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Investment Banking

What is an Investment Bank?

An investment bank is a financial institution that raises capital, trades in securities and manages corporate mergers and acquisitions. Investment banks profit from companies and governments by raising money through issuing and selling securities in capital markets (both equity, debt) and insuring bonds (e.g. selling credit default swaps), as well as providing advice on transactions such as mergers and acquisitions. A majority of investment banks offer strategic advisory services for mergers, acquisitions, divestiture or other financial services for clients, such as the trading of derivatives, fixed income, foreign exchange, commodity, and equity securities.

Role of an Investment Bank in issue of Securities

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Investment banks offer security to both corporations issuing securities and investors buying securities. For corporations investment bankers offer information on when and how to place their securities in the market. To the investor, the responsible investment banker offers protection against unsafe securities. The offering of a few bad issues can cause serious loss to its reputation, and hence loss of business. Therefore, investment bankers play a very important role in issuing new security offerings

Merchant banking 7. Risk management 1. Investment management 6.Core investment banking activities Investment banking 2. Commercial banking 8. . Sales and trading 3. Research 4. Global Transaction Banking 5.

10. 13.Core investment banking activities 9. 11. Corporate treasury Financial control Corporate strategy Compliance Back office Operations and Technology . 12.

 Industry coverage groups focus on a specific industry such as healthcare.  Product coverage groups focus on financial products. industrials. . such as mergers and acquisitions.Structure of Investment Bank  The investment banking division (IBD) is generally divided into industry coverage and product coverage groups. equity. and maintain relationships with corporations within the industry to bring in business for a bank. leveraged finance. and high-grade debt and generally work and collaborate with industry groups in the more intricate and specialized needs of a client. or technology.

Sales is the term for the investment banks sales force. the primary function of a large investment bank is buying and selling products. Sales desks then communicate their clients' orders to the appropriate trading desks. whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas (on caveat emptor basis) and take orders.Sales and Trading    On behalf of the bank and its clients. or structure new products that fit a specific need. . traders will buy and sell financial products with the goal of making an incremental amount of money on each trade. In market making. who can price and execute trades.

 In recent years the relationship between investment banking and research has become highly regulated requiring a Chinese wall between public and private functions. . and investment bankers by covering their clients.Research  Research is the division which reviews companies and writes reports about their prospects.  There is a potential conflict of interest between the investment bank and its analysis is that published analysis can affect the profits of the bank. its resources are used to assist traders in trading.  While the research division generates no revenue. often with "buy" or "sell" ratings. the sales force in suggesting ideas to customers.

lending. and securities brokerage services to institutions. custody services. .Global Transaction Banking  Global Transaction Banking is the division which provide cash management.

mutual funds). often known as Private Wealth Management and Private Client Services.Investment Management  Investment management is the professional management of various securities (shares. real estate).  Investors may be institutions (insurance companies. to meet specified investment goals for the benefit of the investors. bonds.) or private investors (both directly via investment contracts and more commonly via collective investment schemes eg.g.) and other assets (e. corporations etc. pension funds. . etc.  The investment management division of an investment bank is generally divided into separate groups.

Current examples include Goldman Sachs Capital Partners and JPMorgan's One Equity Partners. (Originally.) .Merchant Banking  Merchant banking is a private equity activity of investment banks. "merchant bank" was the British English term for an investment bank.

Commercial Banking  Examples being Goldman Sachs and Morgan Stanley growing into the commercial banking businesses even before the financial crises of 2008. .

.  In recent years the risk of errors has become known as "operational risk" and the assurance Middle Offices provide now includes measures to address this risk. and setting limits on the amount of capital that they are able to trade in order to prevent 'bad' trades having a detrimental effect to a desk overall. market and credit risk analysis can be unreliable and open to deliberate manipulation.Risk Management  Risk management involves analyzing the market and credit risk that traders are taking onto the balance sheet in conducting their daily trades. When this assurance is not in place.

often falls under the finance division as well. Corporate strategy. Compliance areas are responsible for an investment bank's daily operations' compliance with government regulations and internal regulations. . capital structure management.Other Functions     Corporate treasury is responsible for an investment bank's funding. the Finance division is the principal adviser to senior management on essential areas such as controlling the firm's global risk exposure and the profitability and structure of the firm's various businesses. treasury. Financial control tracks and analyzes the capital flows of the firm. along with risk. and liquidity risk monitoring. and controllers. Often also considered a back-office division.

Merchant Banking An institution which covers a wide range of activities such as management. credit syndication. . insurance etc. counselling. credit acceptance.

Started in 1972 by amendment of Banking Regulation Act Till 1970 it was dominated by Foreign Banks viz. Grindlays bank. 2. 3. Citi Bank Which Indian Bank was the first to offer the Merchant Banking services? .Merchant Banking in India 1.

Commercial Banks  Merchant Banks deal with Equity & equity related finance e.g.g. loan sanctions . credit appraisals. raising of funds through money market & capital market  Commercial Banks deal with Debt & Debt related finance e.Merchant Banks vs. credit proposals.

stability & liquidity of money markets  Commercial Banks are asset oriented & avoid risks  Commercial banks are mere financiers . Commercial Banks   Merchant Bankers are management oriented & are accepted to take risks Merchant Banking activities have impact on growth.Merchant Banks vs.

2. 4. 3. Corporate Counselling Project Counselling Capital restructuring Project Management Public Issue Management Loan Syndication Working Capital Lease Financing . 8. 7. 5. 6.Services of Merchant Bankers 1.

11. Portfolio Management Advisory services related to Mergers & Acquisitions Off Shore Finance . 10.Services of Merchant Bankers 9.

Services of Merchant Bankers  1. 2. Project Counseling Preparation & appraisal of the project reports Get financial assistance from institutions Plan for the public issue . 3.

Loan Syndication Make an appraisal of the project to satisfy that it is commercially & technically viable Designing the capital structure. once the financial institution agrees for loan . 3. 2. contribution of the borrower & the need of loan amount Fixing of the initial meeting with financial institution Filling up of the application etc.Services of Merchant Bankers  1. 4.

equity shares. 2. debentures. preference shares.  Issue Management – marketing of Corporate securities viz. bonds to the public To transfer the capital from those who own it to those who need it Pre Issue Management Post Issue Management Who controlled the new issue market till 1992? .Services of Merchant Bankers   1.

offer for sale and private placement Marketing and underwriting Pricing of issues .Pre Issue Management    Issue through prospectus.

Services of Merchant Bankers  1. 3. 2. Pre Issue Management Determining the composition of the capital structure (type of securities to be issued) Drafting of prospectus & application forms Compliance with procedural formalities Appointment of Registrar to deal with share application & transfers Listing of securities . 5. 4.

Arrangement of underwriting Pricing of Issues Selection of brokers. 8.Services of Merchant Bankers 6. publicity & advertising agents . bankers to the issue. 7.

2. 3. 5. Post Issue Management Collection of Application Forms Statement of amount received from bankers Screening applications Deciding Allotment procedure Mailing of Allotment letters.Services of Merchant Bankers  1. 4. Share certificates & refund orders .

5 lacs whichever is less 4. Lead Managers have to mandatorily 5% of the issue or Rs. Banks/Merchant Banking subsidiaries cannot underwrite more than 15% of any issue . All Public Issues have to be fully underwritten 2. Merchant Bankers can underwrite to the limit of outstanding commitment not exceeding 5 times of his Net Worth 3. 2.Underwriting of the Public Issue  Norms to the Underwriting of the Public Issue 1.

2. 3. Long term foreign currency loans Joint venture abroad Financing exports & imports Foreign collaboration arrangements . 4.Off Shore Finance 1.

Scope of Merchant Bankers in India        Growth of New Issues Market Entry of Foreign Investors Changing policy of Financial Institutions Development of Debt Market Innovations in Financial Instruments Corporate Restructuring Disinvestment .