited the needs of the finance community and thus become one of the most vibrant and
exciting segment of financial services.

Globally investment banks handle significant fund-based business of their own in the capital
market along with their non-fund service portfolio which is offered to the clients. All these
activities are broadly segmented across three platforms - equity market activity, debt
market activity and merger and acquisitions (M&A) activity. In addition, given the structure
of the market, there is also a segmentation based on whether a particular investment bank
belongs to a banking parent or is a stand-alone pure investment bank.

LARGEST FULL-SERVICE INVESTMENT BANKS

The following are the largest full-service global investment banks; Full-service investment
banks usually provides both advisory and financing banking services, as well as the sales,
market making, and research on a broad array of financial products including equities,
credit, rates, currency, commodities, and their derivatives. The list compiled here is based
on investment banking revenues and assets.

 Credit Suisse
 Bank of America (Bank of America Merrill Lynch)
 BNP Paribas (BNP Paribas CIB)
 Citigroup (Citi Institutional Clients Group)
 Barclays Capital
 Deutsche Bank
 Goldman Sachs
 HSBC
 JPMorgan Chase (J.P. Morgan Investment Bank)
 Morgan Stanley
 UBS (UBS Investment Bank)
 Royal Bank of Scotland

INVESTMENT BANKS WORLDWIDE

 Morgan Stanley Dean Witter

One of the largest investment banks in the United States, with clients worldwide.
 Merrill Lynch
A leading global financial management and advisory company.
 Credit Suisse First Boston Global investment banking firm offers financial
advisory, capital raising, sales and trading, and financial products.
 Deutsche Bank AG 
European bank serving the financial needs of corporations, firms, institutions,
 and private and business clients worldwide.
 J.P. Morgan & Co.
A leading global financial firm that meets critical financial needs for business
enterprises, governments, and individuals.
 Barclays Capital
International investment bank with presence in all the major markets around the
world.  
 Goldman Sachs
A full-service global investment banking and securities firm.
 Banc of America Securities LLC 
A full service investment bank and brokerage firm.  
 Nomura International -The European subsidiary of the Nomura Securities Co.,
Ltd., focused on meeting the needs of investors and issuers across Europe and
beyond.
 HSBC Group Holdings
Headquartered in London, with an international network of offices in multiple
countries and territories across the world. The Group provides a range of
financial services.
 Macquarie International
Provides specialist investment banking and financial services in select markets
around the world.
 RBC Dominion Securities Inc.
A Full Service Investment Dealer based in Canada. It has operations in mergers
and acquisitions, sales and trading of equities, bonds, money market
instruments, foreign exchange, futures and options, research and investment
management.
 Bank of Scotland 
A part of Lloyds banking group, offering many personal and business banking
services. PC banking available.  
 Smith Barney 
Provides brokerage, investment banking and asset management to corporations,
governments and individuals.  
 Deutsche Bank New Zealand 
A full service investment bank with four banking divisions operating from two
branches.
 Robert W. Baird
Investment banking and wealth management firm servicing clients in the U.S.
and Europe  
 Jefferies Group, Inc.
An investment bank serving mid-cap investors and issuers worldwide. Based in
New York City. (NYSE: JEF)
 The Jordan, Edmiston Group, Inc. 
Middle-market investment banking services for companies in the media and
information industries.  
 CIBC World Markets
Offers credit and capital markets products, securities, brokerage and asset
management services.
 N M Rothschild and Sons 
Provides investment banking and financial services worldwide.  
 SG Cowen Securities 
The U.S. broker-dealer subsidiary of SG providing securities and investment
banking services.
 CLSA Emerging Markets
Provider of investment banking in the emerging markets of Asia, Latin America
and Europe.
 Dresdner Kleinwort Wasserstein
Provides financing and distribution capabilities on a global scale.
 BMO Nesbitt Burns
Full-service investment bank serving the financial needs of individual,
institutional, corporate and government clients.
 Mirus Capital Advisors
Provides investment banking solutions to middle market technology, business
services companies, and family-owned businesses.  
 Simmons & Company International 
Specialist in investment banking, mergers and acquisitions, public debt and
equity offerings to the Energy Industry.
 Jane Capital Partners LLC
International investment bank focusing on corporate finance and mergers and
acquisitions.  
 The International Investor
Global Islamic investment bank with offices in Kuwait, London, Qatar, Bahrain
and UAE.  
 Keefe, Bruyette & Woods, Inc.
Institutionally oriented securities broker/dealer and full service investment bank
 Ziegler and Companies, Inc. 
Provides integrated financial services through two main segments: investment
banking and capital markets, and investment services. features an overview of
services,and investor information. (NASDAQ:ZCO  
 Allison-Williams Company 
Serves financial institutions, investors and companies seeking to raise capital.
 Sanders Morris Harris Group Inc. 
Offer investment banking services to companies and industries. Includes sections
 for client, institutional services, and research library, with contacts for offices
throughout the USA, and headquarters in Houston, Texas. (Nasdaq: SMHG)  
 George K. Baum and Company 
Regional investment banking firm.
 Houlihan Lokey
A international investment banking firm offering mergers and acquisitions,
corporate financing, business valuation, financial opinions, financial restructuring
and merchant banking services.  
 Alpha Finance US Corporation
Investment bank specializing in Greek investments and brokers.  
 Guzman & Company 
Investment banking and institutional brokerage firm serving plan sponsors and
investment management firms.  
 Updata Capital, Inc.
An investment banking firm specializing in mergers and acquisitions in the
information technology industry.  
 Greystone
Specializes in financing multi-family housing and health care properties.  
 Young and Partners
Investment bank for chemical, pharmaceutical, biotechnology, and medical
device companies.
 Buchanan Street
Real estate investment bank that invests on behalf of private and institutional
clients.  
 Chanin Capital Partners
Provides financial restructurings, mergers and acquisitions, corporate finance
and private placements.  
 Oscar Gruss & Son Incorporated 
A full service broker dealer that provides execution and research services to
institutional investors.  
 Gordian Group, L.P.
 Provides investment banking and financial advisory services in complex
situations.
 Menke and Associates, Inc. 
Investment banking firm specializing in ESOP and management buyouts.
 eMergers.com
Designed to broaden distribution of merger and acquisition opportunities on the
Internet.  
 TM Capital Corp. 
A NY Based Investment Banking Firm providing clients with the experience and
expertise necessary to complete strategic corporate transactions including
 mergers, acquisitions and financings.  
 Kontiki Capital Ltd.
Provides investment banking products and services to the South Pacific. Licensed
as an Investment Adviser by the Capital Markets Development Authority of Fiji.
 Arab Investment Bank s.a.l. 
Offers medium and long term financing and investments in local and foreign
currencies. Includes information on the Lebanon stock and bond markets, as well
as foreign exchange rates.  
 Sindicatum Limited 
London-based corporate finance/mergers and acquisitions firm focused on global
emerging markets.
 Griffin Securities, Inc. 
Global investment banking, financial advisory and brokerage firm.  
 Leonard Green and Partners 
A merchant and investment banking firm.  
 Energy Spectrum 
Energy Spectrum offers private equity investments and premium investment
banking services for the energy industry.  
 Presidio-The Credit Specialist 
Provides bond market matched principal intermediation, credit trading and risk
management advisory services. Based in Asia.  
 Gruppo, Levey & Co. 
Provides financial and advisory services to the direct marketing and e-commerce
industries.
 Kuhn Information Capital 
Provides merger and acquisition services to software, data and Internet vendors.
 SARS Ltd. 
Offers corporate finance advice to multinationals, governments, and
corporations in central and eastern Europe.
 Cameron Thomson Group 
Investment banking group specializing in converging media/entertainment and IT
industries.
 Cross Border Enterprises
International investment bank providing private equity banking services.
 EurOrient Investment Group
A privately held investment and merchant banking firm located in Los Angeles,
California.
 Wall Street Organization, Inc.
Online investment banking and financial public relations firm.  
 Instream Partners LLC 
San Francisco firm providing middle market mergers and acquisitions and capital
 raising services.
 Alderman & Company
Investment bankers provide financial advice to aerospace and defense industry.
Includes practice, services, clients, recent transactions, newsletter. Based in
South Norwalk, CT.
 Asia Capital Group, Ltd. 
Provides professional investment banking services to multinational corporations.
 Avondale Partners, LLC
Provides equity research and sales and trading capabilities to the institutional
marketplace. Also offers investment banking services including mergers and
acquisitions, financial and strategic advisory and capital raising.  
 Corsum finance 
Investment Banking, Mergers and Acquisitions, Financial Engineering, Financial
Restructuring and Strategy Analysis in Czech Republic.  
 Texada Capital Corp
Investment banking firm offers corporate finance services to direct marketing
companies.  
 Latitude Partners
Investment banking firm for technology, internet, and communications sectors.
 Phoenix Management Group, LLC 
Provides investment banking, debt restructuring and mezzanine financing.  
 Pharus Advisors, LLC 
Sell-side and buy-side mergers and acquisitions advisory services to venture-
backed technology companies in the small-middle markets.  
 Wm Sword and Co.
Investment bank specializing in merger/acquisition advisory services.  
 Capital Investment Partners 
An established investment banking and capital formation firm.  
 Agawam Partners
Merchant banking firm focused on the media, technology and
telecommunications industries.
 Douglas Group 
Investment banking firm represents business owners in the sale and purchase of
businesses.
 Metos Investments 
Provides investment banking, merger, acquisition, and financial services.  
 Macadam Capital Partners 
Private investment bank advising companies in planning for their capital needs.  
EnCapital
Investment bank offers financial advice to the energy, engineering and
environmental industries.  
  International Capital Corporation
Provides project financing and development services around the world.  
 Bryan, Garnier & Co 
European investment bank specialising in European growth companies.  
Quarterdeck Investment Partners, Inc.
An investment banking firm in Los Angeles and Washington DC.  
 Deutsche Bank Alex.Brown 
Investment banking and brokerage services for private wealth and asset
management  
 Bear Stearns & Co. Inc. 
A worldwide investment banking and securities trading and brokerage firm.

LIST OF TOP 10 INVESTMENT BANKS IN INDIA

1. Avendus Capital: An investment bank providing mergers and acquisitions, fixed returns,
controlled finance, calculated advisory facilities and Private Equity Syndication to its
customers ranging from investors to corporates. The bank has a powerful research
competence which it utilizes to close business deals in hostile circumstances. It presently
concentrates on sectors where Indian firms have strategic expansion advantage namely
Healthcare, Pharmaceuticals, IT Services, Consumer goods, manufacturing, etc.

2. Bajaj Capital: The Bajaj Capital Group is one of the renowned Investment consultant and
Financial Planning firms in India. It is certified under the Category I of Merchant Bankers by
SEBI. Bajaj Capital provides custom-made Fiscal Planning facilities and investment
consultation to the investors, organizational investors, corporates, high income patrons and
Non-Resident Indians (NRIs).
Being one of the biggest distributors of economic goods, Bajaj provides an extensive range
of investment schemes such as general insurance, life insurance, mutual funds, etc to both
public and private institutions.

3. Cholamandalam Investment & Finance Company: A combined fiscal service provider of

three firms namely Cholamandalam DBS Finance Limited (CDFL), DBS Cholamandalam
Distribution Limited and DBS Cholamandalam Securities Limited, Cholamandalam DBS
operates in 16 international markets. DBS provides an extensive range of facilities to small
and medium sized enterprise, corporates, customers and comprehensive banking activities
across Middle East and Asia.

4. ICICI Securities Ltd: India's biggest equity house, ICICI Securities Ltd provide back-to-back
banking solutions through its extensive distribution network to cater to the varied needs of
its retail and corporate clients. The firm is listed under the Monetary Authority of Singapore
(MAS) and Financial Services Authority, UK and has an authoritative place in the core
divisions of its functional areas such as consultant services, fiscal good distribution, Equity
 Capital Markets Advisory Services, etc.

5. IDFC: Initiated in 1997 in Chennai, IDFC undertook the responsibility of providing financial
support to 332 projects accruing a profit of upto Rs 2, 20, 400 million. The sectors under
IDFC's financial assistance are infrastructure, agri related business, transportation,
healthcare, tourism and others.

6. Kotak Mahindra Capital Company: Initiator and leader in equity capital markets, Kotak
Investment Banking has undertaken the developmental work of most ground breaking
advances in the Indian capital markets comprising the launch of book building and Qualified
Institutional Placements (QIPs) in India. The investment bank has an impressive track record
of controlling various sectors and has played a major role in the government's milestone
disinvestments.

7. SBI Capital Markets: SBICAPS is India's foremost investment bank and project consultant,
aiding local firms in capital enlistment endeavors for last many years. The firm started it
operations in 1986 and is an entirely owned subordinate of the State Bank of India. Asian
Development Bank (ADB) possesses 13.84% stakes in equity segment of SBICAPS.

8. Tata Investment Corporation Limited (TICL): A non-banking financial company (NBFC), TICL
is listed with the Reserve Bank of India under the group of 'Investment Company'. The firm's
commercial activities constitute mainly of endowing in long-standing investments in equity
of the firms in various sectors. The chief source of return for the firm entails income on
investment trading and income accrued on dividend.

9. Yes Bank: This Investment Banking association is engaged in the classification, arrangement
and implementation of deals for their clients in varied sectors and nations. Some of the
archetypal transactions incorporate divestitures, private equity syndication, mergers &
acquisitions and IPO consultation.

10. UTI Securities Ltd: Endorsed as a self-regulating professional body in 1994, UTI Securities
Ltd., is one of the renowned investment bank of India. After the termination of Unit Trust of
India (UTI) Act, the total share fund of UTISEL is now controlled by superintendent of
particular enterprise of UTI. The firm has been offering all sorts of investment associated
activities which incorporates investment banking and corporate consultation facilities.

INVESTMENT BANKING: CHANGED FOREVER?

The investment banking and securities dealing industry underwent massive disruptions over
the past two years. The year 2008 saw a complete makeover of the industry as Bear Stearns
fell into the hands of JP Morgan, Lehman Brothers filed for bankruptcy protection, Merrill
Lynch staved off collapse with a Bank of America takeover and the two remaining giants,
Goldman Sachs Group and Morgan Stanley, converted into bank holding companies to
qualify for government assistance. We have seen an incredible destruction of the industry
that was years in the making. Many of the causes came from perverse regulatory incentives
as the industry transitioned from a natural oligopoly into freer competition.

The investment banking industry directly correlates to economic growth given that its ability
to profit derives from the securitization of businesses. Generally, mergers, acquisitions and
other underwriting services depend on the overall level of corporate activity. Corporate
activity directly follows from earnings increases of individual companies and the general
economic outlook and confidence in business prospects. So the fate of investment banking
revenues relies heavily on the fate of the overall economy. Given some of the key structural
characteristics of the investment banking industry, investment banks must seek to form
long-term relationships with individual firms while respecting others banks’ relationships in
a naturally oligopolistic industry. First, investment banks must perform significantly deep
and pointed research into the companies that they offer securitization services to. The initial
enticement into private placements is largely dependent on the solid reputation of the lead
investment banks promoting the security. In order to find buyers for a particular stock issue
that the investment bank wishes to sell to the public, the bank puts its own reputation on
the line claiming its high-standards and due diligence of financial statement review give the
investor security. An investor needs to be able to trust the investment bank’s opinion on the
future prospects of the company and the investment. No investment bank will survive long
should it promote the securities of soon-failing institutions. Any individual bank promoting
worthless companies will soon go bankrupt as investors realize the ill-advised investments
they are taking. This is clearly why so-called “chop shops” and penny-stock promoters
typically never gain respected status and fail in short order or are shutdown by the SEC for
fraud. The major players in the industry have had collective breakdowns in underwriting
standards in times of the past but generally banks must be trustworthy and provide
accurate assessments of future business prospects. (2001 Anand & Galetovic)Initially, then,
a bank must study the company and its prospects and assign an appropriate valuation. This
initial due diligence is costly and results in sunk costs in order to begin a relationship with
outside firms. The costs are necessary but are undertaken because the bank clearly believes
it can garner greater profits in the future by having a relationship. (2001 Anand & Galetovic)
These unrecoverable costs are worthwhile if the bank can create a lasting relationship
where it reuses the same information for future deals and is able to recoup the costs
associated to that particular company as well as the sunk costs lost on firms where potential
deals were rejected due to lower credit quality. These sunk costs relate to another trait in
the investment banking industry, the misaligned connection between costs and fee revenue.
(2001 Anand & Galetovic) Investment banks only generate revenue when they create and
execute a particular security deal. While banks may spend months and months studying a
company, gauging market buying interest, promoting a deal, offering advice, they are only
paid fee income once the deal is finally consecrated. Ultimately a bank may provide a great
deal of services and never collect fee revenues. A third characteristic of the industry is a
bank’s inability to claim any rights over the information it generates about a particular firm
it is investigating for a potential deal. (2001 Anand & Galetovic) The firm may spend
hundreds of man hours dedicated to deal but it has difficulty maintaining that information
as proprietary. The risk of a lead person on the deal team to be hired away by another bank
is high. Banks can attempt to reduce this risk through non-compete agreements but given
the global nature of today’s financial system, non-competes can fail rather easily given their
geographical limitations. Then, this employee who is hired away would bring with them all
the information they had gathered in hours of research at the bank. Also, once the bank has
researched the potential company for underwriting, it must use its reports to generate
outside interest among investors. In seeking these outsider investors, the research is pushed
into the public forum and its privacy is lost. These three traits of the industry point to why
investment banking is naturally oligopolistic. In perfect competition, investment banks
would allow other firms to incur the initial sunk costs for a deal and then free ride off the
information obtained. A bank could easily achieve this by stepping in late in the deal just
before the security is actually created and sold and undercut the initial firm. A simple way to
create the relationship would be to hire away the lead employee on the deal who has the
most intricate knowledge of the company and the deal at hand. “For example, Deutsche
Bank built a global investment bank in a year (Deutsche Morgan Grenfell) by hiring away
staff en masse from other major banks” (2001 Anand & Galetovic). The information and
advice exchanged prior to a deal’s completion give strong incentive for another investment
bank to free ride and offer the deal at a much lower price having not incurred the setup
costs. Therefore, the investment banking industry cannot be perfectly competitive and must
result in a voluntary cooperation among banks not to undercut each other in ruinous
competition that will ultimately destroy the incentives to create long-lasting relationships
with firms. Evidence of this dynamic has been studied in various literatures. In Struggle and
Survival on Wall Street written in 1994, Matthews found that firms have charged 7/8
percent for underwriting top quality bonds for decades. Matthews concluded that there
must be some type of unspoken collusion among banks for this to occur so systematically
for so long. Chen and Ritter reported that “gross spreads received by underwriters on initial
public offerings in the United States are much higher than in other countries. Furthermore,
in recent years more than 90 percent of deals raising $20-80 million have spreads of exactly
seven percent, three times the proportion of a decade earlier.” The spreads were not near
or around seven percent, they broke down to exactly seven percent. In a more competitive
industry, one would expect to find spreads in a range where banks would compete with
each other at least to some degree. Chen and Ritter go on to claim that investment bankers
will openly admit that “they don’t want to turn it into a commodity business” so banks do
not compete on the prices charged for initial public offerings. The ability to perform high-
yielding securities deals is the lifeblood of the investment banking industry and executives
have made sure not to cause a breakdown in the fee schedule. These implicit agreements
show the oligopolistic structure of the investment banking industry. In such a structure,
there is a relatively fixed size of each individual dominant firm in the industry. If firms are all
too small, they will free ride off each other’s information and ruin each other. While if a
particular firm is too large relative to the others, the smaller firms will have increased
incentive to free ride to the detriment of the large firm. Therefore, no firm can become too
large without other, smaller firms attacking it and driving up its costs and reducing its fee
revenues through undercutting. The large firms operate on mutual high reputations and an
implicit agreement not to fall into ruinous competition. This creates the “boys club” that
Wall Street is sometimes seen as. The high barriers to entry in the industry also help support
the Wall Street club. The Securities and Exchange Commission has set a high standard of
capital and regulatory requirements that must be passed in order to setup as an investment
bank (2009 IBIS). The capital standards require large initial investments for conducting
business. More recently, increased regulation of the industry is likely thus further increasing
the barriers to entry for companies not able to produce significant economies of scale to
spread the high costs of compliance with legal regulations. Yet, once a bank is established,
their fixed capital costs are relatively low in comparison to variable labour costs. The
services provided by investment banks require a large amount of administrative work and
are highly labor intensive in general (2009 IBIS). These employees are typically highly
educated and very specialized in their field resulting in outsized wage expenses to maintain
the workforce. This relatively large portion of variable costs helps banks deal with
downturns in economic activity and massive layoffs are an understood part of the business
in times of economic contraction. But, as a barrier to entry into the industry, it can be
difficult to attract the well-qualified candidates in order to setup an enterprise especially in
investment banking because of its reliance on a bonus as a significant portion of an
employee’s compensation. This bonus is very large relative to the employee’s salary and is
only guaranteed if the firm can guarantee its ability to perform high profile securities deals.
In this way, the top firms of the industry are naturally supported by their employees who
stay with the reputation and success guaranteeing their income at the end of the year. Also,
one of the greatest components for success for an investment bank is its reputation.
Reputations are not made in short order but rather take years of quality servicing and then
decades to establish the firm commitment to maintaining integrity in its dealings. Gaining
acceptance from firms as a desired promoter and underwriter of securities is a long, hard-
won battle that substantially hinders new entrants from the market. Reputation and brand
can be measured by goodwill accounting within the financial statements. Goldman Sachs,
for example, records an asset value of over $5 billion for its goodwill and intangible assets
on its financial statements (2009 GS). UBS valued its goodwill at over $4 billion for the year
ended December 31, 2008 (2008 UBS). These goodwill measurements indicate the value of
the business segments that exceed the discounted expected future cash flows and point to a
valuation of a company’s reputation, brand image and customer loyalty. According to U.S.
Census Bureau statistics, the investment banking industry had 5,583 firms in 2007
generating a total of $207.4 billion in sales and employing over 140,000. The industry
experienced rapid growth over the previous five-year period with a 109.7 percent growth in
revenues fuelled by a relatively minor 19.7 percent growth in the number of firms coupled
with a miniscule 6.4 percent increase in the number of employees. Compensation increased
57 percent over the same period from 2002 to 2007, a 9.5 percent compound annual
growth rate. (2009 Census)The state of New York is, by far, the dominant player in the
investment banking industry in terms of revenue, but not hardly so in terms of the number
of institutions. While accounting for only 20.8 percent of the total firms in 2002, New York
firms produced 77.9 percent of the total revenues generated in the industry. California takes
up second in the total revenues with a measly 4.1 percent of total sales. This divergence
clearly points to the dominance of Wall Street and the large market shares of a limited
number of firms. (2009 Census)The year 2008 saw an extraordinary 93.0 percent drop in
industry revenue as the sector imploded in the wake of the subprime mortgage meltdown.
As recently as the year 2007, the top six investment banking firms accounted for 86 percent
of the total market. By the end of 2008, major consolidation had occurred and the top three
firms now had market share of 65 percent. The top six investment banks in 2007, in order of
market share, were Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, Bear
Stearns and JP Morgan. By the end of the 2008, Goldman Sachs and Morgan Stanley had
survived only by converting to bank holding companies to qualify for government capital
infusions. Merrill Lynch was forced into an acquisition by Bank of America after Lehman
Brothers dramatically collapsed in a short time. Bear Stearns was the first to fall in early
2008 forcing a takeover by JP Morgan. The composure of the investment banking industry
has dramatically changed and will continue to change in the future. There are no
independent investment banks remaining of any sizable importance. (2009 IBIS)The current
industry now has four key players accounting for 80 percent of the market. JP Morgan, after
acquiring Bear Stearns in May of 2008, now holds a 26 percent share operating with assets
of $1.6 trillion and 180,000 employees. JP Morgan bartered an exceptional deal with the
Federal Reserve Bank bearing only the first $1 billion in potential losses from the acquisition
while the Fed bears the next $29 billion offering JP a great chance to snap up huge market
share gains without excessive risk of losing capital. JP participated in the same leveraged
loans and mortgage investments that other banks did but on a much more conservative
scale so that still maintained profitability in 2008 with incomes declining 64%. (2009 IBIS)
Goldman Sachs, one of the two remaining firms from the group of the five independent
investment banks, comes in second in market share with 23 percent. Goldman also
weathered the subprime meltdown relatively well as it hedged its positions wisely and
experienced an 80 percent decline in net income in the year 2008. Morgan Stanley ranks
third in share with 16 percent and Bank of America rounds out the top four with 15 percent
market share. These four companies dominate the investment banking industry in the
United States now. Citigroup is the fifth largest and holds a measly one percent share. (2009
IBIS)The 54 percent drop in the equity market from the October 2007 high to the March
2009 low has left many market participants asking why the crisis occurred. Given that the
crisis was first felt within the walls of Wall Street firms, it makes one ask how investment
banks could have incurred such massive losses. The top five firms as well as other
commercial banking institutions threatened the collapse of the entire global financial system
with their extraordinarily excessive leverage and concentration in subprime mortgage
backed securities. Much of the changes in banking habits can be traced back the Gramm-
Leach-Bliley Act (GLBA) of 1999. The GLBA most notably repealed Section 20 of the Glass-
Steagall Act of 1933 (2009 Geyfman & Yeager). After the stock market crash in 1929 the
Federal government passed many new wide-ranging sweeping measures to curtail excessive
risk-taking in the financial markets by large banking institutions. The SEC was formed to
regulate entities and Federal Deposit Insurance Corporation was founded to insure the
deposits of individual customers. Along with these two entities which have proved to be
major successes in creating stability in financial markets, the Glass-Steagall Act had the
specific provision of Section 20. Section 20 prohibited commercial banking institutions from
engaging in securities activities. Banks that held customer deposits were now prohibited
from engaging in or having affiliations with firms that “engaged principally in the issue,
flotation, underwriting, public sale, or distribution at wholesale or retail or through
syndicate participation of stock, bonds, debentures, notes or other securities” (Title 12, U.S
Code, Section 20).Section 20 intended to separate the riskiness of activities that dealt with
securities and the necessity of safety for consumer depositors. Glass-Steagall looked to
curtail the negative effects losses in securities dealing would have on the security of banking
deposits in a firm participating in both aspects of the financial system. As with many other
industries, the move to deregulation seen in the United States throughout the 1980s had its
effects on the financial services industry as well. The slow erosion of Section 20 finally
culminated in the passing of GLBA, otherwise known as the Financial Services Modernization
Act in 1999. This Act allowed bank holding companies to convert into financial holding
companies and perform dealings in securities through subsidiaries without regulatory limits.
(2009 Geyfman & Yeager)The repeal of Section 20 was strenuously lobbied for in Congress
by banking institutions on the premise that major synergies could be achieved without it
creating significant economies of scale. Investment banks must undergo costly
creditworthiness evaluations in order to underwrite securities. These activities are linked to
a firm’s day-to-day financial activities. A bank holding company holding the deposits and
providing credit lines to an institution will have already conducted evaluations of the firm
that can then be transferred into underwriting activities without repeat of the initial sunk
costs independent investment banks must endure. Recent studies have shown a “modest
risk diversification benefits in the post-GLBA era” (2009 Geyfman & Yeager) and “significant
revenue synergies between IB and commercial banking” (2005 Yasuda). On the other hand,
now banks are participating in a significantly riskier world of securities dealing with the
downside of the risks to be felt by those seeking safety in simple depository transactions
with the bank. Geyfman and Yeager found that “universal banks had similar systemic risk
but sharply higher total and unsystematic risk than more traditional banks” (2009). This
finding points to the inherent risks in securities dealing and the possible spill over
disruptions these activities could have on traditional commercial banking activities. The
GLBA led to significant changes in the investment banking industry. The five largest
independent investment banks that had operated under implicit cooperation were forced to
produce earnings elsewhere as many new competitors entered the market. Previously an
unhindered oligopoly, the top five independent investment banks found themselves
competing for securities deals with the new so-called universal banks, major players like JP
Morgan, Citigroup and Bank of America. Every banking institution was now allowed in on
the deal-making turf and held significant sway over firms making securitization decisions
because of the existing relationship with banks holding depository funds. A study in 2005
showed that companies having existing banking relationships will more often choose that
particular bank as their underwriter in securities deals (2005 Yasuda). This poses a great
challenge to investment banks that do not hold deposits because customers that were
previously forced to seek out an independent investment bank were now choosing the bank
holding companies they already had established relationships with for securities deals. After
five years of competing with all other firms in the banking world for securities deals,
investment banks needed a new way to make money. The new solution included employing
a great deal of leverage. One of the most crucial elements of the financial industry collapse
was the major change the SEC passed in legislation in 2004. Since 1975, the SEC had limited
broker dealers a debt-to-net capital ratio of 12-to-1. Most banks exhibit leverage ratios
between 9 and 12 percent depending on the management’s appetite for risk. Investment
banks though, have always found ways to exceed those ratios but the 2004 SEC rules gave
them free reign. The SEC now allowed the top five investment banks to leverage up 30, even
40 to 1. (2008 Para Pundit)One of the most striking elements of the leverage equation is
that it does not include many off-balance sheets obligations and does not account for the
implicit leverage in derivatives contracts. Unhinged positions in credit default swaps and
options can produce catastrophic losses in an extremely short amount of time. American
International Group is a prime example of the riskiness of CDS contracts with the asset
values of their books plummeting as fear of counterparty bankruptcy skyrocketed after
Lehman Brothers’ collapse. Yet, even without the inclusions of these pieces of the equation,
the leverage seen on investment banking balance sheets struck market participants as
showing astounding arrogance and extreme recklessness. At first, leverage was a great boon
to the industry as evidenced by the 109.7 percent growth in revenues from 2002 to 2007.
Investment banks increased their principal trading throughout this period rising from 16% of
revenue generation in 2002 to 23% by 2007 (2009 IBIS). Average leverage ratios skyrocketed
in a short time after the 2004 enactment at the major five investment banks. On average
from 1999 to 2003 the top banks had leverage ratios of: Bear Stearns, 27.6 percent;
Goldman Sachs, 19.2 percent; Lehman Brothers, 25.8 percent; Merrill Lynch, 18.5 percent;
and Morgan Stanley, 21.7 percent. By 2007 every bank had large increases in their debt to
capital ratios: Bear Stearns, 21.5 percent increase to 33.5 percent; Goldman Sachs, 16.6
percent increase to 22.4 percent; Lehman Brothers, 19.2 percent increase to 30.7 percent;
Merrill Lynch, 73.2 percent increase to 32.0 percent; and Morgan Stanley, 53.8 percent
increase to 33.4 percent (2008 Epicurean). These banks took advantage of the SEC rule
change to the fullest extent pushing their balance sheets to the limit, and then over the
limit. While the top four investment banks had market share totalling 39.1 percent in 2002,
the leverage fueled large gains and by 2007, the top four firms had combined market share
of 69.0 percent (2009 IBIS).Leverage is a great bonus in boom times as seen in the housing
market throughout the early 2000s as real estate prices soared. But, leverage is much more
of a zero-sum game than most would like to admit and the fall in housing demand towards
the end of 2007 caused losses in banking portfolios and ultimately resulted in billions of
dollars in writedowns. In the end, none of the top five investment banks existed in its
independent investment banking form by the end of 2008. Bear Stearns collapsed and was
sold off to JP Morgan at a pittance of its former stock price. Lehman Brothers found the
government unwilling providers of bailout monies and claimed bankruptcy in September
2008. Merrill Lynch, seen as the next domino in a falling cascade, was forced into an
acquisition by Bank of America to salvage the company. Goldman Sachs and Morgan Stanley
soon converted into bank holding companies to receive access to the Federal Reserve
discount window. This conversion dictates a major reduction in leverage for the two banks
to comply with regulation. The underlying regulatory structure created economic incentives
that fueled the boom and bust in the investment banking industry. A naturally oligopolistic
industry that would fall victim to ruinous competition under a perfectly competitive market
found itself in a state of implicit cooperation. Investment banks chose not to compete on
price for securities deals as evidenced by clustering of spreads on corporate bonds offerings
and initial public offerings in equities sold by banks. The repeal of Section 20 from the Glass-
Steagall Act of 1933 allowed a new field of entrants into the investment banking arena. The
rise of the universal bank allowed institutions that held depository accounts to now be the
one-stop shop for all a firm’s financial needs. As studies have shown, firms are more likely to
use the bank they already have a relationship with in going forward on securities deals. So,
the independent investment bank found itself in a tough spot. Its oligopoly was invaded by a
swath of new competitors and it had to find a new competitive advantage. The solution was
disastrous in the long-run even while providing five years of record-setting growth rates.
Investment banks leveraged up their mortgage dealings and engaged in a variety of high-risk
derivative bets. It is interesting to note that the two banks with persistently highest leverage
ratio prior to the 2004 SEC rule change were the first to collapse in the 2008 panic. Goldman
Sachs, the best-surviving member of the top five, exhibited the lowest leverage ratio directly
resulting in lessening the blow from the mortgage fallout. It is unclear whether the
investment banking industry will ever be the same again. What is clear is that an underlying
regulatory framework that encourages perverse economic incentives can easily cause
collapse.

Key Industry Statistics

Key Industry Figures 2010
Industry Revenue *28,323.8 $Mi
Revenue Growth *162.6 %
Industry Gross Product *18,035.5 $Mi
Number of Establishments *14,579 Units
Number of Enterprises *10,752 Units
Employment *153,695 Units
Exports --
Imports --
Total Wages *13,135.4 $Mi

Products & Services

  Product/Services Share
Fixed interest, currency and
60%
commodity trading  
Underwriting services 17%
Equities trading commissions 15%
Financial advisory services 08%

Key Competitors in this Industry

Major Player Market Share
The Goldman Sachs Group Inc. XX.XX 
J.P. Morgan Chase & Co. XX.XX 
Bank of America Corporation XX.XX 
Morgan Stanley XX.XX 
Citigroup, Inc XX.XX 

Global Finance names the World’s Best Investment Banks 2010

New York, April 19, 2010 — Global Finance announces its selection of the World’s
Best Investment Banks 2010 to be published in its June 2010 issue.

Global Finance editors, with input from industry experts, used a series of criteria to
arrive at their selections. These included market share, number and size of deals,
service and advice, structuring capabilities, distribution network, efforts to address
market conditions, innovation, pricing, after-market performance of underwritings and
market reputation. Deals announced or completed in the last three quarters of 2009
or the first quarter of 2010 were considered.

“The last 12 months were decidedly mixed for investment bankers,” said Global
Finance publisher Joseph D. Giarraputo. “But many institutions continue to provide
the best possible services to their clients, and we salute them.”

For editorial information please contact: Dan Keeler, Editor, email: dan@gfmag.com

GLOBAL AWARDS

Best Investment Bank J.P. Morgan

Best Equity Bank J.P. Morgan

Best Debt Bank J.P. Morgan

Best M&A Bank Morgan Stanley

Best Up-and-Comer GulfMerger

Most Creative Bank of America Merrill Lynch

SECTORS

Consumer Lazard

Financial Institutions Bank of America Merrill Lynch

Health Care Barclays Capital

Infrastructure Scotia Capital

Industrial/Chemicals J.P. Morgan

Media/Entertainment Bank of America Merrill Lynch

 Metals & Mining BMO Capital Markets

Oil & Gas Bank of America Merrill Lynch

Power Morgan Stanley

Real Estate UBS Investement Bank

Technology
Barclays Capital

Telecom Credit Suisse

REGIONAL AWARDS

NORTH AMERICA

Best Investment Bank J.P. Morgan

Best Equity Bank J.P. Morgan

Best Debt Bank J.P. Morgan

Best M&A Bank Morgan Stanley

WESTERN EUROPE

Best Investment Bank Deutsche Bank

Best Equity Bank J.P. Morgan

Best Debt Bank Deutsche Bank

Best M&A Bank Morgan Stanley

ASIA
Best Investment Bank Morgan Stanley

Best Equity Bank UBS Investement Bank

Best Debt Bank Nomura

Best M&A Bank Morgan Stanley

CENTRAL & EASTERN EUROPE

Best Investment Bank Bank of America Merrill Lynch

Best Equity Bank Bank of America Merrill Lynch

Best Debt Bank J.P. Morgan

Best M&A Bank Bank of America Merrill Lynch

NORDIC

Best Investment Bank Handelsbanken Capital Markets

Best Equity Bank Handelsbanken Capital Markets

Best Debt Bank DnB NOR

Best M&A Bank Rothschild

LATIN AMERICA  

Best Investment Bank Citi

Best Equity Bank Citi

Best Debt Bank Citi

Best M&A Bank BTG Pactual

MIDDLE EAST  
 Best Investment Bank SambaCapital

Best Equity Bank SambaCapital

Best Debt Bank HSBC

Best M&A Bank UBS Investment Bank

AFRICA  

Best Investment Bank Standard Bank

Best Equity Bank RMB Morgan Stanley

Best Debt Bank Standard Bank

Best M&A Bank J.P. Morgan

COUNTRY AWARDS

NORTH AMERICA

Canada Scotia Capital

United States J.P. Morgan

EUROPE

France BNP Paribas

Germany Deutsche Bank

Italy Mediobanca

Netherlands ING

Portugal Caixa BI
Russia Troika Dialog

Spain Santander

Switzerland Credit Suisse

Turkey Garanti Securities

United Kingdom Barclays Capital

ASIA  

Australia UBS Investment Bank

China/Hong Kong China International

Capital Corporation (CICC)

India Kotak Mahindra Bank

Indonesia Mandiri Sekuritas

Japan Nomura

South Korea Samsung Securities

Taiwan Fubon Financial Holding

LATIN AMERICA  

Argentina Citi

Brazil BTG Pactual

Mexico Citi

MIDDLE EAST  

Bahrain Unicorn Investment Bank

Egypt EFG-Hermes

Israel HSBC Bank

 Jordan Arab Bank

Kuwait NBK Capital

Lebanon BankMed

Oman BankMuscat

Qatar QNB Capital

Saudi Arabia SambaCapital

Abu Dhabi Investment

United Arab Emirates
Company (Invest AD)
AFRICA  

Nigeria Standard Bank

South Africa Standard Bank

LEGAL ADVISERS

Global Skadden

North America Skadden

Western Europe Freshfields Bruckhaus Deringer

Asia Baker & McKenzie

Central & Eastern Europe Clifford Chance

Latin America Pinheiro Neto Advogado

Mddle East & Africa

Shearman & Sterling

DEALS OF THE YEAR

 Lloyd's Banking Group

Best Equity Deal $22.5 billion rights issue

   

Lead underwriters Bank of America Merril Lynch, UBS Investment Bank,

Citi, Goldman Sachs, HSBC and J.P. Morgan Cazenova

$7 Billion Qatar bond
Best Debt Deal
 
 
Credit Suisse, QNB Capital,Barclays Capital,
Lead Managers
Goldman Sachs, and J.P. Morgan
Berkshire Hathaway-Burlington
Best M&A Deal
Northern Santa Fe
Advising target Goldman Sachs

WHAT ARE THE MAIN DIFFERENCES BETWEEN COMMERCIAL BANKING AND INVESTMENT
BANKING?

An Investment bank is financial intermediary that performs a variety of services including

underwriting (guarantees the purchase of securities if the market fails to purchase them),
acting as an intermediary between an issuer of securities and the investing public,
facilitating mergers and other corporate reorganizations, and also acting as a broker for
institutional clients.

-A major function of investment banks is the provision (underwriting) of long term equity
and debt to corporations and governments (debt raising for business banks and institutions -
derivatives, bonds, corporate paper or IPO). Private placement (of equities) occurs where an
investment bank offers large holdings in a company coming to the market to its top 10 or so
stock holders; usually large hedge funds. Investment banks also mediate M&A (mergers and
acquisitions), which can include hostile takeovers or joint ventures.

Commercial banks traditionally deal in basic loans and deposit taking within the corporate
business sector. However, this has changed rapidly over the last 10 years as large
commercial business has been able to offer their own debt (corporate bonds). Now
commercial banks are less about lending to multinational companies and more about
advising them, which has blared line between Commercial Banking and Investment banking.
Although, in times of financial hardship like the GFC when corporate debt dries up (i.e. the
liquidity crisis), firms still require commercial banking for funds.

Basic Functions of Commercial Banks

-Domestic lending from domestic deposits
-Large amounts of cross border lending - trade/finance, specifically currency exchange, is
bread and butter of commercial banking: Global risk due to subsidiaries, currencies, and
sovereign (foreign government) risk.
-Revolving line of credit - firms borrowing against their assets (value of company) - used to
be large and generous before the subprime crisis. Now a lot more reporting required, but an
important part of funding that a company would go to a commercial bank for.

RECENT TRENDS IN INVESTMENT BANKING

In the early 1980s, the SEC introduced and made law a rule that permits well-known
companies to register securities without a set sale date and delay the sale of the securities
until the issuers expect their securities will have strong prices in the market. These
registrations are known as "shelf registrations and have become an important part of
investment banking.

Shelf financing also contributed to the decline of the historic connections between specific
corporations and investment banks. Nevertheless, it did not change the basic structure of
the industry, which has retained the pyramid shape. The apex investment houses before the
introduction of shelf financing by and large remained the apex houses afterwards.

Contemporary investment banking is also influenced by the growth of institutional investors

as key players in the securities market. Whereas institutional investors accounted for 25
percent of securities trade in the 1960s, they accounted for over 75 percent in the 1990s. In
addition, the securities market has become more global. For example, U.S. companies raised
more money in London in the early 1980s than in New York. Moreover, U.S. investors are
buying more European and Asian securities than in previous decades.

New technology—including telecommunications technology, computers, and computer

networks—has enabled investment bankers to receive, process, organize, and circulate
large amounts of diverse information. This technology has helped investment banks become
more efficient and complete transactions more quickly.

The increased competition within the investment banking arena has further quelled the
establishment of long-term relationships between corporations and investment houses.
Company executives receive offers from a variety of investment banks and they compare
the offers, choosing the ones they believe will benefit their company the most. Large
corporations generally have transactions with four or more investment banks. Nevertheless,
corporations still favour their traditional investment banks and about 70 percent of the
executives surveyed in a study said they do most of their business with their traditional
investment banks, according to The Investment Banking Handbook.

In the 1980s and 1990s, the investment banking industry continued to consolidate. As a
result, a few investment banks with large amounts of capital dominated the industry and
offered a wide array of services, earning the name "financial supermarkets." This trend also
altered the structure of the industry, affecting the size and roles of syndicates. Syndicates
became dependent on the type and volume of the securities being offered as a result. For
small offerings, syndicates are usually small and the managing banks sell the majority of the
securities. In contrast, for large offerings, the managing banks may create a syndicate
including more than 100 investment banks.

Investment houses continued to be innovative and introduce new financial instruments for
both issuers and investors. Some of the most significant innovations include fixed-income
and tax-exempt securities, which have grown in popularity since their inception in the
1980s. Some key fixed-income securities have been debt warrants, which are bonds sold
with warrants to buy more bonds at a specific time; and debt-equity swaps, where
companies offer stock to existing bondholders.

With a growing number of mergers and acquisitions as well as corporate restructurings,

investment banks have become increasingly involved in the process of arranging these
transactions as part of their primary services. Because of changing economic, competitive,
and market conditions, several thousand small and mid-sized companies as well as a handful
of large corporations agree to merger and acquisition deals each year. Investment banks
facilitate this process by providing advice on such transactions, negotiating on behalf of
their clients, and guaranteeing the purchase of bonds for acquisitions that rely on debt,
known as leveraged buyouts.

The rapid expansion of the Internet in the mid-to-late 1990s provided an impetus for
stockbrokers to begin offering trading services through the Internet. Because of the
popularity of online trading, brokers began offering investment banking services. Early in
1999, E-Trade established the online investment bank "E-Offering," which provides online
initial public offering services.

Since the passage in 1933 of the Glass-Steagall Act, the U.S. banking industry has been
closely regulated. This act requires the separation of commercial banking, investment
banking, and insurance. In contrast to investment banks, commercial banks focus on taking
deposits and lending. Nevertheless, there have been recent endeavours to repeal the act
and to relax its measures. While the act has not been overturned even with efforts
continuing in 1999, the Federal Reserve, which oversees commercial banking, has allowed
commercial banks to sell insurance and issue securities. Consequently, investment banks
and insurers support the latest round of activity to overturn the act. Japan and the United
States are the only major industrial countries that require the separation of commercial and
investment banking.
FUTURE OF INVESTMENT BANKING IN INDIA

Investment banking India has always been very crucial for the smooth flow of market
transactions between various investors, companies, firms and the government. These banks
will have a role to play even in the future, irrespective of the economic conditions in the
country.

Role of Investment banking companies in India

Investment banking companies generally help their clients to access capital through equity,
debt and other kinds of investment products. These firms also trade in equities and
derivative products and also help companies with merger and acquisition deals. About a
couple of years back, when the world economy was reeling under a recession, many
investment banking firms either collapsed or were on the brink of closure. Even a few firms
in India were affected by this global downturn. This led to many sceptics writing off the
revival of these firms.

What is in store for the future?

The economic downturn revealed that only the strong can swim against the tide and still
remain afloat. Those sceptical must realize that the market has its own upheavals and
downturns. When you look at the financial strength of these companies, you just cannot
ignore them. No wonder, most of these firms bounced back once again. However, the future
of Investment banking companies in India looks good, even though we may see new
investment guidelines.

Expected Investment Guidelines

Considering what is happening after the economic crash in the United States, even our
policy makers may be tempted to bring in some stringent guidelines for investment banking
services in India. This may be done with a view to ensure better risk management. Another
option which the law makers may think of is tinkering with the claw back option. This will
certainly protect the investment companies against fraudulent and unethical traders and
companies who might trigger a market crash, thereby causing huge losses. This provision
will ensure recovery of their profits. Lastly, banks may be advised to go slow on short term
funding in order to reduce mismatch between assets and liabilities.

CONCLUSION
The industrial investment bank of India is one of oldest banks in India. The Industrial
Reconstruction Corporation of India Ltd., set up in 1971 for rehabilitation of sick industrial
companies, was reconstituted as Industrial Reconstruction Bank of India in 1985 under the
IRBI Act, 1984. With a view to converting the institution into a full-fledged development
financial institution, IRBI was incorporated under the Companies Act, 1956, as Industrial
Investment Bank of India Ltd. (IIBI) in March 1997. IIBI offers a wide range of products and
services, including term loan assistance for project finance, short duration non-project
asset-backed financing, working capital/ other short-term loans to companies, equity
subscription, asset credit, equipment finance as also investments in capital market and
money market instruments.

In view of certain structural and financial problems adversely impacting its long-term
viability, IIBI submitted a financial restructuring proposal to the Government of India on 25
July 2003. IIBI has since received certain directives from the Government of India, which,
inter alias, include restricting fresh lending to existing clients approved cases rated
corporates, restrictions on fresh borrowings, an action plan to reduce the overhead
expenditure, disposal of fixed assets and a time-bound plan for asset
recovery/reconstruction. The Government of India had also given its approval for the
merger of IIBI with IDBI and the latter had already started the due diligence process.

But on 17 December 2005 the IDBI rejected any such merger.

Size of industry

Global investment banking revenue increased for the fifth year running in 2007, to a record
US$84.3 billion,[5] which was up 22% on the previous year and more than double the level in
2003. Subsequent to their exposure to United States sub-prime securities investments,
many investment banks have experienced losses since this time.

The 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%. Over the past decade, fee income from
the US increased by 80%. This compares with a 217% increase in Europe and 250% increase
in Asia during this period. The industry is heavily concentrated in a small number of major
financial centres, including London, New York City, Hong Kong and Tokyo.

Investment banking is one of the most global industries and is hence continuously
challenged to respond to new developments and innovation in the global financial markets.
New products with higher margins are constantly invented and manufactured by bankers in
the hope of winning over clients and developing trading know-how in new markets.
However, since these can usually not be patented or copyrighted, they are very often copied
quickly by competing banks, pushing down trading margins.

For example, trading bonds and equities for customers is now a commodity business,[citation
needed]
but structuring and trading derivatives retains higher margins in good times—and the
risk of large losses in difficult market conditions, such as the credit crunch that began in
2007. Each over-the-counter contract has to be uniquely structured and could involve
complex pay-off and risk profiles. Listed option contracts are traded through major
exchanges, such as the CBOE, and are almost as commoditized as general equity securities.

In addition, while many products have been commoditized, an increasing amount of profit
within investment banks has come from proprietary trading, where size creates a positive
network benefit (since the more trades an investment bank does, the more it knows about
the market flow, allowing it to theoretically make better trades and pass on better guidance
to clients).

The fastest growing segment of the investment banking industry are private investments
into public companies (PIPEs, otherwise known as Regulation D or Regulation S). Such
transactions are privately negotiated between companies and accredited investors. These
PIPE transactions are non-rule 144A transactions. Large bulge bracket brokerage firms and
smaller boutique firms compete in this sector. Special purpose acquisition companies
(SPACs) or blank check corporations have been created from this industry.