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INVESTMENT BANKING

INTRODUCTION

In broad perspective, Investment Banking is concerned with the primary function of assisting the capital market in its function of capital intermediation i.e. the transfer of financial resources from those who have them (Investors)) to those who need to make use of them for generating GDP (Issuers). It is somewhat similar to what commercial banks do in money market. However it is much wider in its scope and functions which have evolved over a period of time.

INTRODUCTION- Contd.

Investment banking is a field of banking that aids companies in acquiring funds. In addition to the acquisition of new funds, investment banking also offers advice for a wide range of transactions a company might engage in.

An Investment Banker is total solutions provider as far as any corporate, desirous of mobilising capital, is concerned. The services range from investment research to investor service on the one side and from preparation of offer documents to legal compliances and post issue monitoring on the other.

INTRODUCTION- Contd.

Investment bank is a bank which deals with the underwriting of new issues and advises corporations on their financial affairs. - Dictionary of Banking & Finance

An investment bank is a financial intermediary that performs a variety of services, including aiding in the sale of securities, facilitating mergers and other corporate re-organisatios, acting as broker for institutional clients and trading for its own account.

MERCHANT BANKING

Merchant Bank is a bank which arranges loans to companies, deals in international finance, buys and sells shares and launches new companies on the stock exchange, but does not provide normal banking services to the general public. - Dictionary of Banking & Finance Merchant Bank is a bank that deals mostly in (but is not limited to) international finance, long-term loans for companies and underwriting. Merchant banks do not provide regular banking services to the general public. They dont not have retail offices where a customer can go and open a savings account. A merchant bank is sometimes said to be a wholesale bank.

MERCHANT BANKING- Contd.

Merchant Banking is the activity of making direct investments of the investment of the investment banks own funds in some asset not directly related to investment banks traditional business. (US Context) Merchant Bank is a bank that specialises not in lending out of its own funds but in providing various financial services such as accepting bills arising out of trade, underwriting new issues, and providing advice on acquisitions, mergers, foreign exchange, portfolio management etc. (European Context)

MERCHANT BANKING-Indian Context

Merchant Banking is defined asAny person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or acting as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management. - SEBI (Merchant Bankers) Rules 1992

INVESTMENT BANKING- Indian Scenario

Regulators do not allow all investment banking functions to be performed by one entity. This is - to prevent excessive exposure to risk - to prescribe and monitor capital adequacy

Indian investment banks structure their business segments in different companies. Separate company for - Merchant banking - Asset management - Stock broking etc.

SERVICES OFFERED BY INDIAN INVESTMENT BANKS

Core Service - Issue Management, underwriting and book running

Mergers and Acquisitions Advisory Services Corporate Advisory Services - Project finance - Corporate restructuring

Secondary Market Services - Broking in equity and debt segment - Derivative trading and risk management

SERVICES OFFERED BY INDIAN INVESTMENT BANKS- Contd.


Asset Management Services Wealth Management Services -Portfolio management of HNI -Equity research

Institutional Investment - Investment through venture capital subsidiary - Private equity investment - Proprietary (on their own) investment in the secondary market and market making activities

INVESTMENT BANKSOrganisational Structure

An investment bank is split into: - Front Office - Middle Office - Back Office

ORGANISATIONAL STRUCTUREFront Office


Front office includes following activities: 1. Investment Banking

It involves helping customers raise funds in the capital markets and advising on mergers and acquisitions. Investment bankers prepare idea pitches that they bring to meetings with their clients with the expectation that their effort will be rewarded with a mandate when the client is ready to undertake a transaction. Once mandated, an investment bank is responsible for preparing all materials necessary for the transaction as well as the execution of the deal, which may involve subscribing investors to a security issuance, coordinating with bidders, or negotiating with a merger target.

ORGANISATIONAL STRUCTUREFront Office (Contd.)

Other terms for the Investment Banking Division include Mergers & Acquisitions (M&A) and Corporate Finance. The investment banking division (IBD) is generally divided into two groups: - Industry Coverage Group - Product Coverage Group

ORGANISATIONAL STRUCTUREFront Office (Contd.)


2. Investment Management It includes professional management of various securities (shares, bonds etc) and other assets (e.g. real estate) to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes e.g. mutual funds).

ORGANISATIONAL STRUCTUREFront Office (Contd.)


3. Sales & Trading

An important unction of an investment bank is to buy and sell products. In the process of market making, traders will buy and sell financial products with the goal of making an incremental amount of money on each trade. Sales is the term for the investment banks sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas and take orders. Sales desks then communicate their clients' orders to the appropriate trading desks, who can price and execute trades, or structure new products that fit a specific need.

ORGANISATIONAL STRUCTUREFront Office (Contd.)


4. Research

This division reviews various companies and writes reports about their prospects, often with "buy" or "sell" ratings. While the research division generates no revenue, its resources are used to assist traders in trading, the sales force in suggesting ideas to customers, and investment bankers by covering their clients.

ORGANISATIONAL STRUCTUREFront Office (Contd.)


5. Structuring

It is a relatively recent activity undertaken by investment banks. It involves use of derivatives for creating complex structured products which typically offer much greater returns than the underlying cash securities.

ORGANISATIONAL STRUCTUREMiddle Office


Middle office includes following activities: 1. Risk Management

It involves analyzing the market and credit risk that traders are taking onto the balance sheet in conducting their daily trades, 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.

ORGANISATIONAL STRUCTUREMiddle Office (Contd.)


2. Corporate Treasury It is responsible for an investment bank's funding, capital structure management, and liquidity risk monitoring. 3. Financial Control It tracks and analyzes the capital flows of the firm, 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. In the United States and United Kingdom, a Financial Controller is a senior position, often reporting to the Chief Financial Officer.

ORGANISATIONAL STRUCTUREMiddle Office (Contd.)


4. Corporate Strategy Along with risk, treasury, and controllers, it also often falls under the finance division. 5. Compliance These areas are responsible for an investment bank's daily operations compliance with government regulations and internal regulations. Often also considered a back-office division.

ORGANISATIONAL STRUCTUREBack Office


Back office includes following activities: 1. Operations It involves data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers. While it provides the greatest job security of the divisions within an investment bank. it is a critical part of the bank that involves managing the financial information of the bank and ensures efficient capital markets through the financial reporting function. The staff in these areas are often highly qualified and need to understand in depth the deals and transactions that occur across all the divisions of the bank.

ORGANISATIONAL STRUCTUREBack Office (Contd.)


2. Technology
Every major investment bank has considerable amounts of in-house software, created by the Technology team, who are also responsible for Computer and Telecommunications-based support. Technology has changed considerably in the last few years as more sales and trading desks are using electronic trading platforms. These platforms can serve as auto-executed hedging to complex model driven algorithms.

INDIAN INVESTMENT BANKSRegulation

Regulation of investment banks depend upon their constitution and status. At the constitutional level, all investment banking companies incorporated under the Companies Act 1956, are governed by the provisions of the act. Pure investment banks (without presence in banking business) are primarily regulated by SEBI. Universal banks and NBFCs are regulated by RBI and SEBI. Investment banks of separate statute are governed by their respective Act (e.g. SBI).

INDIAN INVESTMENT BANKSRegulation (Contd.)

Functionally, different aspects of investment banking are regulated under the Securities & Exchange Board of India Act, 1992 and the guidelines and regulations issued thereunder. These are as follows: - Merchant banking business consisting of management of public offers is a licensed and regulated activity under the SEBI (Merchant Bankers) Rules, 1992 and SEBI (Merchant Bankers) Regulations, 1992. - Underwriting business is regulated under the SEBI (Underwriters) Rules, 1993 and SEBI (Underwriters) Regulations, 1993. - The activity of secondary market operations including stock broking are regulated under the relevant by-laws of the stock exchange and the SEBI (Stock Brokers & Sub Brokers) Rules, 1992 and SEBI (Stock Brokers & Sub Brokers) Regulations, 1992.

INDIAN INVESTMENT BANKSRegulation (Contd.)


- The business of asset management as mutual fund is regulated under the

SEBI (Mutual Funds) Regulations, 1996. - The business of portfolio management is regulated under the SEBI (Portfolio Managers) Rules, 1993 and the SEBI (Portfolio Managers) Regulations, 1993. - The business of venture capital & private equity by such funds that are incorporated in India is regulated by the SEBI (Venture Capital Funds) Regulations, 1996 and by those that are incorporated outside India is regulated by 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 Institutional Investors) Regulations, 1995.

INDIAN INVESTMENT BANKSRegulation (Contd.)

Apart from the above specific regulations relating to investment banking, investment banks are also governed by other by other laws applicable to all other businesses e.g. tax law, contract law, property law, local state laws etc.