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

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

Core investment banking activities

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

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

Structure of Investment Bank

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

Sales and Trading

On behalf of the bank and its clients, the primary function of a large investment bank is buying and selling products. In 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, who can price and execute trades, or structure new products that fit a specific need.

Research
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. 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. In recent years the relationship between investment banking and research has become highly regulated requiring a Chinese wall between public and private functions.

Global Transaction Banking

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

Investment Management
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). The investment management division of an investment bank is generally divided into separate groups, often known as Private Wealth Management and Private Client Services.

Merchant Banking
Merchant banking is a private equity activity of investment banks. Current examples include Goldman Sachs Capital Partners and JPMorgan's One Equity Partners. (Originally, "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.

Risk Management
Risk management 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. 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. When this assurance is not in place, market and credit risk analysis can be unreliable and open to deliberate manipulation.

Other Functions

Corporate treasury is responsible for an investment bank's funding, capital structure management, and liquidity risk monitoring. Financial control 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. Corporate strategy, along with risk, treasury, and controllers, often falls under the finance division as well. Compliance areas are responsible for an investment bank's daily operations' compliance with government regulations and internal regulations. Often also considered a back-office division.

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

Merchant Banking in India

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

Merchant Banks vs. Commercial Banks

Merchant Banks deal with Equity & equity related finance e.g. raising of funds through money market & capital market

Commercial Banks deal with Debt & Debt related finance e.g. credit proposals, credit appraisals, loan sanctions

Merchant Banks vs. Commercial Banks

Merchant Bankers are management oriented & are accepted to take risks Merchant Banking activities have impact on growth, stability & liquidity of money markets

Commercial Banks are asset oriented & avoid risks

Commercial banks are mere financiers

Services of Merchant Bankers

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Corporate Counselling Project Counselling Capital restructuring Project Management Public Issue Management Loan Syndication Working Capital Lease Financing

Services of Merchant Bankers

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Portfolio Management Advisory services related to Mergers & Acquisitions Off Shore Finance

Services of Merchant Bankers

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Project Counseling Preparation & appraisal of the project reports Get financial assistance from institutions Plan for the public issue

Services of Merchant Bankers

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

Services of Merchant Bankers

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Issue Management marketing of Corporate securities viz. equity shares, preference shares, debentures, 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?

Pre Issue Management

Issue through prospectus, offer for sale and private placement Marketing and underwriting Pricing of issues

Services of Merchant Bankers

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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

Services of Merchant Bankers

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Arrangement of underwriting Pricing of Issues Selection of brokers, bankers to the issue, publicity & advertising agents

Services of Merchant Bankers

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Post Issue Management Collection of Application Forms Statement of amount received from bankers Screening applications Deciding Allotment procedure Mailing of Allotment letters, Share certificates & refund orders

Underwriting of the Public Issue

Norms to the Underwriting of the Public Issue

1. 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. Lead Managers have to mandatorily 5% of the issue or Rs. 2.5 lacs whichever is less

4. Banks/Merchant Banking subsidiaries cannot underwrite more than 15% of any issue

Off Shore Finance

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Long term foreign currency loans Joint venture abroad Financing exports & imports Foreign collaboration arrangements

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