Business of Investment

Banking
 Investment banking transformed from a pure intermediation and service
activity of the early era into a global fund and non-fund business in securities
and capital markets.

 Contemporary global investment banks handle significant fund-based business

of their own in the capital market along with their non-fund service portfolio,
which is offered to clients.

 However, these distinct segments are handled either on the same balance
sheet or through a conglomerate structure using subsidiaries and affiliates
depending upon the regulatory requirements in the operating environment of
each country.
Full Service Investment Banking

 Investment banking has two facets to it, known in the industry as the buy-side
and the sell-side.

 The buy side is about purchasing a security or a service while the sell side
represents the sale of a security or a service.

 When the investment bank is an issue manager, it is on the sell side. But as a
private equity fund manager, it is on the buy side.

 Equity research or stock recommendations are the sell side while an LBO
banker is on the buy side and so on.
Business Portfolio

 Equity Capital Markets: Raising equity capital for companies through public
offers, underwriting support, market making, private equity placements, equity
broking, proprietary trading, equity derivatives trading, equity research and
support services.

 Debt Capital Markets: Raising debt capital through bond issues and placements,
bond underwriting, proprietary bond trading, market making, debt market
derivatives, debt broking, debt market research and support services.

 Mergers and Acquisitions (M&A): M&A advisory, arranging acquisition finance,

merchant banking (as per US terminology), co-investing, white knighting, LBOs
and buy-outs, due diligence, valuation and support services.
 Full service investment banks are engaged in all the business segments listed above.
They work on larger deals and among them the bulge bracket banks work on multi-
billion dollar deals.

 Full service banks can be both universal banks and pure investment banks.

 Boutique investment banks Between the bulge bracket full service investment banks
and the small boutique banks there are a host of mid-sized investment banks (also
known as i-banks) that are either smaller full service banks or larger boutique banks.
There are several such banks in the mid-size segment and lower end of the i-banking
industry proliferating across each country.
 Business Portfolio
Non-Fund Based
Equity portfolio: Stand by underwriting,
private placements, securities business
for equity and equity derivatives
(broking, marketing, distribution &
research).
Debt portfolio: Fixed income
underwriting and placement, structured
financing, securitization, high yield
bonds, CDOs and debt finance advisory,
prime brokerage services.
M&A portfolio: Corporate Restructuring,
M&A transaction services, Merchant
banking, corporate finance advisory.
Fund Based
Equity portfolio: Underwriting, bought
deals, secondary market making and
proprietary trading, equity derivatives
and
arbitrage trading.
Debt portfolio: Underwriting, secondary
market making, proprietary trading,
debt derivatives and structured
products.
M&A portfolio: Participation as lead or
co-investor in buy-outs. LBOs/MBOs
(principal investments business),
mezzanine financing (sub-debt,
convertibles and preferred shares).
Core Investment Banking
Service Portfolio of Indian Investment
Banks
 Core Investment Banking
 Merchant Banking, Underwriting and Book running

 Mergers and Acquisitions Advisory

 Corporate Finance Advisory

 Allied Business

 Asset Management Services

 Mutual Funds
 Hedge Funds
 Venture Capital Funds
 Private Equity Funds

 Securities Business
 Broking, Trading, Sales and Distribution
 Investment Advisory, PMS, Wealth Management
Asset Management

 Started as a complementary service to the clients

 Now forms a core business and a must to survive the competitive market
 Can take many forms like Mutual Funds, Private Investment (PE&VF, Hedge
Funds), Portfolio Management Services & Fund of funds
 Bring synergies for both the universal as well as stand alone investment banks
through institutional investing.
Mutual Funds

 Pools of Investment
 Each Pool of money is called a Mutual Fund Scheme
 Mutual funds assist in Earning Income or Building Wealth
 Utilize the knowledge and experience of a professional fund management
team
 Benefit from the economies of scale
Why Should You Invest In Mutual Funds?

 Easy to understand
 To earn income or build wealth
 Offer choice of various categories of schemes
 Access to ready investment portfolio and past track record
 For regular and disciplined investing
 Investment professionals
What Do You Get As A Mutual Fund
Investor?
 Status of a unit holder
 Unit certificates or statements of accounts
 Share in gains or loss in value of the mutual fund scheme
Benefits Of Investing In Mutual Funds

 Diversification
 Professional management
 Lower entry level
 Economies of scale
 Flexible and Innovative Plans for Investors
 Liquidity
 Transparency
 Well regulated structure
Regulatory Structure Of Mutual Funds In
India
 Securities and Exchange Board of India (SEBI) is the Regulatory Authority
 SEBI aims to protect the interest of the investors. It has framed SEBI (Mutual
Funds) Regulations, 1996
SEBI (Mutual Funds) Regulations, 1996

 “Mutual fund” means a fund established in the form of a trust to raise monies
through the sale of units to the public or a section of the public under one or
more schemes for investing in securities including money market instruments
or gold or gold related instruments or real estate assets
Key Features Of A Mutual Fund As Per Its
Defined Structure
 Mutual fund is established in the form of a Trust
 Mutual funds raise money through sale of units to the public
 Mutual fund schemes can invest in various securities
Key Constituents Of A Mutual Fund
Association Of Mutual Funds In India
(AMFI)
 An Industry Body created to promote the interest of mutual funds in India
 All AMCs in India are members of AMFI
 Maintain high professional and ethical standard
 AMFI has set up ‘AMFI Code of Ethics’
 AMFI Guidelines & Norms for Intermediaries (AGNI)
 AMFI recommends and promotes best business practices and code of conduct
 AMFI interacts with SEBI and represents the Indian mutual fund industry
Other Service Providers In Mutual Fund
Industry
 Custodian
 Registrar and Transfer Agents
 Auditors
 Fund Accountants
 Mutual Fund Distributors
 Collection Bankers
Summary of MFs
Quick Quiz
Quick Quiz
 SEBI defines a hedge fund as an, “Alternative Investment Fund which employs
diverse or complex trading strategies and invests and trades in securities
having diverse risks or complex products including listed and unlisted
derivatives.”

 SEBI defines a private equity fund as an “Alternative Investment Fund which

invests primarily in equity or equity linked instruments or partnership
interests of investee companies according to the stated objective of the
fund.”

 SEBI defines a venture capital fund as an “Alternative Investment Fund which

invests primarily in unlisted securities of start-ups, emerging or early-stage
venture capital undertakings mainly involved in new products, new services,
technology or intellectual property right based activities or a new business
model and shall include an angel fund...”
Regulation of Alternative Investing in
India
 SEBI consolidated the regulation of all such funds under a new scheme of regulation which was
introduced in 2012.

 These regulations intend to regulate funds that are not registered as mutual funds or as
collective investment schemes under their respective regulations. These regulations also permit
non-resident funds to get registered, if they are not registered under the FPI or the FVCI
Regulations.

 SEBI introduced the SEBI (Alternative Investment Funds) Regulations 2012 (AIF Regulations)
under which such funds are sought to be regulated. The Regulations prescribe compulsory
registration of all AIFs with SEBI whether domestic or foreign.

 The essential requirement for a fund to be brought under these regulations is that the fund
should have been pooled and constituted in India.
 Under the AIF Regulations, an alternative investment fund has been defined as, “ Alternative
Investment Fund means any fund established or incorporated in India in the form of a trust
or a company or a limited liability partnership or a body corporate which:

 is a privately pooled investment vehicle which collects funds from investors, whether Indian or
foreign, for investing it in accordance with a defined investment policy for the benefit of its
investors; and

 is not covered under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996,
Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999 or any
other regulations of the Board to regulate fund management activities.”

 It may be noted that SEBI seeks to migrate even all existing domestic VCFs to the AIF
Regulations in due course.

 The AIF Regulations define a private equity fund as “An alternative investment fund that
invests primarily in equity or equity linked instruments or partnership interests of investee
companies according to the stated objectives of the fund.”

 The Regulations also define Category I, Category II and Category III funds based on their
investment objective. While Category I definition primarily fits for VCFs, Category II fits PE
funds and Category III fits hedge funds.
 The main provisions in the regulations with regard to investment are:

 The minimum corpus of an AIF is stipulated at `20 crore and individual subscriptions to such
fund should be a minimum of `1 crore. No scheme is allowed to have more than 1,000
investors.

 The fund manager has to have a continuing interest in the fund to a minimum extent of 2.5% or
`5 crore, whichever is less.

 Funds may raise subscriptions through private placement. After the fund raise is closed, a
closed ended fund may also be listed.

 Category I and II AIFs shall not invest more than 25% of their corpus in one Investee Company.
The same limit for a Category III fund is 10%.

 Investment by Category I and II funds in on the SME platform shall be interpreted as investment
in unlisted securities.

 Category I funds shall invest at least 66.66% of their corpus in unlisted equity shares or equity
linked instruments of a VCU or in companies listed or proposed to be listed on a SME exchange.
The balance of 33.33% may be invested in any of the investment options provided below:
 Subscription to initial public offer of a VCU whose shares are proposed to be
listed.

 Pure debt instruments only as follow on funding in a VCU wherein it already

has an equity exposure.

 Preferential allotment of equity shares of a listed company subject to a lock

in period of one year.

 Equity shares or equity linked instruments of a financially weak company or a

sick industrial company whose shares are listed.

 A financially weak company has been defined for this purpose as a company,
which has accumulated losses at the end of the previous financial year and
has resulted in erosion of more than 50% but less than 100% of its net worth as
at the beginning of the previous financial year.
 Special Purpose Vehicles (SPVs) which are created by a venture capital fund
for the purpose of facilitating or promoting investment in accordance with
these Regulations.

 The venture capital fund may enter into an agreement with merchant banker
to subscribe to the unsubscribed portion of the issue or to receive or deliver
securities in the process of market making for a SME issue in which case the
restrictions mentioned above shall not apply in case of acquisition or sale of
securities pursuant to such subscription or market making.

 There is no regulation on the type of investee companies or VCUs in which

AIFs can make investments except that they shall be domestic companies and
unlisted at the time of investment. VCUs may be engaged in any type of
manufacture or service activity. Therefore, under the guidelines, VCFs may
invest in sick and turnaround companies as well.
Regulation of Foreign Venture Capital
Fund in India
 These regulations provide for these funds to get registered in India following which they can make
investments in Indian companies.

 The FVCI or a global custodian acting on behalf of the FVCI shall enter into an agreement with the
domestic custodian to act as a custodian of securities for FVCI. The domestic custodian shall be
responsible for monitoring of investment of the FVCI and furnishing of periodic reports and other
information to SEBI.

 The general investment conditions governing FVCI investments are as follows:

 The fund shall disclose to the SEBI its investment strategy at the time of registration and
subsequently at the launch of each of its funds.

 It can invest its total funds committed in one VCF.

 The corpus has to be invested in VCUs in the ratio of 66.66%: 33.33% mutatis mutandis as domestic
Category I AIFs. FVCIs do not have a restriction as domestic funds with regard to maximum exposure
to a single VCU. Therefore, technically, the entire corpus may be invested in a single VCU.
Regulatory Framework for Investment
Banking in India
Functionally, different aspects of investment banking are regulated under the
Securities and Exchange Board of India Act, 1992 and the guidelines and regulations
issued there under.

 Merchant banking business consisting of management of public offers is a

licensed and regulated activity under the Securities and Exchange Board of India
(Merchant Bankers) Rules, 1992 and Securities and Exchange Board of India
(Merchant Bankers) Regulations, 1992.

 Underwriting business is regulated under the SEBI (Underwriters) Rules, 1993 and
the SEBI (Underwriters) Regulations, 1993.

 The activity of secondary market operations including stock broking are regulated
under the relevant bye-laws of the stock exchange and the SEBI (Stock Brokers
and Sub-Brokers) Regulations,1992.Besides, for curbing unethical trading
practices, SEBI has promulgated the SEBI (Prohibition of Insider Trading)
Regulations, 1992 and the SEBI (Prohibition of Fraudulent and Unfair Trade
Practices Relating to Securities Markets) Regulations, 1995.
 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 (Alternative Investment Funds) Regulations, 2012 and by those that are 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 Portfolio Investors) Regulations,
1995.
 Venture Capital Fund v/s Venture Capital Firm

 Cases

 Different Levels of funding