118 - Zain Khan

RIZVI INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH Zain Khan
Project Report
On
Investment Banking
In partial fulfillment of the requirements of
The Summer Internship of
Masters in Management Studies
Through
Rizvi Institute of Management Studies and Research
Under the guidance of
Prof. N. K. Gupta
Submitted by
Zain Khan
MMS
Batch:2010-2012
INVESTMENT BANKING 1
CERTIFICATE
This is to certify that Mr. Zain Khan a student of Rizvi Academy of Management, of MMS II bearing roll
no.118 and specializing in Finance has successfully completed the project titled
“INVESTMENT BANKING”
under the guidance of Prof. N. K. Gupta in partial fulfillment of the requirement of Masters in
Management Studies by Rizvi Academy of Management for the academic year 2010-2012
Prof. N. K. Gupta
Project Guide
Prof. Umar Farooq Dr. Kalim Khan

Academic Coordinator Director
EXECUTIVE SUMMARY
Investment Banking is a wide topic and includes a lot of things in it. We will see its
subdivision, what all it comprises of. Investment Banking has been known to the world
since a long time and plays a very important role in the corporate world. It is a part of the
corporate world without the help of which the corporate wouldn’t have grown to the
extent they have grown today. The MNC’s that are seen expanding their base in all the
countries would not have done it effectively. All aspects relating to Investment Banking
are covered. How much is its existence in India and how has it helped in contributing in
the country’s GDP. Also a light is put on what are Mergers and Acquisitions, Foreign
Direct Investment what is there significance, there types and forms. Concluded by a case
on a merger and acquisition that has happened in the country.
Contents
1. Introduction to Investment Banking................................................................................................5
2. Foreign Institutional Investors........................................................................................................7
2.1 Transparency on the basis of Investment......................................................10
2.2 Future of Foreign Institutional Investors.......................................................13
3. Indian ADR (American Depository Receipts)..............................................................................13
3.1 Capital Raised through ADR.........................................................................15
4. Foreign Direct Investment (FDI)..................................................................................................15
4.1 Foreign Direct Investment In India (FDI).....................................................16
5. Introduction to Mergers and Acquisitions.....................................................................................23
Mergers and Acquisitions………………………………………………………………………..23
5.1 Distinction between Mergers and Acquisitions.............................................25
5.2 Procedure of Mergers & Acquisitions...........................................................27
6. BHARTI –ZAIN DEAL ANALYSIS...........................................................................................30
7. Bibliography..................................................................................................................................38
1. Introduction to Investment Banking
Investment banking as an ancillary first originated in Britain and then quickly spread to
the rest of Europe and also to the United States in the form of Merchant Banks whose
main activity was bill financing and loan underwriting for exports. London was the hub of
merchant banking till the beginning of twentieth century. New York then replaced London
as the hub of and the finance epicenter of the world. This happened due to the chain of
uncertain activities in England, which included the aftermath of the two world wars.
The US markets also couldn’t sustain for a long time as the crash of their stock market in
1929 and the severe depression of the 1930’s resulted in the loss of public confidence in
the financial markets and intermediaries. Following this the country formed various acts
just to make it viable for the public and to build back their confidence in the stock market.
Amongst all the acts the Glass-Steagall Act was an act instrumental in separating
commercial banking from investment banking and had the objective of curbing the
extraordinary risk taking capacity of the commercial banks in the stock markets.
Consequently most banks selected one or the other form of banking which suited their
area of concern or interest. Due to this separation of Commercial Banking from
Investment Banking lead to the creation of a separate industry for Investment Banking.
As the industry evolved the competition in the market of investment banking got
toughened and a chain of mergers and acquisitions followed them. Due to this the Glass-
Steagall Act was finally scrapped and was replaced by another act known as the Gran-
Leach-Billey Act in the 1990’s. This act was more lenient towards the bankers and
allowed commercial banking along with investment banking and insurance activities as
well. This was done in order to prompt the investors and the issuers to participate
increasingly in the international markets as the domestic markets of America had
saturated.
Investment Banks faced another challenge to retain their existing clients and for this even
they had to make their foreign presence felt and also generate new business. Investment
Banking has developed leaps and bounds the world over. Finance is as essential to run
business, as oxygen is to remain alive. So the cheapest and the most practical way to
mobilize vast amount of funds for any business is via Investment Banking, other sauces
would require other formalities and additional payments to acquire them.
The Indian story altogether has been more or less the same. The first Indian stock
exchange was set up in Mumbai and Ahmadabad in the nineteenth century and then
expanded to all the cities of the country. With the rapid industrialization in the country
and their expansion in numbers in all the cities helped the stock market to expand as well.
Investment Banking in India was pretty much unknown to all except a few small players,
until and unless the global giants entered the country. Investment banking in the country
was limited to merchant banking as the unknown handled most of them. The market than
was ruled by few scattered small players who made fast bucks out of the craze amongst
Indian investors for IPO’s in the early 1990’s. But by the late 1990’s these investors
became increasingly aware of the scam of these fly away IPO people who used to gather
money of these than unaware investors and disappear. Of cause, money markets and debt
markets were already in existence, but their importance paled significance when compared
to the rock licking stock markets of the early 1990’s, as Indian investors preferred the
latter lured by high returns, and ignoring the much higher risks
Presently a few survivors and the multinational giants that have come to the industry
dominate the Indian market. With the stock market coming under SEBI’s controls and
restrictions, the small investors have started tilting towards the debt and government
securities markets, leading to merchant banking losing much of its importance.
Dematerialization of shares has bought another significant change in the stock market thus
considerably reducing paper work of the registrars.
The introduction of derivatives in the market and the rolling settlement in 2000 further
reduced the interest of small investors in the stock market. But at the same time of writing
however, Indian individual same investors have found another mode of investment in the
stock market through investment in stock futures.
2. Foreign Institutional Investors
Institutional Investors are investors who make huge investments in the stock markets and
are a big support to the Indian economy. The effect of their Investment is there to such an
extent that withdrawal of money by them plunges the share market to its base and a big
investment by them results in a big gain in the days trading of the stock market. These
investors are more favored towards the companies, which are favored towards their
shareholders and look for corporate governance. Foreign Institutional Investors are a part
of portfolio managers; in fact they should be stated as advanced portfolio managers who
dynamically enrich their portfolio with stocks, which are good according to their
knowledge. Investment made by them is in huge amounts and that helps the economy but
their primary concern is their portfolio.
In fact the Foreign Institutional Investors wrote story of success of the Indian stock
markets. The big investments which began by investments in their own markets first and
the success at Wall Street gave them the support and confidence to venture in the Indian
Territory. In this era of globalization every institution, which is growth, oriented cannot
satisfy its capital requirement from the domestic market and has to wander elsewhere for
its capital requirements. On the other hand other developing countries do welcome such
investors, as they would do nothing but help in the development of their economy.
Foreign Institutional Investment in India began in 1993. In the wake of this reform of
foreign investment this process was welcomed with open arms in a country, which had
stayed away from much of these methods of investment. Investment became permanent in
the country and American investors started opening their shops in the country and the
country saw heavy investment in the beginning, as there was a lot of scope for investments
in unexplored stocks. India had an investment of 11 billion dollar in the year 2000, which
was 7-8 % of the investment that was dedicated to the Asian countries.
The number of registered Foreign Institutional Investors in India has grown over 500.
These investors are of different types. They comprise of pension fund, mutual funds,
trusts, asset management companies, and portfolio managers. Of the 500 registered
investors only a small segment is active in the market and is regular investors. The big
names include Morgan Stanley, Templeton, Capital International, and Jardine Fleming etc.
Over the years these institutional investors have been given freedom to invest in any
security of their choice, which includes derivatives in both secondary and primary
markets. Initially the investment ceiling was 24 % and then was raised to 30 % and is
currently at a level of 40 %.
Foreign Institutional Investors initially picked up on blue chip companies for their target
of investment and gradually moved on to midcap, they went through the learning curve on
the way of investment at the Dalal Street. And because of this learning curve they moved
to other stocks apart from the index heavy weights. Clearly research is a major guiding
force.
Fluctuating Flow of Investment
Foreign Institutional Investment is a sought of investment which is quite sensitive to any

glitches that can possibly arrive in the market and flow away with their investment in the
markets just to play it safe. In fact it’s because of their constant withdrawal and injection
of money brings steep corrections in the stock market or a sudden rise in it. It is regarded
as hot money, which stays only till the market remains stable and flies away at any signs
of instability. But labeling the entire form of Foreign Institutional Investment as volatile
would be wrong, as the other forms are not so volatile. The Hedge funds are generally the
volatile form amongst the others.
When a foreign institution plans to invest in an emerging market it takes all-legal, tax and
the forex aspects into consideration just to be on the safer side and then decides the
amount of investment. This is done to gain an understanding on the returns obtained from
the developing market in comparison of the returns obtained on that amount of investment
from the developed markets. This rate of return on investment is 18 % for India. There
may be factors, which affect these investments in short run, but the macro economic
factors would stabilize them in long run.
At the time of recession the steep fall begins with the huge withdrawal of money by the
Foreign Institutional Investors. This withdrawal or negative flow of income continues as
long as the investors don’t find it safe to re-invest. As they are a major player for
investment in the stock market revival from recession is not possible unless they find it
feasible. Investors have kept on complaining of their dissatisfaction from the infrastructure
of the country.
But apart from this the amount of investment has just kept on increasing looking at the
attractiveness of the Indian market as a whole. There have been advancements in the form
of online trading systems being introduced, parallel with the success of de mat and the
major advancements by introducing the derivatives and having rolling settlements. All of
these have held together the confidence of the investors and have made them believe in the
Indian stock market.
The confidence, which is being exhibited by the Foreign Institutional Investors, can be
seen from the events that have happened in the recent past, which include the bloodbath at
NASDAQ, negative mind sets of the analysts, political uncertainties surrounding the
Kargil war, terrorist attacks on Mumbai etc. Irrespective of all these there was no sign of
leaving India completely as one of their investment countries. They are now an integral
part of the
Indian stock market, the fact that in many companies they hold more than 24 % of the
stake makes them ever more crucial and there sudden withdrawal of money can create
havocs’ in the stock market and this also affects the thinking of common investors as they
begin to doubt as why are the foreign investors withdrawing their money and this cycle
leads to correction in the markets rather than a constant climb. But these investors
immediately take care of the situation and whenever there has been a downfall in the
market they have tried to correct it showing that they are concerned of the market and
cannot withdraw money for long.
2.1 Transparency on the basis of Investment
Indian stock markets movement many a time is not based on as per the expectation of the
investors. This can be seen by the following case.
Case
As per the rules every company has to declare its financial results to the stock market. In
this case ITC had good results were in they saw a 50 % rise in their profits due to
increasing business. Now as per the expectations of investors as well as the shareholders
the company’s stock price should appreciate and do well in the next market opening. But
it dint turn out to be as per the expectations and the stock lost tenth of its value soon after
the declaration of results. On the other hand, Philips India another company, which had
not so good results, did something, which was unexpected after the results. Philips India
gained around 100 % on its market value within 15 days. Such unexpected moves confuse
the common investors on whom to invest and on whom not. The reason for this
unexpected rise in the stock value of Philips India was there articulated future plans and
strategies explained to a select group of Foreign Institutional Investors in a fairly
transparent manner.
The case of Infosys also tells us how transparency helps gain more in the market. Infosys
has ushered for a long time a great degree of disclosure and transparency and also adopted
US GAAP (Generally accepted accounting principles). This caught up with the mind of
Foreign Institutional Investors, which gave them the faith of investment and clear rules to
invest and they made big investments in the company. It has helped Infosys to such an
extent that they have now become the first preference for any investor and also for the
stock it reached its ceiling.
Foreign Institutional Investors like a great degree of transparency in the working of a

company. As far to what extent, globally investors like transparency to the maximum and
the company has stated its projection, vision and strategies of management, which are not
in the ambit of statutory framework. Now because more and more companies want
Foreign Institutional Investment in them and foreign investors want transparency in them,
transparency in a companies working has found gates in the country.
Companies now help these investors know their medium to long-term goals, which help
investors finding a suitable company for their investment. In fact now companies have
started inviting the investors to help them disseminate their vision for the company’s
plans. Transparency followed by the foreign investors have done world of good to the
thinking of the domestic institutional investors, and because of their strict rules and
regulations on transparency used have now made domestic investors cautious of the same.
Thus as domestic investors also don’t invest before they find a company according to
their norms and thus because of this legacy bought by foreign investors has helped even
the common investors to do the same. Thus the whole country adhering to transparency in
companies strategies, view, rules and regulation. On the other hand even the companies
tend to gain on adhering to this as their future can be seen and as investors invest huge
amounts they tend to gain on the market value. As a trend in the start followed by some
has become a norm for all the remaining companies. Almost all of the major giants are
following transparency in their reports. What used to be mundane stuff, filled with false
information is now opaque and clean to believe.
Foreign Institutional Investors revolve around entrepreneurs, which follow a dynamic

approach and which work in an emerging area of technology. Companies which are
looking to grow and want to be recognized globally follow paths laid by the foreign
investors and as these investors invest more and more amount in them they are recognized
globally as well. They focus on companies, which have restructured and refocused
themselves according to the changing world.
The hot favorites amongst the foreign investors include Infosys (24.8% stake), Satyam
Computers (30% stake), Zee tilefilms (28% stake), HDFC (30% stake), NIIT (24% stake),
Mastek 19% stake), WIPRO (6% stake) etc. Since all the Foreign Institutional Investors
are long-term players they tend to put pressure on the policy makers to ensure continuity
of sound economic and business policy.
Large portfolio investors prefer to have continuous talk with the company men to have a
feel of things going around the company to be well aware of any move that can be
possibly taken and what affect it can have on the company’s market value. In the process
they tend to advise them as per their knowledge and this helps to bring foreign know how
in the company. In cases where the company tends to take harsh decisions away from the
shareholders point of view, and don’t even adhere to the advise provided by the foreign
investors leaves 2 options for these investors. Either to get on with it or hope everything
would be fine or just get out of it. Such voting is known as the voting with the feet.
Reliance Industries case is a representative of voting with feet done by the investors.
Reliance Industries got itself entangled into duplicate shares in 1995. It had reneged the
promise it made to the foreign investors of not diluting its equity. Debacles such as these
created negative perception of Reliance Industries in the market, especially in the mind of
Foreign Institutional Investors. By December 1995, RIL’s market capitalization lost was
about Rs. 6000 crore. This was a contrary of the reputation of the investors but they have
even done justice to it.
Same was the case of Arvin Mills Ltd. The company embarked on a plan to become world
leaders in denim. Apparently it has gotten itself into troubles. Its financials got worsened.
So did the Foreign Institutional Investors interests in the company.
A. V. Birla is an example where the company restructured the business of Grasim

industries by consolidating cement business and attracted the attention of Foreign
Institutional Investors and these investors then did their job of investing huge amount of
money and the stock gained in the market. Typically no Foreign Institutional Investor
wants to take a place on the board of a company. They don’t want a reputation of running
a company, but do the job which they do best “investing”. They in fact evaluate whether
the company is running according to their needs or not and do the needful for them to do
so.
1. Future of Foreign Institutional Investors
The clout of these foreign institutional investors is immense. The money they posses are
close to around 20 trillion dollar. Even a tiny bit of this can do world of good to emerging
markets. They are the force to reckon in the global market. The move to increase the
ceiling of Foreign Investment in the country will do a world of good to the countries,
which already have foreign investment in them and look to raise the stake of foreign
investment in them. HDFC, which already has 30 % foreign stake, wants to increase it
with the increase in the ceiling. On the other hand Foreign Institutional Investors cannot
afford to avoid a market as big as India.
There have been lots of ups and downs in the country, but post-reform the corporate story
in the country has been good. The Indian corporate sector has adapted to the foreign
norms and not only has it structured itself, it is also developing with a good infrastructure
to be a perfect place for investment.
3. Indian ADR (American Depository Receipts)
The Indian as well as the American economy was going through a slowdown and the
investors were worried of a steep fall in the stock prices especially for the technology
stocks in the US markets. The NASDAQ was controlling the Indian information
technology stocks and avoiding the older economy stocks. Indian IT stocks were given
preference as of their major holding in the US markets.
The US market crash continued fears of recession and non-stop earnings warnings. This
flow of negative news continued which resulted in pulling down of the Dow below 10000
levels. This pull down did not spare the Indian ADR’s as well and stocks such as WIPRO,
Sify and Silverline were amongst the major losers. The liquidity on most of these counters
declined substantially.
Information technology, Communication and

Entertainment companies Meltdown
Issue of ADR’s in the US market from the Indian companies became a hit. The Indian
companies now realized that to be a major player on global basis they have to issue
ADR’s in the American market. This was a source of major capital that was required by
the growth-oriented companies of India. Companies that were growing fast knew that
issuing ADR’s could fulfill their requirement; this helped the Indian companies to tap the
previously untapped resources.
Old economy companies had taken advantage of the ICE meltdown. Old economy
companies have forced buying for them in the US markets through this meltdown, as it
was the other way round when the markets were stable. Amongst the people who invest in
the ADR’s there are a group of strong believers in the Indian companies, they believe that
the Indian companies are insulated to unlikely events unlike the other companies of
different regions.
The Indian pharmacy major company Dr. Reddy’s Lab was listed in the NYSE at a slight
premium than its domestic stock price, a change of a percent. The company was able to
raise 132 US million dollars through their ADR issue. Even the IT major Satyam did the
same and raised 1408 million US dollars through their ADR and were listed in the NYSE
at a staggering 17 % premium. The situation today is quite different; India has lost its
charm amongst the US investors.
An increasing trend of seeking foreign investment through ADR by the Indian companies
is getting faith back in them for the US investors. It is perhaps India’s potential for rapid
growth from the current deeply depressed levels of gross domestic product, fueled by
thriving consumerism, entrepreneurial dynamism and the positive effects from
globalization, that make investment in India a series thing to look for the foreign direct
investors.
India’s knowledge-based industries, which include the software companies,

telecommunication, pharma, media have grown at a real fast pace in the past. They have
acquired many companies on domestic as well as foreign soil, which has given them vast
needed resources, and growth needed to be recognized as global giants.
2. Capital Raised through ADR
Indian firms rose approximately 4 billion dollars through ADR’s up to April 2001,
compared with 1 billion dollar in 1999-2000. This makes Asia’s biggest issuers of ADRs.
According to the data from NASDAQ India was the country with the most ADR’s issued
amongst all the countries from Asia. Investors have been flocking towards India because
of its enormous growth potential offered by Indian knowledge-based and manpower
related companies.
Indian software companies cutting edge technology and e-commerce drive help them
score over the other companies. Lower manpower cost and high talent also make Indian
firms attractive. During the first half year of 2000, capital raised by non-US companies
using depository receipts was 16.5 billion dollar. Innovation and technology driven
companies are critical to develop economies like India. With their abilities to generate
employment and drive the economy, it is essential that these companies not only
undertake acquisitions and explain existing operations but also set up new units abroad.
4. Foreign Direct Investment (FDI)
If any of the event worldwide that would have been regarded as a remarkable event in the
past decade than that would certainly have been the change in the hue of capital inflows.
The flow of capital from one country to the other prior to this was via bank loads and
other forms. In fact as per the data records 82 % of the capital flows in 1975-1982 was in
the form of bank loans and other official development and only 11 % of the capital flow
was in the form of Foreign Direct Investment. But the times have changed and it is the
other way round now. Now the capital flow from Foreign Direct Investment and portfolio
investment constitute of 55 % leaving the rest for bank loans and other forms.
3. Foreign Direct Investment In India (FDI)
In India there has been a steady rise for Foreign Direct Investment and for portfolio
investment as well but the latter as been a bit dicey for a bet in a developing country like
India. This is because portfolio investment is not a safe bet for a safe playing nation and
for amateurs who are not so known to the share market stuff and Foreign Direct
Investment becomes a safe bet for these cautious investors. India has a strong potential to
attract Foreign Direct Investment and can maintain a steady flow of it and the reason for
this is a big domestic market, ready availability for cheap and skilled workforce etc.
But even after this situation the country hasn’t been able to attract much to its potential for
investment and the supply of cumulative inflows has been around the 20 billion dollar
mark and never crossed it, which is very low even when compared to the other developing
countries like China, Singapore, Korea etc. While the country is in needs of huge sums of
capital in the form of Foreign Direct Investment for the creation of productive assets and
for the development of basic infrastructure in the country, the actual inflows in many cases
are coming in the form or Mergers. And on top of that a large portion of money is
concentrated towards a select few sectors and those in real need are ignored only because
the investors don’t find enough profit on investment. As per the data 80 % of the flow was
concentrated to only 6 sectors for a decade between 1991-2000 and the remaining 20 %
was provided to around remaining 30-odd industrial sectors.
The basic reason of the countries inability to attract much of the Foreign Direct
Investment was the thinking or the mindset of the Indian investors of avoiding foreign
investment because of its 200 years of colonial rule. However in general the basic reason
to attract Foreign Direct Investment is general orientation towards exports, for the exports
to improve the country will have to improve its infrastructural facility and the lack of
proper lucrative infrastructural facility is the reason India being behind in terms of Foreign
Direct Investment.
There has been a huge difference between the approved and actual amount of foreign
inflows because of the bureaucratic impediments of the country. The country has laid
down certain foreign exchange acts to provide support to the inflows. Studies reveal that
before setting up an operation in a developing country will have to choose between
capital-intensive and labor-intensive form of industry and the Multi National Company
expanding its operation to other country would go for the latter as because of the unknown
atmosphere of the unknown territory can be a cause of worry for the investors.
Investors prefer labor-intensive industry to the other because labor can be trimmed and
trained as per the requirements and so is the reason of India becoming a hot destination for
the foreign investors. But this has its minus point for the overall development of the
economy as weighing in on this would require relatively less capital as for the other
investment soaking in huge capital. So what India can do is to help promote export for
investors and that would help in the development of the existing infrastructure facility,
roads, ports etc.
Foreign direct investment has been successively liberalized in the last several years
commencing with the new Industrial policy in 1991. Foreign Direct Investment in the
country, since 1991 have been around 19.86 billion dollar and the investment from
institutional investors has been around 11.91 billion dollar. This has helped the foreign
exchange in India which stood to just 2 billion dollar to move up to a mark of 37 billion
dollar. It seems that the government now sees Foreign Direct Investment as an
encouraging thing to stable the Indian economy, which it has done quite successfully.
Foreign Direct Investment was still not freely allowed and there were certain do’s and
don’ts for these investors. They were allowed to sectors, which were weak according to
the government and that to with limited access to some of them. Though it was the
government, which required Foreign Direct Investors to invest, but was done with some
small steps taken by the government towards their access to investment. Some sectors
were completely untouched which included the agriculture and the banking as well.
To improve upon this situation there were acts introduced of which Foreign Exchange
Management Act was laid down on June 1st 2000. The provisions laid down included
automatic route to sectors were earlier there were caps on some sectors for Foreign Direct
Investment. Under FEMA the scope of activities of branches of foreign investment in
India has broadened. It also allowed many Non resident Indians to freely invest in Indian
ventures with only a few conditions. Foreign Direct Investment up to 51 % in export-
oriented route is allowed under automatic-route and investment above 51 % requires
approval from the Foreign Investment Promotion board.
This looks good for the country, but Foreign Direct Investment does not accelerate alone
with dismantling regulatory entry barriers. While dismantling regulatory entry barriers
helps the overall atmosphere of welcoming Foreign Direct Investment it should also
include improving infrastructural barriers, state level reforms, exit policy, consistency in
laws, and quick redress of key concerns and simplification of fiscal laws. One hopes that
the government works towards these issues and help allow a free flow of Foreign Direct
Investment.
Global Foreign Direct Investment
Globalization has resulted in impressive growth of multinational companies and cross

border mergers. Global Foreign Direct investment constitute of around 14 % of the capital
formation around the world. Multi National Companies have now become a force to recon
in the global economic transactions. They number about 63,000 parent firms with about 6,
90,000 affiliates. They span virtually all the countries and their economic activities. The
world’s largest Multi National Companies are placed almost exclusively in the developed
countries, and are the drivers of all the manufacturing activities. They hold around 2
trillion dollar of foreign assets, employ over 6 million people worldwide and their foreign
sales contribute to around 2 trillion dollars.
The familiar faces of globalization are Foreign Direct Investment and in particular
inter regional cross-border mergers. These Multi National Companies become such giants
by acquiring ownership of companies on foreign soil through Foreign Direct Investment.
The growth of these Multi National giants has been visible in most prominently in the last
decade. Virtually all the countries have made necessary provisions for these companies to
enter the host countries soil and carry on with their expansion process.
This is done because these Multi National Giants not only lead to the Foreign Direct
Investment in the concerned country but also lead to economic and social development of
these countries. Going for these Mergers and Acquisitions is the easy way for these
companies to gain cross-border market dominance, strong position in new market, gaining
market power and all the knowledge required from the host nation. They though take
control of the assets of the acquired company but also bring in much needed foreign
resources for the countries good. These Multi National Companies account for one-tenth
of global GDP. The number of parent companies has grown from 7,000 to a staggering
40,000 at the end of 1990.
Foreign Direct Investment is concentrated to a handful of a country. And the pattern of

Foreign Direct Investment in developing countries is even more skewed. Their flow in
inconsistent and unequal and some of the least developed countries received a small part
of the total Foreign Direct Investment that should have been done. Multi National
Companies often tend to carry on their unfair trade practices and sometimes conceal the
profits of the parent company. This has to be tackled by the host nation by addressing
rules abiding proper execution of business by these companies and it is only these
attempts that would help the host nation reap their benefits from the merger that has taken
place with the conglomerate.
While Foreign Direct Investment has grown worldwide, as a matter of fact most of it has
been directed towards the developed nations. Foreign Direct Investment increased to a
record 865 billion dollar in 1999 of which the developed countries attracted 636 billion
dollar and there can be no doubts that the leaders were US and the UK in both forms the
recipients as well as the investors of Foreign Direct Investment. On the other hand India as
compared to these nations has been on the negative sides with recording decline instead of
increase in its Foreign Direct Investment. Automobiles, pharmaceuticals and food,
beverages and tobacco were the main companies when it came to cross-border mergers
and acquisition.
In the developing nations, Latin America and the Caribbean lead the race for the most
amounts of Mergers and Acquisitions attracted. In the Asian continent the activity
exceeded 9 billion dollar, which was led by Korea. Concerns are raised again by the host
nations for these conglomerates gaining inappropriately from their business activities as
they dominate the host market and the medium and small firms are a mere spectators of
this injustice.
Also complained by the host nations is that mergers and takeovers of existing companies
does not add up to the per capita productivity of the country and it just takes over an
existing company whose production was already added to the countries per capita
production. This transfer of ownership is often accompanied by lay-offs of the existing
employees, shut down of certain small units as well.
Cross-border mergers and acquisitions are sometimes deliberately used to reduce

competition from a neighboring country and this is easily done if the company is a big
global player. Such matters lead into social, political, and cultural realms. It has all got to
do with how much foreign intervention a country can face. If the country were aggressive
for its growth and development it would go for maximum exposure to foreign intervention
and if a country were conservative it would do otherwise. Also if a country has a string
position or is developed it would opt for least foreign intervention.
Indian Capital Raising
India has raised capital in the form of deposits from other nations between the periods of
1991 to 2000 for various reasons. Indian Millennium Deposits (IMD) was the third time
raze of capital, which helped India accumulate 5.8 billion dollar from across the world.
The first exercise of this type was Indian Development Bonds rose in 1991 and raised 2
billion dollar. This was necessitated in the context of a variety of adverse factors that
enveloped the Indian Economy.
During 1998 India raised over 4 billion dollar in the form of Resurgent Indian Bonds. At
that time the reason of this raising of capital was the economic sanctions imposed by the
US consequent to Pokhran II, slow Foreign Direct Investment inflow, general economic
recession and the contagion effect of South East Asian Crisis.
Indian Millennium Deposits was therefore a hat trick of such capital raising exercises and
the reason for this was the grave impact of higher oil import billon the balance of payment
situation besides the low Foreign Direct Investment formation and a lowering of credit
rating. All the three issues are hailed as great success by the Indian government, but the
critics have their own response on the issues and regard the 3rd attempt as too costly.
Indian Millennium Deposits were raised by the SBI for its own reason stated as
strengthening its base. It employed services of the foreign banks and a few Indian banks
giving them a tenor of five-year with the coupon rates of 8.5 % (USD) 7.85 % (GBP) 6.85
% (EURO).
Foreign Banks the Real Players
Foreign banks grabbed this opportunity of investing and building up substantial standard
asset portfolio in India for the purpose of investment in Indian Millennium Scheme. These
loans were self-liquidating and carried zero default risk. On this these foreign banks got a
solid service charge for their services. SBI on the other hand passed on half of the amount
mobilized from these foreign banks at an interest rate of 10 % per anum.
The Dollar Deposits

The entire proceeds of the dollar deposits cannot be considered as new inflow. At least 25
per cent of these deposits are mere transfers from FCNR pool of deposits. As Indian
Millennium Deposits carry higher interest rates, some FCNR funds have flown into Indian
Millennium Deposits kitty. Even in the past this cannibalization up to 25 per cent has
taken place between FCNR deposits on one hand and Indian Development Bond on the
other. A more serious problem is with regard of the Indian rupee transforming into IMD
dollar funds trough hawala route. The percentage composition of these funds cannot,
however be quantified. Even the earlier to issues had Hawala funds in them.
Cost Factor
The finance ministry maintains that the funds claimed through Indian Millennium
Deposits are not very expensive, but many critics of this scheme question the assertion of
this fact. The proper way to compare these deposits and there cost would be comparing
them with US treasury bills of comparable maturity. Presently, interest on five-year US
treasury bills has shot up to 5.65 per cent, as against 8.5 per cent on Indian Millennium
Deposits which means a huge gap of 285 basis points.
If going as per the current movement of appreciation of dollar and rupee, it looks that the
cost of these Indian Millennium Deposits would be very expensive. However a substantial
part of these would be converted to external reserves of Reserve Bank of India at a lower
interest rate. While the dollar appreciation may not affect the external reserves, the fact
that they yield very low interests renders the Indian Millennium Deposits effectively
costlier.
After having good external reserves of around 36 billion dollar why did India embarked
upon this costly plan. India’s repeated efforts to strengthen the rupee by selling off its
reserves of dollar have gone in vain. In fact the Reserve Bank of India has only dissipated
its dollar reserve by doing what it was trying to. Will India somehow manage to
strengthen rupee by its strategic moves, well such value enhancement depends more on the
fundamentals of the economy rather than such forceful selling off foreign reserves.
If what affects rupee and what does not is accepted than why is Reserve Bank of India
accumulating so much of Foreign Reserves when rupee itself is not stable. Perhaps the
Reserve Bank of India’s pro-activeness related to rupee and its sell offs can only be to
counter the speculative forces in the market. One another reason that can be considered is
Reserve Bank of India expects that the flow of foreign currency in the future would be
really slow and that is one of the possible reason of this accumulation of foreign reserve.
Out of the 5.8 billion dollar of issue through Indian Millennium Deposits 60 % of it would
go to reserves and the remaining would be used to bifurcate the annual borrowing that
India has.
The Indian government all in all is not able to capitalize on its borrowings in the form of
Indian Millennium Deposits. So the Reserve Bank of India has to give its foreign
exchange policy a relook, not necessarily change it but off course to the extent that it
doesn’t have to carry on such borrowings. Otherwise the Millennium borrowing would not
just be a millennium borrowing but would become a regular exercise, which would go on
with different names and sizes only with higher costs.
5. Introduction to Mergers and Acquisitions
Mergers and Acquisitions
The term mergers and acquisition is a corporate related term. It includes corporate finance,
corporate strategies which are undertaken by organizations to acquire other business units
or other organizations. In mergers and acquisitions one organization basically buys or sells
other organization. The organization would either be of the same sector or of a different
sector. This helps the existing organization to gain an additional advantage of the acquired
company and its long held expertise of that field. Mergers and Acquisition and corporate
restructuring are a big part of the corporate world. If an organizations opts to sell one of its
acquired companies it may either do so to raise funds from its sale for other investment
purposes or its financial advisors no longer consider that part of its business unit as
profitable and selling an non-profitable business unit is a viable decision taken by the
financial advisors after the consent of the directors of the company.
Acquisitions
In an acquisition one company acquires control over the proceedings of another. .
Acquisitions can be private or public. This nature of acquisition depends on the acquire,
whether it’s listed in the public markets. Acquisitions are sometime friendly and
sometimes hostile in nature. This depends on the relationship between the two or if the
company acquired are rivals in the same sector. Mergers and Acquisitions are matters of
confidentiality and are often kept away from the public or media; there are several reasons
for this of which the first and foremost reason is the stock prices of the acquirer which can
either swing in favor or against that company and can affect the reputation amongst the
share holders. The news of acquisition is then released after taking effective steps.
“Demergers” and “Spin offs” are terms sometimes used when one company splits itself
into two for effective handling of the two or when the management of the company is not
able to handle the proceedings of one big company.
Methods of Acquisition:
An acquisition may be affected by

a) Agreement with the persons holding majority interest in the company management like
members of the board or major shareholders commanding majority of voting power;
b)Purchase of shares in open market;
c) To make takeover offer to the general body of shareholders;
d) Purchase of new shares by private treaty;
e) Acquisition of share capital through the following forms of considerations viz. Means
of cash, issuance of loan capital, or insurance of share capital.
Mergers
Mergers and takeovers are permanent and vest in complete control management and
provide centralized administration which are not available in combinations of holding
company and its partly owned subsidiary. Shareholders in the selling company gain from
the merger and takeovers as the premium offered to induce acceptance of the merger or
takeover offers much more price than the book value of shares. Shareholders in the buying
company gain in the long run with the growth of the company not only due to synergy but
also due to “boots trapping earnings”.
Mergers and acquisitions are caused with the support of shareholders, manager’s ad
promoters of the combing companies. The factors, which motivate the shareholders and
managers to lend support to these combinations and the resultant consequences they have
to bear, are briefly noted below based on the research work by various scholars globally
4. Distinction between Mergers and Acquisitions
When a company clearly takes over or swallows the entire business of another company
and clearly establishes itself as a new company it is known as an Acquisition. In legal
aspects the acquired company exists but the newly formed company handles its entire
proceedings and the buyers shares continue to trade in the markets.
In the case of a merger, it is a scenario where none of the companies being acquired or
acquiring has the upper hand. It’s a case where both the companies come together in an
agreement to run together as a single entity with a newly registered name. It is done for
the good of both the companies and is a mutual agreement between both. In case if the
companies are registered in the stock market, the stocks of both the companies are
surrendered and a single stock of the newly formed is listed in the stock market.
Types of Mergers and Acquisitions

There are basically four types of mergers.
1) Horizontal Mergers
2) Vertical Mergers.
3) Conglomerate Mergers
4) Congeric Mergers
1) Horizontal mergers: This type of merger occurs between firms that are direct rivals.
They are basically at the same level financially and are not in a position to acquire the
other completely. So they mutually agree to collaborate their proceedings by legally
forming a single entity.
2) Vertical Mergers: The consolidation of firms that have potential or actual buyer-
seller relationships. It tells us that the buyer has the capacity to acquire the financially
weaker organization. By directly merging with suppliers, a company can decrease reliance
and increase profitability. An example of a vertical merger is a car manufacturer
purchasing a tire company.
3) Conglomerate Mergers: Consolidated firms may share marketing and distribution

channels and perhaps production processes; or they may be wholly unrelated. There are
two types of conglomerate mergers: pure and mixed. Pure conglomerate mergers involve
firms with nothing in common, while mixed conglomerate mergers involve firms that are
looking for product extensions or market extensions.
4) Congeneric Mergers: Congeneric mergers occur where two merging firms are in the
same general industry, but they have no mutual buyer/customer or supplier relationship,
such as a merger between a bank and a leasing company.
.
5. Procedure of Mergers & Acquisitions
Public announcement: To make a public announcement the following procedure are

followed:
1. Appointment of merchant banker: The acquirer shall appoint a merchant banker

registered with SEBI to advise him on the acquisition and to make a public announcement
of offer on his behalf.
2. Use of media for announcement: Public announcement shall be made at least in one
national English daily one Hindi daily and one regional language daily newspaper of that
place where the shares of that company are listed and traded. This helps in making all the
widely and dispersals located shareholders aware of the event.
3. Timings of announcement: Public announcement should be made within four days of

finalization of negotiations or entering into any agreement or memorandum of
understanding to acquire the shares or the voting rights.
4. Contents of announcement: Public announcement of offer is mandatory as required

under the SEBI Regulations
Advantages of Mergers and Acquisition
The main benefit of mergers and acquisition would include increase in cost efficiency,
increase in market share, increased value generation. After acquiring an organization
either the whole staff of that company is retained or replaced. But in either case
management of different organizations handle situations differently and this can
sometimes be helpful for the acquirer. The company’s market capitalization also would
increase after acquiring the other firm to the extent of the value of that organization and
larger the market capitalization of a company more is its value in the market. Finally
acquiring is also a form of expansion of business and that would also result in increased
turnover.
Mergers and Acquisitions are also beneficial

 When a firm wants to enter a new market
 When a firm wants to introduce new products through research and development
 When a firms wants to achieve administrative benefits
 To increase market share
 To lower cost of operation and/or production
 To gain higher competitiveness
 For industry know how and positioning
 For financial leveraging
 To improve profitability and earnings per share
The most common motives and advantage of merger and acquisitions are :-
 Accelerating a company’s growth especially when its internal growth has hit a
paucity due non availability of resources. Internal growth wants a company to develop its
operating facility-manufacturing, research, marketing etc. But lack or inadequacy of
resources slows down the growth of a company. Hence to counter these problems a
company can merge or acquire an existing firm to remove all the obstructions from its
path towards growth.
 Enhancing profitability because a merger of two or more firms results in more

average profitability due to cost reduction and efficient utilization of resources. This may
happen because of :-
Economies of scale: - arises when increase in volume of production leads to reduction of

cost production per unit. This is because, with merger, fixed costs are distributed over a
large volume of production causing the unit cost of production to decline. Economies of
scale may also arise from other indivisibilities such as production facilities, management
functions and management resources and systems. This is because a given function,
facility or resource is utilized for a large scale of operations by the combined firm.
Operating economies: - arise because, a combination of two or more firms may result in
cost reduction due to operating economies. In other words, a combined firm may avoid or
reduce over-lapping functions and consolidate its management functions such as
manufacturing, marketing, R&D and thus reduce operating costs. For example, a
combined firm may eliminate duplicate channels of distribution, or create a centralized
training center, or introduce an integrated planning and control system.
 Diversifying the risks of business by acquiring that business whose flow of

incomes is not correlated. This says growth of business through combination of two
unrelated business. Combination of management and other systems makes the company
strong to face unforeseen economies of the market which otherwise the company being
single wouldn’t have surpassed
 A merger may result in further financial benefits to a company in many ways:-

By eliminating financial constraints
By enhancing debt position of the company. This would happen when various cash flows
of both the companies would get into a mix would help the company to waive off its
remaining debts from surplus cash that is available
By reducing financial costs. This is because due to financial stability the merged firm is
able to borrow at low interest rates.
 Limits the severity of completion for the merged company. This is obvious
because as the market share of the company increases so does its power to give a tough
time to its rivals. The merged firm can exploit technological breakthroughs against
obsolescence and price wars.
6. BHARTI –ZAIN DEAL ANALYSIS
Bharti Airtel is the leading telecommunication company of the country. The total
subcriber base only in India as per the data available is 152.8 million. So that’s massive
but that is expected if you are a market leader in a country with a population of around
120 crore. In fact Bharti would still see a lot of scope to expand in the country itself.
That’s what it is doing expanding in the country very fast, as well as abroad. Bharti is now
the provider of services to about 19 countries which is also expected to increase Telecom
sectors in India is quite hectic and filled with high competitiveness.
Zain’s business in Africa has lined a path to enter into African markets for Bharti Airtel
after signing up the deal to acquire its business. With this acquisition, it makes Bharti
Airtel to take fifth position in the world for its operating system in mobile industry. In
India after Tata’s deal with Corus this is the biggest deal made by Bharti not just for itself
but also for India. Tata’s deal stood to around 12 billion dollars. With this deal almost
more than half a million African users will be enjoying Indian brand. Although there are
many subsidiary companies involved like Bharti, this would be a remarkable performance
in Indian history.
Sunil Bharati Mittal on 31st March 2010 stuck a deal which he was looking for the past 15
years and is now done Bharti acquired most of the African assets of Kuwait’s Zain
telecom and the total cost of the deal was 10.7 billion dollars. Where 9 billion dollars and
1.7 billion through debt and the rest was to be paid in the following year, which was about
700 million dollars. The entire process was managed with 1.9% rate of interest. This deal
will give Bharti a firm foothold in the relatively untapped African markets, making it the
world’s fifth largest wireless company.
Before signing this deal, Bharti had attempted twice to spread its foothold in the growing
market of Africa through the acquisitions talks with MTN, which failed due to regulatory
issues related to the restructuring of MTN with Bharti Airtel. The reason of choosing
Africa for an acquisition was prominently for its population of more than 1 billion similar
to India and it has a geographical region, which is 10 times greater, which led to the un-
development of networks.
Bharti Airtel has aims to replicate its success story in India in the fast growing market of
African telecom market. With Zain’s taken over Bharti Airtel has gained Africa’s 42
million customers and not to mention the huge untapped market which Bharti can benefit
from in years to come. Zain’s profitability is lower than Bharti despite average higher
spending by its users. However, as per an estimate only one in two Africans holds mobile
phone and with Zain having a strong presence in most of the countries in Africa, Bharti is
well set to dream big in terms of global ambitions.
Bharti would consider itself as unfortunate not to stuck a deal with Africa’s biggest
telecom giant as for another reason which says MTN has now become its direct
competitor after Zain’s take over. The combined entity after Bharti-Zain deal has lead to a
group with approximately 160-170 million of subscribers, including 42 million subscribers
of Kuwait’s Zain. The establishment of deal was no big problem because Asia, Africa is
having a well-structured range available, which makes a big difference. Bharti used a new
business model the same as in India. As it focused on its infrastructure and services
appreciated outsourcing for technical and non-technical services. It is also managing to
have good inter personal relations with all its neighboring countries in order to manage
internal connections, which would eventually lead them in cost control and low tariff’s.
Bharti Airtel will be the first company in the world to go for a model such as “managed
capacity and managed services”. Although it is located in places like Sri lanka and
Seychelles, entering Africa with Zain deal will be a real boost for the company and its
revenues. Bharti is trying to understand its customers, as they are the priority, it is known
that in Africa its population uses talk time of 70-80 minutes approximately where as in
India it is around 500 minutes. The tariff in Africa is expected to be greater than India for
10 times approx; although the call rates offered are one paisa per second.
With Indian telecom market almost reaching a saturation point with some scope of
expansion in the inner part of rural India still left, but urban Indian market more than
saturated, Bharti Airtel’s move to go for geographical diversification of its business
operations is something that can be stated as clever move. In fact, now, even the stock
markets have given the thumbs up to the Bharti-Zain deal as the stock prices have soared
up since then.
Income earned by Zain in the year 2009 before the merger with Bharti from its business in
African and Middle East continents
INCOME DISTRIBUTION (IN MILLION $)
AREA
AFRICA MIDDLE EAST
4k 3375
2697
2k 1481
899
0k -37 850
NET INCOME REVENUES EBITDA NET REVENUES REVENUES EBITDA
Diagram (1)
It can be seen from the bar diagram that the Income earned in the form of revenues by
Zain for the financial year 2009 less in Africa then the Middle East. Zain earned revenues
of 2697 million dollar in Africa and 3375 million dollar for the Middle East. The Earnings
before interest and tax, depreciation and amortization were less in the African continent
and stood to 899 million dollar, whereas the earnings before interest, tax, depreciation and
amortization for the Middle East stood at 1481 million dollar. The net income which is
crucial was however in the negative zone for the African continent and was in a loss of 37
million dollar, but the Middle East business was in a profit with its net income around 850
million dollar.
Diagram (2)
With this diagram (2) giving us detailed information of how the roots of Zain has been
throughout the country, it can be clearly seen that places where the business has been more
are also the one which are not running in net profit. As in the case of Nigeria, the country
has huge revenues including their earnings before interest, depreciation, tax and
amortization but the net income is in negative.
It can be seen as the countries with maximum share of business are in losses and that can
be a problem that will be difficult to tackle for Bharti. Also the other countries though
having more business there net income earned is low. However Sudan is a country in
Africa which can be highly profitable for Bharti and which it would be looking forward to
reap its benefits from. Hence the overall business of Africa is giving a net negative
income, which is evident from diagram (1)
This was the case in the African continent, in the Middle East the business is not so huge
but the existing countries are giving net income in positives and that’s what is required for
Bharti. Syria, Iran, Iraq are the countries which have maximum business and are having
net positive incomes. Bharti has financed the Zain deal from a $7 billion USD loan – and
the remaining $2bn will be from Indian rupee loans - at a rate of 300 bps (3.00%) over
LIBOR. LIBOR is at an all time low of about 0.88%.
The 10-year average of LIBOR is 3.75% and if these low LIBOR rates to last too long. At
even 2% of LIBOR and a 300 bps premium and 8% for the Indian bit, Bharti will pay
$500m per year in interest. That means they have to improve EBIDTA by $500m just to
pay for the deal; currently EBIDTA is $1.3bn, so it’s got to scale by 40% for Bharti to get
a chunk. They can definitely improve some bits – tower costs in Africa have been 4x more
than India, which can be lowered and internal efficiencies can be improved. The local
mafia who take care of the lucrative deals and back-peddle commissions in Africa will be
tougher to handle where in India Mittal’s political connections would have helped in the
early stages.
Not taking short-term specifications in mind for the stock. If this deal is immensely
profitable, Bharti should hit new highs in the stock market as well; if it’s not and Africa is
a laggard the prices won’t move. The stock if seen currently is doing very good though the
amount paid for the deal is a bit but money is cheap nowadays and “expensive” is more
affordable than you think.
Interest rate fluctuation for LIBOR for the last 10 years
Conclusion
Although India has been on the back foot for Investment Banking in the beginning of the
industry, but from the time India has been recognized as a global power and all other
developed country see as loads of opportunity in the country, there have been regularity in
Mergers and Acquisition in the country. There are very few global giants who haven’t
given India a thought. In fact there are very few MNC’s who have not had their feet’s
grounded in India. Most Mergers and Acquisition were seen in the Automobile sector and
so are the results that are clearly visible and so is the development of the sector. Clearly
there lies a lot of scope for development of the country via Investment Banking.
7. Bibliography
Investment Banking by Subramanyam
Investment Banking by Amandio F. C. da Silva
www.nseindia.com
www.bloomberg.com

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RIZVI INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH Zain Khan

In partial fulfillment of the requirements of

The Summer Internship of

Masters in Management Studies

Rizvi Institute of Management Studies and Research

Under the guidance of

Prof. Umar Farooq Dr. Kalim Khan

1. Introduction to Investment Banking

2. Foreign Institutional Investors

Fluctuating Flow of Investment

Foreign Institutional Investment is a sought of investment which is quite sensitive to any

2.1 Transparency on the basis of Investment

Foreign Institutional Investors like a great degree of transparency in the working of a

Foreign Institutional Investors revolve around entrepreneurs, which follow a dynamic

A. V. Birla is an example where the company restructured the business of Grasim

1. Future of Foreign Institutional Investors

3. Indian ADR (American Depository Receipts)

Information technology, Communication and

India’s knowledge-based industries, which include the software companies,

2. Capital Raised through ADR

4. Foreign Direct Investment (FDI)

3. Foreign Direct Investment In India (FDI)

Global Foreign Direct Investment

Globalization has resulted in impressive growth of multinational companies and cross

Foreign Direct Investment is concentrated to a handful of a country. And the pattern of

Cross-border mergers and acquisitions are sometimes deliberately used to reduce

Indian Capital Raising

Foreign Banks the Real Players

The Dollar Deposits

5. Introduction to Mergers and Acquisitions

Mergers and Acquisitions

An acquisition may be affected by

4. Distinction between Mergers and Acquisitions

Types of Mergers and Acquisitions

3) Conglomerate Mergers: Consolidated firms may share marketing and distribution

5. Procedure of Mergers & Acquisitions

Public announcement: To make a public announcement the following procedure are

1. Appointment of merchant banker: The acquirer shall appoint a merchant banker

3. Timings of announcement: Public announcement should be made within four days of

4. Contents of announcement: Public announcement of offer is mandatory as required

Advantages of Mergers and Acquisition

Mergers and Acquisitions are also beneficial

 Enhancing profitability because a merger of two or more firms results in more

Economies of scale: - arises when increase in volume of production leads to reduction of

 Diversifying the risks of business by acquiring that business whose flow of

 A merger may result in further financial benefits to a company in many ways:-

6. BHARTI –ZAIN DEAL ANALYSIS

NET INCOME REVENUES EBITDA NET REVENUES REVENUES EBITDA

Interest rate fluctuation for LIBOR for the last 10 years

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