Presentationinvestment Banking

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    UIAMS, Panjab University , Chandigarh

    Dated 31st

    August, 2013

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    Introduction

    Investment banks play a significant role in the financial servicessector. However, Investment banking, as advisory financial services,emerged rather late.

    Formal Investment banking service in India originated with thesetting up of the Investment banking division by the Grind lays Bank

    in 1969 for undertaking management of public issue and financialconsultancy, followed by other foreign banks.

    Pursuant to the recommendations of the Banking Commission(1972), State Bank of India started Investment banking service in1973. The ICICI Ltd was the first development finance institution toinitiate such service in 1974.

    The period following the mid-seventies witnessed a boom in thegrowth of Investment banking organizations in the country whichwere sponsored by banks, financial institutions, NBFCs Brokers andso on.

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    An investment bank is a financial institution that assists

    individuals, corporations and governments in raising capital by

    underwriting and/or acting as the client's agent in the

    issuance of securities. An investment bank may also assist

    companies involved in mergers and acquisitions, and provideancillary services such as market making, trading of

    derivatives, fixed income instruments, foreign exchange,

    commodities, and equity securities.

    Definition

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    Established on June 16, 1933

    It had a stronger impact on US banking regulation

    The Banking act 1933 was a law that established the Federal Deposit InsuranceCorporation (FDIC) in the United States and introduced banking reforms, someof which were designed to control speculation.

    GlassSteagall Act was a reaction to the collapse of a large portion of the

    American commercial banking system in early 1933. It introduced theseparation of bank types according to their business (commercial andinvestment banking).

    The Glass-Steagall Act prohibited any one institution from acting as anycombination of an investment bank, a commercial bank, and/or an insurance

    company.

    History: GlassSteagall Act

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    Enacted on November 12, 1999

    The Gramm-Leach-Bliley Act allowed commercial banks, investmentbanks, securities firms and insurance companies to consolidate.

    Large financial-services conglomerates combine commercial banking

    and investment banking, and sometimes insurance. Such

    combinations were common in Europe but illegal in the United States

    prior to passage of the Gramm-Leach-Bliley Act of 1999.

    The Gramm-Leach-Bliley Act

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    SEBI Rules 1992 define Investment Banking as: A person who is

    engaged in the business of issue management either by making

    arrangements regarding selling, buying, or subscribing to securities asmanager, Consultant, Advisor or rendering corporate advisory services in

    relation to such issue management.

    Investment Banking in India

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    The origin of investment banking in India can be traced back to the 19th

    century when European merchant banks set-up their agency houses in

    the country to assist in the setting 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 Greenfield

    ventures.

    A few small brokers also started rendering Merchant banking services, but

    theirs demand was limited due to their small capital base.

    Evolution of investment

    banking in India

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    It was soon followed by Citibank, which started rendering these services.

    In 1967, ANZ Grindlays bank set - up a separate merchant banking

    division to handle new capital issues.

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

    concern and recommended setting up of merchant banking institutions

    by commercial banks and financial intuitions.

    State bank of India ventured into this business by starting a merchant

    banking bureau in 1972.

    Contd

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    By 1980, the number of merchant banks rose to 33 and was set-up by

    commercial banks, financial institutions and private sector.

    JM finance was set-up by Mr. Nimesh Kampani as an exclusive merchant

    bank in 1973.

    In 1972, ICICI became the first financial institution to offer merchant

    banking services.

    Contd

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    Underwriting (Public offering of securities)

    Trading of Securities

    Mergers and Acquisitions Private Placement of Securities

    Merchant Banking

    Securitization of Assets

    Trading and Creation of Risk Control Instruments Money Management

    ACTIVITIES OF INVESTMENT

    BANKERS

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    REGISTRATION OF INVESTMENT

    BANK

    Compulsory Registration:

    Investment bankers require compulsory registration with

    the SEBI to carry out their activities. They fall under four

    Registration categories

    Category I

    Investment bankers can carry on any activity relatedto issue management, that is , the preparation of prospectus and

    other information relating to the issue, determining the financial

    structure, tie up of financiers, final allotment of securities, refund

    of the subscription and also act as advisors, consultants,

    managers, underwriters or portfolio Managers.

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    Category II Investment bankers can act as advisors, consultants ,

    co-managers, underwriters and portfolio Mangers.

    Category III Investment bankers can act as underwriters, advisors

    and consultants to an issue.

    Category IV Investment bankers can act only as adviser or

    consultant to an issue.

    Thus, only category I Investment bankers could act as lead managers

    to an issue. With effect from December 9, 1997, however, only

    Category I Investment bankers are registered by the SEBI. To carry on

    activities as portfolio managers, they have to obtain separate

    certificate of registration from the SEBI.

    Net worth requirement for Registration is as follow:

    Category I : Rs. 5,00,00,000

    Category II : Rs. 50, 00, 000

    Category III :Rs. 20, 00, 000

    Category IV : Nil

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    OFFERING & SERVICES OF

    INVESTMENT BANKS

    Project Counselling: Project counselling includes preparation

    of project reports, deciding upon the financing pattern to

    finance the cost of the project and appraising the project

    report with the financial institutions or banks. It also includes

    filling up of application forms with relevant information forobtaining funds from financial institutions and obtaining

    government approval.

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    Issue Management: Management of issue involves marketing

    of corporate securities viz. equity shares, preference shares

    and debentures or bonds by offering them to public.Investment banks act as an intermediary whose main job is to

    transfer capital from those who own it to those who need it.

    After taking action as per SEBI guidelines, the Investment

    banker arranges a meeting with company representatives and

    advertising agents to finalize arrangements relating to date ofopening and closing of issue, registration of prospectus,

    launching publicity campaign and fixing date of board meeting

    to approve and sign prospectus and pass the necessary

    resolutions. Pricing of issues is done by the companies in

    consultant with the Investment bankers.

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    Underwriting of Public Issue: Underwriting is a guarantee

    given by the underwriter that in the event of under

    subscription, the amount underwritten would be subscribed

    by him. Banks/Investment banking subsidiaries cannotunderwrite more than 15% of any issue.

    Managers, Consultants or Advisers 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. Companies can appoint one

    or more agencies as managers to the issue.

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    Portfolio Management: Portfolio refers to investment in

    different kinds of securities such as shares, debentures or

    bonds issued by different companies and governmentsecurities. Portfolio management refers to maintaining proper

    combinations of securities in a manner that they give

    maximum return with minimum risk.

    Advisory Service Relating to Mergers and Takeovers: A

    merger is a combination of two companies into a singlecompany where one survives and other loses its corporate

    existence. A takeover is the purchase by one company

    acquiring controlling interest in the share capital of another

    existing company. Investment bankers are the middlemen in

    setting negotiation between the two companies.

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    Off Shore Finance: The Investment bankers help their clients

    in the following areas involving foreign currency. (a) Long term

    foreign currency loans (b) Joint Ventures abroad (c) Financingexports and imports (d) Foreign collaboration arrangements

    Non-resident Investment: The services of Investment banker

    includes investment advisory services to NRI in terms of

    identification of investment opportunities, selection of

    securities, investment management, and operational serviceslike purchase and sale of securities.

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    Loan Syndication: Loan syndication refers to assistance

    rendered by Investment bankers to get mainly term loans for

    projects. Such loans may be obtained from a singledevelopment finance institution or a syndicate or consortium.

    Investment bankers help corporate clients to raise syndicated

    loans from banks or financial institutions.

    Corporate Counseling: Corporate counseling covers the entire

    field of Investment banking activities viz. project counseling,capital restructuring, public issue management, loan

    syndication, working capital, fixed deposit, lease financing

    acceptance credit, etc.

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    Merchant Banking

    DEFINITION: In banking, a merchant bank is a financial institution primarily

    engaged in offering financial services and advice to corporations and

    wealthy individuals on how to use their money.

    The Notification of the Ministry of Finance defines a merchant

    banker as, any person who is engaged in the business of issue

    management either by making arrangements regarding selling,

    buying or subscribing to securities as manager, consultant,

    advisor or rendering corporate advisory service in relation to

    such issue management.

    I n short, merchant bankers assist in raising capital and advice on

    related issues.

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    Merchant bankers assist corporate in raising capital. They assist in

    issue of Shares, syndicating loans, public issue of debentures.

    They also actively arrange working capital.

    Projects scrutinize & persuade merger proposals.

    In BRITAIN merchant bankers & investment bankers are

    synonymous.

    In the U.S., Merchant bank means as investment bank which is

    well-equipped to handle multinational corporations.

    In INDIAmerchant bankers is a body corporate who carries on anyactivity of the issue management, which consist of preparing

    prospectus & other information relating to the issue. Merchant

    banks in India are not allowed to conduct any business other than

    that related to securities market.

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    Difference between investment

    and merchant banking

    Investment Banking Merchant Banking

    Investment banks focus on initial public

    offerings (IPOs) and large public and

    private share offerings.

    Merchant banks tend to operate on

    small-scale companies and offer creative

    equity financing.

    Investment banks only participated in

    underwriting and selling securities in

    large blocks.

    Merchant banks perform international

    financing activities such as foreign

    corporate investing.

    Investment banks rarely offer trade

    financing products to their clients.

    Merchant banks still offer trade

    financing products to their clients.

    In practice, the fine lines that separate the functions of merchant banks and

    investment banks tend to blur.

    In theory, investment banks and merchant banks perform different functions.

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    Services provided by merchant bank

    1. Corporate Counseling It includes a whole range of financial services provided by a

    merchant banker to a corporate unit a view to ensure better

    performance, maintain steady growth and create a better image

    among investors.

    It covers the entire field of merchant banking activities i.e., projectcounseling, capital restructuring, portfolio management and the full

    range of financial engineering including public issue management,

    loan syndication, working capital, fixed deposits, lease financing,

    acceptance credit, etc.

    A merchant banker finds out the problems of enterprise, which

    shall include organizational goals for the enterprise, size of the

    organization and operational scales, choice of a product, pricing,

    etc, and suggests ways and means to solve those problems.

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    2. Project Counseling

    Project counseling is an important merchant banking service

    which includes preparation of project reports, deciding upon thefinancing pattern to finance the cost of the project, appraising

    the project report with the financial institutions/banks.

    Project reports are prepared to obtain government approval of

    the project, for procuring financial assistance from financial

    institutions and banks, for ensuring market for the proposedproduct, for planning public issues, etc.

    Financing the project cost is an important aspect of project

    counseling.

    Merchant banker has to decide the financing mix of the internaland external sources of funds

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    3. Credit Syndication

    Once the client company has decided about the project proposed

    to be undertaken, the next step is looking for the sourceswherefrom the funds could be procured to implement the project.

    Merchant banker has to locate the sources of funds and comply

    the formalities required to procure the funds. This service

    rendered by the merchant banker in arranging and procuring

    credit from financial institutions, banks and other lending and

    investment organizations for financing the clients' project cost or

    meeting working capital requirement is referred to as loan

    syndication or credit syndication.

    Credit syndication in case of domestic borrowings is with theinstitutional lenders and banks.

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    4. Issue Management

    Management of capital issues is a professional service rendered by

    the skilled and experienced merchant bankers. Public issue management involves marketing of corporate securities

    by offering the securities to the public, procuring private

    subscription to the securities and offering securities to existing

    shareholders of the company.

    A merchant bankers post issue activities include final allotment

    and/or refund of subscription amount, calculation of underwriters

    liability in case of under subscription and complying the necessary

    statutory requirements for listing of securities on the stock

    exchange.

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    5. Under writing of public issue

    A fully underwritten public issue spells confidence to the investingpublic, which ensures a good response to the issue. Keeping this inview companies, which float a public issue usually, desire a fullunderwriting of the issue.

    Underwriting is only the guarantee given by the underwriter that inthe event of under subscription, the amount underwritten wouldbe subscribed in proportion by the underwriter.

    6. Bankers to the Issue

    The merchant banker can automatically become the banker tothe issue in the following cases:

    The bank is a broker to the company

    It has given underwriting commitments.

    It acts as a manger to the issue

    The function of a banker to the issue is to accept applicationforms from the public together with subscription money andtransfer them to the account of the controlling branch.

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    7. Portfolio Management

    Portfolio refers to investment in different types of marketable

    securities or investment papers like shared, debentures anddebenture stocks, bonds etc. from different companies or

    institutions held by individuals firm or corporate units.

    Portfolio management refers to managing efficiently the investment

    in the securities held by professionals to others.

    Merchant bankers take up management of a portfolio of securities

    on behalf of their clients, providing special services with a view to

    ensure maximum return by such investments with a minimum risk

    of loss of return on the money invested in securities.

    A merchant banker while performing the services of portfoliomanagement has to enquire of the investment needs of the client,

    the tax bracket, ability to bare risk, liquidity requirements, etc.

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    8. Advisory Services Relating To Mergers and Takeovers

    Merchant bankers are the middlemen settling negotiations between the

    offered and the offeror. Their role is specific and specialized in handling

    the mergers and taker over assignments. Being a professional expert, the

    merchant banker is apt to safeguard the interest of the shareholders in

    both the companies and as such his assistance is useful for both the

    companies, i.e. the acquirer as well as the acquired company.

    Once the merger partner is proposed the merchant banker has to

    appraise the merger/takeover proposal with respect to financial

    viability and technical feasibility.

    He has to negotiate with the parties and decide the purchase

    consideration and mode of payment.

    He has to comply with the legal formalities like getting approvalfrom the Government/ RBI; drafting the scheme of amalgamation;

    getting approval of company Board, financial institution, high court

    if required; arranging for the meeting etc.

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    9. Venture Capital Financing

    Financing an emerging high-risk project is called venture

    capital financing.

    Many merchant bankers are entering into this area by also

    financing viable upcoming projects.

    The financing is by subscription to the equity capital, while

    repayment is by selling the equity through stock market when

    the shares are listed.

    10. Leasing

    Leasing is an another lucrative area of financing where merchant

    bankers are turning.

    Leasing is a viable source of financing while acquiring capital assets.

    The services include arrangement for lease finance facilities for

    leasing companies, legal; documents and tax consultancy.

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    11. Non Resident Investment

    To attract NRI investments in the primary and secondary markets, the

    merchant bankers provide investment advisory services to the NRIs in

    terms of identification of investment opportunities, selection of securities,portfolio management, etc.

    They also take care of operational details like purchase and sale of

    securities securing the necessary clearance from RBI under FERA.

    12. Arranging Offshore Finance The merchant bankers also help their clients in the following areas

    involving foreign currency financing:

    Financing Of Exports And Imports

    Long Term Foreign Currency Loans

    Joint Ventures Abroad

    Foreign Collaboration Arrangements

    The assistance rendered as in the case of financial services covers

    appraisals, negotiations, compliance with procedural and legal aspects etc.

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    13. Management of Fixed Deposits of Companies

    Recently, merchants bankers have begun to structure and mobilizefixed deposits for their corporate clients.

    They take care of the procedural and legal aspects, and also mangethe collection and subsequent servicing of the deposits.

    Advice with regard to the amount to be raised, interest charges,terms of deposits and other related issues are also offered to theclient.

    14. Relief to Sick IndustriesThe services offered by merchant bankers to sick industries can besummarized as follows:

    Assessment of capital requirements and counseling on capitalrestructuring;

    Appraisal of technological, environmental, financial and other factorscausing sickness;

    Preparations of programs and packages for rehabilitation of sick units;

    Providing necessary assistance where the rehabilitation package involvesmergers or amalgamation;

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    Example of banks providing

    merchant banking services

    These Banks are registered with SEBI as CategoryI Merchant

    Banker for providing all the major Merchant Banking services. Citibank was the first merchant bank in India.

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