Investment Banking

An investment bank is a financial institution that assists

individuals, corporations, and governments in raising
financial capital by underwriting or acting as the client's
agent in the issuance of securities (or both).
An investment bank may also assist companies involved in
mergers and acquisitions (M&A) and provide ancillary
services such as market making, trading of derivatives and
equity securities, and FICC services (fixed income
instruments, currencies, and commodities).
Types of players in investment banking

Full-Service Firms- These are type of investment banks who have

significant presence in all areas like underwriting, distribution,
M&A, brokerage, structured instruments, asset management etc.
They are all rounder of the game.
Commercial Banks- Commercial Banks operating through “Section
20” subsidiaries referring to the subsidiaries formed under section 20
of the Glass- Steagall Act which were allowed to carry on limited
investment banking services.
Boutique Firms-These are the type of players which specialist in
particular areas of investment banking.
Brokerage Firms- These firms offers only trading services to retail &
institutional clients. They have huge investor base which is also used
by underwriters to place issues.
 Asset Management Firms- These firms offer on investment services.
This includes activities like fund management, wealth management,
cash management, portfolio management depending on the type of
investors, tenure of corpus, purpose of investments, type of instrument
invested in etc.
Investment Banking Services
Non- Fund Based:
1. Merchant Banking Service for:
 Management of public offers of equity & debt instruments.
 Buy back offers
 Book-running

2. Advisory & transaction service in:

 Project financing
 Syndicate loan
 Venture capital
 Private equity
 Private placements of equity & debt
 Business advisory & structuring
 Financial restructuring
3. Corporate reorganizations such as Merger & acquisition, asset sales, sell-off
& exit etc.
 Acquisition & takeovers
 Government disinvestments & privatization
 Asset recovery agency services

Fund Based Services

 Underwriting
 Market making
 Bought out deals
 Investment in primary market
Services rendered by Merchant bankers

a. Corporate counseling- Corporate counseling covers counseling in the form of

project counseling, capital restructuring, project management, public
issue management, loan syndication, working capital, fixed deposit,
lease financing, acceptance credit etc. The scope of corporate counseling is
limited to giving suggestions and opinions to the client and help taking
actions to solve their problems. It is provided to a corporate unit with a view
to ensure better performance, maintain steady growth and create better image
among investors.
b. Capital structuring- Here the Capital Structure is worked out i.e., the capital
required, raising of the capital, debt-equity ratio, issue of shares and
debentures, working capital, fixed capital requirements etc.
c. Working capital - The Companies are given Working Capital finance,
depending upon their earning capacities in relation to the interest rate
prevailing in the market.
d. Project Counseling- Project counseling is a part of corporate counseling and relates to
project finance. It broadly covers the study of the project, offering advisory
assistance on the viability and procedural steps for its implementation.
 Identification of potential investment avenues.
 A general view of the project ideas or project profiles.
 Advising on procedural aspects of project implementation.
 Reviewing the technical feasibility of the project.
 Assisting in the selection of TCO‘s (Technical Consultancy Organizations) for
preparing project reports.
 Assisting in the preparation of project report.
 Assisting in obtaining approvals, licenses, grants, foreign collaboration etc.,
from government.
 Capital structuring.
 Arranging and negotiating foreign collaborations, amalgamations, mergers and
takeovers.
 Assisting clients in preparing applications for financial assistance to various
national and state level institutions banks etc.
 Providing assistance to entrepreneurs coming to India in seeking approvals from
the Government of India.
e. Portfolio Management-It refers to the effective management of Securities i.e.,
the merchant banker helps the investor in matters pertaining to
investment decisions. Taxation and inflation are taken into account while
advising on investment in different securities. The merchant banker also
undertakes the function of buying and selling of securities on behalf of
their client companies. Investments are done in such a way that it ensures
maximum returns and minimum risks.
f.  Issue Management -Management of issues refers to effective marketing of
corporate securities viz., equity shares, preference shares and debentures or
bonds by offering them to public. Merchant banks act as intermediary
whose main job is to transfer capital from those who own it to those who
need it. The issue function may be broadly divided in to pre issue and post
issue management.
a. Issue through prospectus, offer for sale and private placement.
b. Marketing and underwriting
c. Pricing of issues
g. Credit Syndication - Credit Syndication refers to obtaining of loans from
single development finance institution or a syndicate or consortium.
Merchant Banks help corporate clients to raise syndicated loans from
commercials banks. Merchant banks helps in identifying which financial
institution should be approached for term loans. The merchant bankers
follow certain steps before assisting the clients approach the appropriate
financial institutions.
a. Merchant banker first makes an appraisal of the project to satisfy that it
is viable.
b. He ensures that the project adheres to the guidelines for financing
industrial projects.
c. It helps in designing capital structure, determining the promoter‘s
contribution and arriving at a figure of approximate amount of term
loan to be raised.
d. After verifications of the project, the Merchant Banker arranges for a
preliminary meeting with financial institution.
e. If the financial institution agrees to consider the proposal, the
application is filled and submitted along with other documents.
SEBI Regulations on merchant bankers
 All merchant bankers will require authorization from the SEBI to carry out
business.
 Those with minimum net worth of Rs. 1 crore are authorized to act as Lead
Managers, Managers to the issue. Minimum net worth of Rs. 50 lakh as co-
managers to the issue. Minimum net worth of Rs. 25 lakh as consultant's
advisers to the issue.
 The number of Lead Managers to the issue is restricted to 2 for issues less than
Rs. 50 crore, 3 for less than Rs. 100 crore and 4 for above 100 crore.
 An initial authorization fee, an annual fee and renewal fee may be
collected by SEBI.
 All issue must be managed by at least one authorized banker.
 Each merchant banker is required to furnish to the SEBI half yearly
unaudited financial results.
 SEBI has prescribed the code of conduct for the each merchant banker.
 SEBI has the power to suspend or cancel the authorization in case of
violation.
 To ensure the transparency and accountability in operation of the merchant
banker and protect the investors.
 Inspections will be conducted by SEBI to ensure that provisions of the regulation
are properly complied.

 Brokers and sub brokers

 Registration of brokers and sub-brokers is made compulsory.
 Compulsory audit of broker’s book and filing of audit report with SEBI have been
made mandatory.
 In order to ensure that brokers are professionally qualified and financially
solvent, capital adequacy norms for registration of brokers have been evolved
 To bring about greater transparency and accountability in the broker-client
relationship, SEBI has made it mandatory for brokers to disclose transaction
price and brokerage separately in the contract notes issued to client.
 No broker is allowed to underwrite more than 5% of public issue.
Guidelines to Debentures

a) The amount of working capital debenture should not exceed 20% of

the gross current asset.
b) The debt equity ratio should not exceed 2:1.
c) The rate of interest can be decided by the company.
d) Normally debentures above seven years cannot be issued.
e) Debentures issued to public have to be secured and registered.
f) Credit rating is compulsory for all the debentures except those issued
by public sector companies
Guidelines for protection of the Debenture Holders
g) Servicing of Debentures
h) Protection of interest of Debenture Holders
Lead Manager
 In the pre-issue process, the Lead Manager (LM) takes up the due
diligence of company's operations/ management/ business
plans/ legal etc. Other activities of the LM include drafting and
design of Offer documents, Prospectus, statutory advertisements and
memorandum containing salient features of the Prospectus.
 The post issue activities including management of escrow accounts,
coordinate non-institutional allocation, intimation of allocation
and dispatch of refunds to bidders etc are performed by the LM.
Pre issue Activities

 Signing of MoU- between the client company and the MB. The role and
responsibility is clearly spelt out in the MoU.
 Obtaining appraisal note- contains the details of the proposed capital outlay of
the project and the sources of funding is either prepared in house or is
obtained from the external appraising agencies.
 Optimum capital structure- the level of capital that would maximize the
shareholders value and minimize the overall cost of capital. This has to be
done considering the nature and size of the project.
 Convening meetings- A meeting of the Board of Directors of the issuing company
is conveyed followed by the EGM of the members. The purpose of the meetings is
to decide the various aspects related to issues like an application to RBI seeking
its permission where capital issue of shares is to offer to NRI/OCBs.
 Appointment of financial intermediary- FIs such as underwriters, registrars,
auditors, solicitors, bankers etc has to be obtained under section 58 of the
company’s act 1956.
 Preparing documents- the document to be prepared are initial listing
application for submission to those stock exchange where the
issuing company intends to get its securities listed , MoU with the
registrar, with bankers, with advisors to the issue and co managers,
agreement for purchase of properties. This all will be sent for inclusion.
 Due diligence Certificate- the lead managers issues a due diligence
certificate which certifies that the company has followed all legal
requirement, has exercised utmost care while preparing the offer
documents and has made a true, fair and adequate disclosure in the
offer document.
 Submission of offer document- the draft document along with due
diligence certificate is filed with SEBI. SEBI in turn will make
necessary correction if any within 21 days from the receipt of offer
document.
 Finalization of collection centers- in order to collect the issue application
forms from the prospective investors the lead managers finalizes the
collection centers.
 Filing with ROC- the offer documents completed in all respect is filled
with ROC to obtain acknowledgment.
 Launching the issue- the lead manager has to arrange for public issue
with various banks, brokers, investors etc. The issue is opened for
public immediately after obtaining permission letter from SEBI which is
valid for public issue.
 Promoters’ contribution- A certificate to the effect that the required
contribution of the promoters has been raised before opening of
the issue, has to be obtained by the CA and duly filed with SEBI.
 Issue closure- An announcement regarding the closure of the issue
should be made in the newspapers. 
Post issue activities
 Finalization on the basis of allotment
 Dispatch of share certificates
 Advertisement