INVE$TMENT

BANKING
 History (contd..)
• Modern banking finds its roots in Italy in the
13th century.
• The cities financed its developmental
activities and wars through issuance of bonds
or from borrowing through public.
• World’s oldest known bank has its roots in
Italy. It’s The Monte di Pietà, or Monte Pio set
up in 1472.
 The need for Investment Banks
• First stock market in Antwerp Belgium in 1531– sans
the stock!!
• Limited liabilities companies came into existence in the
1600s to sponsor trade voyages to the East Indies from
countries such as Britain, France etc.
• Investors spread their risk by investing in several
different ventures at the same time, thereby playing
the odds against all of them ending in disaster.
• This kind of business model led to risk management .
• Dutch East India company was the 1st to allow outside
investors to purchase shares.
 The need for Investment Banks
• Share trading at the Jonathan coffee shop in
London.
• Investors who wished to buy or sell securities
posted the details at the coffee shop and the
trade happened.
• A formal stock exchange was built in 1773.
• NYSE came around 19 years later.
• Investment banks help companies and
governments and their agencies to raise money
by issuing and selling securities in the primary
market.
• They assist public and private corporations in
raising funds in the capital markets (both equity
and debt),
• as well as in providing strategic advisory services
for mergers, acquisitions and other types of
financial transactions.
 Whats the Difference??
Commercial Bank
• Individual or small to mid
sized companies.
• Loans to buy a house or
future education etc.
• Bank- Creditor & General
Public – Debtor
• Earns money through the
interest charged on loans
Investment Bank
• Companies/ Start-ups
• Borrows to finance the
growth of a company.
• Investors – Creditor &
Companies – Debtor
• Earns money through the
fees charged for providing
services
Why an Investment Bank
It performs the following functions

Portfolio
Raise Capital
Management

M&A Research
 Principal Businesses of Investment
Banks
• Arranges financing for corporations and governments.
1] Debt
2] Equity
3] Convertibles
• Advises on mergers and acquisitions (M&A) transactions.
• Asset Management Business
1] Offers equity, fixed income, alternative investments, and
money market investment products and services to individual
and institutional clients
2] For alternative investment products, the firm co-invests
with clients in hedge fund, private equity and real estate funds
 Principal Businesses of Investment
Banks
• Client Trading
• Sells and trades securities
and other financial assets
as intermediary on behalf
of investing clients.
• Proprietary Trading
Investment activity by the
firm that affects the firm's
accounts, but does not
involve investing clients.
 Investment Banking In India
• SBI was the first Indian public sector bank to set
up its investment banking division in 1972.
• ‡SBI Caps and IDBI Caps are two prime examples
of investment banks in India today.
• ‡Currently, there are 300 investment banks
registered with SEBI.
• ‡Currently, without holding a certificate of
registration
granted by the Securities and Exchange Board of
India,
no person can act as a investment banker.
Investments in
India
16000

14000

12000

10000

8000
Deal Value in Million
6000

4000

2000

0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source – www.livemint.com
 • Start-ups
• Mid-sized firms
Companies • Large firms
• Govt. Institutions
• Commercial Banks

• High Networth Ind.

• Venture Capitalists
Investors • Based on age group
• Based on profession
• Based on investing knowhow

• SEBI
• Rating Agencies
• Due Diligence firms
Functioning • Underwriters
• Stock exchange
• Brokerage Firms
 Value Parameters
1] ROI
2] Network
3]Risk factor
4]Fees/Charge/Cost
5]Familiarity/Relationship
6]Experience of the bank & the banker
7]Performance
8] Industry Knowledge
9] Personal Attention
10]Time taken to close a deal

http://www.ft.com
The Banker Sept 2011
Venture Capital n Investment Bank

New Business – Venture Capital

Expansion – Venture Capital with

IB acting as the intermediary

Exit Option – Through IPOs

handled by the IBs
FRONT OFFICE
 Front Office
• Pitching to various clients and institutions
• Setting the terms and conditions for any form of deal
• Trading of securities on behalf of clients
 In the process of market making, traders will buy and
sell financial products with the goal of making an
incremental amount of money on each trade.
 Sales desks communicate their clients' orders to the
appropriate trading desks, who can price and execute
trades, or structure new products that fit a specific
need.
 Brokerage Rates

Firm Brokerage for Delivery Brokerage for Intraday trading

SBICAP Securities
0.50% 0.10%
brokerage charges

Sharekhan
0.03% - 0.50% 0.03% - 0.10%
brokerage charges

Motilal Oswal
0.30% - 0.50% 0.03% - 0.15%
brokerage charges

Angel Broking
0.50% 0.02% - 0.03%
brokerage charges

ICICI direct
0.75% 0.15%
brokerage charges

HDFC Securities
0.50% 0.15%
brokerage charges

Religare
0.20% - 0.30% 0.02% - 0.03%
brokerage charges

Reliance Money
0.01% 0.01%
brokerage charges

www.niftyprediction.blogspot.com
• Research is the division which reviews
companies and writes reports about their
prospects, often with "buy" or "sell" ratings.
• Structuring has been a relatively recent
division as derivatives have come into
play, which involves creating complex
structured products which typically offer
much greater margins and returns than
underlying cash securities.
MIDDLE OFFICE
 Middle Office

Middle office usually consists of traders, analysts, and

managers who are knowledgeable of trading activities
but usually don’t engage in market activities
themselves. ( Chinese Wall Policy)
Risk Management involves
• analyzing the market and credit risk that traders are
taking onto the balance sheet in conducting their daily
trades,
• setting limits on the amount of capital that they are
able to trade in order to prevent 'bad' trades having a
detrimental effect to a desk overall.
• Another key Middle Office role is to ensure
that the above mentioned economic risks are
captured accurately (as per agreement of
commercial terms with the client) correctly
and on time (typically within 30 minutes of
trade execution).
BACK OFFICE
 Back Office
• Operations involves data-checking trades that
have been conducted, ensuring that they are
not erroneous, and transacting the required
transfers.
• Every major investment bank has considerable
amounts of in-house software, created by the
Technology team, who are also responsible for
Computer and Telecommunications-based
support.
200
180
160
140
120
Europe
100
80 USA
60 Asia Pacific
40
20
0
2007 2008 2009 2010 2011

IPOs by Region and Globally

Source – The Banker Sept 2011 Issue

 Front End Process (IPO)
1. Company asks for bids
2. Selecting lead managers as per bids
3. Prepare draft offer prospectus document for IPO.
4. Road shows for the IPO
5. Decide the issue date & issue price band with the help of
Issuer Company
6. RHP & IPO Application Forms are printed and posted to
syndicate members; through which they are distributed to
investors
7. Investor – Bidding for the public issue
8. Allocation of shares as per demand
9. Stocks listed on the market
 Institutions/Individuals in IPO process
• Lead managers,also known as Book Running Lead Manager
and Co Book Running Lead Managers.
• Registrars.
• Legal advisors.
• Auditors.
• SEBI.
• Credit rating agencies.
• Syndicate members.( generally banks )
• Investors (Retail Individual Investor (RII), High Net worth
Individual (HNI), Non-institutional bidders, Qualified
Institutional Bidders (QIB's).)
• Advertising agencies.
 Back-end process of an IPO
1) Issuer Company - IPO Process Initialization
Appoints lead manager as book runner.
Appoints registrar of the issue.
Appoints syndicate members.
2) Lead Manager's - Pre Issue Role
3) SEBI – Prospectus Review
SEBI reviews draft offer prospectus.
Reverts it back to Lead Manager if needs clarification
or changes.
SEBI approve the draft offer prospectus, the draft
offer prospectus is now become Offer Prospectus.
Back-end process of an IPO contd..
4) IPO should be graded by a CRA
5) Preparation of Red Herring prospectus
6) Investor – Bidding for the public issue
7) Lead Manager – Price Fixing
8) Registrar - Processing IPO Applications
9) Lead manager – Stock Listing
 Fees taken at diff stages of an IPO
SR NO Particulars % of Issue size
1. Lead Managers (0.2 – 1 )%
2. (3-4) %
Syndicate Fees, and Selling Commission

3. (1-2) %
Advertising, and Marketing Expenses

4. (1-2) %
Printing and Stationary Expenses

5. (1-2) %

Miscellaneous Expenses
-Filing Fess With SEBI, BSE & NSE, Registrar’s Fees,
Legal Advisor’s Fees, IPO Grading, Listing Fees,
Others

6. Total (8-10 ) %
 MARKETING OF IPO
 Press Conference
 Investors Conference
The prospective investors are called by invitation.
The Promoters and Lead Managers give
presentations. They reply to the questions of the
investors to boost their confidence. HNI are called.
Top brokers are also called.
 Road Shows
Road shows are becoming more and more popular
in India.
 MARKETING OF IPO contd..
 Newspaper Advertisements.
 Printing – Prospectus.
The company has to print approved prospectus and provide
enough copies to all intermediaries. If any investor asks for a
copy of prospectus it must be provided to him without any
fees. Sufficient quantities should be maintained at the
registered office of the company and with the Lead Managers.
 Printing Application Forms
Sufficient number of application forms must be printed much
before the opening of the issue. Each form must contain
abridged prospectus in SEBI approved format. It is compulsory
to provide stationery to all underwriters and brokers. They will
arrange distribution to their sub- brokers and other clients
 MARKETING OF IPO contd..
• The reputation of a merchant banker could
expand a firm’s investor base at a lower cost
than the firm can, since the promotional
efforts of a merchant banker on behalf of the
firm would be more creditable.
 Networking and Promotions
• Customer Relationship Managers building the trust
• Networking via already existing clients
• Pitching by interaction with the CEOs and CFOs of
companies
• Hiring people from other firms with strong network
and good customer relationships
• Holding roadshows
• Holding seminars to attract investors
• Structured products and services to attract customers .
Eg. ICICIdirect money Kitchen
 Need Gaps in the IB sector
• Front End
IB is still at a very nascent stage in India and
hence needs to be developed and promoted
properly.
The trust factor is still not been built up amongst
the companies and investors. Here there is need
of trained analysts to do the same.
Lack of Investor knowhow
Still concentrated only on the metros. Need to
move to the tier-2 and tier-3 cities to tap in more
potential investors.
• Back End
Need to develop more robust risk
management systems.
Use of better technology and systems required
for 2 main purposes
1. To keep track of an investor’s database better
2. Bring in faster and more intelligent systems
 Thank You

Shweta Kucheria
Ram Shukla
Anand Kumar Mishra