NCCMP PROJECT

ROLE OF INVESTMENT
BANKERS IN INDIAN STOCK
MARKET
An empirical study
By: Abhinav Aggarwal
Contents

Acknowledgement.......................................................................................................................................2
Introduction.................................................................................................................................................3
Evolution of investment banking in India....................................................................................................5
Registration of investment bank.................................................................................................................6
Grant of certificate......................................................................................................................................7
What is Investment Banking?......................................................................................................................8
Provision of financial advice....................................................................................................................8
Mergers and Acquisitions (or "M&A").................................................................................................9
General financial advice.........................................................................................................................10
Capital raising........................................................................................................................................10
Ways of Raising Capital......................................................................................................................11
The Initial Public Offering and the Regulatory Framework........................................................................12
The IPO Process.....................................................................................................................................12
The Regulatory Framework for IPOs......................................................................................................14
The Role of the Investment Banker in the IPO Process..........................................................................15
Competition in the Indian Investment Banking Industry...........................................................................19
Drivers of Competition..........................................................................................................................19
Capabilities of an Ideal Investment Banker...........................................................................................20
List of some investment banks in India......................................................................................................21
Current and Expected Future Trends.........................................................................................................26
Bibliography...............................................................................................................................................27

1
Acknowledgement

A project report or a research cannot be completed without the assistance, guidance and
inspiration of knowledgeable people.

I therefore will like to pay my special thanks to my institute and my faculty who gave me this
great opportunity to complete this project.

I am thankful to my project guide Mr. Kumar Bijoy who advised me the area for project. His
excellent guidance, helpful advices played a vital role in completion of this project.

I am also thankful to my Parents and Friends who showed me the right path and supported me all
through the development of the project.

This project has been proved rewarding in more than one way and I am thankful for this to all
above mention and to all those who remained unmentioned here.

Abhinav Aggarwal
Introduction

Investment banking is a specific division of banking related to the creation of capital for other
companies. Investment banks underwrite new debt and equity securities for all types of
corporations. Investment banks also provide guidance to issuers regarding the issue and
placement of stock.

In addition to the services listed above, investment banks also aid in the sale of securities in some
instances, they also help to facilitate mergers and acquisitions, reorganizations and broker trades
for both institutions and private investors. They can also trade securities for their own accounts.

Investment banking is the process of raising capital for businesses through public floatation and
private placement of securities. The investment banking industry plays an important
intermediation function in all market economies. The regulatory framework for initial public
offering, competition within the India. An investment banking industry and capabilities of an
ideal Investment Banker are also discussed. Investment banking in India is a relatively new
phenomenon exhibiting low level of competition. There are presently few registered Licensed
Dealing Members (LDMs) engaged in investment banking activities. Most of the capabilities of
an ideal investment banker are also lacking. Recommendations are thus made for Indian
investment banks to improve on these capabilities in order increase the competition within the
investment banking industry and subsequently attract more firms to go public.

Investment banking is the process of raising capital for businesses through public floatation and
private placement of securities. Investment banks work with companies, governments,
institutional investors and wealthy individuals to raise capital and provide investment advice.
Originally, investment banking meant the underwriting and distribution of securities. Today
investment bankers also invest a lot of effort into helping companies design deals and the
securities to finance them, and then use their brokerage arms to sell the securities to the investing
public, both retail and institutional.

The investment banking industry is central to the market-based economy. By bringing together
entities in search of new capital and investors, usually institutional investors, the investment
banking industry play an important intermediation function in all market economies. Just like
most developing
countries, investment banking in India is a relatively new phenomenon. However, if the
experience of other counties is indicative of what is likely to happen, then it is likely that in the
future, companies will increasingly migrate from bank finance to capital market financing for
their long term capital needs.

The India Stock Exchange (GSE) for instance started with 3 Licensed Dealing Members
(LDMs) in 1990. Currently, it has 14 LDMs. By any standard, this has been a growing industry.
Unfortunately, the growth has been uneven. Only a handful of firms have had a significant
impact on the market. The Exchange has 26 listings of equities, 4 corporate bonds and 14 LDMs.
This implies that there are approximately 1.9 listed companies per LDM. In many cases such as
Ashanti Goldfields Company, India Commercial Bank and SSB Bank, the Initial Public
Offerings (IPOs) involved offloading of shares held by the government with relatively little
capital going to the company‟s involved for real investment. With a less efficient financial
market like India‟s, plagued with various problems in accessing long-term funds, any company
intending to raise capital find itself in a precarious position. It is very crucial then for such a
company to select an ideal Investment Bank to guide its efforts in raising long-term capital.

Financing of a company‟s investments is seen as part of its financial planning process. Financial
planners need to evaluate every aspect of this decision process in order to come up with the best
source and approach to raising long- term funds. An important consideration in taking this
decision includes the selection of an Investment Banker to help the business in raising the needed
funds. The decision variables in this direction will depend on established standards the company
can rely on in order to identify the most qualified Investment Banker (Manaster and Carter,
1990).
Evolution of investment banking in India

The origin of investment banking in India can be traced back to the 19 th century when European
merchant banks set-up their agency houses in the country to assist in the setting of new projects.
In the early 20th century, large business houses followed suit by establishing managing agencies
which acted as issue house for securities, promoters for new projects and also provided finance
to Greenfield ventures. The peculiar feature of these agencies was that their services were
restricted only to the companies of the group to which they belonged. A few small brokers also
started rendering Merchant banking services, but theirs was limited due to their small capital
base.

In 1967, ANZ Grindlays bank set - up a separate merchant banking division to handle new
capital issues. It was soon followed by Citibank, which started rendering these services. The
foreign banks monopolized merchant banking services in the country. The banking committee, in
its report in 1972, took note of this with concern and recommended setting up of merchant
banking institutions by commercial banks and financial intuitions. State bank of India ventured
into this business by starting a merchant banking bureau in 1972.In 1972, ICICI became the first
financial institution to offer merchant banking services. JM finance was set-up by Mr. Nimesh
Kampani as an exclusive merchant bank in 1973. The growth of the industry was very slow
during this period. By 1980, the number of merchant banks rose to 33 and was set-up by
commercial banks, financial institutions and private sector. The capital market witnessed some
buoyancy in the late eighties. The advent of economic reforms in 1991 resulted in sudden spurt
in both the primary and secondary market. Several new players entered into the field. The
securities scam in May, 1992 was a major setback to the industry. Several leading merchant
bankers, both in public and private sector were found to be involved in various irregularities.
Some of the prominent public sector players involved in the scam were can bank financial
services, SBI capital markets, Andhra bank financial services, etc. leading private sector players
involved in the scam included Fair growth financial services and Champaklal investments and
finance (CIFCO).

The market turned bullish again in the end of 1993 after the tainted shares problem was
substantially resolved. There was a phenomenal surge of activity in the primary market. The
registration norms with the SEBI were quite liberal. The low entry barriers coupled with
lucrative opportunities lured many new entrants
into this industry. Most of the new entrants were undercapitalized with little or no expertise in
merchant banking. These players could hardly afford to be discerning and started offering their
services to all and sundry clients. The market was soon flooded with poor quality paper issued by
companies of dubious credentials. The huge losses suffered by investors in these securities
resulted in total loss of confidence in the market. Most of the subsequent issues started failing
and companies started deferring their plans to access primary markets. Lack of business resulted
in a major shake out in the industry. Most of the small firms exited from the business. Many
foreign investment banks started entering Indian markets. These firms had a huge capital base,
global distribution capacity and expertise. However, they were new to Indian markets and lacked
local penetration. Many of the top rung Indian merchant banks, who had string domestic base,
started entering into joint ventures with the foreign banks. This energy resulted in synergies as
their individual strength complemented each other.

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

1. Category I - Investment bankers can carry on any activity related to issue management,
that is, the preparation of prospectus and other information relating to the issue,
determining the 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.
2. Category II - Investment bankers can act as advisors, consultants, co- managers,
underwriters and portfolio Managers.
3. Category III – Investment bankers can act as underwriters, advisors and consultants to
an issue.
4. 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.

Net worth requirement for Registration is as follow: 1.

Category I : Rs. 5,00,00,000

2. Category II : Rs. 50, 00, 000
3. Category III :Rs. 20, 00, 000
4. Category IV : Nil

Grant of certificate

The SEBI grants a certificate of registration on consideration of all matters that are relevant to
the activities related to the Investment banker:

(a) Investment bankers should also be a body corporate other than a non- banking financial
company. However, an Investment banker who has been granted registration by the RBI to act as
Primary Dealer may carry on such activity subject to the condition that it would not accept / hold
public deposit,

(b) They are expected to have the necessary infrastructure like adequate office space, equipment
and manpower to effectively discharge their activities

(c) They should have employed at least two persons with experience to conduct Investment
banking business

(d) Any person directly or indirectly connected with the applicant,

(e) They fulfill the capital adequacy requirement of a minimum net worth of Rs. 5Crore

(f) Partners, directors and principal offices should not be involved in any litigation connected
with the securities market, which has an adverse effect on their business
(g) Have recognized professional qualification in finance, law or business management and or
their registration is in the interest of the investors and

(h) The applicant is a fit and proper person. The provisions of the SEBI criteria for Fit and
proper person regulations discussed below would be applicable to the applicants.

What is Investment Banking?

Investment Banking falls under two broad headings:

 The provision of financial advice.

 Capital raising.

Principal clients are companies, particularly publicly listed companies, and governments. For
companies, these services are primarily directed towards raising shareholder value (that is,
ensuring that the share price fully reflects the value of the business); and the actions prescribed
are corporate actions (taking over another company, selling a division, returning cash to
shareholders by paying them a special dividend, etc.). For governments, these services are
usually directed at executing government policy, for example by selling off, or privatizing,
government-held businesses or industries.

Provision of financial advice

As noted above, investment banking advice relates to corporate actions rather than product or
organizational matters, such as product improvement, market analysis or management of
organization. Nonetheless, an investment banker needs to have an understanding of all these
things because they, too, will have an impact on shareholder value.
Mergers and Acquisitions (or "M&A")

The majority of financial advice relates to M&A. The client company seeks to expand by
acquiring another business. There are many possible commercial reasons for this, such as:

 increasing the range of products

 increasing the business' geographical footprint
 complementing existing products
 integrating vertically (i.e. acquire suppliers, further up the chain, or customers, further
down the chain)
 Protecting a position (for example by preventing a competitor from acquiring the
business in question).

In practice therefore, Investment Banking divisions tend to be divided into industry sector teams,
who can then familiarize themselves with the principal players, economics and dynamics of the
sector.

There are also many possible financial reasons for making an acquisition, such as:

 raising profitability, and therefore the share price

 increasing in size
 followed and more widely invested in; again, likely to have a positive effect on the share
price
 financing growth
 improving quality of profits - the market likes predictable profit streams, and will value
these more highly
 Shifting the business towards sectors more favorably viewed by the market.

The Investment Bankers' roles in these transactions involve:

 using their knowledge of the industry sector, to help with the identification of potential
targets which meet commercial criteria such as those referred to above
 using their knowledge of the investment market, to advise on valuation, form of
consideration (should the sellers be paid in cash - which is likely to involve the buyer
borrowing the money - or in the buyer's shares - so that
 the seller ends up with a stake in the buyer, or a blend of the two?), timing, tactics and
structure
 coordinating the work of the other advisers involved in the transaction - lawyers, who
prepare the documentation for the acquisition and help with the "due diligence" to be
performed on the business being acquired; accountants, who advise on the financial
reporting aspects of the transaction, and tax consequences; brokers, who advise on
shareholder aspects (how are the buyer's shareholders likely to view the acquisition?) and
how the market as a whole is likely to receive the transaction; and public relations
consultants, who ensure that the transaction has a favorable press.

General financial advice

Investment Banking also involves providing general financial advice on a range of issues, such
as funding structure (perhaps the company is too indebted, and should issue shares to raise more
money; or does it have too much cash on its balance sheet, just sitting there not earning interest,
so that it should consider paying a large dividend to its shareholders or buying back some of its
own shares?).

Capital raising

If a company is to grow, it has to invest and, often, that capital comes from external sources. This
can be in the form of either "equity", when the company issues more shares to investors, who
buy them for cash; or debt, either from banks or - more usually nowadays - directly from
investors. Investors may be either institutional (pension funds and the like) or “retail”
(individuals).Investment Banks advise on the raising of capital - in what form, how much, from
whom, timing - and may also charge a fee for arranging the financing or for "underwriting"
(guaranteeing to take up any securities that are unsold in the market, so that the issuer knows for
sure how much cash it is going to raise and can plan accordingly).
Ways of Raising Capital

There are several ways of raising equity capital: These are discussed below:

1. Rights Offerings: Most company regulations or charters allow shareholders to have a

pre-emptive right in additional stock issues. Thus, anytime the company wants to raise
additional equity capital, it must make a formal offer to existing shareholders before it
can seek the interest of potential outside investors. Where it sells additional stock issues
to existing shareholders, it is called a rights offering. This offer may be renounceable or
non-renounceable. A renounceable rights offering gives the shareholder the option to
exercise his right to purchase the new shares at the issue price. A non-renounceable rights
offering obligates the shareholder to exercise his rights at the issue price.
2. Public Offerings: Where the corporate charter or regulations are silent on pre-emptive
rights of existing shareholders, it may decide to sell new shares or stock through a rights
offering or a public offering.
3. Private Placements: This method of selling securities is generally used by companies
who are interested in reducing their floatation costs and are interested in a specific group
of investors. Under private placements, new stocks are sold to one or a few investors,
generally institutional investors who invest in large blocks of shares.
4. Employees Purchase Plans and Employee Share/Stock Ownership Plan: In most
organizations, the regulations or charter allows employees to purchase the shares of the
company usually at predetermined prices based on the financial performance of the
entity. This usually affects managerial staff in order to reduce the prevalence of the
principal- agency problem.
The Initial Public Offering and the Regulatory
Framework

At this stage we will focus on the Initial Public Offering (IPO) process, the regulatory
framework within which the activity is organized and the role of the investment banker.

The IPO Process

Many writers in corporate finance have given different descriptions of the initial public offering
process. A combination of the approaches used will yield the best description of this process.
Brigham et al (1999), divides the process into two distinct stages: Stage-one decisions are
internal to the company while stage- two involves the company and an investment bank or
investment banks. Some writers (Weston and Copeland, 1989; Brealey and Myers, 1994;
Grinblatt and Titman, 2002) give a summary of the process by focusing on decisions concerning
pre-registration statements to the trading of the securities on stock exchanges. This study
describes the process under sections Phase-I and Phase-II IPO decisions.

 Phase-I IPO Decisions:

At Phase-I, IPO decisions usually start with the company making decisions in the
following areas:
1. Amount to be raised: The decision variable here is the amount of new capital
needed by the firm.
2. Type of Securities to use: This stage of the process will consider the best
security to use; the firm would have to choose from basic forms such as shares,
bonds or other innovative types, which may include various combinations of
securities usually called exotic securities. The choice of security and the method
of selling will normally fall within the regulatory framework of the securities
industry.
3. Competitive bids versus a Negotiated deal: Should the company offer a block
of securities for sale to the highest bidder? Or should it negotiate a deal with an
investment banker? Competitive bids normally are used by large well-known
firms whiles negotiated deals
 are used by small firms not known to the investment banking community.
4. Selection of an Investment Banker: the firm must decide on the investment
banker to use in raising the needed capital. This stage is very important to the
firm, as it tends to have other implications on the success of the IPO process. The
intensity of the problem faced by the issuing firm may stem from the fact that
there is no model to rely on in selecting an investment banker to make the IPO
successful (Manaster and Carter, 1990). Reputable investment banks target more
established firms whiles other investment banks are good at speculative issues or
new firms going public.

 Phase-II IPO Decisions:

At Phase-II, decisions include the input of the firm‟s selected investment banker.
Components of Phase-II decisions generally include the following:

1. Re-evaluating the initial decisions: At this stage, the firm and its investment
banker will have to re-evaluate regarding issues such as size of the issue and type
of securities to use etc. These decision processes are organized under pre-
underwriting conferences as espoused by Weston and Copeland (1989). The main
aim of the re- evaluation processes is to fine-tune the internal decisions of the
company under Phase-I. This is to ensure the success of the issue.
2. Filing of Registration: The investment banker, after taking an inventory of all
the relevant information, it has to file an application with the Securities and
Exchange Commission (SEC) and the stock exchange if it wants the shares to be
publicly traded. In India, the securities industry laws (SIL) however allow
applications to be filed with the GSE before it is filed with the SEC. Without the
examination and approval by these regulatory bodies, public sale of the security
can never begin.
3. Pricing of the Security: Another important decision at this phase is the pricing of
the security. This depends on a plethora of issues, usually resolved through the
research or experience of the investment banker. The important issues considered
here include, the risk profile of the issuer, the capacity of the market to
accommodate the issue, the reputation of the investment banker etc. The pricing
of the issue has been identified as one of the
 sources of controversy between the issuer and the investment banker (Weston and
Copeland, 1989; Brigham et al, 1999; Grinblatt and Titman, 2002).
4. Forming the Underwriting Syndicate: In underwriting of security issues, the
managing/selected investment banker may or may not be in the position to
underwrite the whole issue. Where it is unable to underwrite the issue, it may
have to form an underwriting syndicate. This will ensure the diversification of
underwriting risk to the managing investment banker and permits economy of
selling effort and expense and encourages nationwide distribution.
5. Forming of the Selling Group: The selling group is formed to facilitate the
distribution of the issue for a commission. The managing investment bank
through the selling group agreement, which usually covers the description of the
issue, concession, handling of purchased securities and duration of the selling
group, is able to control the selling group.
6. Offering and Sale: The last important step in this process is the formal sale of the
securities after the approval by the regulatory authorities. This is usually preceded
by a series of publicity campaigns. The date on which the selling of the issue will
begin is made public before or during the publicity campaign in order to avoid
unfavorable events or circumstances.

The process in India is very much the same as what pertains in other economies. Differences may
be found in the regulatory framework within which it is organised. Important requirement in
India for a company going public is the appointment of an investment banker to guide it through
the process.

The Regulatory Framework for IPOs

The securities industry is under the watchful eyes of the SEC. This regulatory body derives its
powers from the Securities Industry Law (PNDCL 333, as amended by Act590). This piece of
legislation empowers the SEC to oversee all matters relating to the issue securities within the
broad framework of existing laws. Its authority also extends to the supervision of the activities of
major players in the industry including investment banks.
Another recognized authority in this market is the GSE through its regulations aimed
atsafeguarding the interest of investors. It is also considered as a self- regulatoryorganisation
since its rules and regulations guide its members with regards to transactions conducted on and
off the exchange. It however derives its source of existence from the provisions in the Stock
Exchange Act and PNDC Law 333. The GSE also relies heavily on other legislative instruments
such as LI 1509 (Regulations Membership) and Listing Regulations (LI 1510) to effectively
regulate transactions on the exchange.

The memberships regulations are clear the basic requirements to satisfy if an individual or
corporate body
desires to become a member of the exchange. However, the listing regulations provide the
fundamental requirements a corporate entity must satisfy if it desires to list its securities on the
exchange.

Further to the above, the Companies Code, 1963 (Act 179), is another important source of
regulation that affects the market for equity and debt capital. It contains various provisions,
which guide numerous activities of registered corporate entities.

The Role of the Investment Banker in the IPO Process

It is clear from the above discussion that, the activities or roles of the investment banker in the
IPO process cannot be discounted. The success of the IPO will to a large extent depend on the
capabilities of the investment banker selected (Ellis, 1989). However, in the absence of a
model to guide issuers of securities in selecting investment banks, how does a company
come up with the right investment banker to manage its IPO? Despite the numerous efforts made
by academics to investigate into issues concerning the market for IPOs, not much has been done
on the capabilities of investment banks. However by examining critically the roles and
responsibilities of investment banks in the IPO process, we can glean some qualities or
capabilities an investment banker must possess in order to survive in its market. Weston and
Copeland (1989) identified three main functions or roles investment banks play in the IPO
process and these include:

 Underwriting,
 Distribution and,
 Advice and Counsel
Underwriting: This is the insurance function of bearing the risk of adverse price fluctuations
during the period in which a new issue of securities is being distributed. There are two
fundamental ways of doing this, and they are the firm commitment and best efforts underwriting
agreements. The firm commitment agreement obligates the investment banker to assume all the
risks inherent in the issue. On the other hand, the best efforts agreement absolves the investment
banker from any risks in the issue. Under this underwriting agreement, the investment banker
undertakes to help sell at least a minimum amount of the issue with any unsold amounts returned
to the issuing firm. Where the investment banker is not able to sell the minimum quantity agreed
upon, the whole issue is cancelled and reissued when the market is ready to accommodate the
issue.

Distribution: Another related function to the one described above is the ability of the issuing
firm to reach as many investors as possible with its security. According to Weston and Copeland
(1989), investment banks play a very crucial role here, because of their expertise in doing this
relative to the issuing firm assuming this responsibility when issuing securities.

Advice and Counsel: This involves the investment banker making valuable inputs into decisions
concerning its client ability to succeed in the capital market with an IPO. Its ability to make
valuable inputs in this direction may largely depend on its experience in origination and selling
of securities.

In addition, Ellis (1989) identified two categories of factors critical to evaluating and choosing
an investment bank. In his assessment, the most important factors include.

1. Understand our company

2. Earn credibility with our senior management

3. Make useful recommendations to our company

The least important are:

1. Expertise in Eurobond market

2. Expertise in equity underwriting

Ellis (1989) again identified six (6) reasons why investment banks gain importance with their
corporate clients. These are:

1. Credibility with the client corporation‟s senior management-earned over several years.

2. Understanding the client company‟s needs for service and its financial goals and policies.

3. Making useful recommendations to the company over a period of time.

4. Innovating with new financing techniques.

5. Having special expertise in a specific service.

6. Recommending a specific transaction.

Credibility with Senior Management

His postulation on the role of an investment banker goes beyond the IPO process to include other
activities or capabilities of the investment banker, which tends to impact on choice of an
investment banker by senior management who are interested in strategic issues of the
organizations they are responsible for. Thus if an investment banker‟s capabilities fit well with
financial strategies of the organization, it is made an integral part of implementing the financial
strategy.

Understand Client Company

Another reason he finds important to corporate executives is the investment banker‟s knowledge
of their companies and their operations. More conservative corporate executives rated this as a
critical success factor in dealing with investment banks, especially when the investment banking
industry in US has over the years survived, by maintaining a relationship with their clients. In his
study, 3 of the 4 different industries he studied ranked this variable as the most important of all in
dealing with an investment banker.
Making Useful Recommendations

A more IPO related factor is the ability of the investment banker to make valuable
recommendations to the issuing firm over time. This is because it reinforces the reliability and
consistency of the investment bank‟s capabilities to its corporate clients. In this lighten
investment banker that is able to consistently make valuable inputs into the financial decisions of
a client strengthens the relationship between itself and its client.

Expertise in Equity Underwriting

Another important IPO related capability is the ability of the investment banker to underwrite
securities. In the absence of any model to determine the overall capabilities of an investment
banker, this has been one of the criteria for ranking the performance of investment banks.

Having Expertise in a Specific Service

The competitive wave sweeping the US investment banking industry has caused most investment
banks to concentrate on their capabilities where they can gain a competitive advantage. The era
where one investment banker was at the center of a corporate entity‟s financial strategy is over.
Corporate entities are
„shopping‟ for specific capital market capabilities of investment banks. This has eventually
changed the structure of the investment banking industry where size used to be a competitive
factor.

Supplementing Capabilities

Other capabilities such as Euro market capabilities, recommending specific transactions and
innovating with new financing techniques are all additives to the more generic functions
described above. These capabilities, though not really taken to be very important then are now
making very important inputs into the choice of firms by corporate clients. Grinblatt and Titman
(2002), point out that investment banks have been motivated in various ways to develop
capabilities in these areas to expand their client- base beyond their domestic financial markets.
Competition in the Indian Investment Banking Ind
ustry

There are presently only 4 representing 29% active investment banks out of the 14 legally
recognized investment banks in India. The four are NTHC, Databank Limited

(DBL),
Merbank Brokerage Limited (MBL) and Consolidated Discount House Securities (CDH).
Although, there is fierce competition among these four investment banks, to a large
extent the industry is not very competitive.

Drivers of Competition

Two main change factors have been identified to bring about competition within the industry in
the not too distant future:

African Project Development Facility

The African Project Development Facility (APDF) in collaboration with the India Stock
Exchange is looking for ways to encourage small and medium scale enterprises (SMEs) to access
equity capital by encouraging them to go public. Under this scheme, APDF will finance up to
about 30% of cost of going public whiles the
companyfinances the remainder. The arrangement also involves the GSE stream lining thelisting
procedure to make provision for provisional listing of securities for 6 months. The GSE also
gives a discount to the issuing firm depending on how long it takes for the firm to graduate to
any of the official lists of the Exchange (APDF, 2002).

Reduced Cost of Floatation

The implication of the above is that neither the issuing firm nor the investment banker will have
to experience any cash drain in order to undertake an IPO exercise. The impact on competition is
estimated to be positive because other
inactive investment banks will be forced to build capabilities to be able to compete with the four
active investment banks in the market. This move, all things being equal, will change the face of
competition in the industry.

Capabilities of an Ideal Investment Banker

These capabilities can be identified in the services mostly offered by the investment banks. They
include the following:

Investment Management/Fund Management

The ideal investment bank in India should possess strong skills in investmentmana gement. This
generates income for it as well as help in the distribution of new issues.

In depth Knowledge of Corporate Finance Issues

It must have a team of professionals who are well versed in the issues of corporate finance to
enable it make valuable inputs into the financial decisions of their clients. It also gives it a
competitive advantage when the investment banker is bidding for IPO projects.

Pricing of Services

The ideal investment banker should be able to deliver its services at a lower cost in order to woo
capable businesses interested in going public. One peculiar problem preventing SMEs in India
from going public is the cost involved in going public.

Pre-Financing of IPOs

In India, IPOs have been identified as very costly for the issuing firms. In order for an
investment banker to woo clients, it should be capable of pre-financing the IPO in order to gain a
competitive advantage in its market. This has been one of
the strategies adopted by NTHC Ltd. over the years in order to gain dominance in the IPO
market.

Performing Ancillary Services

Other augmenting capabilities include the ability to support the trading of these curities floated.
This primarily involves supporting transactions in the security on the secondary market.
Registrar and Custodial services are the key to the competitive strategies of an investment
banker. Out of four active investment banks, only NTHC and MBL have built capabilities over
the years to perform this function. An advantage of these supplementary services is the future
cash streams in fees charged to the issuing firms. This is bundled together with other services
when investment banks are pricing their fees. Thus it is cheaper for the issuing firm to outsource
the registrar services to the investment banker rather than employ another investment banker to
undertake this function. These activities, although may not seem necessary to the performance of
the investment banking function, could create competitive advantage for the investment banker
possessing them.

List of some investment banks in India

1. Avendus Capital

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

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

3. Cholamandalam Investment & Finance Company

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

4. ICICI Securities Ltd

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

5. IDFC

Initiated in 1997 in Chennai, IDFC undertook the responsibility of providing financial

support to 332projects accruing a profit of upto Rs 2, 20, 400
 million. The sectors under IDFC's financial assistance are infrastructure, agro related
business, transportation, healthcare, tourism and others.

6. Kotak Mahindra Capital Company

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

7. SBI Capital Markets

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

8. Tata Investment Corporation Limited (TICL)

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

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

10. JP Morgan

J.P. Morgan is a path breaker in providing financial services and solution to its patrons in
more than100 nations across the world assisted by one of the most wide-ranging
international product proposals. The firm has been assisting its patrons in commercial and
business ventures, besides administering their wealth for more than 2 centuries. It is a
division of JPMorgan Chase & Co. (NYSE: JPM) with assets worth USD 2.5 trillion.

11. UBS AG

UBS AG is an expanded international fiscal service provider with its main office in
Zurich and Basel located in Switzerland. It is among the world's biggest individual
wealth administrator besides being the second largest in Europe both in terms of market
funding and productivity. The firm has its branches spread across 50 nations with around
40% staff performing business in American nations, 14% in Europe, 33% in Switzerland
and 12% in Asia Pacific. UBS's international business institutes are assets and wealth
management, and investment banking.
12. Goldman Sach

Responsible for providing fund ideas and fiscal help to its clients, shareholders,
communities, etc., Goldman Sach facilitate industrial expansion of Indian firms by
investing in people, companies and our communities present across the world. The
banking firm administers business risks of the firms and gives helpful suggestion in
buying and selling businesses. It also assists the state and national level government in
sponsoring their functions through loans and equity shares

13. Deutsche Bank

With its headquarters in Frankfurt in Germany, Deutsche Bank takes pride of being the
international leader in commercial banking and securities, operational banking, wealth
management, asset management and retail banking. It is world's foremost global fiscal
service supplier with total assets worth Euro 2.2 trillion assisted by the workforce of
80,000 employees across the globe. The bank is registered in the renowned exchange
markets namely New York stock exchanges (NYSE) and Frankfurt (FWB).

14. Morgan Stanley

MSIM offers personalized wealth management facilities and goods to administration,

institutions, non-profit firms, pension funds, high income individuals, retail investors, etc.
In India the firm operates many local mutual fund schemes under Morgan Stanley Mutual
Fund brand for retail investors. It subsidiary Morgan Stanley Advantage Services assists
Morgan Stanley's Institutional Services operations ranging from fiscal structuring to
research activity, portfolio assessment to IT expansion etc.
 15. Ambit Corp Finance

Leaders in our investment banking, Ambit Corp provide excellent financial solutions to
its clients. The firm‟s specialty lies in offering holistic services to our Investment
Banking customers in context of Equity Financial Markets, Mergers and Acquisitions,
and Alternate Fund.

Current and Expected Future Trends

Investment Banking Revenue at present is just over 4 percent of corporate banking

revenue pool which is expected to rise over ten-fold by 2020. In India, there are about 15
Multinational Investment Banks, 15-20 large homegrown Investment Banks, about 500
investment Banks with teams of 5-50 people and nearly 1000 mom and pop Investment Banks.
Statistics estimate that every alternate day a new Investment Bank comes up in the country.
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