investment banking

Module-01

Investment Banking & Financial services

Investment banking

l An investment bank is a financial institution that assists individuals, corporations, and governments in raising capital by underwriting or acting as the client's agent in the issuance of securities (or both).

l An investment bank may also assist companies involved in mergers and acquisitions and provide ancillary services such as market making, trading of derivatives and equity securities, and FICC services (fixed income instruments, currencies, and commodities).

l Unlike commercial banks and retail banks, investment banks do not take deposits.

There are two main lines of business in investment banking.

1.Sell Side:-Trading securities for cash or for other securities (e.g. facilitating transactions, market-making), or the promotion of securities (e.g. underwriting, research, etc.) is the "sell side", 2.Buy Side :- It is a term used to refer to advising institutions concerned with buying investment services. Private equity funds, mutual funds, life insurance companies, unit trusts, and hedge funds are the most common types of buy side entities.

Structure of Investment Banking

Investment banks are organized into 3 categories.

Front Office l Helping customers raise funds in the capital markets and advise

on mergers and acquisitionsl professional management of various securities and other assetsl Buying and selling financial products with the goal of making

money on each tradel Creating and marketing financial productsl Researching industries, companies, and products

Structure of Investment Banking

Middle Office l Analyzing credit and market risk for the bankl Making sure operations are complying with regulationsl Responsible for capital management and risk monitoring

Back Office l Making sure the bank runs smoothly by submitting trades,

maintaining databases, and transacting required money transfers

l The information technology department

Functions of Investment Banking

Mergers and Acquisitions

Advisory services

Corporate financing

Equity & Debt

Underwriting

Equity and fixed income

research

Sales and trading

Importance of Investment Banking

1.Corporations- raising its capital. It facilitates the trading of securities thereby, increasing the liquidity of the securities.

2. For Individuals- It provides investment opportunities to the individuals or entities.

3.Most of the corporations get advisory services from the investment banks regarding the mergers, acquisitions and divestiture.

Investment Banking in India

l Grindlays bank began Investment Banking (Merchant Banking) in India in 1967 with RBI issuing the second license to Citi in 1970.

l These two banks primarily provided services which included loan syndication, equity raising and other advisory services.

l In 1972, a Banking Commission report asserted the need for Merchant Banking services in India by public sector banks.

l The commission recommended the same structure as American investment banks (Glass-Steagall Act).

l Merchant banks were meant to manage investments and provide advisory services.

Investment Banking in India

l SBI was the first Indian public sector bank to set up its merchant banking division in 1972.

l This was followed by Bank of India, Central Bank of India, Bank of Baroda and many more.

l SBI Caps and IDBI Caps are two prime examples of merchant banks in India today.

l Currently, there are 136 merchant banks registered with SEBI. l Lastly, without holding a certific ate of registration granted

by the Securities and Exchange Board of India, no person can act as a merchant banker.

Types of Investment banking

Full-Service Firms- These are type of investment

banks who have significant presence in all areas like

underwriting, distribution, M&A, brokerage,

structured instruments, asset management etc.

They are all rounder of the game.

Boutique Firms-These are the type of players

which specialist in particular areas of investment

banking.

Types of Investment banking

Brokerage Firms- These firms offers only trading

services to retail & institutional clients. They have

huge investor base which is also used by

underwriters to place issues.

Asset Management Firms- These firms offer on

investment services. This includes activities like

fund management, wealth management, cash

management, portfolio management depending on

the type of investors, tenure of corpus, purpose of

investments, type of instrument invested in etc.

l Top 10 Investment Bankers in India

Vendus Capital

Bajaj Capital

Cholamandalam Investment & Finance Company

ICICI Securities Ltd

IDFC

Kotak Mahindra Capital Company

SBI Capital Markets

TATA Investment Corporation Ltd

Yes Bank

UTI Securities Ltd

l Global Investment Bankers

Bank of America (Bank of America Merrill Lynch) Barclays (Barclays Capital) BNP Paribas (BNP Paribas CIB) Citigroup (Citi Institutional Clients Group) Credit Suisse Deutsche Bank Goldman Sachs HSBC JPMorgan Chase (J.P. Morgan Investment Bank) Morgan Stanley Nomura Holdings UBS (UBS Investment Bank) Royal Bank of Canada (RBC Capital Markets) Royal Bank of Scotland Wells Fargo (Wells Fargo Securities)

Investment Banking Servicesl Non- Fund Based

Management of public offers of equity & debt instruments.Buy back offers.Book-running Advisory & transaction service inProject financing,Syndicate loanVenture capital Private equityPrivate placements of equity & debtBusiness advisory & structuring Financial restructuringCorporate reorganizations such as Merger & acquisition, asset sales, sell-off & exit etc.Acquisition & takeoversGovernment disinvestments & privatizationAsset recovery agency services

Fund Based UnderwritingMarket makingBought out dealsInvestment in primary market

Support servicesl Non Fund Based

Secondary market servicesStock brokingDerivative productPortfolio Management Sales & distribution

Equity research

Fund Based Venture capitalPrivate equityAsset managementProprietary trading & dealing in securities.

Merchant Banking

It is a non-baanking financial activity A combination of Banking and consultancy services. Consultancy means to provide advice, guidance and service for a fee. It helps a businessman to start a business.It helps to raise (collect) finance.It helps to expand and modernize or restructuring of a business. It helps to revive sick business units.It also helps companies to register, buy and sell shares at the stock exchange.

DEFINITION OF MB

According to the SEBI (Merchant Bankers) Rules, 1992, “ A merchant banker has been defined as any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or acting as manager, consultant, adviser or rendering corporate advisory services in relation to such issue management.

Services of MB

SEBI Guidelines for Merchant Bankers

Should have authorization from SEBI, which is based onProfessional QualificationInfrastructureEmployment of two peopleCapital AdequacyPast track record

Categories of Merchant Bankers Category -1:- i) merchant bankers can carry on any activity related to issue management i.e.the preparation of prospect, tie-up financiers, final allotment of securities , refund of the subscription and so on. ii) They could also act as advisors consultants managers underwriters or portfolio mangers


Category II :- to act as adviser, consultant, co-manager, underwriter, portfolio manager. Category III :- to act as underwriter, adviser or consultant to an issue Category IV :- to act only as adviser or consultant to an issue Only category 1 merchant bankers could act as lead managers to an issue To carry an activities as portfolio mangers & underwriters they have to obtain separate certificate of registration from the SEBI


The capital requirement depends upon the category. The minimum net worth requirement for acting as merchant banker is given below:

Category I – Rs. 5 crores Category II – Rs, 50 lakhs Category III – Rs. 20 lakhs Category IV –Nil

Should submit half yearly unaudited financial statement to SEBIShould follow SEBI code of conduct on integritySEBI shall supervise, and has powers to suspend/ cancel authorizationMerchant banker should enter contract with corporate body on mutual rights, liabilities, obligations etc

Lead Manager

“Lead managers are category 1 merchant banker appointed by the company going public to manage the IPO issue.

Merchant Banker As lead Manager

•Appointment of a lead manager by a company

S. No

Size of the issue Maximum Number Of

Lead Manager

1. Less than Rs.50 crores 2

2. Rs.50 crores to Rs.100 crores 3



5. Above Rs.400 crores 5 or more as prescribed by

SEBI

ISSUE MANAGEMENT

• Management of issues involves marketing of corporate securities ie…equity shares, preference shares and debentures by offering them to public.

• Broadly divided intoPre-issue activities:Post-issue activities:

Pre-Issue ObligationsAppointment of lead merchant banker & exercise of due diligence by himPayment of requisite fee, along with draft offer document to be paid/filed with the SEBI Board.Documents to be submitted along with the Offer Document by the Lead Manager

Memorandum of Understanding (MOU) Inter-se Allocation of Responsibilities Due Diligence Certificate Certificates Signed by the Company Secretary or Chartered Accountant, in Case of Listed Companies Making Further Issue of Capital Prescribed Undertaking regarding transactions in securities by the `promoter' the 'promoter group' and the immediate relatives of the `promoters during the period between the date of filing the offer documents with the Registrar of Companies or Stock Exchange as the case may be and the date of closure of the issue to be reported to Stock Exchanges within 24 hours of such transactions List of Promoters’ Group and other Details

Pre-Issue Obligations1)Appointment of Intermediaries

I. Appointment of Merchant BankersII. Appointment of Co-managersIII. Appointment of Other Intermediaries: The

issuer is responsible to appoint the other intermediaries (underwriters, other merchant bankers, Registrars, Banker(s) to the issue etc. in consultation with the Lead Merchant Banker

2)Underwriting: The Lead merchant banker shall satisfy themselves about the ability of the underwriters to discharge their underwriting obligations.

3)Offer Document to be Made Public: The draft offer document filed with the Board shall be made public for a period of 21 days from the date of filing the offer document with the Board.

4)Dispatch of Issue Material

Pre-Issue Obligations

1) No Complaints Certificate: To be filed by lead merchant banker after a period of 21 days from the date the draft offer document was made public,

2) Mandatory Collection Centres to be arranged3) Authorised Collection Agents to be appointed4) Advertisement for Rights Post Issues: Advertisement to

be released in case of a rights issue, giving the date of completion of despatch of letters of offer,

5)Appointment of Compliance Officer6)Abridged Prospectus7)Agreements with depositories8)Branding of securities

POST-ISSUE OBLIGATIONS

1)Post issue monitoring reports

A) Irrespective of the level of subscription, the post-issue Lead Merchant Banker shall ensure the submission of the post-issue monitoring reports as per formats specified

B) These reports shall be submitted within 3 working days from the due dates.

C) Due diligence certificate to be submitted with the final post issue monitoring report.

2) Redressal of the investor grievances The post-issue lead merchant banker shall actively associate himself with post-issue activities namely allotment, refund and dispatch and shall regularly monitor redressal of investor. 3) Coordination with the intermediariesI. The post-issue lead merchant banker shall

maintain close coordination with the Registrars to the Issue.

II. Any act of omission or commission on the part of intermediaries shall be reported to the Board

4) Underwritersl the lead merchant banker shall satisfy himself that the

issue is fully subscribed before announcing closure of the issue

l the lead merchant banker shall ensure that the underwriters honour their commitment within 60 days from the date of closure of the issue, In case there is a devolvement on underwriters.

l The lead merchant banker shall furnish information in respect of underwriters who failed to meet their underwriting devolvements

5) Bankers to issue The post-issue lead merchant banker shall ensure that moneys received pursuant to the issue are kept in a separate bank & released by the said bank only after the listing of the shares

6) Post issue advertisements l Post- issue lead merchant banker shall ensure

that in all issues, advertisement giving details relating to over subscription, basis on allotment, number, value and percentage of application received etc. is released within 10 days.

7) Basis of allotment In a public issue of securities , the managing director of stock exchange along with the lead merchant banker and the registrar to an issue, shall ensure that basis of allotments is finalised in a fair and proper manner

8) Proportionate-allotment Procedure An allotment shall be made on a proportionate basis within the specified categories . The proportionate allotments of securities in an issue, that is oversubscribed shall be subject to reservation for the retail individual investors as described in the following:

1. A minimum 50% of the net offer of securities to the public shall initially be made available for the allotment to retail individual investors as the case may be .

2.the balance net offer of securities to the public shall be made available for allotment to:a) individual applicants other than retail individual investorsb) other investors including corporate bodies/ institutions , irrespective of the number of shares, debentures and so on , applied for.

3) The unsubscribed portion of the net offer to any one of the categories may be made available for allotment to applicants in the other category, if so required

Due Diligence

The term “due diligence” is used generally refer to the process of investigating a company’s business, legal and financial affairs So Due diligence is an investigation of a business or person prior to signing a contract, or an act with a certain standard of care.

Done by Underwriters to gain a clear understanding of the issuer and its business, to assess the risks associated with the proposed transaction and,perhaps most importantly, to confirm the statements made in the offering document in order to avoid liabilities

Due diligence process

The due diligence process will generally include the investigation on following elements:• background • business • financial • accounting • legal • corporate governance, if appropriate

Regulatory Framework

Overview of Different Regulatory Authorities

Government of India

SEBI

Ministry of

Finance Ministry of Corporate

Affairs

Ministry of Commerce &

IndustryRBI

FIPB

Department of Economic

Affairs

Department of Industrial Policy &

Promotion

Registrar of Companies

Key Regulatory Authorities

Department of Economic Affairs Formulates and implements policies relating to the

securities market, including under the Securities Contracts (Regulation) Act, 1957

Ministry of Corporate Affairs Responsible for administration of the Companies Act,

1956 Operates the Investor Protection Cell which provides a

mechanism for facilitating the redress of investor grievances

Slide 39

Key Regulatory Authorities

Reserve Bank of IndiaThe monetary authority of IndiaFrames policies relating to movement of foreign exchange / investments by non resident investorsFIPBConsiders and approves foreign direct investment proposals that do not fall under the automatic route for foreign investment

Slide 40

Scope of Key Regulatory Authorities

SEBI RBI

Stock Exchanges

Clearing Corporation

sDepositories

Mutual Funds

Banks

Broker Dealers

Merchant Bankers

Depository Participants

Registrar & Transfer

Agents

Primary Dealers

• SEBI ( ISSUE OF CAPITAL AND DISCLOSURE REQUIREMENTS) Regulations, 2009• SEBI ( ISSUE AND LISTING OF DEBT SECURITIES) Regulations, 2008.• SEBI ( PROHIBITION OF INSIDER TRADING ) Regulations, 1992• SEBI ( MERCHANT BANKERS ) Regulations, 1992• SEBI ( UNDERWRITERS ) Regulations, 1993• SEBI ( REGISTRARS TO AN ISSUE AND SHARE TRANSFER AGENTS )

Regulations, 1993• SEBI ( BANKERS TO AN ISSUE ) Regulations, 1994• SEBI ( SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS ) Regulations

1997 (Takeover Code) • SEBI ( PROHIBITION OF FRADULENT AND UNFAIR TRADE PRACTICES

RELATING TO SECURITIES MARKET ) Regulations, 2003

IMPORTANT SEBI REGULATIONS

SEBI Regulations for Portfolio Managers

l No person shall act as portfolio manager unless he holds a certificate granted by the Board under these regulations

l The applicant is a body corporatel The applicant has the necessary infrastructure like

adequate office space, equipments and the manpower to effectively discharge the activities of a portfolio manager

l The applicant has either–l (i) a professional qualification in finance, law,

accountancy or business management orl (ii) an experience of at least ten years in related activities

in the securities market.l The applicant has in its employment minimum of two

persons who, between them, have at least five years experience

SEBI Regulations for Portfolio Managersl Any previous application for grant of certificate made by any person

directly or indirectly connected with the applicant has been rejected by the Board.

l Any disciplinary action has been taken by the Board against a person directly or indirectly connected with the applicant.

l The applicant fulfills the capital adequacy requirements of 2 cr.

l The applicant, its director, principal officer or the employee is not involved in any litigation connected with the securities market

l The applicant, its director, principal officer or the employee has at any time not been convicted for any offence involving moral turpitude or has been found guilty of any economic offence

l grant of certificate to the applicant is in the interest of investorl the applicant is a fit and proper person

SEBI Regulations for Portfolio Managers

l It shall take adequate steps for redressal of grievances of the investors within one month of the date of the receipt of the complaint and keep the Board informed about the number, nature and other particulars of the complaints received

l Contract with clients and disclosures.l The investment objectives and the services to be providedl type of instruments and proportion of exposure & restrictionl tenure of portfolio investments & terms for early withdrawal of

funds or securities by the clientsl amount to be invested in portfolio is 25 lacsl Settling procedure & fees payable to PMl Custody of securitiesl The terms of accounts and audit and furnishing of the reports

to the clients

SEBI Regulations for Stock brokers & Sub Broker

l stock broker" means a person having trading rights in any recognised stock exchange and includes a trading member

l “sub-broker” means any person not being a member of stock exchange who acts on behalf of a stock broker as an agent or otherwise for assisting the investors in buying, selling or dealing in securities through such stock brokers

l Regulations to be a stock broker l (a) No person shall act as a stock broker, unless he seeks a certificate of

registration from the Board for each stock exchange in which he seeks to operate

l (b) has the necessary infrastructure like adequate office space, equipment and man power to effectively dischargehis activities

l (c) has any past experience in the business of trading or dealing in securities, as the case may be

l (d) has been subjected to disciplinary proceedings under the rules, and bye-laws of a stock exchange, or enforcement action under securities laws, with respect to his business as a stock-broker involving either himself or any of his partners, directors or employees

SEBI Regulations for Stock brokers & Sub Broker

e) is a fit and proper person

(f) has any financial liability which is due and payable in terms of the Act, the Securities Contracts (Regulation) Act, 1956 or rules and regulations thereunder

(g) has obtained certification in terms of SEBI (Certification of Associated Persons in the Securities Markets) Regulations, 2007 or as may be specified by the Board;

(h) satisfies the minimum networth and deposit requirements for the segment for which membership or approval is sought

Conditions of registration for Stock brokers & Sub Broker

l Any registration granted by the Board under regulation shall be subject to the following conditions, namely,-

(a) the stock broker holds the membership of any stock exchange(b) he shall abide by the rules, regulations and bye-laws of the stock exchange which are applicable to him(c) where the stock broker proposes change in control, he shall obtain prior approval of the Board for continuing to act as such after the change;(d) he shall pay fees charged by the Board in the manner provided in these regulations;(e) he shall take adequate steps for redressal of grievances, of the investors within one month of the date of receipt of the complaint and inform the Board as and when required by the Board;(f) he shall at all times abide by the Code of Conduct (g) he shall at all times maintain the minimum networth

Table on Networt & DepositSegment Stock

brokerClearing member

Self clearing member

networth deposit networth deposit networth deposit

Cash * * * * * *

Equity * * 3 cr 50 lacs 1 cr 50 lacs

Currency Der

1cr * 10cr 50 lacs 5 cr 50 lacs

Debt 50 lacs * 3cr * 1 cr *

* As may be specified by the Board from time to time

Clearing Memberl A Clearing Member (CM) of NSCCL has the responsibility of clearing

and settlement of all deals executed by Trading Members (TM) on NSE, who clear and settle such deals through them.

l Primarily, the CM performs the following functions:l Clearing - Computing obligations of all his TM's i.e. determining

positions to settle.l Settlement - Performing actual settlement. Only funds settlement is

allowed at present in Index as well as Stock futures and options contracts

l Risk Management - Setting position limits based on upfront deposits / margins for each TM and monitoring positions on a continuous basis.

l Clearing Membersl Types of Clearing Members

l Trading Member Clearing Member (TM-CM)l A Clearing Member who is also a TM. Such CMs may clear

and settle their own proprietary trades, their clients' trades as well as trades of other TM's & Custodial Participants

l Professional Clearing Member (PCM)l A CM who is not a TM. Typically banks or custodians could

become a PCM and clear and settle for TM's as well as of the Custodial Participants

l Self Clearing Member (SCM)l A Clearing Member who is also a TM. Such CMs may clear

and settle only their own proprietary trades and their clients' trades but cannot clear and settle trades of other TM's.

SEBI Regulations for ISSUE AND LISTING OF DEBT SECURITIES

l Debt securities means a non-convertible debt securities which create or acknowledge indebtedness, and include debenture, bonds and such other securities of a body corporate but excludes bonds issued by Government or such other bodies as may be specified by the Board, security receipts and securitized debt instruments

l General conditionsl No issuer shall make any public issue of debt securities if

its promoter, has been restrained or prohibited or debarred by the Board

l issuer shall choose one of the stock exchange as the designated stock exchange for listing & obtained in-principle approval for listing.

l credit rating has been obtained from at least one credit rating agency

l entered into an arrangement with a depository for dematerialization of the debt securities

l The issuer shall appoint one or more merchant bankers to the issue

l The issuer shall appoint one or more debenture trustees

l The issuer shall not issue debt securities for providing loan to or acquisition of shares of any person who is part of the same group or who is under the same management.

l The draft offer document filed with the designated stock exchange shall be made public by posting the same on the website of the designated stock exchange, issue or lead manager for seeking public comments for a period of seven working days from the date of filing the draft offer document with such exchange.

l The Lead Merchant Banker shall ensure that all comments received on the draft offer document are suitably addressed prior to the filing of the offer document with the Registrar of Companies.

l A copy of draft and final offer document along with Due Diligence certificate shall also be forwarded to the Board for its records

l The debenture trustee shall, prior to the opening of the public issue, furnish to the Board a due diligence certificate

l The issuer shall make a advertisement in an national daily with wide circulation, on or before the issue opening date and such advertisement shall, amongst other things, contain the disclosures

l A public issue of debt securities may be underwritten by an underwriter registered with the Board

l A trust deed for securing the issue of debt securities shall be executed by the issuer in favour of the debenture trustee within three months of the closure of the issue

l For the redemption of the debt securities issued by a company, the issuer shall create debenture redemption reserve in accordance with the provisions of the Companies Act, 1956

l The issuer shall redeem the debt securities in terms of the offer document.

LISTING OF DEBT SECURITIES

l An issuer desirous of making an offer of debt securities to the public shall make an application for listing to one or more recognized stock exchange

l The issuer shall comply with conditions of listing of such debt securities as specified in the Listing Agreement with the stock exchange where such debt securities are sought to be listed