Unit 4

Investment
Banking
 Commercial
Banking
• A commercial bank may be described as
the financial intermediary, that offers a
number of monetary services to the
general public and corporations as well.
• These are profit making companies,
which are owned and controlled by the
group of individuals.
Functions of Commercial
Banking
• Disbursement of payments
• Collection funds
• Providing working capital finance
• Safeguarding valuables
• Purchasing and selling securities
• Bank overdraft
• Cash credit
• Discounting bill of exchange
 Merchant
Banking
• A merchant bank refers to the banking
company that provides both financial and
consultancy services to the clients.
• It has got expertise in international finance,
underwriting and business loans.
• It is also engaged in activities associated with
the promotion and development of
industrial projects.
 Difference between
Commercial and
Merchant
BASIS FOR COMPARISON banking
COMMERCIAL BANK MERCHANT BANK

Meaning Commercial bank is a Merchant bank refers to the

banking company financial institution, that
established by a number of specializes in international
people for providing the trade and provide and array
basic banking functions i.e. of services to its clients.
accepting deposits and
lending money to general
public.

Governing Act/body Regulated by Banking Rules and regulations

Regulation Act, designed by SEBI.
1949.

Engaged in General banking business Consultancy type business

 BASIS FOR
COMPARISO COMMERCIAL BANK MERCHANT BANK
N
Nature of loan Debt-related Equity-related
extended

Exposure to risk Less Comparatively

more
Role Financier Financial Advisor
Caters Needs of general Needs of corporate
public. firms.
 Investment
Banking
• Investment banks are set up to help the clients, i.e.
Companies, High net-worth individuals (HNIs) and
government in arranging capital.
• They act as a financial intermediary between the
Company requiring capital and the investors and in
this way, the savings are turned into investments.
• Further, they generate revenue from dealer and
brokerage activities, corporate
financial engineering, restructuring, speculation
corporate finance and treasury
and management.
arbitrage,
BASIS FOR COMPARISON MERCHANT BANK INVESTMENT BANK
Meaning Merchant Bank implies a Investment Banks are the
banking institution, that middleman between the
fulfills capital issuer of securities and
requirements of the the investing public, and
companies in the form of also provides various
share ownership, rather financial services to the
than granting loans. clients.

Deals with International financing Underwriting and

activities issuance of securities

Based on Fee based Fee based and fund

based

Trade financing Offered to the clients Rarely provided

Deals with Small companies Large companies
 Functions of Investment
Banks
• Investment banks help companies and
governments and their agencies to raise money
by issuing and selling securities in the primary
market.
• They assist public and private corporations in
raising funds in the capital markets (both equity
and debt),
• as well as in providing strategic advisory services
for mergers, acquisitions and other types of
financial transactions.
• Acts as a middleman by facilitating the flow of
savings from those economic units that want to
invest to those units that want to raise funds.
 Types of Players in Investment
Banking

• Full fledged service firms

• Commercial banks through
subsidiaries
• Brokerage firms
• Asset management firms
• Boutique firms
 Full Fledged
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.

 Commercial banks through
subsidiaries
• 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.
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.
Boutique
firms
• These are the type of players which specialist
in

particular areas of investment banking.

 Core Services of Investment
Banks
• Non fund Based
• Merchant Banking services
• Advisory services
• Merger & Acquisition
• Asset sales
• Sell off and Exit of businesses

• Fund Based
• Under-writing
• Market Making
• Bought out deals
• Investment in primary markets
 Investment Banking in
• It allIndia in 19 Century. During
started th that period,
European banks first established their trading
industries in the land of India. Since that ancient
time, foreign banks have taken the reign of
investment banking in India. But that didn’t last for a
long time.
• SBI was the first Indian public sector bank to set up
its investment banking division in 1972.
• Currently, there are 300 investment 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 investment banker
Top Investment Banks based
on No of Deals
Rank Name of the Investment Bank No. of Deals (2016)
1 Ernst & Young Private Ltd. 26
Price Water House Coopers, Investment
2 Banking Arm 11

3 Deloitte Touche Tohmatsu India, LLP 11

4 O3 Capital Global Advisory Private Ltd. 8
5 KPMG India Private Ltd. 8
6 Axis Capital Ltd. 7
Standard Chartered Bank, Investment Banking
7 Division 6

8 Avendus Capital Private Ltd. 6

9 JM Financial Institutional Securities Ltd. 6

10 KPMG Corporate Finance LLC 6

 Top Investment Banks based
on value of deals
Deal Value (in $
Rank Name of the Investment Bank millions) No. of Deals

1 Arpwood Capital Private Ltd. 21,891.71 4

2 JM Financial Institutional Securities Ltd. 13,599.77 6
3 Morgan Stanley 11,950.00 4
4 Ernst & Young Global Ltd. 10,898.72 4
5 Kotak Mahindra Capital Co. Ltd. 10,149.96 4
6 Ambit Private Ltd. 9,730.00 3
7 DH Consultants Private Ltd. 9,730.00 1
7 Citigroup Global Markets India Private Ltd. 9,730.00 1
8 Lazard Ltd. 9,407.42 4
9 J.P. Morgan Securities LLC 8,000.00 1
9 Evercore Partners Inc. 8,000.00 1
Standard Chartered Bank, Investment Banking
10 Division 3,667.80 6
Top Investment banks in terms
of IPOs
Rank Name of the Investment Bank
1 ICICI Securities
2 Edelweiss Financial Services
3 Axis Bank
4 HSBC
5 Kotak Mahindra Bank
6 IIFL Securities
7 IDFC Bank
8 State Bank of India
9 JM Financial Institutional Securities Ltd.
10 Elara Capital
 Top full service IB in the
world
• JPMorgan Chase.
• Goldman Sachs.
• Bank of America Merrill Lynch.
• Morgan Stanley.
• Citi Group.
• Credit Suisse.
• Barclays Investment Bank.
• Deutsche Bank
 Regulatory
1. At the
Framework
constitutional level, all investment banking
companies incorporated under the Companies Act
1956 are governed by the provision of the Act.
2. Investment banks that are incorporated under a
separate statute such as the SBI or the IDBI are
regulated by their respective statue.
3. Universal Banks are regulated by RBI of India under the
RBI Act 1934 & The Banking Regulation Act which put
restrictions on the investment banking exposures to be
taken by the banks. The RBI has relaxed the exposure
limits for merchant banking subsidiaries of the
commercial banks.
4. Investment banking companies that
areconstituted as Non-banking Financial Companies
(NBFCs) are regulated operationally by the RBI
under Chapter IIIB section 45H & 45QB of the
RBI Act, 1934. Under these sections RBI is
empowered to issue directions in the area of
resources mobilization, accounts &
administrative controls.
The following directions have been issued by the
RBI so far:
i. Non-Banking Financial Companies
Acceptance of Deposits (Reserve Bank)
Directions, 1998.
ii. NBFCs prudential Norms (Reserve Bank) Directions,
1998.
5. Functionally, different aspects of investment banking are
regulated under the Securities And Exchange Board of
India Act, 1992 & the guidelines & regulations issued
under. These are listed below:
i. Merchant banking business consisting of management of
public offers is a licensed & regulated activity under the
SEBI Act (Merchant Bankers rules), 1992.
ii. Underwriting business is regulated under the SEBI
(underwriters) Rules & Regulations, 1993.
iii. The activity of secondary market operations including
stock broking are regulated under the relevant by-law of
the Stock Exchange & the SEBI (stock broker & sub broker)
Rules & Regulations, 1992.
iv. Besides for restricting unethical trading practices, SEBI has
issued the SEBI Prohibition of fraudulent & unfair trade
practices relating to securities markets Regulations 1995
& also SEBI prohibited insider trading under regulations,
1992.
v. The business of asset management as mutual funds is
regulated under the SEBI (Mutual Fund) Regulations,
1996.
vi. The business of portfolio management is regulated
under the SEBI Portfolio mangers Rules & Regulations,
1993.
vii. The business of Venture Capital & Private Equity by
such funds that are incorporated in India is regulated
by the SEBI Venture Capital Regulations, 1996 & by
those that are incorporated outside India is regulated
under the SEBI Foreign venture capital funds
Regulations, 2000.
viii. The business of institutional investing by foreign
investment banks & other in
Secondary markets is governed investor Indian
by the SEBI
s
Foreign Institutional Investors Regulations 1995.
6. Investments banks that are set up in India
with Foreign Direct Investment either as joint
ventures with Indian partners or as fully
owned subsidiaries of the foreign entities are
governed in respect of the foreign investment
by the Foreign Exchange Management Act,
1999 & Foreign Exchange
(Transfer
Management or issue of a person
outside
residentIndia) Regulations 2000 issued there
under as amended from time to time through
circulars issued by the RBI.
7. Apart from these investment banks are also
governed by other laws applicable to all other
businesses such as – tax law, contract law,
property law, local state laws, arbitration law
and the other general laws that are applicable
in India.