Module 1

INVESTMENT BANKING AND

FINANCIAL SERVICES

KIRAN S ASSISTANT PROFESSOR BGSIT,BG

1 NAGAR 2/19/2016
  Introduction:
 Definition of investment banking:
A specific division of banking related to the creation
of capital for other companies. Investment banks
underwrite new debt and equity securities for all
types of corporations. Investment banks also
provide guidance to issuers regarding the issue and
placement of stock.

KIRAN S ASSISTANT PROFESSOR BGSIT,BG

2 NAGAR 2/19/2016
  DEFINITION of 'Investment Bank - IB'
 A financial intermediary that performs a variety of services.
Investment banks specialize in large and complex financial
transactions such as underwriting, acting as an
intermediary between a securities issuer and the investing
public, facilitating mergers and other corporate
reorganizations, and acting as a broker and/or financial
adviser for institutional clients. Major investment banks
include Barclays, BofA Merrill Lynch, Warburg's, Goldman
Sachs, Deutsche Bank, JP Morgan, Morgan Stanley,
Salomon Brothers, UBS, Credit Suisse, Citibank and
Lazard. Some investment banks specialize in particular
industry sectors. Many investment banks also have retail
operations that serve small, individual customers.

KIRAN S ASSISTANT PROFESSOR BGSIT,BG

3 NAGAR 2/19/2016
 Functions of investment banks
 IPOS: initial public offering. Investment banking
helps in raising the capital for both public as well
as private company by providing underwriting
securities.
 Investment management: Investment
bankers also provide advice to investors on
buying selling and managing
securities(bonds,shares,) like other facilities
like real estate,hedge fund, mutual fund
etc.the investment management division has
been divided into separate division called
KIRAN S ASSISTANT PROFESSOR BGSIT,BG
4 private wealth management and private client
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  Boutiques: Small investment banking firms
providing financial services are called boutiques.
They are mainly specialised in trading bonds,
advising for mergers and acquisition , and
providing technical analysis.
 Mergers and acquisitions:
The company offers mergers and acquisition
services.
 Structuring of derivates:
the company needs to focus on structuring
derivatives .
KIRAN S ASSISTANT PROFESSOR BGSIT,BG
5 Merchant banking :
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  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.

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  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.
 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
KIRAN S ASSISTANT PROFESSOR BGSIT,BG
7 some of the best known financial services firms
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  The 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
KIRAN S ASSISTANT PROFESSOR BGSIT,BG
for a given
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amount of risk on their balance sheet.
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  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.)
 private investors (both directly via investment
contracts and more commonly via collective
investment schemes, mutual funds) .
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  Role as an advisor
 Deciding how to raise capital is a major decision for
any company or government. In most cases, they
lean on an investment bank – either a large Wall
Street firm or a “boutique” banker – for guidance.
 Taking into account the current investing climate, the
bank will recommend the best way to raise funds.
This could entail selling an ownership stake in the
company through a stock offer or borrowing from the
public through a bond issue. The investment firm can
also help determine how to price these instruments by
utilizing sophisticated financial models.
 In the case of a stock offering, its financial analysts
will look at a variety of different factors – such as
earnings potential and the strength of the
management team – to estimate how much a share of
the company is worth. If the client is offering bonds,
the bank will look at prevailing interest rates for
similarly rated businesses to figure out how much it
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compensate borrowers.
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  Investment banks also offer advice in a merger or
acquisition scenario. For example, if a business is
looking to purchase a competitor, the bank can
advise its management team on how much the
company is worth and how to structure the deal in
a way that’s favourable to the buyer

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  Underwriting stocks and bonds:
If an entity decides to raise funds through an equity
or debt offering, one or more investment banks will
also underwrite the securities. This means the
institution buys a certain number of shares – or
bonds – at a predetermined price and re-sells them
through an exchange.
 Research – Larger investment banks have large
teams that gather information about companies
and offer recommendations on whether to buy or
sell their stock. They may use these reports
internally but can also generate revenue by
selling them to hedge funds and mutual fund
managers.

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12 NAGAR 2/19/2016
  Trading and Sales – Most major firms have a trading
department that can execute stock and bond
transactions on behalf of their clients. (L8) In the past,
some banks have also engaged in proprietary trading,
where they essentially gamble their own money on
securities; however, a recent regulation known as
the Volcker Rule has clamped down on these
activities.
 Asset Management – The likes of J.P. Morgan and
Goldman Sachs manage huge portfolios for pension
funds, foundations and insurance companies through
their asset management department. Their experts
help select the right mix of stocks, debt instruments,
real estate trusts and other investment vehicles to
achieve their clients’ unique goals.
KIRAN S ASSISTANT PROFESSOR BGSIT,BG
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  Wealth Management – Some of the same banks that
perform investment banking functions for Fortune 500
businesses also cater to everyday investors. Through
a team of financial advisors, they help individuals and
families save for retirement and other long-term
needs
 Securitized Products – These days, companies
often pool financial assets – from mortgages to credit
card receivables – and sell them off to investors as a
fixed-income products. An investment bank will
recommend opportunities to “securitize” income
streams, assemble the assets and market them to
institutional investors.

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  The Bottom Line
 While some of their more complex products have
given investment banks a bad name, these firms
play an important role by helping companies and
government entities make educated financial
decisions and raise needed capital.

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15 NAGAR 2/19/2016
 Types of investment banks
1. Full service firms: they provide services from
underwriting, mergers and acquisitions,
distribution, brokerage, structured instruments,
asset management.
2. Commercial banks:
3. Boutique firms
4. Brokerage firms
5. Asset management firms

KIRAN S ASSISTANT PROFESSOR BGSIT,BG

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 Merchant Banking services
 Merchant banking services:
 Meaning:
 A bank that deals mostly in (but is not limited to)
international finance, long-term loans for
companies and underwriting is merchant bank.
Merchant banks do not provide regular banking
services to the general public.

KIRAN S ASSISTANT PROFESSOR BGSIT,BG

17 NAGAR 2/19/2016
 Services of merchant banking
1.Corporate counselling:
Corporate counselling covers the entire field of
merchant banking activities, project counselling,
capital restructuring , project management
2.Project counselling:
it includes preparation of project reports, deciding
upon the financial pattern to finanace the cost of
the project and appraising the project report with
banks
3.Loan syndication- merchant banking provides
assistance in getting loans from banks
4.Issue management-
KIRAN S ASSISTANT PROFESSOR BGSIT,BG
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  The issue management has been divided into 2:
1. Pre issue management
2. Post issue management
The pre issue management is divided into:
 Issue through prospectus, offer for sale and
private placement
 Marketing and underwriting
 Pricing of issues

KIRAN S ASSISTANT PROFESSOR BGSIT,BG

19 NAGAR 2/19/2016
 Issue through prospectus-
It is done through sale of securities in private
placement, the investors include LIC,UTI,GIC,SFC.
 Marketing: after despatch of prospectus to SEBI ,
the merchant bankers arrange a meeting with
company representatives and advertising agents
to finalise arrangements relating to date of
opening and closing of issue, registration of
prospectus , launching publicity campaign.
 Pricing of issues:
The capital issues have opened the capital market
to free pricing of issues.
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  Post issue management :
It consists of collection of application forms and
statement of account received from bankers,
screening applications, deciding allotment
procedure ,mailing of allotment letters ,share
application and share certificates and refund
orders.
 Underwriting of public issue:
Underwriting is a guarantee given by the
underwriter that in the event of undersubscription ,
the amount underwritten , would be subsrcibed by
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  Managers, consultants or advisors to the issue.
The managers to the issue assist in the drafting of
prospectus, application forms and completion of
formalities under the companies act, appointment of
registrar for dealing with share applications and transfer
and listing of shares of the company on the stock
exchange.
5. Portfolio management:
Portfolio refers to investment in different kinds of
securities such as shares, debentures or bonds issued
by different companies and securities issued by the
government.
It is not merely a collection of unrelated assets but a
carefully blended asset combination within a unified
framework.
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PROFESSOR BGSIT,BG

combination of securities in a manner that they give

 6.Advisory service relating to mergers and
acquisitions:
It also provides mergers and acquisition services to
the clients .
7.Off shore finance: the merchant bankers help
their clients in the following areas involving foreign
currency.
1. Long term foreign currency loans
2. Joint ventures abroad
3. Financing exports and imports
4. Foreign collaboration arrangements

KIRAN S ASSISTANT PROFESSOR BGSIT,BG

23 NAGAR 2/19/2016
 Changing landscape of investment
banking regulation of the capital
market
 Growth of new issue market: the growth of new
issue market is unprecedented since 1990-91.
the amount of annual average of capital issues by
non government public companies was only
about rs 90 crore in the 70s, the same rose to
over rs 1000 crore in the 80s and further to
22,233 crore.
 Entry of foreign investors: an outstanding
development in the history of indian capital
market was its opening up in 1992 by allowing
foreign institutional investors to invest in primary
and
KIRAN secondary
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PROFESSOR and also permitting indian
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companies to directly tap foreign capital through
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  Changing policy of financial institutions: with the
changing emphasis in the lending policies of
financial institutions from security orientation to
project orientation, corporate enterprises would
require the expert services of merchant bankers
for project appraisal, financial management. The
policy of decentralisation and encouragement of
small and medium industries will further increase
the demand for technical and financial services
which can be provided by merchant bankers.

KIRAN S ASSISTANT PROFESSOR BGSIT,BG

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  Development of debt market- the concept of debt
market has set to work through national stock
exchange and over the counter exchange of
India.
 Innovations in financial instruments: the Indian
capital market has witnessed innovations in the
introduction of financial instruments such as non
convertible debentures with detachable warrants,
cumulative convertible preference shares, zero
coupon bonds, deep discount bonds, triple option
bonds,secured premium notes, floating rate
bonds, auction rated debentures.
KIRAN S ASSISTANT PROFESSOR BGSIT,BG
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  Corporate restructuring: as a result of liberalisation
and globalisation, the. competition in the corporate
sector is becoming intense. To survive in the
competition, companies are reviewing their strategies
, structure and functioning. This had led to corporate
restructuring including mergers, acquisitions, splits,
disinvestments and financial restructuring.
 Disinvestment-the government raised rs 2000 crore
through disinvestment of equity shares of selected
public sector undertakings in 1993-94. the
government proposes to shift the present method of
periodic sale of public sector shares to round the year
offloading of shares directly on the stock exchange
from the year 1995-96
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 SEBI guidelines for merchant
bankers
 To protect the investors interest, the SEBI has made it
mandatory for merchant bankers to disclose on their
websites the following:
 For each issue the matters to be disclosed are:
1. Three year track record of companies whose IPO’S /FPO
s were managed by them for each issue the matters to
be disclosed are :
2. Issue size
3. Extent of over /under subscription
4. The shareholding of the QIBs at the end of each of the
three subsequent financial years.
5. Financials of the company for 3 years
6. Earnings per share and price earning multiple at the end
of the each three financial years
7. Post listing via a vis the peer as well as the industry
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8. The extent of trading of shares whether active or thin.
 Brokers and sub brokers
 DEFINITION of 'Broker'
 1. An individual or firm that charges a fee or
commission for executing buy and sell orders
submitted by an investor.
 2. The role of a firm when it acts as an agent for a
customer and charges the customer a
commission for its services.
 3. A licensed real estate professional who
typically represents the seller of a property. A
broker's duties may include: determining market
values, advertising properties for sale, showing
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properties
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clients with regard to offers and related matters.
 'Broker'
 Traditionally, only the wealthy could afford a
broker and access the stock market. The internet
triggered an explosion of discount brokers, which
allow investors to trade at a lower cost, but don't
provide personalized advice. Because of discount
brokers, almost anybody can afford to invest in
the market.

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 Functions of brokers
1.Client registration-
first of all , a trading broker has to enter into an
agreement in the specified format with his client
before accepting any orders on his client’s behalf.
It has to be on stamp paper. The information may
release to :
Investors financial profile
Investors risk profile and risk taking ability
Investors social profile

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  The broker has to obtain 3 size photos in case of
individual clients and all partners in the case of
partnership firms.
2. Obtaining margin money-it is also mandatory for
the broker to collect margins from his clients in all
cases where the margin in respect in his client in
settlement , would work out to be more than 50000.
3. Execution of orders-the main objective is to
execute the client orders carefully.
4. Supply of necessary slips- on execution of trade ,
the broker .i.e. the trading member should inform
his client the order number.
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  Issue of contract note- the broker should then
issue a contract note to his clients for all trades,
whether for purchase or sale of securities ,
executed with all relevant details.
This contract note should be issued within 24 hours
of the execution of the contract.
 Statement of particulars in a contract note-
It is mandatory to mention the details of the
investors say: the name, address, and sebi
regulation and registration number of the member
broker.
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  Payment/delivery of securities- it is the duty to
make the payment or delivery of securities within
24 hours of time.

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 Registration of sub brokers
 Definition. A 'Sub-Broker' is any person who is
not a Trading Member of a Stock Exchange but
who acts on behalf of a Trading Member as an
agent or otherwise for assisting investors in
dealing in securities through such Trading
Members.

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 Apart from the brokers, there are other category of
persons called sub brokers. As a matter of fact, a
sub broker is not a member of stock exchange .
But he is a person who acts as an agent of a stock
broker.
 Jobbers- a jobber is a professional independent
broker who deals in securities on his own behalf.
His main job is to make a margin of profit from the
price variations of securities.
 Tarawaniwalas- he is an active member in bse.he
is similar to a jobber in the london stock
exchange.
 Commission brokers-he buys and sells securities
on behalf of his clients for commission.
 Sub brokers-he is an agent of stock broker. He
helps
KIRAN the clients
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through the stock broker.
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