Professional Documents
Culture Documents
Sohail Copied Black Book Project
Sohail Copied Black Book Project
Investment Banking
Bachelor of commerce
Banking & insurance
semester v
2015-2016
Submitted
In Partial Fulfillment of the requirement for the Award of
Degree
of Bachelor of Commerce-Banking &Insurrance
By
Mohd. Sohail Shaikh
ROLL NO :30
DECLARATION
SIGNATURE:
Mohd. Sohail Shaikh
ROLL NO: 30
CERTIFICATE
COURSE COORDINATOR
PRINCIPAL
EXTERNAL EXAMINER
DATE:
PLACE: MUMBAI
ACKNOWLEDGENT
All these years we have just studying and passing. But this time we have got an
opportunity to make such a project study . So it is very obvious for me to thank all
those people associated with the making of the project .
I owe a great many thanks to my project guide Mr. Krishnan
Ramchandran, Who has been constant support and guidance throughout the
making of my project and for monitoring my project with attention and care.
Shehas taken the pains to go through the project and make necessary correction as
needed.
And last but not least I would take the opportunity to thank my parents
without whom the project would have been a distant reality. Sincere thanks to all
my fellow mates and well-wisher.
Executive Summary
Investment banking encompasses not mearly merchant
banking but other related capital market activities such as
Stock trading market making, underwriting, and broking and
asset management as well. Besides the above, investment banks
also provides a host of specialized corporate advisory services in
the areas of project advisory, Business and financial advisory
and mergers and aqusitions.
Investment banks are from traditional down the street in
the sence that it does not keep any deposits with itself to pay us
an interest nor does it graduates the safekeeping of your
money. An take deposits and make commercial and retail loans.
In real years, However, the lines between the two types of
structure have blurred especially as commercial banks have
offered more investment banking services.
Introduction
At a very macro level, Investment Banking as the
t e r m s u g g e s t s , i s concerned with the primary function of
assisting the capital market in its functions of capital intermediation,
i.e. the movement of financial resourcesfrom those who have them (the
Investors), to those who need to make us of them for generating GDP
(the Issuers). As already discussed banking and financial
institutions on the one hand and the capital market on the other arethe
two broad platforms of institutional intermediation for capital
flows inthe economy. Therefore, 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 p 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
resource allocation. Nevertheless, it would be unfair
toconclude so, as that would confine investment banking to a
very
narrows p 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 w o r l d o
f h i g h f i n a n c e . O v e r t h e decades, backed by evolution
a n d a l s o f u e l l e d b y r e c e n t t e c h n o l o g i c a l developments,
investment banking has transformed repeatedly to suit the
needs of the finance community and thus become one of the
most vibrant and exciting segment of financial services. Investment
bankers have always enjoyed celebrity status, but at times they have paid
the price for excessive flamboyance as well. To c o n t i n u e f r o m t h e
a b o v e , i n t h e w o r d s o f J o h n F. M a r s h a l l a n d M . E . Ellis,
investment banking is what investment banks do. This definition
can be explained in the context of how investment banks have evolved i
n their functionality and how history and regulatory intervention have
shaped such as evolution. Much of investment banking in its present
form thus owes its
andm e r g e r s a n d a c q u i s i t i o n s . T h e a c t i v i t y p
r o fi 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
largefi n a n c i a l p o w e r h o u s e s t h e m s e l v e s , t h e g l o
b a l i n v e s t m e n t b a n k s p l a y a major 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
Growth
Merchant banking in India was given a shot in the
arm with the advent of SEBI in 1988 and the
subsequent introduction of free pricing of
primarymarket equity issues in 1992. However, post
1992, the merchant bankingindustry was largely
driven by issue management activity which
fluctuatedw i t h t h e t re n d s i n t h e p r i m a r y m a r ke t .
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
followed by a severe setback in business. SEBI
started to
regulatet h e m e rc h a n t b a n k i n g a c t i v i t y i n 1 9 9 2 a
n d a m a j o r i t y o f t h e m e rc h a n t bankers who register
ed with SEBI were either in issue management or a s s o c i
ated activity such as underwriting or advisorsh
i p . S E B I h a d f o u r categories of merchant bankers
with varying eligibility criteria based ontheir
networth. The highest number of registered
merchant bankers withSEBI was seen in the midnineties, but the numbers have dwindled
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 with SEBI as at the end of March 2003 was
124, from
a peak of almost a thousand in the nineties. In the financi
al year 2002-03 itself. The number decreased by 21.
u a l l y t r a n s f o rm i n g t h e m s e l v e s i n t o f u l l s e r v i c e
c o m m e rc i a l b a n k s ( c a l l e d u n i v e r s a l b a n k i n g i n
t h e I n d i a n c o n t ex t ) . T h e y a l s o h a v e f u l l service
investment banking under their fold. Other entities
such as NBFCs or subsidiaries of public sector banks
mainly offer merchant banking and other capital market
services. There are also several others who 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 h o l d m e r c h a n t b a n k i n g o r underwriting
registrations.Presently, there are no global Indian
investment banks although there is a bulge bracket
of investment banks in India that have some overseas
presenceto serve Indian issuers and their investors.
At the middle level are several
niche players including the merchant banking
subsidiaries of some publicsector banks. Some of
these subsidiaries have been either shut down or soldoff
in the wake of two securities scam seen in 1993 and in
2000. However,c e r t a i n b a n k s s u c h a s C a n a r a B a n k
a n d Pu n j a b N a t i o n a l B a n k h a v e h a d successful
merchant banking activities. Among the middle level
players arealso merchant banks structured as nonbanking financial services companiessuch as Rabo India
Finance Ltd, Alpic Finance etc. There are also in
themiddle level, some pure advisory fi rms such as
Lazard Capital, Ernst &Young, KPMG, Price Waterhouse
Coopers etc. At the lower end are severalniche players
and boutique firms, which focus on one or more segments
of the investment banking spectrum.
a re p re s e n t l y a l a rg e n u m b e r o f d o m e s t i c i n s t i t
u t i o n a l i n v e s t o r s i n t h e secondary market apart
from approved foreign institutional investors.
Inaddition, institutional investments have risen
signifi cantly in the primarymarkets through venture
capital and private equity investments by investorsin
both the domestic and non-domestic categories.
Several of the leadinginvestment banks either have
dedicated venture funds or private equity fundsthat
invest in primary market. In addition they
make proprietary investmentsin the secondary market
through their dealing and market activities.
The business portfolio of Indian Investment Banks has
been briefly discussed inFig.
I n t e r d e p e n d e n c e b e t w e e n D i ff e r e n t Ve r t i c a l
s i n I n v e s t m e n t Banking
As is evident from Figure , there are diff erent
verticals in investment banking and they do enjoy syne
rgies with one another. While some of theservice or
business segments form the core of investment
banking, others provide invaluable support. This interdependence and complementaryexistence has been
explained below.While merchant banking largely relates
to management of public
floatationso f s e c u r i t i e s o r re v e r s e fl o a t a t i o n s s u c
h a s b u y b a c k s a n d o p e n o ff e r s , u n d e r w r i t i n g i s
a n i n h e re n t p a r t o f m e rc h a n t b a n k i n g f o r p u b l i c
i s s u e s . Similarly, bought out deals and market
making are a part of the process of fl o a t i n g i s s u e s
o n t h e O TC E xc h a n g e o f I n d i a . T h e c o n c e p t o f
m a r ke t making has now been introduced for listing
of certain scrips in the mains t o c k exc h a n g e s a s
w e l l . Ad v i s o r y a n d t r a n s a c t i o n s e r v i c e h a v e a
closel i n k a g e w 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
reversefl oatation. Such services also help in
maintaining an enduring relationshipwith clients
during those times when merchant banking is not a hot
activitydue to depressed market conditions. The
other segment of primary marketa c t i v i t y , i . e .
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 u i t y h a s e q u a l
s y n e rg i e s
withm e r c h a n t b a n k i n g . B 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 w h i c h e n a b l e s identification of
potential IPO candidates quite early, which helps not
onlyin generating good fee income from merchant
ex p o s u re t o a s i n g l e e n t i t y t h ro u g h t h e
u n d e r w r i t i n g b u s i n e s s a n d other fund based
commitments such as standby facilities etc to 25%
of their net owned funds (NOF). Therefore these
companies are now on par with other investment
banks which can do so up to 20
times their NOF.4 . 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
t h a t a re c o n s t i t u t e d a s n o n - b a n k i n g fi n a n c i a l
c o m p a n i e s a re re g u l a t e d o p e r a t i o n a l l y b y t h e R
B I u n d e r Chapter IIIB (sections 45H to 45QB) of the
Reserve Bank of IndiaAct, 1934. Under these sections
RBI is empowered to issue
directionsi n t h e a re a o f re s o u rc e m o b i l i z a t i o n , a c
c o u n t s a n d a d m i n i s t r a t i v e controls. The following
directions have been issued by the RBI so far:
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
u i t y b y s u c h funds that are incorporated in India is
regulated by the SEBI(Venture Capital Funds)
Regulations, 1996 and by those
thata re i n c o r p o r a t e d o u t s i d e I n d i a i s re g u l a t e d
u n d e r t h e S E B I (Foreign Venture Capital Funds)
Regulations 2000.
y markets isg o v e r n e d b y t h e S E B I ( F o r e i g n I
n s t i t u t i o n a l I n v e s t o r s ) Regulations 1995.
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
w i re s e r v i c e s l i k e R e u t e r s , C r i s i l M a r k e t w i r e
, B l o o m b e r g a n d D o w J o n e s Newswires.
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
b e e n s t r u c t u re d a s a s e p a r a t e specialist group
that off ers their clients fi nancial advice and
assistance inrestructuring, divestures, acquisitions, demergers, spin-offs, joint
ventures, privatization and takeover defense mechanisms
. The research group offers products such as sectoral rep
orts, company reports and special themeanalyses, daily,
weekly and monthly market views as well as specific
policyforecasts. The private client group offers depository,
broking and investmentadvisory services to high net
worth individuals, professionals and promotersof business
groups, corporate executives, trusts and private
companies.In 1996, the DSP group fl oated a separate
equity broking company calledDSP Securities Ltd.
which is a member of the BSE.
a p p r a i s a l f r o m b a n k s a n d fi n a n c i a l i n s t 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.
Capital market
: This group provides merchant banking services
inconnection with public issues, rights issues and public
offers for
buy- backs and open offers. It also advises clients on the
private placements, ADR and GDR issues and overseas bo
nd issues by theSBI.
Research
: T h i s g ro u p p ro v i d e s t h e re s e a rc h s u p p o r t f o r i
n - h o u s e departments and for institutional clients.
Besides regular updates on
companies and industries, the research gro
u p b r i n g s o u t I n d i a Strategy,
Debt Market Review and Daily Debt Market
review whichare circulated to SBI Caps investment
banking and broking clients.I n i t s a n n u a l r e p o r t
for the year ending March 31, 2002, SBI
Capsreported that is has two business seg
m e n t s ( a ) F e e b a s e d s e g m e n t providing merch
ant banking and advisory services like issuemanagemen
t, underwriting, arranger, project advisory and struc
turedfinance. (b) Fund based segment which undertakes
deployment of fundsin leasing, hire purchase and
securities dealing. However, as a result
of S E B I d i re c t i v e s , f re s h l e n d i n g u n d e r l e a s i n g
a n d h i re - p u rc h a s e w a s stopped from 1
st
July 1998. For the period 2001-02, SBI Caps was
rankedfirst among issue managers by PRIME database
( P ro j e c t Fi n a n c e & Ad v i s o r y B u s i n e s s ) G ro u p p r
o v i d e s ex p e r t i s e i n various vertical segments in
the infrastructure sector including power, oil,gas, ports,
automobiles, steel & metals and hotels by offering
structuredfi n a n c e s o l u t i o n s t o c l i e n t s . T h e Fi xe d I
n c o m e S e c u r i t i e s G ro u p a t KMCC advises PSUs, Go
vernment companies, fi nancial institutions, banks an
d corporates on raising capital by way of public or private
placement of debt. KMCC is credited with innovating on s
ome bonds t r u c t u re s i n t h e I n d i a n m a r ke t . T h e
a d v i s o r y g ro u p o n m e rg e r s
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 identifi cation of
targets or buyers, valuation, negotiations and
bidding,c a p i t a l s t r u c t u r i n g , t r a n s a c t i o n s t
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 financing strategies
and implementation.KMCC is supported in its
functions by Kotak Securities Ltd, a broking firm
incorporated in 1995 that is also a joint venture with
Goldman Sachswhich handles all the broking,
distribution and research business of thegroup. Kotak
Securities is a member of the debt segment of the NSE
andis also a member of the National Stock Exchange
Members Association.Kotak Securities offers services to
investors, financial institutions,
mutualf u n d s , re l i g i o u s a n d c h a r i t a b l e t r u s t s , i n s
u r a n c e c o m p a n i e s , e t c . T h e institutional business
division has a comprehensive research cell
withsectoral analysts covering all the major areas
of the Indian
economy. Int h e i n t e r n a t i o n a l a re n a , i t p ro v i d e s
b ro ke r a g e s e r v i c e s o n t h e I n d i a n securities to
institutional and other investors who are based outside
India.D u e t o i t s o v e r s e a s p re s e n c e , t h e c o m p a n y
h a s m a r ke t i n g i n t e re s t s i n Indian GDR and ADR
issues as well.
Fo r t h e i n s t i t u t i o n a l c l i e n t s , a p ro d u c t c a l l e d A
K S E S S , w h i c h primarily covers secondary market broki
ng. It caters to the needsof foreign and Indian
institutional investors in Indian equities (bothlocal shares
and GDRs).
The Wall Street IPO market has seen the fewest number
of issuess i n c e 1 9 7 8 i n t h e c a l e n d a r y e a r 2 0 0 3 ,
w i t h j u s t fi v e i n t h e fi 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 ro m i n s u r a n c
e a n d fi n a n c i a l services firms and four of them were
IPOs.
T h e re p o r t e d f e e o f A m e r i c a n I n v e s t m e n t b a n k s
f e l l b y 2 1 % i n 2002 to $14.1 billion. Salomon took
the highest fee of around
$2 billion followed by the other two with around $1.2 billi
on each.Since April 2001, 78000 jobs were slashed in this
industry in USAaccounting for about 10% of the total
strength.
American investors poured more money into debt mutual
funds in2 0 0 2 a c c o u n t i n g t o $ 1 3 3 b i l l i o n a n d
t h e re w e re f e w t a ke r s f o r public issues of equity
junk bonds and convertible bonds.
National
I n 2 0 0 2 , t h e re w a s o n l y o n e G D R / A D R i s s u e a s
c o m p a re d t o 6 i n 2001 and 9 in 2000. This was
made by Mascon Global which raised$ 1 0 m i l l i o n
t h ro u g h i s s u e o f 2 . 5 m i l l i o n G D R s w h i c h a re
listed
atL u xe m b o u r g S t o c k E x c h a n g e . I n t h i s m a r k
e t , C i t i b a n k w a s t h e leading depository banks
according to Instanex Capital Consultants. T h i s w a s
f o l l o w e d b y B a n k o f N e w Yo r k , D e u t s c h e B a n k
a n d J P Morgan.
Among these, more than 50% werec r o s s border deals according to a survey conduct
e d b y K P M G Corporate Finance. The deals were
mostly in the SME segment withaverage size not
exceeding $25 million. The banking, fi nance and
insurance sectors contributed almost one-third of
the total volume.Privatization deals also played a
significant part.
D S P- M L d e - l i s t e d f ro m t h e s t o c k ex c h a n g e
s i n c e i t s p ro m o t e r s , Hemendra Kothari and Merrill
Lynch together held more than 90% of the shares. DSP
was rated the The Best Domestic Investment
Banki n I n d i a f o r 2 0 0 0 b y F 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 B e s t Domestic M&A
House in India as well as Best Domestic
E q u i t y House in India in 2000. This distinction has
returned for three yearsin a row with DSP-ML being
named as the Best Domestic
SecuritiesH o u s e a n d B e s t D o m e s t i c I n v e s t m e n t
Bank for 2002-2003 byAsiamoney (May 2003
issue) and The Asset (January 2003
i s s u e ) magazine respectively
Conclusion
Given the scope for investment banking in India, the
future looks bright for t h e i n d u s t r y a s a w h o l e i n
I n d i a . M a n y m o re p u re i n v e s t m e n t b a n k s
a n d advisory firms could convert themselves into full
service investment banksthat would broaden the
market and make the service delivery much
moreeffi cient. In addition, the technological and
market developments shapingt h e c a p i t a l m a r ke t
a s d i s c u s s e d w o u l d a l s o p ro v i d e a n a d d e d
i m p e t u s t o growth of investment banking. Better
regulatory supervision and stricter enforcement of
the code of conduct of market intermediaries would
ensurethat better quality issuers come to the
market and existing issuers wouldfollow enhanced
standards of corporate governance. In the long run, all
thesedevelopments would ensure fair return to investors,
and bring back investor s u p p o r t t o t h e m a r ke t . T h i s
w o u l d a u g u r w e l l f o r t h e c a p i t a l m a r ke t
i n general and investment banking in particular.