CHAPTER 1

INTRODUCTION

Investment banking includes a wide variety of activities, including underwriting, selling, and
trading securities, providing financial advisory services ,and managing assets. Investment banks
cater to a diverse group of stakeholders companies, governments, non-profit institutions, and
individuals and help them raise funds on the capital market. They perform the following major
functions for their customers:
Serve as trading intermediaries for client
Lend and invest banks asset
Provide advice on mergers, acquisitions, and other financial transactions
Research and develop opinions on securities, markets, and economies
Issue, buy, sell, and trade stocks and bond
Manage investment portfolios.
At a very macro level, Investment Banking as term suggests, is concerned 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 generating GDP(the Issuers). Banking and financial institution on the one
hand and the capital market on the other are the two broad platforms of institutional that
investment for capital flows in economy. Therefore, it could be inferred that investment banks
are those institutions that are counterparts of banks in the capital markets in the function of
intermediation in the resource allocation. Nevertheless, it would be unfair to conclude so, as that
would confine investment banking to very narrow sphere of its activities in the modern world of

high finance. Over the decades, backed by evolution and also fueled by recent technologies
developments, an investment banking has transformed repeatedly to suit the needs of the finance
community and thus become one of the most vibrant and exciting segment of financial services.
Investment bankers have always enjoyed celebrity status, but at times, they have paid the price
for the price for excessive flamboyance as well.
The term "finance" in our simple understanding is perceived as equivalent to 'Money'.
But finance exactly is not money, it is the source of providing funds for a particular activity.
Providing or securing finance by itself is a distinct activity or function, which results in Financial
Management, Financial Services and Financial Institutions. Finance therefore represents the
resources by way funds are needed for a particular activity. We thus speak of 'finance' only in
relation to a proposed activity. Finance goes with commerce, business, banking etc. Finance is
also referred to as "Funds" or "Capital", when referring to the financial needs of a corporate
body. 2 A financial system or financial sector functions as an intermediary and facilitates the
flow of funds from the areas of surplus to the areas of deficit. A Financial System is a
composition of various institutions, markets, regulations and laws, practices, money manager,
analysts, transactions and claims and liabilities. The word "system", in the term "financial
system", implies a set of complex and closely connected or interlined institutions, agents,
practices, markets, transactions, claims, and liabilities in the economy. The financial system is
concerned about money, credit and finance-the three terms are intimately related yet are
somewhat different from each other. Financial System of India (or any country) consists of
financial markets, financial intermediation and financial instruments or financial products.

DEFINATION:
An individual or institution, which acts as an underwriter or agent for corporations and municipalities
issuing securities. Most also maintain broker/dealer operations, maintain markets for previously issued
securities, and offer advisory services to investors. Investment banks also have a large role in facilitating mergers
and acquisitions, private equity placements and corporate restructuring. Unlike traditional banks, investment banks
do not accept deposits from and provide loans to individuals. Also called investment banker.

A Investment banker is any who is engaged in the business of issue

management
eitherbym a k i n g a r r a n g e m e n t s r e g a r d i n g s e l l i n g , b u y i n g
o r s u b s c r i b i n g t o s e c u r i t i e s o r a c t i n g a s manager/consultant/ advisors or
rendering corporate advisory service in relation to such issue management.

MEANING OF INVESTMENT BANKING:

Investment banking is a field of banking that aids companies in acquiring funds. In
addition to the acquisition of new funds, investment banking also offers advice for a wide range
of transactions a company might engage in. An investment bank is a financial institution that
assists individuals, corporations and governments in raising capital by underwriting and/or acting
as the client's agent in the issuance of securities.
An investment bank may also assist companies involved in mergers and acquisitions, and
provide ancillary services such as market making, trading of derivatives, fixed income
instruments, foreign exchange, commodities, and equity securities. Investment bankers identify
capital opportunities, negotiate and structure deals, and execute private and public financial
transactions.
The essential function of an investment bank is to act as an intermediary between
potential investors and those who seek capital. Investors include individuals, mutual funds,
municipalities, public corporations, and private institutions. An investment banking firm also
does a large amount of consulting. Investment bankers give companies advice on mergers and
acquisitions, for example. They also track the market in order to give advice on when to make
public offerings and how best to manage the business' public assets. Some of the consultative
activities investment banking firms engage in overlap with those of a private brokerage, as they
will often give buy-and-sell advice to the companies they represent.

Investment banking is a field of banking that aids companies in acquiring

funds. In addition to the acquisition of new funds, investment banking also offers
advice for a wide range of transactions a company might engage in. An investment
bank is a financial institution that assists individuals, corporations and

governments in raising capital by underwriting and/or acting as the client's agent in

the issuance of securities. An investment bank may also assist companies involved
in mergers and acquisitions, and provide ancillary services such as market making,
trading of derivatives, fixed income instruments, foreign exchange, commodities,
and equity securities. Investment bankers identify capital opportunities, negotiate
and structure deals, and execute private and public financial transactions. The
essential function of an investment bank is to act as an intermediary between
potential investors and those who seek capital. Investors include individuals,
mutual funds, municipalities, public corporations, and private institutions. An
investment banking firm also does a large amount of consulting. Investment
bankers give companies advice on mergers and acquisitions, for example. They
also track the market in order to give advice on when to make public offerings and
how best to manage the business' public assets. Some of the consultative activities
investment banking firms engage in overlap with those of a private brokerage, as
they will often give buy-and-sell advice to the companies they represent.

INVESTMENT BANKING IN INDIA:

Investment Banks are financial intermediaries who help businesses in fund raising. An
investment bank or an investment banking firm is a kind of a financial institution, which assists
governments, corporations and even individuals in raising assets by underwriting or acting as an
agent of client for issuing securities. Such an organization even assists companies in Mergers and
Acquisitions and offer ancillary services like market making, foreign exchange, trading of
derivatives, commodities, equity securities and instruments of fixed income. Investment Banking
in India has evolved over a period of time. As per Indian Regulations, it is not allowed for one
legal entity to perform all investment banking functions. Bankruptcy remoteness is a key feature
while structuring the business lines of an investment bank. Therefore, Indian Investment banks

follow a conglomerate structure by keeping their business segments in different corporate entities
to meet regulatory norms.
OBJECTIVES OF INVESTMENT BANKING ARE:
An Investment Banker is an intermediary between the capital markets (investors) and
corporations (borrowers). He offers strategic 9 advice and performs financial analysis. He also
does research and analyses all public information to give advice on publicly listed stocks and
bonds to investors and sales and trading groups.
The objectives of Investment Banking include:
Guidance
Project Formulations
Implementation
Modernization
Diversification
Mobilizing resources
Raising Capital
Investment banks work for companies and governments, and profit from them by raising
money through the issuance and selling of securities in capital markets and insuring bonds, 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.
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.

INVESTMENT BANKING ACTIVITIES ARE AS FOLLOWS:

Investment Banks provide a wide range of financial services to clients. They structure
Mergers and Acquisition deals, raise capital, analyze prospects of listed companies and offer
advice, trade in securities on behalf of clients etc.
Therefore, Investment Banking can be defined to encompass many activities such as Intermediary between issuer and investor
Offering brokerage services to public & institutional investors
Provide access to equity and fixed income capital
Underwriting and distributing new security issues
Providing financial advice to corporate clients especially on security issues,M&ADeals
Due Diligence
Providing financial research to investors, corporate customers
Providing fee-based asset management services
Merchant Banking, Venture Capital Investing
Providing Bridge Loans For M&A, New Financing
Arranging & Funding Syndicated Loans
Foreign Exchange Trading & Hedging
Arranging Swaps, Other Risk Management Tools

Key Laws Governing Investment Banking Practices:

In the absence of a comprehensive piece of legislation governing
financial services in India, various services are regulated through a variety of
Acts and Rules and by different regulators. Investment Banking in India is
regulated by various legislations and the regulatory powers are also
distributed between different regulators depending on the constitution and
status of the investment bank. Pure investment banks that do not have
presence in the lending or banking business are governed primarily by the
capital market regulator Securities and Exchange Board of India (SEBI).
However, multi-national banks and non banking financial corporations which
are investment banks are regulated primarily by the Reserve Bank of India
(RBI) in their core business of banking or lending and insofar as the
investment banking segment is concerned, they are also regulated by SEBI.
An overview of the regulatory framework is as under:
a. All investment banking companies incorporated under the Companies Act 1956, are governed
by the provisions of that Act.
b. Multi-national banks are regulated by the Reserve Bank of India under the Reserve Bank of
India Act, 1934 and the Banking Regulation Act, 1949.
c. Investment banking companies that are constituted as non-banking financial companies are
regulated operationally by the RBI under Chapter IIIB of the RBI Act, 1934.
d. Functionally, different aspects of investment banking are regulated under the
Securities and Exchange Board of India (SEBI) Act, 1992 and the guidelines and
regulations issued thereunder. These are as follows:

SEBI (Issue of capital & Disclosure Requirements) regulations 2009

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011
SEBI (Prohibition of Insider Trading) Regulations 1992
SEBI (Foreign Institutional Investors) Regulations 1995

 SEBI (Venture Capital Funds) Regulations 1996

SEBI (Foreign Venture Capital Investors) Regulations 2000
SEBI (Mutual Funds) Regulations 1996
SEBI (Merchant Bankers) Regulations 1992
SEBI (Buy-Back of Securities) Regulations, 1998
Private Limited Company and Unlisted Public Limited Company (Buy-Back of Securities)
Rules, 1999
SEBI (Underwriters) Regulations, 1993
Securities Contracts (Regulation) Act,1956
e. Investment banks that are set up in India with foreign direct investment are governed in
respect of the foreign investment by the Foreign Exchange Management Act, 1999. 14
f. Apart from the above specific regulations relating to investment banking, investment banks are
also governed by other general laws applicable to all other businesses in India like tax laws,
contract laws, arbitration law etc.
IMPOERTANT TERMS RELATED TO INVESTMESNT BANKING:
Buying and Selling
Buying
Deciding on the proper time to purchase a security that you would like to add to your
holdings can be a daunting task. If the price drops immediately after you buy, it may seem as if
you missed out on a better buying opportunity. If the price jumps right before you make your
move, you may feel as if you paid too much. As it turns out, you should not let these small
fluctuations influence your decision too much. As long as the fundamentals that led you to decide
on the purchase have not changed, a few points in either direction should not have a large impact
on the long-term value of your investment

Similarly, the fact that an investment has been increasing in value of late is not a
sufficient reason for you to purchase it. Momentum can be very fickle, and recent movement is
not necessarily an indicator of future movement. Therefore, buying decisions should be based on
sound and thorough research geared toward discerning the future value of a security relative to
its current price. This analysis is will probably not touch upon price movement in the very
recent past. As you learn more about investing you'll get better at deciding when to buy, but
most experts comma end that beginners avoid trying to time the market, and just get in as soon as
they can and stay in for the long haul.
Selling:
There comes a time when investments must be liquidated and converted back into cash.
In a perfect world, selling would only be necessary when investment goals have been reached
or time horizons have expired, but, in reality, decisions about selling can be much more difficult.
For one thing, it can be just as hard to decide when to sell as it can be to decide when to buy. No
one wishes to miss out on gains by selling too soon, but, at the same time, no one wishes to
watch an investment peak in value and then begin to decline.
Selling may also become necessary if investment goals change over time. You may need
to reduce the amount of risk in your portfolio or you may have the opportunity to seek out
greater returns. Additionally, a security may have increased in value to the point that it
is overvalued. This creates an excellent opportunity to cash in and seek out new undervalued
investments. Often you will need to make this type of sale in the course of rebalancing a
portfolio necessitated by gains and losses in different areas.
REGISTRATION OF INVESTMENT BANK
Compulsory Registration:
Investment bankers require compulsory registration with the SEBI to carry
out their activities. They fall under four Registration categories
Category I
Investment bankers can carry on any activity related to issue management, that
is
,t h e p r e p a r a t i o n o f p r o s p e c t u s a n d o t h e r i n f o r m a t i o n r e l a t i n g t o t h e i s s u e ,
d e t e r m i n i n g t h e financial structure, tie up of financiers, final allotment of
securities, refund of the subscription and also act as advisors, consultants, managers,
underwriters or portfolio Managers.

Category II

Investment bankers can act as advisors, consultants , co-managers, underwriter sand

portfolio Mangers.
Category III
Investment bankers can act as underwriters, advisors and consultants to an issue.
Category IV
Investment bankers can act only as adviser or consultant to an issue. Thus, only
category I Investment bankers could act as lead managers to an issue. With effect
from December 9, 1997, however, only Category I Investment bankers are registered
by the SEBI. To carry on activities as portfolio managers, they have to obtain
separate certificate of registration from the SEBI

REGISTRATION CHARGES
1. An Investment banker has to pay to the SEBI1.Application fee of Rs.25,000;
2. Registration , Rs. 10 Lakhs and
3 .Renewal fee of Rs. 5 lakhs every three years from the fourth year from the date of initial
registration.
CONDITIONS OF REGISTRATION
The Registration / renewal of certificate of the Investment banker would be subject to
thefollowing conditions:
1. Prior approval of the SEBI would be necessary to continue to act as a Investment banker after
change of its status/constitution. Change of status / Constitution means any change
in status / constitution of whatsoever nature including (a) amalgamation/demerger /consolidation
/ any other kind of corporate restructuring , (b) change in its managing/whole time directors and
(c) any change in control over the body corporate. Change in control means (i) if its shares are
listed , change of control in terms of stipulations of the SEBI takeover Regulations (ii) change in
its controlling interest in any other case .controlling interest means direct / indirect interest to the
extent of at least 51 percent of voting rights.
2.Enter into a legally binding contract with the issuer specifying their mutual duties and
responsibilities
3.Pay the registration / renewal fee in the prescribed manner
.4.Take adequate steps for redressal of investors grievances within one month of the complaint
and keep the SEBI informed about the number , nature and other particular of such complaints
together with the manner of their redressal.
5.A bide by the relevant regulations under the SEBI Act.

OFFERING & SERVICES OF INVESTMENT BANKS

Project Counseling:
Project counseling includes preparation of project reports, deciding upon the financing pattern to
finance the cost of the project and appraising the project report with the financial institutions
or banks. It also includes filling up of application forms with relevant information for obtaining
funds from financial institutions and obtaining government approval.
Issue Management:
Management of issue involves marketing of corporate securities viz. equity shares, preference
shares and debentures or bonds by offering them to public. Investment banks act as an
intermediary whose main job is to transfer capital from those who own it to those who need it.
After taking action as per SEBI guidelines, the Investment banker arranges a meeting with
company representatives and advertising agents to finalize arrangements relating to date
of opening and closing of issue, registration of prospectus, launching publicity campaign and
fixing date of board meeting to approve and sign prospectus and pass the necessary resolutions.
Pricing of issues is done by the companies in consultant with the Investment bankers.
Underwriting of Public Issue:
Underwriting is a guarantee given by the underwriter that in the event of under subscription, the
amount underwritten would be subscribed by him. Banks/Investment banking subsidiaries cannot
underwrite more than 15% of any issue.
Managers, Consultants or Advisers to the Issue:
The managers to the issue assist in the drafting of prospectus, application forms and completion
of formalities under the Companies Act, appointment of Registrar for dealing with share
applications and transfer and listing of shares of the company on the stock exchange. Companies
can appoint one or more agencies as managers to the issue.
Portfolio Management:
Portfolio refers to investment in different kinds of securities such as shares, debentures or bonds
issued by different companies and government securities. Portfolio management refers to
maintaining proper combinations of securities in a manner that they give maximum return with
minimum risk.
Advisory Service Relating to Mergers and Takeovers:
A merger is a combination of two companies into a single company where one survives and
other loses its corporate existence. A takeover is the purchase by one company acquiring
controlling interest in the share capital of another existing company. Investment bankers are the
middle men in setting negotiation between the two companies.

 Off Shore Finance:

The Investment bankers help their clients in the following areas involving foreign currency.(a)
Long term foreign currency loans(b) Joint Ventures abroad.

MAIN ACTIVITY
An investment bank is split into the so-called front office, middle office, and back office
.Investment banks offer security to both corporations issuing securities and investors buying
securities. For corporations investment bankers offer information on when and how to place
their securities in the market. The corporations do not have to spend on resources with which it is
not equipped. To the investor, the responsible investment banker offers protection against unsafe
securities. The offering of a few bad issues can cause serious loss to its reputation, and hence loss
of business. Therefore, investment bankers play a very important role in issuing new security
offerings