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INVESTMENT BANKING INTRODUCTION What is investment banking? Is it investing? Is it banking? Or is it investing in banks? Really, it is neither.

Investment banking, or Ibanking, as it is often called, is the term used to describe the business of raising capital for companies and advising them on financing and merger alternatives. Companies need cash in order to grow and expand their business; investment banks sell securities to public investors in order to raise this cash. These securities can come in the form of stocks or bonds. At a very micro level, µInvestment banking¶ is concerned with the primary function of assisting the capital market in its function of capital intermediation i.e. the movement of financial resources from those who have them (the Investors), to those who need to make use of them (the Issuers). Banking and financial institutions on the one hand and the capital market on the other are two broad platforms of institutional intermediation for capital flows in the economy. Therefore, it could be inferred that investment banks are those institutions that are the counterparts of banks and the capital market in the function of intermediation in resource allocation. From its small beginnings in the seventies and eighties, investment banking unfolded itself as a full-fledged service industry during 1991. From mere public flotation services such as issue management and underwriting, the investment banking industry has evolved to encompass many high profile corporate actions. The term µInvestment Banking¶ has a much wider connotation and is gradually becoming more of an inclusive term to refer to all types of capital market activity, both fund-based and non-fund based. Investment Banker provides two general functions: 1. raising funds for clients and, 2. assisting clients in the sale or purchase of securities Over the decades, backed by evolution and also fuelled by recent technological developments, investment banking has transformed repeatedly to suit the needs of the finance community and thus become one of the most vibrant and exciting segments of financial services. Investment bankers have always enjoyed celebrity status. DEFINITION There appears to be considerable confusion today about what does and does not constitute an ³investment bank´ and ³investment banker´. Let us see what is it? Investment Bank (IB)

A financial intermediary that performs a variety of services. This includes underwriting, acting as an intermediary between an issuer of securities and the investing public, facilitating mergers and other corporate reorganizations, and also acting as a broker for institutional clients. The role of the investment bank begins with pre-underwriting counseling and continues after the distribution of securities in the form of advice. Investment Banker A person representing a financial institution that is in the business of raising capital for corporations and municipalities. An investment banker may not accept deposits or make commercial loans. Investment bankers are the people who do the grunt work for IPO and bond issues.


Almost all investment banks are heavily involved in providing additional financial services for clients. only a few small firms provide only this service.INVESTMENT BANKING MEANING OF INVESTMENT BANKING In the strictest definition. both in debt and equity. and the division handling this in an investment bank is often called the "Investment Banking Division" (IBD). fixed income. foreign exchange. However. commodity. and equity securities. such as the trading of derivatives. investment banking is the raising of funds." and any employee involved in either side as an "investment banker. It is therefore acceptable to refer to both the "Investment Banking Division" and other 'front office' divisions such as "Fixed Income" as part of "investment banking." Furthermore. one who engages in these activities in-house at a non-investment bank is also considered an investment banker .

assistance with due diligence. Many firms have both buy and sell side components. A quality investment banking firm can provide the services required to initiate and execute a major transaction. For example. mutual funds. and is vitally interested in seeing the transaction close. an investment bank provides objectivity. accounting.e. The "buy side" constitutes the pension funds. Some criteria to consider include: ‡ Services Offered For all functions except sales and trading. and generally assisting in all phases of the project to ensure successful completion. companies with less than about $100 million in revenues are better served by smaller investment banks. . and the client should expect top-notch service from the investment banking firm. etc. coordinating legal.." This is trading securities for cash or securities (i.e. thereby empowering small to medium sized companies with financial and transaction experience without the addition of permanent overhead. most projects will include detailed industry and financial analysis. the services should go well beyond simply making introductions. allows for efficient use of client personnel. What to look for in an Investment Bank? nvestment banking is a service business. and in a financial transaction may be at a disadvantage versus larger competitors.). Generally only large client firms will get this type of service from the major Wall Street investment banks. underwriting. market-making). Who needs an Investment Bank? Any firm contemplating a significant transaction can benefit from the advice of an investment bank. research. facilitating transactions. a valuable contact network. and the investing public who consume the products and services of the sell-side in order to maximize their return on investment. Most small to medium sized companies do not have a large inhouse staff. negotiating the terms of the transaction. and other advisors. or "brokering" a transaction. Although large corporations often have sophisticated finance and corporate development departments. hedge funds. preparation of relevant documentation such as an offering memorandum or presentation to the Board of Directors. or the promotion of securities (i.More commonly used today to characterize what was traditionally termed "investment banking" is "sell side.

After the transaction. ‡ Ongoing Support Having worked on a transaction for your company. an investment bank will charge an initial retainer fee. The investment bank should have a wide network of relevant contacts. The investment bank must be willing and able to put the right people on the project and work diligently to meet critical deadlines. that the project is completed in an efficient time frame. an experienced. Because investment banks are intermediaries. the investment bank will be intimately familiar with your business. a good investment bank should become a trusted business advisor that can be called upon informally for advice and support on an ongoing basis. However. for example when bidding on a company that is for sale. ‡ Record of Success Although no reputable investment bank will guarantee success. investment banking projects has very specific deadlines. such as potential investors or companies that could be approached for acquisition. which may be one-time or monthly. senior members of the investment banking firm will be active in the project on a day-to-day basis. with the majority of the fee contingent upon successful completion of the transaction. quality investment bank adds significant cant value to a transaction and can pay for its fee many times over. At the same time. Ability to Work Quickly Often. and generally not providers of capital. the firm must have a demonstrated record of closing transactions. The investment banker has a vested interest in making sure the transaction closes. some executives elect to execute transactions without an investment bank in order to avoid the fees. Depending on the type of transaction. it may be preferable to work with an investment bank that has some background in your specific industry segment. rather than on the day-to-day details of the transaction. ‡ Fee Structure Generally. It is important to utilize a fee structure that aligns the investment bank's incentive with your own.‡ Experience It extremely important to make sure that experienced. the client is able to focus on running the business. and with terms that provide maximum value to the client. knowing that the transaction is being handled by .

Chase Bank. . National City Bank. to the significant demand for corporate finance. The affiliates were sparsely capitalized and were financed by the parent banks for their underwriting and other business obligations. As in the past. in the entire 1920s. The stock and bond market boom of the 1920s was an opportunity that banks could not miss. EVOLUTION AND GROWTH OF INVESTMENT BANKS At the end of World War I. the price-earning ratios reached absurd limits and the bubble eventually burst in October 1929 wiping out millions of dollars of bank depositors¶ funds and bringing down with its banks such as the Bank of United States. commercial banks in the USA were already preparing for an economic recovery and consequently. they owned security affiliates through holding companies. by which time. The stock market got overheated with investment banks borrowing money from the parent banks in order to speculate in the bank¶s stocks. But since they could not underwrite and sell securities directly. commercial banks started to acquire stock broking business in a bid to have their presence made in such markets. Morgan and Bank of America were the most aggressive banks present at that time. mostly for short selling. The first of such acquisitions happened when the National City Bank of New York acquired Halsey Stuart and Company in 1916. However.individuals with experience in executing similar projects. In preparation for a boom in the capital markets in the 1920s. investment banking meant underwriting and distribution of securities. they were not maintained like water tight compartments. It was expected that American companies would shift their dependence from commercial banks to the stock and bond markets wherein funds were available at a lower cost and for longer periods of time. Once the general public joined the frenzy.

investment banks participate in derivatives market. the creation of primary market for securities. The range of services offered may cover underwriting services. The bulge group consisting of eight investment banks has a global presence and these firms dominate the league in key business segments. credit cards. i. On the other hand. It was also extended to mean at a secondary level. loans (corporate and individual). In the area of structured finance.In order to restore confidence in the banking and financial system. mergers and acquisitions. which were considered the exclusive business of commercial banks. several legislative measures were proposed. secondary market making through securities dealing. Since the passing of this Act. These activities were segregated as the exclusive domain of investment banks. funds management. which eventually led to the passing of the Banking Act 1933 that restricted commercial banks from engaging in securities underwriting and taking positions or acting as agents for others in security transactions. investment banks were barred from deposit taking and corporate lending. fund raising and private equity. investment banks also provide financial engineering through securitization deals and derivative instruments. The Act thus provided the water tight compartments that were absent before. insurance products.e.5 Credit Suisse First Boston .0 Goldman Sachs 7. On the dealing and trading side. investment banking became narrowly defined as the basket of financial services associated with the flotation of corporate securities. depository services. arbitrage and speculation. GLOBAL INDUSTRIAL STRUCTURE The Investment banking industry on a global scale is oligopolistic in nature ranging from the global leaders (known as the µGlobal Bulge Group¶) to µPure¶ Investment banks and µBoutique¶ Investment banks. advisory services in the areas of corporate restructuring. The top ten global firms in terms of their fee billings as in 2001 are listed below: Market shares of Global Investment Banks % of total Merrill Lynch 9.

7 Morgan Stanley 6.6 Deutsche Bank 3. since these can usually not be patented or copyrighted.2 Salmon Smith Barney (Citigroup) 6.P. However. which are Merrill Lynch.5 Bank of America 2. Investment banking is one of the most global industries and is hence continuously challenged to respond to new developments and innovation in the global financial markets.3 J.e.7. Therefore.5 UBS Warburg 4. New products with higher margins are constantly invented and manufactured by bankers in hopes of winning over clients and developing trading know-how in new markets. i. many have theorized that all investment banking products and services would be commoditized.6 Lehman Brothers 3. they are very . the global investment banking industry ranges from the acknowledged global leaders listed above to a large number of mid-sized competitors at a national or regional level and the rear end is supported by boutique firms or advisory and sector specialists. which do not have commercial banking connections. Goldman Sachs and Morgan Stanley Dean Witter.4 Within the listing given in the table referred to above are the top µpure¶ investment banks. Morgan 5. Throughout the history of investment banking. Listed therein are also the leading European Universal Banks that are called so due to their role in both commercial and investment banking.

Other such banks such as Canara Bank. However. pushing down trading margins. in 1986. However. Based on the American experience which led to the passing of the Glass Steagall Act. ‡ Growth Merchant banking in India was given a shot in the arm with the advent of SEBI in 1988 and the subsequent introduction of free pricing of primary market equity issues in 1992. investment banking was largely confined to merchant banking services. Punjab National Bank. post-1992. PNB.often copied quickly by competing banks. SBI set up SBI Capital Markets Ltd. These two banks were providing services for syndication of loans and raising of equity apart from other advisory services. though the existence of this branch of financial services can be traced to over three decades. Bank of Baroda. the merchant banking industry was largely driven by issue management activity which fluctuated with the trends in the primary market. Syndicate Bank. THE INDIAN SCENARIO ‡ Origin In India. the Banking Commission Report asserted the need for merchant banking services in India by the public sector banks. Merchant banks were meant to manage investments and provide advisory services. Other banks such as the ± Bank of India. Indian Bank and ICICI created separate merchant banking entities. and Canara Bank also followed suit to set up their merchant banking outfits. by the mid eighties and early nineties. Grindlays Bank (now merged with Standard Chartered Bank in India) began merchant banking operations in 1967 with a license obtained from the RBI followed by the Citibank in 1970. ICICI was the first financial institution to set up its merchant banking division in 1973. The forerunners of merchant banking in India were the foreign banks. the Commission recommended a separate structure for merchant banks so as to distinct them from commercial banks and financial institutions. Following the above recommendation. The later entrants were IFCI and IDBI with the latter setting up its merchant banking division in 1992. most of the merchant banking divisions of public sector banks were spun off as separate subsidiaries. It was in 1972. the SBI set up its merchant banking division in 1972. BOB. There have been phases of .

investment banks and merchant banks perform different functions.hectic activity followed by a severe setback in business. The highest number of registered merchant bankers with SEBI as at the end of March 2003 was 124. In order to stabilize their businesses. though the breadth available in the overseas capital market is still not present in the Indian capital market. most merchant banks perished in the primary market downturn that followed later. several merchant banks diversified to offer a broader spectrum of capital market services. other than a few industry leaders. In practice. especially in the corporate debt segment. In the financial year 2002-2003 itself. it may be said that the industry in India has seen more or less similar development as its western counterparts. the other merchant banks have not been able to transform themselves into full service investment banks. INVESTMENT BANKING AND MERCHANT BANKING Merchant banksand Investment banks in their purest forms are different kinds of financial institutions that perform different services. it is only the bigger industry players who are in investment banking. SEBI started to regulate the merchant bankers who registered with SEBI were either in issue management or associated activity such as underwriting or advisor ship. Secondly. In theory. While many investment banks participate in trade financing activities. the number decreased by 21. the fine lines that separate the functions of merchant banks and investment banks tend to blur. from a peak of almost thousand in the nineties. Traditional merchant banks often expand into the field of marketing of securities and have an onerous responsibility towards the investors who invest in such securities. due to the lack of institutional financing in a big way to fund capital market activity. SEBI had four categories of merchant bankers with varying eligibility criteria based on their net worth. ‡ Constraints in Investment Banking Due to the over-dependence on issue management activity in the initial years. The third major deterrent has also been the lack of depth in the secondary market. However. Going by the service portfolio of the leading full service investment banks in India. Pure investment banks raise funds for businesses and some .

Investment banking is a term of much wider connotation than Merchant banking as it implies significant fund-based exposure to the capital market. bridge financing. trade consulting and co-investment in projects involving trade of one for or another.governments by registering and issuing debt or equity and selling it on a market. trade finance and international transaction facilitation. investment banks only participated in underwriting and selling securities in large blocks. Traditional merchant banks primarily perform international financing activities such as foreign corporate investing. In order to bridge the gap between venture capital and a public offering. While investment banks tend to focus on larger companies. Investment banks facilitate mergers and acquisitions through share sales and provide research and financial consulting to companies. downturn in the primary market has forced merchant banks to diversify and become full- . larger merchant banks tend to privately place equity with other financial institutions. In India. Internationally. foreign real estate investment. Merchant banks tend to operate on small-scale companies and offer creative equity financing. merchant banks offer their services to companies that are too big forvent ure capital firms to serve properly. mezzanine financing and a number of corporate credit products. but are still too small to make a compelling public share offering on a large exchange. Some of the activities that a pure merchant bank is involved in may include issuing letters of credit. But. However. often taking on large portions of ownership in companies that are believed to have strong growth potential. As a general rule. investment banks focus on initial public offerings (IPOs) and large publicand private share offerings. Investment banks rarely offer trade financing because most investment banking clients have already outgrown the need for trade financing and the various credit products linked to it. the dependence has been heavily on Merchant banking more particular with issue management and underwriting. Investment banks have progressed in both fund-based and non-fund based segments of the industry. Merchant banks still offer trade financing products to their clients. Traditionally. Traditionally. investment banks did not deal with the general public. transferring funds internationally.

e. They are financial intermediaries. and they make the markets that allocate capital and regulate price in these financial exchanges. those who provide capital are called ³investors.fledged Investment banks. corporations or companies that sell or ³issue´ securities for cash) and investors to place capital (i.´ since they issue ownership in their enterprises (i.e. promises to pay debt interest and repay debt principal) in exchange for cash or cash equivalents. They bring together those whoneed funds with those whohave funds. the critical link between users and providers of capital. INVESTMENT BANKS AS FINANCIAL INTERMEDIARY Investment bankers facilitate the flow of money. Investment bankers enable issuers to raise capital (i. equity) or obligations from their enterprises (i. individuals or institutions that buy or invest in those securities) in the most efficient manner for both. Those who desire to raise capital are called ³issuers.´ since they must invest cash or cash equivalents in exchange for those rights of ownership or obligation. .e.e.



individuals or institutions that buy or . corporations or companies that sell or ³issue´ securities for cash) and investors to place capital (i.e. Investment bankers enable issuers to raise capital (i.e.INVESTMENT BANKING ³investors.´ since they must invest cash or cash equivalents in exchange for those rights of ownership or obligation.

Boundaries among diverse financial institutions are blurring. And.g. Blizzards of innovative instruments are sweeping financial markets. products. which involves helping customers raise funds in the Capital Markets and advising on mergers and acquisitions.. new markets (e. coordinating with bidders. amplifying the complexity and the competition. Other terms for the Investment Banking Division includes Mergers & Acquisitions (M&A) and Corporate Finance (often pronounced ³corpfin´).g. financial markets.Middle Officeand Back Office. has expanded dramatically. new techniques (e. Tokyo. or negotiating with a merger target. the prominence of mergers and acquisitions). Investment banking. and new muscle (e. firms..g. London and India). The industry has been transformed new functions (e. Investment banking may involvesubscribing investors to asecurity issuance. merchant banking) have changed the face of contemporary Investment banking.. Investment Management is the professional management of various securities (shares. such as swaps).invest in those securities) in the most efficient manner for both. Investment banking is a dynamic industry characterized by flux and transformation.g. new products (e. Financial instruments have grown more complex as financial intermediaries have become more competitive. ORGANIZATIONAL STRUCTURE OF INVESTMENT BANKS Division of Investment Banks An investment bank is split into the so-calledFront Office.g. Barriers between international financial markets are eroding. securitization of illiquid receivables).g. bonds.) and other assets (e.. and techniques are merging and melding. The individual activities are described below: Front Office Investment Banking is the traditional aspect of investment banks. rate risk management mechanisms. real . long simply synonymous with the domestic underwriting and market making of corporate equity and debt securities. etc..

whose primary job is to call on institutional andh igh -n e t -wort h investors to suggest trading ideas and take n s ion funds. In the process of market making. Investment banks play a lead advisory role in this booming segment of financial advisory business. which either specialize in local markets or in certain product segments. The global mergers & acquisitions business is very large and measures up to trillions of dollars annually. debt market activity and merger and acquisitions (M&A) activity. In the case of universal banks such as the Citigroup or UBS Warburg. traders will buy and sell financial products with the goal of making anincremental amount of money on each trade. Pure investment banks such as Goldman Sachs.g. Mutual funds). given the structure of the market. Sales and Trading is often the most profitable area of an investment bank. Financial Markets is split into four key divisions: Sales.Sales is the term for the investment banks sales force.) or private investors (both directly via investment contracts and more commonly viacollective investment schemes e. Merrill Lynch and Morgan Stanley Dean Witter do not have commercial banking in their portfolio and therefore. there is also segmentation based on whether a particular investment bank belongs to a banking parent or is a stand-alone pure investment However these distinct segments are handled either on the same balance sheet or through subsidiaries and affiliates depending upon the regulatory requirements in the operating environment of each country. corporations etc. All these activities are segmented across three broad platforms ± equity market activity. Besides. In addition. Investors may be institutions (insurance companies. or BUSINESS PORTFOLIO OF INVESTMENT BANKS Globally. to meet specified investment goals for the benefit of the investors. responsible for the majority of revenue of most investment banks. investment banks handle significant fund-based business of their own in the capital market along with their non-fund service portfolio that is offered to clients. which can price and execute trades. there are a host of other domestic players present in each country and mid-sized investment banks. Research and Structuring. loan products form a significant part of the debt market business portfolio. they come in as investors in management buy-outs and management buy-in .Sales desks then communicate their clients¶ orders to the appropriate trading desks. do not offer loan products. Trading. Besides the larger firms.

they also represent their investors in such buy-out deals BUSINESS PORTFOLIO OF INVESTMENT BANKS Globally. there are a host of other domestic players present in each country and mid-sized investment banks. investment banks handle significant fund-based business of their own in the capital market along with their non-fund service portfolio that is offered to clients. Investment banks play a lead advisory role in this booming segment of financial advisory business. Besides. On the other occasions. On the other occasions. Pure investment banks such as Goldman Sachs. In the case of universal banks such as the Citigroup or UBS Warburg. wherein investment banks manage private equity funds. Merrill Lynch and Morgan Stanley Dean Witter do not have commercial banking in their portfolio and therefore. which either specialize in local markets or in certain product segments. The global mergers & acquisitions business is very large and measures up to trillions of dollars annually. they come in as investors in management buy-outs and management buy-in transactions. In addition. All these activities are segmented across three broad platforms ± equity market activity. Besides the larger firms. wherein investment banks manage private equity funds.transactions. debt market activity and merger and acquisitions (M&A) activity. given the structure of the market. loan products form a significant part of the debt market business portfolio. they also represent their investors in such buy-out deals . However these distinct segments are handled either on the same balance sheet or through subsidiaries and affiliates depending upon the regulatory requirements in the operating environment of each country. there is also segmentation based on whether a particular investment bank belongs to a banking parent or is a stand-alone pure investment bank. do not offer loan products.

since banks are subject to the Banking Regulation Act. Though investment banks also earn a significant component of their income from nonfund based activity. which prohibit them from exposing themselves to stock market investments and lending against stocks beyond certain specified limits. the Indian regulatory regime does not allow all investment banking functions to be performed under one entity for two reasons ± to prevent excessive exposure to business risk under one entity and to prescribe and monitor capital adequacy and risk mitigation mechanisms. For e. it may be appreciated that investment banking encompasses a wide area of capital market based businesses and services and has a significant financial exposure to the capital market. On the regulatory front. Therefore. the capital adequacy requirements and leveraging capability for each business line have been prescribed differently under relevant provisions of law. Therefore. bankruptcy remoteness is a key feature in structuring the business lines of an investment bank so that the risks and rewards are defined for the investors who provide resources to the investment banks. it is desirable to have merchant banking in a separate company as it requires a separate merchant banking license from the SEBI. which distinguishes them from pure merchant banks INDIAN INVESTMENT BANKING INDUSTRY ‡ CHARACTERISTICS AND STRUCTURE Investment banking in India has evolved in its own characteristic structure over the years both due to business realities and the regulatory regime.g. it is their capacity to support clients with fund-based services. Indian investment banks structure their business segments in different corporate entities to be able to meet regulatory norms. commercial banks in India have to follow the provisions of the Banking Regulation Act and the RBI regulations. they cannot perform investment banking to a large extent on the same balance sheet.Investment Banking Spectrum From this diagram. In addition. Asset management business in the . Merchant Bankers other than Banks and financial institutions are also prohibited from undertaking any other business other than that in the securities market. However. On the same analogy.

Some of these subsidiaries have been either shut down or sold off in the wake of the two securities scams seen in 1993 and in 2000. Alpic Finance etc. Equity research should be independent of the merchant banking business so as to avoid the kind of conflict of interest. Presently. The bigger investment banks have several group entities in which the core and non-core business segments are distributed. there are no Indian investment banks although there is a bulge bracket of investment banks in India that have some overseas presence to serve Indian issuers and their investors. Among these. Among the middle level players are also merchant banks structured as non-banking financial services companies such as Rabo India Finance Ltd. Kotak Mahindra. DEVELOPMENTS Over the subsequent years.. Stock broking has to be separated into a different company. IDBI. as it requires a stock exchange membership apart from SEBI registration. the merchant banking industry has seen tremendous shake out and only about a 10% of them remain in serious business as pointed out earlier. ICICI. The other development is that due to the gradual regulatory developments in the capital markets. Investment banking in India has also been influenced by business realities to a large extent. the Indian investment banking industry has a heterogeneous structure. licensing and capital controls. However. the long-term financial institutions are gradually transforming themselves into full service commercial banks 9called µuniversal banking¶ in the Indian context. Firstly. Due to the above reasons. There are also in the middle .form of a mutual fund requires a three-tier structure under the SEBI regulations. At the middle level are several niche players including the merchant banking subsidiaries of some public sector banks. two developments have taken place. certain banks such as Canara Bank and Punjab National Bank have had successful merchant banking activities. Others have either one or more entities depending upon the activity profile. IL & FS. with the downturn in the capital markets. Citibank and others offer almost the entire gamut of investment banking services permitted in India. They also have full service investment banking under their fold. investment banking activities have come under regulations which require separate registration. Some of them such as ± SBI. The heterogeneous and fragmented structure is evident even if Indian investment banks are classified on the basis of their activity profile.

In addition.a group of professionals that provides investment banking and mergers and acquisitions expertise to financial institutions. Several of the leading investment banks either have dedicated venture funds or private equity funds that invest in primary market. Some examples of companies that may represent prospective FIG clients include insurance companies specializing in personal or commercial insurance products. INSTITUTIONAL INVESTING AND INVESTMENT BANKING Institutional investors have been a recent phenomenon in the Indian capital market.level. which till then had the presence of a handful of public financial institutions such as the UTI and the insurance companies. which focus on one or more segments of the investment banking spectrum. The term lending institutions such as the IDBI and IFCI did not participate in secondary market dealing as a matter of policy. there are presently a large number of domestic institutional investors in the secondary market apart from approved foreign institutional investors. Price Waterhouse Coopers etc. Some investment banks use these sorts of divisions more as a marketing technique than as a representation of real expertise. some pure advisory firms such as ± Lazard Capital. institutional investments have risen significantly in the primary markets through venture capital and private equity investments by investors in both the domestic and non-resident categories. some investment banks further segment their areas of expertise under the financial institutions group into a banking or financial services group. What does the 'FIG' at an investment bank refer to? The 'FIG' at an investment bank usually refers to the financial institutions group . commercial finance companies that provide financial services to . and an insurance group. KPMG. In order to provide more tailored services. With the advent of liberalization. At the lower end are several niche players and boutique firms. Ernst & Young.

mining. Companies typically issue stock when they first go public through initial public offerings (IPOs). retail. is the initial sale of the common shares of a corporation to the public. energy. managing investments. . recapitalization.businesses. Before stocks and bonds are issued. and they may issue stock and bonds periodically to fund such enterprises as research. This examination requires the full disclosure of a company's strengths and weaknesses. investment dealers. Investment banks aid companies and governments in selling securities as well as investors in purchasing securities. SERVICE PORTFOLIO OF INDIAN INVESTMENT BANKS The core services provided by Indian investment banks are broadly divided into two categories: Management of public offers and private placements. perceived by entrepreneurs and start-up executives is a good way to secure money to expand the business without over-reliance upon third-party debt. Initial public offering or IPO. These are profiled below: (A)Management of public offers and private placements Initial Public Offer The first exposure of a company to the capital market ± i. expert financial opinion and corollary analysis and advisory services. which entail carefully evaluating a company's worth in terms of money and equipment (assets) and debt(liabilities). telecommunications. financial restructurings. in financial market terminology. which is currently. media. It represents a primary market. Some other investment banking segments include: health care. acquisitions. IPO.e. investment bankers perform due diligence examinations. and wealth management companies. Initial Public Offer. although this is by no means an exhaustive list of the business divisions within which investment banks operate. The services that the FIGs may provide to clients include. corporate valuations. mergers. B) Corporate advisory services. brokerages. and expansion. industrial. new product development. technology and real estate. but are not limited to: private and public equity or debt financing. banks.

If the securities fail to sell for the set price. The µright¶ herein refers to the entitlement of a shareholder to apply for and receive additional shares in the company. Role of Investment Banker in Listed Companies The functional areas for investment bankers in listed companies are thus listed below: 1) Acting as advisers and arrangers in raising debt and equity finance through . consists of post-listing public issues. and broker-dealers who do both. It is a right and not obligation. the market will punish the illprepared. offers for sale and composite issues. From Investment banking prospective too. The lessons are clear. IPO is a complex process requiring hard work by a skilled team of investment bank: in the end. Rights Issues and Secondary Public Offers A rights issue is made to the existing shareholders of a company. Investment banks take the form of brokers or agents who purchase and sell securities for their clients. A listed company has to consider many more aspects than an unlisted company in approaching its shareholders or the primary market for funds. A listed company shall be eligible to make rights issue and secondary public offers. this area of service forms the main activity for most Indian investment banks. In the days when the public offers market is very vibrant. Thus. IPO market is of special significance to investment banking since this is an area that provides statutory exclusivity to them as lead managers. Therefore. investment banks must carefully determine the set price by considering the expectations of the company and the state of the market for the securities.and trading securities. The primary service provided by investment banks is underwriting. which refers to guaranteeing a company a set price for the securities it plans to issue. a listed company has a set of opportunities and limitations as compared to an unlisted company. Secondary public offer also known as follow on offering. the investment bank pays the company the difference. dealers or principals who buy and sell securities for their personal interest in turning a profit.

Theinstitutional investors are Venture Capital funds and Private Equity funds. investment companies. Perform a study of the industry landscape and competitor analysis. The investment banker plays a key advisory role in formulating the business of a start-up company and also helps it to raise its finances. 6) Advise companies on buy backs and act as merchant bankers for such offers. and pension funds. Advise the company on the necessary steps to be taken to make the business model credit worthy and investor friendly. Depending upon the category of investors being looked at and the status of the investor company. Private placement is distinguished from the ³public´ offering of securities. 2) Acting as advisers and arrangers for private placement of debt and equity. ‡ Venture Capital funds is institutional risk capital that has the mandate of investing in start-up companies. The term µprivate issue of equity¶ has to be interpreted in terms of issue of equity hares in the non-public route either through a private offering or by other means. Investment Bankers also place securities with a limited number of institutional investors such as insurance companies. the private market for raising equity can be broadly classified asINSTITUTIONAL andNON-INSTITUTIONAL private placements. 3) Acting as merchant bankers for transactions relating to rights issues and secondary public offers. product pricing strategy and SWOT analysis. the investment banker can deliver the following services to a start-up company: Strategy and business advisory services in formulating the business model for the company¶s stated business objective.the capital market. 4) Advise companies on pricing and valuation for various types of offers. . 5) Advise companies on post-listing issues and offerings. Broadly. Private Placement of Equity Equity capital can be raised through public offers or through private issues.

it is found that most of the top line investment banks do not prefer to work with start-ups in pure advisory role unless the company¶s business plan is large enough to their linking. are larger investors investing in later stage companies. presentations and ensuring negotiations with prospective Investors. stock broking companies. and following up as necessary. TheNON-INSTITU TIONA L investors include high networth investors (called HNIs). financial and investment companies. In this area. Considering the fact that investment banks provide transactionoriented services. seed stage venture investors (also called µangel¶ investors). The µengagement¶ in connection with a private equity transaction can be summarized as follows: Identify and initiate contact with prospective investors. Such kind of limited private offers are generally made by appointing a suitable agency that can facilitate the fund raising. and recommend to the company further action as may be required.Act as the arranger for the company¶s debt or equity financing as per the financing plan that includes representation and negotiations. Review the outcome of such meetings with the company. institutional market investors such as mutual funds and. While some investment banks specialize only in raising venture capital and private equity. Review and advise on proposals/offers from prospective investors. portfolio investors. the role of investment banker is more transaction oriented than in venture capital fund raising. other corporate. foreign institutional investors and non-resident Indians Private placements in the non-institutional category are generally made through close sources. the organization is fully in place and the cash flow model is proven. Raise financing for the company in the most efficient way possible. including road shows. Represent or accompany the company in meetings. This is because. the business model of the company is more established. others that have strong investor relationships . ‡ Private Equity funds on the other hand.

offer private placements to non-institutional investors as a service. Usually a check-list of the required information is prepared and the information is put together in the form of a private placement memorandum. the private placement market which is considered as a market for the informed investor and the placement being made in a close loop. mostly institutional or high net worth private investors. As of now. shareholders and existing lenders for the proposed debt and has the necessary powers under its memorandum and articles of association. has been hugely popular due to its simple and quick deal process. These are boutique investment banks that are often an extension of stock broking houses. Private Placement of Debt The private placement market for debt securities essentially consists of medium to long-term debt securities such as debentures and bonds being placed privately with selected investors. The arranger has to then become familiar with the company¶s business. Private placement of Debt is an important source of funds both for companies under the Companies Act and other types of entities such as public sector corporations. lack of elaborate disclosures and regulatory clearances.especially in the HNI category. the investors and both these are brought together by the investment banker who acts as the arranger to the placement. required for the . Therefore. the financials of the company and the financing requirements. financial institutions and banks. The first step in this direction would be to appoint the investment bank as an arranger to the whole placement. ingenuity and market intelligence to arrive at the coupon rate and suitable enhancements if any. the industry space. One of the important tasks of the investment banker is to arrive at the instrument in offer and the deal structure. there are three main constituents in this market ± the issuers. Debt securities issued through private placement can also be listed on the stock exchange to provide them with liquidity. The investment banker has to use his conventional wisdom. Sec 293(1)(a) and 293(1)(d) of the Companies Act. All the necessary back-up papers and documents are also compiled and kept ready for the requirement of investors. The first step for the investment banker is to ascertain that the company has taken the necessary approvals from its board. The deal process typically starts with the issuer rolling out a plan to raise funds through the private placement route.

investment banks have become increasingly involved in the process of arranging these transactions as part of their primary services. This is the most important business segment for investment bankers after management of public offers. popularly known as M&A. . To survive in the competition. sometimes becoming the largest revenue stream. the investment banker performs the pivotal role of transaction service. it has now become an integral part of the advisory service portfolio of leading investment banks. Project financing has traditionally been a term loan based activity. where investment banks had very little to do unless an element of capital market financing was involved. deal structure. acting as a catalyst for the entire deal. Credit rating is an important process in the deal as it enhances the possibility of closing the deal early by providing all the necessary comfort to investors. structure and functioning. (B)Corporate Advisory Services Corporate Re-organizations As a result of liberalization and globalization the competition in the corporate sector is becoming intense. conducts the valuation and due diligence and negotiations for arriving at the term sheet. accounting and tax issues involving such corporate re-organizations. In a corporate restructuring involving a split-up or a disinvestment by the promoters. this business segment. not only because of its complexity but because of its profound economic significance as well. in the traditional days of investment banking. However. contributed to a significant share of the bottom line of investment banks. This has led to corporate restructuring. Globally. The investment banker also works closely with other professionals such as accountants and legal advisors in order to look at the legal.instrument. companies are reviewing their strategies. Project Advisory Services Probably one of the most fascinating areas in corporate finance is project finance. the investment banker prepares the entire feasibility plan. Thus in all corporate re-organizations. identifies the buyers or the sellers as the case may be. With a growing number of mergers and acquisitions as well as corporate re-organizations.

future business opportunities and the resulting cash flow there from. Broadly. In order to achieve such restatement a complex financial and legal process is involved as it concerns several conflicting interests. existing borrowings and their carrying cost. The various steps involved are as follows: The first stage would be to formulate a viability plan for the company. of late. Project advisory services relate to all facets of project finance. present financial position. The Investment Banking Services in Debt Restructuring Investment bankers. loan applications and associated documents Act as µarranger¶ on behalf of the client for representation and negotiations with lenders and equity investors Management of private placements/public offers of debt or equity Achieve financial closure with the best terms and in the best possible time for the project. the investment banker has to understand the business model. Therefore. the range of services entails the following: Bid advisory services in projects wherein the project is awarded to a particular consortium through a bidding process Advise in entering into other key project contacts Structuring the means of finance for the project Preparation of Project Report. . which begin at the stage of project conceptualization and extend till the completion of financial closures and beyond. Financial Restructuring encompasses restructuring of debt capital (outside liability) as well as equity capital. Financial Restructuring Advisory µFinancial Restructuring¶ as the term denotes is the art of restating the financial position of a company as reflected by its Balance Sheet as on a given date. Financial Restructuring can be triggered off either from theasset side of the Balance Sheet or theliability side. Most projects in recent times have used the services of investment banks in this area of high finance. have developed a service area in advising and representing companies in debt restructuring programmes. For this purpose.especially of those with a Universal Banking background.

Since SEBI guidelines stipulate that share buybacks have to comply with SEBI guidelines.Once the company¶s viability and future operating plan have been formulated. if the buy-back is over priced. in the area of share buy-back. it may erode shareholders value for those who remain with the company post-buyback. The pricing becomes critical because if the buy-back is under-priced. companies that intend to restructure their equity capital are listed on the stock exchanges and therefore. and a merchant banker holding a valid license should manage the offer. it becomes imperative for the company to appoint a merchant banker as manager to the offer. the real need for an investment banker in equity restructuring is to play the role of a merchant banker for a proposed share buy-back if any. the role of the merchant banker becomes extremely important. The investment banker has to use his expert knowledge and prior experience in formulating the scheme. Mergers and Acquisitions Advisory . the next step would be to float the µDebt Restructuring Scheme¶ (DRS). More often than not. The major contribution that the merchant banker makes in such assignments. the offer may not be successful. On the other hand. The DRS has to comply with statutory norms and applicable guidelines issued by the RBI. apart from managing the offer. However. such restructuring may need to comply with the relevant provisions of the SEBI guidelines. is in advising the company on the proper method to be adopted for the buy-back accordingly. The next step would be to present the DRS to lenders and represent the client in discussion and negotiations with the consortium of leaders or individual lenders as the case may be. The Investment Banking Services in Equity Restructuring The investment banker plays an important role in the equity restructuring of a company. Therefore. as part of the restructuring programme. so as to envisage workable terms of sacrifice from lenders and attractive terms of liability and cost reduction for his client.

middle market M&A firms. merger is a combination of two or more companies into a single where one survives and other lose their corporate existence. The key differentiate or between a firm designated as an investment bank and a firm that operates as an M&A advisor is that an investment bank ± in addition to performing an M&A advisory role ± may also: . bulge bracket firms. business intermediaries and business brokers. M&A advisory constituted the only advisory area and accounted for the second largest revenue stream of their business. The investment banking domain in M&A advisory is mainly in partner search. It has become an important advisory area at a time when Indian industry is passing through a transformation to meet the demands of globalization. As a general rule. In the earlier era of investment banking. M&A advisory firms are referred to by a number of names including: investment banks. M&A advisory is also an area wherein investment banks face competition from pure advisory and professional firms and financial services companies. This service warrants high range of skill in the art of financial deal making that investment banks specialize in. due diligence and deal closure. negotiations and deal structuring. valuation. M&A have traditionally been the forte of investment banks world over. middle market firms handle the mid-size transactions and investment banks handle the largest transactions.In simple words. business brokers represent client of smaller transactions.