DEFINITION OF “INVESTMENT BANK”

A financial intermediary that performs a variety of services. This

includes underwriting, acting as an intermediary between an issuer

of securities and the investing public, facilitating mergers and

other corporate reorganizations, and also acting as a broker for

institutional clients.

1

MEANING OF INVESTMENT BANK

an investment banker is a banker who will sell and negotiate the

terms of an investment on behalf of a client. The main function of

an investment banker is to take the responsibilities of the action of

selling and investing away from the client and into more

knowledgeable hands. The importance and value of an investment

banker is that they are responsible for making important sales and

investments based on their knowledge. 

it is not the financial investment in the banking sector. But in fact ,

investment is a kind of banking function which is used to help

clients in creating wealth and funds. The commercial banks use

this type of banking in accord with sensible and practical use of

the available resources . Not only this, investment banking and

people engaged in this sector also provides advice on how to

transact in business they are currently in.

Though investment banking , companies can create fund in two

ways . They can either draw on public funds from capital market

by releasing the stock i.e. corporate finance they can go to venture

capitalist or private equities to become shareholders in their

company . The field of investment banking is also engaged in

giving advice and consultation to how manage various takeover

and merging . The handling of mergers and acquisition come

under the corporate finance function of the investment banking .

The margin between investment banking and other forms of

banking has been very unclear for a long period of time now and

for the same time , the function of this banking sector has grown

to covering every field of wealth management .

2

THE IMPORTANCE OF INVESTMENT

BANKS

Investment banks exist to help large-scale corporations and

governments get money. They help these clients invest in financial

products that they buy, sell, or create and, hopefully, make a

return on the money they invested in the financial vehicles

suggested by investment banks. Many investment banks also give

loans to their clients, which is one of the leading factors that

influence the lives of individuals not directly associated with such

a firm. In the late 1990s to mid-2000s the now infamous housing

and credit bubbles were stewing, and the American economic

system was undergoing the process of financialization—the

depreciation in value of all exchanges—contributing to the

fragility of the overall economy. Simultaneously the size of

investment banks and other financial entities were rapidly

expanding, until in 2008 experts estimated they were roughly the

same size as traditional commercial and retail banks. During that

time, several commercial and retail banks were writing mortgages

to individuals who would later default; many of those banks

received the funds they were using to make those toxic loans was

borrowed from investment banks. Between 2007 and 2008 there

was a run on these financial entities; investors stopped placing

money with the investment banks and began to withdraw their

funds from them because they were worried about the solvency of

such institutions. More importantly to the overall picture, during

3

this time investment banks were borrowing a number of short-

term liquid investment products to finance the purchase of long-

term, illiquid, or otherwise risky assets. Because of the

problematic credit market, what resulted were waves of rapid

deleveraging, or the selling of those long-term assets at a

significantly reduced price. The turmoil between this rapid is

deleveraging and the run on the investment banking industry in

concert with the housing and credit bubbles helped create the

perfect conditions for the financial meltdown that began in 2007.

In a speech to The Economic Club of New York on June 9, 2008,

then New York Federal Reserve Bank president and CEO

Timothy Geithner explained the condition as such:

In early 2007, asset-backed commercial paper conduits, in

structured investment vehicles, in auction-rate preferred securities,

tender option bonds and variable rate demand notes, had a

combined asset size of roughly $2.2 trillion. Assets financed

overnight in tri party repo grew to $2.5 trillion. Assets held in

hedge funds grew to roughly $1.8 trillion. The combined balance

sheets of the then five major investment banks totalled $4 trillion.

In comparison, the total assets of the top five bank holding

companies in the United States at that point were just over $6

trillion, and total assets of the entire banking system were about

$10 trillion. The combined effect of these factors was a financial

system vulnerable to self-reinforcing asset price and credit cycles.

Renowned economist Paul Krugman believes that the run on the

investment banking system is the core cause of the 2007 financial

collapse:

4

As the shadow banking system expanded to rival or even surpass

conventional banking in importance, politicians and government

officials should have realized that they were re-creating the kind

of financial vulnerability that made the Great Depression possible

—and they should have responded by extending regulations and

the financial safety net to cover these new institutions. Influential

figures should have proclaimed a simple rule: anything that does

what a bank does, anything that has to be rescued in crises the way

banks are, should be regulated like a bank.

The role of investment banks in the American economic system is

important. The United States is seeing and feeling the impact that

problems in the investment banking industry can have on the

everyday lives of its people, proving that such a financial entity

can touch the lives of individuals who may not even directly

interact with it. Nothing happens or is contained in a vacuum, and

investment banking is certainly no exception.

FUNCTIONS OF INVESTMENT   BANKER

5

Investment bankers provide service and advice to companies,

organizations and governments. Investment bankers also assist

and advise companies on mergers and acquisitions, which

basically means that they act as the buyer or seller (whatever

position the company is taking) and negotiate the transaction. In

other instances they just provide a strategy for action against an

unwelcome bid. Investment bankers provide a wide array of

services, including underwriting the issuance of equity or debt to

aid a company having financial difficulties. It is the duty of the

investment banker to provide advice on issues such as how to raise

capital through equity or debt instruments.

 An investment banker's main goal is to help clients achieve their

goals. Investment bankers will assist their clients with the

implementation of their chosen plan, including but not limited to

buyouts. Investment bankers also must take charge of their own

client load. Investment bankers must identify and secure their own

clientele, so they literally have total control of how much or how

little work they have.

 When corporation sells new securities to raise funds, the offering

is called a primary issue. The agent responsible for finding buyers

for these securities is called the investment banker. The

investment banker purchase primary issue from corporation and

arranges immediate resell of these securities to the investors.

Merrill Lynch & Co., Goldman Sachs are some examples of well-

known investment banking firms. Broadly investment bankers

(investment banking firms) perform three functions: Investigation,

Analysis and Research (Origination), Underwriting (Public Cash

offerings) and Distribution. Most of time a single investor banker

6

performs all functions, however some investment bankers are

specialized in certain functional areas only.

INVESTIGATION, ANALYSIS AND RESEARCH:

Origination includes the subsidiary operations of discovery,

investigation, and negotiation. Discovery is the finding of a

prospective issue of securities; investigation is the testing of the

investment credit of the prospective security issuer, and the

intrinsic soundness of the issue; negotiation is the determination of

the amount, the price, and the terms of the proposed issue.

Investigation usually involves an analysis of the financial history

of the corporation by accountants, investigation of legal factors, a

survey of its physical property by engineers, and in-depth review

of operations. The purpose of investigation and analysis is to

determine whether a proposed issue has sufficient merit to be

offered to investment community. In other words, function of

investment banking is careful analysis of the soundness and

reliability of the corporation whose securities are seeking the

investment market. The task of investigation and analysing the

numerous factors, which govern the value of investment

securities, varies considerably with the different types of issuing

bodies.

 

UNDERWRITING (PUBLIC CASH OFFERINGS):

7

When a corporation wishes to issue new securities and sell them to

the public, it makes an arrangement with an investment banker

whereby the investment banker agrees to purchase the entire issue

at a set price, known as underwriting. Underwriting also refers to

the guarantee by the investment banker that the issuer will receive

a certain minimum amount of cash for their new securities. The

investment banker buys a new security issue, pays the issuer, and

markets the securities. The underwriter’s compensation is the

difference between the price at which the securities sold to the

public, and the price paid to the company for the securities.

Underwriting can be done either through negotiations between

underwriter and the issuing company (called negotiated

underwriting) or by competitive bidding. A negotiated

underwriting is a negotiated agreed arrangement between the

issuing firm and its investment banker. Most large corporations

work with investment bankers with whom they have long-term

relationship. In competitive bidding, the firm awards offering to

investment banker that bid the highest price.

 

In certain cases, for large or risky issues a number of investment

bankers get together as a group, they are referred to as syndicate.

A syndicate is a temporary association of investment bankers

brought together for the purpose of selling new securities. One

investment banker is selected to manage the syndicate called the

originating house, which does underwriting of the major amount

of the issue. There are two types of underwriting syndicates,

divided and undivided. In a divided syndicate, each member group

has liability of selling a portion of offerings assigned to them.

However, in undivided syndicate, each member group is liable for

8

unsold securities up to the amount of its percentage participation

irrespective of the number of securities that group has sold.

DISTRIBUTION :

Another function of investment banker it to market the security

issues. The investment banker acts as a specialist to distribute

securities efficiently for the corporation. It can be very expensive

and ineffective for a corporation to sell an issue by establishing

marking and selling organization by its own. Investment banker

has established marketing and sales network to distribute

securities. For a reputed invest banker, with its past history of

selecting good companies and pricing securities builds a broad

client base over time, and further increases the efficiency with

which securities can be sold.

 

            Invest banker offers security to both corporation issuing

securities and investors buying securities. For corporations

investment banker offers definite price guaranty on a certain date

for securities to offer. The corporation runs no risk of the

uncertainties of the market and do not have to spend on resources

with which it is not equipped with.

To the investor, the responsible investment banker offers

protection against unsafe securities. The offering of a few unsound

issues can caused serious loss to its reputation, and hence loss of

business. Therefore, investment banker play very important role in

issuing new security offerings.

9

THE ROLE OF INVESTMENT BANKERS IN

MERGERS AND   ACQUISITIONS

Amid the turmoil of the 2008 credit crisis, the traditional model of

the mega independent investment bank as a highly leveraged,

largely unregulated, innovative securities underwriter and M&A

advisor foundered. Lehman Brothers was liquidated and Bear

Stearns and Merrill Lynch were acquired by commercial banks

J.P. Morgan Chase and Bank of America, respectively. In an effort

to attract retail deposits and borrow from the U.S. Federal Reserve

System (the “Fed”), Goldman Sachs and Morgan Stanley

converted to commercial bank holding companies subject to Fed

regulation.

While the financial markets continue to require investment

banking services, they will be provided increasingly through

“universal banks” (e.g., Bank of America/Merrill Lynch and

Citibank/Smith Barney), which provide the customary commercial

banking as well as investment banking services. In addition to

those already mentioned, traditional investment banking activities

also include providing strategic and tactical advice and acquisition

opportunities; screening potential buyers and sellers; making

initial contact with a seller or buyer; and providing negotiation

support, valuation, and deal structuring guidance. Along with

these investment banking functions, the large firms usually

maintain substantial broker-dealer operations serving wholesale

and retail clients in brokerage and advisory capacities. While the

era of the thriving independent investment banking behemoth may

be over, the role of investment banking boutiques providing

specialized expertise is likely to continue to thrive.

10

Investment bankers derive significant income from writing so-

called fairness opinion letters. A fairness opinion letter is a

written and signed third-party assertion certifying the

appropriateness of the price of a proposed deal involving a tender

offer, merger, asset sale, or leveraged buyout. It discusses the

price and terms of the deal in the context of comparable

transactions. A typical fairness opinion provides a range of “fair”

prices, with the presumption that the actual deal price should fall

within that range. Although such opinions are intended to inform

investors, they often are developed as legal protection for

members of the boards of directors against possible shareholder

challenges of their decisions.

The size of an investment banking advisory fee is often contingent

on the completion of the deal and may run about 1–2 present of

the value of the transaction. Such fees generally vary with the size

of the transaction. The size of the fee paid may exceed 1–2

present, if the advisors achieve certain incentive goals. Fairness

opinion fees often amount to about one fourth of the total advisory

fee paid on a transaction (Sweeney, 1999). Although the size of

the fee may vary with the size of the transaction, the fairness

opinion fee usually is paid whether or not the deal is

consummated. Problems associated with fairness opinions include

the potential conflicts of interest with investment banks that

generate large fees. In many cases, the investment bank that

brought the deal to a potential acquirer is the same one that writes

the fairness opinion. Moreover, they are often out of date by the

time shareholders vote on the deal, they do not address whether

the firm could have gotten a better deal, and the overly broad

range of value given in such letters reduces their relevance. Courts

11

agree that, because the opinions are written for boards of directors,

the investment bankers have no obligation to the shareholders

(Henry, 2003).

THE INVESTMENT BANKER’S ROLE IN IPO

The investment banker should prove his competence to his clients

and show his areas of core competency to attract clients.

Moreover, he must do so while adhering to the strict regulatory

framework put down by SEBI. The Companies Act , the

government and other regulatory bodies. Therefore , the only way

for him to strive to stay in the competition and be among the best

is neither through great innovations or entrancing creativity , but

rather through just being excellent at his job .

12

The investment banker plays a vital role in channelling the

financial surplus of the society into productive investment avenues

. The investment banker has a fiduciary role in relation to the

investors . He has to ensure the adequacy and appropriateness of

the disclosure made in the offer document .

The investment banker is the leader among all the intermediaries

associated with the issue . He is required to guide and co-ordinate

the activities of the registrar to the issue, banker to issue

advertising agency , printers ,underwriters , brokers , etc.

The investment bankers has to ensure the compliance of all the

law and regulation governing the securities market. He may also

be upon to assist the statutory authorities in developing a

regulatory framework for the orderly growth of capital markets

13

GENERAL OBLIGATIONS AND

RESPONSIBILITIES

The investment banker must abide by the code of conduct as

specified by SEBI .

An investors banker should not carry on any business other than

that in the securities markets. An exception to this rule is a bank or

a public financial institution that has been granted a certificate of

registration under these regulations .

Every investment bankers must maintain his own books of

account, record and documents. This includes the balance sheet,

profit and loss accounts, copy of auditors to SEBI. This must be

done so that SEBI can monitor the capital adequacy of the

investment banker.

All issue can be managed by at least one investment banker

function as the lead investment banker.

Every lead investment banker must enter into agreement with his

client company and other investment bankers setting out their

mutual rights, liabilities and obligations relating to such issue and

in particular to disclosure, allotment and refund, before taking up

the assignment relating to an issue .

Where there are more than one lead investment banker to the

issue, the responsibilities of each such investment banker must

clearly demarcated and a statement furnished to SEBI .

A lead investment banker cannot manage the issue of any

associated body corporate

14

A lead investment banker cannot associate with any other

investment banker without registration under SEBI.

The investment banker, who is responsible for verification

of the contents of the prospectus in respect of an issue and the

reasonableness of the views expressed therein, must submit to

SEBI at least two weeks prior to the opening of the issue for

subscription, a due diligence certificate.

The lead investment banker must submit the particular of

the issue, the draft prospectus and any other literature intended to

be circulated among the shareholders.

The lead manager undertaking the responsibility for refunds

or allotment of securities in respect of any issue must continue to

be associated with the issue till the subscribers have received the

share certificate or refund of excess application money.

The above obligations and responsibilities may be

considered as constraints in mind, the investment banker’s

15

16

THE INVESTMENT BANKS: THE LONG-TERM

BENEFITS

They're traditionally one of the most lucrative units of a major

financial firm, fierce competitors for the ample fees buyout shops

toss off. These elite financial sponsors groups generated at least

$7.68 billion in global investment banking fees through M&A

advisory, equity capital markets work and debt financing in the

first half of 2011 alone, accounting for 19% of all the investment

banking fees over that time, according to Dialogic. This

constitutes a major rebound from a decade low in the first six

months of 2009 and nearly equals the first half of 2006, the

second-highest such period on record.

As Matthew Stopnik, the U.S. head of financial sponsors for UBS,

says, "It's a loyal client base, and it's a great driver of

opportunities across the platform, all different products, all

different sectors."

The Deal magazine recently spent several months interviewing

financial sponsors group heads to assess how their teams had

reconstituted themselves after the financial crisis. In this

relationship-driven world, major firms place a premium on

continuity and ensuring that they have bankers with big Rolodexes

and reputations in charge of these groups. The least senior

managing director on Credit Suisse Group's financial sponsors

team has been with the firm 13 years, for instance.

While the independent brands of three major firms were

swallowed up in the turmoil of 2008, many teams and major talent

survived intact. For example, J.P. Morgan Chase & Co. picked

17

up its current co-head of financial sponsors, Larry Alletto, and

several other members of the group from the old Bear Stearns

Cos. Bank of America Corp. immediately shot up to the No. 1

ranking for fees in its sponsors business when it acquired Merrill

Lynch & Co. And most strikingly, Barclays Capital, the

investment banking division of Barclays plc, got nearly its entire

sponsors team by absorbing the investment banking unit

of Lehman Brothers Holdings Inc. after the firm's failure. Some

of the Barclays team, including John Miller, head of global

financial sponsors at the firm, not only come from Lehman but

have been together since business school in the '90s.

These relatively small teams at the biggest banks hoard some of

the most profitable deals around. J.P. Morgan, BofA

and Goldman, Sachs & Co. ranked as the top three in FSG fees in

the first half of the year, according to Freeman Consulting

Services and Thomson Reuters. They collectively take in 30% of

all fees paid by sponsors. "J.P. Morgan is still the 800-pound

gorilla in the room," says one banker.

One of the most striking developments in the world of FSGs is the

recent attention given to the middle market -- even at firms that

used to harvest mega buy outs. Morgan Stanley, for instance,

hired Joe Purcell out of J.P. Morgan last year to head up its

middle-market effort. The average value of deals done by the top

10 firms dropped from $4.2 billion in 2006 to $597 million in

2008 before rebounding to $962 million in 2011 through June,

according to Preqin Ltd.

18

"What's missing is the very, very large consortium leveraged

buyouts, but the mix of buyouts remains," says J.P. Morgan's

Alletto.

Midmarket-oriented teams are raising their profiles. In August

Jorge Mora, in the sponsors group at UBS through 2008, accepted

a position as head of the U.S. sponsors group at Macquarie

Capital, which has made an aggressive push into private equity

advisory. Shortly after Mora's move, London-based managing

director James Seagrave defected from J.P. Morgan and David

Luse left Bank of America Merrill Lynch to join as managing

directors with the sponsors group at Jefferies & Co., which has

doubled the size of its PE team over the past two years. Just last

year, Lehman veteran Les Gorman joined as co-head of the

expanding financial sponsors group at BMO Capital

Markets; Lazard hired Fotis Hasiotis from BAML to co-head its

European team advising PE firms; and Mark Epley left his post as

global head of financial sponsors at Deutsche Bank AG, where he

had worked for nine years, to head up Nomura Holdings Inc.'s

FSG.

Despite their ubiquity, there are surprisingly few places where

sponsor heads received their training: Most notably, nearly a

dozen managing directors or sponsor heads stem from either

investment bank Donaldson, Lufkin & Jenrette, acquired by Credit

Suisse in August 2000, or its junk bond-pioneering predecessor,

Drexel Burnham Lambert, which, after its demise in 1990,

provided DLJ with much of its talent.

19

Alletto and Adam Sokoloff, head of Jefferies' financial sponsor

group, worked at Drexel together. Stopnik's predecessor at UBS

was Steve Smith, another Drexel alum who now runs UBS'

restructuring department. Macquarie's Mora hails from DLJ, as

does Moelis & Co. founder Ken Moelis (he started out at Drexel)

and others in his sponsors group, which managed to grab 9.6% of

the market share for advisory roles in PE-backed deals through

August, according to Dealogic. Then there's Credit Suisse, whose

team absorbed the DLJ DNA after the 2000 acquisition.

"At both First Boston and DLJ, the goal was to train people to be

well-rounded bankers. That philosophy continues today at Credit

Suisse," says Malcolm Price, Credit Suisse's current head of

financial sponsors in North America. Brian Van Elslander, the

head of FSG at Wells Fargo Securities LLC, came out of Credit

Suisse in 2006.

When asked why being part of these teams made for such long

careers, veteran PE bankers uniformly saw the resiliency of PE in

tough times as vindication of the business model. "The

combination of long-term or sticky money, patient capital

structures and sound operational practices allowed [PE firms] to

successfully manage through the crisis," says Citigroup Inc.'s

head of the alternative investments group, Brad Coleman.

Considering the tectonic shifts in the financial world over the past

decade -- not to say in recent months -- that may be what they'll

have to do again.

20

THE RISE OF THE MODERN

INVESTMENT BANK

Perhaps no other organization inspires as much awe, intrigue,

controversy and curiosity as the global investment

bank. Investment banks have a storied history and today, they sit

astride the fast-paced flow of global trade and capital. 

This article will provide a brief historical overview of investment

banks, describe the different roles they play in the origination and

distribution of securities, and examine the conflicts of interest that

arise when these functions take place under one corporate roof.

FROM CLIPPER SHIPS TO KKR  

Adam Smith famously described capitalism as an invisible

hand guiding the market in its allocation of goods and services.

The financial engines of this hand during the 18th and 19th

centuries were European merchant banks, such as Hope & Co.,

Baring Brothers and Morgan Grenfell. For a time, the

Netherlands, and later Great Britain, ruled the waves of global

commerce in far-flung ports of call such as India and Hong Kong.

The merchant banking model then crossed the Atlantic and served

as the inspiration for the financial firms founded by prominent

families in what could perhaps be called the emerging market of

the day - the United States. The structure and activities of early

U.S. firms such as JP Morgan & Co. and Dillon Read and Drexel

& Co. reflected those of their European counterparts and included

financing new business opportunities through raising and

deploying investment capital.

21

Over time, two somewhat distinct models arose from this. The old

merchant banking model was largely a private affair conducted

among the privileged denizens of the clubby world of old

European wealth. The merchant bank typically put up sizable

amounts of its own (family-owned) capital along with that of other

private interests that came into the deals as limited-

liability partners. Over the 19th century, a new model came into

popular use, particularly in the United States. Firms seeking to

raise capital would issue securities to third-party investors, who

would then have the ability to trade these securities in the

organized securities exchanges of major financial center’s such as

London and New York. The role of the financial firm was that

of underwriter - representing the issuer to the investing public,

obtaining interest from investors and facilitating the details of the

issuance. Firms engaged in this business became known as

investment banks.

Firms like JP Morgan didn't limit themselves to investment

banking, but established themselves in a variety of other financial

businesses including lending and deposit taking (i.e. commercial

banking). The stock market crash of 1929 and ensuing Great

Depression caused the U.S. government to reach the conclusion

that financial markets needed to be more closely regulated in order

to protect the financial interests of average Americans. This

resulted in the separation of investment banking from commercial

banking (the Glass-Steagall Act of 1933). The firms on the

investment banking side of this separation - such as Morgan

Stanley, Goldman Sachs, Lehman Brothers and First Boston -

went on to take a prominent role in the underwriting of corporate

America during the post war period; the largest gained fame as the

22

so-called "bulge bracket".

The term "merchant bank" came back into vogue in the late 1970s

with the nascent private equity business of firms like Kohlberg,

Kravis & Roberts (KKR). Merchant banking in its modern context

refers to using one's own equity (often accompanied by external

debt financing) in a private transaction, as opposed to

underwriting a share issue via publicly traded securities on an

exchange - the classic function of an investment bank. Many of

the large global firms today conduct both merchant banking

(private equity) and investment banking.

THE REGULATORY INFRASTRUCTURE

In the United States, investment banks operate according to

legislation enacted at the time of Glass-Steagall. The Securities

Act of 1933 became a blueprint for how investment banks

underwrite securities in the public markets. The act established the

practices of due diligence, issuing a preliminary and final

prospectus, and pricing and syndicating a new issue. The

1934 Securities Exchange Act addressed securities exchanges and

broker-dealer organizations. The 1940 Investment Company

Act and 1940 Investment Advisors Act established regulations for

fiduciaries, such as mutual funds, private money managers and

registered investment advisors. In Wall Street parlance, the

investment banks represent the "sell side" (as they are mainly in

the business of selling securities to investors), while mutual funds,

advisors and others make up the "buy side".

 

23

ANATOMY OF AN OFFERING

A company selects an investment bank to be lead manager of a

securities offering; responsibilities include leading the due

diligence and drafting the prospectus. The lead manager forms a

team of third-party specialists, including legal counsel, accounting

and tax specialists, financial printers and others. 

In addition, the lead manager invites other banks into an

underwriting syndicate as co-managers. The lead and co-managers

will allot portions of the shares to be offered among themselves.

Because their underwriting fees derive from how much of the

issue they sell, the competition for lead manager and senior

allotment positions is quite intense. 

When a company issues publicly traded securities for the first time

through an initial public offering (IPO), the lead manager appoints

a research analyst to write a research report and begin on going

coverage of the company. The report will contain an economic

analysis of the business and its prospects given the market for its

products and services, competition and other factors. Once the

analyst initiates coverage, he or she will make on going

recommendations to the bank's clients to buy, hold or sell shares

based on the perceived fair value relative to current share price.

Distribution begins with the book-building process. The

underwriting syndicate builds a book of interest during the

offering period, usually accompanied by a road show, in which the

issuer's senior management and syndicate team members meet

with potential investors (mostly institutional investors such as

24

pension funds, endowments and insurance companies). Potential

investors receive a red herring, a preliminary prospectus that

contains all materially significant information about the issuer but

omits the final issuing price and number of shares. 

At the end of the road show, the lead manager sets the final

offering price based on the prevailing demand. Underwriters seek

to have the offering oversubscribed (create more demand than

available shares). If they succeed, they will exercise a 15%

overallotment option, called a green shoe, which is named after

the Green Shoe Company, the first issuer of such an option. This

permits the underwriters to increase the number of new shares

issued by up to 15% (from the number stated in the prospectus)

without going through any additional registration. 

The new issue market is called the primary market. The Securities

and Exchange Commission (SEC) registers the securities prior to

their primary issuance, then they start trading in the secondary

market on the New York Stock Exchange, Nasdaq or other venue

where the securities have been accepted for listing and trading.

WALL STREET'S CHINESE WALL

Investment banking is fraught with potential conflicts of interest.

This problem has intensified through the consolidation that has

swept through the financial services industry, to the point where a

handful of large concerns - the fabled bulge bracket banks -

account for a disproportionate share of business on both the buy

and sell side. 

25

The potential conflict arising from this is simple to understand.

Buy-side agents - investment advisors and money managers - have

a fiduciary obligation to act solely in the best interests of their

investing clients, without regard for their own economic

incentives to recommend one product or strategy versus another.

Investment bankers on the sell side seek to maximize the results to

their clients, the issuers. When a firm in which the main line of

business is sell side, investment banking acquires a buy-side asset

manager, and these incentives can be at odds. 

Unfortunately for investors, the economics of the business are

such that a disproportionate amount of an investment bank's

profits derive from its underwriting and trading businesses. The

competition for mandates is intense, and the pressure is high on all

participants - the bankers, research analysts, traders and

salespeople - to deliver results. 

One example in particular is research. The research analyst is

supposed to reach independent conclusions irrespective of the

investment bankers' interests. Regulations mandate that banks

enforce a separation between research and banking, popularly

referred to as a Chinese Wall. In reality, however, many firms

have tied research analysts' compensation to investment banking

profitability. Scrutiny following the collapse of the dotcom bubble

in 2000 has led to some attempts to reform some of these flawed

practices.

26

WHAT ABOUT COMPENSATION?

A discussion on investment banking wouldn't be complete without

addressing the enormous sums of money that investment bankers

are paid. Essentially, a bank's main income-producing assets walk

out of the office building every evening. Deals are completed and

money is made based solely on the relationships, experience and

clever thinking of the professionals who work there. 

As such, an investment bank has little to do with the profits it

earns except to pay the folks who produced them. It is not unusual

for 50% or more of top-line revenues to go into the salaries and

bonuses for an investment bank's employees. Most of this goes to

the principal architects of the deals, but is also goes to the

associates and analysts who toil over discounted cash flow spread

sheets and comparable models until the early hours of every

morning. 

The catch is that most of this compensation is paid as bonuses.

Fixed salaries are by no means modest, but the big seven-figure

payoffs come through bonus distributions. The risk for an

investment banker is that such pay outs can quickly vanish if

market conditions turn down or the firm has a bad year.

Investment bankers spend an inordinate amount of time trying to

figure out new ways to make money - in good times and bad.

Business areas like M&A, restructuring, private equity

and structured finance, most of which were not part of an

investment bank's repertoire prior to the mid to late 1970s, provide

27

evidence of this profession's ability to continually find new ways

to make money.

THE BOTTOM LINE

For all the mystery surrounding investment banks, the role they

have played throughout the evolution of modern capitalism is

fairly straightforward. These institutions provide the financial

means to enable Adam Smith's invisible hand to function. 

Investment banks have flourished in a variety of economies, from

the merchant traders of 18th-century London and Amsterdam to

the behemoths of today, whose influence spans the globe. As long

as there is a market economy, there are likely to be investment

bankers coming up with new ways to make money, while the rest

of us marvel at how they manage to do it.

28

SIZE OF INDUSTRY

Global investment banking revenue increased for the fifth year

running in 2007, to a record US$84.3 billion,[4] which was up 22%

on the previous year and more than double the level in 2003.

Subsequent to their exposure to United States sub-prime securities

investments, many investment banks have experienced losses

since this time.

The United States was the primary source of investment banking

income in 2007, with 53% of the total, a proportion which has

fallen somewhat during the past decade. Europe (with Middle East

and Africa) generated 32% of the total, slightly up on its 30%

share a decade ago Asian countries generated the remaining 15%.

Over the past decade, fee income from the US increased by

80%. This compares with a 217% increase in Europe and 250%

increase in Asia during this period. The industry is heavily

concentrated in a small number of major financial centres,

including City of London, New York City, Hong

Kong and Tokyo.

Investment 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. New products with

higher margins are constantly invented and manufactured by

bankers in the hope of winning over clients and developing

trading know-how in new markets. However, since these can

usually not be patented or copyrighted, they are very often copied

quickly by competing banks, pushing down trading margins.

29

For example, trading bonds and equities for customers is now a

commodity business, but structuring and

trading derivatives retains higher margins in good times—and the

risk of large losses in difficult market conditions, such as

the credit crunch that began in 2007. Each over-the-

counter contract has to be uniquely structured and could involve

complex pay-off and risk profiles. Listed option contracts are

traded through major exchanges, such as the CBOE, and are

almost as commoditized as general equity securities.

In addition, while many products have been commoditized, an

increasing amount of profit within investment banks has come

from proprietary trading, where size creates a positive network

benefit (since the more trades an investment bank does, the more

it knows about the market flow, allowing it to theoretically make

better trades and pass on better guidance to clients).

The fastest growing segment of the investment banking industry

are private investments into public companies (PIPEs, otherwise

known as Regulation D or Regulation S). Such transactions are

privately negotiated between companies and accredited investors.

These PIPE transactions are non-rule 144A transactions.

Large bulge bracket brokerage firms and smaller boutique firms

compete in this sector. Special purpose acquisition companies

(SPACs) or blank check corporations have been created from this

industry.

30

The ten largest global investment banks as of December 31, 2010,

are as follows:

Rank Company Fees ($m)

1. J.P. Morgan $5,533.85

2. Bank of America Merrill Lynch $4,581.59

3. Goldman Sachs $4,386.52

4. Morgan Stanley $4,055.48

5. Credit Suisse $3,379.12

6. Deutsche Bank $3,286.80

7. Citi $3,238.67

8. Barclays $2,864.44

9. UBS $2,614.44

10. BNP Paribas $1,433.89

31

EVOLUTION OF INVESTMENT BANKER IN

INDIA

The evolution can be traced back to the 19th century when

European merchant bank setting up their agencies houses to assist

the new projects. In the early 20th century, large business houses

followed suit by establishing managing agencies which acted as

issue house for securities for new project and also provide finance

to greenfield ventures. The 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 merchant banking services, but theirs was limited due to

small capital base.

In 1967, ANZ Grind lays bank set up a separate merchant banking

division to handle new capital issue. It was soon followed by

Citibank which started rendering these services. The foreign banks

monopolized merchant banking services in the country. The

banking committee, in its report in 1972, took note of this with

concern and recommended setting up merchant banking institution

by commercial bank and financial institution. State bank of India

ventured into this business by starting a merchant banking bureau

in 1972. In 1972, ICICI became the first financial institution to

offer merchant banking services. JM finance was set up by Mr .

Nimesh Kampani as an exclusive merchant bank 1973. The

growth of this industry was very slow during this period.by 1980,

the number of merchant banks rose to 33 and was set up by

commercial bank, financial institutions and private sector. The

capital market witnessed some buoyancy in the late eighties. The

advent of economic reforms in 1991 resulted in sudden spurt in

32

both the primary and secondary market. Several new players

entered into the field. The securities scam in May, 1992 was a

major setback to the industry. Several leading merchant bankers,

both in public and private sectors were found to be involved in

various irregularities. Some of the prominent public sector players

where involved in the scam were can bank financial services, SBI

capital market, Andhra bank financial services, etc. leading private

sector players involved in the scam included fair growth financial

services and champaklal investment and finance(CIFCO).

The market turned bullish again in the end of 1993 after the

tainted shares problem was substantially resolved. There was a

very phenomenal surge of activity in the primary market. the

registration norms with the SEBI were quite liberal. The low entry

barriers coupled with lucrative opportunities lured many new

entrants into this industry. Most of the new entrants were

undercapitalized with little no expertise in merchant banking.

These players could hardly afford to be discerning and started

offering their services to all and sundry clients. The market was

soon flooded with poor quality of paper issued by companies

started deferring their plans to access primary markets, lack of

business resulted in a major shake out in the industry. Most of the

small firms exited form the business. Many foreign investment

bank started entering Indian market. These firms had a huge

capital base, global distribution capacity and expertise. However,

they were new to Indian market and lacked local penetration.

Many of the top rung Indian merchant banks, who had strong

domestic base, started entering into joint ventures with the foreign

33

banks. This energy resulted in synergies as individual strength

complemented each other .

INVESTMENT BANKERS IN INDIA

Investment bankers play an important role in the issue

management process. Lead managers (category I merchant

bankers) have to ensure correctness of the information furnished

in the offer document. They have to ensure compliance with SEBI

rules and regulations as also guidelines for disclosures and

investor protection. To this effect, they are required to submit to

SEBI a due diligence certificate conforming that the disclosures

made in the draft prospectus or letter of offer are true, fair and

adequate to enable the prospective investors to make a well

informed investment decision. The role of merchant bankers in

performing their due diligence functions has become even more

important with the strengthening of the disclosure requirements

and with the SEBI giving up the vetting up of  prospectus. SEBIs

various operational guidelines issued during the year to merchant

bankers primarily addressed the need to enhance the standard

of disclosures. It was felt that a further strengthening of the

criteria for registration of merchant bankers was necessary,

primarily through an increase in the net worth requirements, so

that the capital would be commensurate with the level of activities

undertaken by them. With this in view, the net worth requirement

or category I merchant bankers was raised in 1995-96 to

Rs.5crore. In 1996-96, the SEBI (merchant bankers) regulations,

1992 were amended to require the payment of fees for each letter

of offer or draft prospectus that is filed with SEBI.

34

UNDERWRITERS

Underwriters are required to register with SEBI in terms of the

EBI(Underwriters) Rules and Regulations, 1993. In addition to

under writers registered with SEBI in terms of these regulations,

all registered merchant bankers in categories I, II and III and stock

brokers and mutual funds registered with SEBI can function

as underwriters.

POTENTIAL OF INVESTMENT BANKING IN

INDIA

The major problem of Indian capital markets today is the lack of

investor confidence, which is mainly on account of lack of

liquidity, unscrupulous issuers and merchant bankers and poor or

unapprised issues. Investment Banking can solve this problem

because investors would be dealing with reputed investment

bankers in the primary bankers in the primary market rather than

unknown issuers. The issues will be properly appraised and

priced. Similarly, Investment Banks would hold the issue until

market conditions are appropriate for issue, thus reducing the risk

exposure of investors to gestation for issue. Moreover, the price of

reissue will be a better

indicator of issue’s performance. Investment banks make the

primary market for IPOs thus assuring protection to the issuer

about subscription In sum, the quality of pricing, appraisal, and

primary market functions will improve resulting in substantial

improvement in investor confidence. Since the investment bank

lends its name to the issue it implies that investors can trust the

35

issue. As a result, Investment bankers are gradually replacing

merchant banking.

LIST OF TOP 10 INVESTMENT BANKS OF INDIA

Bank of America:

This American bank, being one of the leading investment banks in

the world, has even got its branches in the Republic of India.

Operating in the country since the year 1964, this bank provides a

comprehensive range of financial solutions and products to some

of the top most corporates, multinationals and financial

institutions in the nation. Their main office is based in India at the

following address:

Barclays Capital:

This investment banking company is a division of the Barclays

Bank Plc. Focused on meeting the needs of the Indian corporates,

especially in the Small and Medium Enterprise (S. M. E.) sector as

well as the companies of the country who have got a flair for

international growth, this bank offers a range of cash management

and investment products. The India based head office of this

investment bank is located at the following location:

B. N. P. Paribas:

36

B. N. P. Paribas started operating in India from the year 1860 from

the city of Kolkata in the name of C. N. E. P. (Comptoir National

d'Escompte de Paris). Presently, they serve many domestic and

international banks with their corporate banking necessities. They

can be contacted at the below mentioned contact details:

Citi Bank:

Operating in India for over 106 years, this is among the famous

financial institutions of Citi Group. Besides offering different

services related to investment banking, this investment bank

provides varied banking services with a capital investment of

about US $ 3.1 billion, which is spread all over the world. The

head office of Citi Bank in this nation is situated at the address

that is provided below:

Credit Suisse A. G.:

Credit Suisse, based in India in the capital cities of New Delhi and

Mumbai, provides an array of security services and investment

banking services in the country. Financial advisory services as

well as equity underwriting to the corporate companies in the

nation are among the specialties of this organization. The contact

details of the Mumbai branch of this bank are as follows:

Deutsche Bank:

37

Being a leader of investment banking in the global market, this

bank has got a profitable cum strong client franchise in the private

sector. They offer their unparalleled services to the financial

sector in both the national and the international domain. The

corporate head office of the bank is located at the address that is

given below:

Deutsche Bank A. G.

Deutsche Bank House, 

Hazarimal Somani Marg,

Fort, Mumbai - 400 001,

Maharashtra, India.

Tel.: + 91 - 022 - 6658 4600 

J. P. Morgan:

This leading bank in the world set up their operations in the

country during the year 1930. This famous foreign bank

specializes in the business of investment advisory services as well

as wholesale investment banking. The contact information of this

bank are given below:

Kotak Mahindra Bank Limited:

38

Apart from being listed among the leading banks in India, this

banking organization is even a famous name in the field of

investment banking in the country. Their subsidiary Kotak

Investment Banking provides a complete range of high quality

solutions for capital marketing as well as financial advising. The

main office of this bank in India is situated at the address that is

given below:

The Hong Kong and Shanghai Banking Corporation Limited:

With its origin dating back to the year 1853 in India, this

investment bank, popular as H. S. B. C., has got the following

three business interests in the country:

Equities research and broking

Export and project finance

Worldwide investment banking

Their head office in this nation is situated in the address, which is

as follows:

Yes Bank Limited:

39

This customer centric and service driven bank of India has

fructified to the investment banking sector as well as different

other wealth management services in the country since its

establishment from the year 2004. The corporate head quarter of

this Indian Bank is located at Mumbai at the below mentioned

address:

TATA MOTORS COMPLETES ACQUISITION OF JAGUAR LAND ROVER

Tata Motors today acquired the Jaguar Land Rover businesses

40

from Ford Motor Company for a net consideration of US $2.3 billion, as announced on March 26, in an all-cash transaction. Ford has contributed about US $600 million to the Jaguar Land Rover pension plans. 

Mr. Ratan N. Tata, Chairman of Tata Sons and Tata Motors, was present at the handing over ceremony at the head quarters of Jaguar Land Rover at Gaydon in the UK along with Mr. Don Leclair, the Executive Vice President and Chief Financial Officer of Ford Motor Company, and Mr. Lewis Booth, Executive Vice President of Ford Motor Company, who has responsibility for Ford of Europe, Volvo and Jaguar Land Rover.

Commenting on the occasion, Mr. Tata said, “This is a momentous time for all of us at Tata Motors. Jaguar and Land Rover are two iconic British brands with worldwide growth prospects. We are looking forward to extending our full support to the Jaguar Land Rover team to realise their competitive potential. Jaguar Land Rover will retain their distinctive identities and continue to pursue their respective business plans as before. We recognise the significant improvement in the performance of the two brands and look forward to this trend continuing in the coming years. It is our intention to work closely to support the Jaguar Land Rover team in building the success and preeminence of the two brands.” 

Tata Motors confirmed that Mr. David Smith, the acting Chief Executive Officer of Jaguar Land Rover, would be the new CEO of the business. Mr. Smith has 25 years of experience with Jaguar Land Rover and Ford. Before recently returning to Jaguar Land Rover as its Chief Financial Officer, he was Director Finance and Business Strategy for PAG and Ford of Europe. 

Mr. Smith said, “We are very pleased with the association with Tata Motors. We look forward to a sustained bright future for the company and its stakeholders.” 

41

Jaguar Land Rover has been acquired at a cost of US$ 2.3 billion on a cash free, debt-free basis. The purchase consideration includes the ownership by Jaguar and Land Rover or perpetual royalty-free licences of all necessary Intellectual Property Rights, manufacturing plants, two advanced design centres in the UK, and worldwide network of National Sales Companies. 

Long term agreements have been entered into for supply of engines, stampings and other components to Jaguar Land Rover. Other areas of transition support from Ford include IT, accounting and access to test facilities. The two companies will continue to cooperate in areas such as design and development through sharing of platforms and joint development of hybrid technologies and powertrain engineering. The Ford Motor Credit Company will continue to provide financing for Jaguar Land Rover dealers and customers for a transition period. Tata Motors is in an advanced stage of negotiations with leading auto finance providers to support the Jaguar Land Rover business in the UK, Europe and the US, and is expected to select financial services partners shortly.

About Tata MotorsTata Motors is India's largest automobile company, with revenues of US$ 8.8 billion in 2007-08. With over 4 million Tata vehicles plying in India, it is the leader in commercial vehicles and among the top three in passenger vehicles. It is also the world's fourth largest truck manufacturer and the second largest bus manufacturer. Tata cars, buses and trucks are being marketed in several countries in Europe, Africa, the Middle East, South Asia, South East Asia and South America. Through subsidiaries and associate companies, Tata Motors has operations in South Korea, Thailand and Spain. It also has a strategic alliance with Fiat.

RNRL, RELIANCE POWER MERGERThe Anil Dhirubhai Ambani Group’s (ADAG’s) gas transportation company, Reliance Natural Resources Ltd (RNRL),

42

will merge with sister firm Reliance Power (R-Power) in a Rs 50,000-crore, all-stock deal.

The board of directors of the two companies, in meetings held today, approved a swap ratio of 4:1, meaning RNRL shareholders are to get one R-Power share for every four they hold. The ratio is based on the valuation made by consultancy firm KPMG, a statement issued by the two companies said.

BSE

|NSE

Price

The proposed merger is subject to approvals of the shareholders of R-Power and RNRL, the stock exchanges, the High Court here, and all other requisite permissions, sanctions and approvals, it said.The merger will take the market capitalisation (m-cap) of R-Power to a little over Rs 52,000 crore. Its m-cap was Rs 41,979 crore at the close of trading on Friday and that of RNRL was Rs 10,394 crore.

R-Power will retain the assets and people of RNRL, a company with a turnover of Rs 298 crore, and continue to do business in the areas pursued by it, people close to the development said. After the merger, the company’s net worth will exceed Rs 16,000 crore and it will have 600,000 shareholders. The net worth of RNRL is Rs 1,900 crore, the statement said.

However, the combined market value of the two ADAG firms does not compare well with the Rs 1.23 lakh crore m-cap that R-Power commanded on February 11, 2008 — the day it got listed

43

on the stock market after a Rs 11,500-crore initial public offer, the biggest IPO in India’s history.

The listing saw R-Power catapulting into the elite league of Rs 1-trillion companies, with the scrip touching an intra-day high of Rs 599.90. However, it soon slipped below the IPO price of Rs 450 a share, making its membership in the Rs 1-trillion (Rs 1 lakh crore) m-cap group shortlived.

The merger will accelerate R-Power’s plans to set up a 10,000-Mw gas-based power plant, set in train with its Gas Supply Master Agreement with Mukesh Ambani’s Reliance Industries Ltd (RIL) last week. “The move will help R-Power accelerate its backward integration plans from a pure thermal power generation company to quickly venture into other value chains of energy business,” said an industry observer.

R-Power, currently with about 1,000 Mw of generation capacity, plans to implement about 37,000 Mw of power projects. RNRL’s shareholders, about 80 per cent of them also shareholders of R-Power, will now get an opportunity to join the latter’s power dreams. Over 80 per cent of RNRL shareholders had received their shares free on the demerger from RIL in 2006, as part of a settlement within the Ambani family.

Sources said the move would also make R-Power a domestic power company with one of the largest coal reserves. It has about four billion tonnes of coal reserves in Indonesia and India. RNRL has 45 per cent interest in four coal-methane blocks, spread over 3,251 sq km and estimated resources of 193 billion cubic metres, and a 10 per cent share in an oil and gas block in Mizoram, with an acreage of 3,619 sq km and reserve potential of up to 28 bn cu m.

ICICI BANK TO BUY BANK OF RAJASTHAN

44

Mumbai: Shareholders of the troubled Bank of Rajasthan Ltd (BoR) are set to get 25 shares of ICICI Bank Ltd for 118 shares of BoR in the ratio of 4.72:1, after the boards of the two banks decided to go ahead with a merger.“This is based on an internal analysis of the strategic value of the proposed amalgamation, average market capitalization per branch of old private sector banks and relevant precedent transactions,” an ICICI Bank release said, after its board gave its in-principle approval to the proposal.BoR promoter Pravin Kumar Tayal termed the proposed merger as a “win-win” situation for all—the banks, their employees and investors.

In a day of high drama, BoR stock rose 19.95% on the Bombay Stock Exchange to close at Rs99.50, its year high, and after trading hours, the bank sent a release to the stock exchanges saying its board will meet in the evening to discuss a proposal of merging the bank with ICICI Bank.

Boads of both banks met in the evening separately, and after the meeting ICICI Bank sent a release, saying, it “has entered into an agreement with certain shareholders of Bank of Rajasthan agreeing to effect the amalgamation of Bank of Rajasthan” with itself.

45

ICICI Bank stock was down 1.45% to Rs889.35.

Audit firm Haribhakti and Co. and Deloitte Haskins and Sells will assess the valuation of Bank of Rajasthan and the boards of both banks will meet on 23 May to seal the deal.

“The final determination of the share exchange ratio is subject to due diligence, independent valuation,” ICICI Bank said.

Most banking analysts said the currently proposed swap ratio is highly favourable to Bank of Rajasthan shareholders.

A back-of-the-envelope calculation by analysts values the deal at more than Rs3,000 crore and per branch acquisition cost at Rs7 crore for ICICI Bank, almost equivalent to ICICI’s per branch opening cost.

ICICI Bank, India’s second largest lender, is among banks that held talks to buy a controlling stake in Bank of Rajasthan, The Economic Times reported on 6 May.

This will be ICICI Bank’s third acquisition after Bank of Madura in 2000-01 and Sangli Bank in 2006-07. The first acquisition helped ICICI Bank step up its presence in the south and the second in the west. The BoR acquisition will strengthen its network in northern as well as western India.

BoR has a network of 463 branches and 111 ATMs. About 60% of its branches are in Rajasthan. ICICI Bank, India’s largest private sector lender, has a network of 2,009 branches and 5,219 ATMs.

ICICI Bank has an asset base of Rs3.63 trillion and posted a net profit of Rs4,025 crore in 2010. BoR’s asset base is Rs17,224 crore and in first nine months of fiscal 2010, its net loss was Rs9.82 crore. It posted a net loss of Rs44.70 crore for the December quarter and has not announced March quarter earnings.BoR’s net non-performing assets as a percentage of total loans in December was 1.05%. The comparable figure for ICICI Bank for the year-end is 1.55%.

“The proposed amalgamation would substantially enhance ICICI Bank’s branch network, already the largest among Indian private sector banks, and especially strengthen its presence in northern and western India. It would combine Bank of Rajasthan’s branch

46

franchise with ICICI Bank’s strong capital base,” the ICICI Bank release said.

India’s capital markets regulator in March banned BoR promoter Tayal and about 100 companies and people associated with his family from trading in securities for improper disclosure about their holdings in the bank.

According to the Securities and Exchange Board of India, the Tayal family owned 55.01% of the bank in December, even though Tayal claimed his group stake was 28.06%.

BoR has also been under the scanner of the Reserve Bank of India (RBI) for alleged violation of banking regulations, including those on corporate governance.

G. Padmanabhan, BoR managing director and chief executive officer, was appointed by RBI in November for two years with a mandate to improve corporate governance practices at the bank.

RBI has also ordered two major audits of the bank.

47

WEBLIOGRAPHY :-

http://www.nabard.org/pdf/report_financial/full%20Report.pdf

http://iimc-finclub.com/finblog/financial-inclusion-in-india

http://www.livemint.com

http://www.indiapost.gov.in/

http://www.oecd.org/

48