INVESTMENT BANKING

GROUP NO:-4
Prepared By:-
BULCHANDANI VASHDEV 09
CHOKSI VIRAJ 12
KANDALGAONKAR KAIVALYA 26
SHAH HARSH 49
SHAH PRIYAM 50
SURANA NALIN 56
WADHWANI RITESH 58
 Concept of Investment Banking
 Glass–Steagall Act- Stock Market Crash of 1929

 Glass–Steagall was effectively repealed for many large

financial institutions by the Gramm–Leach–Bliley Act in
1999.

 The Dictionary of Banking and Finance defines

‘investment bank’ as a term used in the US to mean ‘ a
bank which deals with the underwriting of new issues
and advises corporations on their financial affairs.

 Primary function of assisting capital market in the

movement of financial resources from those who have
them (investors) to those who want them (issuers).
Importance of Investment Banking
 For corporations- raising its capital. It facilitates
the trading of securities thereby, increasing the
liquidity of the securities.

 For Individuals- It provides investment

opportunities to the individuals or entities.

 Most of the corporations get advisory services

from the investment banks regarding the
mergers, acquisitions and divestiture.
 Structure of Investment Banking
 Investment banks are organized into "Front Office", "Middle Office", and "Back
Office" operations.
 Front Office
◦ Helping customers raise funds in the capital markets and advise on mergers
and acquisitions
◦ professional management of various securities and other assets
◦ Buying and selling financial products with the goal of making money on each
trade
◦ Creating and marketing financial products
◦ Researching industries, companies, and products
 Middle Office
◦ Analyzing credit and market risk for the bank
◦ Making sure operations are complying with regulations
◦ Responsible for capital management and risk monitoring
 Back Office
◦ making sure the bank runs smoothly by submitting trades, maintaining
databases, and transacting required money transfers
◦ Tthe information technology department
Evolution of investment banking in India
 The origin of investment banking in India can be traced
back to the 19th century when European merchant banks
set-up their agency houses in the country to assist in the
setting of new projects.

 In the early 20th century, large business houses followed

suit by establishing managing agencies which acted as
issue house for securities, promoters for new projects
and also provided finance to Greenfield ventures.

 A few small brokers also started rendering Merchant

banking services, but theirs was limited due to their
small capital base.
Contd…….
 It was soon followed by Citibank, which started rendering
these services.

 The banking committee, in its report in 1972, took note of

this with concern and recommended setting up of
merchant banking institutions by commercial banks and
financial intuitions.

 State bank of India ventured into this business by starting

a merchant banking bureau in 1972.

 In 1967, ANZ Grindlays bank set - up a separate merchant

banking division to handle new capital issues.
 Investment Banking in India
 Grindlays bank began Investment Banking (Merchant
Banking) in India in 1967 with RBI issuing the second
license to Citi in 1970.
 These two banks primarily provided services which
included loan syndication, equity raising and other
advisory services.
 In 1972, a Banking Commission report asserted the need
for Merchant Banking services in India by public sector
banks.
 The commission recommended the same structure as
American investment banks (Glass-Steagall Act).
 Merchant banks were meant to manage investments and
provide advisory services.
 Investment Banking in India
 SBI was the first Indian public sector bank to set up its
merchant banking division in 1972.
 This was followed by Bank of India, Central Bank of
India, Bank of Baroda and many more.
 SBI Caps and IDBI Caps are two prime examples of
merchant banks in India today.
 Currently, there are 136 merchant banks registered with
SEBI.
 Currently, without holding a certificate of registration
granted by the Securities and Exchange Board of India,
no person can act as a merchant banker.
 Role of an Investment Bank
 Consulting. Offer advices on mergers and acquisitions to
companies.
 Focus on environmental Issues in below two
circumstances
◦ For IPO, Due diligence and disclosure process
◦ Transactions relating to environmental Service Industry
 Relevance to developing and transition economies,
Underwriting Goverement Bonds.
 Brokering Privatization
 Tracking the market
 Role of an Investment Bank
 Managing public assets of businesses.
 Similar with that of a private brokerage house.
 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 for producing GDP (the
issuers).
 Helps the corporations in raising capital.
 Trading of securities thereby, increasing the liquidity of
the securities.
 It provides investment opportunities to the individuals or
entities.
 ACTIVITIES OF INVESTMENT
BANKERS
 Underwriting (Public offering of securities)
 Trading of Securities
 Private Placement of Securities
 Mergers and Acquisitions
 Merchant Banking
 Securitization of Assets
 Trading and Creation of Risk Control Instruments
 Money Management
 Underwriting
Function:-

• Public offering of securities.

• Helping firms raise funds thru stocks or bond

issues.

• It is a traditional activity -- "sponsoring.“

 Underwriting involves
 Origination: advising the issuer on the terms
(what type and how much) and timing of the
offering

 “Underwriting”: a kind of insurance

IBs buy securities from issuers and re-sell them to

customers.
If demand is lower than expected, IBs take loss.
Contd……
Making a market afterwards:


IBs may act as a dealer later, giving the issue extra liquidity.


Investors are more willing to buy the issue if they know there will be a
market later.

Sales and distribution:


IBs have built up regular network to sell securities.


Often, a syndicate is often organized by the lead or co-lead underwriters
(or co-managers) to share the capital risk.
 Trading of Securities
 The trading arm of an investment bank provides
important input for the pricing of a security, the
selling of the issue, and the subsequent liquidity
for the issue.
 IBs must take a principal position in a transaction.
 Revenue from trading is generated via
bid-ask spread, and
appreciation of the price of the securities held in
inventory
 Private Placement of Securities
 Investment banks assist the placement of
securities with a limited number of
institutional or wealthy individual investors.
 Fee for private placement:

Size (in million) fee

$ 5 - 10 1.5 - 4.0%
10 - 15 1.0 - 3.0%

25 - 50 0.7 - 2.0%

over 50 0.5 - 1.5%

 Mergers and Acquisitions
Role of investment banking in M&A
 Find M&A candidates:

 vertical merger
horizontal merger
use for excess cash/way to expand
find undervalued business (bad
management?)
 access to another market
Contd…
 Advise acquiring firms or target firms with respect
to price and nonprice terms of an exchange or
help target firms fend off an unfriendly takeover
attempt.

 Assist acquiring firms in obtaining financing.

 MERCHANT BANKING
 Merchant banking refers to a transaction in which an
investment banking firm commits its own funds by
either taking an equity interest or creditor position in
companies.

 An example is bridge financing wherein an

investment banking firm loans funds to a client to
consummate a takeover. Bridge financing is not only
important for its potential source of interest income,
but also to attract clients who are considering an
LBO.
 Securitization of Assets
 Securitization of assets refers to the issuance of
securities that have a pool of assets as
collateral.

 Example: Citibank and Cheung Kong Holding's

Mortgage-backed securities.

 Revenue from securitization:

The underwriting of an issue
Price difference
Trading and Creation of Risk Control
Instruments
 There are risk control instruments which an investment
banking firm creates for its clients and in which it acts as a
counterpart to the agreement.

 Examples of contracts that can be used to control risk for

both investors and issuers include futures, options, interest
rate swaps, and customized interest rate agreements.

 Risk control instruments are also used by investment

banking firms to protect their own position in transactions
 Money Management
 Investment banking firms have created
subsidiaries that manage funds for either
individual investors or institutional investors such
as pension funds.
 Competition
• Investment banking firms are facing competition from:

 Commercial banks with the virtual elimination of Glass-Steagall

 New trading technology that is allowing institutional investors to execute
trades without employing investment banking firms as intermediaries.
 Direct purchase by institutional investors of publicly registered securities
from issuers.
 some of the more sophisticated corporations themselves who are
establishing in-house groups to perform some of the activities traditionally
done by investment banking firms.
 Top 10 Investment Bankers in India
 Vendus Capital
 Bajaj Capital
 Cholamandalam Investment & Finance Company
 ICICI Securities Ltd
 IDFC
 Kotak Mahindra Capital Company
 SBI Capital Markets
 Tata Investment Corporation Limited (TICL)
 Yes Bank
 UTI Securities Ltd
Global Investment Bankers
 Bank of America (Bank of America Merrill Lynch)
 Barclays (Barclays Capital)
 BNP Paribas (BNP Paribas CIB)
 Citigroup (Citi Institutional Clients Group)
 Credit Suisse
 Deutsche Bank
 Goldman Sachs
 HSBC
 JPMorgan Chase (J.P. Morgan Investment Bank)
 Morgan Stanley
 Nomura Holdings
 UBS (UBS Investment Bank)
 Royal Bank of Canada (RBC Capital Markets)
 Royal Bank of Scotland
 Wells Fargo (Wells Fargo Securities)
Large financial-services conglomerates combine
commercial banking and investment banking, and
sometimes insurance
 ABN Amro
 Bank of Montreal (BMO Capital Markets)
 BNP Paribas (BNP Paribas CIB)
 Fortis
 HSBC
 ING Group
 KBC Bank
 Kotak Mahindra Bank
 Nomura Securities Co.
 Royal Bank of Canada (RBC Capital Markets)
 Royal Bank of Scotland Group (RBS Securities)
 Standard Bank
 Standard Chartered Bank