M.D.COLLEGE TYFM INVESTMENT BANKING
CHAPTER 1
INTRODUCTION
An investment !n" 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). 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 F!! services (fi"ed income instruments, currencies, and
commodities).
#nlike commercial banks and retail banks, investment banks do not take
deposits. From $%&& ('lass()teagall Act) until $%%% ('ramm(*each(+liley
Act), the #nited )tates maintained a separation between investment banking
and commercial banks. ,ther industriali-ed countries, including '. countries,
have historically not maintained such a separation. As part of the /odd(Frank
0all )treet 1eform and !onsumer 2rotection Act of 34$4 (/odd5Frank Act of
34$4), 6olcker 1ule asserts full institutional separation of investment banking
services from commercial banking.
7here are two main lines of business in investment banking.
• 7he 8sell side8 involves trading securities for cash or for other securities
(e.g. facilitating transactions, market5making), or the promotion of
securities (e.g. underwriting, research, etc.).
• 7he 8buy side8 involves the provision of advice to institutions concerned
with buying investment services. 2rivate equity funds, mutual funds, life
insurance companies, unit trusts, and hedge funds are the most common
types of buy side entities.
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An investment bank can also be split into private and public functions with an
information barrier which separates the two to prevent information from
crossing. 7he private areas of the bank deal with private insider information
that may not be publicly disclosed, while the public areas such as stock analysis
deal with public information.
An advisor who provides investment banking services in the #nited )tates must
be a licensed broker5dealer and sub9ect to )ecurities : ;"change !ommission
();!) and Financial ndustry 1egulatory Authority (Forgan )tanley, *ehman +rothers, First +oston
and others.
7hat trend began to change in the $%.4s as a new focus on trading propelled
firms such as )alomon +rothers, >errill *ynch and /re"el +urnham *ambert
into the limelight. nvestment banks earned an increasing amount of their profits
from proprietary trading. Advances in computing technology also enabled banks
to use more sophisticated model driven software to e"ecute trades and generate
a profit on small changes in market conditions.
n the $%.4s, financier >ichael >ilken populari-ed the use of high yield debt
(also known as 9unk bonds) in corporate finance and mergers and acquisitions.
7his fueled a boom in leverage buyouts and hostile takeovers (see Fistory of
2rivate ;quity). Filmmaker ,liver )tone immortali-ed the spirit of the times
with his movie, 0all )treet, in which >ichael /ouglas played the role of
corporate raider 'ordon 'ekko and epitomi-ed corporate greed.
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nvestment banks profited handsomely during the boom years of the $%%4s and
into the tech boom and bubble. 0hen the tech bubble burst, it precipitated a
string of new legislation to prevent conflicts of interest within investment banks.
nvestment banking research analysts had been actively promoting stocks to
investors while privately acknowledging they were not attractive investments. n
other instances, analysts gave favourable stock ratings to corporate clients in the
hopes of attracting them as investment banking clients and handling potentially
lucrative initial public offerings.
7hese scandals paled by comparison to the financial crisis that has enveloped
the banking industry since 344?. 7he speculative bubble in housing prices along
with an overreliance on sub5prime mortgage lending trigged a cascade of crises.
7wo ma9or investment banks, +ear )tearns and *ehman +rothers, collapsed
under the weight of failed mortgage5backed securities. n >arch, 344., the
Federal government began using a variety of ta"payer5funded bailout measures
to prop up other firms. 7he Federal 1eserve offered a G&4 billion line of credit
to =.2. >organ !hase to that it could acquire +ear )terns. +ank of America
acquired >errill *ynch. 7he last two bulge bracket investment banks, 'oldman
)achs and >organ )tanley, elected to convert to bank holding companies and be
fully regulated by the Federal 1eserve.
>oving forward, the recent financial crisis has weakened both the reputation
and the dominance of #.). investment banking organi-ations throughout the
world. 7he growth of foreign capital markets along with an increase in pools of
sovereign capital is changing the landscape of the industry.
7he growing international flow of capital has also opened up opportunities for
investment banking in new financial centers around the world, including those
in developing countries such as ndia, !hina and the >iddle ;ast.
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EVOLUTION OF INVESTMENT BANKING IN INDIA
7he origin of investment banking in ndia can be traced back to the $%
th
century
when ;uropean merchant banks set5up their agency houses in the country to
assist in the setting of new pro9ects. n the early 34
th
century, large business
houses followed suit by establishing managing agencies which acted as issue
house for securities, promoters for new pro9ects and also provided finance to
'reenfield ventures. 7he peculiar feature of these agencies was that their
services were restricted only to the companies of the group to which they
belonged. A few small brokers also started rendering >erchant banking
services, but theirs was limited due to their small capital base.
n $%H?, Aultiple relationships between various factors render decision5making difficult.
Financial solutions can be provided to the clients only when the advisor is
competent to understand all or at least a ma9ority of them. +efore practical
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solutions emerge, the tools for decision5making will give greater choice to the
solution provider. A strong grounding in theory and concepts facilitates this.
• P8)+79t S*e9i!-i:A deal. 7he regulators@ guidelines have to be strictly followed, even while
envisaging a combination. *egal knowledge is also important for structuring
such deals, which will help identify the constraints associated with proposed
solution. 7he situation gets more intense when the deal is a cross5border >:A
proposal. Apart from the knowledge of the inland laws, foreign laws also have
to be considered. Any regulation by the foreign government can make an
otherwise desirable deal, unviable.
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• Kn)=-e+'e )> C!*it!- M!8"ets !n+ F7n9ti)nin'
>ore than any other industry, it is the investment banking industry that has a
direct bearing on the way capital markets function. Any changes in the capital
market regulations affect the brokerage side of the business, along with the trade
clearing and settlement houses. 7he trading personnel should be conversant with
the regulations, guidelines, procedural formalities and actual trade e"ecution
processes involved in capital market. ;.g. 7rading system involves a lot of
additional skills than online trading. Fe has to be conversant with the codes,
symbols and conventions followed by the market. Kuick signaling and accurate
interpretation are of utmost significance. Any mistake in these would lead to
faulty e"ecution of orders and might entail additional costs to the firm in
correcting the errors.
• Kn)=-e+'e )> Re'7-!t)8? B)+ies inv)-ve+ in t;e V!8i)7s
O*e8!ti)ns
t is necessary for an investment banker to be aware of all the regulatory bodies
that govern the activities in which heLshe is involved. A thorough knowledge of
all such bodies is absolutely essential to perform e"traordinarily. n ndia, the
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);+ : central bank acts as a watchdog and regulator of market related
activities.
• Kn)=-e+'e )> Inte8n!ti)n!- B7siness S9en!8i) !n+ E9)n)mi9
T8en+s
7hough a researcher is primarily involved in economic and business cycle
studies, it is the duty of all the investment bankers to have a general overview of
these affairs. )alespersons, who also act as financial consultantsLadvisors,
should essentially be aware with economic and business cycles, lest they lose
the respect and trust of the client. 7he requirement for global perspective and
international e"posure is becoming increasingly important. 7he firm should
offer services across the national borders to the corporate clients and informed
services are possible only when the employee is well5equipped with
international business information.
• Kn)=-e+'e )> S)>t=!8e T))-s@ Deve-)*ments in t;e Fie-+ )>
In>)8m!ti)n Te9;n)-)'?
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,ne of the most important technical skills is the usage of computers, tools and
internet technologies. >arketing, brokerage, research and capital mobili-ation
have all undergone sweeping changes owing to technology.
7he securities trader has changed into a tech5savvy professional, e"ecuting
online orders : maintaining databases. 7he technology helps management and
other departmental professionals and even the clients to disseminate such data in
negligible time. Asset managers have now complicated tools for scientific and
in5depth valuation of portfolios. !omp frameworks can be solved with
minimum effort using technology.
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? C)mm7ni9!ti)n S"i--s
• Ai-it? t) C!te8 t) t;e A7+ien9e A99)8+in' t) its A=!8eness
Leve-s
!ommunication skills include both the means of communication M written and
oral. Fowever, the audiences vary e"tensively, and hence, the requisite
communication skills also differ widely. A marketer handling individual
investors will necessarily have to keep the content very simple and e"press t in
layman@s terms. #sage of financial terms : 9argons will not fetch results. !ash
flows, the characteristics of the instruments : the risk class to which the
investment belongs to must be e"plained in simple : easily understandable
terms.
• Ne')ti!ti)n S"i--s
:A transactions are the toughest assignments for
negotiations. ;ven a friendly transaction would be difficult if not for patient and
mutually negotiations. 7he common issues that pertain to negotiation are M
terms of offer, offer price, post merger integration, organi-ation and reporting
structure, business lines to be developed above all dealing with the overlapping
functions. 0hile negotiating, the banker should always keep the prime ob9ect in
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the mind : quickly evaluate the various counter offers : suggestions made by
other party.
• Pe8s)n!-it? T8!its
2ersonality 7raits plays an important role in developing the skill set of an
investment banker. !reativity is an important feature. t comes in use while
handling prospectus, clients : team members. t is essential when solutions are
to be identified for comple" problem. nnovations : creativity are required
structure deals.
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? Ot;e8 S"i--s
• M!8"etin' S"i--
7he marketing skills would be an application of skills mentioned above. ,ne
of the important marketing skill would be relationship management. #nlike
most other industries where relationship plays a facilitating role in
conducting business, it is fundamental issue in the investment banking
industry. An attitude for creating, establishing : maintaining relationships,
during boom : down period, is of utmost importance in getting mandates.
• Inte82Pe8s)n!- S"i--s
nter5personal skills are basically blended from communication skills, and
personality traits. 7hey include interactions with superiors, subordinates,
colleagues, clients, competitors, team members and even politicians and
public office bearers. nter5personal skills come to the fore during team
e"ercises where diplomacy and manners become essential. 7eam e"ercises
can also include dealing with members from other departments or even with
other firms. )uch situations call for greater application of team skills and an
element of mutual respect towards each other.
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• Net=)8"in' S"i--s
:As are
friendly. nvestment bankers seek to optimi-e price and terms, so that the Dbest
priceE may not be the highest price for client sellers (all cash or confidence in
closing may be more important) nor the lowest price for client buyers
(certainty of getting the deal done may be more vital). nvestment banks find,
facilitate, price, and finance mergers and acquisitions. Also included in >:A
are leverage buyouts by private equity, the restructuring and recapitali-ation of
companies, and the reorgani-ation of troubled companies.
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• Fin!n9i!- A+vis)8? C S*)ns)8 G8)7* Fin!n9e2
Financial advisory services have grown dramatically as investment banks work
with the large number of private funds ( hedge funds and private equity ( that
have mushroomed in recent years and control hundreds of billions of dollars.
)ervices include (i) raising of capital for general funds, (ii) >:A acquisitions,
(iii) financing acquisitions, (iv) 2,s of portfolio companies owned by the
funds (when appropriate) and (v) >:A of these companies (when 2,s are not
appropriate). nvestment banks like to involve themselves with hedge funds
and private equity since they are transaction oriented, generate huge fees and
are in perpetual deal mode.
• F!i8ness O*ini)ns
Fairness opinions support >:A, leveraged buyouts and restructurings for
public companies. 2roviding an independent, defensible, e"pert statement on
values and the DfairnessE of those values is an essential part of any such public
transaction. nvestment banks command what may seem to be e"orbitantly
high fees for giving fairness opinions, considering the number of hours worked
(and the amount of paper produced). 7he reason is the significant liability the
investment bank assumes, which can be reali-ed both in the courts via
shareholder suits and in industry reputation. n fact, ma9or investment banks do
not like to provide fairness opinions ( the risks are too high for the fees ( but
generally do so only to serve important clients.
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• Ris" M!n!'ement
Fedging positions in interest rates, foreign currency e"changes and commodity
positions through swaps, options and futures are an essential building block of
financial markets. )waps are the mechanism by which two or more parties
e"change their debt obligations in order to control more precisely each party@s
desired riskLreturn profile. )waps work because different entities have different
comparative advantages when pricing different categories of debt in different
financial markets. 2arties of dissimilar credit ratings or financing needs can
e"change their obligations (e.g., from shorter term to longer term and vice
versa) in order to optimi-e their financial strategy and structure. 1isk
management groups combine e"pertise in diverse hedging instruments to
develop a complete hedging strategy for enterprises.
• Me89;!nt B!n"in'
>erchant banking is the commitment of an investment bank@s own capital to
equity5level investments and participations, seeking very high returns. )uch
commitment of capital is made for two general purposesN $) to facilitate a client
transaction (i.e., a bridge loan until permanent financing is obtained)O or 3) to
purchase securities in an operating company for the firm@s own account (i.e.,
whether $44B ownership by the investment bank, in partnership with a client,
or as the manager of an *+,P+2$Q fund). +ridge loans are highly profitable,
combining commitment fees, placement fees, high interest rates,and equity
kickers.
• Fin!n9e C Se978itiorgan + 1isk works with investment
banking to e"ecute transactions and advise investors, although its Finance :
,peration risk groups focus on middle office functions involving internal, non5
revenue generating, operational risk controls. !redit default swap, for
instance, is a famous credit risk hedging solution for clients invented by =.2.
>organ's +lythe >asters during the $%%4s.7he *oan 1isk )olutions group
within +arclays' investment banking division and 1isk >anagement and
Financing group housed in 'oldman )ach's securities division are client5driven
franchises. Fowever, risk management groups such as operational risk, internal
risk control, legal risk, and the one at >organ )tanley are restrained to internal
business functions including firm balance5sheet risk analysis and assigning
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trading cap that are independent of client needs, even though these groups may
be responsible for deal approval that directly affects capital market activities.
1isk management is a broad area, and like research, its roles can be client5
facing or internal.
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II. MIDDLE OFFICE
7his area of the bank includes treasury management, internal controls, and
internal corporate strategy.
• !orporate treasury is responsible for an investment bank's funding,
capital structure management, and liquidity risk monitoring.
• Financial control tracks and analy-es the capital flows of the firm the
finance division is the principal adviser to senior management on
essential areas such as controlling the firm's global risk e"posure and the
profitability and structure of the firm's various businesses via dedicated
trading desk product control teams. n the #nited )tates and #nited
Jingdom, a financial controller is a senior position, often reporting to
the chief financial officer. nternal corporate strategy tackling firm
management and profit strategy, unlike corporate strategy groups that
advise clients, is non5revenue regenerating yet a key functional role
within investment banks.
• 7his list is not a comprehensive summary of all middle5office functions
within an investment bank, as specific desks within front and back
offices may participate in internal functions.
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III. BACK OFFICE
• OPERATIONS
7his involves data5checking trades that have been conducted, ensuring
that they are not wrong, and transacting the required transfers. >any
banks have outsourced operations. t is, however, a critical part of the
bank.
• TECHNOLOGY
;very ma9or investment bank has considerable amounts of in5house
software, created by the technology team, who are also responsible for
technical support. 7echnology has changed considerably in the last few
years as more sales and trading desks are using electronic trading. )ome
trades are initiated by comple" algorithms for hedging purposes.
Firms are responsible for compliance with government regulations and
internal regulations.
• OTHER BUSINESSES
• G-)!- t8!ns!9ti)n banking is the division which provides cash
management, custody services, lending, and securities brokerage
services to institutions. 2rime brokerage with hedge funds has been an
especially profitable business, as well as risky, as seen in the 8run on the
bank8 with +ear )tearns in 344..
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• Investment m!n!'ement is the professional management of various
securities (shares, bonds, etc.) and other assets (e.g., real estate), to
meet specified investment goals for the benefit of investors. nvestors
may be institutions (insurance companies, pension funds, corporations
etc.) or private investors (both directly via investment contracts and
more commonly via collective investment schemes e.g., mutual funds).
7he investment management division of an investment bank is generally
divided into separate groups, often known as private wealth management
and private client services.
• Me89;!nt !n"in' can be called 8very personal banking8O merchant
banks offer capital in e"change for share ownership rather than loans,
and offer advice on management and strategy. >erchant banking is also
a name used to describe the private equity side of a firm. !urrent
e"amples include /efoe Fournier : !ie. and =2>organ's ,ne ;quity
2artners and the original =.2. >organ : !o. 1othschild@s, +arings,
0arburg@s and >organ@s were all merchant banks. (,riginally,
8merchant bank8 was the +ritish ;nglish term for an investment bank.)
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ORGANIEATIONAL STRUCTURE
• nvestment banking is split into front office, middle office, and back
office activities. 0hile large service investment banks offer all lines of
business, both 8sell side8 and 8buy side8, smaller sell5side investment
firms such as boutique investment banks and small broker5dealers focus
on investment banking and salesLtradingLresearch, respectively.
• nvestment banks offer services to both corporations issuing securities
and investors buying securities. For corporations, investment bankers
offer information on when and how to place their securities on the open
market, an activity very important to an investment bank's reputation.
7herefore, investment bankers play a very important role in issuing new
security offerings
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CHAPTER /
INDUSTRY PROFILE
7here are various trade associations throughout the world which represent the
industry in lobbying, facilitate industry standards, and publish statistics. 7he
nternational !ouncil of )ecurities Associations (!)A) is a global group of
trade associations.
n the #nited )tates, the )ecurities ndustry and Financial >arkets Association
()F>A) is likely the most significantO however, several of the large
investment banks are members of the American +ankers Association
)ecurities Association (A+A)A)P$&Q while small investment banks are
members of the arkets
in ;urope (AF>
.
n the securities industry in !hina (particularly mainland !hina), the
)ecurities Association of !hina is a self5regulatory organi-ation whose
members are largely investment banks.
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GLOBAL SIEE AND REVENUE MIF
'lobal investment banking revenue increased for the fifth year running in
344?, to a record #)G.A.& billion, which was up 33B on the previous year and
more than double the level in 344&. )ubsequent to their e"posure to #nited
)tates sub5prime securities investments, many investment banks have
e"perienced losses. As of late 34$3, global revenues for investment banks were
estimated at G3A4 billion, down about a third from 344%, as companies pursued
less deals and traded less. /ifferences in total revenue are likely due to
different ways of classifying investment banking revenue, such as subtracting
proprietary trading revenue.
n terms of total revenue, );! filings of the ma9or independent investment
banks in the #nited )tates show that investment banking (defined as >:A
advisory services and security underwriting) only made up about $C534B of
total revenue for these banks from $%%H to 344H, with the ma9ority of revenue
(H4SB in some years) brought in by 8trading8 which includes brokerage
commissions and proprietary tradingO the proprietary trading is estimated to
provide a significant portion of this revenue.
7he #nited )tates generated AHB of global revenue in 344%, down from CHB
in $%%%. ;urope (with >iddle ;ast and Africa) generated about a third while
Asian countries generated the remaining 3$B. 7he industry is heavily
concentrated in a small number of ma9or financial centers, including !ity of
*ondon, :A was a
primary source of investment banking revenue, often accounting for A4B of
such revenue, but dropped during and after the financial crisis. ;quity
underwriting revenue ranged from &4B to &.B and fi"ed5income underwriting
accounted for the remaining revenue.
1evenues have been affected by the introduction of new products with higher
marginsO however, these innovations are often copied quickly by competing
banks, pushing down trading margins. For e"ample, brokerages commissions
for bond and equity trading is a commodity business but structuring and
trading derivatives has higher margins because each over5the5counter contract
has to be uniquely structured and could involve comple" pay5off and risk
profiles. ,ne growth area is private investment in public equity (22;s,
otherwise known as 1egulation / or 1egulation )). )uch transactions are
privately negotiated between companies and accredited investors.
+anks also earned revenue by securiti-ing debt, particularly mortgage debt
prior to the financial crisis. nvestment banks have become concerned that
lenders are securiti-ing in5house, driving the investment banks to pursue
vertical integration by becoming lenders, which is allowed in the #nited )tates
since the repeal of the 'lass5)teagall Act in $%%%
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CHAPTER 0
TOP 15 BANKS
*ist of investment banks
7he ten largest investment banks as of are as follows (by total fees from all
advisory). 7he list is 9ust a ranking of the advisory arm of each bank and does
not include the generally much larger portion of revenues from sales and
trading and asset management.
Ra
nk
Bank Name Found
ed
Headquarter Revenue
"
=.2. >organ :
!o.
3444 3?4 2ark Avenue, >anhattan, :A advisory, syndicated loans, equity
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capital markets and debt capital markets.
7he Financial 7imes, 7he 0all )treet =ournal and +loomberg often cover
mergers and acquisitions and capital markets. *eague tables are also availableN
• nvestment +anking 1eview, 7he Financial 7imes.
• nvestment +anking )corecard, 7he 0all )treet =ournal.
• 'lobal >:A Financial Advisory 1ankings, +loomberg.
• 'lobal !apital >arkets *eague 7ables, +loomberg.
•
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CHAPTER 15
FINANCIAL CRISIS OF %55/
7he 344. financial credit crisis led to the notable collapse of several banks,
notably including the bankruptcy of large investment bank *ehman +rothers
and the hurried sale of >errill *ynch and the much smaller +ear )tearns to
banks which effectively rescued them from bankruptcy. 7he entire financial
services industry, including numerous investment banks, was rescued by
government loans through the 7roubled Asset 1elief 2rogram (7A12).
)urviving #.). investment banks such as 'oldman )achs and >organ )tanley
converted to traditional bank holding companies to accept 7A12 relief. )imilar
situations occurred across the globe with countries rescuing their banking
industry. nitially, banks received part of a G?44 billion 7A12 intended to
stabili-e the economy and thaw the fro-en credit markets. ;ventually, ta"payer
assistance to banks reached nearly G$& trillion, most without much scrutiny,
lending did not increase and credit markets remained fro-en.
7he crisis led to questioning of the business model of the investment bank
without the regulation imposed on it by 'lass5)teagall. ,nce 1obert 1ubin, a
former co5chairman of 'oldman )achs, became part of the !linton
administration and deregulated banks, the previous conservatism of
underwriting established companies and seeking long5term gains was replaced
by lower standards and short5term profit. Formerly, the guidelines said that in
order to take a company public, it had to be in business for a minimum of five
years and it had to show profitability for three consecutive years. After
deregulation, those standards were gone, but small investors did not grasp the
full impact of the change.
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A number of former 'oldman5)achs top e"ecutives, such as Fenry 2aulson
and ;d *iddy were in high5level positions in government and oversaw the
controversial ta"payer5funded bank bailout. 7he 7A12 ,versight 1eport
released by the !ongressional ,versight 2anel found that the bailout tended to
encourage risky behaviour and 8corrupted the fundamental tenets of a market
economy8.
#nder threat of a subpoena, 'oldman )achs revealed that it received G$3.%
billion in ta"payer aid, GA.& billion of which was then paid out to &3 entities,
including many overseas banks, hedge funds and pensions. 7he same year it
received G$4 billion in aid from the government, it also paid out multi5million
dollar bonusesO the total paid in bonuses was GA..3 billion. )imilarly, >organ
)tanley received G$4 billion in 7A12 funds and paid out GA.A?C billion in
bonuses.
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CHAPTER 11
MAAOR INVESTMENT BANKS IN INDIA
An investment bank is a financial institution that assists individuals,
!orporations and governments in raising capital by underwriting andLor acting
as the client@s agent in the issuance of securities egN 2,L F2, work is handled
by investment banks. An investment bank also assist companies in mergers and
acquisitions, and provide ancillary services such as market making, trading of
derivatives, fi"ed income instruments, foreign e"change, commodities, and
equity securities.
7he following is the list of ma9or indian investment banks based out of ndia.
• Aven+7s
Avendus is an investment bank based in ndia with offices in >umbai and
+angalore. 7he firm was founded in $%%% by three investment bankers 1anu
6ohra, 'aurav /eepak and Jaushal Jumar, who had worked for large global
financial institutions and wanted to offer knowledge and research oriented
capital raising and >:A solutions to international firms with a strong ndia
connection.
0ebsite urlN http,--www.a/endus.com
• B!G!G C!*it!-
+a9a9 !apital@s nvestment +anking )ervice is a step ahead in that direction.
+a9a9 !apital offers you unparalleled capital raising solutions for your
business. 0ith over $34 offices in C4 cities all over the country and a network
of over $4,444 Advisor Associates, we can connect you to potential investors
all over the country.
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• B!89-!?s In+i!
+arclays unveiled its 'lobal 1etail and !ommercial +anking division in ndia
over the past year as part of its plan to be a leading global bank. n a very short
time, +arclays is already making waves in one of the world@s fastest growing
countries.
web site urlN httpNLLwww.barclays.in
• C-!m!n+!-!m Investment B Fin!n9e C)m*!n?
!holamandalam nvestment : Finance !ompany *imited is the financial
services arm of the #)/ ..4 million >urugappa 'roup. ncorporated in $%?.,
it is one of the leading Financial )ervices !ompany in the country. 7he
products and services include vehicle finance, capital market finance, mutual
funds, securities broking, depository services, and insurance and distribution
services. web site urlN httpNLLwww.cholamandalam.comL
• ICICI Se978ities Lt+
A subsidiary of !! +ank ( the largest and most recogni-ed private bank in
ndia !! )ecurities *td is premier ndian nvestment +ank, with a dominant
position in its core segments of its operations ( !orporate Finance including
;quity !apital >arkets Advisory )ervices, nstitutional ;quities, 1etail and
Financial 2roduct /istribution.
0ebsite urlN httpNLLwww.icicisecurities.comL
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• ICRA Limite+
!1A *imited (an Associate of >oody@s nvestors )ervice) was incorporated
in$%%$ as an independent and professional company. !1A is a leading
provider of investment information and credit rating services in ndia. !1A@s
ma9or shareholders include >oody@s nvestors )ervice and leading ndian
financial institutions and banks.V
0ebsite urlN httpNLLwww.icra.in
• IDFC
/F!@s mission is to be the financier and advisor of choice for infrastructure in
ndia. /F! is positioned as a special financial institution which is focused on
pro9ect finance and investment banking activities in infrastructure. 'oing
forward, /F! will focus on establishing stable fee revenues from innovative
infrastructure initiatives in financial markets, asset management, pro9ect
development and advisory along with growing its balance sheet at a significant
pace. 0ebsite urlN httpNLLwww.idfc.comL
• IDFC P8iv!te E:7it?.
/F! 2rivate ;quity (/F! 2 was set up in 3443 as a $44B subsidiary of the
nfrastructure /evelopment Finance !ompany (/F!). /F! 2; manages two
funds with a current corpus of ergers : Acquisitions, Advisory )ervices and
Fi"ed ncome )ecurities and 2rincipal +usiness.
web site urlN httpNLLwww.kmcc.co.inL
• In+7st8i!- Fin!n9e C)8*)8!ti)n )> In+i! #IFCI$
F!, the first /evelopment Finance nstitution in ndia, was set up in $%A., as
a )tatutory !orporation, to pioneer institutional credit to medium and large
industries F! was also the first institution in the financial sector to be
converted into a 2ublic *imited !ompany. F!@s record of performance has
broadly run parallel to the course of industrial and economic development of
the nation. F!@s principal operations include ( 2ro9ect financing, Financial
services : !omprehensive corporate advisory services web site urlN
httpNLLwww.ifciltd.comL
• K)t!" Investin' B!n"in'
Jotak >ahindra !apital !ompany (J>!!) helps leading ndian corporations,
banks, financial institutions and government companies access domestic and
international capital markets. J>!! has the most current understanding of
investor appetite, having been the leading book runnerLlead manager in public
equity offerings in the period FT 344354H.web site urlN httpNLLwww.kmcc.co.in
• SBI C!*it!- M!8"ets
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)+ !apital >arkets *td. is amongst the oldest players in the ndian !apital
>arket, offering an entire range of nvestment +anking )ervices. 0ith strong
fund mobili-ation strengths, we are one of the leading players in the areas of
fund raising through !apital >arket ssues L 2rivate 2lacement.
web site urlN httpNLLwww.sbicaps.comL
• Yes B!n"
Tes +ank@s nvestment +anking group is involved in the identification,
structuring and e"ecution of transactions for our clients in diverse industries
and geographies. )ome of the typical transactions include mergers :
acquisitions, divestitures, private equity syndication and 2, advisory.
• S.E Investments Limite+
);*@s philosophy on corporate governance envisages commitment to ensure
customer satisfaction through better services. 7he company is committed to
good corporate governance : continuously reviews various relationship
measures with a view to enhance shareholder@s value. );*provides detailed
information on various issues concerning the company@s business and financial
performance. );* respects the rights of its share holders to information on
performance of the company and believes that the best corporate governance
promotes transparency and helps mitigate the risks associated with the
business. web site urlN httpNLLwww.seil.in
• SSKI G8)7*
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))J is a leading ndia5based financial services group that offers nstitutional
;quities and nvestment +anking services. ))J nvestment +anking is a full5
service investment bank with a strong research bias. ,ur team members bring
deep domain knowledge, spanning a number of sectors, that we are able to
leverage to meet the varied corporate finance needs of our clients. 0e provide
a full range of services, from private placements of equity and debt, public
offerings, pro9ect advisory to mergers and acquisitions.
web site urlN httpNLLwww.sski.co.inL
• Sm!-- In+7st8ies Deve-)*ment B!n" )> In+i!
)mall ndustries /evelopment +ank of ndia ()/+) was established in April
$%%4 under an Act of ndian 2arliament. )/+ has completed $3 years of
service to the small scale sector. !onsequent upon, amendment in the )/+
Act, the +ank has been delinked from )/+ with effect from >arch 3?, 3444.
7he )/+ (Amendment) Act, 3444 has changed the provisions relating to
capital structure, share holding pattern, management, business, borrowings, etc.
7he amended Act provides for divesting of C$B of the equity share capital of
1s.A.C billion )ubscribed and held by /+ in favour of *ife nsurance
!orporation of ndia, 'eneral nsurance !orporation of ndia, 2ublic )ector
+anks and other nstitutions owned or controlled by the 'overnment of ndia.
web site urlN httpNLLwww.sidbi.comL
• UTI Se978ities Lt+
#7 )ecurities *td., was promoted as an independant professional entity in
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=une $%%A. 0ith the repealing of #nit 7rust of ndia (#7) Act, the entire share
capital of #7);* is now held by Administrator of specified undertaking of
#nit 7rust of ndia since $st February 344&. #7);* has been providing all
kinds of nvestment related activities which include investment banking and
corporate advisory services.
web site urlN httpNLLwww.usectrade.comL
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CHAPTER 1%
ROLECCHALLANGES OF INVESTMENT BANKING
COMPANISE IN INDIA
nvestment banking companies generally help their client@s to access capital
through equity, debt, and others kinds of investment products. 7hese firm also
trade in equity and derivative products and also help companies with merger
and acquisition deals.
About a couples of years back, when a world economy was reeling under a
recession, many investment banking either collapsed or were on the brink of
closure. ;ven a few firms in ndia were affected by this global downturn. 7his
led to many skeptices writing off the revival of those firms.
CHALLENGES
nvestment banking is one of the most global industries and is hence
continuously challenged to respond to new developments and innovation in the
global financial markets. 7hroughout the history of investment banking, it is
only known that may have theori-ed that all investment banking product and
services would be commoditi-ed.
CHAPTER 1
INTRODUCTION
An investment !n" 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). 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 F!! services (fi"ed income instruments, currencies, and
commodities).
#nlike commercial banks and retail banks, investment banks do not take
deposits. From $%&& ('lass()teagall Act) until $%%% ('ramm(*each(+liley
Act), the #nited )tates maintained a separation between investment banking
and commercial banks. ,ther industriali-ed countries, including '. countries,
have historically not maintained such a separation. As part of the /odd(Frank
0all )treet 1eform and !onsumer 2rotection Act of 34$4 (/odd5Frank Act of
34$4), 6olcker 1ule asserts full institutional separation of investment banking
services from commercial banking.
7here are two main lines of business in investment banking.
• 7he 8sell side8 involves trading securities for cash or for other securities
(e.g. facilitating transactions, market5making), or the promotion of
securities (e.g. underwriting, research, etc.).
• 7he 8buy side8 involves the provision of advice to institutions concerned
with buying investment services. 2rivate equity funds, mutual funds, life
insurance companies, unit trusts, and hedge funds are the most common
types of buy side entities.
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An investment bank can also be split into private and public functions with an
information barrier which separates the two to prevent information from
crossing. 7he private areas of the bank deal with private insider information
that may not be publicly disclosed, while the public areas such as stock analysis
deal with public information.
An advisor who provides investment banking services in the #nited )tates must
be a licensed broker5dealer and sub9ect to )ecurities : ;"change !ommission
();!) and Financial ndustry 1egulatory Authority (Forgan )tanley, *ehman +rothers, First +oston
and others.
7hat trend began to change in the $%.4s as a new focus on trading propelled
firms such as )alomon +rothers, >errill *ynch and /re"el +urnham *ambert
into the limelight. nvestment banks earned an increasing amount of their profits
from proprietary trading. Advances in computing technology also enabled banks
to use more sophisticated model driven software to e"ecute trades and generate
a profit on small changes in market conditions.
n the $%.4s, financier >ichael >ilken populari-ed the use of high yield debt
(also known as 9unk bonds) in corporate finance and mergers and acquisitions.
7his fueled a boom in leverage buyouts and hostile takeovers (see Fistory of
2rivate ;quity). Filmmaker ,liver )tone immortali-ed the spirit of the times
with his movie, 0all )treet, in which >ichael /ouglas played the role of
corporate raider 'ordon 'ekko and epitomi-ed corporate greed.
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nvestment banks profited handsomely during the boom years of the $%%4s and
into the tech boom and bubble. 0hen the tech bubble burst, it precipitated a
string of new legislation to prevent conflicts of interest within investment banks.
nvestment banking research analysts had been actively promoting stocks to
investors while privately acknowledging they were not attractive investments. n
other instances, analysts gave favourable stock ratings to corporate clients in the
hopes of attracting them as investment banking clients and handling potentially
lucrative initial public offerings.
7hese scandals paled by comparison to the financial crisis that has enveloped
the banking industry since 344?. 7he speculative bubble in housing prices along
with an overreliance on sub5prime mortgage lending trigged a cascade of crises.
7wo ma9or investment banks, +ear )tearns and *ehman +rothers, collapsed
under the weight of failed mortgage5backed securities. n >arch, 344., the
Federal government began using a variety of ta"payer5funded bailout measures
to prop up other firms. 7he Federal 1eserve offered a G&4 billion line of credit
to =.2. >organ !hase to that it could acquire +ear )terns. +ank of America
acquired >errill *ynch. 7he last two bulge bracket investment banks, 'oldman
)achs and >organ )tanley, elected to convert to bank holding companies and be
fully regulated by the Federal 1eserve.
>oving forward, the recent financial crisis has weakened both the reputation
and the dominance of #.). investment banking organi-ations throughout the
world. 7he growth of foreign capital markets along with an increase in pools of
sovereign capital is changing the landscape of the industry.
7he growing international flow of capital has also opened up opportunities for
investment banking in new financial centers around the world, including those
in developing countries such as ndia, !hina and the >iddle ;ast.
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EVOLUTION OF INVESTMENT BANKING IN INDIA
7he origin of investment banking in ndia can be traced back to the $%
th
century
when ;uropean merchant banks set5up their agency houses in the country to
assist in the setting of new pro9ects. n the early 34
th
century, large business
houses followed suit by establishing managing agencies which acted as issue
house for securities, promoters for new pro9ects and also provided finance to
'reenfield ventures. 7he peculiar feature of these agencies was that their
services were restricted only to the companies of the group to which they
belonged. A few small brokers also started rendering >erchant banking
services, but theirs was limited due to their small capital base.
n $%H?, Aultiple relationships between various factors render decision5making difficult.
Financial solutions can be provided to the clients only when the advisor is
competent to understand all or at least a ma9ority of them. +efore practical
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solutions emerge, the tools for decision5making will give greater choice to the
solution provider. A strong grounding in theory and concepts facilitates this.
• P8)+79t S*e9i!-i:A deal. 7he regulators@ guidelines have to be strictly followed, even while
envisaging a combination. *egal knowledge is also important for structuring
such deals, which will help identify the constraints associated with proposed
solution. 7he situation gets more intense when the deal is a cross5border >:A
proposal. Apart from the knowledge of the inland laws, foreign laws also have
to be considered. Any regulation by the foreign government can make an
otherwise desirable deal, unviable.
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• Kn)=-e+'e )> C!*it!- M!8"ets !n+ F7n9ti)nin'
>ore than any other industry, it is the investment banking industry that has a
direct bearing on the way capital markets function. Any changes in the capital
market regulations affect the brokerage side of the business, along with the trade
clearing and settlement houses. 7he trading personnel should be conversant with
the regulations, guidelines, procedural formalities and actual trade e"ecution
processes involved in capital market. ;.g. 7rading system involves a lot of
additional skills than online trading. Fe has to be conversant with the codes,
symbols and conventions followed by the market. Kuick signaling and accurate
interpretation are of utmost significance. Any mistake in these would lead to
faulty e"ecution of orders and might entail additional costs to the firm in
correcting the errors.
• Kn)=-e+'e )> Re'7-!t)8? B)+ies inv)-ve+ in t;e V!8i)7s
O*e8!ti)ns
t is necessary for an investment banker to be aware of all the regulatory bodies
that govern the activities in which heLshe is involved. A thorough knowledge of
all such bodies is absolutely essential to perform e"traordinarily. n ndia, the
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);+ : central bank acts as a watchdog and regulator of market related
activities.
• Kn)=-e+'e )> Inte8n!ti)n!- B7siness S9en!8i) !n+ E9)n)mi9
T8en+s
7hough a researcher is primarily involved in economic and business cycle
studies, it is the duty of all the investment bankers to have a general overview of
these affairs. )alespersons, who also act as financial consultantsLadvisors,
should essentially be aware with economic and business cycles, lest they lose
the respect and trust of the client. 7he requirement for global perspective and
international e"posure is becoming increasingly important. 7he firm should
offer services across the national borders to the corporate clients and informed
services are possible only when the employee is well5equipped with
international business information.
• Kn)=-e+'e )> S)>t=!8e T))-s@ Deve-)*ments in t;e Fie-+ )>
In>)8m!ti)n Te9;n)-)'?
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,ne of the most important technical skills is the usage of computers, tools and
internet technologies. >arketing, brokerage, research and capital mobili-ation
have all undergone sweeping changes owing to technology.
7he securities trader has changed into a tech5savvy professional, e"ecuting
online orders : maintaining databases. 7he technology helps management and
other departmental professionals and even the clients to disseminate such data in
negligible time. Asset managers have now complicated tools for scientific and
in5depth valuation of portfolios. !omp frameworks can be solved with
minimum effort using technology.
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? C)mm7ni9!ti)n S"i--s
• Ai-it? t) C!te8 t) t;e A7+ien9e A99)8+in' t) its A=!8eness
Leve-s
!ommunication skills include both the means of communication M written and
oral. Fowever, the audiences vary e"tensively, and hence, the requisite
communication skills also differ widely. A marketer handling individual
investors will necessarily have to keep the content very simple and e"press t in
layman@s terms. #sage of financial terms : 9argons will not fetch results. !ash
flows, the characteristics of the instruments : the risk class to which the
investment belongs to must be e"plained in simple : easily understandable
terms.
• Ne')ti!ti)n S"i--s
:A transactions are the toughest assignments for
negotiations. ;ven a friendly transaction would be difficult if not for patient and
mutually negotiations. 7he common issues that pertain to negotiation are M
terms of offer, offer price, post merger integration, organi-ation and reporting
structure, business lines to be developed above all dealing with the overlapping
functions. 0hile negotiating, the banker should always keep the prime ob9ect in
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the mind : quickly evaluate the various counter offers : suggestions made by
other party.
• Pe8s)n!-it? T8!its
2ersonality 7raits plays an important role in developing the skill set of an
investment banker. !reativity is an important feature. t comes in use while
handling prospectus, clients : team members. t is essential when solutions are
to be identified for comple" problem. nnovations : creativity are required
structure deals.
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? Ot;e8 S"i--s
• M!8"etin' S"i--
7he marketing skills would be an application of skills mentioned above. ,ne
of the important marketing skill would be relationship management. #nlike
most other industries where relationship plays a facilitating role in
conducting business, it is fundamental issue in the investment banking
industry. An attitude for creating, establishing : maintaining relationships,
during boom : down period, is of utmost importance in getting mandates.
• Inte82Pe8s)n!- S"i--s
nter5personal skills are basically blended from communication skills, and
personality traits. 7hey include interactions with superiors, subordinates,
colleagues, clients, competitors, team members and even politicians and
public office bearers. nter5personal skills come to the fore during team
e"ercises where diplomacy and manners become essential. 7eam e"ercises
can also include dealing with members from other departments or even with
other firms. )uch situations call for greater application of team skills and an
element of mutual respect towards each other.
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• Net=)8"in' S"i--s
:As are
friendly. nvestment bankers seek to optimi-e price and terms, so that the Dbest
priceE may not be the highest price for client sellers (all cash or confidence in
closing may be more important) nor the lowest price for client buyers
(certainty of getting the deal done may be more vital). nvestment banks find,
facilitate, price, and finance mergers and acquisitions. Also included in >:A
are leverage buyouts by private equity, the restructuring and recapitali-ation of
companies, and the reorgani-ation of troubled companies.
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• Fin!n9i!- A+vis)8? C S*)ns)8 G8)7* Fin!n9e2
Financial advisory services have grown dramatically as investment banks work
with the large number of private funds ( hedge funds and private equity ( that
have mushroomed in recent years and control hundreds of billions of dollars.
)ervices include (i) raising of capital for general funds, (ii) >:A acquisitions,
(iii) financing acquisitions, (iv) 2,s of portfolio companies owned by the
funds (when appropriate) and (v) >:A of these companies (when 2,s are not
appropriate). nvestment banks like to involve themselves with hedge funds
and private equity since they are transaction oriented, generate huge fees and
are in perpetual deal mode.
• F!i8ness O*ini)ns
Fairness opinions support >:A, leveraged buyouts and restructurings for
public companies. 2roviding an independent, defensible, e"pert statement on
values and the DfairnessE of those values is an essential part of any such public
transaction. nvestment banks command what may seem to be e"orbitantly
high fees for giving fairness opinions, considering the number of hours worked
(and the amount of paper produced). 7he reason is the significant liability the
investment bank assumes, which can be reali-ed both in the courts via
shareholder suits and in industry reputation. n fact, ma9or investment banks do
not like to provide fairness opinions ( the risks are too high for the fees ( but
generally do so only to serve important clients.
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• Ris" M!n!'ement
Fedging positions in interest rates, foreign currency e"changes and commodity
positions through swaps, options and futures are an essential building block of
financial markets. )waps are the mechanism by which two or more parties
e"change their debt obligations in order to control more precisely each party@s
desired riskLreturn profile. )waps work because different entities have different
comparative advantages when pricing different categories of debt in different
financial markets. 2arties of dissimilar credit ratings or financing needs can
e"change their obligations (e.g., from shorter term to longer term and vice
versa) in order to optimi-e their financial strategy and structure. 1isk
management groups combine e"pertise in diverse hedging instruments to
develop a complete hedging strategy for enterprises.
• Me89;!nt B!n"in'
>erchant banking is the commitment of an investment bank@s own capital to
equity5level investments and participations, seeking very high returns. )uch
commitment of capital is made for two general purposesN $) to facilitate a client
transaction (i.e., a bridge loan until permanent financing is obtained)O or 3) to
purchase securities in an operating company for the firm@s own account (i.e.,
whether $44B ownership by the investment bank, in partnership with a client,
or as the manager of an *+,P+2$Q fund). +ridge loans are highly profitable,
combining commitment fees, placement fees, high interest rates,and equity
kickers.
• Fin!n9e C Se978itiorgan + 1isk works with investment
banking to e"ecute transactions and advise investors, although its Finance :
,peration risk groups focus on middle office functions involving internal, non5
revenue generating, operational risk controls. !redit default swap, for
instance, is a famous credit risk hedging solution for clients invented by =.2.
>organ's +lythe >asters during the $%%4s.7he *oan 1isk )olutions group
within +arclays' investment banking division and 1isk >anagement and
Financing group housed in 'oldman )ach's securities division are client5driven
franchises. Fowever, risk management groups such as operational risk, internal
risk control, legal risk, and the one at >organ )tanley are restrained to internal
business functions including firm balance5sheet risk analysis and assigning
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trading cap that are independent of client needs, even though these groups may
be responsible for deal approval that directly affects capital market activities.
1isk management is a broad area, and like research, its roles can be client5
facing or internal.
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II. MIDDLE OFFICE
7his area of the bank includes treasury management, internal controls, and
internal corporate strategy.
• !orporate treasury is responsible for an investment bank's funding,
capital structure management, and liquidity risk monitoring.
• Financial control tracks and analy-es the capital flows of the firm the
finance division is the principal adviser to senior management on
essential areas such as controlling the firm's global risk e"posure and the
profitability and structure of the firm's various businesses via dedicated
trading desk product control teams. n the #nited )tates and #nited
Jingdom, a financial controller is a senior position, often reporting to
the chief financial officer. nternal corporate strategy tackling firm
management and profit strategy, unlike corporate strategy groups that
advise clients, is non5revenue regenerating yet a key functional role
within investment banks.
• 7his list is not a comprehensive summary of all middle5office functions
within an investment bank, as specific desks within front and back
offices may participate in internal functions.
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III. BACK OFFICE
• OPERATIONS
7his involves data5checking trades that have been conducted, ensuring
that they are not wrong, and transacting the required transfers. >any
banks have outsourced operations. t is, however, a critical part of the
bank.
• TECHNOLOGY
;very ma9or investment bank has considerable amounts of in5house
software, created by the technology team, who are also responsible for
technical support. 7echnology has changed considerably in the last few
years as more sales and trading desks are using electronic trading. )ome
trades are initiated by comple" algorithms for hedging purposes.
Firms are responsible for compliance with government regulations and
internal regulations.
• OTHER BUSINESSES
• G-)!- t8!ns!9ti)n banking is the division which provides cash
management, custody services, lending, and securities brokerage
services to institutions. 2rime brokerage with hedge funds has been an
especially profitable business, as well as risky, as seen in the 8run on the
bank8 with +ear )tearns in 344..
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• Investment m!n!'ement is the professional management of various
securities (shares, bonds, etc.) and other assets (e.g., real estate), to
meet specified investment goals for the benefit of investors. nvestors
may be institutions (insurance companies, pension funds, corporations
etc.) or private investors (both directly via investment contracts and
more commonly via collective investment schemes e.g., mutual funds).
7he investment management division of an investment bank is generally
divided into separate groups, often known as private wealth management
and private client services.
• Me89;!nt !n"in' can be called 8very personal banking8O merchant
banks offer capital in e"change for share ownership rather than loans,
and offer advice on management and strategy. >erchant banking is also
a name used to describe the private equity side of a firm. !urrent
e"amples include /efoe Fournier : !ie. and =2>organ's ,ne ;quity
2artners and the original =.2. >organ : !o. 1othschild@s, +arings,
0arburg@s and >organ@s were all merchant banks. (,riginally,
8merchant bank8 was the +ritish ;nglish term for an investment bank.)
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ORGANIEATIONAL STRUCTURE
• nvestment banking is split into front office, middle office, and back
office activities. 0hile large service investment banks offer all lines of
business, both 8sell side8 and 8buy side8, smaller sell5side investment
firms such as boutique investment banks and small broker5dealers focus
on investment banking and salesLtradingLresearch, respectively.
• nvestment banks offer services to both corporations issuing securities
and investors buying securities. For corporations, investment bankers
offer information on when and how to place their securities on the open
market, an activity very important to an investment bank's reputation.
7herefore, investment bankers play a very important role in issuing new
security offerings
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CHAPTER /
INDUSTRY PROFILE
7here are various trade associations throughout the world which represent the
industry in lobbying, facilitate industry standards, and publish statistics. 7he
nternational !ouncil of )ecurities Associations (!)A) is a global group of
trade associations.
n the #nited )tates, the )ecurities ndustry and Financial >arkets Association
()F>A) is likely the most significantO however, several of the large
investment banks are members of the American +ankers Association
)ecurities Association (A+A)A)P$&Q while small investment banks are
members of the arkets
in ;urope (AF>
.n the securities industry in !hina (particularly mainland !hina), the
)ecurities Association of !hina is a self5regulatory organi-ation whose
members are largely investment banks.
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GLOBAL SIEE AND REVENUE MIF
'lobal investment banking revenue increased for the fifth year running in
344?, to a record #)G.A.& billion, which was up 33B on the previous year and
more than double the level in 344&. )ubsequent to their e"posure to #nited
)tates sub5prime securities investments, many investment banks have
e"perienced losses. As of late 34$3, global revenues for investment banks were
estimated at G3A4 billion, down about a third from 344%, as companies pursued
less deals and traded less. /ifferences in total revenue are likely due to
different ways of classifying investment banking revenue, such as subtracting
proprietary trading revenue.
n terms of total revenue, );! filings of the ma9or independent investment
banks in the #nited )tates show that investment banking (defined as >:A
advisory services and security underwriting) only made up about $C534B of
total revenue for these banks from $%%H to 344H, with the ma9ority of revenue
(H4SB in some years) brought in by 8trading8 which includes brokerage
commissions and proprietary tradingO the proprietary trading is estimated to
provide a significant portion of this revenue.
7he #nited )tates generated AHB of global revenue in 344%, down from CHB
in $%%%. ;urope (with >iddle ;ast and Africa) generated about a third while
Asian countries generated the remaining 3$B. 7he industry is heavily
concentrated in a small number of ma9or financial centers, including !ity of
*ondon, :A was a
primary source of investment banking revenue, often accounting for A4B of
such revenue, but dropped during and after the financial crisis. ;quity
underwriting revenue ranged from &4B to &.B and fi"ed5income underwriting
accounted for the remaining revenue.
1evenues have been affected by the introduction of new products with higher
marginsO however, these innovations are often copied quickly by competing
banks, pushing down trading margins. For e"ample, brokerages commissions
for bond and equity trading is a commodity business but structuring and
trading derivatives has higher margins because each over5the5counter contract
has to be uniquely structured and could involve comple" pay5off and risk
profiles. ,ne growth area is private investment in public equity (22;s,
otherwise known as 1egulation / or 1egulation )). )uch transactions are
privately negotiated between companies and accredited investors.
+anks also earned revenue by securiti-ing debt, particularly mortgage debt
prior to the financial crisis. nvestment banks have become concerned that
lenders are securiti-ing in5house, driving the investment banks to pursue
vertical integration by becoming lenders, which is allowed in the #nited )tates
since the repeal of the 'lass5)teagall Act in $%%%
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CHAPTER 0
TOP 15 BANKS
*ist of investment banks
7he ten largest investment banks as of are as follows (by total fees from all
advisory). 7he list is 9ust a ranking of the advisory arm of each bank and does
not include the generally much larger portion of revenues from sales and
trading and asset management.
Ra
nk
Bank Name Found
ed
Headquarter Revenue
"
=.2. >organ :
!o.
3444 3?4 2ark Avenue, >anhattan, :A advisory, syndicated loans, equity
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capital markets and debt capital markets.
7he Financial 7imes, 7he 0all )treet =ournal and +loomberg often cover
mergers and acquisitions and capital markets. *eague tables are also availableN
• nvestment +anking 1eview, 7he Financial 7imes.
• nvestment +anking )corecard, 7he 0all )treet =ournal.
• 'lobal >:A Financial Advisory 1ankings, +loomberg.
• 'lobal !apital >arkets *eague 7ables, +loomberg.
•
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CHAPTER 15
FINANCIAL CRISIS OF %55/
7he 344. financial credit crisis led to the notable collapse of several banks,
notably including the bankruptcy of large investment bank *ehman +rothers
and the hurried sale of >errill *ynch and the much smaller +ear )tearns to
banks which effectively rescued them from bankruptcy. 7he entire financial
services industry, including numerous investment banks, was rescued by
government loans through the 7roubled Asset 1elief 2rogram (7A12).
)urviving #.). investment banks such as 'oldman )achs and >organ )tanley
converted to traditional bank holding companies to accept 7A12 relief. )imilar
situations occurred across the globe with countries rescuing their banking
industry. nitially, banks received part of a G?44 billion 7A12 intended to
stabili-e the economy and thaw the fro-en credit markets. ;ventually, ta"payer
assistance to banks reached nearly G$& trillion, most without much scrutiny,
lending did not increase and credit markets remained fro-en.
7he crisis led to questioning of the business model of the investment bank
without the regulation imposed on it by 'lass5)teagall. ,nce 1obert 1ubin, a
former co5chairman of 'oldman )achs, became part of the !linton
administration and deregulated banks, the previous conservatism of
underwriting established companies and seeking long5term gains was replaced
by lower standards and short5term profit. Formerly, the guidelines said that in
order to take a company public, it had to be in business for a minimum of five
years and it had to show profitability for three consecutive years. After
deregulation, those standards were gone, but small investors did not grasp the
full impact of the change.
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A number of former 'oldman5)achs top e"ecutives, such as Fenry 2aulson
and ;d *iddy were in high5level positions in government and oversaw the
controversial ta"payer5funded bank bailout. 7he 7A12 ,versight 1eport
released by the !ongressional ,versight 2anel found that the bailout tended to
encourage risky behaviour and 8corrupted the fundamental tenets of a market
economy8.
#nder threat of a subpoena, 'oldman )achs revealed that it received G$3.%
billion in ta"payer aid, GA.& billion of which was then paid out to &3 entities,
including many overseas banks, hedge funds and pensions. 7he same year it
received G$4 billion in aid from the government, it also paid out multi5million
dollar bonusesO the total paid in bonuses was GA..3 billion. )imilarly, >organ
)tanley received G$4 billion in 7A12 funds and paid out GA.A?C billion in
bonuses.
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CHAPTER 11
MAAOR INVESTMENT BANKS IN INDIA
An investment bank is a financial institution that assists individuals,
!orporations and governments in raising capital by underwriting andLor acting
as the client@s agent in the issuance of securities egN 2,L F2, work is handled
by investment banks. An investment bank also assist companies in mergers and
acquisitions, and provide ancillary services such as market making, trading of
derivatives, fi"ed income instruments, foreign e"change, commodities, and
equity securities.
7he following is the list of ma9or indian investment banks based out of ndia.
• Aven+7s
Avendus is an investment bank based in ndia with offices in >umbai and
+angalore. 7he firm was founded in $%%% by three investment bankers 1anu
6ohra, 'aurav /eepak and Jaushal Jumar, who had worked for large global
financial institutions and wanted to offer knowledge and research oriented
capital raising and >:A solutions to international firms with a strong ndia
connection.
0ebsite urlN http,--www.a/endus.com
• B!G!G C!*it!-
+a9a9 !apital@s nvestment +anking )ervice is a step ahead in that direction.
+a9a9 !apital offers you unparalleled capital raising solutions for your
business. 0ith over $34 offices in C4 cities all over the country and a network
of over $4,444 Advisor Associates, we can connect you to potential investors
all over the country.
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• B!89-!?s In+i!
+arclays unveiled its 'lobal 1etail and !ommercial +anking division in ndia
over the past year as part of its plan to be a leading global bank. n a very short
time, +arclays is already making waves in one of the world@s fastest growing
countries.
web site urlN httpNLLwww.barclays.in
• C
-!m!n+!-!m Investment B Fin!n9e C)m*!n?!holamandalam nvestment : Finance !ompany *imited is the financial
services arm of the #)/ ..4 million >urugappa 'roup. ncorporated in $%?.,
it is one of the leading Financial )ervices !ompany in the country. 7he
products and services include vehicle finance, capital market finance, mutual
funds, securities broking, depository services, and insurance and distribution
services. web site urlN httpNLLwww.cholamandalam.comL
• ICICI Se978ities Lt+
A subsidiary of !! +ank ( the largest and most recogni-ed private bank in
ndia !! )ecurities *td is premier ndian nvestment +ank, with a dominant
position in its core segments of its operations ( !orporate Finance including
;quity !apital >arkets Advisory )ervices, nstitutional ;quities, 1etail and
Financial 2roduct /istribution.
0ebsite urlN httpNLLwww.icicisecurities.comL
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• ICRA Limite+
!1A *imited (an Associate of >oody@s nvestors )ervice) was incorporated
in$%%$ as an independent and professional company. !1A is a leading
provider of investment information and credit rating services in ndia. !1A@s
ma9or shareholders include >oody@s nvestors )ervice and leading ndian
financial institutions and banks.V
0ebsite urlN httpNLLwww.icra.in
• IDFC
/F!@s mission is to be the financier and advisor of choice for infrastructure in
ndia. /F! is positioned as a special financial institution which is focused on
pro9ect finance and investment banking activities in infrastructure. 'oing
forward, /F! will focus on establishing stable fee revenues from innovative
infrastructure initiatives in financial markets, asset management, pro9ect
development and advisory along with growing its balance sheet at a significant
pace. 0ebsite urlN httpNLLwww.idfc.comL
• IDFC P8iv!te E:7it?.
/F! 2rivate ;quity (/F! 2
was set up in 3443 as a $44B subsidiary of thenfrastructure /evelopment Finance !ompany (/F!). /F! 2; manages two
funds with a current corpus of ergers : Acquisitions, Advisory )ervices and
Fi"ed ncome )ecurities and 2rincipal +usiness.
web site urlN httpNLLwww.kmcc.co.inL
• In+7st8i!- Fin!n9e C)8*)8!ti)n )> In+i! #IFCI$
F!, the first /evelopment Finance nstitution in ndia, was set up in $%A., as
a )tatutory !orporation, to pioneer institutional credit to medium and large
industries F! was also the first institution in the financial sector to be
converted into a 2ublic *imited !ompany. F!@s record of performance has
broadly run parallel to the course of industrial and economic development of
the nation. F!@s principal operations include ( 2ro9ect financing, Financial
services : !omprehensive corporate advisory services web site urlN
httpNLLwww.ifciltd.comL
• K)t!" Investin' B!n"in'
Jotak >ahindra !apital !ompany (J>!!) helps leading ndian corporations,
banks, financial institutions and government companies access domestic and
international capital markets. J>!! has the most current understanding of
investor appetite, having been the leading book runnerLlead manager in public
equity offerings in the period FT 344354H.web site urlN httpNLLwww.kmcc.co.in
• SBI C!*it!- M!8"ets
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)+ !apital >arkets *td. is amongst the oldest players in the ndian !apital
>arket, offering an entire range of nvestment +anking )ervices. 0ith strong
fund mobili-ation strengths, we are one of the leading players in the areas of
fund raising through !apital >arket ssues L 2rivate 2lacement.
web site urlN httpNLLwww.sbicaps.comL
• Yes B!n"
Tes +ank@s nvestment +anking group is involved in the identification,
structuring and e"ecution of transactions for our clients in diverse industries
and geographies. )ome of the typical transactions include mergers :
acquisitions, divestitures, private equity syndication and 2, advisory.
• S.E Investments Limite+
);*@s philosophy on corporate governance envisages commitment to ensure
customer satisfaction through better services. 7he company is committed to
good corporate governance : continuously reviews various relationship
measures with a view to enhance shareholder@s value. );*provides detailed
information on various issues concerning the company@s business and financial
performance. );* respects the rights of its share holders to information on
performance of the company and believes that the best corporate governance
promotes transparency and helps mitigate the risks associated with the
business. web site urlN httpNLLwww.seil.in
• SSKI G8)7*
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))J is a leading ndia5based financial services group that offers nstitutional
;quities and nvestment +anking services. ))J nvestment +anking is a full5
service investment bank with a strong research bias. ,ur team members bring
deep domain knowledge, spanning a number of sectors, that we are able to
leverage to meet the varied corporate finance needs of our clients. 0e provide
a full range of services, from private placements of equity and debt, public
offerings, pro9ect advisory to mergers and acquisitions.
web site urlN httpNLLwww.sski.co.inL
• Sm!-- In+7st8ies Deve-)*ment B!n" )> In+i!
)mall ndustries /evelopment +ank of ndia ()/+) was established in April
$%%4 under an Act of ndian 2arliament. )/+ has completed $3 years of
service to the small scale sector. !onsequent upon, amendment in the )/+
Act, the +ank has been delinked from )/+ with effect from >arch 3?, 3444.
7he )/+ (Amendment) Act, 3444 has changed the provisions relating to
capital structure, share holding pattern, management, business, borrowings, etc.
7he amended Act provides for divesting of C$B of the equity share capital of
1s.A.C billion )ubscribed and held by /+ in favour of *ife nsurance
!orporation of ndia, 'eneral nsurance !orporation of ndia, 2ublic )ector
+anks and other nstitutions owned or controlled by the 'overnment of ndia.
web site urlN httpNLLwww.sidbi.comL
• UTI Se978ities Lt+
#7 )ecurities *td., was promoted as an independant professional entity in
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=une $%%A. 0ith the repealing of #nit 7rust of ndia (#7) Act, the entire share
capital of #7);* is now held by Administrator of specified undertaking of
#nit 7rust of ndia since $st February 344&. #7);* has been providing all
kinds of nvestment related activities which include investment banking and
corporate advisory services.
web site urlN httpNLLwww.usectrade.comL
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CHAPTER 1%
ROLECCHALLANGES OF INVESTMENT BANKING
COMPANISE IN INDIA
nvestment banking companies generally help their client@s to access capital
through equity, debt, and others kinds of investment products. 7hese firm also
trade in equity and derivative products and also help companies with merger
and acquisition deals.
About a couples of years back, when a world economy was reeling under a
recession, many investment banking either collapsed or were on the brink of
closure. ;ven a few firms in ndia were affected by this global downturn. 7his
led to many skeptices writing off the revival of those firms.
CHALLENGES
nvestment banking is one of the most global industries and is hence
continuously challenged to respond to new developments and innovation in the
global financial markets. 7hroughout the history of investment banking, it is
only known that may have theori-ed that all investment banking product and
services would be commoditi-ed.