INVESTMENT BANK

PROF. JIVAN KUMAR CHOWDHURY

 INVESTMENT BANK
 Financial Intermediary
 Performing a variety of service

 IB have retail operations that serve small and

individual customers
 Investment banking has two facets to it:

1. buy-side 2. sell-side
* In its allied businesses, it works from buy - side
* When the investment banking is an issue manager
it is on the sell – side, based on the nature of
business.
Issue Managers, Underwriters and
Brokers
 The primary market intermediaries are the
merchant bankers, underwriters to issues and
brokers to issues. The merchant bankers are the
issue manages who bring the issues to the primary
market investors.
 Issue management is an onerous job and is closely
regulated by SEBI in order to ensure strict discipline
among merchant bankers so as to be careful in
bringing only quality issues to the market.
 Therefore, the regulators in many countries enforce
a licensing mechanism for issue managers.
 Issue management is a fee-based service and one
of the prime functions of an investment bank.
 Underwriters provide the much-needed safety net for issuers
bringing their issues to the market. Underwriting is a fund-
based service provided by a market intermediary, which
consists of taking a contingent obligation to subscribe to an
agreed number to securities in an issue, if such securities are
not subscribed to by the intended investors.
 If the issue is fully subscribed by the investors, the
underwriter has no fund obligation to the issue but collects
the underwriting fee.
 However, if the investors do not subscribe to the issue fully,
the obligation devolves on the underwriter to the extent of
the unsubscribed portion of the issue. Underwriting, however,
has different forms in other countries based on the regulatory
framework and methodology of offers.
 Brokers to an issue are appointed specially by the issuer to
market the issue on its behalf with the investors. Brokers are
registered trading members of a stock exchange whose
primary activity is to trade on behalf of clients in the
secondary market. By appointing them specifically to market
a public issue, the issuer ensures that there is adequate
marketing support to promote the issue.
 Unlike underwriter, pure brokers to an issue do not earn
anything and neither do they have any guarantee obligation
like the underwriters. Brokers usually have many sub-brokers
working for them through whom they market an issue and
share the brokerage they earn from the issuer with them. The
activities of brokers and sub-brokers in India are regulated
by the SEBI.
 REGULATORY FRAMEWORK FOR INVESTMENT
BANKING IN INDIA
 For more than four decades, the investment banking activity was
mainly confined to merchant banking  services. The foreign banks
were the forerunners of merchant banking in India. The erstwhile
Grindlays Bank began its merchant banking operations in 1967 after
obtaining the required license from RBI. Soon after Citibank followed
through. Both the banks focused on syndication of loans and raising
of equity apart from other advisory services. In 1972, the Banking
Commission report asserted the need for merchant banking
activities in India and recommended a separate structure for
merchant banks totally different from commercial banks structure.
 The merchant banks were meant to manage
investments and provide advisory services. The SBI set up its
merchant banking division in 1972 and the other banks followed
suit. ICICI was the first financial institution to set up its merchant
banking division in 1973.
 The advent of SEBI in 1992 was a major boost to the
merchant banking activities in India and the activities were
further propelled by the subsequent introduction of free
pricing of primary market equity issues in 1992. Post-1992,
there was lot of fluctuations in the issue market affecting the
merchant banking industry.
 SEBI started regulating the merchant banking activities in
1992 and a majority of the merchant bankers were registered
with it. The number of merchant bankers registered with SEBI
began to dwindle after the mid nineties due to the inactivity
in the primary market. Many of the merchant bankers were
into issue management or associated activity such
as underwriting or advisory. Many merchant bankers
succumbed to the downturn in the primary market because of
the over-dependence on issue management activity in the
initial years. Also not all the merchant bankers were able to
transform themselves into full-fledged investment banks.
 Currently bigger industry players who are in investment
banking are dominating the industry. The Indian
investment banks depended on issue management to a
greater extent and so some of them had to perish due to
the primary market downturn in the 90’s.
 The bigger industry players were the only ones to
survive because of a general lack of institutional
financing in a big way to fund capital market activity,
which would have otherwise paved way for other smaller
players.
 The lack of depth in the secondary market, especially in
the corporate debt market could not supplement
the primary market for any major development.
 Characteristics of Indian Investment Banking Industry
 Till the 1980s, the Indian financial services industry was
characterized by debt services in the form of term
lending by financial institutions and working capital
financing by banks and non-banking financial
companies. Capital markets was still an unorganized
industry and was mostly restricted to stock broking
activity. In the early nineties, when the capital markets
opened up, merchant banking and asset management
services flourished. Many banks, NBFCs and financial
institutions entered the merchant banking, underwriting
and advisory services driven by the boom in the primary
market.
 Over the subsequent years, the merchant banking
industry had faced a huge downturn due to
recession in the capital markets. Also, the capital
markets and investment banking activities came
under lot of regulatory developments that required
separate registration, licensing and capital
controls. This proved to be an impediment for the
growth of the investment banking industry.
 The regulations do not permit all investment banking
functions to be performed by a single entity for two reasons:
◦ To prevent excessive exposure to business risk.
◦ To prescribe and monitor capital adequacy and risk
mitigation mechanisms.
 The commercial banks are prohibited from getting exposed
to stock market investments and lending against stocks
beyond certain specified limits under the provisions of RBI
and Banking Regulation Act.
 Merchant banking activities can be carried out only after
obtaining a merchant-banking license from SEBI.
 Merchant bankers other than banks and financial institutions
are not authorized to carry out any business other than
merchant banking.
 The Equity research activity has to be carried out independent
of the merchant banking activity to avoid conflict of interest.
Stock broking business has to be separated into a different company
Regulatory Framework for Investment Banking in India
 An overview of the regulatory framework is furnished below:
1. All investment banks incorporated under the Companies Act,
1956 are governed by the provisions of that Act.
2. Those investment banks that are incorporated under a separate

statute are regulated by their respective statute. Ex: SBI, IDBI.

3. Universal banks that function as investment banks are regulated by

RBI under the RBI Act, 1934.

4. All Non-banking Finance Companies that function as investment

banks are regulated by RBI under RBI Act, 1934.

5. SEBI governs the functional aspects of Investment banking under

the Securities and Exchange Board of India Act, 1992.

6. Those investment banks that carry foreign direct investment either

through joint - ventures or as fully owned

 subsidiaries are governed by Foreign Exchange Management
Act, 1999 with respect to foreign investment.
 It is pertinent to mention here that Investment Banking in
India is regulated in its various facets under separate
legislations
 Pure investment banks that do not have presence in the
lending or banking business are governed primarily by the
capital market regulator (SEBI)
 Universal banks and NBFC investment banks are regulated
primarily by the RBI in their core business of banking and
lending under the RBI Act,1934 & the BR Act,1949 &
investment banking segment by SEBI
Major Players in the Indian Industry
 Several big investment banks have set many group
entities in which the core and non-core business
segments are distributed. SBI, IDBI, ICICI, IL&FS, Kotak
Mahindra, Citibank and others offer almost all of the
investment banking activities permitted in the country.
The long-term financial institutions like ICICI and IDBI
have converted themselves into full service commercial
banks (called as Universal banks). The Indian
investment banks have not gone global so far though
some banks do have a presence in the overseas. The
middle level constitutes of some niche players and a
few subsidiaries of the public sector banks. 
 Certain banks like Canara bank and Punjab National
bank have had successful merchant banking activities
while some other subsidiaries have either closed their
operations or sold off their business due to a couple of
securities scam in the industry.
 There are also merchant banks structures as NBFCs
such as Alpic Finance, Rabo India Finance Ltd and so on.
Some of the pure advisory firms that operate in the
Indian market are Lazard Capital, Ernst & Young, KPMG,
and Price Water Coopers etc.
CONTD..
 Investment banking companies that are
constituted as non-banking financial companies
are regulated operationally by the RBI under
Chapter IIIB (Sections 45H to 45QB) of the RBI Act
 RBI is empowered to issue directions in the area
of resource mobilisation, accounts and
administrative controls
 Merchant banking business consisting of
management of public offers is regulated activity
under 21A of the SEBI ( Merchant Bankers),
Regulation, 1992
CONTD..
 The business of asset management as mutual
funds is regulated under the SEBI ( Mutual
Funds) Regulations, 1996
 The business of portfolio management is

regulated under the SEBI ( Portfolio Managers)

Regulations, 1993
 The business of venture capital by such funds

that are incorporated in India is regulated by

the SEBI (Investment Funds) Regulations,
2012
CONTD..
 Business of institutional investing by foreign
investment banks and other investors in
Indian Secondary Markets is governed by SEBI
 Investments banks that are set up in India

with foreign direct investment are governed

in respect of the foreign investment by the
FEMA,1999 and FEMA Regulation, 2000
 Investment banks are governed by other laws

as tax law, contract law, property law, local

state laws, arbitration law applicable in India.
INDIAN INVESTMENT BANKS
 Deutsche Equities ( India ) Pvt. Ltd
 Credit Suisse Securities ( India ) Pvt. Ltd

 Barclays Bank PLC

 HDFC Bank Ltd

 Axis Capital Ltd

 Axis Bank Ltd

 A.K. Capital Service Ltd

 Ashika Capital Pvt. Ltd

 Avendus Capital Pvt. Ltd

Some are pursuing Personal Banking, Corporate

Banking, Wealth & Investment Management
INVESMENT ADVISORY AND WEALTH
MANAGEMENT SERVICES
 Investment advisory services for making
investment recommendations to clients and
helping them in making investment
 Investment advisory services are meant for

HNI clients known sometimes as pvt. Banking

 Fundamental difference in the manner in

which wealth management through portfolio

management services or other forms of asset
management differ from investment advisory
services
CONTD..
 In Asset management – Funds are removed
from the investor’s books and pooled
separately into a different entity or on the
books of the asset manager
 In Investment advisory – Funds are not

removed from their books of the investors.

 Advisor makes recommendations from time

to time on suitable investment options

looking at the profile of the investor.
CONTD..
 In the Indian Capital Market, both investment
advisors and portfolio managers are regulated.
 Investment advisors require stipulated
minimum qualification and should adhere to a
code of conduct so as to prevent investors
from getting misled by sub-standard advice or
service quality
 Investment advisory relies heavily on the
research department of good advices to
prepare financial plans for individual clients
DIFFERENCE BETWEEN INVESTMENT
BANKING & COMMERCIAL BANKING
Investing Banking
1. It refers to Financial Institution
offering services like under –
writing of securities, brokage
service & so on
2. Customers Specific Service
3. Performance of Financial Market
4. Few hundred Customer only
5. Banker to Individual, Govt. and
Corporation
6. Income based on fees, profit or
commissions on trading market
Commercial Banking
1. It provides services like
accepting deposits, lending
money, payment on standing
order & many more services
2. Standardized service
3. Nation’s Economic Growth &
demand for Credit
4. Millions
5. All Citizens
6. Fees and Interest Income
 Future of Investment Banking in India
 The scope for investment banking in India is very big, as much
of it has not been exploited so far. This proves to be a
significant point for a bright future for the Indian investment
banks. A lot of pure merchant banks and advisory firms have
an opportunity to convert themselves in to full service
investment banks. With this, their markets are bound to
broaden and their service deliveries poised to be more
efficient. The technological and market developments
influencing the capital market will also provide an additional
impetus to the growth of the investment banks.
THANKING YOU
FOR
WATCHING !!!