A

PROJECT REPORT ON
“A STUDY ON INVESTMENT BANKING ANALYSIS WITH SPECIAL
REFERENCE TO BANK”
University of Mumbai in partial completion of the degree of
Bachelor in commerce (Accounts Finance)
SEMESTER -VI
Under the faculty of commerce

Submitted By
Miss. PRANALI MAHINDRA INGAWALE
PRN NO 000000000
Under the guidance of
Prof. ANIKTA
DEPARTMENT OF COMMERCE

Gurukul COLLEGE OF COMPUTER SCIENCE AND INFORMATION

TECHNOLOGY, CHIPLUN
(Affiliated to the University of Mumbai)
2021-2022

pg. 1
 Gurukul COLLEGE OF COMPUTER SCIENCE AND INFORMATION
TECHNOLOGY, CHIPLUN
(Affiliated to the University of Mumbai)

Certificate
This is to certify that Miss. PRANALI MAHINDRA INGAWALE
has worked and duly completed her Project Work for the degree of Bachelor in
Commerce (Accounting & Finance) under the Faculty of Commerce in the subject of
Accounting and her project is entitled,
“A STUDY ON INVESTMENT BANKING ANALYSIS WITH SPECIAL
REFERENCE TO BANK”
under my supervision Prof. ANIKTA
I further certify that the entire work has been done by the learner under my guidance
and that no part of it has been submitted previously for any Degree of any University.
It is her own work and facts reported by her personal findings and investigations.

Date:

Name and Signature of External Examiner Head Of Department

Guiding Teacher Commerce

pg. 2
 Declaration by learner
I the undersigned Miss. PRANALI MAHINDRA INGAWALE
here by, declare that the work embodied in this project work titled “A STUDY ON
INVESTMENT BANKING ANALYSIS WITH SPECIAL REFERENCE TO BANK”
, forms my own contribution to the research work carried out under the guidance of
Prof. ANIKTA is a result of my own research work and has not been previously
submitted to any other University for any other Degree to this or any other University.

Wherever reference has been made to previous works of others, it has been clearly
indicated as such and included in the bibliography.
I, here by further declare that all information of this document has been obtained and
presented in accordance with academic rules and ethical conduct.

Name and Signature of the learner Certified by

pg. 3
 Acknowledgment
To list who all have helped me is difficult because they are so numerous and the depth
is so enormous.
I would like to acknowledge the following as being idealistic channels and fresh
dimensions in the completion of this project.
I take this opportunity to thank the University of Mumbai for giving me chance to do
this project.
I would like to thank my Principal Mrs. Poonam R. Shityalkar for providing the
necessary facilities required for completion of this project.

I take this opportunity to thank our Chairman Mr. Sanjay Pandurang Darekar for
her moral support and guidance.

I would also like to express my sincere gratitude towards my project guide

Prof. ANIKTA whose guidance and care made the project successful.

I would like to thank my College Library, for having provided various reference
books and magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped
me in the completion of the project especially my Parents and Peers who supported
me throughout my project.

pg. 4
It is my proud privilege to express my sincere gratitude to
allthose who helped me directly or indirectly in com
pletion of this project report.I am greatly indebted to Mr.
Govind Sowani my project guidefor his support, guidance and
valuable suggestions by which this
work h a s b e e n c o m p l e t e d e f f e c t i v e l y a n d e f
f i c i e n t l y . T h e s e a l l contributions are of immense
value.I o w e t h a n k s t o M r . K a s h y a p G a n a t r a m y c
o - o r d i n a t o r f o r providing the required data to complete t

pg. 5
INDEX

pg. 6
 Introduction
At a very macro level, ‘Investment Banking’ as the t
e r m s u g g e s t s , i s concerned with the primary function of
assisting the capital market in itsfunctions of capital
intermediation, i.e. the movement of financial resourcesfrom those
who have them (the Investors), to those who need to make us of them
for generating GDP (the Issuers). As already discussed banking
andfinancial institutions on the one hand and the capital market on
the other arethe two broad platforms of institutional
intermediation for capital flows inthe economy. Therefore, it
could be inferred that investment banks are
thosei n s t i t u t i o n s t h a t a r e t h e c o u n t e r p a r t s o f b
a n k s i n t h e f u n c t i o n o f intermediation in resource
allocation. Nevertheless, it would be unfair toconclude so, as
that would confine investment banking to a very
narrows p h e r e o f i t s a c t i v i t i e s i n t h e m o d e r n w o r l d o f
h i g h f i n a n c e . O v e r t h e decades, backed by evolution an
d also fuelled by recent technological developments,
investment banking has transformed repeatedly to suit
theneeds of the finance community and thus become one of the
most vibrantand exciting segment of financial services. Investment
bankers have alwaysenjoyed celebrity status, but at times they have
paid the price for excessiveflamboyance as well.To continue from
the above, in the words of John F. Marshall and M.E. Ellis,
‘investment banking is what investment banks do’. This definition
can be explained in the context of how investment banks have evolve
d in their functionality and how history and regulatory intervention
have shaped suchas evolution. Much of investment banking in its
present form thus owes its

origin to the financial market in USA, due to which, American

investment banks have been leaders in the American and Euro marke
ts as well.Therefore, the term ‘investment banking’ can
arguably be said to be of American origin. Their counterparts in
UK were termed as ‘merchant banks’since they had confined
pg. 7
themselves to capital market intermediation until theUS investment
banks entered the UK and European markets and extendedthe
scope of such businesses

pg. 8
 Investment Banking and Merchant Banking
Distinguished
At this stage, it would be relevant therefore, to draw a fine line of
distinction between the terms ‘Investment Banking’ and ‘Merchant B
anking’ as boththese terms are extensively used in this
project. ‘Merchant Banking’ as theterm suggests, is the
function of intermediation in the capital market. It consists
of assisting issuers to raise capital by placement of securities
issued by them with investors. However, merchant banking is not mer
ely aboutmarketing securities in an agency capacity. The
Merchant Banker has anonerous responsibility towards the
investors who invest in such securities.The regulatory
authorities require the merchant banking firms to
promotequality issues, maintain integrity an ensure compliance with
the law on ownaccount and on behalf of the issuers as well.
Therefore, merchant banking isa fee based service management of
public offers; popularly know as ‘issuemanagement’ and for private
placement of securities in the capital market. InIndia, the Merchant
Banker leading a public offer is also called as the
‘LeadManager’.O n t h e o t h e r h a n d , t h e t e r m , ‘ I n v e s t m e n
t B a n k i n g ’ h a s a m u c h w i d e r connotation and is gradually
becoming more of an inclusive term to refer toall types of capital
market activity, both fund-based and non-fund
based.T h i s d e v e l o p m e n t h a s b e e n d r i v e n m o r e b y
t h e w a y t h e A m e r i c a n investment banks have evolved
over the past century. Given this situation,investment banking
encompasses not merely merchant banking but
other related capital market activities such as –stock
trading, market making, underwriting, broking and asset
management as well. Besides the above,

Evolution of American Investment Banks

pg. 9
The earliest events that are relevant for this discussion can be
traced to theend of World War I, by which time, commercial
banks in the USA
werea l r e a d y p r e p a r i n g f o r a n e c o n o m i c r e c o v e r y a n d
c o n s e q u e n t l y, t o t h e significant demand for corporate
finance. It was expected that Americancompanies would shift
their dependence from commercial banks to stock and bond
markets wherein funds were available at a lower cost and
for longer periods of time. In preparation for a boom in the
capital markets inthe 1920s, commercial banks started to acquire
stock broking businesses in
a bid to have their presence made in such markets. The first of suchac
quisitions happened when the National City Bank of New York
acquiredHalsey Stuart and Company in 1916. As in the
past, in the entire 1920s, investment banking meant underwriting
and distribution of securities.The stock and bond market boom in
1920s was as opportunity that bankscould not miss. But
since they could not underwrite and sell
securities d i r e c t l y , t h e y o w n e d s e c u r i t y a f f i l i a t e s t h r o
u g h h o l d i n g c o m p a n i e s . However, they were not
maintained like water tight compartments. The affiliates
were sparsely capitalized as were financed by the parent banks
for their underwriting and other business obligations. While the
boom
lasted,investment banking affiliates made huge profits as
underwriting fees,specially in the segment called ‘Yankee Bonds’
issued by overseas issuers
inU S m a r k e t . I n t h e s t o c k m a r k e t , t h e b a n k s m a i n l y c
o n d u c t e d b r o k i n g operations through their subsidiaries and
lent margin money to customers.But with the passage of the
McFadden Act in 1927, bank subsidiaries began

underwriting stock issues as well. National City Bank, Chase Bank,

Morganand Bank of America were the most aggressive banks present

pg. 10
at that time. The stock market got over-heated with investment banks
borrowing money from the parent bank in order to speculate in
the bank’s stock, mostly for short selling. Once the general
public joined the frenzy, the price-earningratios reached absurd
limits and the bubble eventually burst in October 1929wiping out
millions of dollars of bank depositors’ funds and bringing down with
it banks such as Bank of United States/In order to restore
confidence in the banking and financial system,
severallegislation measure were proposed, which eventually
led to the passing of the Banking Act 1933 (popularly know as
Glass-Steagall Act) that
restrictedcommercial banks from engaging in securities un
derwriting and taking positions or acting as agents for others in s
ecurities transactions. Theseactivities were segregated as the exclusive
domain of investment banks.
Onthe other hand, investment banks were barred from dep
osit taking andc o r p o r a t e l e n d i n g , w h i c h w e r e c o n s i d e
r e d t h e e x c l u s i v e b u s i n e s s o f commercial bank. The Act
thus provided the water tight compartments
thatwere needed before. Since the passing of this Act, inv
estment banking became narrowly defined as the basket of
financial services associated withthe floatation of corporate securities,
i.e. the creation of primary market for securities. It was also
extended to mean at a secondary level, secondary market
making through securities dealing.By 1935, investment banking
became one of the most heavily regulated industries in
USA. The Securities Act, 1933 provided for the first time the

preparation of offer documents and registration of new securities with

thef e d e r a l g o v e r n m e n t . T h e S e c u r i t i e s E x c h a n g e
pg. 11
A c t , 1 9 3 4 l e d t o t h e establishment of the Securities Exchange
Commission. The Maloney Act of 1938 led to the formation of the
NASDAQ, the Investment Company Act,1940, which
brought mutual funds within the regulatory ambit and
theI n v e s t m e n t A d v i s e r s A c t , 1 9 4 0 w h i c h a l s o r e g u l a t
e d t h e b u s i n e s s o f investment advisers and wealth
managers.After the passing of the Glass-Streagall Act of the 1930s,
until the beginningof the 21
st
century, investment banking had been through several phases
of transformation which had broken down the water tight
compartments to agreat extent. Due to the 1973 Arab oil
embargo, world economies were under pressure and inflation
and interest rate volatility became disturbing.
Itw a s a t t h i s t i m e t h a t i n s t i t u t i o n a l i n v e s t o r s m a d d e r
t h e i r a d v e n t i n t o securities markets. It was also the time
when the industrial and
financials e r v i c e s e c t o r s w e r e b e g i n n i n g t o e x p a n d a n d
g l o b a l i z e . D u e t o t h e s e developments, investment banki
ng and commercial banking once again became constrained b
y the very legislation that was meant to clean up thesystem in the
1930s. This led to several relaxations over the years such asthe
Securities Acts Amendments, 1975 which had permitted
commercial banks to have subsidiaries (called section 20
subsidiaries) that were allowedto underwrite and trade in securities. In
1990, J.P. Morgan was the first bank to open a section 20 subsidiary.
Since the Glass-Streagall Act did not applyto foreign
subsidiaries of US banks, they continued to underwrite
in
theE u r o b o n d m a r k e t a n d b y 1 9 8 4 , t h e y h a d a 5 2 % m a
r k e t s h a r e i n t h a t business. But there was stiff competition from
Japanese banks in this marketand by 1987, they underwrote only 25%
of the Eurobond issuances

pg. 12
During the economic growth and globalization of the 1980s,
investment banking expanded to several new areas and services whic
h had includedcurrency trading, real estate, financial future
s, bridge loans, mortgage- backed securities and several others.
But the stock market crash of 1987once again brought the focus back
to core areas of specialization. Similarly,the ambitious expansion that
took place on a global scale was also halted tosome extent. However
due to technological advancements in the 1990s andthe availability
of global access through the revolution in
communicationt e c h n o l o g i e s f u e l l e d t h e g l o b a l g r o w t h
a g a i n . B u t t h i s t i m e t h o u g h , investment banking is no more
restricted to underwriting new issuances
andsecurity dealing. The shift is more towards providing
expertise in new products and risks. Apart from these activities, in
vestment banking alsoencompasses a considerable spectrum of
advisory services in the areas of corporate restructuring,
mergers and acquisitions and LBOs, fund
raisingand private equity. On the dealing and trading side
, investmen t banks participate in derivatives market, arbitrage and
speculation. In the area of structured finance, investment bank
s also provide financial engineering through securitization
deals and derivative instruments

pg. 13
 European Investment Banks
In continental Europe (excluding UK), the concept of a
‘Universal Bank’had been the undercurrent since the late
nineteenth century, when most
of t h e s e b a n k s w e r e s e t u p . T h e t e r m ‘ u n i v e r s a l b a n k
i n g ’ m e a n t t h e c o - existence of commercial banking
(lending activity) along with investment banking
(investment and distribution activity). Their universality was in
thesense of harnessing the vast retail customer base that these banks
enjoyed tomarket security issuances by their investment
banking arms. These issueswere mostly in the local markets
designated in the local currencies. France’sBanques d’affiars
and Germany’s Universalbanken are good examples.The United
Kingdom, which is considered as Europe’s largest
investment banking market, had its own structure evolved from histo
ry. The oldestm e r c h a n t b a n k i n L o n d o n w a s B a r i n g s B r o
t h e r s w h i c h h a d p l a y e d a prominent role in the nineteenth cen
tury. Securities distribution was thefunction of stock brokers,
secondary market trading was held by jobbers andadvisory services
were provided by merchant bank. The term ‘merchant bank’ was
evolved so as to distinguish between commercial banks and thosethat
provided capital market advice. However, the breaking down
of
such barriers in 1986 by allowing banks to own broking outfits led to
aconsolidation and most of the broking firms got
absorbed by larger and diversified entities. Around the same
time, the US too was witnessing thedisappearance of distinction
between pure broking entities restricted to
thesecondary markets and investment banking entities inv
olved with the primary markets. The US investment banks with the
ir integrated global business model entered UK and Europe and later i
nto Japan.

pg. 14
The introduction of the Euro currency in 1999, helped the US
invasion further byneutralizing the local currency advantages
enjoyed by European
universal banks. By 2001, the US bulge group garnered 29.7% of the
investment banking fee generated in Europe as compared to 16.3% by
the Europeanuniversal banks.Post-1986, the merchant banks
and commercial banks in UK could not m a t c h u p t o t h e
US onslaught which ultimately led to the sale of
SGWarburg, the merchant bank to Swiss Bank Corpo
r a t i o n ( w h i c h w a s acquired by UBS later) in 1995. In 1997,
Natwest Bank and Barclays Bank exited investment banking business.
Morgan Grenfell, a merchant bank wassold to Deutsche Bank in
1990. In this upheaval, niche players such as Drexel
Burnham and Barings Bank also collapsed with internal
deficiencies.This led to cross border M&A between European
banks inter-se and their American counterparts to create bigger
investment banks. UBS Warburgwas born out of merger of
UBS and Swiss Bank Corporation which had earlier acquired
SG Warburg. Deutsche Bank acquired Bankers Trust.

pg. 15
 Global Industry Structure
The investment banking industry on a global scale is oligopolistic in
natureranging from the global leaders (known as the ‘Global
Bulge Group’) to‘Pure’ investment banks and ‘Boutique’ investment
banks. The bulge groupconsisting of eight investment banks has
a global presence and these firmsdominate the league tables in
key business segments. The top ten globalfirms in terms of their
fee billing as in 2001 are listed in TableWithin the listing given
in the table referred to above are the top ‘pure’ investment
banks, i.e. which do not have commercial banking connections,which
are Merrill Lynch, Goldman Sachs and Morgan Stanley Dean
Witter.Listed therein are also the leading European Universal Banks
that are calledso due to their role in both commercial and
investment banking. The fiveleading universal banks in the world
and their important group affiliates aregiven in
TableT h e r e f o r e , t h e g l o b a l i n v e s t m e n t b a n k i n g i n
d u s t r y r a n g e s f o r m t h e acknowledged global leaders to a
larger number of mid-sized competitors ata national or regional level
and the rear end is supported by boutique firmsor advisory and
sectoral specialists.

pg. 16
 Business Portfolio of Investment Banks
Globally, investment banks handle significant fund-based business of
their own in the capital market along with their non-fund service
portfolio whichis offered to clients. However, these distinct segments
are handled either onthe same balance sheet or through subsidiaries
and affiliates depending uponthe regulatory requirements in the
operating environment of each
country.All these activities are segmented across three br
oad platforms –equitymarket activity, debt market activity
and merger and acquisition
(M&A)a c t i v i t y . I n a d d i t i o n , g i v e n t h e s t r u c t u r e o f t h
e m a r k e t , t h e r e i s a l s o a segmentation based on whether a
particular investment bank belongs to a banking parent or is
a stand-alone pure investment bank. Figure representsthe broad
spectrum of global investment
acitivity.F r o m t h i s d i a g r a m , i t m a y b e a p p r e c i a t e d t
h a t i n v e s t m e n t b a n k i n g encompasses a wide area of
capital market based businesses and
servicesand has a significant financial exposure to the ca
pital market. Thoughinvestment banks also earn a significant
component of their income fromnon-fund based activity, it is
their capacity to support clients with
fund- based services, which distinguishes them from pure merchant b
anks. In theUS capital market, investment banks underwrite issues or
buy them
outrighta n d s e l l t h e m l a t e r t o r e t a i l i n v e s t o r s t h e r e b y
t a k i n g u p o n t h e m s e l v e s significant financial exposure to client
companies. Besides, being such
largefinancial power houses themselves, the global invest
ment banks play amajor role as institutional investors in trading
and having large holdings of capital market securities. As dealers they
take positions and make a marketfor many securities both in equity
and derivative segments.

pg. 17
They hold large inventories and therefore influence the direction
of the market. GoldmanSachs, Salomon Brothers, Merrill Lynch,
Schroeders, Rothschild and other significant Market Investors both on
their own account and on behalf of the billions dollars of funds under
their management.The global mergers and acquisitions business is
very large and measures upto trillions of dollars annually. Investment
banks play a lead advisory role inthis booming segment of financial
advisory business. Besides, they come inas investors in management
buy-outs and management buy-in transactions.On other occasions,
wherein investment banks manage private equity funds,they also
represent their investors in such buy-out deals.In the case of universal
banks such as the Citigroup or UBS Warburg,
loan products form a significant
part of the debt market business portfolio.
Pureinvestment banks such as Goldman Sachs, Merrill Ly
nch and MorganStanley Dean Witter do not have commercial
banking in their portfolio andtherefore, do not offer loan
products. Besides the larger firms, there are
ah o s t o f o t h e r d o m e s t i c p l a y e r s p r e s e n t i n e a c h c o u n
t r y a n d m i d - s i z e d investment banks, which either
specialize in local markets or in certain product
segments.Some investment banks in the overseas markets
also specialize in niche segments such as –management of
hedge funds, bullion trade, commodityhedges, real estate
and other exotic markets

pg. 18
The Indian Scenario
Origin
In India, though the existence of this branch of financial
services can betraced to over three decades, investment
banking was largely confined tomerchant banking services.
The forerunners of merchant banking in
Indiaw e r e t h e f o r e i g n b a n k s . G r i n d l a y s B a n k ( n o w m
e r g e d w i t h S t a n d a r d Chartered Bank in India) began merchant
banking operations in 1967 with alicense obtained from the RBI
followed by the Citibank in 1970. These two banks were providing
services for syndication of loans and raising of equityapart from other
advisory services.It was in 1972, that the Banking Commission
Report asserted the need for merchant banking services in India by
the public sector banks. Based on theAmerican experience which led
to the passing of the Glass-Streagall Act, theCommission
recommended a separate structure for merchant banks so as todistinct
them from commercial banks and financial institutions.
Merchant banks were meant to manage investments and provide
advisory services.Following the above recommendations, the SBI set
up its merchant bankingdivision in 1972. Other banks such as the
–Bank of India, Central Bank of India, Bank of Baroda, Syndicate
Bank, Punjab National Bank, Canara Bank also followed suit to set
up their merchant banking outfits. ICICI was thefirst financial
institution to set up its merchant banking division in 1973. Thelater
entrants were IFCI and IDBI with the latter setting up its
merchant

pg. 19
 banking division in 1992. However, by the mid eighties and early nin
eties,most of the merchant banking divisions of public sector banks
were spun off as separate subsidiaries. SBI set up SBI Capital Markets
Ltd. in 1986. Other such banks such as –Canara Bank, BOB,
PNB, Indian Bank and ICICI created separate merchant banking
entities

pg. 20
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 primarymarket equity issues in 1992. However, post
1992, the merchant bankingindustry was largely driven by issue
management activity which fluctuatedwith the trends in the
primary market. These have been phases of hectic activity
followed by a severe setback in business. SEBI started to
regulatethe merchant banking activity in 1992 and a majo
rity of the merchant bankers who registered with SEBI were eithe
r in issue management or associated activity such as underwri
ting or advisorship. SEBI had four categories of merchant
bankers with varying eligibility criteria based ontheir
networth. The highest number of registered merchant bankers
withSEBI was seen in the mid-nineties, but the numbers have
dwindled
since,d u e t o t h e i n a c t i v i t y i n t h e p r i m a r y m a r k e t . T h e
n u m b e r o f r e g i s t e r e d merchant bankers with SEBI as at the
end of March 2003 was 124, from
a peak of almost a thousand in the nineties. In the financial year 2002-
03itself, the number decreased by 21

pg. 21
Constraints in Investment Banking
Due to the over dependence on issue management
activity in the initial years, most merchant banks perished in
the primary market downturn thatfollowed later. In order to
stabilize their businesses, several merchant banksdiversified to offer a
broader spectrum of capital market services. However,other than a
few industry leaders, the other merchant banks have not
beenable to transform themselves into full service investment
banks. Going bythe service portfolio of the leading full service
investment banks in India,
itm a y b e s a i d t h a t t h e i n d u s t r y i n I n d i a h a s s e e n
m o r e o r l e s s s i m i l a r development as its western
counterparts, though the breadth available in theoverseas capital
market is still not present in the Indian capital market.
Secondly, due to the lack of institutional financing in a
big way to fundcapital market activity, it is only the
bigger industry players who are ininvestment banking.
The third major deterrent has also been the lack of depth
in the secondary market, especially in the corporate debt segment.

pg. 22
Characteristics and Structure of Indian I
n v e s t m e n t B a n k i n g Industry
Investment banking in India has evolved in its own characteristics
structureover the years both due to business realities and the
regulatory regime.On the regulatory front, the Indian
regulatory regime does not allow allinvestment banking
functions to be performed under one entity for
tworeasons–(a) to prevent excessive exposure to business risk under
one
entityand (b) to prescribe and monitor capital adequacy an
d risk mitigation mechanisms. Therefore bankruptcy remoteness is
a key feature in structuringthe business lines of an investment
bank so that the risks and rewards aredefined for the investors
who provide resources to the investment banks. Inaddition, the
capital adequacy requirements and leveraging capability
for each business line have been prescribed differently under relevant
provisionsof law. On the same analogy, commercial banks in India
have to follow
the provisions of the Banking Regulation Act and the RBI regulations,
which prohibit them from exposing themselves to stock market invest
ments andlending against stocks beyond certain specified
limits.Therefore, Indian investment banks structure their b
usiness segments indifferent corporate entities to be able to meet
regulatory norms. For e.g. it isdesirable to have merchant banking
is a separate company as it requires aseparate merchant
banking license from the SEBI. Merchant bankers other than
banks and financial institutions are also prohibited from
undertakingany other business other than that in the securities
market. However, since

pg. 23
banks are subject to the Banking Regulation Act, they cannot perform
investment banking to a large extent on the
same balance sheet. Assetmanagement business in the
form of a mutual fund requires a three-tier structure under
the SEBI regulations. Equity research should be independentof the
merchant banking business so as to avoid the kind of
conflict of interest as faced by American investment banks.
Stock broking has to
bes e p a r a t e d i n t o a d i f f e r e n t c o m p a n y a s i t r e q u i r
e s a s t o c k e x c h a n g e membership apart from SEBI regi
stration. A complete overview of theregulatory framework for
investment banking is furnished later.Investment banking in India has
also been influenced by business realities toa large extent. The
financial services industry in India till the early 1980s was
driven largely by debt services in the form of term
financing from financial institutions and working capital
financing by commercial banksand non-
banking financial companies (NBFCs). Capital market services
were mostly restricted to stock broking activity which was driven by a
non-c o r p o r a t e u n o r g a n i z e d b o d y i n d u s t r y .
M e r c h a n t b a n k i n g a n d a s s e t management services came
up in a big way only with the opening up of thecapital markets in the
early nineties. Due to the primary market boom duringthat period,
many financial business houses such as financial
institutions, banks and NBFCs entered the merchant banking,
underwriting and
advisory business. While most institutions and commercial banks floa
ted merchant banking divisions and subsidiaries, NBFCs combined
their existing businesswith that of merchant banking.Over the
subsequent years, two developments have taken place. Firstly, withthe
downturn in the capital markets, the merchant banking industry has
seen

pg. 24
a tremendous shake out and only about a 10% of them remain
in
serious business as pointed out earlier. The other development is that
due to thegradual regulatory developments in the capital markets,
investment bankingactivities have come under regulations which
require separate registration,licensing and capital controls.Due to
the above reasons, the Indian investment banking
industry has a heterogeneous structure. The bigger investment
banks have several groupentities in which the core and non-
core business segments are distributed.Others have either one
or more entities depending upon the activity
profile.The heterogeneou s and fragmented structure is evi
dent even if Indianinvestment banks are classified on the basis of
their activity profile. Some of them such as –SBI, IDBI, ICICI, IL
& FS, Kotak Mahindra, Citibank
ando t h e r s o f f e r a l m o s t t h e e n t i r e g a m u t o f i n v e s t m e n
t b a n k i n g s e r v i c e s permitted in India. Among these, the long ter
m financial institutions aregradually transform ing themselves
into full service commercial banks(called ‘universal ban
king’ in the Indian context). They also have fullservice
investment banking under their fold. Other entities such as NBFCs
or subsidiaries of public sector banks mainly offer merchant banking
and other capital market services. There are also several others who
are providing
onlyc o r p o r a t e a d v i s o r y s e r v i c e s b u t p r e f e r t o h o l d m e
r c h a n t b a n k i n g o r underwriting registrations.Presently, there
are no global Indian investment banks although there is a bulge
bracket of investment banks in India that have some overseas
presenceto serve Indian issuers and their investors. At the
middle level are several

pg. 25
niche players including the merchant banking subsidiaries of
some publicsector banks. Some of these subsidiaries have been
either shut down or soldoff in the wake of two securities scam seen in
1993 and in 2000. However,certain banks such as Canara
Bank and Punjab National Bank have had successful
merchant banking activities. Among the middle level players arealso
merchant banks structured as non-banking financial services
companiessuch as Rabo India Finance Ltd, Alpic Finance etc.
There are also in themiddle level, some pure advisory firms
such as –Lazard Capital, Ernst &Young, KPMG, Price
Waterhouse Coopers etc. At the lower end are severalniche players
and boutique firms, which focus on one or more segments of the
investment banking spectrum

pg. 26
Service Portfolio of Indian Investment Banks
Core Services
Merchant Banking, Underwriting and Book Running
The primary market which was quite small in India, was revitalized
with theabolition of the Capital Issues (Control) Act 1947 and
the passing of theSecurities and Exchange Board of India Act,
1992. The SEBI functions asthe regulator for the capital
markets similar to its counterpart, the SEC inUSA. SEBI vide its
guidelines dated June 11, 1992 introduced free pricingof securities
in public offers for the first time in India. Over the last
tenyears, there have been two distinct phases of primary market
boom –the first between 1992-1996 and the second between 1998-
2001. The third wave of primary market issues could shape up in the
near future. This market is veryclosely regulated by SEBI. In the days
when the public offers market is
veryv i b r a n t , t h i s a r e a o f s e r v i c e f o r m s t h e m a i n a c t i v
i t y f o r m o s t I n d i a n investment banks. In the past few years,
though public offers have been veryfew, the private placement
market especially in the debt segment has beenvery active and
has served as an important source of funds for prime-
ratedcorporates. Notable among such offerings are related
privately placedd e b e n t u r e s i s s u e d b y p u b l i c s e c t o r c o
r p o r a t i o n s a n d l e a d i n g p r i v a t e companies. Financial in
stitutions have been raising funds via the public offers and
hand holding them in the private placements as well. Once
the private placement markets also come under regulatory stipulations
,investment banks would have a wider role to play in such issuances.

pg. 27
Mergers and Acquisitions Advisory
The mergers and acquisitions industry was pretty nascent in
India prior
to1 9 9 4 a n d c o n t i n u e s t o b e t i n y c o m p a r e d t o t h e
g l o b a l s c a l e o f s u c h transactions. However, two main
features that have given a big push to thisindustry are:
•
The forces of liberation and globalization that have forced the
Indianindustry to consolidate.
•
The institutionalization of corporate acquisitions by SEBI through
itsguidelines, popularly known as the Takeover Code.One of the
cream activities of investment banks has always been
M&Aadvisory. The larger investment banks specialize in M&A as a
core activity.While some of them provide pure advisory services
in relation to M&A,others holding valid merchant banking licenses
from SEBI also manage theopen offers arising out of such corporate
events

pg. 28
Corporate Advisory
Investment banks in India also have a large practice in corporate
advisoryservices relating to project financing, corporate restructuring,
capitalrestructuring through equity repurchases (including
management of
buyback offers under section 77A of the Companies Act, 1956), raisin
g privateequity, structuring joint-ventures and strategic partnerships
and other suchvalue added specialized areas

pg. 29
Support services and Businesses

Secondary Market Activities

Most of the universal banks such as ICICI, IDBI and Kotak Mahindra
havetheir broking and distribution firms in both the equity and debt
segments of the secondary market. In addition several other
investment banks such as theIL & FS and pure investment
banks such as DSP Merrill Lynch and JM Morgan Stanley
have a strong presence in this area of activity. In the pastfew
years, the derivatives segment has been introduced in Indian
capitalm a r k e t a n d t h i s p r o v i d e s a n a d d i t i o n a l a v e n u e
o f s p e c i a l i z a t i o n f o r investment banks. Derivatives tra
ding, risk management and structured products offerings are
the new segments that are fast becoming the areas of future potential
for Indian investment banks. The securities business
also provides extensive research offerings and guidance to investors.
Thes e c o n d a r y m a r k e t s e r v i c e s c a t e r t o b o t h t h e i
n s t i t u t i o n a l a n d n o n - institutional investors.
Asset Management Services
Most of the top financial groups in India which have
investment banking businesses such as the –
ICICI, the IDBI, Kotak Mahindra, DSP MerrillLynch, JM Morgan
Stanley, SBI and IL & FS also have their presence in theasset
management business through separate entities. As per the three
layer structure propounded by SEBI, the parent organization acts
as the sponsor of the fund and the fund itself is constituted as a trust.
The trust is managed by

pg. 30
Asset Management Services
Most of the top financial groups in India which have
investment banking businesses such as the –
ICICI, the IDBI, Kotak Mahindra, DSP MerrillLynch, JM Morgan
Stanley, SBI and IL & FS also have their presence in theasset
management business through separate entities. As per the three
layer structure propounded by SEBI, the parent organization acts
as the sponsor of the fund and the fund itself is constituted as a trust.
The trust is managed by
an asset management company and a separate trustee com
pany whichoversees the interests of the unit holders in the
Mutual Fund. The wholestructure has as arm’s length distance
from the sponsor’s other businessesand entities

pg. 31
Wealth Management Services (Private Banking)
Many reputed investment banks nurture a separate servic
e segment tomanage the portfolio of high networth
individuals, households, trusts andother types of non-institutional
investors. This can be structured either as
a pure advisory service wherein the investment manager does not hav
e anyaccess to the funds or as a fund management service wherein the
investmentmanager is given charge of the funds. In the former case, it
becomes a non-discretionary portfolio and in the latter
case, it becomes a
discretionary portfolio. Such activity is regulated under the SEBI g
uidelines as alreadydiscussed. In other cases, wealth management
may be restricted to
a research based activity wherein the investor is provided good invest
mentrecommendations from time to time.

Institutional Banking
Institutional investors have been a recent phenomenon in the Indian
capitalmarket, which till then had the presence of a
handful of public financial institutions such as the UTI and the
insurance companies. The term lendinginstitutions such as the
IDBI and IFCI did not participate in secondary market
dealing as a matter of policy. With the advent of liberalization, there
are presently a large number of domestic institutional in
vestors in thesecondary market apart from approved foreign
institutional investors. Inaddition, institutional investments
have risen significantly in the primarymarkets through venture
capital and private equity investments by investorsin both the
domestic and non-domestic categories. Several of the
leadinginvestment banks either have dedicated venture funds or
private equity fundsthat invest in primary market. In addition they
make proprietary investmentsin the secondary market through
their dealing and market activities. The business portfolio of
Indian Investment Banks has been briefly discussed inFig
pg. 32
Interdependence between Different Verti
c a l s i n I n v e s t m e n t Banking
As is evident from Figure , there are different
verticals in investment banking and they do enjoy synergies with o
ne another. While some of theservice or business segments form
the core of investment banking,
others provide invaluable support. This inter-dependence and comple
mentaryexistence has been explained below.While merchant banking
largely relates to management of public
floatationsof securities or reverse floatations such as buy b
acks and open offers,underwriting is an inherent part of
merchant banking for public issues.Similarly, bought out
deals and market making are a part of the process of floating
issues on the OTC Exchange of India. The concept of
marketmaking has now been introduced for listing of certain
scrips in the mainstock exchanges as well. Advisory and
transaction service have a
closel i n k a g e w i t h m e r c h a n t b a n k i n g a s m o r e o f t e n t h
a n n o t , s u c h s e r v i c e s culminate in a merchant banking
assignment for a public issue or a reversefloatation. Such services
also help in maintaining an enduring relationshipwith clients
during those times when merchant banking is not a hot activitydue to
depressed market conditions. The other segment of primary
marketactivity, i.e. venture capital and private equity has
equal synergies
withm e r c h a n t b a n k i n g . B e i n g i n v e n t u r e c a p i t a l b u s i
n e s s w h i c h e n a b l e s identification of potential IPO candidates
quite early, which helps not onlyin generating good fee income
from merchant banking services, but alsogood in capital gains
for the venture capital invested at earlier rounds of

pg. 33
financing in such companies. Similarly, being in private equity
businesshelps in harnessing the potential offered by later stage and
listed companies,which may approach an investment bank
primarily for merchant bankingservices.The support business
vertical in the secondary market operations also havesynergies with
those in the primary equity and debt market segment as far
asinvestment banking is concerned. Stock broking and primary
dealership indebt markets nurture institutional, corporate and
retail clients who can betapped effectively for asset management,
portfolio management, and privateequity business. In addition,
presence in the equity derivative and foreignexchange
derivatives segments can help in offering solutions in
treasurymanagement to clients. In addition, the advisory and
transaction
servicesvertical can draw expertise from such segments in
providing structured financing solutions to its clients. All
these verticals are driven by supportservices such as sales and
distribution and also equity research and analysis.Lastly but more
importantly, the capability in sales and distribution
alsodetermines the success of the merchant banking vertical.Thus, it
may be seen that the growth and success of an
investment bank depends on its strengths in each vertical and how
well it combines them for synergies. To sum up, investment banking
is a business that is very sensitiveto the economic and capital
market scenario and therefore, the broader
the platform of its operations, the more is likelihood of an investment
bank surviving business cycles and sudden shocks from the market

pg. 34
Regulatory Framework for Investment Banking
As discussed above, investment banking in India
is regulated in its variousfacets under separate legislations or
guidelines issued under statute.
Ther e g u l a t o r y p o w e r s a r e a l s o d i s t r i b u t e d b e t w e e n d i
f f e r e n t r e g u l a t o r s depending upon the constitution and
status of the investment bank. Pureinvestment banks which
do not have presence in the lending or
banking business are governed primarily by the capital market regul
ator (SEBI).However, universal banks and NBFC investment
banks are also regulated primarily by the RBI in their core business
of banking or lending and so far as the investment banking segment is
concerned, they are also regulated bySEBI. An overview of
the regulatory framework is furnished
below:1 . A t t h e c o n s t i t u t i o n a l l e v e l , a l l i n v e s t m e n
t b a n k i n g c o m p a n i e s incorporated under the
Companies Act, 1956 are governed by the provisions of that
Act.2.Investment banks that are incorporated under a separate
statute suchas the SBI or the IDBI are regulated by their respective
statute.
IDBIi s i n t h e p r o c e s s o f b e i n g c o n v e r t e d i n t o a c o m p
a n y u n d e r t h e Companies Act.3.Universal Banks are regulated
by the Reserve Bank of India under theRBI Act 1934 and the
Banking Regulation Act which put restrictionson the investment
banking exposures to be taken by banks. The RBIhas relaxed the
exposure limits for merchant banking subsidiaries of commercial
banks. Till now, such companies were restricting their

pg. 35
exposure to a single entity through the underwriting
business and other fund based commitments such as standby
facilities etc to 25% of their net owned funds (NOF). Therefore these
companies are now on par with other investment banks which can do
so up to 20 times their NOF.4.Investment banking companies
that are constituted as non-bankingfinancial companies
are regulated operationally by the RBI under Chapter IIIB
(sections 45H to 45QB) of the Reserve Bank of IndiaAct, 1934.
Under these sections RBI is empowered to issue
directionsin the area of resource mobilization, accounts an
d administrative controls. The following directions have been
issued by the RBI so far:
•
Non-Banking Financial Companies Acceptance of Deposits(Reserve
Bank) Directions, 1998.
•
NBFCs Prudential Norms (Reserve Bank) Directions,
1998.5.Functionally, different
aspects of investment banking are regulatedunder the
Securities Exchange Board of India Act, 1992 and
theguidelines and regulations issued there under. These are listed
below:
•
Merchant banking business consisting of management of publicoffers
is a licensed and regulated activity under the Securitiesand
Exchange Board of India (Merchant Bankers) Rules 1992and
Securities Exchange Board of India (Merchant
Bankers)Regulations 1992.

pg. 36
•U n d e r w r i t i n g b u s i n e s s i s r e g u l a t e d u n d e r
t h e S E B I (Underwriters) Rules 1993 and the SEBI
( U n d e r w r i t e r s ) Regulations 1993.

•The activity of the secondary market operations including

stock broking are regulated under the relevant by-laws of the stock ex
change and the SEBI (Stock Brokers and Sub Brokers) Rules1992
and the (Stock Brokers and Sub Brokers)
Regulations 1992. Besides, for curbing unethical trading practices,
SEBI
has promulgated the SEBI (Prohibition of Insider Trading)Regulation
s 1992 and the SEBI (Prohibition of Fraudulent
andU n f a i r T r a d e P r a c t i c e s R e l a t i n g t o S e c u r i t i e s
M a r k e t s ) Regulations 1995.

•The business of asset management as mutual funds is regulatedunder

the SEBI (Mutual Funds) Regulations 1996.

•The business of portfolio management is regulated under

theSEBI (Portfolio Managers) Rules, 1993 and the SEBI
(PortfolioManagers) Regulations, 1993.

•The business of venture capital and private equity by su

chfunds that are incorporated in India is regulated by the
SEBI(Venture Capital Funds) Regulations, 1996 and by those
thatare incorporated outside India is regulated under the
SEBI(Foreign Venture Capital Funds) Regulations 2000.

•The business of institutional investing by foreign

investment banks and other investors in Indian secondary markets is
governed by the SEBI (Foreign Institutional Inv
e s t o r s ) Regulations 1995.

pg. 37
6.Investments banks that are set up in India
w i t h f o r e i g n d i r e c t investment either as joint ventures
with Indian partners or as fullyowned subsidiaries of the
foreign entities are governed in respect of the foreign
investment by the Foreign Exchange Management Act,1999
and the Foreign Exchange Management (Transfer or issue
of Security by a Person Resident Outside India) Regulations 2000
issuedthere under as amended from time to time through circulars
issued bythe RBI.
7.Apart from the above specific regulations relating
t o i n v e s t m e n t banking, investment banks are also governed
by other laws applicableto all other businesses such as the –tax law,
property law, state laws,arbitration law and other general laws that are
applicable in India.

pg. 38
Regulatory Framework for Merchant Banking
Merchant Bankers are governed by the SEBI (Merchant
Bankers) Rules 1992 and SEBI (Merchant Bankers)
Regulations 1992. According to theSEBI (Merchant Bankers)
Rules 1992 a Merchant Banker means ‘a personwho is
engaged in the business of issue management either by
makingarrangements regarding selling, buying or subscri
bing to securities asmanager, consultant, advisor or rend
ering corporate advisory service inrelation to such
issue management’.Given the fact that Merchant Bankers are
entrusted with the responsibility of issue management by law, the
regulatory framework is designed to ensurethat they sufficient
competence and exercise diligence in their work suchthat the
issuers comply with all statutory requirements concerning the issue.At
the same time, the merchant banker shall have high levels of integrity
sothat quality issues alone are brought to the primary market.
Keeping theseobjectives in mind and investor protection as the
paramount objective,
theS E B I h a s l a i d e m p h a s i s o n e n s u r i n g t h a t m e r c h a n t
b a n k e r s f u l f i l t h e eligibility criteria on an on-going
basis and has therefore provided for compulsory
registration every three years. All Merchant Bankers need
tohave a valid registration certificate under the said rules to perform
the role of Merchant Bankers to issues. In considering the application
for registration,SEBI shall pay regard to the professional
qualification in finance, law
or business management, adequate office space, manpower, office eq
uipmentand other infrastructure, at least two support staff
members who have thecompetence to be in the field of
merchant banking business, existence of

pg. 39
minimum stipulated capital and previous experience to
investor
grievanceredressal.T h e a c t i v i t i e s t h a t a M e r c h a n t B a n
k e r i s a u t h o r i z e d t o d o a r e i s s u e management and
a s s o c i a t e d a c t i v i t i e s s u c h a s a d v i s i n g o r p r o v i d i n g co
nsultancy or marketing services for the issue, underwriting of issues
and portfolio management, though portfolio management alone requir
esadditional registration under the relevant regulations. Merchant
Bankers are precluded from carrying on any business or fund-
based activity other thanthat associated with the securities market.
Merchant Bankers are also
bound by the Code of Conduct prescribed under the Regulations. In a
ddition,M e r c h a n t B a n k e r s h a v e t o c o m p l y w i t h
g e n e r a l o b l i g a t i o n s a n d responsibilities under the
Regulations.Presently there is only one category of
Merchant Bankers prescribed by SEBI (Category I) and the
minimum stipulated networth for such MerchantBankers is Rs.five
crore. Such Merchant Bankers holding valid certificatesof
registration are alone qualified to manage public offers. SEBI
levies aone-time authorization fee, an annual fee and a
renewal fee from each Merchant Banker.Under the regulations,
Merchant Bankers have also to submit periodicalreturns and any
other additional information that SEBI might seek from timeto time.
SEBI also has a right of inspection of the books of account,
recordsand documents of the merchant banker at any time if
required. SEBI maysuo moto conduct an enquiry or launch an
investigation into the working of a Merchant Banker or on
receipt of a complaint against such Merchant

pg. 40
Banker. SEBI may even appoint an external auditor to inspect the
books
andr e p o r t t o S E B I . B a s e d o n t h e f i n d i n g s , S E B I i
s e m p o w e r e d t o t a k e appropriate action to award penalty
points to the erring Merchant
Banker based on the degree of the default or contravention in accord
ance with theSEBI (Procedure for Holding Enquiry by Enquiry
Officer and ImposingPenalty) Regulations 2002. The aggrieved
Merchant Banker may prefer
toa p p e a l t h e C e n t r a l G o v e r n m e n t u n d e r t h e S E B I
( A p p e a l t o C e n t r a l Government) Rules 2003. It may also
be mentioned here that a MerchantBanker is deemed to be a
connected person to the issuer under the SEBI (Prohibition
of Insider Trading) Regulations, 1992.

pg. 41
Anatomy of Some Leading Indian Investment
Banks.

ICICI Securities Ltd. (I-Sec).

I-Sec is a part of the ICICI group whose parent company is the ICICI
Bankmwhich till recently was a financial institution that
converted itself into auniversal bank by it merger with its own
commercial bank, the ICICI Bank in 2003. I-Sec, which was
initially a joint venture with J.P. Morgan of
theU S , b e c a m e f u l l y o w n e d b y I C I C I a f t e r J . P . M o r g
a n e x i t e d f r o m t h e business.I-Sec is a full service
investment bank that provides services across all thesegments
spanning –debt market, equity market, derivatives and
corporateadvisory services. It has support services in rese
arch and broking. Thea d v i s o r y b u s i n e s s f o c u s e s o n m e
r g e r a n d a c q u i s i t i o n s , c r o s s b o r d e r acquisitions, equity
and bidding for a number of reputed companies. Theequity
business offers research, sales and execution services to
institutionalinvestors in the secondary market and capital market
related services such
ase x e c u t i o n o f p u b l i c o f f e r i n g s , s t r u c t u r i n g a n d
r e g u l a t o r y a n d l e g a l documentation services.In order to
assist/provide corporate clients and institutional investors
withi n v e s t m e n t b a n k i n g s e r v i c e s i n t h e U S A . I - S e c
s e t u p t w o U S b a s e d subsidiaries namely ICICI Securities
Holding Inc and ICICI Securities
Inc.ICICI Securities Inc registered itself with the Nationa
l Association of

pg. 42
Security Dealers Inc as a broker-dealer, empowering it to engage in a
varietyof securities transactions in the US
market.I C I C I B r o k e r a g e S e r v i c e s L i m i t e d , a m e m b e r o
f t h e N a t i o n a l S t o c k Exchange of India Limited, is the
domestic broking subsidiary of I-
Sec’sdistribution and secondary market services are hand
led by the brokingcompany.

DSP Merrill Lynch Ltd.

Originally incorporated as DSP Financial Consultants Ltd, its
name waschanged to DSP Merrill Lynch (DSP-ML) in 1996
following its conversioninto a joint venture with Merrill
Lynch of USA, a leading international capital raising financial
management and advisory company. Merrill Lynchhas a 40% equity
stake in DSP-ML. DSP-ML is a part of the DSP groupwhich has
been in the securities and brokerage business for 130 years in
theIndian market, thus pre-dating even the Bombay Stock
Exchange.DSP-ML is a leading full service Investment Bank
that provides servicesacross debt market, equity market and
corporate advisory segments. It
also provides services to private customers on equity and debt product
s andwealth management. It has a full fledged research team serving
the needs
of both its institutional and retail clients. The company is among the
major players on proprietary
account in the debt and equity markets and is also aregistered primary
dealer in government securities.

pg. 43
The functional divisions at DSP-ML consist of the –Investment
BankingGroup, the Equity Sales Group, the Equity Trading
and Dealing Group, DebtSales Group, the Mergers and Acquisitions
Group, the Research Group andthe Private Client Group. The
investment banking group generates equityand debt products
emerging from IPOs, secondary issues and debt marketissues as
well as private placements. It is also a leading underwriter in
bothequity and debt products. These products are distributed through
the equitysales group and the debt sales group. Both the
marketing groups serve a cross section of institutional
clients, other non-institutional clients such astrusts and
investment companies, retail clients and overseas investors.
Thesales groups also distribute apart from their own
products, the products emerging from other entities such as
DSP Merrill Lynch Mutual Fund andother mutual funds. The
sales groups are supported by a national
distributionnetworking comprising of approximately 8000 sub-
brokers and alliance partners.The trading and dealing groups
support the broking activity in equities andthe primary dealership
activities in the debt market. DSP-ML, is one of thelargest
institutional broking firms in India. It is a founding member of
TheStock Exchange, Mumbai (BSE) and is an active member
of the
NationalS t o c k E x c h a n g e ( N S E ) o f I n d i a i n b o t h t h
e e q u i t y s e g m e n t a n d t h e wholesale debt market segment. It
is an accredited primary dealer with theRBI and an active
participant in the Government Securities/Treasury billmarkets.
As a primary dealer, it makes a market for debt securities
byoffering to buy and sell quotes. These quotes are also
available on
wires e r v i c e s l i k e R e u t e r s , C r i s i l M a r k e t w i r e , B l o o m
b e r g a n d D o w J o n e s Newswires.

pg. 44
The mergers and acquisitions advisory has been
structured as a separate specialist group that offers their
clients financial advice and assistance inrestructuring, divestures,
acquisitions, de-mergers, spin-offs, joint
ventures, privatization and takeover defense mechanisms. The researc
h group offers products such as –sectoral reports, company reports an
d special themeanalyses, daily, weekly and monthly market views as
well as specific policyforecasts. The private client group offers
depository, broking and investmentadvisory services to high net worth
individuals, professionals and promotersof business groups, corporate
executives, trusts and private companies.In 1996, the DSP group
floated a separate equity broking company calledDSP Securities
Ltd. which is a member of the BSE

pg. 45
M Morgan Stanley Pvt. Ltd.
JM Morgan Stanley (JMMS) is a joint venture between the JM
FinancialGroup and Morgan Stanley Dean Witter of the
USA. In 1997, Morgan Stanley which was established in New
York in 1935, had acquired DeanWitter, an investment bank
founded in 1924 in San Francisco. JM MorganStanley
commenced operations in April 1999. However, the association of the
two partners is limited only to the investment banking area. Both
of themhave separate asset management companies in India which run
independentof mutual fund businesses.Unlike DSP-ML and I-Sec
which have an integrated structure, the JM Grouphas separate
companies handling various components of the capital
market business. The core functions of investment banking are perfor
med byJMMS. This company focuses on capital raising, mergers and
acquisitions, private equity and advisory work for Indian corporations
in both theinternational and domestic capital markets. The function of
distribution andmarketing securities is handled by two of its wholly
owned subsidiaries –JMMorgan Stanley Retail Services Pvt. Ltd.
(JMRS) and JM Morgan StanleyFixed Income Securities Pvt. Ltd.
(JMFI). JMRS provides equity
distributions e r v i c e s f o r p r i m a r y m a r k e t p r o d u c t s , m u t u
a l f u n d s , e q u i t y s a l e s a n d marketing support for the group
broking activity and wealth
managementand portfolio management services to high ne
t worth individuals. JMFIoffers similar services in fixed
income (debt) securities. A third company,JM Morgan Stanley
Securities Pvt. Ltd. handles all the broking operations for the
group and provides services to institutional clients and others. It
also provides research support for both FII and Indian institutional
clients.

pg. 46
SBI Capital Markets Ltd

Founded in 1986 as a hive-off of the SBI Merchant Banking

division, SBICapital Markets Ltd. (SBI Caps) is amongst the oldest
players in the Indiancapital market. It is a full service investment bank
that provides investment,advisory and financial services. In
2001, SBI Caps started its sales and distribution activity along
with equity and debt broking services.SBI Caps provides services
across the following spectrum:
•
Mergers and Acquisitions
: This group provides advisory serviceswith regard to
disinvestment of the government, valuations,
mergersa n d a c q u i s i t i o n s i n t h e c o r p o r a t e s e c t o r , f i n a n
c i a l a n d b u s i n e s s restructuring and other areas.
•
Project advisory and structure finance
: It is arguably one of
thel e a d i n g g r o u p s i n t h e c o m p a n y t h a t p r o v i d e s s
e r v i c e s s u c h a s restructuring and privatization advisory for
public utilities, policyadvisory to Central and State
Governments, regulatory bodies andgovernment departments
and organizations, project structuring andadvisory to the private
sector and arranging finance for such projects.SBI Caps has been a
major player in governmental work and in theinfrastructure
sector. The project advisory services consist of hand-holding
from the concept to commissioning stage involving
projectstructuring, contract structuring, financial modeling, pr
eparation of i n f o r m a t i o n m e m o r a n d u m , s y n d i c a t i o n o f
d e b t a n d e q u i t y a n d assistance in documentation and fin
ancial closure. Other servicesinclude appraisals for green-
field and brown-field projects,
techno- e c o n o m i c a p p r a i s a l f r o m b a n k s a n d f i n a n c
i a l i n s t i t u t i o n s f o r establishing the viability of corporate
restructuring plans, and vettingof contracts, loan documents, project
documentation etc.

pg. 47
•Capital market
: This group provides merchant banking services inconnection
with public issues, rights issues and public offers for
buy- backs and open offers. It also advises clients on the private place
ments, ADR and GDR issues and overseas bond issues by theSBI.

•Treasury and Investments

: This group deals with the proprietary investment of the
company in the equity, debt and money markets.Resource
mobilization and management is also undertaken by this group.

•Broking of Equity and Debt

: SBI Caps is a registered broker and amember of the NSE in the
equity and wholesale debt segments and isalso a member in the equity
segment. The broking group caters to thesecondary market needs of
financial institutions, FIIs, mutual
funds, banks, other corporates, high net worth individuals, non-
residentinvestors and retail investors. The company commenced
wholesaledebt market broking in 2001. The company expects
to have a
strong presence in institutional broking. The company plans to open a
derivative trading desk soon.

•Sales and Distribution of equity and mutual fund products

: SBICaps has been a leading mobilizer of funds both for public
offers and private placements.

•Research
: This group provides the research support for in-
housedepartments and for institutional clients. Besides regular
updates on

pg. 48
companies and industries, the research group brings
o u t I n d i a Strategy, Debt Market Review and Daily Debt
Market review whichare circulated to SBI Caps investment banking
and broking clients.I n i t s a n n u a l r e p o r t f o r t h e y e a r
ending March 31, 2002, SBI
Capsreported that is has two business segments –(a)
F e e b a s e d s e g m e n t providing merchant banking and advisory se
rvices like issuemanagement, underwriting, arranger, project adv
isory and structuredfinance. (b) Fund based segment which
undertakes deployment of fundsin leasing, hire purchase and
securities dealing. However, as a result
of SEBI directives, fresh lending under leasing and hire-
purchase wasstopped from 1
st
July 1998. For the period 2001-02, SBI Caps was rankedfirst among
issue managers by PRIME database.

pg. 49
Kotak Mahindra Capital Company
Born in 1995 as part of a corporate re-organization as an
unlimited c o m p a n y . T h e K o t a k M a h i n d r a C a p i t a l C o m
p a n y ( K M C C ) , i s t h e investment banking entity belonging to
the Kotak Mahindra Group. It is astrategic joint venture between
Kotak Mahindra Bank Limited (KMBL)and the Goldman Sachs
Group LLP of USA. KMCC is a full service investment
bank whose core business centers on equity issuances andfixed
income securities, mergers and acquisitions and advisory services.A s
an investment bank, KMCC is registered with SEBI
a n d i s a l s o registered as a non-banking financial company
with RBI. It is also anactive member of the association of Merchant
Bankers of India (AMBI).KMCC has two wholly owned
subsidiaries –(a) Kotak Mahindra (UK)Limited, which is
registered with the Securities and Futures Association,UK and
regulated by the Financial Services Authority, UK and (b)
Kotak Mahindra Inc based in USA, which is registered with the
Securities andExchange Commission, USA. KMCC is the first Indian
investment bank to have sought such regulations in USA and UK. A
third company calledKotak Mahindra (International) Limited.,
based in Mauritius providesdistribution and other client services to
non-resident investors.In KMCC, the Equity Capital Markets group
focuses on structuring andexecuting diverse equity financing
transactions in the public and privatemarkets for corporates, banks,
financial institutions and the
Government.P r o d u c t s i n c l u d e i n i t i a l p u b l i c o f f e r i n g s ( I
P O s ) , r i g h t s o f f e r i n g s , convertible offerings, private
placements and private equity for unlistedand listed companies. In
the advisory business, the Structured Finance

pg. 50
(Project Finance & Advisory Business) Group provides e
xpertise invarious vertical segments in the infrastructure sector
including power, oil,gas, ports, automobiles, steel & metals and hotels
by offering
structuredfinance solutions to clients. The Fixed Income S
ecurities Group atKMCC advises PSUs, Government compan
ies, financial institutions, banks and corporates on raising capital b
y way of public or private placement of debt. KMCC is credited with i
nnovating on some bondstructures in the Indian market. The
advisory group on mergers
anda c q u i s i t i o n s p r o v i d e s c o m p l e t e s o l u t i o n s o n s t r a t
e g y f o r m u l a t i o n identification of targets or buyers,
valuation, negotiations and
bidding,c a p i t a l s t r u c t u r i n g , t r a n s a c t i o n s t r u c t u r i n
g , a s s i s t a n c e i n l e g a l documentation and acquisition
financing strategies and implementation.KMCC is supported in its
functions by Kotak Securities Ltd, a brokingfirm incorporated in
1995 that is also a joint venture with Goldman Sachswhich handles
all the broking, distribution and research business of the group.
Kotak Securities is a member of the debt segment of the NSE andis
also a member of the National Stock Exchange Members
Association.Kotak Securities offers services to investors, financial
institutions,
mutualfunds, religious and charitabl e trusts, insurance co
mpanies, etc. Theinstitutional business division has a
comprehensive research cell withsectoral analysts covering all
the major areas of the Indian
economy. Inthe international arena, it provides brokerage
services on the Indiansecurities to institutional and other
investors who are based outside India.Due to its overseas
presence, the company has marketing interests in Indian
GDR and ADR issues as well

pg. 51
The research products brought out by Kotak Securities include:

•For the institutional clients, a product called AKSESS,

which primarily covers secondary market broking. It caters to the ne
edsof foreign and Indian institutional investors in Indian equities
(bothlocal shares and GDRs).

•The Daily Forex Monitor which tracks the Indian and

internationalforeign exchange markets and opines on currency
strategies on adaily basis.

•The Weekly Money Market Update which gives the details of

thedevelopments in markets and provides a short-term interest
rateview along with indicative pricing for Triple A credits.

•The CURRENCY WATCH captures the monthly developments inthe

Indian foreign exchange markets, analyses the key
influencingi s s u e s , a s s e s s f u t u r e o u t l o o k a n d a l s o r e c o m
m e n d s h e d g i n g strategies.

•Monthly FINSEC and FINSEC Focus.Kotak Securities is also

a registered primary dealer with the RBI in
thegovernment securities market. As a primary dealer, the
company acts as
am a r k e t m a k e r a n d a l s o p r o v i d e s t w o w a y q u o t e s , a c
t s a s r e t a i l e r a n d marketing agent, provides underwriting
support on government securitiesissues and participates in
auctions held by the
RBI.B e s i d e s , t h e a b o v e c o m p a n i e s , t h e K o t a k G r o u p i
n c l u d e s t h e K o t a k Mahindra Bank which was formerly a
non-banking finance company thathas recently been converted
into a bank, the Kotak Mahindra Mutual Fund

pg. 52
which is managed by the Kotak Mahindra Asset Management
Co. Ltd andthe OM Kotak Life Insurance, which is a joint venture
with Old Mutual Plcof UK and the Kotak Mahindra Venture
Capital Co. which manages the private equity fund of the
group.

pg. 53
Recent Trends in Investment Banking
One of the trends that has been developing in the past few
years in theglobal and Indian investment banking arena, is the strong
emergence of universal banks ahead of pure investment banks as
market leaders. Theseuniversal banks have the additional
financial muscle of their bankingarms that add to their
investment banking strengths. Pure
investment banks have found it unmanageable to maintain leadership
positions dueto difficult market conditions and the economic
downturn. The year 2002has been dubbed as the watershed year in
investment banking for over adecade. Globally, universal banks
such as the –Citigroup, JP MorganChase and Deutsche Bank are
emerging strongly against pure
investment banks such as Goldman Sachs and Morgan Stanley. This tr
end could probably reappear in India as well with the emergence of S
BI, ICICI,IDBI and Kotak Mahindra Bank as strong universal banks.
However,
in2 0 0 2 , p u r e i n v e s t m e n t b a n k s s u c h a s J M M o r g a n S t
a n l e y a n d D S P Merrill Lynch still occupied top position
s in the investment bankingleague
tables.S o m e r e c e n t d e v e l o p m e n t s i n t h e i n v e s t m e n t b a
n k i n g i n d u s t r y a s reported in some financial dailies and
other press clippings are listed below:
International
•
The Wall Street IPO market has seen the fewest number of
issuessince 1978 in the calendar year 2003, with just five
in the first

pg. 54
quarter. These have mostly been from insurance and fina
ncialservices firms and four of them were IPOs.

•I n 2 0 0 2 , t h e r e w a s a d r o p o f 2 8 % i n g l o b a l e q u i t y
a n d e q u i t y related issuances according
to Thomson Financial. IPOs were themain causality with a
drop of 34% to $60.6 billion.
Europeanm a r k e t s a w a d r o p o f 5 3 % d r o p i n I P
O s a n d 5 4 % d r o p i n convertible bond issuances. In
Europe, the market focus
shiftedf r o m f u n d r a i s i n g t h r o u g h I P O s a n d p u b l i c
i s s u e s t o m o r e restructuring deals. These are termed as ‘rescue
finance’ deals
sucha s r i g h t s i s s u e a n d f u l l y c o n v e r t i b l e b o n d i s s u e s
b y t r o u b l e d companies.
Ericsson, Sonera and Zurich Financial Services aresome
companies that made rights issues in 2002. According
toDealogic, the volume of rights issues in Europe rose from
$20.7 billion to $21.5 billion in 2002. The most popular instrument in
USA and Europe has been the ‘mandatory convertible’ (f
ullyconvertible) bond which is considered as a forward
share sales which is superior in nature to a rights issue.

•The Citigroup was Wall Street’s top stock and bond underwriter
in2002. Citigroup affiliates Salomon Smith Barney arranged
$414 billion of offerings with a 10.6% market share according toTho
mson Financial. Merrill Lynch and CSFB were ranked secondand
third respectively. However, the total underwriting pie fell by5%
during the same year.

•The top IPO investment bank in 2002 was Salomon Smith

Barneyfollowed by Goldman Sachs. Goldman arranged the largest
IPO of

pg. 55
2002, the $4.6 billion CIT Group Inc. (Tyco
International Ltd) unit.

•The reported fee of American Investment banks fell by

21% in2002 to $14.1 billion. Salomon took the highest fee of
around
$2 billion followed by the other two with around $1.2 billion each.Sin
ce April 2001, 78000 jobs were slashed in this industry in
USAaccounting for about 10% of the total strength.

•Global M&A market was also dull in 2002 witnessing a sharp fallof
47% to stand at $996 billion from $1887 billion in the
previousy e a r . T h e b i g g e s t d e a l s i n 2 0 0 2 w e r e H P -
C o m p a q , A m g e n - Immunex Corp, AOL Time Warner-AOL
Europe, Bayer-
AventisC r o p S c i e n c e , C o m c a s t C o r p - A T & T
Broadband, PhilipsP e t r o l e u m - C o n o c o a n d
S i e m e n s R o b e r t B o s c h - A t c c s Mannesmann.

•Some of the big universal banks such as JP Morgan Chase

took major hits in their private equity businesses due to the
technologymeltdown. Incidentally, JP Morgan, which is one of Wall
Street’slargest private equity operators with a fund base of $28
billion,generated $130 million in revenues in private equi
ty in 2001fuelled mainly by the IPO market boom in technology
stocks. Dueto the meltdown, many investment banks have felt it
necessary tospin off their private equity operations into separate
entities. BNPParibas, Deutsche Bank, HSBC and Zurich Financial
Services aresome of these banks.

pg. 56
•American investors poured more money into debt mutual funds
in2002 accounting to $133 billion and there were few
takers for public issues of equity junk bonds and convertible
bonds.

National

•During the year 2001, JM Morgan Stanley which acted as

adviser toM&A deals worth Rs.16022 crore was rated the top
investment
bank i n I n d i a . T h e o t h e r p l a y e r s i n t h e b i g l e a g u e w e r
e ABN-Amro(Rs.10460 crore), DSP Merrill Lynch
(Rs.7130 crore), Arthur Andersen (now part of E&Y
, Rs.3532 crore), Kotak Mahindra(Rs.1719 crore), R
a b o I n d i a F i n a n c e ( R s . 8 3 3 c r o r e ) a n d L a z a r d Capital (
Rs.536 crore) –(as reported in the Economic Times 21
st
November 2001).

•In 2002, there was only one GDR/ADR issue as

compared to 6 in 2001 and 9 in 2000. This was made by
Mascon Global which raised$10 million through issue of
2.5 million GDRs which are listed
atL u x e m b o u r g S t o c k E x c h a n g e . I n t h i s m a r k e t , C i t i b
a n k w a s t h e leading depository banks according to Instanex
Capital Consultants.This was followed by Bank of New
York, Deutsche Bank and JP Morgan.

•In the M&A market, the year 2002 saw an increase of around
5% inthe value of M&A deals in Inda. Among these, more than
50% werec r o s s -
border deals according to a survey conducted by KP
M G Corporate Finance. The deals were mostly in the SME
segment withaverage size not exceeding $25 million. The
banking, finance and insurance sectors contributed almost one-
third of the total volume.Privatization deals also played a
significant part.

pg. 57
•DSP-ML de-listed from the stock exchange since its
promoters, Hemendra Kothari and Merrill Lynch together held more
than 90% of the shares. DSP was rated the ‘The Best Domestic
Investment
Bank’i n I n d i a f o r 2 0 0 0 b y F i n a n c e A s i a . E u r o m o n
e y v o t e d i t ‘ B e s t Domestic M&A House in India’ as
well as ‘Best Domestic Equity House in India’ in 2000. This
distinction has returned for three yearsin a row with DSP-ML being
named as the ‘Best Domestic
SecuritiesHouse’ and ‘Best Domestic Investment Bank’ for
2002-2003 byAsiamoney (May 2003 issue) and The Asset
(January 2003 issue) magazine respectively.

pg. 58
The Conflict of Interest Issue
The most burning global issue in the investment banking industry is
that of conflict of interest between investment bankers and their
research analysisdivisions. In the wake of the Enron, Worldcom and
other corporate
disasters,t h e i s s u e h a s g a i n e d s o m e s i g n i f i c a n c e . T h e S
e c u r i t i e s a n d E x c h a n g e Commission in the USA (SEC)
have initiated investigations into instances of investment banks
issuing over-optimistic research and steering shares in hotIPOs to
important clients for vested interests. In such investigations some
of the banks have been imposed fines. Merrill Lynch paid up fines to
the
extento f $ 1 0 0 m i l l i o n i n r e g u l a t o r y p r o c e e d i n g s i n 2 0
0 2 b r o u g h t a g a i n s t i t s misleading research reports.
Citigroup’s Salomon Smith Barney is also inthe dock and may
find itself paying the heaviest fines. CSFB also finds itself in trouble
with the regulators. Most of the other top investment banks suchas –
Goldman Sachs, Lehman Brothers, Bear Sterns, Deutsche
Bank, JPMorgan Chase and others also found their names in
the fines list in 2002.CSFB was fined for misleading investors on
offerings in technology shares.JP Morgan on the other hand,
has been under a cloud for its role in the infamous off-
balance sheet partnership it had crafted for Enron.Besides, investment
banks have also been the target of several lawsuits filed by aggrieved
investors. In late 2002, the French luxury goods leader LVMHfiled a
100 million euro lawsuit against Morgan Stanley alleging that
itsresearch report on LVMH was biased because of the investment
bank’s closeadvisory relationship with LVMH’s arch rival
Gucci Group NV. MorganStanley was also the underwriter of
Gucci’s IPO in 1995

pg. 59
Both the NYSE and NASDAQ came out with ‘research analysts’
conflict of interest rules’ in May 2002 which was
subsequently approved by SEC. Market observers have felt that
this is a good development from the point of view of addressing
conflict of interest, currently a burning issue in
theindustry. While an investment bank may be advising a
client on a buy out,its private equity arm may be in the fray for its
purchase. An example of thiswas the sale of the power storage
business of Invensys in 2001 whereinMorgan Stanley was
the advisor in the $505 million sale to EnerSys a company
owned by Morgan Stanley Capital Partners (Morgan
Stanley’s private equity firm).So how does the conflict of
interest really arise? Most investment banksh a v e i n -
house research divisions which act as a support func
t i o n a s discussed earlier. The research divisions perform vital
function of trackingcorporates and making recommendations to
their clients in the secondarymarket operations or to their own
dealing rooms. They also issue reviewsand ratings to new
issuances hitting the market. The conflict could arise if the
research analyst promotes a share, the public offering for which is
beinghandled by the merchant bank. Alternatively, it could also be
that the analystis privy to insider information being provided by
their merchant
bankingd i v i s i o n a n d t h e r e u p o n i s s u e r e c o m m e n d a t i o
n s t h a t c o u l d a m o u n t t o fraudulent deceit of investors or
gains for select few. Over the years,
thee t h i c a l w a l l b e t w e e n m e r c h a n t b a n k e r s a n d r e s e a r
c h a n a l y s t s m e l t e d especially in the heat of the IPO and the
internet boom. The
compensation patterns of the investment bankers and research analys
t were also gettingcomplementary to an extent thus undermining their
independence.
A study was conducted by the SEC in 2001on ‘full
service investment banks’ in Wall Street

pg. 60
focusing on these conflicting relationships. The studydisclosed two
main areas of conflict–(a) research recommendations tendingto
become marketing tools for merchant banking assignments by
the
same bank and analysts getting paid share of such investment bankin
g gains, (b)o w n e r s h i p o f s t o c k s b y r e s e a r c h a n a l y s t s i n
t h e c o m p a n i e s t h a t t h e y recommend or research. The study
disclosed that analysts leveraged
their position in pumping up recommendations in companies that the
y areinterested in when they went public.In the revised dispensation,
one of the main provisions is that analysts haveto disclose their
interests in their recommendations. In addition, there is sought
to be a water tight compartment in the working of the
merchant banking departments and research divisions. The third are
a has been theregulation of compensatory structures for research
analysts based on
the profits of the merchant banking divisions. The developments in th
e USAhave also resulted in precautionary amendments to regulations
made in
India by SEBI though such instances of conflict of interest have not s
urfaced sofar. SEBI has amended the regulations that have been in
place for MerchantBankers, Underwriters and for the prohibition of
insider trading. As a result,analysts are barred from private trading in
shares they analyze. There is stillroom for more regulation in future in
this area of importance for the survivalof the investment banking
industry.In conclusion, it can be said that the investment
banking industry has beenthrough difficult times. On one hand, the
economic slow down and the crashof the markets that were
propelled to dizzy heights by the new economy

pg. 61
stocks have battered their bottom lines and led to a large scale
cut back
ins t a f f a n d o p e r a t i o n s . O n t h e o t h e r h a n d , r o l e o f i n
v e s t m e n t b a n k s i n corporate scandals and their questionable
business practices and ethics havetaken a toll on their reputation
and image. A large scale cleaning up has totake place in their
methods of working and service offerings. Similarly, amajor
resurrection of their confidence is required through resurgence of
themarkets, whenever that happens. In the meantime, the industry has
to live upto the challenge through appropriate restructuring and
consolidation.

pg. 62
Conclusion
Given the scope for investment banking in India, the future looks
bright for the industry as a whole in India. Many more pure
investment banks and advisory firms could convert themselves
into full service investment banksthat would broaden the market
and make the service delivery much moreefficient. In addition,
the technological and market developments shapingthe capital
market as discussed would also provide an added impetus
togrowth of investment banking. Better regulatory supervision
and stricter enforcement of the code of conduct of market
intermediaries would ensurethat better quality issuers come to the
market and existing issuers wouldfollow enhanced standards of
corporate governance. In the long run, all thesedevelopments would
ensure fair return to investors, and bring back investor support to
the market. This would augur well for the capital market
ingeneral and investment banking in particular.

pg. 63