Project Report On “Investment Banking” Bachelor of commerce Banking & insurance semester v 2015-2016 Submitted In Partial ulfillment of the re!uirement for the "# "#ard of $egree of Bachelor of %ommerce-Banking &Insurrance B Mohd. Sohail Shaikh ROLL NO !"
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I Mohd. Sohail Shaikh, the student of B'%om' Banking and Insurance semester v . 2015 / 2016* hereb $eclare that I have comleted the roect on 3 Investment Banking4'
he information submitted through this roect is true and original to the best of m kno#ledge' *$+# PL$(#M'MB$I
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I Mohd. Sohail Shaikh, the student of B'%om' Banking and Insurance semester v . 2015 / 2016* hereb $eclare that I have comleted the roect on 3 Investment Banking4'
he information submitted through this roect is true and original to the best of m kno#ledge' *$+# PL$(#M'MB$I
SI&N$+'R# Mohd. Sohail Shaikh ROLL NO !"
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his is to certif that MR. Mohd. Sohail Shaikh ,ROLL NO. NO. !" of B'com' Banking and Insurance Semester v . 2015 - 2016 has successfull comleted the roect on --Investment Banking--
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"ll these ears #e have ust studing and assing' But this time #e have got an oortunit to make such a roect stud ' So it is ver obvious for me to thank all those eole associated #ith the making of the roect ' I o#e a great man thanks to m roect guide Mr. rishnan
Ramchandran, :ho has been constant suort and guidance throughout the making of m roect and for monitoring m roect #ith attention and care' Shehas taken the ains to go through the roect and make necessar correction as needed'
I #ould also like to thank our course coordinator )=S' 7"=IS>)" '7 for being a moral suort to us during a roect'
I e?ress thanks to m college rincial rincia l $r' ="@ ="@I8$="8 7"=">"$I 7"=">"$I for e?tending her suort'
"nd last but not least I #ould take the oortunit to thank m arents #ithout #hom the roect #ould have been a distant realit r ealit'' Sincere thanks to all m fello# mates and #ell-#isher'
#2ec3tive S3mmar4 Investment banking encomasses not mearl merchant banking but other related caital market activities such as / Stock trading market making* under#riting* and broking and asset management as #ell' Besides the above* investment banks also rovides a host of secialiAed cororate advisor services in the areas of roect advisor* Business and financial advisor and mergers and a!usitions'
Investment banks are from traditional do#n the street in the sence that it does not kee an deosits #ith itself to a us an interest nor does it graduates the 3safekeeing4 of our mone' "n take deosits and make commercial and retail loans' In real ears* >o#ever* the lines bet#een the t#o tes of structure have blurred eseciall as commercial banks have offered more investment banking services'
Introduction "t a ver macro level* Investment BankingC as the t e r m s u g g e s t s * i s concerned #ith the rimar function of assisting the caital market in itsfunctions of caital intermediation* i'e' the movement of financial resourcesfrom those #ho have them .the Investors* to those #ho need to make us of them for generating <$P .the Issuers' "s alread discussed banking andfinancial institutions on the one hand and the caital market on the other arethe t#o broad latforms of institutional intermediation for caital fl o# s in the econom' herefore* it could be inferred that investment banks are thosei n s t i t u t i o n s t h a t a r e t h e c o u n t e r a r t s o f b a n k s i n t h e f u n c t i o n o f intermediation in resou rce allocation' 8evertheless* it #ou ld be unfair toconclude so* as that #ould confine investment banking to a ver narro#s h e r e o f i t s a c t i v i t i e s i n t h e m o d e r n # o r l d o f h i g h f i n a n c e ' 9 v e r t h e d e c ad es * b ac ke d b e vo l ut io n a n d a l s o f u e l l e d b r e c e n t t e c h n o l o g i c a l d ev el o men ts* investment banking has transformed reeatedl to suit the needs of the finance communit and thus become one of the most vibr ant and e?citing segment of financial services' Investment bankers have al#as enoed celebrit status* but at times the have aid the rice for e?cessive flamboance as #ell' o continue from the a b o v e * i n t h e # o r d s o f D o h n ' ) a r s h a ll a n d ) ' ; ' ;llis* investment banking is #hat investment banks doC' his definition can be e?lained in the conte?t of ho# investment banks have evolved i n their functionalit and ho# histor and regulator intervention have shaed such as evolution' )uch of investment banking in its resent form thus o#es its
origin to the financial market in S"* due to #hich* "merican inv es tme nt banks have been leaders in the "merican and ;uro markets as #ell' h e re f o re * t h e t e r m i n ve s t me n t b a nk i n gC c a n a r g u a b l b e s a i d t o b e o f "merican origin' heir counterarts in 7 #ere termed as merchant banksC since the had confined themselves to caital market intermediation until the S investment banks entered the 7 and ;uroean markets and e?tended the scoe of such businesses'
investment Banking and Merchant Banking *isting3ished "t this stage* it #ould be relevant therefore* to dra# a fine line of distinction bet#een the terms Investment BankingC and )erchant Bank ingC as boththese te rms are e?ten sive l used in this roect' )erchant BankingC as the t e r m s u g g e s t s * i s t h e function of intermediation in the caital market' It consists of assisting issuers to raise caital b lacement of securities issued b them #ith investors' >o#ever* merchant banking is not merel aboutmarketing securities in an agenc caacit' he )erchant Banker has an onerous resonsibilit to#ards the investors #ho invest in such securities' he regulator authorities re!uire the mer cha nt ban kin g firms to romo te !ualit issues* maintain integrit an ensure comliance #ith the la# on o#n account and on behalf of the issuers as #ell' herefore* merchant banking is a fee based service management of ublic offersE oularl kno# as issue managementC and for rivate lacement of securities in the caital market' In India* the )erchant Banker leading a ublic offer is also called as the (ead)anagerC'9n the other hand* the term* Investmen t B a n k i n g C h a s a m u c h # i d e r connotation and is graduall becoming more of an inclusive term to refer toall tes of caita l market activit* both fund-based and non-fund based' h i s d e v e l o m e n t h a s b e e n d r i v e n m o r e b t h e # a t h e " m e r i c a n investment banks have evolved over the ast centur'
investment banks also provide a host of special i z e d c o r p o r a t e a d v i s o r y services in the areas of project advisory, business and nancial advisory
andmergers and acquisitions. The activity p r o l e o f i n v e s t m e n t b a n k s i s discussed in more in detail later in this chapter
Evolution of American nvestment !anks The ea rliest events that are relevant for this discussion can be traced to theend of "orld "ar , by #hich time, commercial banks in the $%A #erea l r e a d y p r e p a r i n g f o r a n e c o n o m i c r e c o v e r y a n d c o n s e q u e n t l y , t o t h e signi cant demand for corporate nance. t #as e&pected that Americancompanies #ould shift their dependence from commercial banks to stock an d bo nd ma r ket s #herein funds #ere available at a lo#er cost a n d f o r longer periods of time. n preparation for a boom in the capital markets inthe '()*s, commercial banks started to acquire stock broking businesses in a bid to have their presence made in such markets. The rst of suchacquisitions happened #hen the +ational ity !ank of +e# -ork acquireda l s e y % t u a r t a n d ompany in '('/. As in the past, in the entire '()*s,investment banking meant under#riting and distribution of securities.The stock and bond market boom in '()*s #as as opportunity that bankscould not miss. !ut since they could not under#rite and sell s e c u r it ie s d i r e c t l y , t h e y o # n e d s e c u r i t y a 0 l i a t e s t h r o u g h h o l d i n g c o m p a n i e s . o # ev er , they #ere not maintained like #ater tight c o m p a r t m e n t s . T h e a0liates #ere sparsely capitalized as #ere nanced by the parent banks for their under#riting and other business obligations. "hile the boom lasted ,i n v e s t m e n t b a n k i n g a 0 l i a t e s m a d e h u g e pr o ts as un de r# ri t in g fe es ,specially in the segment called 1-ankee !onds2 issued by overseas issuers in$ % m a r k e t . n t h e s t o c k m a r k e t , t h e b a n k s m a i n l y c o n d u c t e d b r o k i n g operations through
their subsidiaries and lent margin money to cust omer s. !ut #ith the passage of the 3c4adden Act in '()5, bank subsidiaries began under#riting stock issues as #ell. +ational ity !ank, hase !ank, 3organand !ank of America #ere the most aggressive banks present at that time.The stock market got over6heated #ith investment banks borro#ing moneyfrom the parent bank in order to speculate in the bank2s stock, mostly for short selling. 7nce the general public joined the frenzy, the price6 earning ratios reached absurd limits and the bubble eventually burst in 7ctober '()(#iping out millions of dollars of bank depositors2 funds and bringing do#n#ith it banks such as !ank of $nited %tates8n order to restore condence in the banking and nancial system, severallegislation measure #ere proposed, #hich eventual ly led to the passing of the !anking Act '(99 :popularly kno# as ;lass6%teagall Act< that restrictedco mme rci al ba nk s fro m e ng ag in g in se c ur it ie s un d er #r it in g an d t ak i ng positions or acting as agents for others in securities transactions. Theseactivi ties #ere segregated as the e&clusive domain of investment banks. 7nthe other hand, investment banks #ere barre d f ro m d ep o si t t ak i ng a nd c o r p o r a t e l e n d i n g , #hich #ere considered the e&clusive busine s s o f commercial bank. The Act thus provided the #ater tight compartments that# e r e n e e d e d b e f o r e . % i n c e t h e p a s s i n g o f t h is Act , i nv est me nt ba nk in g became narro#ly dened as the basket of nancial services associated #iththe =oatation of corporate securities, i.e. the creation of primary market for s e c u r i t i e s . t # a s also e&tended to mean at a secondary level,
secondarymarket making through securities dealing.!y '(9>, investment banking became one of the mos t he av il y reg ul at ed industries in $%A. The %ecurities Act, '(99 provided for the rst time the
preparation of o?er documents and registration of ne# s ecurities #ith thef e d e r a l g o v e r n m e n t . T h e % e c u r i t i e s E & c h a n g e A c t , ' ( 9 @ l e d t o t h e es tablishment of the %ecurities E&change ommission. The 3aloney Act of '(9 led to the format ion of the +A%BAC, the nvestment ompany Act,'( @* , #h ic h brought mutual funds #ithin the regulatory ambit and the n v e s t m e n t A d v i s e r s A c t , ' ( @ * # h i c h a l s o r e g u l a t e d t h e b u s i n e s s o f investment advisers and #ealth managers.After the passing of the ;lass6 %treagall Act of the '(9*s, until the beginningof the )' st century, investment banking had been through several phases of tran sformation #hic h had broken do#n t he #ater tight compartments to agrea t e& te nt . Bu e to the '(59 Arab oil embargo, #orld economies # e re under pressure and in=ation and interest rate volatility became disturbing. t# a s a t t h i s t i m e t h a t i n s t i t u t i o n a l i n v e s t o r s m a d d e r t h e i r a d v e n t i n t o securities markets. t #as also the time #hen the industrial and nancialservice sectors #ere beginning to e & p a n d a n d g l o b a l i z e . B u e t o t h e s e d ev el o p m ents, investment banking and commercial bank i n g o n c e a g a i n became constrained by the very legisla tion that #as meant to clean up thesystem in the '(9*s. This led to several rela&ations over the years such asthe %ecurities Acts Amendments, '(5> #hich had permitted commercial banks to have subsidiaries :called section )* subsidiaries< that #ere allo#edto under#rite and trade in securities. n '((*, D.. 3organ #as the rst bank to open a section )*
subsidiary. %ince the ;lass6%treagall Act did not applyt o foreign subsidiaries of $% banks, they continued to under#rite in t he E u r o b o n d m a r k e t a n d b y ' ( @ , t h e y h a d a > ) F m a r ke t s h a r e i n t h a t business. !ut there #as sti? competition from Dapanese banks in this marketand by '(5, they under#rote only )>F of the Eurobond issuances Buring the economic gro#th and globalization of the '(*s, inv es tment banking e&panded to several ne# areas and services #hich had includedcu r re n c y t r a d i n g , re a l e s t a t e , n a n c i a l f u t u re s , b r i d g e l o a n s , m o r t g a g e6 backed securities and several others. !ut the stock marke t crash of '(5once again brought the focus back to core areas of specialization. %imilarly,the ambitious e&pansion that took place on a global scale #as also halted tosome e&tent. o#ever due to technological advancements in the '((*s andthe availabil ity of global access through the revolution in communicationt e c h n o l o g i e s f u e l l e d t h e g l o b a l g r o # t h a g a i n . ! u t t h i s t i m e t h o u g h , investmen t banking is no more restricted to under#riting ne# issuances ands e c u r i t y d e a l i n g . T h e s h i f t i s m o r e t o # a r d s p ro v i d i n g e& p e r t i s e i n n e # products and risks. Apart f rom these activities, investment banking alsoencompass es a considerable spectrum of advisory services in the areas of corporate restructuring, mergers and acquisitions and G!7s, fund r ai sing a n d p r i v a t e e q u i t y. 7 n t h e d e a l i n g a n d t r ad i n g s i d e , i n v e s t m en t b a n ks participate in derivati ves market, arbitrage and speculation. n the area of s t r u ctured nance, investment banks also provide
n a n c i a l e n g i n e e r i n g through securitization deals and derivative instruments
European nvestment !anks n continental Europe :e&cluding $H<, the concept of a 1$niversal !ank2had been the undercurrent since the late nineteenth century, #hen most of t h e s e b a n k s # e r e s e t u p . T h e t e r m 1 u n i v e r s a l b a n k i n g 2 m e a n t t h e c o 6 e&istence of commercial banking :lending activity< along #ith investment banking :investment and distribution activity<. Their universality #as in thesense of harnessing the vast retail customer base that these banks enjoyed tomarket security issuances by their investment banking arms. These issues #ere mostly in the local markets designated in the local currencies. 4rance2s!anques d2a0ars and ;ermany2s $niversalbanken are good e&les.The $n it ed Hingdom, #hich is considered as Europe2s largest inv es tment banking market, had its o#n structure evolv ed from history. The oldestm e r c h a n t b a n k i n G o n d o n #as !arings !rothers #hich had played a prominent role in the nineteenth century. %ecurities distri bution #as thefunction of stock brokers, secondary market trading #as held by jobbers andadvi sory services #ere provided by merchant bank. The term 1merchant bank2 #as evolved so as to distinguish bet#een commercial banks and thosethat provided capital market advice. o#ever, the breaking do#n of such barriers in '(/ by allo#ing banks to o#n broking o utts led to aco ns ol id at io n an d mo st of th e b r o k i n g r m s g o t a b s o r b e d b y l a rg e r a n d diversied entities. Around the same time, the $% too #as #itnessing thedisappearance of distinction bet#een pure broking entities restricted to thes e c o n d a r y m a r k e t s a n d i n v e s t m e n t b a n k i n g
e n t i t i e s i n v ol v e d # i t h t h e primary markets. The $% i nvestment banks #ith their integrated global business mo del entered $H and Europe and later into Dapan.
introduction of the Euro currency in '(((, helped the $% invasion further byneutralizing the local curre ncy advantages enjoyed by European uni versal banks. !y )**', the $% bulge group garnered )(.5F of the investment banking fee generated in Europe as compared to '/.9F by the Europeanuniversal banks.ost6 '(/ , the merch ant ban ks and c o mm e rc i al b a nk s in $ H c o ul d no t m a t c h u p t o the $% onslaught #hich ultimately led to the sale of % ; "a r b u r g , t h e m e r c h a n t b a n k t o % # i s s ! a n k o r p o r a t i o n : # h i c h # a s acquired by $!% later< in '((>. n '((5, +at#est !ank and !arclays !ank e&ited investment banking business. 3organ ;renfell, a merchant bank #asso ld to Be ut sc he !a nk in '( (* . n t his uph eav al, nic he p lay ers suc h as Bre&el !urnham and !arings !ank also collapsed #ith internal deciencies.This led to cross border 3IA bet#een European banks inter6se and their American counterparts to create bigger investment banks. $!% "arburg#as b orn out of merg er o f $ !% a nd %#iss !ank orporation #hich hadearlier acquired %; "arburg. Beutsche !ank acquired !ankers Trust.
;lobal ndustry %tructure The investment banking industry on a global scale is oligopolistic in natureranging from the global leaders :kno#n as the 1;lobal !ulge ;roup2< to1ure2 investment banks and 1!outique2 investment banks. The bulge groupcons isting of eight inve stmen t banks has a global presence and these rmsdominate the league tables in key business segments. The top ten gl ob al rms in terms of their fee billing as in )**' are listed in Table"i th in th e li st in g gi ve n in th e ta bl e ref erre d to ab ove are th e to p 1p ure 2 investment banks, i.e. #hich do not have commercial banking connections,#hich are 3errill Gynch, ;oldman %achs and 3organ %tanley Bean "itter.Gisted therein are also the leading European $niversal !anks that are calledso due to their role in both commercial and investment banking. The ve leading universal banks in the #orld and their important group a0liates aregiven in TableT h e r e f o r e , t h e g l o b a l i n v e s t m e n t b a nking industry ranges form theackno#ledge d global leaders to a larger number of mid6sized competitors ata national or regional level and the rear end is supported by boutique rmsor advisory and sectoral specialists.
!usiness ortfolio of nvestment !anks ;lobally, investment banks handle signicant fund6based business of their o#n in the capital market along #ith their non6fund service portfolio #hichis o?ered to clients. o#ever, these distinct segments are handled either onthe same balance sheet or through subsidiaries and a0liates depending uponthe regulatory requirements in the operating environment of each country.All these activities are segmented acros s three broad pla tfo rms Jeq uit ymarket activity, debt market activity and merger and acquisition :3IA
large n a n c i a l p o # e r h o u s e s t h e m s e l v e s , t h e g l o ba l in ve st me nt ba nk s pl ay amajor role as institutional investors in trading and having large holdings of capital market securities. As dealers they take positions and make a marketfor many securities both in equity and derivative segments. They hold large
inventories and therefore in=uence the direction of the market. ;old man%achs, %alomon !rothers, 3errill Gynch, %chroeders, Kothschild and other signicant 3arket nvestors both on their o#n account and on behalf of the billions dollars of funds under their management.The global mergers and acquisitions business is very large and measures upto trillions of dollars annually. nvestment banks play a lead advisory role inthis booming segment of nancial advisory business. !esides, they come inas investors in management buy6outs and management buy6in transactions.7n other occasions, #herein investment banks manage private equity funds,they also represent their investors in such buy6out deals.n the case of universal banks such as the itigroup or $!% "arburg, loan products form a signicant part of the debt market business portfolio. urei n v e s t m e n t b a n k s s u c h a s ; o l d m a n % a c h s , 3 e r r i l l Gyn c h a n d 3 o r g a n %tanley Bean "itter do not have commercial banking in their portfolio andth erefore, do not o? er loan products. !esides the larger rms, there are ah o s t o f o t h e r d o m e s t i c p l a y e r s p r e s e n t i n e a c h c o u n t r y a n d m i d 6 s i z e d i nv es tm en t banks, #hich either specialize in local markets or i n ce rt ai n product segments.%o me in v es t me nt banks in the overseas markets also specialize in ni c he segments such as Jmanagement of hedge funds, bullion trade, commodity hedges, real estate and other e&otic markets.
The ndian %cenario7rigin n ndia, though the e&istence of this branch of nancial services can betraced to over three decades, investment banking #as largely con ned tomerchant banking services. The forerunners of merchant banking in ndia# e r e t h e f o r e i g n b a n k s . ; r i n d l a y s ! a n k : n o # m e r g e d # i t h % t a n d a r d hartered !ank in ndia< began merchant banking operations in '(/5 #ith alicense obtained from the K! follo#ed by the itibank in '(5*. These t#o banks #ere providing services for syndication of loans and raising of equityapart from other advisory services.t #as in '(5), that the ! anking ommission Keport asserted the need for merchant banking services in ndia by the public sector banks. !ased on theAmerican e&perience #hich led to the passing of the ;lass6%treagall Act, theommission recommended a separate structure for merchant banks so as todistinct them from commercial banks and nancial institutions. 3erchant banks #ere meant to manage investments and provide advisory services.4ollo#ing the above recommendations, the %! set up its merchant bankingdivision in '(5). 7ther banks such as the J!ank of ndia, entral !ank of ndia, !ank of !aroda, %yndicate !ank, unjab +ational !ank, anara !ank also follo#ed suit t o set up their merchan t b ankin g ou t ts. #a s th erst nancial institution to set up its merchant banking division in '(59. Thelater entrants #ere 4 and B! #ith the latter setting up its merchant
banking division in '((). o#ever, by the mid eighties an d early nineties,most of the merchant banking divisions of public sector banks #ere spun o? as separate subsidiaries. %! set up %! apital 3arkets Gtd. in '(/. 7ther suc h b ank s su ch as J ana ra ! ank, !7!, +!, ndian bank and icici created seprate merchant banking entities.
;ro#th 3erchant banking in ndia #as given a shot in the arm #ith the advent of %E! in '( and the subsequent introduction of free pricing of primarymarket equity issues in '((). o#ever, post '((), the merchant bankingindustry #as largely driven by issue management activity #hich =uctuated#ith the trends in the primary market. T h e s e h a v e b e e n p h a s e s o f h e c t i c activity follo#ed by a severe setback in business. %E! started to reg ulat et h e m e r c h a n t b a n k i n g a c t i v i t y i n ' ( ( ) a n d a m a jo r i t y o f t h e me rc h a n t bankers #ho register ed #ith %E! #ere either in issue management or as s o c i ated activity such as under#riting or advisorsh ip . %E ! ha d fo ur categories of merchant bankers #ith varying eligibility criteria based ontheir net#orth. The highest number of registered merchant bankers #ith%E! #as seen in the mid6 nineties, but the numbers have d#indled since,d u e t o t h e i n a c t i v i t y i n t h e p r i m a r y m a r k e t . T h e n u m b e r o f r e g i s t e r e d merchant bankers #ith %E! as at the end of 3arch )**9 #as ')@, from a peak of almost a thousand in the nineties. n the nanci al year )**)6*9 itself. The number decreased by )'.
onstraints in nvestment !anking Bue to the over dependence on issue m a n a g e m e n t a c t i v i t y i n t h e i n i t i a l y ear s, mo st merchant banks perished in the primary market do#nturn that follo#ed later. n order to stabilize their businesses, several merchant banksdiversied to o?er a broader spectrum of capital market services. o#ever,other than a fe# industry leaders, the other merchant banks have not beenable to transform themselves into full service investment banks. ;oing by the service portfolio of the leading full service investment banks in ndia, itm a y b e s a i d t h a t t h e i n d u s t r y i n n d i a has seen more or less similar development as its #estern counterparts, though the breadth available in theover sea s ca pit al m arket i s st ill not p rese nt in the ndian capital market.%econdly, due to t h e l a c k o f i n s t i t u t i on a l n a n c i ng i n a b i g # a y to fundcapital market activity, it is only the bigger industry players #ho are ininvestment banking. The third major deterrent has also been the lack of depth in the secondary market, especially in the corporate debt segment.
haracteristics and %tructure of ndian nv estment !ankingndustry nvestment banking in ndia has evolved in its o#n characteristics structureover the years both due to business realities and the regulatory regime.7 n t h e regulatory front, the ndian regulatory regime does not allo# allinvestment banking functions to be performed under one entity for t#oreasonsJ:a< to prevent e&cessive e&posure to business risk under one entityand :b< to prescribe and monitor capital a d eq u ac y a nd r i s k m i t i g a t i on mechanisms. Therefore bankruptcy remoteness is a key feature in structuringth e business lines of an investment bank so that the risks and re#ards aredened for the investors #ho provide resources to the investment banks. naddit ion, the capital adequacy requirements and leveraging capability for each business line have been prescribed di?erently under relevant provisionsof la#. 7n the same analogy, commercial banks in ndia have to follo# the provisions of the !anking Kegulation Act and the K! r egulations, #hich prohibit them from e&posing themselve s to stock market investments andlending against stocks beyond certain specied limits.The refore , ndi an inv est men t b ank s st ruc t ur e t he ir b us in es s se gm en ts in di?erent corporate entities to be able to meet regulatory norms. 4or e.g. it isdesirable to have merchant banking is a separate company as it requires aseparate merchant banking license from the %E!. 3erchant bankers other than banks and nancial institutions are also prohibited from undertakingany other business other than that in the securities market. o#ever, since
banks are subject to the !anking Kegulation Act, they can not performin ve st men t ba nk ing to a lar ge e&t en t on the same balance sheet. Assetmanagement business in the form of a mut ual fund requires a t h re e 6 t i e r structure under the %E! regulations. Equity research should be independentof the merchant banking business so as to avoid the ki nd of co n= ic t of interest as faced by American investment banks. %tock broking has to bes e p a r a t e d i n t o a d i ? e r e n t c o m p a n y a s i t r e q u i r e s a s t o c k e & c h a n g e m embership a part from %E! registration. A complete overvie # of theregulatory frame#ork for investment banking is furnished later.nvestment banking in ndia has also been in=uenced by business realities toa large e&tent. The nancial services industry in ndia till the early '(*s# a s d r i v e n l a r g e l y b y d e b t s e r v i c e s i n t h e for m of te rm na nc in g f rom nancial institutions and #orking capital nancing by commercial banksand non6banking nancial companies :+!4s<. apital market services#ere mostly restricted to stock broking activity #hich #as driven by a non6 corporate unorganized body industry. 3 e r c h a n t b a n k i n g a n d a s s e t management services came up in a big #ay only #ith the opening up of thecapital markets in the early nineties. Bue to the primary market boom duringthat period, many nancial business houses such as nancial inst itut ions, banks and +!4s entered the merchant banking, under#riting and
advisory business. "hile most institutions and commercia l banks =oated merchant banking divisions and subsidiaries, +!4s combined their e&isting business#ith that of merchant banking.7ver the subsequent years, t#o developments have taken place. 4irstly, #iththe do#nturn in the capital markets, themerchant banking industry has seen tremendous shake out and only about a '*F of them remain in serious business as pointed out earlier. The other develo pment is that due to thegradual regulatory developments in the capital markets, investment bankingactivi ties have come under regulations #hich require separate registration,licensing and capital controls.Bu e t o t he ab ov e re as on s, th e nd ia n investment banking industry has a heterogeneous structure. The bigger investment banks have several groupentities in #hich the core and non6core business segments are distributed.7thers have either one or more entities depending upon the activity prole.The het eroge neo us and fra gmen ted str uct u r e i s e v i d e n t e v e n i f n d i a n investment banks are classied on the basis of their activity prole. %ome of them such as J%!, B!, , G I 4%, Hotak 3ahindra, itibank ando t h e r s o f f e r a l m o s t t h e e n t i r e g a m u t o f i n v e s t m e n t b a n k i n g s e r v i c e s permitted in ndia. Among these, the long term nancial institutions aregrad
ually transforming themselves into full service commercial banks:called 1universal banking2 in the nd ian con te&t <. They als o ha ve ful lservice investment banking under their fold. 7ther entities such as +!4s or subsidiaries of public sector banks mainly o?er merchant banking and other capital market services. There are also several others #ho are providing onlyc o r p o r a t e a d v i s o r y s e r v i c e s b u t p r e f e r t o hold merchant banking or under#riting registrations.resently, there are no global ndian investment banks although there i s a bulge bracket of investment banks in ndia that have some overseas presenceto serve ndian issuers and their investors. At the middle level are several niche players including the merchant banking sub sidiar ies of some pub lic sector banks. %ome of these subsidiaries have been either shut do#n or soldo? in the #ake of t#o securities scam seen in '((9 and in )***. o#ever,ce rt ai n ba nk s su ch as a na ra !a nk an d un ja b +at io na l !a nk ha ve ha d successful merchant banking activities. Among the middle level players arealso merchant banks structured as non6 banking nancial services companiessuch as Kab o ndia 4inance Gt d, Alpic 4inance etc. There are also in themiddle level, some pure advisory rms such as J Gazard api tal, Ernst I-oung, H3;, rice "aterhouse oopers etc. At the lo#er end are severalniche players and boutique rms, #hich focus on one or more segments of the investment banking spectrum.
%ervice ortfolio of ndian nvestment !anksore %ervices 3erchant !anking, $nder#riting and !ook KunningThe primary market #hich #as quite small in ndia, #as revitalized #ith theabolition of the apital ssues :ontrol< Act '(@5 and the passing of the%ecurities and E&change !oard of ndia Act, '((). The %E! functions asthe regulator for the capital markets simil ar to its counterp art, the %E in $%A. %E! vide its guidelines dated Dune '', '(() introduced free pricingo f s e c u r i t i e s i n p u b l i c o ? e r s f o r t h e r s t t im e i n n d ia . 7v er t he la st t e n years, there have been t#o distinct phases of primary market boom Jthe rst bet#een '(()6'((/ and the second bet#een '((6 )**'. The third #ave of primary market issues could shape up in the near future. This market is veryclosely regulated by %E!. n the days #hen the public o?ers market is veryv i b r a n t , t h i s a r e a o f s e r v i c e f o r m s t h e m a i n a c t i v i t y f o r m o s t n d i a n investment banks. n the past fe# years, though public o?ers have been veryfe#, the priva te place ment market esp ecially in the debt segment has beenvery active and has served as an important source of funds for prime6 ratedc o r p o r a t e s . + o t a b l e a m o n g s u c h o ? e r i n g s a re re la t ed p ri va t el y pl ac ed d e b e n t u r e s i s s u e d by public sector corporations and leading p r i v a t e c o m p an i e s . 4i n a n c i al i n s t i t u ti o n s h a v e b e en r ais ing fun ds v ia t he p ubl ico?ers and hand holding them in the private placements as #ell. 7nce the private placement markets also come under regulator y stipulations,investment banks #ould have a #ider role to play in such issuances.
3ergers and Acquisitions Advisory The mergers and acquisitions industry #as pretty nascent in ndia prior to' ( ( @ a n d c o n t i n u e s t o b e t i n y c o m p a r ed to the global scale of suchtransactions. o#ever, t#o main features that have given a big push to thisindustry areL M The forces of liberation and globalization that have forced the ndianindustry to consolidate. M The institutionalization of corporate acquisitions by %E! through itsguidelines, popularly kno#n as the Takeover ode.7ne of the cream activities of investment b a n k s h a s a l # a y s b e e n 3 I A advisory. The larger investment banks specialize in 3IA as a core activity."hile some of t hem provid e p ure advisory servic es in relatio n to 3IA,others holding valid merchant banking licenses from %E! also manage theopen o?ers arising out of such corporate events.
3ergers and Acquisitions Advisory The mergers and acquisitions industry #as pretty nascent in ndia prior to' ( ( @ a n d c o n t i n u e s t o b e t i n y c o m p a r ed to the global scale of suchtransactions. o#ever, t#o main features that have given a big push to thisindustry areL M The forces of liberation and globalization that have forced the ndianindustry to consolidate. M The institutionalization of corporate acquisitions by %E! through itsguidelines, popularly kno#n as the Takeover ode.7ne of the cream activities of investment b a n k s h a s a l # a y s b e e n 3 I A advisory. The larger investment banks specialize in 3IA as a core activity."hile some of t hem provid e p ure advisory servic es in relatio n to 3IA,others holding valid merchant banking licenses from %E! also manage theopen o?ers arising out of such corporate events.
%upport services and !usinesses%econdary 3arket Activities 3ost of the universal banks such as , B! and Hotak 3ahindra havetheir broking and distribution rms in both the equity and debt segments of the secondary market. n addition several other investment banks such as theG I 4% and pure investment banks suc h as B% 3e rr il l Gyn ch an d D3 3organ %tanley have a strong presence in this area of activity. n the p astfe# years, the derivatives segment has been introduced in ndian capitalm a r k e t a n d t h i s p r o v i d e s a n a d d i t i o n a l a v e n u e o f s p e c i a l i z a t i o n f o r i nv es tm en t b a nks. Berivatives trading, risk management and s t r u c t u re d products o?erings are the ne# segments that are fast becoming the areas of future potential for ndian investment banks. The securities business also provides e&tensive research o?erings and guidance t o investors. Thes e c o n d a r y m a r k e t s e r v i c e s c ater to both the institutional and non6 institutional investors. Asset 3anagement %ervices 3ost of the top nancial groups in ndia #hich have investment banking businesses such as the J , the B!, Hotak 3ahindra, B% 3errillGynch, D3 3organ %tanley, %! and G I 4% also have their presence in theasset management business through separate entities. As per the three layer structure propounded by %E!, the parent organization acts as the sponsor of the fund and the fund itself is constituted as a trust. The trust is managed by
an asset management company and a separate tr ust ee co mp an y #h ic hoversees the interests of the unit holders in the 3utual 4und. The #holestructure has as arm2s length distance from the sponsor2s other businessesand entities. "ealth 3anagement %ervices :rivate !anking< 3any reputed investment banks nurture a sepa ra te se rv ic e se gm en t to manage the portfolio of high net#orth individuals, households, trusts andother types of non6institutional investors. This can be structured either as a pure advisory service #herein the investment manager does not have anyaccess to the funds or as a fund management service #herein the investmentmanager is given charge of the funds. n the former case, it becomes a non6dis cret ion ary port foli o and in t he l att er case, it becomes a d i s c re t i o n a r y portfolio. %uch activity is regulated under the %E! guidelines as alreadydiscussed. n other cases, #ealth management may be restricted to a research based activity #herein the investor is provided good investmentrecommendations from time to time. nstitutional !anking nstitutional investors have been a recent phenomenon in the ndian capitalma r ket , #h ic h t il l t he n ha d th e presence of a handful of public n a n c i a l institutions such as the $T and the insurance companies. The term lendingin s t i t u t i o n s s u c h a s t h e B! and 4 did not participate in s e c o n d a r y market dealing as a matter of policy. "ith the advent of liberalization, there
are presently a large number of domestic instit ut io na l inv est ors in th esecondary market apart from approved foreign institutional investors. naddition, institutional investments have risen signicantly in the primarymarkets through venture capital and private equity investments by investorsin both the domestic and non6domestic categories. %everal of the leadinginvestment banks either have dedicated venture funds or private equity fundsthat invest in primary market. n addition they make proprietary investmentsin the secondary market through their dealing and market activities. The business portfolio of ndian nvestment !anks has been brie=y discussed in4ig.
n t e r d e p e n d e n c e b e t # e e n B i ? e r e n t Ne r t i c a l s i n n v e s t m e n t !anking As is evident from 4igure , there are di?erent verticals in investment banking and they do enjoy syne rgies #ith one another. "hile some of theservic e or business segments form the core of investment banking, others provide invaluable support. This inter6 dependence and complementarye&istence has been e&plained belo#."hile merchant banking largely relates to management of public =oatationsof s ec ur it ie s or rev er se = oat at io ns s uc h a s b u y b a c k s a n d o p e n o ? e r s , u nd e r # r i t in g i s an inherent part of merchant banking for publi c is su es . %imilarly, bought out deals and market making are a part of the process of = oa ti ng is su es on the 7T E&change of ndia. The concept of marketmaking has no# been introduced for listing of certain scrips in the mainst oc k e&c ha ng es as #ell. Advisory and transaction service have a c lo s e l i n k a g e # i t h m e r c h a n t b a n k i n g a s m o r e o f t e n t h a n n o t , s u c h s e r v i c e s culminate in a merchant banking assignment for a public issue or a reverse=oatation. %uch services also help in maint aini ng an enduring relationship #ith clients during those times #hen merchant banking is not a hot activitydue to depressed market conditions. The other segment of primary marketac ti vi t y, i. e. venture capital and private equity has equal synergies # i t hm e r c h a n t b a n k i n g . ! e i n g i n v e n t u r e c a p i t a l b u s i n e s s # h i c h e n a b l e s identication of potential 7 candidates quite early, #hich helps not onlyin gener ating g ood fee income from merchant
banking services, but alsogood in capital gains for the venture capital invested at earlier rounds of
nancing in such companies. %imilarly, being in private equity business helps in harnessing the potential o?ered by later stage and listed companies,#hich m ay ap proach an investment b ank primarily for merchant banking services.The support business vertical in the secondary market operations also havesynergies #ith those in the primary equity and debt market segment as far asinvestment banking is concerned. %tock broking and primary dealership indebt markets nurture institutional, corporate and retail clients #ho can betapped e?ectively for asset management, portfolio management, and privateequity business. n addition, presence in the equity derivative and foreigne&change derivatives segments can help in o? ering solutions in treasurymanagement to clients. n addition, the advisory and transaction se rvi ce sv e r t i c a l c a n d r a # e & p e r t i s e f r o m s u c h s e g m e n t s i n p r o v i d i n g s t r u c t u r e d n anc ing solutions to its clients. All these verticals are driven by supportservices such as sales and distribution and also equity research and analysis.Gastly but more importantly, the capability in sales and distribution alsodetermines the success of the merchant banking vertical.Th us , i t m ay be se en th at th e g ro#t h an d su cc es s o f an in ve st me nt ba nk depends on its strengths in each vertical and ho# #ell it combines them for synergies. To sum up, investment banking is a business that is very sensitiveto the economic and capital market scenario and therefore, the broader
the platform of its operations, the more is likelihood of an investment bank surviving business cycles and sudden shocks from the market.
Kegulatory 4rame#ork for nvestment !anking As discussed above, investment banking in ndia is regulated in its variousfacets under separate legislations or guidelines issued under statute. Ther e g u l a t o r y p o # e r s a r e a l s o d i s t r i b u t e d b e t # e e n d i ? e r e n t r e g u l a t o r s d epending upon the constitution and status of the investment bank. ure i n v e s t m e n t b a n k s # h i c h d o n o t h a v e presence in the lending or b a n k i n g business are governed primarily by the capital market regulator :%E!<.o#ever, universal banks and +!4 inve stment banks are also regulated primarily by the K! in their core business of banking or lending and so far as the investment banking segment is concerned, they are also regulated by%E!. An overvie# of the regulatory frame#ork is furnished belo#L' . A t t h e c o n s t i t u t i o n a l l e v e l , a l l i n v e s t m e n t b a n k i n g c o m p a n i e s i nc o r p o r a t e d under the ompanies Act, '(>/ are governed b y t h e provisions of that Act.).nvestment banks that are incorporated under a separate statute suchas the %! or the B! are regulated by their respective statute. B!i s i n t h e p r o c e s s o f b e i n g c o n v e r t e d i n t o a c o m p a n y u n d e r t h e ompanies Act.9.$niversal !anks are regulated by the Keserve !ank of ndia und er theK! Act '(9@ and the !anking Kegulation Act #hich put restrictionson the investment banking e&posures to be taken by banks. T he K! has rela&ed the e&posure limits for merchant banking subsidiaries of commercial banks. Till no#, suc h companie s #ere restricting their
e&posure to a single entity through the un d er #r it in g b us i ne ss an d other fund based commitments such as standby facilities etc to )>F of their net o#ned funds :+74<. Therefore these companies are no# on par #ith other investment banks #hich can do so up to )* times their +74.@. n ve st me nt ba nk in g c om p an ie s t h a t a r e c o n s t i t u t ed a s n o n 6 b an k i n g n a n c i a l companies are regulated operationally by the K ! u nd er hapter ! :sections @> to @>C!< of the Keserve !ank of ndiaAct, '(9@. $nder these sections K! is empo#ered to issue directionsin th e are a o f res ou rce mob il iz at ion , ac c ou n t s a n d a d m i n is t r a t i v e controls. The follo#ing directions have been issued by the K! so farL M +on6!anking 4inancial ompanies Acceptance of Beposit s:Keserve !ank< Birections, '((. M +!4s rudential +orms :Keserve !ank< Birections, '((.>.4unc tio nal ly, di? erent aspects of investment banking are regulatedun der the %ecurities E&change !oard of ndia Act, '(() and theguidelines and regulations issued there under. These are listed belo#L M 3erchant banking business consisting of management of publico?ers is a licensed and regulated activity under the %ecuritiesand E&change !oard of ndia :3erchant !ankers< Kules '(()and %ecurities E&change !oard of ndia :3erchant !ankers
•
$nder#riting business is regulat e d u n d e r t h e % E ! : $ n d e r # r i t e r s < Ku l e s ' ( ( 9 a n d t h e % E ! : $ n d e r # r i t e r s < Keg ulations '((9.
M The activity of the secondary market operations including stock broking are regulated under the relevant by6la#s of the stock e&change and the %E! :%tock !rokers and %ub !rokers< Kules'(() and the :%tock !rokers and % u b ! ro ke r s < Ke g u l a t i o n s '((). !esides, for curbing unethical trading practices, %E! has promulgated the %E! :rohibition of nsider Trading. M The business of asset management as mutual funds is regulatedunder the %E! :3utual 4unds< Kegulations '((/. M The business of portfolio manageme nt is regulated und er the%E! :ortfolio 3anagers< Kules, '((9 and the %E! :ortfolio3anagers< Kegulations, '((9. M T h e b u s i n e s s o f v e n t u re c a p i t a l a n d p r i v a t e e q ui t y b y su ch funds that are incorporated in ndia is regulated by the %E!:Nenture apital 4unds< Kegulations, '((/ and by those thata r e i n c o r p o r a t e d o u t s i d e n d i a i s r e g u l a t e d u n d e r t h e % E ! :4oreign Nenture apital 4unds< Kegulations )***. M The business of institutional invest ing by foreign investment banks and other investors in ndian secondar
y markets isg o v e r n e d b y t h e % E ! : 4 o r e i g n n s t i t u t i o n a l n v e s t o r s < Kegulations '((>.
/.nvestments banks that are set up i n n d i a # i t h f o r e i g n d i r e c t i n v e s t m e n t either as joint ventures #ith ndian partners or as fullyo#ned subsidiaries of the foreign entities are governed in respect of the foreign investment by the 4oreign E&change 3anagement Act,'((( and the 4oreign E&chang e 3anageme nt :Transfer :Transfer or issue of %ecurity by a erson Kesident 7utside ndia< Kegulations )*** issuedthere under as amended from time to time through circulars issued bythe K!.5 . A p a r t f r o m t h e a b o v e s p e c i c r e g u l a t i o n s r e l a t i n g t o i n v e s t m e n t ba banking, investment banks are also governed by other la#s applicableto all other businesses such as the Jta& la#, property la#, state la#s,arbitration la#s,arbitration la# and other general la#s that are applicable in ndia.
Kegulatory 4rame#ork for 3erchant !anking 3 e r c h a n t ! a n k e r s a re re g o v e r n e d b y t h e % E ! :3e rcha nt !an kers< Kules '( '(() () a nd %E! %E! :3erchant !ankers< Kegulations '((). According to the%E! :3erchant !ankers< Kules '(() a 3erchant !ank !anker er mean means s 1a 1a per perso son#ho n#ho is en ga ge d in th e business of issue management either by makingarrangements regarding selling, buying or subscribing to securities asmanager, consult ant, advisor or rendering corporate advisory se r v i c e i n rela relatio tion n to such such issu issue e manag managem emen ent2. t2.;i ;iven ven the the fact that 3erchant !ankers are entrusted #ith the respo espons nsib ibil ilit ity y of of iss ue manage man age ment men t by la#, la# , the regulatory frame#ork is designed to ensurethat they su0 cient competence and e&ercise e&ercise diligence in t heir he ir #ork #o rk su such ch that that the the iss issuer uers s com comply ply #ith #ith all all statutory requirements concerning the issue.At the same time, the merchant banker shall have high levels of inte in tegr grit ity y sothat quality qual ity issues issu es alone alon e are broug ht to the primary market. Heeping theseobjectives in mind and investor protection as the paramount objective, the% E ! h a s l a i d e m p h a s i s o n e n s u r i n g t h a t m e r c h a n t b a n k e r s f u l l t h e e l ig i g ib i b il i l it i t y c ri r i te t e ri ri a on an on6going basis and has therefore p ro v id ed fo r compulso compulsory ry registra registration tion every every thre three e years . All 3ercha nt !ankers need to have a val valid registration certicate under the said rules to perform the role of 3erchant !ankers to issues. n considering the appl applic icat atio ion n for for regis egistr trat atio ion,%E! n,%E! sh shal alll pay pa y regard reg ard to the th e professional professional qualication in nance, la# o r business management, management, adequate o0ce space, manpo #er, #er, o0ce o0ce equi equipm pmen entand tand oth er infras inf rastr truct uct ure, at least t#o support sta? members #ho have
thecompetence to be in the eld of merchant merchant banking business, e&istence of
minimum stipulated capital and previous e&perience to investor grievanceredressal.The activities that a 3erc hant !anker is authorized to do are issu e m a n a g e m e n t a n d as s o c i a t e d a c t i v i t i e s s u c h a s a d v i s i n g o r p r o v i d i n g consultancy or marketing services for the issue, under#riting of issues and portfolio management, though portfolio management alone requiresadditional registration under the relevant regulations. 3erchant !ankers are precluded from carrying on any business or fund6 based activity other thanthat associated #ith the securities market. 3erchant !ankers are also bound by the ode of onduct prescribed under the Kegul ations. n addition,3 e r c h a n t ! a n k e r s h a v e t o comply #ith general obligations an d responsibilities under the Kegulations.re s e n t l y there is only one category of 3erchant !ankers p re s c r i b e d b y %E! :ategory < and the minimum stipulated net#orth for such 3erchant!ankers is Ks.ve crore. %uch 3erchant !ankers holding valid certicatesof registration are alone qualied to manage public o?ers. %E! levies aone6 tim e aut hor iza tio n fee, an annual fee and a rene#al fee from e a c h 3erchant !anker. $nder the regulations, 3erchant !ankers have also to submit periodicalreturns and any other additional information that %E! might seek from timeto time. %E! also has a right of inspection of the books of account,
recordsand documents of the merchant banker at any time if required. %E! may suo moto conduct an enquiry or launch an investigation into the #orking of a 3erchant !anker or on receipt of a complaint against such 3erchant.
!anker. %E! may even appoint an e&ternal auditor to inspect the books andr e p o r t t o % E ! . ! a s e d o n t h e n d i n g s , %E! is empo#ered to takeappropriate action to a#ard penalty points to the erring 3erchant !an ker based on the degree of the default or contravent ion in accordance #ith the%E! :rocedure for olding Enquiry by Enquiry 70 cer and mposingenalty< Kegulations )**). The aggrieved 3erchant !anker may prefer toa p p e a l t h e e n t r a l ; o v e r n m e n t u n d e r the %E! :Appeal to entral;overnment< Kules )**9. t may also be mentioned here that a 3 erc han t! a n k e r i s d e e m e d t o b e a c o n n e c t e d pe rs on to t he is su er un de r th e %E ! :rohibition of nsider Trading< Kegulations, '(().
Anatomy of %ome Geading ndian nvestment !anks. %ecurities Gtd. :6%ec<. 6%ec is a part of the group #hose parent company is the !ankm#hich till recent ly #as a nancial inst itut ion that converted itself into auniversal bank by it merger #ith its o#n commercial bank, the !ank in )**9. 6%ec, #hich #as initially a joint venture #it h D.. 3organ of the$ % , b e c a m e f u l l y o # n e d b y a f t e r D . . 3 o r g a n e & i t e d f r o m t h e business.6 %ec is a ful l service investment bank that provides services across all thesegments spanning Jdebt market, equity market, derivatives and c orp ora te a d v i s o r y s e r v i c e s . t h a s s u p p o r t s e r v i c e s i n re s ea rc h a nd b ro k in g . Th e a d v i s o r y b u s i ness focuses on merger and acquisitions, c r o s s b o r d e r acquisitions, equity and bidding for a number of reputed companies. Theequity business o?ers research, sales and e&ecution services to institutionalinvestors in the secondary market and capital market related services such ase & e c u t i o n o f p u b l i c o ? e r i n g s , s t r u c t u r ing and regulatory and legaldocumentation services.n order to assist8provide corporate clients and institutional investors #ithi n v e s t m e n t b a n k i n g s e r v i c e s i n t h e $ % A . 6 % e c s e t u p t # o $ % b a s e d subsidiaries namely %ecurities olding nc and %ecurities nc. % e c u r i t i e s n c r e g i s t e r e d i t s e l f # i t h t h e +ational Association of
%ecurity Bealers nc as a broker6dealer, empo#ering it to engage in a varietyof securities transactions in the $% market. !rokerage %ervices Gimited, a m e m b e r o f t h e + a t i o n a l % t o c k E&change of ndia Gimited, is the domestic broking subsidiary of 6 %ec2sdistribution and secondary market service s a re h an dl ed by th e b rok in g company. B% 3errill Gynch Gtd. 7riginally incorporated as B% 4inancial onsultants Gt d, it s name #aschanged to B% 3errill Gynch :B%6 3G< in '((/ follo#ing its conversionin t o a j o i n t v e n t u r e # i t h 3 e r r i l l Gy n c h o f $ % A , a l e a d i n g i n t e rn a t i o n a l capital raising nancial management and advisory company. 3errill Gynchhas a @*F equity stake in B% 63G. B%63G is a part of the B% group #hich has been in the securities and brokerage business for '9* years in thendian market, thus pre6dating even the !ombay %tock E&change.B%6 3G is a leading full service nvestment !ank that provides se rvicesacross debt market, equity market and corporate advisory segments. t also provides services to private customers on equity and debt products and#ealth management. t has a full =edged research team serving the needs of both its institutional and retail clients. The company is among the major players on proprietary account in the debt and equity markets and is also aregist ered primary dealer in government securities.
The fu nctional divisions at B%63G consist of the J nvest ment !anking;roup, the Equity %ales ;roup, the Equity Trading and Bealing ;roup, Bebt%ales ;roup, the 3ergers and Acquisitions ;roup, the Kesearch ;roup andthe rivate lient ;roup. The inve stment banking group generates equityand debt products emerging from 7s, secondary issues and debt marketissues as #ell as private placements. t is also a leading under#riter in bothequity and debt products. These products are distributed through the equitys a l e s group and the debt sales group. !oth the mar ket in g g rou ps ser ve across section of institutional clients, other non6institutional clients such astrusts and investment companies, retail clients and overseas investors. Thesa le s gr ou p s also distribute apart from their o#n products, t he p ro d uc t s emerging from other entities such as B% 3errill Gynch 3ut ual 4und and other mutual funds. The sales groups are supported by a national distributionnet#orking comprising of appro&imately *** sub6brokers and alliance partners.The trading and dealing groups support the broking activity in equities andthe primary dealership activities in the debt market. B%63G, is one of thelarg est institutio nal broking rms in ndia. t is a founding member of The%tock E&change, 3umbai :!%E< and is an active member of the +ational%tock E&change :+%E< of ndia in both the equity segment and the#holesale debt market segment. t is an accredited primary dealer #ith theK! and an active participant in the ;overnment %ecurities8Treasury billma rke t s. As a primary dealer, it makes a market for debt s e c u r it i e s b y o ? e r i n g t o b u y a n d s e l l q u o t e s .
T h e s e q u o t e s a re a l s o a v a i l a b l e o n # i re s e r v i c e s l i k e K e u t e r s , r i s i l 3 a r k e t # i r e , ! l o o m b e r g a n d B o # D o n e s +e#s#ires.
T h e m e rg e r s a n d a c q u i s i t i o n s a d v i s o r y h a s bee n str uct ured as a sep ara te specialist group that o?ers their clients nancial advice and assistance inrestructuring, divestures, acquisitions, de6 mergers, spin6o?s, joint ventures, privatization and takeover defense mechanisms . The research group o?ers products such as Jsectoral rep orts, company reports and special themeanalyses, daily, #eekly and monthly market vie#s as #ell as specic policyforecasts. The private client group o?ers depository, broking and investmentadvisory services to high net #orth individuals, professionals and promotersof business groups, corporate e&ecutives, trusts and private companies.n '((/, the B% group = oated a separate equ ity broking compan y cal led B% %ecurities Gtd. #hich is a member of the !%E.
D3 3organ %tanley vt. Gtd. D3 3organ %tan ley :D33%< is a joint venture bet#een the D3 4inancial;ro up an d 3o rg an %tanley Bean "itter of the $%A. n '((5, 3 o rg a n %tanley #hich #as established in +e# -ork in '(9>, had acquired Bean"itter, an investment bank founded in '()@ in %an 4rancisco. D3 3organ%tanley commenced operations in April '(((. o#ever, the association of the t#o partners is limited only to the investment banking area. !oth of themhave separate asset management companies in ndia #hich run independentof mutual fund businesses.$nlike B%63G and 6%ec #hich have an integrated structure, the D3 ;rouphas separate companies handling various components of the capital market business. The core functions of investment bankin g are performed byD33%. This company focuses on capital raising, mergers and acquisitions, private equity and advisory #ork for ndian c orporations in both theinternational and domestic capital markets. The function of distribution andmarketing securities is handled by t#o of its #holly o#ned subsidiaries JD33organ %tanley Ketail %ervices vt. Gtd. :D3K%< and D3 3organ %tanley4i&ed ncome %ecurities vt. Gtd. :D34<. D3K% provides equity distributionservices for primary market produc t s , m u t u a l f u n d s , e q u i t y s a l e s a n d marketing support for the group broking activity and #ealth man ag ement a n d p o r t f o l i o m a n a g e m e n t s e r v i c e s to high net #orth individuals. D34o?ers similar services in &ed income :debt< securities. A third company,D3 3organ %tanley %ecurities vt. Gtd. handles all the broking operationsfor the group and provides services to institutional clients and others. t
also provides research support for both 4 and ndian institutional clients.
%! apital 3arkets Gtd 4ounded in '(/ as a hive6o? of the %! 3erchant !anking division, %!apital 3arkets Gtd. :%! aps< is amongst the oldest players in the ndiancapital market. t is a full service investment bank that provides investment,adv is or y a nd na nc ia l s er vi ce s. n )**', %! aps started its sales anddistribution activity along #ith equity and debt broking services.%! aps provides services across the follo#ing spectrumL M Mergers and Acquisitions L This group provid es advisory servi ces #ith regard to disinvestment of the government, valuations, mergersand acquisitions in the corporate sec t o r , n a n c i a l a n d b u s i n e s s restructuring and other areas. M Project advisory and structure fnance L t is arguably one of thel e a d i n g g r o u p s i n t h e c o m p a n y t h a t p r o v i d e s s e r v i c e s s u c h a s restructuring and pr ivatization advisory for public utilities, policyadviso ry to entral and %tate ;overnments, regulatory bodies andgovernment departments and organizations, project structur ing and advisory to the private sector and arranging nance for such projects.%! aps has been a major player in governmental #ork and in theinfrastructure sector. The project advisory services consist of hand6holding from the concept to commissioning stage involving projectstructuring, contract structuring, nancial m odeling, p reparation of i n f o r m a t i o n m e m o r a n d u m , s y n d i c a t i o n o f d e b t a n d e q u i t y a n d assis t a n c e i n d o c u m e n t at i o n a n d n a n c i a l c l o su r e . 7
ther servicesinclude appraisals for green6eld and bro#n6 eld projects, techno6economic
a p p r a i sa l f r om b a n k s a n d n a n c i a l i n st i t u t i o n s f o r establishing the viability of corporate restructuring plans, and vettingof contracts, loan documents, project documentation etc. M Capital market L This group provides merchant banking services inconnection #ith public issues, rights issues and public o?ers for buy6 backs and open o?ers. t also advises clients on the private placements, ABK and ;BK issues and overseas bo nd issues by the%!. M Treasury and I nvestments L This group deals #ith the proprietaryinvestment of the company in the equity, debt and money markets.Kesource mobilization and management is also undertaken by thisgroup. M Broking o Equity and e!t L % ! aps is a registered broker and amember of the +%E in the equity and #holesale debt segments and isalso a member in the equity segment. The broking group caters to thesecondary market needs of nancial institutions, 4s, mutual funds, banks, other corporates, high net #orth individuals , non6residentinvestors and retail investors. The company commenced #holesaledebt market broking in )**'. The company e&pects to have a strong presence in institutional broking. The company pl ans to open aderivative trading desk soon. M
"ales and istri!ution o equity and mutual und products L % ! aps has been a leading mobilizer of funds both for public o?ers and private placements. M #esearc$ L This group provides the research support for i n6 ho u se departments and for institutional clients. !esides regular updates on companies and industries, the research gro up brings out ndia%trategy, Bebt 3arket Kevie# and Baily Bebt 3arket revie# #hichare circulated to %! aps investment banking and broking clients. n i t s a n n u a l r e p o r t for the year ending 3arch 9', )**), %! apsreported that is has t#o business seg m e n t s J : a < 4 e e b a s e d s e g m e n t providing merch ant banking and advisory services like issuemana ge men t, under#riting, arranger, project advisory and struc turednance. :b< 4und based segment #hich undertakes deployment of fundsin leasing, hire purc hase and securities dealing. o#ever, as a result of % E ! d i r e c t i v e s , f r e s h l e n d i n g u n d e r l e a s i n g an d hi re 6 pu rc ha se #a sstopped from ' st Duly '((. 4or the period )**'6*), %! aps #as rankedrst among issue managers by K3E database
Hotak 3ahindra apital ompany !orn in '((> as part of a corporate re6 organization as an u nl im it ed c o m p a n y. T h e H o t a k 3 a h i n d r a a p i t a l o m p a n y : H 3 < , i s t h e investment banking entity belonging to the Hotak 3ahindra ;roup. t is astrategic joint venture bet#een Hotak 3ahindra !ank Gimited :H3!G
unlistedand listed companies. n the advisory business, the %tructured 4inance
: r o j e c t 4i n a n c e I A d v i s o r y ! u s i n e s s < ; r o u p p r o v i d e s e& p e r t i s e i n various vertical segments in the infrastructure sector including po#er, oil,gas, ports, automobiles, steel I metals and hotels by o?ering structured na nc e s ol ut ion s t o c li ent s. Th e 4i&ed nc ome %e cu ri ti es ;ro up at H3 advises %$s, ;o vernment companies, nancial institut ions, banks an d corporates on raising capital by #ay of public or private placement of debt. H3 is credited #ith innovating on s ome bondstructures in the ndian market. The advisory group on mergers anda c q u i s i t i o n s p r o v i d e s c o m p l e t e s o l u t i o n s o n s t r a t e g y f o r m u l a t i o n identi cation of targets or buyers, valuation, negotiations and bidding,capital structuring, transaction st r u c t u r i n g , a s s i s t a n c e i n l e g a l documentation and acquisition nancing strategies and implementation.H3 is supported in its functions by Hotak %ecurities Gtd, a b rokingrm incorporated in '((> that is also a joint venture #ith ;oldman %achs#hich handles all the broking, distribution and research business of the group. Hotak %ecurities is a member of the debt segment of the +%E andis also a member of the +ational %tock E&change 3embers Association.Hotak %ecurities o?ers services to investors, nancial institutions, mutualfunds, religious and charitable trusts, ins ur an ce co mp an ie s, et c. Th einstitutional business division has a comprehensive research cell #ithsectoral analysts covering all the major areas of the ndian economy. nthe int ernat ion al arena , i t p rovid es br oke ra ge se rv ic es on th e n di an securities to institutional and other investors #ho are based outside
ndia.Bue to i ts o ver sea s pres enc e, t he c ompa ny ha s ma rk et in g i nt er es ts in ndian ;BK and ABK issues as #ell.
The research products brought out by Hotak %ecurities includeL M 4or the institutional clients, a product called A H % E % % , # h i c h primarily covers secondary market broki ng. t caters to the needsof foreign and ndian institutional investors in ndian equities :bothlocal shares and ;BKs<. M The Baily 4ore& 3onitor #hich tracks the ndian and internationalforeign e&change markets and opines on currency strategies on adaily basis. M The "eekly 3oney 3arket $pdate #hich gives the details of thedevelopments i n markets and provides a short6 term interest rate vie# along #ith indicative pricing for Triple A credits. M The $KKE+- "AT captures the monthly developments inthe ndian foreign e&change markets, analyses the key in=uencingi s s u e s , a s s e s s f u t u r e o u t l o o k a n d a lso recommends hedgingstrategies. M 3onthly 4+%E and 4+%E 4ocus.Hotak %ecurities is also a registered primary dealer #ith the K! in t h e government securities market. As a primary dealer, the company acts as am a r k e t m a k e r a n d a l s o p r o v i d e s t # o # a y q u o t e s , a c t s a s r e t a i l e r a n d marketing agent, provides under#riting support on government se cu rit ies issues and participates in auctions held by the K!.! e s i d e s , t h e a b o v e c o m p a n i e s , t h e H o t a k ; r o u p i n c l u d e s t h e H o t a k 3ahindra !ank
#hich #as formerly a non6banking nance company thathas recently been converted into a bank, the Hotak 3ahind ra 3utual 4und
#hich is managed by the Hotak 3ahindra Asset 3anagement o. Gtd andthe 73 Hotak Gife nsurance, #hich is a joint venture #ith 7ld 3utual lco f $ H a n d t h e H o t a k 3 a h i n d r a N e n t u re a p i t a l o . # h i c h m a n a g e s t h e private equity fund of the group.
Kecent Trends in nvestment !anking 7ne of the trends that has been developing in the past fe# years in theglobal and ndian investment banking arena, is the strong emergence of universal banks ahead of pure investment banks as market leaders. Theseuniversa l banks have the additional nancial muscle of their bankingarms that add to their investment banking strengths. ure investment banks have found it unmanageable to maint ain leadership positions dueto di0cult market conditions and the economic do#nturn. The year )**)has been dubbed as the #atershed year in investment banking for over adecade. ;lobally, universal banks such as th e Jitigroup, D 3organhase and Beutsche !ank are emerging strongly against pure investment banks such as ;oldman %achs and 3organ %t anley. This trend could probably reappear in ndia as #ell #ith the emergence of %!, ,B! and Hotak 3ahindra !ank as strong universal banks. o#ever, in) * * ) , p u r e i n v e s t m e n t b a n k s s u c h a s D 3 3 o r g a n % t a n l e y a n d B % 3 e rr il l Gy n ch s t il l o cc u p i e d t o p p o s i t i o n s i n t h e i n v e s t m e n t b a n k i n g lea gue tables.%ome recent developments in the inve s t m e n t b a n k i n g i n d u s t r y a s reported in some nancial dailies and other press clippings are listed belo#L International M The "all %treet 7 market has seen the fe#est number of issuessin ce '( 5 in th e c al en da r y ea r ) ** 9, # i t h ju s t v e i n t he r s t
q u a r t e r. T h e s e h a v e m o s t l y b e e n f r o m i n s u r a n c e a n d n a n c i a l services rms and four of them #ere 7s. M n )**), there #as a drop of )F in global e q u i t y a n d e q u i t y rel at ed i ssu anc es ac co rd in g to Thomson 4inancial. 7s #ere thema in c au sa li t y #ith a drop of 9@F to O/*./ billion. E u ro p e a n m a r k e t s a # a d r o p o f > 9 F d r o p i n 7 s a n d > @ F d r o p i n convertible bond issuances. n Europe, the market focus shiftedf r o m f u n d r a i s i n g t h r o u g h 7 s a n d p u b l i c i s s u e s t o m o r e restructuring deals. These are termed as 1rescue nance2 deals sucha s r i g h t s i s s u e a n d f u l l y c o n v e r t i b l e b o nd issues by troubledcompanies. Ericsson, %onera and Purich 4inancial %ervices ares o m e c o m p a n i e s t h a t m a d e r i g h t s i s s u e s i n )* *) . Ac co rd in g to Bealogic, the volume of rights issues in Europe rose from O)*.5 billion to O)'.> billion in )**). The most popular in strument in$% A an d Eu rop e ha s be en th e 1ma nd at ory convertible2 :fullyconvertible< bond #hich is considered as a for#ard share sales#hich is superior in nature to a rights issue. M The itigroup #as "all %treet2s top stock and bond under#riter in)**). itigroup a0 liates %alomon %mith !arney arranged O@'@ billion of o?erings #ith a '*./F market share accor ding toThomson 4inancial. 3errill Gynch and %4! #ere ranked secondand third respectively. o#ever, the total under#riting pie fell by>F during the same year. M
The top 7 investment bank in )**) #as %alomon %mith !arneyfollo#ed by ;oldman %achs. ;oldman arranged the largest 7 of
)**), the O@./ billion T ;roup nc. :Tyco nt erna tio nal Gtd
boom in technology stocks. Bueto the meltdo#n, many investment banks have felt it necessary tospin o? their private equity operations into separate entities. !+aribas, Beutsche !ank, %! and Purich 4inancial %ervices aresome of these banks.
M American investors poured more money into debt mutual funds in)**) acc oun tin g to O'99 bil lio n and t h e re # e re f e # t a ke r s f o r public issues of equity junk bonds and convertible bonds. %ational M Buring the year )**', D3 3organ %tanley #hich acted as adviser to 3IA deals #orth Ks.'/*)) crore #as rated the top investment bank i n n d i a . T h e o t h e r p l a y e r s i n t h e b i g l e a g u e # e r e A ! + 6 A m ro : K s . ' * @ / * c r o r e < , B % 3 e r r i l l Gy n c h : K s . 5 ' 9 * c r o r e < , A r t h u r A n d e r s e n : n o # p a r t o f E I - , K s . 9 > 9 ) c r o r e < , Ho t a k 3ahindra:Ks.'5'( crore<, Kabo ndia 4ina n c e : K s . 9 9 c r o r e < a n d G a z a r d a p it al : Ks .> 9 / crore< J:as reported in the Economic Times )' st +ovember )**'<. M n )**), there #as only one ;BK8ABK issue a s co mp are d to / in )**' and ( in )***. This #as made by 3ascon ;lobal #hich raisedO' * mi ll i on through issue of ).> million ;BKs #hich are listed atG u & e mb o u r g % t o c k E & c h a n g e . n t h i s m a r k et, itibank #as theleading depository banks according to nstane& apital onsultants.This #as f o l l o # e d b y ! a n k o f + e # -o r k , B e u t s c h e ! a n k a n d D 3organ. M n the 3IA market, the year )**) sa# an increase of around >F inthe value of 3IA deals in nda.
Among these, more than >*F #erec r o s s 6 border deals according to a survey conduct e d b y H 3 ; orporate 4inance. The deals #ere mostly in the %3E segment #ithaverage size not e&ceeding O)> million. The banking, nance and insurance sectors contributed almost one6third of the total volume.rivatization deals also played a signicant part. M B%63G de6listed from the stock e&change s i n c e i t s p ro m o t e r s , emendra Hothari and 3errill Gynch together held more than (*F of the shares. B% #as rated the 1The !est Bomestic nvestment !ank2i n n d i a f o r ) * * * b y 4 i n a n c e A s i a . E u r o m o n e y v o t e d i t 1 ! e s t Bomestic 3IA ouse in ndia2 as #ell as 1!est Bomestic Equityouse in ndia2 in )***. This distinction has returned for three yearsin a ro# #ith B%63G being named as the 1!est Bomestic %ecuritiesouse2 and 1!est Bomestic nvestment !ank2 for )**)6)**9 byAsiamoney :3ay )**9 issue< and The Asset :Danuary )**9 i s s u e < magazine respectively
The on=ict of nterest ssue The most burning global issue in the investment banking industry is that of con = ict of intere st bet #een investment bankers and their research analysisdivisions. n the #ake of the Enron, "orldcom and other corporate disasters,t h e i s s u e h a s g a i n e d s o m e s i g n i c a n c e . T h e % e c u r i t i e s a n d E & c h a n g e ommission in the $%A :%E< have initiated investigations into instances of investment banks issuing over6optimistic research and steering shares in hot7s to important clients for vested interests. n such investigations some of the banks have been imposed nes. 3errill Gynch paid up nes to the e&tento f O ' * * m i l l i o n i n r e g u l a t o r y p r o c e e d i ngs in )**) brought against itsmisleading research reports. itigroup2s %alomon %mith !arney is also inthe dock and may nd itself paying the heaviest nes. %4! also nds itself in trouble #ith the regulators. 3ost of the other top investment banks suchas J ;oldman %achs, Gehman !rothers, !ear %terns, Be ut sc he !a nk , D 3organ hase and others also found their names i n th e nes list in )**). %4! #as ned for misleading investors on o?erings in technology shares.D 3organ on the other hand, has been under a cloud for its role in theinfamous o?6 balance sheet partnership it had crafted for Enron.!esides, investment banks have also been the target of several la#suits led by aggrieved investors. n late )**), the 4rench lu&ury goods leader GN3 led a '** million euro la#suit against 3organ %tanley alleging that itsresearch report on GN3 #as biased because of the investment bank2s closeadvisor y
relationship #ith GN32s arch rival ;uc ci ;roup +N. 3organ%tanley #as also the under#riter of ;ucci2s 7 in '((>
!oth the +-%E and +A%BAC came out #ith 1research analysts2 con=ict of i n t e re st r ul e s 2 i n 3a y )* *) #hich #as subsequently approved by % E . 3arket observers have felt that this is a good development from the point of v i e # o f a d d re s s i n g c o n = i c t o f i n t e r e s t , c u r re n t l y a b u r n i n g i s s u e i n t h e industry. "hile an investment bank may be adv ising a client on a buy out ,its private equity arm may be in the fray for its purchase. An e&le of this# a s t h e s a l e o f t h e p o # e r s t o r a g e b u s i n e s s of nvensys in )**' #herein3organ %tanley #as the advisor in the O>*> million sale to En er % ys a company o#ned by 3organ %tanley apital artners :3organ %tanley2s private equity rm<.%o ho# does the con= ict of interest really ariseQ 3ost investment banksh a v e i n 6 house research divisions #hich act as a su p p o r t f u n c t i o n a s discussed earlier. The research divisions perform vital function of trackingcorpor at es and making recommendations to their clients in the secondarymarket operations or to their o#n dealing rooms. They also issue revie#sand ratings to ne# issuances hitting the market. The con= ict could arise if the research analyst promotes a share, the public o?ering for #hich is beinghandled by the merchant bank.
Alternatively, it could also be that the analystis privy to insider information being provided by their merchant bankingdivision and there upon issue recom m e n d a t i o n s t h a t c o u l d a m o u n t t o fraudulent deceit of investors or gains for select fe#. 7ver the years, thee t h i c a l # a l l b e t # e e n m e r c h a n t b a n k e r s a n d r e s e a r c h a n a l y s t s m e l t e d especially in the heat of the 7 and the internet boom. The compensation patterns of the investment bankers and r esearch analyst #ere also gettingcomplementary to an e&tent thus undermining their independence.
A study #as conducted by t he %E in )**'on 1 f u l l s e rv i c e i n v e s t m e n t banks2 in "all %treet focusing on these con=icting relationships. The studydisclosed t#o main areas of con=ictJ:a< research recommendations tendingto become marketing tools for merchant banking assignments by the same bank and analysts getting paid share of such invest ment banking gains, :b
m e rc h a n t banking departments and research divisions. The third area has been theregula tio n of comp ensatory structures for research analysts based on the prots of the merchant banking divisions. The develo pments in the $%Ahave also resulted in precautionary amendments to regulations made in ndia by %E! though such instances of con=ict of interest have not surfaced sofar. %E! has amended the regulations that have been in place for 3erchant!ankers, $nder#riters and for the prohibition of insider trading. As a result,analysts are barred from private trading in shares they analyze. There is stillroom for more regulation in future in this area of importance for the survivalof the investment banking industry.n conclusion, it can be said that the investment banking industry has beenthrough di0cult times. 7n one hand, the economic slo# do#n and the crashof the market s that #ere propelled to dizzy heights by the ne# economy
%tock have battered their bottom lines and led to large scale cut back in sta? and operation on the other hand, role of investment banks in corporate scandals and their q uestionable business practices and ethics have taken a toll on their reputation and image. A large scale cleaning up has to take place in their method of #orking and services o?ering. %imilarly, a major resurrection of their condence is required through resurgence of the market, #herever that happens. n the meantime, the industry has to live up to t he challenge through appropriate restructuring and consolidation.
Conclusion ;iven the scope for investment banking in ndia, the future looks bright for t he i n d us t r y a s a # ho l e i n ndia. 3any more pure investment banks andadvisory rms could convert themselves into full service investment banksthat #ould broaden the market and make the service delivery much moree0 cient. n addition, the technological and market developments shapingt he ca pi ta l ma rke t as discussed #ould also provide an added im p et us t o gro#th of investment banking. !etter regulatory supervision and stricter enforcement of the code of conduct of market intermediaries #ould ensurethat better quality issuers come to the market and e&isting issuers #ouldfollo# enhanced standards of corporate governance. n the long run, all thesedevelopments #ould ensure fair return to investors, and bring back investor s u p p o rt t o t h e m a rk e t . T h i s #ould augur #ell for the capital market ingeneral and investment banking in particular.
