INTRODUCTION

CHAPTER 1

INTRODUCTION

At a very macro level, Investment Banking as term suggests, is concerned with the primary function of assisting the capital market in its function of capital intermediation, i.e., the movement of financial resources from those who have them (the Investors), to those who need to make use of them for generating GDP (the Issuers). Banking and financial institution on the one hand and the capital market on the other are the two broad platforms of institutional that investment for capital flows in economy. Therefore, it could be inferred that investment banks are those institutions that are counterparts of banks in the capital markets in the function of intermediation in the resource allocation. Nevertheless, it would be unfair to conclude so, as that would confine investment banking to very narrow sphere of its activities in the modern world of high finance. Over the decades, backed by evolution and also fuelled by recent technologies developments, an investment banking has transformed repeatedly to suit the needs of the finance community and thus become one of the most vibrant and exciting segment of financial services. Investment bankers have always enjoyed celebrity status, but at times, they have paid the price for the price for excessive flamboyance as well.

To continue from the above words of John F. Marshall and M.E. Eills, investment banking is what investment banks do. This definition can be explained in the context of how investment banks have evolved in their functionality and how history and regulatory intervention have shaped such an evolution. Much of investment banking in its present form, thus owes its origins to the financial markets in USA, due o which, American investment banks have banks have been leaders in the American and Euro markets as well. Therefore, the term investment banking can arguably be said to be of American origin. Their counterparts in UK were termed as investment banks since they had confined themselves to capital market intermediation until the US investments banks entered the UK and European markets and extended the scope of such businesses.

Investment banks help companies and governments and their agencies to raise money by issuing and selling securities in the primary market. They assist public and private corporations in raising funds in the capital markets (both equity and debt), as well as in providing strategic advisory services for mergers, acquisitions and other types of financial transactions. Investment banks also act as intermediaries in trading for clients. Investment banks differ from commercial banks, which take deposits and make commercial and retail loans. In recent years however, the lines between the two types of structures have blurred, especially as commercial banks have offered more investment banking services. In the US, the Glass-Steagall Act, initially created in the wake of the Stock Market Crash of 1929, prohibited banks from both accepting deposits and underwriting securities; Glass-Steagall was repealed by the Gramm-Leach-Bliley Act in 1999. Investment banks may also differ from brokerages, which in general assist in the purchase and sale of stocks, bonds, and mutual funds. However some firms operate as both brokerages and investment banks; this includes some of the best known financial services firms in the world. More commonly used today to characterize what was traditionally termed investment banking is sells side." This is trading securities for cash or securities (i.e., facilitating transactions, market-making), or the promotion of securities (i.e. underwriting, research, etc.).Definition

An individual or institution, which acts as an underwriter or agent for corporations and municipalities issuing securities. Most also maintain broker/dealer operations, maintain markets for previously issued securities, and offer advisory services to investors. Investment banks also have a large role in facilitating mergers and acquisitions private equity placements and corporate restructuring. Unlike traditional banks, investment banks do not accept deposits from and provide loans to individuals.

1.1 Commercial banking vs. investment bankingWhile regulation has changed the businesses in which commercial and investment banks may now participate, the core aspects of these different businesses remain intact. In other words, the difference between how a typical investment bank and a typical commercial operate bank is simple. A commercial bank takes deposits for checking and savings accounts from consumers while an investment bank does not. We'll begin examining what this means by taking a look at what commercial banks do.

Commercial banks

A commercial bank may legally take deposits for checking and savings accounts from consumers. The federal government provides insurance guarantees on these deposits through the Federal Deposit Insurance Corporation (the FDIC), on amounts up to $100,000. To get FDIC guarantees, commercial banks must follow a myriad of regulations. The typical commercial banking process is fairly straightforward. You deposit money into your bank, and the bank loans that money to consumers and companies in need of capital (cash). You borrow to buy a house,

Finance a car, or finance an addition to your home. Companies borrow to finance the growth of their company or meet immediate cash needs. Companies that borrow from commercial banks can range in size from the dry cleaner on the corner to a multinational conglomerate.

Investment banks

An investment bank operates differently. An investment bank does not have an inventory of cash deposits to lend as a commercial bank does. In essence, an investment bank acts as an intermediary, and matches sellers of stocks and bonds with buyers of stocks and bonds.

Note, however, that companies use investment banks toward the same end as they use commercial banks. If a company needs capital, it may get a loan from a bank, or it may ask an investment bank to sell equity or debt (stocks or bonds). Because commercial banks already have funds available from their depositors and an investment bank does not, an I-bank must spend considerable time finding investors in order to obtain capital for its client.

1.2 History of Investment bankingGiven its history, investment banking is often thought of as a European, and especially British, financial specialty, and British institutions continue to maintain a major presence in this area. Since the 1800s and even earlier, however, U.S. firms (such as J.P. Morgan) also have been active in investment banking. However, although both investment banks and commercial banks, as well as other types of businesses, have been authorized to engage in private equity investment in the United States, financial institutions have not been major providers of private equity.

Until the 1950s, U.S. investors in private equity were primarily wealthy individuals and families. In the 1960s and 1970s, corporations and financial institutions joined them in this type of investment. (In the 1960s, commercial banks were the major providers of one kind of private equity investing, venture-capital financing.) Through the late 1970s, wealthy families, industrial corporations, and financial institutions, for the most part investing directly in the issuing firms, constituted the bulk of private equity investors.

In the late 1970s, changes in the Employee Retirement Income Security Act (ERISA) regulations, in tax laws, and in securities laws brought new investors into private equity. In particular, the Department of Labor's revised interpretation of the "prudent man rule" spurred pension fund investment in private equity capital. Currently, the major investors in private equity in the United States are pension funds, endowments and foundations, corporations, and wealthy investors; financial institutions-both commercial banks and investment banks-represent approximately 20 percent of total private equity capital, divided approximately equally between the two. The U.S. Department of the Treasury (Treasury) estimates that at year-end 1999, commercial banks accounted for approximately $35 billion to $40 billion and investment banks for approximately another $40 billion, of the $400 billion total investment in the private equity market.

At $400 billion as of year-end 1999, the private equity market is approximately one-quarter the size of the commercial and industrial bank-loan market and the commercial-paper market. In recent years, funds raised through private equity have approximately equaled and sometimes exceeded funds raised through initial public offerings and public high-yield corporate bond issuance. The market also has grown dramatically in recent years, increasing from approximately $4.7 billion in 1980 to its 1999 figure. Despite this tremendous growth, the private equity market is extremely small compared with the public equity market, which was approximately $17 trillion at year-end 1999

1.3 Evolution of investment banking in India

The origin of investment banking in India can be traced back to the late 19th century when European investment banks set up their agency house in the country to assist in the setting up of new projects. In the early 20th century large business houses followed suit by establishing managing agencies which acted as issue house for securities, promoters for new projects and also provided finance to green field ventures. But these entire roles were limited to small capital base.

In 1967, ANZ Grindlays bank set up separate Investment banking division to handle new capital issues. It was soon followed by CitiBnak, which started rendering Investment Banking services. The foreign banks monopolized investment banking services in the country. The banking commission, in its report in 1972, took note if this with concern and recommended setting up of investment banking institutions by commercial banks and financial institutions. SBI ventured into this business by starting a investment business bureau in 1972. In 1973, ICICI became the first financial institutions to offer investment banking. JM finance was set up in 1973. The growth of industry during that period was very slow. The industry remained more or less stagnant in the eighties.

The capital market witnessed some buoyancy in the late eighties. The advent of economic reforms in 1991 resulted in a sudden spurt in 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 investment banker, both in public and private sector were found to be involved in various irregularities, some of the prominent public sector players involved in the scam were canbank financial services and champaklal investment and finances. The markets turned bullish again in the end of 1993 after the tainted shares problems were substantially resolved. The registration norms with SEBI were quiet liberal. Many foreign investment bankers stated entering in India in tie ups with Indian player. Some of tie ups player were

JM Finance- Morgan Stanley

DSP Financial consultants- Merill lynch

Kotak Mahindra- Goldman Sachs

SBI Capital Markets Lehman Brothers

In India investment banker can be segregated as follows, depending on the sector to which they belong.1. Public sector Investment bankers a. Commercials banks. b. National Financial Institutions. c. State financial institutions.2. Private sector Investment Bankers a. Foreign Bankers b. Indian private Banks c. Leasing Banks. d. Financial and Investment companies.

The current of the investment banking industry is in state of flux. The current transition phase is witnessing a paradigm shift in the nature and composition of this industry. The industry was hitherto synonymous with issue management and underwriting. Investment bankers have stared diversifying into new function such M&A, new products, new techniques.

1.4 Who needs an Investment BankAny firm contemplating a significant transaction can benefit from the advice of an investment bank. Although large corporations often have sophisticated finance and corporate development departments provide objectivity, a valuable contact network, allows for efficient use of client personnel, and is vitally interested in seeing the transaction close. Most small to medium sized companies do not have a large in-house staff, and in a financial transaction may be at a disadvantage versus larger competitors. A quality investment banking firm can provide the services required to initiate and execute a major transaction, thereby empowering small to medium sized companies with financial and transaction experience without the addition of permanent overhead, an investment bank provides objectivity, a valuable contact network, allows for efficient use of client personnel, and is vitally interested in seeing the transaction close. Most small to medium sized companies do not have a large in-house staff, and in a financial transaction may be at a disadvantage versus larger competitors. A quality investment-banking firm can provide the services.1.5 Type of Expertise Required

Investment banking is one of the best ways a young person can learn about finance and make good money right out of school. It requires substantial hardships, including high pressure, long days and nights of hard work, a few difficult personalities, and the expectationno, the requirement that all personal plans are subject to the demands of work. Life is very much at the mercy of the markets. Bull markets bring more work to do than is humanly possible. The type of staff required for a investment bank will depend upon its functions which are them selves flexible. The investment bank should have an organization large enough to deal with a number of applications at a time. The issue house which acts as the investment banker normally pays visits to the company's plant, warehouses, and other physical assets and if a company is making its first issue, it might secure independent reports from Chartered Accountants, industrial consultants, technical experts etc. The issue house, which is a investment bank also, requires, plant, management, labor, competitors, profit margins, taxations, etc. They have to keep ready all the information needed in the form of dossiers with respect to the affairs of the company generally enquired into by the investing public, lending financial institutions and the government.

Secondly, a investment bank has to suggest an appropriate time of issue and provisional terms. Once these terms are settled the share certificates, prospectus and other documents are drafted by the investment bank with the assistance of lawyers, accountants and others. They have to satisfy the Companies Act and other SS requirements of law. Subsequently, the investment bank may have to get ready the application to the SEBI for the public issues. This requires familiarity with the regulations under the Companies Act and the SEBI guidelines and the procedures to be followed and the authorities to be approached. The provisions under the MRTP Act regulating monopoly practices and other activities of big industrial houses should also be looked into.

Thirdly, they may have to make an application to the appropriate stock exchange for quotation and satisfy the stock exchange authorities with respect to the terms of issue and prospectus. Listing requirements are to be observed and familiarity with the stock exchange rules and bye-laws as well as the provisions of the Securities Contracts Regulations) Act would be essential. They may have to advise on the desirability or otherwise of listing on the stock exchange as well as help the companies go through the process of getting their shares listed. Advertisements containing all the information legally required to be given in the prospectus must be published in all the leading proposed date of opening and closing, a summary of the companys business history, balance sheet, etc, to which a reference was made earlier. Once the issue made, the work of the investment bank relates to arranging for the allotment of shares in consultation with the company and the stock exchange authorities with the help of Registrars.CHAPTER 2

THE MAIN ACTIVITIES AND UNITSThe primary function of an investment bank is buying and selling products both on behalf of the bank's clients and also for the bank itself. Banks undertake risk through proprietary trading, done by a special set of traders who do not interface with clients and through Principal Risk, risk undertaken by a trader after he or she buys or sells a product to a client and does not hedge his or her total exposure. Banks seek to maximize profitability for a given amount of risk on their balance sheet

An investment bank is split into the so-called Front Office, Middle Office and Back Office. The individual activities are described below:

Front Office

Investment Banking is the traditional aspect of investment banks which involves helping customers raise funds in the Capital Markets and advising on mergers and acquisitions. Investment bankers prepare idea pitches that they bring to meetings with their clients, with the expectation that their effort will be rewarded with a mandate when the client is ready to undertake a transaction. Once mandated, an investment bank is responsible for preparing all materials necessary for the transaction as well as the execution of the deal, which may involve subscribing investors to a security issuance, coordinating with bidders, or negotiating with a merger target. Other terms for the Investment Banking Division include Mergers & Acquisitions (M&A) and Corporate Finance (often pronounced "corpfin").

Investment management 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 the investors. Investors 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) . Middle Office Risk Management involves analyzing the market and credit risk that traders are taking onto the balance sheet in conducting their daily trades, and setting limits on the amount of capital that they are able to trade in order to prevent 'bad' trades having a detrimental effect to a desk overall. Another key Middle Office role is to ensure that the above mentioned economic risks are captured accurately (as per agreement of commercial terms with the counterparty) correctly (as per standardized booking models in the most appropriate systems) and on time (typically within 30 minutes of trade execution). In recent years the risk of errors has become known as "operational risk" and the assurance Middle Offices provide now include measures to address this risk. When this assurance is not in place, market and credit risk analysis can be unreliable and open to deliberate manipulation. Back Office

Operations involve data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers. While it provides the greatest job security

2.1 Functions of the investment banking divisions 1. Advice and liaison obtaining consent of the Central and Stat e Government, for the project if necessary;

2. Preparation of economic, technical and financial feasibility reports;

3. Initial project preparation, pre-investment survey, and market studies;

4. Help in raising rupee resources from financial institutions and commercial banks;

5. Underwriting and also for subscription, if necessary, to the new issues or syndication of loans, etc;

6. Assistance in raising foreign exchange resources so as to enable the industrial concerns to import machinery and technical know-how and secure foreign collaboration.

7. Advice on setting up turnkey project s in foreign countries and locating foreign markets;

8. Help in financial management and in designing proper capital structure and debt- equity ratio, etc, for the company.

9. Advice on restructuring of capital, amalgamation, mergers, takeovers, etc;

10. Management of investment trust, charitable trusts etc;

11. Management aid and entrepreneurial aid (management audit providing designs of the complete system, operational research and management consultancy); and

12. Recruitment (selection of technical and managerial personnel), etc.

CHAPTER 3SCOPE OF INVESTMENT BANKINGThe Investment banker plays a vital role in channelizing the financial surplus of the society into productive investment avenues. The investment banker has fiduciary role in relation to the investor. Some of the major functions performed by investment banker are as follows.

1. Management of debt and equity offering This is the traditional bread and butter operations for most of the investment banker in India. The role of the investment banker is dynamic and it has to be nimble footed to capitalize on available opportunities. It has to assist its clients in raising fund from the market. It may also be required to counsel them on various issues that affect their finances. The main area of its role includes:

Instrument Designing

Pricing the issue

Registration of the offer document

Underwriting the support

Marketing the issue

Allotment and refund

Listing on stock exchange

Listing on stock exchange

2. Placement and distribution The distribution network of Investment banker can be classified as institutional and retail. The network of institutional investors consist of Mutual Funds, FIIs, bank, domestic and multinational financial institutions, PE, pension funds, etc. the size of this network represent the wholesale reach of the Investment banker. The basic requirement to create and service the institutional segment is the existence of good in-house research facilities. The investment proposal should be accompanied by high quality research reports of the Investment banker to justify the investment recommendation. The retail distribution reach depends upon the networking with the investors. Many Investment banks have associate firms which are brokers on the stock exchange. These brokers appoint sub-brokers at various locations to service both the primary market and secondary market needs of the local investors. Thus a large base of captive investors is created and maintained.

The distribution network can be used to distribute various financial products like:

Equity : retail and institutional investors

Debt Instruments : retail and institutional investors

Mutual Fund products : retail investors

Fixed deposits : retail investors

Insurance products : retail investors

Commercial paper : institutional investors

3. Corporate advisory Services - investment bankers offers customized solutions to the financial problem of their clients. One of the key areas for advisory role is financial structuring. The process includes determining the appropriate level of gearing and advising the company whether to leverage, de-leverage or maintain its current debt-equity levels. The asset turnover ratios may be analyzed to study whether the company is over trading or under trading. The companys working capital practices are studied and alternative working capital policies are suggested. The investment banker may also explore the possibility of refinancing high cost funds with alternative cheaper funds. They play advisory role in securitization of receivables. They also help their cash rich clients in deployment of their short-term surpluses.4. Project Advisory - investment bankers are associated with their clients from the early stage of their project. They assist the companies in conceptualizing the project idea when it is at nebulous stage. Once the project is conceptualized, they carry out the initial feasibility studied to examine its viability. Investment bankers provide inputs to their clients in preparation of the detailed project report. They also offer project appraisal services to clients.5. Loan syndication - investment bankers arrange to tie up loans for their clients. The first step involves analyzing the clients cash flow pattern so that terms of borrowing can be defined to suit the cash flow requirements. The important loan parameters include amount, currency, tenure, drawdown, moratorium and the amortization. The investment bankers then prepare the detailed loan memorandum. The loan memorandum is then circulated to various banks and financial institutions and they are invited to participate in the syndicate.The banks indicate the amount of exposure of service they are willing to take and the interest rates thereon. The terms are further negotiated and fine- tuned to the satisfaction of both parties. The final allocation is done to the various members of the syndicate. The investment banker also helps the clients in loan documentation procedures.

6. Research Services - Nearly all banks have a staff of research analysts who study economic trends and news, individual company stocks, and industry developments to provide proprietary investment advice to institutional clients and in-house groups, such as the sales and trading divisions. Until recently, the research division has also played an important role in the underwriting process, both in wooing the client with its knowledge of the clients industry and in providing a link to the institutions that own the clients stock once its publicly traded. Indeed, in many cases, research analysts compensation was tied to investment banking revenues. However, in recent times banks have faced public and regulatory outcries over conflicts of interest inherent in having bankers and researchers work hand in hand. As a hypothetical example, consider Bank A, which counts Company X, which is facing financial difficulties, among its banking clients. Should Bank As research team pan Company Xs stock, which would benefit investors who subscribe to Bank As research, but might upset Company X to the point that it drops Bank A and hires another firm to be its investment banker? Or should it recommend the purchase of Company X stock, which would help Company X financially and keep the banking revenues from Company X rolling inand pump up research analysts bonuses, which are based in part on the success of Bank As banking operations? In an effort to end the legal scrutiny of their operations, investment banks are now attempting to reinforce the separation between their banking and research arms. You can certainly count on research playing a lesser role in selling banking deals. Also, independent research houses (e.g., Needham & Co., Sidoti & Co., and JMP Securities) are benefiting in a big way from a settlement between the investment banking industry and regulators that requires investment banks to spend a total $432.5 million over 5 years to give clients independent research. And as the full service investment banks move to purchase independent research, as theyre required to do by regulators, certain research specialistsStandard & Poors and BNY Jay hawk (which actually aggregates research from more than 100 research organizations)are looking like theyre going to make out handsomely.

7. Venture capital - Venture capital is risks money, which is used in risky enterprises either as equity or debt capital. It may be in new sunshine industries or older risk enterprises. The funds, which finance such risky, are called venture capital funds. Venture capital is a post-war phenomenon in the business world, mainly developed as a sideline activity of the rich in USA. To connote the risk & adventure & some element of investment, the generic name of venture capital was coined. In the late 1960s a new breed of professional investors called venture capitalists emerged whose specialty was to combine risk capital with entrepreneurial management & to use advance technology to launch new products and companies in the markets place. Undoubtedly, it was venture capitalists astute ability to assess and manage enormous risks & export from them tremendous returns that changed the face of America. In developed countries, this capital came from pension funds, insurance companies & even large banks. Some large companies with excess funds may provide this capital to achieve diversification, market expansion & window on technology or to share in this result of R&D of others. In India, as the majority of the above institutions are in the public sector, only the government or public financial institutions can provide the funds for venture capital. Venture capital is a post-war phenomenon in the business world, mainly developed as a sideline activity of the rich in USA. To connote the risk & adventure & some element of investment, the generic name of venture capital was coined. In the late 1960s a new breed of professional investors called venture capitalists emerged whose specialty was to combine risk capital with entrepreneurial management & to use advance technology to launch new products and companies in the markets place. Undoubtedly, it was venture capitalists astute ability to assess and manage enormous risks & export from them tremendous returns that changed the face of America.

Innovative, hi-tech ideas are necessarily risky. It is here that the concept of venture capital steps in. Venture Capital provides long start up costs to high risks & returns project. Typically, these projects have mortality rates and therefore are unattractive to risks-averse bankers & private sectors companies.

8. Merger and acquisitions M&A are becoming increasingly significant in term of services offered by the investment bankers in India. During the licensing era, several companies had indulged in unrelated diversifications depending on the availability of the licenses. The companies thrived in spite of their inefficiencies because the total capacity in the industry was restricted due to licensing. The companies over a period of time became unwieldy conglomerates with suboptimal portfolio of assorted business. The policy of decontrol and liberalization coupled with globalization of the economy has exposed the corporate sector to serve domestic and global competition. The industry is passing through a transitory phase of restructuring. The mergers and acquisitions group provides advice to companies that are buying another company or are those selves being acquired. M&A work can seem very glamorous and high profile. At the same time, the work leading up to the headline-grabbing multibillion-dollar acquisition can involve a Herculean effort to crunch all the numbers, perform the necessary due diligence, and work out the complicated structure of the deal. As one insider puts it, You have to really like spending time in front of your computer with Excel. Often, the M&A team will also work with a corporate finance industry group to arrange the appropriate financing for the transaction (usually a debt or equity offering). In many cases, all this may happen on a very tight timeline and under extreme secrecy. M&A is often a subgroup within corporate finance; but in some firms, it is a stand-alone department. M&A can be one of the most demanding groups to work for. M&A benefits the following Financial:

I. Benefits on account of tax shield.

II. Restructuring and strengthening the balance sheet.

III. Profiting from leveraged buyouts.

IV. Investment of surplus cash.

Marketing

I. Increase in market share.

II. Elimination of competition.

III. Diversification of risks.

IV. Growth without increase in the capacity.

Production

I. Horizontal and vertical integration.

II. Acquisition of new technology.Classifications of mergers

Horizontal mergers take place where the two merging companies produce similar product in the same industry.

Vertical mergers occur when two firms, each working at different stages in the production of the same good, combine.

Con-generic merger/concentric mergers occur where two merging firms are in the same general industry, but they have no mutual buyer/customer or supplier relationship, such as a merger between a bank and a leasing company. Example: Prudential's acquisition of Bache & Company.

Conglomerate mergers take place when the two firms operate in different industries.

M&Q requires following step

(i) Acquisition search: - the first step is to determine the universe of potential target companies. Information is gathered about these companies based on their published data, industry specific journals, database etc. if the acquisition involves buying only part of the target company, segmental data may be difficult to obtain. Similarly, information about private companies may not be readily available. Once the universe is determined, targets may be short listed based on those parameters.

(ii) Approaching the target: - This is one of the most critical roles played by the investment bankers in the deal. There are broadly two methods of approaching the targets- passive strategy i.e. no aggressive approach is used and active strategy i.e. acquisition may be friendly or hostile.

(iii) Valuation: - valuation of the target company is the most critical task performed by the investment banker. A conservative valuation can result in collapse of the deal while an aggressive valuation may create perpetual problems for the acquiring company. The commonly used valuation methods are

(a) Discounted cash flow method.

(b) Comparable companies method

(c) Book value method

(d) Market value method

(iv) Negotiation: - This is the process of formulating the structure of the deal. The investment banker plays a vital role in closing the financial side of the negotiation. From a financial standpoint, the key elements of negotiations are the price and the form of consideration. Both the elements are interrelated and affect the attractiveness of the deal. The investment banker must ensure that the final price paid should not exceed the perceived value of the targets to the acquirer.

(v) Acquisition finance: - once the negotiation is over and the price is finalized, the investment banker has to assist the acquirer in arranging the required finance. The consideration can be paid in the form of cash, debt securities or equity of the acquiring company. Cash may be raise from the internal accruals, sale of assets, etc. It may also be refinanced by bank borrowing, public issue or private placement of debt and equity.

9. Initial Public Offerings: - Initial Public Offerings (IPO) is the first time a company sells its stock to the public. Sometimes IPOs are associated with huge first-day gains; other times, when the market is cold, they flop. It's often difficult for an individual investor to realize the huge gains, since in most cases only institutional investors have access to the stock at the offering price. By the time the general public can trade the stock, most of its first-day gains have already been made. However, a savvy and informed investor should still watch the IPO market, because this is the first opportunity to buy these stocks.

Reasons for an IPO: - When a privately held corporation needs to raise additional capital, it can either take on debt or sell partial ownership. If the corporation chooses to sell ownership to the public, it engages in an IPO. Corporations choose to "go public" instead of issuing debt securities for several reasons. The most common reason is that capital raised through an IPO does not have to be repaid, whereas debt securities such as bonds must be repaid with interest. Despite this apparent benefit, there are also many drawbacks to an IPO. A large drawback to going public is that the current owners of the privately held corporation lose a part of their ownership. Corporations weigh the costs and benefits of an IPO carefully before performing an IPO.

Appointment of investment banker and other intermediaries: The company first selects the Investment Banker(S) for handling the issue. The investment banker should have a valid SEBI registration to be eligible for appointment.The criteria normally used in selection of Investment Bankers are:i. Past track record in successfully handling similar issues

ii. Distribution network with institutional and individual investors

iii. General reputation in the market

iv. Trained manpower and skills for instrument designing and pricing

v. Good rapport with other market intermediaries

vi. Value added services like providing bridge loans against public issue proceeds

Issue in any of the capacities

An investment banker can be associated with the issue in any of the following capacities:

Lead Manager to the issue

Co Manager to the issue

Underwriter to the issue

Advisor/Consultant to the issue10. Working capital: - Working capital, also known as net working capital, is a financial metric which represents operating liquidity available to a business. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Finance for working capital, particularly for new ventures, often needs to be syndicated on behalf of the promoters, and investment banks assist in this as well. For existing companies, non/traditional sources such as through the issue of debentures for this purpose, and others have been successfully tapped by investment bankers. This ensures that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses

11. Foreign currency finance: - Of late, India has become increasingly active in the international money markets, and this trend is likely to continue. For import of capital goods and services from overseas, the arrangement of various kinds of export credits from different countries is also required.

In addition to this wide range of services, some of the larger banks are also involved in areas such as the arrangement of lease finance, and assistance in acquisitions and mergers etc.

12. Underwriting: - Underwriting refers to the process that a large financial service provider (bank, insurer, investment house) uses to assess the eligibility of a customer to receive their products (equity capital, insurance, mortgage or credit). This is a way of placing a newly issued security, such as stocks or bonds, with investors. A investment banker underwrites the transaction, which means they have taken on the risk of distributing the securities. Should they not be able to find enough investors, they will have to hold some securities themselves. Underwriters make their income from the price difference (the "underwriting spread") between the price they pay the issuer and what they collect from investors or from broker-dealers who buy portions of the offering. When a dealer bank purchases Treasury securities in a quarterly Treasury bond auction, it acts as underwriter and distributor. Treasury securities purchased by a primary dealer are held in a dealer bank's trading account assets portfolio, and they are often resold to other banks and to private investors. The main work of investment banks relates to underwriting of new issues and rising of new capital for the corporate sector. Of the amount underwritten, some part devolves on the underwriters, which varies depending on the state of the capital market, and the intrinsic worth of the project. The SEBI has made underwriting Compulsory for all issues offered to Public first but later it was made optional. SEBI made it necessary for investment bank to undertake or make a firm commitment for 5% of issued amount to the public.

13. Financial Engineering by Investment Bankers: - It involves design, development and implementation of innovative financial instruments and processes and the formulation of creative solutions to the problem in finance. A number of factors have accelerated the process of financial innovation. They include: Interest rate volatility

Exchange rate volatility

Regulatory and tax changes

Globalization of the market

Increased competition among investment bankers

14. Securitization:- is a structured finance process, which involves pooling and repackaging of cash-flow-producing financial assets into securities that are then sold to investors. The name "securitization" is derived from the fact that the forms of financial instruments used to obtain funds from the investors are securities. All assets can be securitized so long as they are associated with cash flow. Hence, the securities which are the outcome of securitization processes are termed asset-backed securities (ABS). From this perspective, securitization could also be defined as a financial process leading to an issue of an ABS.

Securitization often utilizes a special purpose vehicle (SPV), alternatively known as a special purpose entity (SPE) or special purpose company (SPC), in order to reduce the risk of bankruptcy and thereby obtain lower interest rates from potential lenders. A credit derivative is also generally used to change the credit quality of the underlying portfolio so that it will be acceptable to the final investors. A very basic example would be as follows. XYZ Bank loans 10 people $100,000 a piece, which they will use to buy homes. XYZ has invested in the success and/or failure of those 10 home buyers- if the buyers make their payments and pay off the loans, XYZ makes a profit. Looking at it another way, XYZ has taken the risk that some borrowers won't repay the loan. In exchange for taking that risk, the borrowers pay XYZ interest on the money they borrow. From the perspective of XYZ, those loans are 10 different assets. They have value- one, if the loan fails, XYZ takes ownership of the house. Two, if the loan succeeds, XYZ gets their money back along with the interest they charge. XYZ can do two things with those loans. They can hold them for 30 years and, they would hope, make a profit on their investment. Or they could sell them to some other investor, and walk away. In doing this, they would make less profit than if they held onto them long term, but they would benefit in that they make some profit while also getting their original investment back. They give up some of the reward (profit) in exchange for not having the risk. So XYZ Bank decides they'd rather have the cash now. They could sell those 10 loans to 10 investors. Each investor would be taking a risk in buying those loans, because if any loan defaults, that one investor loses. Naturally, investors would not be willing to pay very much for those loans, knowing the risk involved. XYZ wants to sell those loans for the best price they can get, so they decide to securitize those loans. They combine the 10 loans into one entity, and then they split that one entity into 10 equal shares. Each investor still pays the same $100,000, but instead of owning one loan, they will own 10% of all 10 loans. If one loan fails, every investor loses 10%.

The result is that XYZ bank is able to sell their assets for more money, and investors are insulated from the volatility of directly owning individual mortgages. However, if a majority of the mortgages in the asset pool act in the same way ( Correlation ) then the risk is similar to owning one mortgage. Investors incur some of the volatility and there is no inherent "insurance" against major loss.

15. Portfolio management services:- A list of all those services and facilities that are provided by a portfolio manager to its clients, relating to the management and administration of portfolio of securities or the funds of clients, is referred to as portfolio management services. The term portfolio means the total holdings of securities belonging to any person.

Portfolio Manager: - According to SEBI, Portfolio Manager means any person who pursuant to contract or arrangements with a clients, advices or directs or undertakes on behalf of the clients the management or administration of a portfolio of securities or the funds of client, as the case may be

Discretionary Portfolio Manager:- According to SEBI, discretionary portfolio manager means a portfolio manager who exercises or may, under a contract relating to portfolio management, exercises any degree of discretion as to the investments or management of the portfolio of securities or the funds of the clients, as the case may be.16. Sales & Trading: - Make trades in securities for the primary and secondary markets

For currencies, stocks, bonds, derivatives, futures, commodities, asset-backed treasuries etc on

Behalf of institutional clients (mutual and pension funds), individual investors and for the

Banks themselves. Sales are another core component of any investment bank. Salespeople take the form of:

1) The classic retail broker

2) The institutional salesperson, or

3) The private client service representative. Brokers develop relationships with individual investors and sell stocks and stock advice to the average Joe. Institutional salespeople develop business relationships with large institutional investors. Institutional investors are those who manage large groups of assets, for example pension funds or mutual funds. Private Client Service (PCS) representatives lie somewhere between retail brokers and institutional salespeople, providing brokerage and money management services for extremely wealthy individuals. Salespeople make money through commissions on trades made through their firms.

In trading traders also provide a vital role for the investment bank. Traders facilitate the buying and selling of stock, bonds, or other securities such as currencies, either by carrying an inventory of securities for sale or by executing a given trade for a client. Traders deal with transactions large and small and provide liquidity (the ability to buy and sell securities) for the market. (This is often called making a market.) Traders make money by purchasing securities and selling them at a slightly higher price. This price differential is called the "bid-ask spread.CHAPTER 4

RISK INVOLVED IN INVESTMENT BANKINGIn the course of their operations, investment banks are invariably faced with different types of risks that may have a potentially negative effect on their business. Risk management in investment bank operations includes risk identification, measurement and assessment, and its objective is to minimize negative effects risks can have on the financial result and capital of a bank. Investment banks are therefore required to form a special organizational unit in charge of risk management. Also, they are required to prescribe procedures for risk identification, measurement and assessment, as well as procedures for risk management.

The risks to which a investment bank is particularly exposed in its operations are: liquidity risk, credit risk, market risks (interest rate risk, foreign exchange risk and risk from change in market price of securities, financial derivatives and commodities), exposure risks, investment risks, risks relating to the country of origin of the entity to which a bank is exposed, operational risk, legal risk, reputational risk and strategic risk.

Liquidity risk - is the risk of negative effects on the financial result and capital of the bank caused by the banks inability to meet all its due obligations.

Credit risk - is the risk of negative effects on the financial result and capital of the bank caused by borrowers default on its obligations to the bank.

Market risk- includes interest rate and foreign exchange risk.1. Interest rate risk is the risk of negative effects on the financial result and capital of the bank caused by changes in interest rates.2. Foreign exchange risk - is the risk of negative effects on the financial result and capital of the bank caused by changes in exchange rates.

A special type of market risk is the risk of change in the market price of securities, financial derivatives or commodities traded or tradable in the market.

Exposure risks - include risks of banks exposure to a single entity or a group of related entities, and risks of banks exposure to a single entity related with the bank.

Investment risks - include risks of banks investments in entities that are not entities in the financial sector and in fixed assets. Risks relating to the country of origin of the entity to which a bank is exposed -(country risk) is the risk of negative effects on the financial result and capital of the bank due to banks inability to collect claims from such entity for reasons arising from political, economic or social conditions in such entitys country of origin. Country risk includes political and economic risk, and transfer risk. Operational risk - is the risk of negative effects on the financial result and capital of the bank caused by omissions in the work of employees, inadequate internal procedures and processes, inadequate management of information and other systems, and unforeseeable external events.

Legal risk it is the risk of loss caused by penalties or sanctions originating from court disputes due to breach of contractual and legal obligations, and penalties and sanctions pronounced by a regulatory body.

Reputational risk - is the risk of loss caused by a negative impact on the market positioning of the bank.

Strategic risk - is the risk of loss caused by a lack of a long-term development component in the banks managing team.4.1 Need for risk management

The primary goal of risk management is to ensure that a financial institutions trading, position taking, credit extension, and operational activities do not expose it losses that could threaten the viability of the firm. As risk taking is an integral Part of the investment banking business, it is not surprising that investment bank have been risk management ever since they have been established. The only thing which has change is the complexity. It involves following steps

Identifying and assessing risks

Establishing policies, procedures, and risk limits

Monitoring and reporting compliance with reliance with these limits

Delineating capital allocation and portfolio management

Developing guidelines for new products and including new exposures within the current frame work

Applying new measurements methods to the existing productRisk management practices in front office

1. Taping of telephone lines of traders and dealers to resolve of disputes at a later date.

2. Restriction on personal trading by the dealer.3. Restrictions on transaction at off market rates and documentation procedures to justify any off-market transactions.

4. Restrictions on after-hours trading and off-premises trading and documentation procedures to justify them when undertaken.5. Adequate compensation policies should be formulated to protect dealers from losses in case of disputed traders.

6. Revaluation of position may be conducted by traders to monitor positions by the controllers to record periodic profit and loss, and by the risk mangers who seek to estimate risk under various market conditions.

7. Traders should maintain professionalism, confidentiality and proper language in telephone and electronic conversation.8. Management should analyze the trading activity periodically.Risk management in the back office

1. It should have written documentation indicating the range of permissible products, trading authorities and permissible counterparties.

2. It should have limits for each type of contract or risk type.

3. The management should explicitly state the procedure for the written authorization of the trades in excess of the laid down limits.

4. Adequate procedure for promptly resolving the failure to receive or deliver securities on the settlement dates must be established.

Other risk management practices

1. As with traditional banki9ng transactions, an independent credit function should conduct an internal credit review before engaging in transaction with the prospective counterparties. Credit guidelines should ensure that the limits are approved for only those counterparties that meet the appropriate credit criteria. The credit risk management function should verify that the limits are approved by the credit specialist.2. The assessment of the counterparties based on simple balance sheet measures the traditional assessment of the financial condition may be adequate for many types of counterparties. The credit risk assessment policies should also properly define the type of analysis to be conducted on the counterparties based on the nature of their risk profile. In some instance stress testing may be needed when counterpartys creditworthiness may be adversely affected by the short-term fluctuations in the financial markets.3. The top management has to identify those areas where the bank practices may not comply with the stated policies. Necessary internal controls for ensuring that the practices confirm with that stated policies should be put in place.CHAPTER 5

THE BIG PICTURE- MAJOR PLAYERS IN INVESTMENT BANKINGUntil the wave of consolidation and convergence that started in the 1990s in the financial services industry, the playing field had changed very little and was easy to understand. Commercial banks and investment banks each had their roles, as defined by federal regulations, and seldom did the two meet. And within investment banking, firms could be neatly categorized by their size, market focus, or both. At the top was the bulge bracket, which consisted of the six largest firms: Merrill Lynch, Goldman Sachs, Morgan Stanley, Salomon Smith Barney, First Boston, and Lehman Brothers. These firms still dominate the securities underwriting and M&A markets, though there are few name changes in the past few years. All firms beyond the bulge bracket were labeled boutiques or regional. Boutiques are niche firms that focus on a particular industry, such as technology, or financing vehicle. Regional, as the name implies, focus on financing and investment services in a particular geographic region. These labels are still used (although the smaller firms scorn the boutique image), but as the rapid pace of mergers and acquisitions continues to alter the landscape, the traditional categories are becoming less and less meaningful. Large commercial banks that have acquired investment banks are bringing large amounts of capital to the playing field, along with a mix of financial services more varied than ever before. Some of the major players on investment banking are:1. Bank of America Securities LLC -Bank of America Securities is the U.S. investment banking arm of Bank of America, one of the biggest commercial banks around. Together with Bank of Americas U.K. investment banking subsidiary, Banc of America Securities Ltd., it offers a full range of investment banking and brokerage services. The company was created in 1998, when its parent bank acquired Montgomery Securities. Later, Bank of America was acquired by NationsBank, and the combined entity took on the Bank of America name. Banc of America Securities main offices are in San Francisco, New York, and Charlotte. It employs people in areas including corporate and investment banking, the global markets group (debt capital raising, sales, trading, and research), portfolio management, e-commerce, global treasury services, and asset management. Banc of America Securities offers full-time and summer associate and analyst programs in the United States and in Europe. 2. Credit Suisse first Boston LLC - Credit Suisse First Boston is the result of the 1988 merger of the investment bank First Boston and Credit Suisse, a European commercial bank. In 2000, the firm acquired Donaldson, Lufkin & Jenrette, and a leading underwriter of high-yield bonds with a golden reputation in research. A bulge-bracket bank, CSFB ranked fifth among all banks in 2003 in terms of global debt, equity, and equity-related issuance. CSFB has experienced trouble in recent years, with business slackening in key areas (e.g., IPO underwriting) and regulatory trouble (the firm paid a $200 million fine in 2002 for research improprieties and another $100 million in 2002 to settle charges that it received kickbacks in the form of higher commissions from clients to whom it allocated hot IPO sharesand in the process rock-star tech banker Frank Quattrone resigned and eventually was convicted of criminal charges). The firm has also been losing key bankers in recent times; epitomizing this trend, the CEO of the investment bank, John Mack, announced plans to leave the firm in the summer of 2004, reportedly due to the fact that his desire to merge Credit Suisse with another firm was not in line with the desires of the majority of the directors of Credit Suisse. After that announcement, the firms head in China announced plans to leave the firm, and as this guide goes to press the firm must surely be worried that an exodus of the firms talent in Asia will ensue. 3. Deutsche Banc Securities Inc. - Deutsche Banc Securities is the full-service North American investment banking arm of German financial services giant Deutsche Bank AG. It includes Deutsche Bank Alex. Brown, which provides M&A, acquisition finance, and project finance advisory to clients in the health-care, media, real estate, technology, and telecom sectors. The bank has been undergoing some changes, with some key employees leaving the firm and the addition of a number of senior-level hires. In March 2004, Deutsche announced it was laying-off 50 employees in the equity group, including nine senior research analysts, dropping coverage of 100 of the 731 companies it used to cover in the process. Observers report that layoffs could continue as the bank cuts back on research coverage, a common trend on the Street. Overall, though, Deutsche Bank has been focused on building its presence in North America.

4. The Goldman Sachs Group, Inc. - Goldman Sachs was founded in 1869 when Marcus Goldman, an immigrant from Europe, began a small enterprise to provide an alternative to expensive bank credit. In the 1950s, Goldman played a lead role in establishing the municipal bond market, and in the 1970s the firm formed the first official M&A and real estate departments on Wall Street. Today it continues to sit at or near the top in most areas of investment banking advisory, sales, and trading. In the first 6 months of 2004, Goldman ranked second in global equity and equity-related business, second in global IPO underwriting, fourth in global investment-grade corporate debt, fourth in underwriting, and first in M&A advisory. Perhaps even more significant, it is probably considered by the majority of people in the industry as the gold standard in terms of the quality of its employees (a belief thats especially true among Goldman employees, naturally), what an investment bank should be, and how a bank should do business. (A fact thats a bit ironic given that Goldman has faced as much scrutiny as any other bank as the SEC and other regulators try to clean up Wall Street in the wake of the early-2000s banking scandalsand has had to pay a pretty penny to settle charges of misdeeds brought against it.) 5. J.P Morgan & Co. - This firm was formed by a mega-merger when Chase Manhattan, one of the largest commercial banks around, paid $33 billion to join with J.P. Morgan, one of the oldest and most prestigious commercial and investment banks in the world. Subsidiaries include J.P. Morgan Fleming Asset Management, which serves institutional investors; J.P. Morgan Partners, a private-equity house; J.P. Morgan H&Q, an investment banking arm focused on areas like tech and health care; and J.P. Morgan Private Bank, which serves wealthy private clients. And now, with the 2004 acquisition of Bank One, its getting even bigger. (However, the acquisition probably wont have a major effect on the way things are done in the investment bank, J.P. Morgan.) J.P. Morgan is a major player in terms of debt and equity issuance worldwide; in the first half of 2004, it was third in the league tables in global equity underwriting, in U.S. IPO underwriting, and in overall debt underwriting. It is also a player in M&Afifth best in the business, in terms of worldwide announced deals in the first half of 2004.

6. Merill Lynch & Co., Inc. - Merrill was founded in 1914, when Charles Merrill opened the first U.S. retail brokerage firm, winning his company the nickname the firm that brought Wall Street to Main Street. He was joined a year later by his friend Edmund Lynch. In recent years, the company has worked to increase its presence in the global market place. The firms strength lays in its vast retail brokerage network and large asset management business, as well as its position near the top of the global underwriting and advisory league tables. All has not been rosy for Merrill of late. Poor performance has forced the firm to drop thousands of employees over the past several years. In 2002, the firm was forced to pay $100 million to New York State after evidence supporting allegations of fraudulent stock recommendations by Merrill research analysts came to light. Also in 2002, the firm was one of a number of major banks paying between $80 million and $125 million as part of a $1.335 billion settlement with regulators for research misdeeds. In 2003, the firm was charged by the SEC with helping Enron fraudulently pump up its profits in 1999, and Merrill agreed to pay $80 million to settle.

CHAPTER 6THE EVOLVING INDUSTRY STRUCTUREAs the global economic climate cooled down following the economic and financial meltdown, so did investment banking performance. Lower interest rates drive business, such as mortgage-backed and municipal securities. At the same time, the big banks found them selves tremendously overstaffed, having hired new employees like gangbusters in the boom years of the 1990s. As a result, investment banks have started laying-off.

Investment banking has witnessed a rash of cross-industry mergers and acquisitions in recent times, largely due to the late-1999 repeal of the Depression-era Glass-Steagall Act. The repeal, which marked the deregulation of the financial services industry, now allows commercial banks, investment banks, insurers, and securities brokerages to offer one anothers services. As I-banks add retail brokerage and lending to their offerings and commercial banks try to build up their investment banking services, the industry is undergoing some serious global consolidation, allowing clients to invest, save, and protect their money all under one roof. These mergers have added a downward pressure on employment in the industry, as merged institutions make an effort to reduce redundancy.

The Industry One of the biggest issues was the fact that banks overrated the investment potential of client companies stocks intentionally, deceiving investors in the pursuit of favorable relationshipsand ongoing banking revenue opportunitieswith those companies. Firms also came under fire for the methods by which they allocated stock offerings (specifically, for whether they charged excessive commissions to clients who wanted to purchase hot offerings), as well as for possible manipulation of accounting rules in the course of presenting clients financial info to potential investors. By now, almost all of the important investment banks have paid fines totaling in the billions of dollars to settle allegations against them, and the scrutiny of regulators remains sharp. And banks are paying millions to purchase independent research to provide to their customers.

CHAPTER 7CONCLUSIONFor the past couple of years the investment banking industry has been shrinking and the current scenario calls for combined efforts by the regulators and the industry itself to take measures for improving the situation. At present the industry is going through changes. Many non banking finance companies are focusing on becoming multi business entities so that they can remain commercially viable. The corporate sector has perennial needs for services such as investment advisory, corporate restructuring, distressed assets acquisition and equity and debt financing. And as the economy improves the need for these services will further intensify. This indicates good prospects for the investment banks proficient in these areas of business. It is time for the investment banks to focus on developing competitive advantages in the form of wider outreach and ability to mobilize national savings with greater efficiency.

In this scenario, investment banks have had to increase their international presence in order to retain existing clients and to generate new business. They have been achieving these offices abroad as well as by acquiring or merging with foreign investment banks. Similarly investment banks from other countries have been strengthening their ties with American investment banks. The industry has been witnessing consolidation across geographical functional-supermarket, where all the financial need of all types of clients can be fulfilled. With the abolition of glass-Steagell act, it is possible for bank to convert itself into a supermarket that offers all types of financial services to issuers and investors, at both retail and wholesale level. The range of services offered may cover underwriting services, fund, management, insurance products, credit cards, loans, depository services. Corporate advisory services, trust services etc. The rapid technology changes have started affecting the industry. As various commercial banking and investment banking activities have become digitalized, the established players are facing challenge on pricing front from all small new players. This is big forcing big banks to find means of turning the digitalization to their advantage and reducing cost. Today they are focusing more on lower cost, better quality services, innovative products and new service channel so that can have deeper penetration in the market. During the downturn in the economy the demand for the industries services declines equally fast. The earning in the industry are extremely volatile as they depend upon extremely volatile factors like interest rates, exchange rates., inflation etc. they need to stay big enough at all times to be able to satisfy suddenly increasing demand, yet be flexible enough to be able to downsize quickly in a declining market.

Issuer

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