“OmGanesh”

http://Pakistanmba.jimdo.com
For Free Downloading of this report
and for more
projects,assignments,reports on
Marketing,Management
Marketing Management,
Accounting,
Economics
Human Resource,
 Organizational Behaviour,
Financial Management
Cost Accounting
VISIT
http://Pakistanmba.jimdo.com

Project on :
Investment Banking
 Guide:
Jayalaxmi Mam

Topics of Investment Banking:-

➢ Introduction
➢ Meaning
➢ Overview
~Evolution of Investment Banking
~Its Mechanism (statement of investment banking)
➢ Products/Services Offered
~Lists of explanation
~Special services
➢ How these services server the purpose of clients?
➢ Risks associated with investment banking?
~Types
~Explanation (example){problem impact}
➢ How the risks are managed effectively?
~Why risks management?
~Ways (example){problem action}
➢ Future Scenario
➢ Conclusion
 INTRODUCTION

At a very macro level, ‘Investment Banking’ as term suggests, is concerned with

the primary function of assisting the capital market in its function of capital
intermediation, i.e., the movement of financial resources from those who have
them (the Investors), to those who need to make use of them for generating GDP
(the Issuers). Banking and financial institution on the one hand and the capital
market on the other are the two broad platforms of institutional that investment for
capital flows in economy. Therefore, it could be inferred that investment banks are
those institutions that are counterparts of banks in the capital markets in the
function of intermediation in the resource allocation. Nevertheless, it would be
unfair to conclude so, as that would confine investment banking to very narrow
sphere of its activities in the modern world of high finance. Over the decades,
backed by evolution and also fuelled by recent technologies developments, an
investment banking has transformed repeatedly to suit the needs of the finance
community and thus become one of the most vibrant and exciting segment of
financial services. Investment bankers have always enjoyed celebrity status, but at
times, they have paid the price for the price for excessive flamboyance as well.
 To continue from the above words of John F. Marshall and M.E. Eills,
‘investment banking is what investment banks do’. This definition can be
explained in the context of how investment banks have evolved in their
functionality and how history and regulatory intervention have shaped such an
evolution. Much of investment banking in its present form, thus owes its origins to
the financial markets in USA, due o which, American investment banks have banks
have been leaders in the American and Euro markets as well. Therefore, the term
‘investment banking’ can arguably be said to be of American origin. Their
counterparts in UK were termed as ‘merchants banks’ since they had confined
themselves to capital market intermediation until the US investments banks entered
the UK and European markets and extended the scope of such businesses.
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.
Investment banks also act as intermediaries in trading for clients. Investment banks
differ from commercial banks, which take deposits and make commercial and retail
loans. In recent years, however, the lines between the two types of structures have
blurred, especially as commercial banks have offered more investment banking
services. In the US, the Glass-Steagall Act, initially created in the wake of the
Stock Market Crash of 1929, prohibited banks from both accepting deposits and
underwriting securities; Glass-Steagall was repealed by the Gramm-Leach-Bliley
Act in 1999. Investment banks may also differ from brokerages, which in general
assist in the purchase and sale of stocks, bonds, and mutual funds. However some
firms operate as both brokerages and investment banks; this includes some of the
best known financial services firms in the world.
More commonly used today to characterize what was traditionally termed”
investment banking” is “sells side." This is trading securities for cash or securities
(i.e., facilitating transactions, market-making), or the promotion of securities (i.e.
underwriting, research, etc.).
The "buy side" constitutes the pension funds, mutual funds, hedge funds, and the
investing public who consume the products and services of the sell-side in order to
maximize their return on investment. Many firms have both buy and sell side
components.
Definition

An individual or institution, which acts as an underwriter or agent for

corporations and municipalities issuing securities. Most also maintain
broker/dealer operations, maintain markets for previously issued securities,
and offer advisory services to investors. Investment banks also have a large
role in facilitating mergers and acquisitions, private equity placements and
corporate restructuring. Unlike traditional banks, investment banks do not
accept deposits from and provide loans to individuals. Also called investment
banker.

Who needs an Investment Bank?

Any firm contemplating a significant transaction can benefit from the advice of an
investment bank. Although large corporations often have sophisticated finance and
corporate development departments provide objectivity, a valuable contact
network, allows for efficient use of client personnel, and is vitally interested in
seeing the transaction close.
Most small to medium sized companies do not have a large in-house staff, and in a
financial transaction may be at a disadvantage versus larger competitors. A quality
investment banking firm can provide the services required to initiate and execute a
major transaction, thereby empowering small to medium sized companies with
financial and transaction experience without the addition of permanent overhead,
an investment bank provides objectivity, a valuable contact network, allows for
efficient use of client personnel, and is vitally interested in seeing the transaction
close.
Most small to medium sized companies do not have a large in-house staff, and in a
financial transaction may be at a disadvantage versus larger competitors. A quality
investment-banking firm can provide the services

Organizational structure of an investment bank

The main activities and units
The primary function of an investment bank is buying and selling products both on
behalf of the bank's clients and also for the bank itself. Banks undertake risk
through proprietary trading, done by a special set of traders who do not interface
with clients and through Principal Risk, risk undertaken by a trader after he or she
buys or sells a product to a client and does not hedge his or her total exposure.
Banks seek to maximize profitability for a given amount of risk on their balance
sheet
An investment bank is split into the so-called Front Office, Middle Office and
Back Office. The individual activities are described below:
Front Office
• Investment Banking is the traditional aspect of investment banks which
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 (often pronounced "corpfin").

• Investment management is the 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 eg. mutual funds) .

• Financial Markets is split into four key divisions: Sales, Trading, Research
and Structuring.

○ Sales and Trading is often the most profitable area of an investment

bank , responsible for the majority of revenue of most investment
banks 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 (on caveat emptor basis) and take
orders. Sales desks then communicate their clients' orders to the
appropriate trading desks, which can price and execute trades, or
structure new products that fit a specific need.

○ Research is the division which reviews 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. In recent years the
relationship between investment banking and research has become
highly regulated, reducing its importance to the investment bank.

○ Structuring has been a relatively recent division as derivatives have

come into play, with highly technical and numerate employees
working on creating complex structured products which typically
offer much greater margins and returns than underlying cash
securities.
Middle Office
• Risk Management involves analysing 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. Another key Middle
Office role is to ensure that the above mentioned economic risks are
captured accurately (as per agreement of commercial terms with the
counterparty) correctly (as per standardised booking models in the most
appropriate systems) and on time (typically within 30 minutes of trade
execution). In recent years the risk of errors has become known as
"operational risk" and the assurance Middle Offices provide now include
measures to address this risk. When this assurance is not in place, market
and credit risk analysis can be unreliable and open to deliberate
manipulation.
Back Office
 • Operations involve 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.

Recent evolution of the business

New products
Investment banking is one of the most global industries and is hence continuously
challenged to respond to new developments and innovation in the global financial
markets. Throughout the history of investment banking, many have theorized that
all investment banking products and services would be commoditized. New
products with higher margins are constantly invented and manufactured by bankers
in hopes of winning over clients and developing trading know-how in new
markets. However, since these can usually not be patented or copyrighted, they are
very often copied quickly by competing banks, pushing down trading margins.
For example, trading bonds and equities for customers is not a commodity
business but structuring and trading derivatives is highly profitable .Each OTC
contract has to be uniquely structured and could involve complex pay-off and risk
profiles. Listed option contracts are traded through major exchanges, such as the
CBOE, and are almost as commoditized as general equity securities.
In addition, while many products have been commoditized, an increasing amount
of profit within investment banks has come from proprietary trading, where size
creates a positive network benefit (since the more trades an investment bank does,
the more it knows about the market flow, allowing it to theoretically make better
trades and pass on better guidance to clients).
Possible conflicts of interest
Potential conflicts of interest may arise between different parts of a bank, creating
the potential for financial movements that could be market manipulation.
Authorities that regulate investment banking (the FSA in the United Kingdom and
the SEC in the United States) require that banks impose a Chinese wall which
prohibits communication between investment banking on one side and research
and equities on the other.
Some of the conflicts of interest that can be found in investment banking are
listed here:
• Historically, equity research firms were founded and owned by investment
banks. One common practice is for equity analysts to initiate coverage on a
company in order to develop relationships that lead to highly profitable
investment banking business. In the 1990s, many equity researchers
allegedly traded positive stock ratings directly for investment banking
business. On the flip side of the coin: companies would threaten to divert
investment banking business to competitors unless their stock was rated
favorably. Politicians acted to pass laws to criminalize such acts. Increased
pressure from regulators and a series of lawsuits, settlements, and
prosecutions curbed this business to a large extent following the 2001 stock
market tumble
• Many investment banks also own retail brokerages. Also during the 1990s,
some retail brokerages sold consumers securities which did not meet their
stated risk profile. This behavior may have led to investment banking
business or even sales of surplus shares during a public offering to keep
public perception of the stock favorable.
• Since investment banks engage heavily in trading for their own account, there is always
the temptation or possibility that they might engage in some form of front running.

Types of investment banks

Investment banks "underwrite" (guarantee the sale of) stock and bond issues,
trade for their own accounts, make markets, and advise corporations on capital
markets activities such as mergers and acquisitions.
Merchant banks were traditionally banks which engaged in trade financing. The
modern definition, however, refers to banks which provide capital to firms in the
form of shares rather than loans. Unlike Venture capital firms, they tend not to
invest in new companies.

Investment banks provide four primary types of services:

Raising capital, advising in mergers and acquisitions, executing securities sales and
trading, and performing general advisory services. Most of the major Wall Street
firms are active in each of these categories. Smaller investment banks may
specialize in two or three of these categories.

Raising Capital
An investment bank can assist a firm in raising funds to achieve a variety of
objectives, such as to acquire another company, reduce its debt load, expand
existing operations, or for specific project financing. Capital can include some
combination of debt, common equity, preferred equity, and hybrid securities such
as convertible debt or debt with warrants. Although many people associate raising
capital with public stock offerings, a great deal of capital is actually raised through
private placements with institutions, specialized investment funds, and private
individuals. The investment bank will work with the client to structure the
transaction to meet specific objectives while being attractive to investors.

Mergers and Acquisitions

Investment banks often represent firms in mergers, acquisitions, and divestitures.
Example projects include the acquisition of a specific firm, the sale of a company
or a subsidiary of the company, and assistance in identifying, structuring, and
executing a merger or joint venture. In each case, the investment bank should
provide a thorough analysis of the entity bought or sold, as well as a valuation
range and recommended structure.

Sales and Trading

These services are primarily relevant only to publicly traded firms, or firms, which
plan to go public in the near future. Specific functions include making a market in
a stock, placing new offerings, and publishing research reports.

General Advisory Services:

Advisory services include assignments such as strategic planning, business
valuations, assisting in financial restructurings, and providing an opinion as to the
fairness of a proposed transaction.
Terms Related To Investment Bank

Buying and Selling

Buying

Deciding on the proper time to purchase a security that you would like to add to
your holdings can be a daunting task. If the price drops immediately after you buy,
it may seem as if you missed out on a better buying opportunity. If the price jumps
right before you make your move, you may feel as if you paid too much. As it turns
out, you should not let these small fluctuations influence your decision too much.
As long as the fundamentals that led you to decide on the purchase have not
changed, a few points in either direction should not have a large impact on the
long-term value of your investment.

Similarly, the fact that an investment has been increasing in value of late is not a
sufficient reason for you to purchase it. Momentum can be very fickle, and recent
movement is not necessarily an indicator of future movement. Therefore, buying
decisions should be based on sound and thorough research geared toward
discerning the future value of a security relative to its current price. This analysis
will probably not touch upon price movement in the very recent past. As you learn
more about investing you'll get better at deciding when to buy, but most experts
recommend that beginners avoid trying to time the market, and just get in as soon
as they can and stay in for the long haul.

The proper time to buy a security is quite simply when it is available for less than
its actual value. These undervalued securities are actually not as rare as they sound.
However, the problem is simply that they are never sure bets. The value of a
security includes estimates of the future performance of factors underlying the
value of the security. For stocks, these factors include things like earnings growth
and market share. Changes can be predicted to a degree, but they are subject to
fluctuation due to forces both within and beyond the control of the company.

The overall economic climate, changes in the industry or even bad decisions by
management can all cause a security poised to ascend in value to become an under
performer. Therefore, it is essential to practice your analysis before putting your
money into action. Make some mock purchases based on your personal analysis
technique and track the results. Not all of your decisions will lead to the results you
were expecting, but if most of your choices turn out to be good and there are
mitigating factors that you can learn from to explain your missteps, then you may
be ready to put your analysis technique and investing strategy into action.

At this point, the need to continuously monitor your investments does not
disappear. Both under performers and overachievers should be studied carefully to
fine-tune your strategy. You should also regularly look at your securities to make
sure that the fundamentals for success that led you to buy in the first place are
intact. If not, you may need to prepare to cash in and start looking for the next
opportunity.

One way to avoid the hassles of deciding when to buy altogether is to practice
dollar-cost averaging. This strategy advocates investing a fixed dollar amount at
regular intervals. The price when you first invest is relatively unimportant (as long
as the fundamentals are sound) because you will be purchasing shares at a different
price each time you buy. The success of your investment then lies not with short-
term fluctuations, but with the long-term movement of the value of the security.

Selling:

There comes a time when investments must be liquidated and converted back into
cash. In a perfect world, selling would only be necessary when investment goals
have been reached or time horizons have expired, but, in reality, decisions about
selling can be much more difficult. For one thing, it can be just as hard to decide
when to sell as it can be to decide when to buy. No one wishes to miss out on gains
by selling too soon, but, at the same time, no one wishes to watch an investment
peak in value and then begin to decline.

Investors often seek to sell investments that have dropped in value in the short-
term. However, if conditions have not changed significantly, drops in price may
actually represent an opportunity to buy at a better price. If the initial research,
which led to the purchase, was sound, a temporary decline does not preclude the
success that was originally predicted. Of course, things change, and if the security
no longer meets the criteria that led to its purchase, selling may in fact be the best
option.

Selling may also become necessary if investment goals change over time. You may
need to reduce the amount of risk in your portfolio or you may have the
opportunity to seek out greater returns. Additionally, a security may have increased
in value to the point that it is overvalued. This creates an excellent opportunity to
cash in and seek out new undervalued investments. Often you will need to make
this type of sale in the course of rebalancing a portfolio necessitated by gains and
losses in different areas.

Selling can be especially difficult when an under performing stock must be

dumped. Some investors let their emotions dictate their actions and hold on to
stocks that have fallen in value rather than to sell, thinking that selling at a loss is
like admitting that they made a mistake. However, realizing the loss and moving
on to better investments is often preferable to continuing to hold onto a loser in the
hopes that it will somehow rebound.

When considering any sale, you must factor in the costs of the sale itself. Fees and
taxes will eat into profits, so they must be subtracted from any increases in value to
understand the true impact of the transaction. Capital gains taxes are higher for
gains on investments held less than one year, so it's often wise to invest for the
long term rather than to buy and sell quickly. On the other hand, it can be
dangerous to hold an investment longer than you want to, simply to reduce the tax
burden.

It is essential to remember that just because an investment increases in value after

it has been sold does not necessarily mean that it was sold prematurely. Managing
risk and diversification are often more important than capitalizing on short-term
gains in a particular security. Keeping in mind the initial goals for the investment
and adjusting them to fit your present goals will allow you to make smarter
decisions about selling.

Principles of Investing
 1. Start Investing Now

We say this not just to discourage procrastination, but because an early start can
make all the difference. In general, every six years you wait doubles the required
monthly savings to reach the same level of retirement income. Another
motivational statistic: If you contributed some amount each month for the next
nine years, and then nothing afterwards, or if you contributed nothing for the first
nine years, then contributed the same amount each month for the next 41 years,
you would have about the same amount. Compounding is a beautiful thing.

2. Know Yourself

The right course of action depends on your current situation, your future goals, and
your personality. If you don't take a close look at these, and make them explicit,
you might be headed in the wrong direction.
• Current Situation: How healthy are you, financially? What's your net worth
right now? What's your monthly income? What are your expenses (and where
could they be reduced)? How much debt are you carrying? At what rate of
interest? How much are you saving? How are you investing it? What are your
returns? What are your expenses?

• Goals: What are your financial goals? How much will you need to achieve
them? Are you on the right track?

• Risk Tolerance: How much risk are you willing and able to accept in pursuit of
your objectives? The appropriate level of risk is determined by your personality,
age, job security, health, net worth, amount of cash you have to cover
emergencies, and the length of your investing horizon.

3. Get Your Financial House In Order

Even though investing may be more fun than personal finance, it makes more
sense to get started on them in the reverse order. If you don't know where the
money goes each month, you shouldn't be thinking about investing yet. Tracking
your spending habits is the first step toward improving them. If you're carrying
debt at a high rate of interest (especially credit card debt), you should unburden
yourself before you begin investing. If you don't know how much you save each
month and how much you'll need to save to reach your goals, there’s no way to
know what investments are right for you.

If you've transitioned from a debt situation to paycheck-to-paycheck situation to a

saving some money every month situation, you’re ready to begin investing what
you save. You should start by amassing enough to cover three to six months of
expenses, and keep this money in a very safe investment like a money market
account, so you're prepared in the event of an emergency. Once you've saved up
this emergency reserve, you can progress to higher risk (and higher return)
investments: bonds for money that you expect to need in the next few years, and
stocks or stock mutual funds for the rest. Use dollar cost averaging, by investing
about the same amount each month. This is always a good idea, but even more so
with the dramatic fluctuations in the market in the past 10 years. Dollar cost
averaging will make it easier to stomach the inevitable dips.

And remember; never invest in anything you don't understand.

4. Develop A Long Term Plan

Now that you know your current situation, goals, and personality, you should have
a pretty good idea of what your long-term plan should be. It should detail where
the money will go: cars, houses, college, and retirement. It should also detail where
the money will come from. Hopefully the numbers will be about the same.

Don't try to time the market. Get in and stay in. We don't know what direction the
next 10% move will be, but we do know what direction the next100% move will
be.

Review your plan periodically, and whenever your needs or circumstances change.
If you are not confident that your plan makes sense, talk to an investment advisor
or someone you trust.

5. Buy Stocks

Now that you've got a long term view, you can more safely invest in 'riskier'
investments, which the market rewards (in general). This requires patience and
discipline, but it increases returns. This approach reduces the entire universe of
investment vehicles to two choices: stocks and stock mutual funds. In the long run,
they're the winners: In this century, stocks beat bonds 8 out of 9 decades, and
they're well in the lead again. According to Ibbotson's Stocks, Bonds, Bills and
Inflation 1995 Yearbook, here are the average annual returns from 1926 to 1994
(before inflation):
• Stocks: 10.2% (and small company stocks were 12.1%)
• Intermediate term treasury bonds: 5.1%
• 30-day T-bills: 3.7%
But is it really worth the additional risk just for a few percentage points? The
answer is yes. 10% a year for 20 years is 570%, but 7% a year for 20 years is only
280%. Compounding is God's gift to long-term planners.

If you buy outstanding companies, and hold them through the market's gyrations,
you will be rewarded. If you aren't good at selecting stocks, select some mutual
funds. If you aren't good at selecting mutual funds, go with an index fund (like the
Vanguard S&P 500).

6. Investigate Before You Invest

Always do your homework. The more you know, the better off you are. This
requires that you keep learning, and pay attention to events that might affect you.
Understand personal finance matters that could affect you (for example, proposed
tax changes). Understand how each of your investments fits in with the rest of your
portfolio and with your overall strategy. Understand the risks associated with each
investment. Gather unbiased, objective information. Get a second opinion, a third
opinion, etc. Be cautious when evaluating the advice of anyone with a vested
interest.

If you're going to invest in stocks, learn as much as you can about the companies
you’re considering. Understand before you invest. Research, research, Read books.
Consider joining an investment club or an organization like the American
Association of Individual Investors. Experiment with various strategies before you
put your own money on the line. Examine historical data or participate in a stock
market simulation. Try a momentum portfolio, a technical analysis portfolio, a
bottom fisher portfolio, a dividend portfolio, a price/earnings growth portfolio, an
intuition portfolio, a mega trends portfolio, and any others you think of. In the
process you'll find out which ones work best for you. Learn from your own
mistakes, and learn from the mistakes of others.

If you don't have time for all this work consider mutual funds, especially index
funds.
 7. Develop the Right Attitude

The following personality traits will help you achieve financial success:
• Discipline: Develop a plan, and stick with it. As you continue to learn, you’ll
become more confident that you're on the right track. Alter your asset allocation
based on changes in your personal situation, not because of some short-term
market fluctuation.

• Confidence: Let your intelligence, not your emotions; make your decisions for
you. Understand that you will make mistakes and take losses; even the best
investors do. Re-evaluate your strategy from time to time, but don't second-guess
it.

• Patience: Don't let your emotions be ruled by today's performance. In most

cases, you shouldn't even be watching the day-to-day performance, unless you
like to. Also, don't ever feel like it's now or never. Don't be pressured into an
investment you don’t yet understand or feel comfortable with.
The following personality traits will hurt your chances of financial success:
• Fear: If you are unwilling to take any risk, you will be stuck with investments
that barely beat inflation.

• Greed: As an investment class, 'get rich quick' schemes have the worst returns. If
your expectations are unrealistically high, you'll go for the big scores, which
usually don’t work.
It is generally a good idea to avoid making financial decisions based on
emotional factors.

8. Get Help If You Need It

The do-it-yourself approach isn't for everyone. If you try it and it's not working, or
you're afraid to try it at all, or you just don't have the time or desire, there's nothing
wrong with seeking professional assistance.

If you want others to handle your financial affairs for you, you will nevertheless
want to remain involved to some degree, to make sure your money is being spent
wisely.
 Initial Public Offerings

Initial Public Offerings (IPOs) are the first time a company sells its stock to the
public. Sometimes IPOs are associated with huge first-day gains; other times, when
the market is cold, they flop. It's often difficult for an individual investor to realize
the huge gains, since in most cases only institutional investors have access to the
stock at the offering price. By the time the general public can trade the stock, most
of its first-day gains have already been made. However, a savvy and informed
investor should still watch the IPO market, because this is the first opportunity to
buy these stocks.

Reasons for an IPO

When a privately held corporation needs to raise additional capital, it can either
take on debt or sell partial ownership. If the corporation chooses to sell ownership
to the public, it engages in an IPO. Corporations choose to "go public" instead of
issuing debt securities for several reasons. The most common reason is that capital
raised through an IPO does not have to be repaid, whereas debt securities such as
bonds must be repaid with interest. Despite this apparent benefit, there are also
many drawbacks to an IPO. A large drawback to going public is that the current
owners of the privately held corporation lose a part of their ownership.
Corporations weigh the costs and benefits of an IPO carefully before performing
an IPO.

Going Public

If a corporation decides that it is going to perform an IPO, it will first hire an

investment bank to facilitate the sale of its shares to the public. This process is
commonly called "underwriting"; the bank's role as the underwriter varies
according to the method of underwriting agreed upon, but its primary function
remains the same.

In accordance with the Securities Act of 1933, the corporation will file a
registration statement with the Securities and Exchange Commission (SEC). The
registration statement must fully disclose all material information to the SEC,
including a description of the corporation, detailed financial statements,
biographical information on insiders, and the number of shares owned by each
insider. After filing, the corporation must wait for the SEC to investigate the
registration statement and approve of the full disclosure.

During this period while the SEC investigates the corporation's filings, the
underwriter will try to increase demand for the corporation's stock. Many
investment banks will print "tombstone" advertisements that offer "bare-bones"
information to prospective investors. The underwriter will also issue a preliminary
prospectus, or "red herring", to potential investors. These red herrings include
much of the information contained in the registration statement, but are incomplete
and subject to change. An official summary of the corporation, or prospectus, must
be issued either before or along with the actual stock offering.

After the SEC approves of the corporation's full disclosure, the corporation and the
underwriter decide on the price and date of the IPO; the IPO is then conducted on
the determined date. IPO’s are sometimes postponed or even withdrawn in poor
market conditions.

Performance

The aftermarket performance of an IPO is how the stock price behaves after the
day of its offering on the secondary market (such as the NYSE or the NASDAQ).
Investors can use this information to judge the likelihood that an IPO in a specific
industry or from a specific lead underwriter will perform well in the days (or
months) following its offering. The first-day gains of some IPO’s have made
investors all too aware of the money to be had in IPO investing. Unfortunately, for
the small individual investor, realizing those much-publicized gains is nearly
impossible. The crux of the problem is that individual investors are just too small
to get in on the IPO market before the jump. Those large first-day returns are made
over the offering price of the stock, at which only large, institutional investors can
buy in. The system is one of reciprocal back scratching, in which the underwriters
offer the shares first to the clients who have brought them the most business
recently. By the time the average investor gets his hands on a hot IPO, it's on the
secondary market, and the stock's price has already shot up.

SEBI Guidelines

The Government has setup Securities Exchange Board of India

(SEBI) in April 1988. For more then three years, it had no statutory powers. Its
interim functions during the period were:
i. To collect information and advise the Government on matters relating to
Stock and Capital Markets.
ii. Licensing and regulatory and Merchant Banks, Mutual Fund, etc..
iii. To prepare the legal drafts for regulatory and developmental role of SEBI
and
iv. To perform any other functions as may be entrusted to it by Government.

The need for setting up independent Government agency to regulate and

develop the Stock and Capital Market in India as in many developed
countries was recognised since the Seventh Five Year was launched (1985)
when some major industrial policy changes like opening up of the economy
to out side the world and greater role to the Private Sector were initiated.
The rampant malpractices noticed in the Stock and Capital Markets stood in
the way of infusing confidence of investors, which is necessary for
mobilisation of large quantity of funds from the public, and help the growth
of the industry.

The malpractices were noticed in the case of companies, Merchant

Bankers and Brokers who are all operating in Capital Markets. The need to
curb the malpractices and to promote healthy Capital Market in India was
felt. The security industry in India has to develop on the right lines for which
 a competent Government agency as in UK (SIB) or in USA (SEC) is needed.

As referred to earlier, malpractices have been reported in both

the primary market and secondary market. A few examples of malpractices
in the primary market are as follows:
a) Too may self styled Investment Advisers and Consultants.
b) Grey Market or unofficial premiums on the new issues.
c) Manipulation of markets before new issues is floated.
d) Delay in allotment letters or refund orders or in dispatch of Share
Certificates
e) Delay in listing and commencement of trading in shares.
A few examples of malpractices in the Secondary Market are as fallows:
a) Lack of transparency in the trading operations and prices charged to clients.
b) Poor service due to delay in passing contract notes or not passing contracts
notes, at all.
c) Delay in making payments to clients or in giving delivery of shares.
d) Persistence of odd lots and refusal of companies to stop this practice of
allotting shares in odd lots, which disappeared with the introduction of
Demat form of trading.
e) Insider trading by agents of companies or brokers rigging and manipulating
prices.
f) Takeover bids to destabilise management.

Objectives:

The SEBI has been entrusted with both the regulatory and development
function. The objectives of SEBI are as follows:
a) Investor protection, so that there is a steady flow of savings into the
Capital Markets.
b) Ensuring the fair practices by the issuers of securities, namely,
companies so that they can raise resources at least cost.
 c) Promotion of efficient services by brokers, merchant bankers and
others intermediaries so that they become competitive and
professional.

SEBI AND FREE PRICING OF EQUITY SHARES

With the repeat of Capital Issuers Control Act of 1947 in May 1992,
the SEBI issued fresh guidelines for new Capital issues from June 11, 1992.
Pricing of Shares expect in case of new companies with no track record is left to
free market forces. The new Companies have to issues shares at par only. The
existing unlisted companies if they desire listing can make public issue upto 20%
of equity and price can be determined by free market forces, as determined by the
issuer or the lead manager. Similarly, an existing listed company can also fix the
price of issue depending on the markets forces. In all these cases, the reasons for
such price fixation, transparency and proper disclosers are insisted upon by the
SEBI. The draft letter of offer to the public is to be vetted by SEBI, which was
delegated to lead merchant bankers by SEBI after 1996.

As per SEBI guidelines, 12 months should elapse between bonus issue

and public or rights issue. A private placement of promoters’ quota is not
permitted. Merchant bankers held responsible for ensuring that prospectus is fair
and disclosures are full and correct and that highlights and risk factors are slept out
in all issues. Although free pricing is permitted, the rationale of such fixation is to
be provided to the SEBI when it examines the drafts letter of offer.

FOR COMPLETE REPORT AND

DOWNLOADING

VISIT
HTTP://PAKISTANMBA.JIMDO.COM