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