t

i' t, ]

-ir,li,:$n

'

'

inr r"T'i*'"'

\,,'' \, \, \r
"-

L,l ''.,

C*orr=*

THE INVESTMENT BANKING PARADIGM

8.1

CONCEPT AND DEFINITIONS

with the primary In a very broad perspective,'Investment Banking'as the term suggests, is concerned movement of the i.e. function of assisting the capital market in its function of capital intermediation, for thoie who have them (the Investors) to those who need to make use of them
financial resources from

on one hand, and the generating GDp (the Issuers). At the macro level, banks and financial institutions for capital flows capital market on the other, are the two broad platforms of institutional intermediation of banks in the counterparts the are banks in the economy. Therefore, it can be inferred that investment it Nevertheless, of eapital. capital markei in discharging the critical function of pooling and allocation of its sphere nalrow very a to would be untair to conclude so, as that would confine investment banking backed by evolution and decades, the Over finance' global of world activities in the contemporary time and again to suit the fuelled by technological developments, investment banking has transformed exciting segment of financial services' needs of the finance communitl' ts become the most vibrant and have paid the price for excessive at times, but Investment bankers have always enjoyed celebrity status, flamboyance as welll.

.Dictionary of Banking and Finance'2 defines 'inv-estment bank' as a tefln used in the US to corporations ontheirfiruancial mean,abankwhich dealswiththe tmderwriting of new issues and advises This definition obviously captures affairs, .The equivalent term in UK for such function is 'Issue House'. floatations and'financial advisory the core activity of an investment bank pertaining to capital market the evolution of investment banks pointer towards a service to corporations. It does not however, throw provided by Bloombery which detines an is as global on"-rtop financial shops. A broader defrnition of services, inclrtding aiding in the investment bank as a 'financial intermediary rhat performs a variety The

-r:li

acting as brokers to both sale of secttrities, facilitating mergers and other corporate te-organisations, definition captures several individual and institutional clients ancl trading for its own accoltnr'. This them' functions of an investment bank though it still does not capture all of industry, in the rvords of John F' banking investment the of In keeping with the ever expanding trend This definition can be Marshall and M.E. Ellis,'iniestntei banking is whqt investment banks do'3. and how histori functionality in their evolved explained in the context of how investment banks have in its present banking of investment and regulatory intervention have shaped such evolution. Much banks have investment form owes its origins to the financial markets in USA, due to which' American can banking' 'investment been leaders in th1 Rmerican and Euro markets as well. Therefore, the term
be said to be of American origtn.

a1

8.I.1

Merchant Banking
rnl

At this stage. ir would be necessary for the fine Iine of distinction^between

.:;,xl::yl:::i:xx,,:;:y;;:,T#,:.:#;;;,'i;i;:i:;:ir:ii,r",:;.",
connores

;;';:;J'*"se

of

a conceptual.discussion

on rhe subje*. ro draw

tn shares and hetps to raunch

comparrmenrar approach

;H'X"l,J'aiT:n+#i:,,*..'"il[#.T,:.ffi
tl'estmentl;;;;"t'^"nt

rh,,,"..hui:;^:{,:,!'l':r;l?I*!::*,,,r",i,.,,.i,2'i,',! ';":,:,::',li'u::;;,,:,;;7;;,,?ir* ie;-;il;Jnented activity consisring oruourgirg rru# ,na trading

u",r""n*Joi'r..,i,
banJting and invesrrnt invesrtnenr

yI[

""t}l'*::,'1$r:lrGl;;;;';fi:T;Hing a"nnition
X?ff

;;".'.ffi i;T:'i-

**r,tl*****r; il;';::,
r'o,,r';'g
dspect nas has beex been rhe rrra_uur"a an

banks' 'Meru:hanri*tirs

rnvestment

'"i'i'a 'o"'r" it',i,;;;;;';,';;:::::;,',{:#, !r;;::i{:i::xi{"t*::,K3!: mercha;;ffi;J:il.ffi::',:'H:,:r'"","!,fi adju-nct;-;;;;ii**es i;ixix!*[1*#,jl: buvouts unJ u.qrrritr;;;;*.,, tn"*'irrJ"'s tt" in*itrn";;;;;?is primarily t1.T:rchanre,;u,T,ll.j:4"::ffi1;*r,ru*ii:#;,i[:il1:,,1,,, {,i {;, of fura. uylrlr""rl**, t..* trr* a"r".ru",
advisor. such as its owrr bank in ourside

llt.Juin or uS origin that emanates rrom i, irJZrir,,n, of nmkins dire* ir.n no'l di'rec'ltv

b,,rii'8

is an umbreltu

such described

iIL;* *:n:*i:j":i:;:;":;'t:.:r;::::t:,y,;;;;',iJ't{iiiliTffiii:il"nx':,"triH ts therefore that ola fund-baseJ;;;;::r,"d rrjo.l"rtr.'r

According,o u,o.ouT

"::I;::1-;;;;f:fi:::j1:i?ii3,,lH:,il*ffT:[:,|;;1esses
"t'n.

and,he,,oni*i,* u.a,ur. oi
business

ii!.':!",i:ir;;'-;?:':-,,:;:,,,i{ii';"::!::;'"!1i!"!r"

u,,,*,, *,,,,*-,

,,

o:;:;':,,,

:::;::,;:r:{;:,!::,'"an''"ii'iu'i";;';:,X::''::;ro::::,';;{:;:,'iot ""i'"s :e ort acquisitiorts, merge_1s.. erc. ' This s on the ;r-iJJ connotation foreign of rnerch*r'u"rtirgjr"rfi.uol, {::,:8'*?r "r, referred to as .merchjril: uuriJ "uo,or ;d;;;":vrce marker inrerm"diu,ion,l, 9,,0,1r; #],. ;#:l3r,T.:'i1"ffi;i:::stme,t banri,, i, ,n" uK was ,"rrr."rt""j;r..f"r.#Iil the US investmenr urrr, "*"r.0 ,"i';;3,;:.#; H:[llfri:1,."11#t
as 'utt) person w serins. l:,?.,: con.rtttrartr, adris,er .,,,,:-:_ofn:r,ng

;,;;';,'ciccepring birs

speciatizes

't

_l*lk*:i#::l 1,,tr,[T.;IlTi:::,:i-il:, b1.rnakins;:;:;;;;);:,:ned

;.,1..o1n".,.0

irrro,,.;r":).':: '"b,r,l'it,i,,ilt'u"tt Thereforb, in lfldia ,n..1,,0"r,,,g ,".?nun i;;;u',r:;(:::r1' 'se^.'ice under raw ana acrru;tierl., ,n."."_,,i,.-"1',lil,;i;,:'.1rffiffi-""T.:, connorarion or ,issue

, of issue nnrrasement :,,t;;;';r';:;,'*"r'chant eitlter o'

tggz

;:! gir : :,

rro

m,he,aw and regu,a,i

Banket')

R,t.s'

on

;;Li::::!"!;;;:'; ::::fl:;:;:::"f,;:;
rr*rio^
is more in the tines or the uK

ifffi;*i"#:,{#i'.:!r:Hi':,H;::"'ing r", * r...r,uniur;;il.l'"'f"u,*,r 'l"o;#;:'

rn such securiries.

i"'""

tyJ", p.ouia"a

,i"T." rcgtrlarory r;;;"r''s

onerous responsibitv ',i:iilthe investo-rs towards who invest require ,n" ,lr.irrrrJ

ilffiIi#

:|*;,*i

anking firms to promote qualitv

The Investnrcnt Banking

Paradigm

8.3

issues, maintain integrity and ensure compliance with the law on own account and on behalf of the issuers as well. In India, the merchant banker leading a public offer is called the 'Lead Manager'.

To conclude the above discussion, it has to be understood that the term 'merchant banking' has different connotations in the US and other markets. In the US market, it is a fund-based activity. In UK and in India, it predominantly connotes intermediation and advisory activity in connection with public floatations of securities. However, it is clear lhat 'investment banking' is a term of wider import describing a range of fund-based and fee-based capital market activities performed by investment banks. 'Ivferchant banking' is a term of much nrrrrower import defining either a fund-based activity (as in the US Market) or a predominantly fee-based service concerning largely with issue management and activities connected therewith (as in the UK and Indian markets).

8.2

EVOLUTION OF AMERICAN IT{VESTMENT BANKS

The earliest events that are relevant for this discussion can be traced to the end of World War I, by which time, commercial banks in the US,{ were preparing fbr an economic recovery and consequently, to the significant demand for corporate finance. It was expected that American companies would shift their dependence from commercial banks to the stock and bond markets wherein funds were available at lower cost and for longer pedods of time. In preparation for a boom in the capital markets in the 1920s, commercial banks starled to acquire stock broking businesses in a bid to have a presence in such markets. The first such acquisition happened when the National City Bank of New York acquired Halsey Stuart and Company in 1916. As in the past, in the entire 1920s, investment banking meant underwriting and distribution of securities The stock and bond market boom of the 1920s was an opportunity that banks could not miss. But since they could not underwrite and sell securities directly, they owned security affiliates through holding companies. However, the compartments were not maintained in a water-tight tashion. The affiliates were thinly capitalised and were financed by the parent banks for their underwriting and other business obligations. While the boom lasted, investment banking affiliates made huge profits as underwriting fees, specially in the segment called 'Yankee Bonds' issued by overseas issuers in US market. In the stock market, the banks mainly conducted broking operations through their subsidiaries and lent margin money to customers. But with the passage of the McFadden Act tn 1927, bank subsidiaries began underwriting stock issues as well. National City Bank, Chase Bank, Morgarand Bank of America vrere the most aggressive banks at that time. The stock market got over-heated with investment banks bortowing money from the parent banks irr order to speculate in the bank's stocks, mostly fbr short selling. Once the general public joined the frenzy, the price-earnings ratios reached absurd limits and the bubble eventually burst in October 1929 wiping out millions of dollars of bank depositors' funds and bringing down with it banks such as the

f '.r

Bank of United States.

8.2.1

Regulation of the Industry

In order to'restore confidence in the banking and financial system, several legislative measures were proposed, which eventually led to the passage of the Banking Act 1933 (popularly known as the GlassSteagall Act) that restricted commercial banks from engaging in securities underwriting and taking positions or acting as agents for others in securities transactions. These activities were segregated as the exclusive domain of investrnent banks. On the other hand, investment banks were bared from deposit

8.4

Investment Banking

commercial banking that raised deposits fiom risk-averse clepositors and investment banking that operated on a high-risk model. It was also perceived that breaking up large universal banks such as J.p. Nlorgan would eventually lead to specialized institutions in the respeitive areas of the loan and securities markets. By 1935' investment banking became one of the most heavily regulated industries in USA. The Securities Act, 1933 provided for the first time the preparation oloffer documents and registration of new securities with the federal government. The Securities Exchange Act, l9341ed to the establishment of the Securities Exchange Commission. The Maloney Act of 1938 ied to the formarion of the NASDAe, the Investment Company Act, 1940 brought mutual funds rvithin the regulatory arnbit and the Investment Advisers Act, 1940 regulated the business of investment advisers and rvealth managers. Due to the strict regulation against universal banking, there were break-ups in large banks such as J.p. Morgan. subsequent to the passage.of the Glass-Steagall Act, a splinter group f-* J.p.Morgan set up ilIo.gun Stanley investment bank while J.p.Morgan itself continued as a commercial bank.

of investment banks to such risk. Therefore, the regulators peiceived a conflict of interest between

the floatation of corporate securities, i.e. the crealibn of primary market for securities. It was also extended to mean at a second Ievel, secondary market ma1<ing through securities dealing. The only exception was with respect to the issue of commercial paper by c(lrporations to finance their working capiial requirements. Although such paper competes directly with short-term loans from banks, investment banks had the freedom to facilitate the issuance of such securities and to subscribe to such issues as well. The main concem of the regulators at that time was the inherent risk of capital market investments and exposure

and colporate lending, which were constdered the exclusive business of commercial banks. The Act thus provided water-tight compartments that were non-existent earlier. Since the passage of this Act, investment banking became narrowly defined as the basket of financial services associated with

taking

8.?.2 Birth of.Contemporary Universal

Banks

l,
i:
I

ii

Amendments, 1975 that permitted commercial banks to have subsidiaries (called section 20 subsidiaries) that were allowed to undetwrite and trade in securities. In 1990, J.p. Nlorgan was the first bank to open a section 20 subsidiary. Since the Glass-Steagall Act did not apply to foreign subsidiaries of US banks, they continued to underwrite in the EurobonJ market and by t-lb,i, tt had a 52vo market share in that business' But there was stiffcompetition from Japanese "y banks in this market and by l9g7 , theyunderwrote only 25Vo of the Eurobond issuances. During the economic growth and globalisation of the 1980s, investment banking expanded to several new areas and services which included currency trading, real estate,

After the passage of the Glass-Steagall Act of the I 930s, until the beginning of the 2 I ,t century, investment banking had been through several phases of transformation. which hacl broken down thl wabr-tight compartments to a great extent. Due to the 1973 Arab oil embargo. world economies were under pressure and inflation and interest rate volatility became disturbing. It was at this time that institutional investors made their advent into securities markets. It was also the time when the industrial and financial service sectors were beginning to expand and globalise. Due to these developments, investment banking and commercial banking once again became constrained by the very legislation that was meant to clean up the system in the 1930s' This led to several relaxations ouei tt'," years such as the Securities Acts

and several others. But the sick market crash of 1987 once again brought f:T::.u'^" lcurities the focus back to core areas of specialisation. Similarly the ambitious expansion on a global scale was :i also halted to some extent. However, technological advancement in the 1990s and th; ,"uil"biily ,, global access through the revolution in communication technologies fuellerl the global growth again.

financial futures, bridge loans,

*:,1;!

..

ii

fr

t_ tl

The Invesfinenl

,ll' Lookirg

dilution over the at the archaic objectives of the Glass-Steagall Act and its subsequent Modernisation (Gramm-Leach-Bliley) .a*"i"rlli *u, r*u15, repealed and replaced by the Financial restrictions among commercial anti-affiliation the removed e.i"irbqq on Novembe r 12,1999.This Act institution created after the mega first the of one ffi;, inu"***t banks and insurance companies. banks' Salomon investment of two the merger deregulation was Salomon Smith Barney, formed by and Travelers' bank' commercial was the largest Brothers and Smith Barney. Similarly, Citibank which by the acquired later was company, m"rg"d to form Citigroup. Salomon Smith Barney
an insurance

Citigroup to form the largest universal bank'

century' had grown much beyond the The investment bankilg industry though, by the turn of the security dealing. The contemporary shift is towards traditional areas of underwriting new issuances and for structured financial deal making providing expertise in new prodo.t, and sophisticated techniques investment banking encompasses a considerable spectrum and managing risks. Apart from these activities, lnergers and acquisitions and LBOs' fund of advisory services in the areas of corporate restructuring' side, investment banks participate in derivatives raising and private equity. on tlie dealing and trading investment banks also provide financial market, arbitrage and speculation. In structured finance, instruments. engineering through securitisation deals and derivative -The prominent us-based investment banks are listed in Table 8.1 .
Table

8.1

Prominent US-based Investment Banks

Merrill Lynch &

Goldman Sachs

ComPanY

Salomon Smith BarneY (CitigrouP) Morgan StanleY Dean Witter

J.P.

Morgan Chase

Bear, Stems

&

ComPanY

Lehmann Brothers Bank of America

:l

8.3- EUROPEAN INVESTMENT BANKS

banks were established. The term since the late nineteenth century when most of these

--,''u Incontinental Europe (excluding UK), the concept of a '[Jniversal Bank'had been the undercurrent 'universal banking'
(lending activity) with investment banking (investment meant the co-existence of commercial banking iense of harnessing the vast retail customer base and distribution activity). Their universality wis in the investment banking arms' These issues that these banks enjoyed to market secrriiy issuances by their d'affairs and markets designaied in the local currencies. France's Banques

were mostly in tfre local Germany's Universalbanken are examples' market, had'its own structure The United Kingdom, which is Europe's largest investment banking Brothers' which played a Barings r,ir,ory. The oldest ,n"..hurt bank in London was of stock-brok function the """1;;J;;;; prominent role in the nineteenth century. Securities distribution was

&6

Investn ent Banking,

secondary market trading was taken up by jobbers and advisory services were provided by merchant those that banks. The term 'merchant bank' was evolved to distinguish between comlnercial banks and provided capital marker advice. However, the breaking down of such barriers in 1986 by allowing banks diversified io oo,n broking outfits led to consolidation and most broking firms got absorbed by bigger and pure between distinction of disappearance the witneising entiiies. Around the same time, US too was primary with involved entities banking broking entities restricted to secoudary markets ancl investmEnt and Europe markets. The US investment banks with their integrated global business model entered UK neutralising by further and later into Japan. The introduction of the Euro in i999 helped the US invasion group the local culrency advantages enjoyed by European universal banks. By 2001, the US bulge European the garnered2g.TZo oithe investmentbanking fee generated in Europe as compared to 16.37o by

t
{
ri.l

universal banks.

post-l9g6, the merchant banks and commercial banks in UK could not match up to the US onslaught which ultimately led to the sale of SG Warburg, the leading merchant bank to Swiss Bank Corporation (which was acquired by UBS later) in 1995. In i997, Natwest Bank and Barclays Bank exited investment this upheaval, banking business. Morgan Grenfell, a merchant bank was sold to Deutsche Bank in 1990' In This led failures' niche players such as Drexel Burnham and Ba.'ings Bank also collapsed with internal
bigger to cross border M&A between European banks inrer-se and their American counterparts to create investment banks. UBS Warbu.g *u. born out of the merger of UBS and Swiss Bank Corporation,

,l

{
.;

which had earlier acquired SOWarburg. Deutsche Bank acquired Bankers Trust. The prominent investment banks outside of US are listed in Table 8.2.
Table

8.2

Prominent Non-US Investment Banks

UBS Warburg
Credit Suisse First Boston

ABN Amro Bank

Deutsche Bank

Alex Brown (Deutsche Bank grouP)

Oppenheimer Securities (CIBC group)

Banker's Trust (Deutsche Bank group) Barclays Bank

Dillon Read (UBS grouP)

Paine Webber (UBS grouP)

Donaldson, Lu{kin & Jenrette (CSFB group)

CIBC Wbrld Markets

Nomura Securities

Nikko Securities
Daiwa Yamaichi

iil;1

1i:,
$

h.'g.c GLOBAL INDUSTRY

'#**"

STRUCTURE

,nirr,' in kev business':'*-'l,ll,,.i';'"'i'ffi;;irlng ""uge to their isincetheydefine.i"'iJ"''ii""ilthe'rndustryandsenda'*'iiJ;;;;;";angingwithtime,generally i*us'{ra'live

'i''u"rr' ?11i5;'ffi-"#$:l';itl*rtln::iin:,1t11111 . n,0.,,'it'"*." ';:"%;;; "' ctrnsisting of group banks take tn.'"-l'i:i:l1o:i:",, btrlge rt'' thetr

scale is industrv on a^globai banking investmenr

"l'.'*"1'-'-H$"X?ffi"H#'lf*t*:"*:*
clie
about

:
'

uunt ,'

''i, ;HH"i,,;*::ktt:i*fl;n:'*ln;i}!',,f#'iJ;;il;rins-1l'lrreir .p
.'ur"

iii:fir,,,

:':::ll:. il;..i"""t

rrrTable 8.3 so as are llstsu in market shares

r]',nt-i:-t^i,rted

;"ilffi

an lnoicatio'i

"t?"it

industry' importance in the

""'""

t,'

,**""'

"*r"

*.a

qhares \ir^rtzer SMJes -.,.^ Market Banks with Illustrative Inr,est,rent Major Global 9.0

Merrill LYnch
Goldman Sachs Boston Credit Suisse First (CitigrouP) Salomon Smith Barney

1.5

1,)
6.7

6.3
5.5

Witter Morgan StanleY f)ean

J.P.

Morgan

4.6 3.6

UBS Warburg
Lehmann Brothers Dezitsche Bank

15
2.4 csttnettl bcu*s" nave i'e' which do nol

Bank of Amerlca

t[*:iii:i'#*;**f:.p'* their important t-::m;:U:Xi::Hi;::ll",t"'-;nd ."IJ:i:;rl'*x*t1,:5,1ff ."Irl:ilil#ilirn:,ni,-iii,"{r.$iilrilTilT:s'flilri:**ni::ftT:il:rr'l :ommerciar banking '"ll'','j','nli#;; ril*iil'lfI[[f art The t Witter. witter. Listed above liJi#; henkins. ri'" -.*^^r ;^rri"i. andrn'
and above.

withinrhe risting

r,,.,@ff"1J[iH,i"JrJ.i:J:fi;:;;i:Zji.:,1:*:*,:',ffi',ffi:
: :- r.hle
R.4.

bothcommercial

Deutsche (German) CSFB Deutsche Bank

I.P. Morgan Chase

UBS Warburg

Citibank
Bamey Salomon Smith (Investment Bank) (Private EquitY) Schroders

Morgan Grenfell Donaldson, Lutkin

Chemical Bank
(merged)

Di[on

Read

&

Jenrette

(Investment Bank)

AIex Brown Bankers Trust

Beacon GrouP Robert Fleming Hambrecht &

Paine Webber

ao"'

PhiliPs & Drew (*=:d] Swiss Bank

8.8

Inrestment Bunkins

Therefore, the global inr..'estment banking industry ranges from the acknowledged global leaders listed above to a larger nurrber of mid-sized competitors at a national or regional level and the rear end is supported by boutiqtr6 firms or advisorl, and sectoral specialists.

8.4.1 Faettirs Responsible for Growth of Universal Banks and

.-''Financial Conglomerates
Globally, a lar-ee number of corporations prefe4 to deal with one-stop financial shops rather than look for separate entities to serve thejr commercial banking and investment banking needs. Keeping this trend in view, in 1997 the US Federal Reserve Board (the country's central bank) raise<l the amount of revenue that a commercial bank's section 20 subsidiary can earn from underwritin-s and dealing in securities to

of its total revenue. This led to further marriages between commercial and investment banks and their subsidiaries. Acquiring profitable securities businesses also made sense to a bank's bottom line. The second factor that contribufes to the rising influence of global universal banks has been the advent of globalisation which brought along with it increasing integration of global financial markets, liberalization of capital flows across economies and the emergence of sophisticated technologies and trading mechanisms. Global transactions such as cross borcler mergers and acquisitions, international capital raising through global security floatations and synclicated loans have given rise to the criticality of having global financial conglomerates. To serve their clients better, many investment banks and universal banks have gone global either singly or in joint ventures and have become large financial conglomerates. Merrill Lynch, Goldman Sachs, Morgan Stanley Dean Witter, Citigroup, JP Morgan Chase and others have operations in almost all major financial centers of the world. Many other Wall Street firms and pure investment banks pursued the globalisation strategy. Major US banks earn more than a quarter of their revenues liom global securities businesses. Similarly, several non-US banks and securities firms set up their presence in the US such as Deutsche Morgan Grenfell, UBS Warburg, HSBC. CSFB, CIBC Oppenheimer, Natwest Markets, Dairva and Nomura Securities.
25Vo

8.5

BUSINESS PORTFOLIO OF IM/ESTMENT BANKS

Globally, investment banks handle significant fund-based business of their own in the capital market along with their non-fund service portfolio, which is offered to clients. However, these distinct segments
are handled either on the same balance sheet or through subsidiaries and affiliates depending upon the regulatory requirements in the operating environment of each country. A11 these activities are segmented

:t

across three broad platforms-(a) equity market activity, (b) debt market activity and (c) merger and
based on whether a particular investment bank belongs to a commercial banking parent or is
a

alone pure inveslment bank. As far as the US investment banks are concemed, core inyestment banking (underwriting, isquii management, marketing and research), securities portfolio (proprietary trading and investment), asset management and advisory services are the main contributors to their revenue. Merrill Lynch a pure investment bank, derives a higher proportion of its income from secondary market brokerage. highest revenue earner is however proprietary trading and investment. Morgan Stanley earns alni equal revenues from investment banking and asset management though its highest revenue is :igi

fiom proprietary trading and investment. In general, it is found that proprietary trading and invesnn6 contribute the.largest revenue to US investment banks. The top underwriters and new issue

#-_---

ffi

,*,\

The Int,esfinent

Lufkin areGoldmanSachs,Merrill.Lynch,MorganStanleyDeanWitter,'gsFBandJ.P.Morgan.Theleading of pure debt securities) are Donaldson

investment banks in

;;"r;,

Investment banks

transactions buy-outs and management buy-in as investors in managernent in come they banks manage Besides, occasions, rn'herein investments .rn.r.hunt ba,king'). under above discussed deals' t-heir investors in such buy-out private equity funds, products form a significant loan or uBS Warburg, 'h";';i;;;;present ,h" ,, iunt, univers-Jl In rhe case of Goldman Sachs' Merrill Lynch banks porlfolio. business 'u"hls do not oart of the debt marker banking in their portfolio and'therefore' t'u'" finance Stanley O*, Witt"i do not structured Morgun in "o**"tcial a large presence -d leading investment banks have offer loan products. H";;";;,;;reral backed securities (MBS) and mortgale (ABS)' ,u"1, u, asset-backed securities

Dean Witter' Merrill Lynch and Morgan Stanley up to trillions of dollars annually' business islarge and measures The global mergers t u"qu;rilons financial advisory business' ptayll"ui ooriro.y role in this booming *"g*"niof (already

n""Jin"o*" underwriting'iir*r.",

o;;ir.;

*"t

P"*;;;;i"ent

c;;;;;

and securitisation producis

credit derivatiu" proouJts

of tlai ftansactions that are structured St*"t ..d rnu""ing1niJr""t "'iei'^1'."n such as of lenders' Many investments banks ,u,,,g'."qrir.*"nl *a oi;;;;;"* pri"ing are exffemely to meet desired Commercial banking presence Citigroup ac ttrat have a Sffong concerned' are Deutsche Bank, ABN Amro, structures ei'J"'JrtngSLd credit derivative deals. As far invest time a many' and active in structured financing "' nt^' issuances of such securities them origlnaT in dealing banks investment "'a 'financial engineerittg'' activity-is also known as in them. This line or r-rr'in"r, and mid-sized investment or ao*"'ti" ptuy"" in each country the larger firms, there are a host investment banks
Besides

in "t'tuin banks, which eitherup".irrir" u' -unig'-ent or hedge runds' bu*ion in the overseu, estate and other exodc markets' ffade, commodity hedges, real banking activity' spectrum of global investment Exhibit 8.1 represents the broad t'"o'ipu""' a wide area of capital g.1, it may be appreciated- tt',ui iir.rt*ent banking market' Exhibit From financial exposure to the capital una rtut ,..ui"", ,ru activity' businerr", based based market " 'igtirit"'t or tneir income from non-fund u ,igniri"uri Jo*ion"nt them from pure Though invertrr,"nt bur.,i., ulro "urn services' which distinguishes clients support to -ith them outright and it is their capacity banks underwrite issues io Uuy investment market, capital US to client companies' merchant banks. In the signrficant financiar exposure taking opon ,t play a major role banks se* them to investors thereby "rnr"ives global inuestment power t or.r..,r]"*r;i";; the financial large As dealers' being Besides, capital market

local *urr,",* o, in

product

ttg*"'i''

Some'

*u'oil"iiilU:Hffi;;;""''";;;:j:::

il;;-#ed

r
jj

..-f

as instirutionut

of. leflfrtiel' i, ,riairg "na t urirg-iurg. rr.roitgt in.it e equity and derivative segmenrs' uotti ,i.urities ro. a mirket -Jnv Salomon they take positions * _*" the market' Goldman Sachs' i.fl;;";;!ai1"",iti tn"r.ror" unJ iru"r,;A;, 1r They hold larg" market investors both on

inr.r,orl

Roth.schild and others are significant Brothers, Menill Lynch, Schroeders, under their management' of the billions of dollars of funcls rheir own accounmJ;; l"rrrrr

N OF INDIAN INVESTMENT BANKING

8.6.1 Origin

decades' can be traced to over thlee this-.branch of financial services of existence the though In India,

investmentbankingwaslargelyconfinedtomerchantbankingservices.Theforerunnersofmerchant

ffi0"

Exhibit 8.1: Global Investment Banking paradigm

:
itl

sector banks. Based on the American experience, which led,to the passige or the ,r.* Glass-Steagall Act, the Commission recommended a separate structure for merchant urrtr"iirii;; f from commercial banks and financial institutions. Merchant banks were *"uni ,o i;;;r-*.ro 1; -'--"-o- ri;** and provide advisory services. + Following the above recommendation, the SBi set up its merchant banking division in l972.otrrr, ]ii: banks such as the Bank of Inclia. central Bank of India. Bank of Baroda,iyrairo,".nrnr., rrJ"o iif National Bank' canara Bank followed suit to set up their merchanr banking outfits. rcrcl w;; ;" i^r ,i*. financial inidmdon to set up its merchanr bankingdivision in rqz:. rh; i?;;;;r;;;;. ;tid ffi ,:,i*,5 IDBI with the latter setting up its merchant banking division in l992.Howeyer, by the mid ",$

in the RBI followJ uy it arii# i in 1970' Th'ese two banks were providing services for syndication of loans anrl raising ;r " ;i from other advisory services. "qrr,ylr* It was in 1972 tiatthe Banking Commission Report asserted the need for merchant banking ,"*r.", i| in India by the public
-

banking in India were the foreign banks. Grindlays Bank (now merged with Standard Chartered Bank India) began merchant banking operations in 1961 wirh a licence from

,.

"rgtri"r;;' |iil ,,..iiirt

..i1{

.-

"fillltt

Tlte

nv

e snnertt

ltnkh g-!!!!9!-]!)

sector'banks di,visions of public mcrehant: banki-ng thc of most nineties,

a5 ur i

}":,Jlllit}*ff

r":l1,#?'oi'-*"'*".' q '-'"" ffi:j#jtri+:*kt$tix**i"...t,'l'-=Trr*i:*f; lorttteo initially us u hant banking

1"i", t*t
tnere

i;''u'' Growth

,Merchanrbanking in lndia

[lJ;;:1*:#],';,;:;.il$J^*:lll,:'ff ''ilerwri'lingor tglul"l,Ti:il1'::'[ff tSlXii:"LtT in issue *...ion, ,,:lsgturered with SEBI.J"r"-"i,n". bankers *tn, ,ir*t ilflu'Y f1;"":,TL;'iill1,[:i:::-":::]:i+hTi#*llllun#ll'i:ilff j*;:;
1i,.,",'0,,,n",,*0.i,'i"''o*i'otq''"',t::XiiiHii.i.".,r-f,, * i,se,r, trre n, l#,q -:.T,1:[:nii,',#tj"::1fi rrr tttu ""-"ntnetles' thousand in tlle

T#;;, *::1,.1;i1|;Jil:::l,lli; :::ii:l: or rree r.:il*"i;;';;;, introducrion "ffii,;,",;,.0 t-il:::'"f o'l'^: tv t"'e11 *"1 fouowed indusry i.banking hecric activity ::l::: i:l:t};:xilll,lii;

- ^ -1-ar r.rus ri'en a slror

i. artn with the advent the arm in rhe

the subsequent of SEBI in 1988 and p"r, ,qq:. the merchant with rhe

i"'lTn'""'*'"'

;;;t

;llt

or armost

*::,:-i**xx*;i*i,##**,1****l**i*q*#":*r^1 t' r"llu'l,ried

i"i,n.u
tt'g

banks ilJ:i;T :::*[l,i:T,T:lJLL"J ;:?i::I1..'i,,.',;.nr counrerparts' n:,I';'.[lT [[J:l: u"'"* oi in:.-::'.:l;^: f":J:t;"r" or less simila' a""rop*"nt as its western investmetrt birnks' tl,l1"-tlr*li;il"'* n,, l:tiirhrt tnt t''ui;-"lii *i'u'' market
mav he said ,n*" u,.ua,r,,

to orrer a broader

#ffi;i,""ry*I:*::ffiu}",iil'fil::,:lt:: in rn'l,a ii
capital

il"il

i'""IT:'ii,i,",;';;; corporare d.b, '".,'*u",", in ruitse*ic" *P'::^:rdary '.gn,'n'' especll market, ffiU; listed on the NSE' the se1, BSE una urooi'i's,il;;;;"t"s has been trr" r,.,ra"q.ia1;':.i,n ln corrlpanr( on tle
market' bigger industrv plaverl

ililiil',Jl:[,1];j;i["# Secondrv' u:',l.],ll*;;;,;;;;'.

""i"l"t'l':tt:; '' r:T'lT;;jl,l!:il:ill,o]l",deterrenr

'in"rtn'inttt

the activelv tradecl

nls 3bsrrt 5000 listed J;;t';; i" below these numbers'

s.TCHARACTERISTICSANDSTRUCTUREoFINDIANINVESTMENT over the yea \''-'-characteristic structure own its in evolved

*:n:TI^lll}llil'J:x;i:,,i::yj:_i*. t"ot'n ,.gu,r,orir'""t' on

rhe

in India has

to be perrorm"o

"ll'"*''i'e;i "'i'v

'[t

does not uqy reg'ulrtory regime

t1ffii:L'"",":"tl1 ::Jfio''-o ti"

auir,,".*"1:::#J,,"';::*l: ftitni t"t'sive.exposL

*i';s"r;,i[n:ffi:[

+'-l,:;:*11*:.l.;l:;**riil::';.fi
;:

;ix:ili

j;5"flfl il**f;i*;:l':['Ti:iT]'"',"ffi or
p'""'iutialir-1"'tty
und"t relevant provisions
tr

t'TirJ\*:itlnrl:l'ilrd:ilJii*":ffi
5;1n'l}.'ll,lil;;;;mmerciur

have been

il

li

I
lll
B

h;

8.12

Investment Banking

banks in India have to follow the provisions of the Banking Regulation Act and the RBI regulations, which prohibit them from exposing themselves to'stock market investments and lending against stocks

beyond specified limits.

Therefore, Indian investment banks follow a conglomerate strucflue by keeping their business segments in different corporate entities to meet regulatory norrrs. For example, merchant banking business has to be in a separate company as it requires a separate merchant banking licence from the Securities and Exchange Board of India (SEBI).'Merchant bankers other than banks and financial institutions are also prohibited

from undertaki-ng any_bgsilqpq qth-e1 t[an that in the securities market.]owever, since banks tre mqeafb-* ihe Baliking Refulation Act, they cannot perform investment banking-to a large extent on the same balance sheet. Asset management business in the fonn of a mutual fund requires a three-tier strucflii6ifiitEi?he SEBI regulations.'Equity research should be independent of the merchant banking business to avoid the kind of conflict otlnter#dd"TmlrAmerican investmentbanks..securities busiiess iii's lo U6i6gi'aGa into a different company as it requires-.q stock exchange membership aparLfryq1._.S_EBl:-qg1t$gr. Investment banking in IndifTis-also been influenced by business realitiei-io"i-iifr[?ilent. fhe financial services industry in India till the early 1980s was driven largely by debt services in the form of term fin3-nc-iqg frqm lnancial institutions and working capital financing by comrnercial banks and nonbanking financial companies (NSfCst. Capital market services were mostly resfiicted to stock brokiug activity which was driven by a non-corporate nnorganised industry. Merchant banking and asset management.services came up in a big way only with the opening up of the capital rnarkets in the early nineties. Due to the primary market boom during that period. many financial business houses such as financial institutions, banks and NBFCs entered the merchant banking. underwriting and advisory business. While most institutions and commercial banks floated merchant banking divisions and subsidiaries, NBFCs combined their existing business with that of merchant banking. Over the years, two developments have taken place. Firstly, with the downturn in the capital markets in the later phase, the merchant banking industry saw a tremendous shake out and only about 10% of the larger firms remained in serious business. The other development is that due to the gradual regulatory
developments in the capital markets, investment banking activities came under regulations which required separate registration, licensing and capital controls. Due to the above reasons, Indian investment banking industry has a heterogeneous structure. The bigger investment banks have several group entities in which the core and non-core business segments are distributed. Others have either one or more entities depending upon the activity profile. The heterogeneous and fragmented structure is evident even if Indian investment banks are classified on the basis of their activity profile. Some of them such as SBI, IDBI. ICICI, IL & FS, Kotak Mahindra Capital, Citibank and others offer almost the entire gamut of investment banking services permitted in India. Among these, the long-term financial institutions (IDBI and ICICD converted themselves into full service commercial banks. They also have full service investment banking subsidiaries under their fold. Other entities such as NBFCs or subsidiaries of public sector banks mainly offer merchant banking and corporate advisory services. Some others specialise in merchant banking and other capital market services. There are also several others who are only into corporate advisory services but prefer to hold merchant banking or underwriting registrations. As of now, there are no global Indian investment banks although there is a bulge bracket of investment banks in India that have some overseas presence to serve Indian issuers and their investors. At the middle level are several niche players including the merchant banking subsidiaries of some public sector banks. Some of such subsidiaries have been shut down or sold off in the wake of the two securities

'.|;

ffi, til.

have had successful merchant banking actiiities. Among the middle level players are also merchant banks structured as non-banking financial services companies such as Rabo India Finance Ltd, Ambit,

.s@l

1993 and in 2000. However, certain banks such as Canara Bank and punjab National Bank

Meghraj etc. There are also in the middle level, some pure advisory firms such asLazardCapital, Ernst & Young, KPMG, Price Waterhouse Coopers etc. At the lower end are several niche players and boutique firms, which focus on one or more segments of the investment banking spectrum.

Table

8.5

Major Indian Investment Banks

SBI Capital Markets Ltd. Kotak Mahindra Capital Company JM Morgan Stanley Ltd
DSP Merrill Lynch Ltd.

ICICI Securities Ltd IDBI Capital Markets Ltd

..Enam Financial Consultants Ltd.

Thble Industrial

8.6

Leading Indian Universal Banks and their Investment Banking Affiliates

IACI
Bank Ltd

State Bank

Kotak

UTI Bank

Punjab

Development Bank of India Ltd.

of India

Mahindra
Bank Ltd.

Lrd

National
Bank

IDBI Capital Markets Ltd.

ICICI
Securities Ltd.

SBI Capital Markets Ltd.

Kotak Mahindra Capital Company

UTI
Securiiies Ltd.

PNB Gilts Ltd.

8.8 SERVICE PORTFOLIO

8.8.1 Core Services

OF INDIAN INVESTMENT BANKS

The core services provided by Indian investment banks are in the areas of equity market, debt market and advisory services. These are profiled below.

8.8.7.7 Nlerchant Banking, lJndenoriting and Book Running

As mentioned earlier, the primary market which was quite small in India, was revitalised with the abolition of the Capital Issues (Control) Act 1947 and the passing of the Securiries and Exchange.Board of India Act L992. The SEBI functions as the regulator for the capital markets much in the lines of capital market

very closely regulated by SEBI. When the primary markets are buoyant, issue management, bookbuilding and syndicated underwriting form a very dominant segment of activity for most Indian investment banks. A segment of the primary market is also the private placement market,.especially for government securities and, commercial paper and bonds floated by public sector banks and corporations. Investment

regulators of other countries such as the SEC in USA. SEBI vide its guidelines dated June 1992 introduced free pricing of securities in public offers for the first time in India. The public offer market is

ll,

Erfl,lli

placements as well' and hand holding them in the private banks have been managing the public offers uarket as well' thereby

of the private placement SEBI has gradually U".n-in.."u.ing its ,"gutuiion, role therein' making *""r.hunt bankers play a significant

g.g.r.2
t*o ,uin

Mergers and Acquisitions

Adoisory

pretty The mergers and acquisitions industry was

n:t::nt t'-1dl1,Tt:r to 1994

has grown st g,ificantly

post-2000andcross-bordertransactionsinr,olvinglncliancompaniesconstituteasignificantchunk.The

industry are: factors that have given a big push to this to consolidate' that have forced the In<lian industry The forces of liberalisation and globalisation known popularly its guidelines, o The irrstitutionalisation of corporate acquisitions by SEBI through as the Takeover Code' The larger investment banks has always been M&A advisory' One of the cream activities of investment services in while some of them provide pure advisory banks specialise in M&A as a core activity. the open banking licences irom SEBI also manage relation to M&A, others holding valid merchant offers arising out of such corporate events'

8.8.1.3 CorPorate Adoisory

relating to project practice in corporate advisory services Investment banks in lndia also have a large ('*t'^1T,f.:".L1ry:::l
financing, corporare resrructuring, capital

througir equity repurchase: structuflng compinies Act 1956), raising private equity, of.buyback ofters under section 1-TAofthe important these of Some areas' added specialisecl joint-ventures and strate-eic partnerships and other value book' 'uariro.y services t ur" discussed in clifferent chapters of this

r..,ri"iua"g

i""'

:t
:i
ltl

8.8.2 Allied Businesses 8'8'2'1 securities 'Business

other investment

'tl: ,j,

UTI Bank and Kotift The universal banks such as SBI' ICICI' IDBI' addition several segments of the seconclary market' In distribution firms in both the equity and debt banks such as DSP Merrill Lynch and banks such as the IL & FS ancl p"ure ir",'"stment
JMMorganStanleyhaveaStrongpresenceinthisareaofactivity.Aftertheintroductionofthederivative banks' Derivative trading'

Mahi,clra have their broking and

:i

oi specialisation for investment segment, it had provided an additionut ur"u bdcoming the areas are the new segments that are fast risk management and structured product offerings research securities business also provides extensive of future potential for Indian investment banks.ihe institutional the The secondary market services cater tQ both based products and guidance to investors.

'8.8.2.2

and non-institutional investors'

.n
.:;l:. 'ira':

Asset Maiagement Seruices MostofthetopfinancialgroupsinlndiawhichhaveinvestmentbankitlgbusinessessuchasthelClCL have their JM Morgan Stanley' Sgt and IL t Fl also the IDBI, Korak Mahindra, DSp Menill t-yn.t, grew separate entities' Mutual Fund industry presence in the asset management business through alorce to reckon rvith in the capital market' Mutual significantly in India from tG late nineties and is funds have sophisticated fund management' I\tlutual funds provide the common investor the service of been discussed in ChaPter 15' into the business of starting dedicated venture Several Indian investment banks have also ventured Bank' Mahindra group' |L&FS' IDFC' UTI' Canara capital and private equity funds. ICICI Bank, Kotak process the in reportedly is SBI equity funds' IDBI and others have dedicated venture capital and private

p:
't.:,ii]

,*

rilfr
'lr',r.ii

,it..
ai:,i

i'ii

*
.r..Yl +8"

',:$rti

.:r;ii
_

.\'li

l:,rl

-t;t':

:,:1:)b

:.,.f'.'

r"''

The lnt'estment Bank

8.1s

to set uP ae^t1'tng up with foreign funds several investment banks Besides' in fund' discussed venture a been of setting up equrty business has Venture capital and private

funas' India specific private e[uity

Chapter 15.

S,s.2.SlnuestmentAduisoryandWealthManagement investors' This can be ManyreputedinvestmentbanksnurtureaSeparateservice,:"c-".1'tomanagetheportfolioofhigh types of non-institutionai other and trusts oerworrh individuals, ;;;;;i;r, or non-dis"".*y'v rytr"l'":i:X?"ffJ1HIT"X',tlI^[T:":"i strucrured either as " d;;ii;;'rv However, ln sevel investible.funds. good public the investor rs prclvided activity since it invotves off.r- inu"rt-ent advice wherein discussions *unu*"il.ilr.**."* further lor offer porttblio may refer to chapter 15 from time to ti*"' n"uao
investment recommendations services' and investment advisory on wealth management

ExhibitS.2:BusitrcssPortfoliooflndianlnvestmentB%nks

8.16

Investment Banking

8.9 INTER.DEPENDENCE BETWEEN DIFFERENT VERTICALS

IN INVESTMENT BANKING
As is evident from the above, there are different verticals in investment banking and they do enjoy synergies with one another. While some of the service or business segments form the core of investment banking, others provide invaluable support. It is important to understand the inter-dependence and complementary sri.,.n.. of all these business segments. While merchant banking largely relates to management of public floatation of securities or reverse floatation such as the buy backs and open offers, underwriting is an inherent part of merchant banking for
public issues. Similarly, bought out deals and market making are a part of the process of floating issues on the OTC Exchange of India. Market making offers liquidity and depth to the secondary market and thereby complements primary market floatation. Advisory and transaction services have a close linkage with merchant banking as more often than not, such services culminate in a merchant banking assignment for a public issue or a reverse floatation. Such serv'ices also help in maintaining an enduring relationship with clients during times when merchant banking is not a hot activity due to depressed market conditions. The other segment of primary market activity, i.e. venture capital and private equity has equal synergies with merchant banking. Being in venture capital business enables identification of potential IPO candidates quite early, which helps not only in generating good fee income from nterchant banking services, but also in good capital gain for the venture capital invested at earlier rounds of financing in such eompanies. Similarly, being in private equity business helps in harnessing the potential offered by later stage antl listed companies, rvhich may approach an invdstment bank primarily for merrhant banking services. The allied business verticals in the secondary market operations also have synergies with those in the primary equity and debt market segment as far as investment banking is concemed. Stock broking and primary dealership in debt markets nu,ture institutional. corporate and retail clients who can be tapped effectively for asset management, portfolio management. and private equity businesses. In addition, presence in the equity derivative and foreign exchange derivative segments can help in offering solutions in ffeasury management to clients. In addition, the advisory and transaction services vertical can draw expertise from such segments in providing structured financing solutions its clients. All these vefticals 3r'e driven by support services such as sales and distribution and equity research and analysis. Lastly but importantly. the capability in sales and distribution determines the success of the merchant banking vertical. Thus. it may be seen that the growth and success of an investment bank depends on its strengths in each vertical and how well it combines them for synergies. To sum up the discussion, investment banking is a business that is very sensitive to the economic and capital rnarket scenario and therefore, the broader the platform of operations, the more is the likelihood of an investment bank surviving business cycles
and sudden shocks from the market.

8.10

CONFLICT OF INTEREST IN INVESTMENT BANKING

With the repeal of the Glass-Steagall Act, regulators had to put in place systemic checks in the US (known as 'firewalls') to prevent the section 20 subsidiaries of banks from accessing the funds of their pa,rent commercial banks. Several firewalls were introduced both at the corporate level and at the management and employee level. However. the firewalls could not prevent impending disasters that rocked the US'capital market at the turn of the century. The most burning global issue in the investment banking industry at ihe beginning of the 2lst century became the conflict of interest between investment banks and their research analysis divisions. In the

F!',.

The Investntent Banking Paradi

8.17

of the Enro1, Worldcom and other corporate disasters, this issue gained significant importance. (SEC) initiated investigations into instances of fhe Securities and Exchange Commission in the USA shares in hot IPOs to impofiant clients steering artd research in .r,-"n, banks issuing over-optirnistic i vested interests. In such investigations, some of the banks have been imposed fines. Merrill Lynch

million in regulatory proceeding in 2002 brought against its misleading was also in the dock and found itself paying the I ir."*.f, reports. Citigroup's Salomon Smith Bamey l h"avi"rt of fines. CSFB was also in trouble with the regulators. Most of the other top investment banks
.paid

up fines to the extent of $ 100

in 2002. CSFB was fined for misleading investors on offerings in its role in the infamous off," technology shares. JP Morgan on the other hand, was under a cloud for balance sheet partnerships it had crafted for Enron. In Besides, investment banks were also the targets of several lawsuits filed by aggrieved investors. Stanley lae 2A02, the French luxury goods leader LVMH filed a 100 million euro suit against Morgan close advisory alleging that its research report on LVMH was biased because of the investment bank's of underwriter the also was Stanley Morgan NV. Group rir,al Gucci arch relationship with LVMH'5
also found their names in the fines list

Morgan Chase and others such as Goldman Sachs, Lehman Brothers, Bear Stems, Deutsche Bank, JP

Gucci's IPO in 1995. in IMay Both the NySE and the NASDAe came our with 'research analysts conflict of interest rules' good was a this felt that observers 2002 which was subsequently approved by the SEC. Market may be bank an investment development from the point of view of addressing conflict of interest. While of example advising a client on a buy out, its private equity arm may be in the fray for its purchase. An was the .sale of the power storage business of Invensys in 2001 wherein Morgan Stanley was the

this advisor in the $505 million sale to EnerSys, a company owned by Morgan Stanley Capital Partners (Morgan Stanley's private equity arm)' research So, how does the conflici of interest really arise? Most investment banks'have in-house of functions vital perform divisions as a suppot't function as discussed earlier. The research divisions or operations tracking corporates and making recommendations to their clients in the secondary market The the market. to their own dealing rooms. They also issue reviews and ratings to new issuances hitting which is being for public offering the share, a promotes analyst conflict could arise if the research information privy to insider is the analyst that be also handled by the merchant bank. Alternatively, it could amount to could that recommendations from the merchant banking division and there upon issues investment between fraudulent 6eceit of investors or gains for select few. Over the years, the firewalls boom' The bankers and research analysts melted especially in the heat of the IPO and the internet

getting compensation patterns of the investment bankers and the research analysts were also to an extent thus undermining their independence' "o-p1.*"ntary Astudy was conducted by the SEC in 2001 on 'full senice int,estment banks' in Wall Street focusing on recolnthese conflicting relationships. The study disclosed two main areas on conflict-(a) research bank atrd same the by assignments banking mendations tending to become marketing tools for merchant

research analysts analysts getting paid share of such investment banking gains, (b) ownership of stocks by pos..iun in the companieithat they recommend or research. The srudy disclosed that analysts leveraged their in pumping up recommendations in companies that they are interested in when they went public. In the ,erised dispensation, one of the main provisions is that analysts have to disclose their interests recommendations. In addition, there is sought to be a water-tight compaftment in the working of

in their

regulation the investment banking departments and the research divisions. The third area has been the divisiolts. banking of the merchant profits the on of compensatory srrucrur., fb, ,"r.u..h analysts based

ffi$,
t
i

irfl+.s{l

8.\8

Investnent Banking

resulations in India by

lmru*iil:Hi"J':X':il; ffi ii,,",,timeandr,iioo,r*-it'""*d*i;tr$T";fl bankers in connectro of insider trading' As a

Ju*ug", on investment o"rn were in place for *"r"n"ii
p'ot'iuition
I I

in the lrrrlian.capital Thecorporate.scandalsthatsurfacedintheUSAalsoresultedinprecautiolollu*"ldmentsto ,,r'rriring securitie, r'uuit SEBI. There were

market

"*",

,, una ,rna"*Ji"* *o for the indu strv resurr, analysrs arebarredfrgmqrivatetlllllii::i1iT,T:i",;rilfff;ffifi:'"mformorere': ": one ;;i o"r't'" ** "men t b ankin gthrough tumultuous. times. on went ['*i; T:y :? ffi'"il:: XiJi # ffi industry
In brief, it can be *uio tt,ut and the hand, the economic '11'.:1,T:fl 'ro*-Jo'n
the investme,1

lf

gkffi

9""u,,, *":i;;;f:-""pi"i-"'r:i. f*;"'::#ll'::'l;:"it.l:; **Ut,,:f hll$:,il:Ji"1*l#;.'n:n{:*l*:;X:f: the shake-up tn

all

on their reputation

ir""ri.""i

uankin

place' g"Jil;;;'-*otwithstanding industr/ remains fi rmly in

S.IIREGULAf,ORYFRAMEWoRKFoRII{'uESTMENTBANKTNG various services financiar services in India'

piece of legislation govemin^g In the absence of a comprehensive 9v'9iri;:"::f'r;"::?:Tilf'ffi.J^1";[H!i:,.7 are regurated

through:ff:#;;;;'

*jil;' 'iJ

:lriiJJTj*T*r:r,::1ru, ana staius or'ri."'n'"ti*"nt denending upon rhe ;r;ir*; il;;*;, ir,. r*aing o.t""n1ry,i,r"::*;jljfril;#t*,',J.Fll,i;;t:'f5i"Tif,::"}
il;;;;"t * t'*t*"ttti'rti'g-'i;;;;t;t '"gui';;

[$iH';:1'.1,'i."'Jlllili;;;;;;'*""' do not have ba{' p"" in'"tt*ent banks that

aitr"'#

regurai&s

invest concemed' they are also universal'banks and NBFC Iil" lending and insofar business of banking or f'om""otk is furnished below: of tt'" the compames ou"*I** en SEBI' by regulated tompuni"' incorporated under tanking investment all o At the constitutional level, the Banking under rhe RBI Ac'l and In recent to be takerl by banks' market capital on limits restrictions "*po'*"t

: fi'JJ:1;:rr*::,Y,i[:'#iil"iil:J:t*;':f.'lg]i
Regulation

fut in" ti";;;;;i" relaxelle^:xposure shown ir"*"Til;"r* Tillnow' such companies were to restrict years, these.".oi.iion, have ona o11tt fund based for merchant banking subsidiaries ", ""**"t?*'uunt'' ura"'*titin!'l;;i;"-t ;* single funds (NOF)' Therefore rheir exposur" to u* "r,n1.:rr.r; ,o *"uir"r?* 'n"tt'ti"i"wnecl commitmenrs ,r.t as standby *t'itf' can do so upto 20 dmes their 'sq'"r fu't' t'lrfrl."i,'"'it*t .ri p". ur" now on
these compani", 'net owned funds'. --:..-+^A-o

n.i*tri"t

.:l

.Investmentbankingcompaniesthalareconstitutedasnon-bankinglinancialCompanl

operationa.v"ur"i''nsiuna"'c'uiiffi

il;;",^11:}i:*:::l*'l'l'ff 1"';t'ilT;
llll"t

-^n-h2r

ies areregulated

***:il":m*'iliiil1#:;::ffi: Financial a"*n"rr5rt"*r,"r""

tr
Non-Banking
Exchange Board of
are listed below:

"

1i"r o"rltt" i*#rve

rar ;""r uv'lhe RBI s3 Directions' 1998

:

Bank)

issued rhereunder' These .F,J*:l'#**iI;ffi:-,:.'*":,T:Il;Ti'fi guideline. u,;r'.i]"tions lndia Act iggzanJthe

113?3-,","u,rnderthesecuritiesand

FIT

The lnttestmen!

B!!

Paradigm

8.19

1992 trMerchantbankingbusinessconsistingoflDanagementofpublicoffersisalicencedandregulated tln"t"*,*t Bankers) Rules and 1992' activiry u,der rhe s".rri,i", rro* on"r.rrant Bankers) Regulations ;r*a 1993 and the SEBI arra Rules' Securities "r [i"J".*.rt#)

Exchang.'ffi;;ii'
rro"..|f,:';'#;

and

nxcffi

tr

regulated Underwriting business is

Sub Brokers) Rules n'okerl and !"iJT::*:i"'*" ;li:T:ff fi '3'YiJil'#',,l"?i3:,ry'^y'i:"llt??J,:."I#:[x3ffi #i*;*i(s*tt exrhmqe stuck unethitu\ oi the

relevanr by-laws 1992-Besides, for curbing and Sub e,'i';,in"gulati.ons sroters andthe(sto.t. |992 (gnitptottiUition of Insider Trading) Regulations' *r;;;-qq"t"a.irr" practices, trading i"fui' ftade Practices Relating to Securities (prohibiTion SEB, tbe and 'r 1992 Regulations 1995'

,;;,

r*roif,L"i

Markets)

trThebusin",,otu,,"*anagementasmutualfundsisregulatedunderthesEBl(MutualFunds) " n"grfutions 1996' ' resulatedunderthesEBl(PortfolioManagers)Rules' ts n ittE uotiness of portfolio management rndi a a, are incorpora,ed in j s,rr are 1 1996 ald by those that ;,n,",,::ffi C"&;;;i.1,n.ry1"91ns. Capital Funds) sigiiv"n,,," is regulated uv ,i-," sdet Go,gign V"ntu,"

;i*i i#j*;1[X:ffi,iE*
#

f.1ffi

incorporated

n"gri"tio"*
199s.

",.,,uI ';,u ZOOO'

i, ,"gulut"j'-,u"' investors in -'-- hv foreisn investment banks and other. -".;1',ii"iHit[:[:HffiH.^'il*i"'o*"*la'lions

either as joint venufes

"if.:h:i::*;::*n:1"ffi
.
with Indian nu*n"rl
Exchange from time to t1fir,. it thereunder as amended issued 2000 Regulations the RBI.

with foreign direct investment are set up in India governed in respect that banks Investments ol tn" foreign entities are

i, ", *ir, .i'-l"d ,rb#;;; i; of thef oreig'*"*'*""0''*:t:T1?l,iTl['."",H*i*::'::'i":?:3'1"*:nIffi isi by or Management (Transfer r*gtt notrfications issued

t'" '.aw' contract law' oApartfromtheabovespecificre8ulationsrelatingtoinvestmentbanking,investmentbanksare business"' so"h u' G othlr a i"ws applicabl" 'ff and the other general law applicable in India' also governe. O,
properry

"*. r"*, ro"uiii"i"'iu*r,

arbitration taw

8.12 v'L-

BANKS AND FTNANCIAL FULL SERVICE INVE-S-TMENTS oF THE FuruRE

boNcror-iEneres

he growing

Jffi ffi
banking,

Thebusinessofinvestmentbankingisundergoingrapid.transformationinresponsetot

'mantra'for success ar

for all financial

*d invesrment.il*l'rl,rr;;" ;" ,."or1i'ii.i, ,, ,r1r*.^, ;;;'

l:r'*t*nml*:.tl"iii:[ ";lT:,trffi ,t.T*H;Ti:il:*ffi go for one-stop sh'pptng ;?;';;iuu't"o *" *'J''uv to that
shaping ,,p

;"'fi'alcial

eonglomerates

-"$*";ri:il1t;T:#,'tr*Ji[!i*a:l#ffi::l3HH'y;:;:fi '':;;'--- '*;:n:";:;f*J; 'up.ve.hevears' ***tl;'JHJ;:Ii:i o"n' especiallv rrom the ''''il';;;"' Emergtng -.ir",i.t also been increasing'
has

8.20

Irxvestment

fundmanagerIent,truStservices,thriftchartersetc.Therefo.,,,n",*

Stanrev Stanley wirh readins leerti-_

of the future that can even add on in".ur..-and^pension

private bankins), privare brokerage. sat", urJ equity and venrure capirat, orrrriu,iJ"r, ;"r:';#T'ent' dealing in ri-"Jl*"i"" securities, structured;:"::iltll lrading ara"irv"stm.n! primary rltl&flclng and,ptoprieti.v can add all their banking corporate advisory r".ri."r. universal banks p-au.6]r'w services offered as furr servic"

, ruture thererL hes iri nir,"*ii;;::7":::'^:1,j,9,,.*o *ffi :il3,;?*ffi *ffi13"T,:f ffiT"..'-".1i:,i:y;::X::;[T.1'il:i:;:il::T,"J:;:*::t

rn,",t-*"til'{r:u1lffix rH1rf;.;-:1Tj:j:l
r*r, ,,
:Ji,:-_,".,:j,$ to make them one-stop financiar ,,r" crtigrouf ;;-,;;",r.rrld be rhe moders of growth in

;:ffi T.-r'1il4:,'XJ:imt,*ruI companies and setring ili'Ji,",:Xl:*;:*rn*,o."n,.,1;il:;""ilffi up priuui. firnrtc rhe m"rger or runds b.il.,;:;;;;6# #,:,:::.,AiirtJi::ff",,v Nrorgan ^l:,:::i, "o",r" rhe
.1_h^

*-tUl;l,lJ:,',:'XiTffi#[#*ir

11

,,""airr'f"","J"i1,,i1e.u:,g is being repraced

by

j*l*

,t#lt"tT:jffi*'o

conglomerat"'

ilil

NOTES

'

was charged with brineing.down rhe were accused ot stock mark., ..ur,

iili:W:r:;T:l;i1:xff.ffi:ff[;ly.h,:l borders or regaritv. *.1,: ,n:

;]ffiil,

M,ken, Dennis Levine rvan Boesky, Nick Leeson n;,; #;;.I.:::i.i,S',Y,ilT#:,,1:;icrinl or no',uoyu,i." i"yono tr,"

rrJrrr'e;rk ,n.r*n .!,i. iffi_:tr_# .rpi,uirrri..i,, ,.rni ,,,0 2000 fl.Jrr.#**

respecrivery.

f*:tr

4,4

p::
I

lrlt,.tr.

:i].,;jI.ii$ii:tt;,ji{:t!:itll;riil,:!.iii:

'irti;ai!iit::l:.

: )

'::

iiiti:at, .i: r-l::*#i:i!i:r'r.ii*tF:

ffiss''
I

2. The Dictionary of Banking and Finance, P.H. Collin, Bloomsbury Publishing, London. 3. Investment Banking and Brokerage by John F. Marshall and M.E. Ellis, Probus Publishing.
I

SELECT REFERENCES
l

l.

2. 3. 4. 5. 6. 7. 8. News Reports 9. News Reports

Education' 2005. Investntent Bonking-An Otll,ssey in High Finance-Pratap G. Subramanyam, Mc-Graw-Hill Books' Euromoney Scott-Quinn, Investment Banking Theory and Practice-Brian Investment Banking antl Brokerage-John F. Marshall and M.E. Ellis, Probus Publishing. Investment Banking in the Financial System-Charles R.Geisst, Prentice-Hall' Investment Brmking-Addressing the Management Issues-steven I. Davis, Palgrave Macmillan. The Business oJ Investment Banking-K. Thomas Liaw, John wiley & Sons, Inc. Indian Financial S-t,s/enr-H.R. Machiraju, Vikas Publishing House Pvt. Ltd., Reprint 2000 and articles inThe Ecottornic Times' and articles itn the Business Standard'

SELF-TEST QUESTIONS

verticals interWhat are the core services offered by investment banks? How are the different business
dependent? banks more between merchant banking and investment banking. How are full service investment to clients? value better deliver competent to structure permitted What is the regulatory framework for investment banking in India? Explain the conglomerate

2. Diitinguish
j

ir

3.

in India.

4.

Explain the worldwide?

.conflict of interest' issue in investment bankiag? Why has it caught the attention of regulators

ffi,'

l
v
CHapren

UNDERWRITING

9.1

CONCEPT AND

DEFINITION
ir*"ilffitiJiii[ffist

,-''}}

chapters, one of As has been discussed in earlier offers. pruri. of new securiries rhrough public

for well established companies th";gllsuJgr' process of uncertainty *itn ,"g-Of;ilffio+f;'iiu

to raise issuer company would be able

significant fund raising methods company undergoes a Nevertheless' as ar issuer' every

is the issuance the.mai*3g[ixiligsll the primary market

puti"olar issue goes through;gggggful$6the

h

In ::"::::t::'-it"'.t:it"t;i:;:HlllliilT. that m av av e been received fl i::#;;@s J# ;'Jf.:fi#LH-Yr?l::: suctr a situation, rh" "o;;;;;ii:::,.t:"1: in,,3lott" Dosltlon tnatl rr wuuru uv rlvrl'**ry are market funds. That would leave the company
become a deterrent rrr.-is,or''riitigated in some wav, it would the lrowth of the capital-fiarxar for issuer companies ro come totn'dffikei-anairrar"#yjeopardlze of underwril-tg-'gygJJsd and has since tt'" t6co$ising the importance of this- risrt "lugtliqq' *iir,"o""pt prdric offeiltfideriian.-aurv, una"rw:':',rg: become one orthe ^ o[ an investmell-!11k" one of the important core lunctions

tt'" i't"'A"a utnount

-*TtJintrerenr risk in public

driven processes. N"

"r" variables. Harirsr#;;;;;;;;;

offers is u ,arr**tffi*frur most of a public offer' can exactly p."Aicitt'" o"to-"

issuers Jiice pubric offers

as

it is dependent on several

*;;;;;r"Ja'aa,;L#

9.1.1 Definition

the way it has evolved as an area service obligations depending upon as 'an Underwriting may connote different u"ni"rwriting is define^d in the SEBI lslpuidelines Indian tlie In service. marker capital of "onr"*,, of a bodv corpoiffi when the existirug ,o ,uU":'ii'" io tt" 'i""fties agreemenr with or witho,ut conditio,s

shareholclersofsuchbodl'corporateorthepubticdonotstbscribetothesecuritiesofferedtothem''An underwriter,accordingtoit"sgst(uno".writersj*r*r1993means'apersonwhoens2sls.inthebusiness us analyse these definitions' oY o Uoiy corporate'' Let of undemvriting of art a body corporate. 't1""'U' *1,t, proposed issue of securities by '1"i" is always in Firstly, underwriting " "on,".tio., ;;:G**-ul-gg=underwriter' The specific underwriting It is not a general understanding between undengiling is :1through anlffierwr-irin-g-agieeifrEfrflTsecondly, commirmenr. t,u, to u" io.um.nl"d in case the ffiSfrf-to whom ,"1kd;tl"'"i;'ffie ,rd;;;;;;"'rru'tafa the by asreemenr that consists of taking a -tley are offe*a ao,noi,*bscribe to them' d;;ft;"' underwriting is a service are not of securities in an issue if such securities a:bi,ligation\osubscribe,o un ugr""Jnumber

il"d

imngrn *I:

__

FSis

9.2

Ini,eslntent Banking

underwritten securities to subscribed to by the intended investors. The underwriter's job is to market the investors and procure subscriptions 1-or su9-h "secunttes' by an underwriter since there is no Thirdly, underwriting is primarily fee-b5-e$-9ry!9 the issue is fully subscribed to by the fundamental obligation to subscribe to if investors do not subscribe to investors, the unCerwriter has no further obligation to the issue' However, portion of the issue' In rhe issue fully, the obligation falls upon the u11$.9gy1{g{-tO,.l-ic\up the unsubscribed has to.purchase.the underwriter underwrirer the s ince. se-rvice]since i-#:g:_:ry rgriia-Uri.O becomes allunt situation. underwriting b..o-.r such a situation, T..ry:::T: ""i to this reason that underwriting is a risky ii'fr," securities that have remained up for taken be catt they activity for investment banks that requires careful assessment of issues before activity' such to und"r-ritirg. In addition, underwriting requires sufficient financial resources to be allocated

ffiffiil""tities.If

l":

ll:

9.1.2

Sub-underwriting

an issue of shares' Sub-underwriting is used by an underwriter,tJlsJryffUhg{isk"assumed in underwriting to underwrite his/her Sub-underwriting is u pro..r, under which"iEi-ffirwriter appoints other persons XYZ Ltd for 10,000 with obligation underwriting an has own underwriting obligation. For example, if A obligation' B and total 'shares, s A of out each shares A may choose to appoint B and C to underwrite 5000 share issue' XYZLtd-'s to underwriter C would then be called sub-underwriters to A and A would be the company. issuer the to has A sub-underwriter has the same obligation to the underwriter as the underwriter The underwrirer normally shares the underrvriting fee with the sub-underwriters fot;h-Sii=*S:Jk

''iol,,o?*ffi - ;#;i;'-;;;

il il-,;;;*,i,.,

hrou

gh

jyffiy1l'

" \'o

le]

ftrjffii;;Ading

a sub-underwriting arrangement. the underwriter shall rernain primarily responsible their obligations for the underrvritten shares and any failure on the part of the sub-underwriters to fulfill words, the other In the underwriter's obligation to the issuer company.

shall not absolve or discharge to take cognizance of issuer company is not a part; to sub-underwriting arrangements. It is not required to fulfill their any sub-underwriting arrangements of its underwriters and can require the underwriters agreements do not obiigations even if their sub-underwriters have not done so. Since sub-underwritin$ for a documentation part essential of a concern the issuer or the lead manager, these do not become underwriter, an by obligation of public issue. Howeveq for the purpose of ascertaining the fulfillment procured by the the subscriptions procured by the iub-underwriters are also included along with those underwriter directly.

:i

9.1.3

Underwriting Commission

company' The underwriter's compensation for the services rendered is the fee that is paid by the issuer underwriting value of the percentage of paicl a as is This fee, which is known as underwriting commission, (the total number of securities underwritten multiplied by the offer price per security). Underwriting purchase commission is payable irrespective of whether the underwriter ultimately has any requirement to 'brokerage' with confused the underwritten securities or not. Underwriting commission should not be a that is paid to a stock broker for dealing in shares or for procuring subscriptions. Brokerage is merely

marketlng commission lvhile underwriting commission is compensation'for taking underwriting risk besides procuring sdbscriptions. The payment of underwriting commission is governed by section 76 of the Companies Act, which is further stipulates a ceiling of 57o with respect to shares and 2.57o with respect to debentures. This a prescribe articles if the and ,uL3".t to authorization under the articles of association of the company

Iinderwril

9.3

ffi, *
r,

""*.irr" government, an lssuer colnpany rs ies picked up by them. Within the above ceilings fixed by the lee to negotiate lower rates of commission with underwriters'
Underwriting Agreement
the document that establishes the contragt bqlyeen the underwriter and I.Th. und".*riting agreement is ithe irru". part of material contracts for the issue and requircs to be approved by the forms a ,.concemed"o*pJny."t .;r'tra'iiiospticl'us regibtration stock exchang,itupu.t-rio- being fleb with the Roc and should be followed is recommendatory rnol"fuf,O"r-riting agfeement, whicti

11 ,h:-.1:.^,:1:..1"19J il;;;r;;; "gp_"I2i%-y,itt' -pqrqs: re.eqr$rv-p&arc: ii iutty subscribed by iisire ::iiitl":,*:::!rt: ..!ting 1s 1% if rhri i;; ;;ft ,r; n;soo.mO',n; uppri.uui" paid additional 17o on the an be iiilriAd*rifis.Can

Govemment of lower rate shalt apply. Within the above said ceilings, the

lndia(M.

'ny

iffi;li

fn*der-:Sr;Uibriuea,

uiffi

.!?-.

main tdi[6-"-it"r, possiblb by all underwriteis. The model agreement lists out the following "-i-Airiount being underwritlgn e Provision for sub-underwnting o Computation of dtlvriiv?inenr fi li . Procedure foi effeciing oi discharge of underwriting obligations o Right to receive commission within statutory stipulation

Tfi5-sEB"I--evolved7

clauses:

&l
:ll $', '-i
,:l:

Statutory declarations.

9.2

REGULATORY FRAMEWORK

$;

.i

vi
:;

i'
i.

1993 an$ SEBI underwriting activity in India is regulated under the SEBI (Unclerwriteis) Rules under the above (Underwriteri) Regulations 1993. The regulatory framework for underwriting activity said Rules and Regulations is summarized below o Underwriring business can be taken up by finan-c1f-r-1r'g*[g.L.o}A.53!!gn5g, mEIUAl"&l]dE.*above e.ntities except merchanr bankers registere{ wilh Qppr,rya!i.ilq.N"qFCs";mfihe SE"BII' wittr ff;;fu .;, ..qrt.. r.'n" resisrera affnoiniflters o All underwriters shall have necessary infrastructure, past experience, minimum of two employees {*l from time to time and shall comply with the minimum capital adequacy requirement as stipulated

i,l

+:ffi;;

of the concemed stock exchanges' and further comply with additional capital adequacy requirements

o Underwriters have to enter i"telgg*ly-I1**ilg*ggI'ggg'Sn$-wil[Jhg o

.

underwriting agreemenrs have ro be upprffiGfi#iffii..,,"hange to be listed. In the case of financial institutions, banks and mutual funds, the issuer cgmp4}yjBS-lgipIly-"
sea_arately

-r;lryJ*ggPPanies' The wherein the shaiesTi6flr:bposed

prior to finalir:4t19n-ef.tha.issue..f'or un0rY*filg-.1,9"PP9,{L

-Ga.i*i{ffirdtainmlb"dions c annot exceed thq $lAtutary a9ilings." n Al1 underwriting con6act'f lidffi-io be classified a$ material contracts and disclosed

".

as such

in the

offer document' offer document and filed with the Registrar of Companies prior to the issue of the samd. the evidence to itintiacts thei'e.arf Sfrb,ilfr11,f*iG_t+msriqie prorliciea

in conducting their Besides the above, underwriters should atso compty with a code of conduct business. The code prescribes inter alia, the following main provisions: o Underwriters should avoid conflict of interest and make necessary disclosures of their interests if
any.

9.4

Investment Bartking

' lH:x;T"jL:i":11 or,g3ry#-*rr,e ombudsman il* iri'fl'b'#:#ili' i:1',LJ:,,T:T,31'-:*"*isermeeliffi ' uauiffilS''o,It?i"ilil;;: o1,n; oi ffi emplov':es shall i: ;i:';l:;Tr:fi not render directly *1,,ffi$lqF,!s" *" ur
rrs

:..1,:q,

p"[,4j"tpJ*g wi rh the issuer

Undenvrit"r; Undenvrirers

,n",

dsglerr,;;;"iffiJJif ill'#;1i9Il',*ql*I*:i' oith"i, ,f,;i. been miG?i r;ASrrin a. "':"*:l::'r'"Y.1$;, ". "'ripi" "-rP19.y,99l,.{ilettoir"e?iiltam.o;;;;;#;ilftji],T;i:ffmT* ,ri"#;J.'"""

9.3

DEVOLVEMENT

issue and the overarr

ll

The amount of financial support to be provided by an underwriter in-an, under-subscribed issue of u, ,,a".,riting rirm procures ::;::'ff'#,-L.[';:^:::::!:;;;;": resser

u, u,.d:,*n".

,i,ll'"Tiil:il#:fJ::::1,no".,iitt", irli. u".""..,

his or r,,".

. ;'.1;;,"*",.;,*;;;J,i

"-,t",i#devorvement p".ro.mu,.J;i;;il:"J1;:Tn::lxr::jJff.:r"xil,tti:#**ffitrj
compretery, such vuvr underwrirer has been ,nrler-subscribed overal.-Jl

tr,"

;il",",

i,::H";i:Hl'*J;:*tyiover

*J,,l"rting

,- 'lt following merhod ;i;il;Ir']tu" 's recomn)ended devolvement by SEBI for,n" of underwriters. fu.prr" of arriving at (a) All eligible applications received from investors towarcrs subscriptions tssue shall go,to reduce una"r*rir""rr' for the securities in the otriguiionJ,Jrirr""rr"r,. I{owever. to ascertain

o,rl'illfiffi

each

shall be altocared

"' *[lH'iT::.T"t"-'r;-.*;;;;;;h'.
(d)

,::T:;#j1i,."'ii*"01;:"ilr.. Fiffiyil3Jh?:?J;f sub-underwri,*--Jrir, (a) a ,nrir*lir"r".' above,

b,ur

invesred direcrry by invesrors

-,,r":; l.i,g

.ou,"a

After followjnp -il*ruTlffi ;:,1i;1'],ff iJIJ,Jl,l##ff

(e) Devolvement

:H:rJff .:,:1if ::,,:x,rfl:,:r1fl.1i;i

n,,h e,",ur
o

ff"1??Jl f;;"tr;*",;:.;i#**;g:i"*U#e *"-v! i, or Illustration ABCIId

,

is ihe positive balance that remains in the account of a particular underwriter after qrrruullt

rhe

The issue has been

issue hai been

,,r,?''o"t

n,

undel'-subscription

issue

,b::ry,i,,,,, ,aa,uni:,iiiiti7*,:i;;

nb Li;::,;:;T;:l::';::;\::r.,rossregailng to Rs t00,000. {##;::;;{,:;{,r;y ,r:" "i,_."i ,rfi,"riooo eticg,,;.,, " ,,Lc ttuurrnarton available on. the
subscripilons, Amottnt Rs 76,500

of r0.000.rlnrcs of Rs l0 each o

in the

i,ii. ir," in di vi du ar
issue.

,, , :
Lxamine

Vatid subscriptions received Received ttrrouglr

Received, through ruoaan

rririir", f
ni", ).

27,500 ,34,800 .14"200

th_e unclenv

rirc

rs. devolt,e meril.

76,500
2s,,,soa

".'.."tY.:

5AW",,
3'4;8A0
,,

'q.na.

'Arnouttt Rs
',,,.,',

,',?16,5AA

'',,,1 ,'

,' '

,ll,,7ao '22,404

':" 6.3gi6 :: ,' 22t6AA 'tl',5.0A '' .

:''

iI

taa.fr00
t'"",'',t

:yalid,isiuiiei'tif,f"s,rerciuu'l,,,,,,'r,
{Jnder svbsc':riptian,ii'(Tata!"1}

:;:.,,,;.'.t',,',t,7;6,5gg

lli cit ' .

.,...,.,'

,,:t':aa

':,t,::,::at

'

i.3riA}

,1i..;eompfiatton: of ,,lnt tqtwqf;,Devolv.emet

:.,,,,

:. I,

'''P
2A,A00 '.il';VA0

a
fi,00a
22,40a
,

'

.i,ft

:',t,Total,wulcrx,iritittg rtbligali,on

35paa , t,5,oao' ,g3aa '22,604

=-aa?--:-

.t' uaird',iascitiptio'rts''pietirbd, .'Err,''t'i'''' t' '-. Direct sibsciiptians ilbcadd Irrr , .' ', I'.',,,',Grog5..'4grrltremenit:: ,.:

,23aa
d;AA0

j,45A
3,290

4,02a

'1,734

'r,:

, 4,150
,B6A

22,680

'

i:,LeE$

Negative bttlance o! S allot'ated

,I
3'840
''

3,84A
18,840

{9.3301 e;330

.- . '-*-j.-*-.4si:'F-;"'!"#}:}@4*}ie*w#l#M'

rrrFr

i:i W'.

9.6

Imestnent Bankirtg

Q tirt o,, ,tlrrrtian of onLly Rs 3450 thottgh has procurent,almbit:.,: *ov-tl,'rr"Li'a"aur"a rh.,"i,;;;;;;-iubscribed e issues u,hereirt trrc direct subscriptions are high, those'inderwritgrs w'ho.havelunderwritten r''t'tt:rt mo?e more procurd and ptocured less.binefrt:., ntore tlwn those who uncretwrite t"r, ,ia'pro,;;;;,;;;:'"Lt " "i Coruputcrti,rt of lJrtderu.ritittg Contmis,sittrt O R S . lhlicl .subscriprions procured
!hree times morc rhctn R. Ir

It nmy' be obsen'.d that the total ttf tlrc individual cofltpanents of net devolvement is equal totthe. under-subscription in the isstrc. h *q also be rrrr"a tn*iitr'J'rt"r,rt rurrrtt when added up tvith the, ptocuretnent and allocotion o.f each tmdenvrite,r; irr"ti ti"rir6 to t!rc underwriting obligariott of,, respective undenvt'iter' All ha'r'e been rourded nfi,, ,r,ir"i,:iptes of Rs r0 J?gTtres since the devolvement has to result in sub,scr.iptiir"to ,lro,r, nV R, l0 From the qbove basis oY arr;rrng at "nrl,. i"i'i,r".iiii, it rnay be understoocr thar a bigger onrtenuriliet af direct"sutbsr,;;;;;;';;i ,other underu,riters. atf !jl:^:!,r.!":ailocarion For,: *tstance, in ttte above iilustratirn, R gers sn ahocatioruJf "'rii,,iJ"tlohn a, +ozo fro*k;;;;";;;;;rtions, which . is the higltest anxottg all underw,riteri. tt malt be not"d tirot this is because such allocation is pro-rata on the basis of unden riri,tg oitig);r,rrr"ii",rrir"ri','i" basis of procurements. Due made to iltis reason' it may be obsen'ed tlrut

,,

Z.5Vc (A) Net Det,olternenr commission @ 2.07o (B) receivable ',o.!'*'.ss.ion ':'n' Overull
Lotnnu.tsron @

undemritirtg tomntissiort

(Va)

11.700 292.50 j,g00 76:00 36g.00 ISO

22.400

v.J vv

g300

22,600

-160.00 g60 l7,za 572.20 ,.r*

207.50 565.00 lg.B40 0 .,, 376.80 , r, 6,.1, , sg4.30 56s.00 "; ";
,,

.,;,,

u" obse,ntedfront the abave pstte: of determination.oJ,tndenvtiting commission ,".::,::::' reward goes that tlx,. , tnaxunum to trte underwriter whose prourements arc the maximum-irrespiestiye;.af th,:,, atnounl wtder*ritten' Therefore, s gets the rnaximum:cornrnission thougrt the am,aunt.underwt:ir*n,. o;::^'.t..':: tea'st' As a coroilarv, R. v'rrct i*tr" ilrri"rmr:r,r,r',""irtt the underwriters. sets trrc reast Percentage of commission thaugh the amotrnt untle,wriften by,i tr,tlre ,ft;..!x6s,, nttttitnunt. in additias, to toke a fimd expostrre ,y ns r'a,a+o ;, ;;;;r:i,i)')ue orr. tf one vuerc to cansider the inrerest cost on tlte anrcurit in ,"ri"a Oy oilay lOqrfoottrio mto,nths, the netrate of overall tnnder,writing,,. cottltllissiottfallsto.iust0'777o',ni,ni'*"itt3%"b,;;lxanii.,)j'..

,;;r;;;-;';

:l

9.3.1

This basis of pa'vment of underwriting commission is just a,d equitabre since it provicles arr incentive for an underwriter to market an issue raiher than to merery underwrite it. From an issuer,s perspective, it would be better for the issue to u" *r.t"i.i extengivery ,o u, to u.hi"r" a wide spread than to get the shares concentrated of sirarehording into the hands of a few underwriters.

Devolvement Notice
asreement. the fouowing procedurc is envisaged in rhe case of an
af.t-er rhe dare

fr:::ffl:fi#:*iJ'o"rwriting
municate in rvriting to

(a) The issuer company shall-YiltrllJ0 days

11"].|l-@disei tla-iji+6,1;#;;*il..the

Ililffi1l.#:Jpu:1,t"*.]]iffi{:Jor'tn'ruu*'i'i""o-u"1s5eq@
-+.aei!,r!le

of closure of the subscription list comtotal numrjer of ;;ffiffi,

."J

,i

.:.i

,r{
,:j
,:i1

.,,M

tlndenrriting

9.7

(b)rhe;lT?:lr:Xiiffi :Jf#ffi-.1#i:tl]re:'d*lgr':3e"'[
r.t iiltiau,*lik"H?.*E*it,-*ili#;i;;;""i'iia"uor,..n.nt, make or proctrel!9 applications to sribscribti
the receipt of ttre devcitveriient notice,

stratt w-ittiin 30 dafs arter

to the securities

(d)

the required paymeni'to'the co.rpa,y' alternative do so, the company shall be fi'ee to make In the event of iailure of the underwriter to

[nf *ur*lf ,n"*'alciri$with

anangementsrvithoutprejudiceto]egalremedies-againsttheunderu,riterfbrfailuretomeet right to claim damages' devoiirement reqtiirements, including the

a company Fro- ih" above rnechanism, it is evident that if an undlr-subscribed be to it ithas to initially close the issue and declare

has to enlbrce devolvement on underwriters'

issue. Thereafter, it has to send

go ttrrough Many a time, issuer companies hesitate to devolvement notices to respective underwriters. has to live company the u'oulcl cause humilioiion in public' In adrjition' the devolvement route since that

withthestigmaofadevolvedpublicissue,wlrichcouldevenaffectitsmarketprospect'sandtheopportunity prefer to'get underwriters to thrs reason, several issuer companies to make future public offers. Due to

bailoutanissuepriortoclosureofstrbscriptionlistssothattheissuecanbeofficiallyclosedasa
successful issue.

It may be understood t}om the above, that when options-(a)togettheissuebailedoutpriortocloseofthesubscriptionlistsrvitlrthehelpofunderwriters, brokersandotherlargeinvestorsand(u)togothroughthedevolvetnentroutebydeclaringtheissue often than noii.", to Jrllderwriters. In borderline cases' rlore
under-subscribed ard issuing devolvement compelled' if tl're issue is heavily under-subscribed dnd they are not, companies prefer option (a). Only (b)' companies go through oPtion

has tr,vo an issue has not fared u,ell, the company

9.4
).i
):.
:

BUSINESS MODEL

though nranl 1ti[ie' if underwritten underwriting is essentially a fee-basecl business u'-td-t^:lttouently with a significant exposure to issuer compa[ies successful, the unclerwriter encls up

issues are not

t()

of minitnum capital adequacy S-EBI has frescribed the requirenrents market risks. Keeping this in view, given-time' The minimum capital

l;l

inA u

"ap adequacy i";"R$"2o"r"dffii-ffia rhe maximurn

at 1ty on the underwiiting obligations that can s*bsist

cunnot

rieiworth Jt:'iu:i

of the underwriter'. ^:^1:_^ i-,,-,la^rrririno; underwriting and do not get rnto rssue managenent ,rEJeVna i*aEm;rbanks that specialize in However' " commlssio,n as,th1-principal source of income' per se. These firms o"p"na upon underwriting sub-underYll:',tj of they develop in extensive network

"rJ"..uririiig'oiriigdiid;is

u" .t-1g than 20 rimes

the

riski, since rhe business model is fraught rvith is because' as seell ln the securities underwritten by them' This market tJ ,g"nt, brokers and distribution underwriting is to 6e in a safe position by coverirrg the illustration 2, an underwriler firnr's firct objective tate of the the of ilr..espective it on there can be no devolvement
obligation with procurement so that

ttti;"
since

it determines (c)capitallossesarisingtherefrom,Letustfytoseeirowthisworliswithanillustratiorr.

rnorJel.are (a) the netrvorth of the main drivers to a viable under-writing business (b) the arlotlllt of del'olvetnent the volume of business tiu' tun be undertakel'

underwriter
and

9,8

lrtvestment Bankin

Assumptions Present Ner**onh - Rs 25 lakh Devoivement probabilitlt - 0.25 Det'olvement quantum - 50?o Cost af debt - l2Vc Average cv*cle time - 3 montlu Unrlerwriting comrnissiott - 2;5Vc on Bracuretnent and devolvemEnt Tux rqte - 30.qo Capital loss ott devolt,ecl secttrities = l5?a

Solution' Based on ihe above:assump,1jon.fr.[he

Business Cycle
Present Networth

busines.s pTojection,,can: be

wat

ed out

Qt
25.00.
:

82
26.40
'

a3
27'88'
557.57

',29.44,
598,79
t...-, ,::':.t

Mq-t.unde*riting ' .'

D evolv ement p rob abltiry

20
0.25

500.0CI'

528:00

Devolvement

Quantum;'
(Qt)

,,

50%

..

12s,A0

132.00 66.00
39.6A
:

139,i9
69.70 41.82 1.25
13.94

147.2CI

62.s0.

, 73,60
44.16
1,32

lian
; Unde ,PBT
Tax

Jinancing rcquired

'
:.

37,5A,..'
,

Cosl of debt

3Vt

,l ,r\iI
I

rwriting Commissiort
loss on det,olved securities

'2-5AVa

e 1,13 {rzso

: I'19
13.2,A

Capital

lSVo

t4.72
11.04

s3s;:
2.00 0.50

9.90
2,

t0.45
2.23

tl

2.36
:

307a

a.63

0.67

, a.71
1.6s.

PAT

t.40

t.48

t.56

If the above rnodel is analysedfurther; it rvill be.fountl that etert, lVo ino'eise in devilvement. probabilint leads to a 24% decline in arutual profit. Siittilartl'. u l'h irtt'rease itt devolvement quantunl leads to a l2Vo decline in annual profit. Continuing further. a !9c increa.se irt capital loss on devolt'ement leads to a 33Vo tlrop in annual profit. Since urdent'ritittg is u t.opittrl clriren bu,sirtcss, an operating loss has a spiralling ffict by,,,erading networth on oie hand. artd itrrpactirtLg futurc

vglumeofbusiness.anthegther......

Frorn the.above discussion. it emerges that an underwriter has to endeavour to minimize the impact of the above three factors to create a successful business model. This can be accomplished through improved distribution networks and investor base, qualitative assessnrent of issues to be unclerwritten and building financial strength so as to minimise distress sale of devolved securities in the secondarv market post-listing.

9.5

UNDERWRITING IN FIXED PRICE OFFERS

Under the present regulatory framework, underwriting is optional for a fixed price offer. Therefore, if an issuer company feels that the issue is strong enough to sell on its merits, it may decide to take the risk

m'$

LlnLlentriti

9.9

fot ttot underwriting'l '::L','Ll-'ii,',,;'::,:il,1lJJ and opt ror i. ond.,'tund*q securiries to investors 1 .,r ,.an,oer

norma,l f,"'ision is normarlv il? ffJ:'1""':l.j!:E{lIl' ror,ri::x1::*;ll.',i,iL:-H:-':ilil:tJ:Hi-Iil;ilg

-aken in consurr'urrrlrr

";';fio".u.,.lod -.,1'r,,pri.," ts ttrat il'a lixed price'otler "'::'^l::;;;;wriuen amounr vr*;;-;*d# aIiIUu.r st'pY'1t: ,,Tilii:',.*'"T1;:"il:,:',1X1]liil;'Xi ur lurther "r-E:2]1* the total underwrttten of ru",t"*X?l'il::l':[",ff Theregulationsfurthersttpulatelnatrtc"^:;"i The regulations 57o 57o of l:'[^l;;;;;;; obligatto ;lllll:::ol::lil;",,ilttpu'i-aur,* nri.iruum I uno"t't'" undertrke uttuur'" n''nauto', ttrurtu*'"'JoiauoO* il q*::lll'lT:j*L1'fi.::::l SIIaII issue stipulatrfl$ he ,*'ot"."ti"ii atin ,*'or"."'i"ii " p potl bring quality issues "ou d b' s re g u at i o n tu rhrsregurati"":llL":.'::11#ffii,l',]-ff'il*Y:"1l,SttffJlTlil"'::::: o w e r' Thi it t ] lX'X'". * whiche'erisrorver -it. il:,oi'',r"sensc or
I I I

. .

"ltl,":T:::.r.r*unusinf

iliil;ilriting
""

risk oi the isrue' il

to the rnarket'

9.6
-As'i5er

UNDERWRITING

IN BOOK-BUIUT OFFERS
be necessary to the.exteu*l''1:

and the issuer compa'v

prev'"i:l'-*i"JJ::;:i;:l;:lif,,'""#ll,*,1'J,':i',"r:j1:Tl;ili[ilTji'tlij'Jl 'ir,.,O"rurrlting
i:::,:t;;;# *.;
d:::
rras to

no*"utt'iii''t^tqui"*"nt olv ttre balance ffiis*t*runx1i***u'll-x#::'#'H:":l:':x"#*""^'ou"r:: ,n" ,:'-rOit"i" '-'"mbers' qi*' t" such issues' the o""a'r,1rr"r;';;
be done by
issues where \n5ora#;;;"o

has to not apply to

Joj;ro mandatorv underwriting' 'r'uri i::T# *'in* tn"''*""-'n"t:li;'i*,""Ti"lliffi::":1fr'[Jil: oortion of the NPo' runner,*1#:: book the
ue.min"o","rii,

,r**0.*

*"i"'"'*oy

u"'

u"

book buirt offers,

*"J":J:,T,"*:H[;[.Ti5**'*'r'+fr in the an under-subscription

In the case of In order ro ,r."o.lit.,"
the syndicare

i"?[::T:il ffi:;;;i* 'llTlTlne event or the Tl;;:*r*:#:*',",,;'il$-,*ii:[:li;:ntin:,m*il:l,T:IJ#i'ixrlu"'"'p'n'iur" rir I :n'" :;ff [:;'i'1.;;T;i;""'' in an il;;;;,; *" ber( ) g o*he underwriters

*",#;;;
m
s
f

;k,

wr.r.ore

ulferrvriting obligation

iT#t'#'#"x-itrtili::i:",:,'; ,'#!.;t;;{t-t*:::,:lHHJtlf;

"

"i" .i-"'o'1y"'i:^t"1ff
I

ai

Ii

tr

rur

,;,.H,Jillf#iT,J'i:i#JH'#*if"['1$]:iil[iilI"i"'"'ns
oft-er

slnres proposed
the

clocum*t "i"t*-uuilt lhe lJrrdenvriters' "' ancl 'Tlte L'otrtptttn rn*"gt' tn'l otr;:";;;;"'"'

offer

t"]l:r:""1,:rt:r'j",;lo

the Ecptitv nn u"d'^'titinS.Aste.enrcnt 'for

'i'*''4'*o Book n,u,,,i,,{lr'nity'))s,.'"tEntmt'

n"')""'1i'')'it"'"'''
th1

shall be respottstbte

':":::;:-;ir*1;f;;1:::'*:;:ilT:" lortirlrri,,f,r:i'"ii:i':orts' Pursuant rc ilte

':,',,i,::i,;',:i'#,iii:;r;l:li"::';;'{l';l;'-^ri""'l';' At'i'':;;:;''i)'''''"d''-"ters)' o'bove inderuritittg

ro closing'

:'fil;ryi;"|'|:#:::!;;,,
rhe resoutces'of

,.?fil:t?;i:"";ii:iiljl:;i*!;,,"':,';i;:;:i':',{,;,{-it',rx;:t;,*:i;;rr';'liii"'i,{;iiiii'
underwriring *i'''"""'i'i-'' ,f'n sEBt ,{ct Section tz(t) or'ii'e
et1"^t111,,eretl

'ln"'s'o'[ 'l ':t"'"::,:',::,!;:lf:^;i:'k:;;;:;iii*s,ni,n iii:{;i*,,':;,:,x?y"'::::':'

'

as brckers

*i'n

Excl'ais"@'

among

-Allocation Nonvithstemding iorcnts

rn"J''"p"'iie

ii:tiiii:;iii:ijt';.:;'1"il"i"'i!'1')"'i'i:;';:;;;;;';n"i I) tttierttrite r in ad/ititttt

^i"

,.

."-."-,

:'-t' -l-1-!{jcry

ffi*

9.10

InvestmentBtutkit

Agreemettt. Allotme'nt

as speciJied in tlrc {Jnderwriting to the extett of tlrc clefatrlted antotult also be required to trtrocwe/subscribe prospecttts and ruay not be this o, per.the

proportionate Llndenvriters'.

in

any

to QIBs is discretiono-,-,, !,",:::f cotilcl be dffirent for the t'ariotts *rr"-|)ra rt* pattet'tts of allotment to the QIBs
f

9.7
-

UNDERWRITING ASSESSMENT OF AN ISSUE FOR

in underwriting business As explained above, the critical risk factors As a corollary' in order to capital loss from devolved securities' .r.,.i"r, (b) devolvem"n, quoniu* and (c) capacity to procure f;;;";t are capital adequacy and thenot mitigate these risks, tt. .riti.ul suffice unless the would

are (a) devolvement probability'

,1ror[-nn"'cial strength tut it subscriptions. Capital adequacy comes upon the distribution network it. ffrt-iap""lt, to procure depends with augmented is procure to build an capacity mort.tubiiity of u,i"o"' While underwriters tt" and underwriter the of base and investor of time' they have to marketing agents over a period and sub-brokers brokers, of expansive network issue that they underwrite' carefully assess the *J"'uUitity of every investor's perspective since sno.rta always be made from an Assessment of an issue for underwriting in chapter 4' institutional finds rurow with investors. As explained the iss*e is successful only when it gio*th rvhile the.retail investors by the persfective of medium ttrm from issues primary at look investors listing' Institutional the first thlee to six months after and large. look for.short-term profit uoot<infwitrrin for appreciation wait to keen of the issue and are therefore investors are driven more by the fundamentals such as the factors on of one to two years' A lot depends business in the market price over a longer time frame of the record' sountlness at the time of issue' past track pdce of intlustry, pricing of the issue, fu-ndamentals Tft"'" futto" determine the equilibrium ,i,ititiiy plan. financial p"rro*run.". level of Uruna "tt' thecompany,sshareinthemarketthatalargein*,,t*toot,for-Hor,vever,retailinvestorsafedrivenmore more to retail fundamentals' Therefore what matters opportunities;;';y arbitrage and motive profit by price appreciation' floaring stock and possibility of investors is the affordability of the share, have to underwriters mind' UNf u'O Ltail investors in Keeping the abwe *ini-r"t of instituiii"J, reach to strengths anrl their own distribution tt,"," look at the potential of the issue to meet suppod can that "^p".tations loyal investor base and brokers develop a strong and these investors. Many underwriters and recommend the issue investors these hu'" con'in"" si-qnificant number of irru.*. underwriters the support will 'o through money Lut" investo* unless say, to Needless '"to**endations' 'uth strongly. factor' .h:."1'TJ,11d arrive at the

p;; i;#

:.t

to assess the above not continue. Therefore, underwriters have ::;"";from their own investor base for

un#iI;,T"J.illli;r[:",ffi.:;:, commitment'
entering into an underwriting

before''l, rlar issue before a parricular

9"8

SAFETY NET

'safery net' is a rnechanism wherebv an

:ff I;;HJii[:lfJ:

:ffi H;ffi

il::'J:ll''":Jffi:1il:.;;;;'il;;;il;;" "i'r'i 5"'."^p'i":l:1::"T*"";1l3i:fi:'5:; ",XT:1"::';:*fi per securitv, ir a saretv net has beer i[t'::.',".],.il ffi;il il;;; price or Rs 60
*Hffi,ffi
'n v,vvvv -.r^ li,?"t'ilT.':ffi::illi'"ff*:Hi,"^1;;':':l ottefed by me Company' [Ils urvs]tur rrrcl t::"i:i.::.:i,,":?::::1'::*?*::;;.;1 ; ,_,,^..^. -, choose to exercrsoI the per securitl'' Obviously' the investor would
provicler for a price

1f,:',]'tr;Jil:l:ffJ,HlHffi#
nt
OO

;ffiill,*"*a'*v,?p':'lq:11:::':i3-T':* ji:*?-,;

is-suer'"*pi:]-:I"i::T?^T,,:i1:f**:?":ltli[il""':x:t

;"ll::':] :i[::.1,'tr*:lly i}ll

.r +tr-^..a oo.,rrificq to the safety nd
urw
Sat_eJ e*li,,.]

"i

F,rl,*

9.11

het only

Ilfli:ii:i '

the market price falls below the offer price in post issue frading. SEBI has imposed certain of a,safety net keeping in view the need for such facitity to be provided only 11""T,."ior ror.la]t investors. Therefore, the following regulations apply to safety net arrangements: (a) Any saf-ety net scheme or buy-back arrangements of the shares proposed in any public issue shall be finalised by issuer company with the lead merchant banker in advance and disclosed in the prospectus. (b) Such buy-back or safety net arrangements shall be made available only to all original resident

if

individual allotees.

(c) Such buy-back or safety net facility shall be limited upro a maximum of 1000 securiries per
of securities. (d) The financial capacity of the person making available buy-back or safety ner disclosed in the draft prospectus.
allottee and the offer shall be valid at least for a period of 6 months from the last date of despatch

shall be

Safety net is thus an additional protection that may be made available by an issuer company to small investors entirely at its option. Issuer companies usually do so as a marketing factor ior the issue. Secondly providing a safety net in a high priced issue may also send a signal to prospective investors about the confidence of the company in its pricing and post-issue performance oftne scrip. The financial intermediary or underwriter that provides the safety net has to be coveretl for all losses that it may book on account of purchase of shares at the issue price lrom investors. This would however depend on the understanding reached with the company and the prornoters. Under the provisions of the Companies Act, the company cannot offer to buy-back such securities or conlpensate for the losses. Therefore, the safety net provider has to exit either through the market by holding on ro such securities for a period of time or sell them to the promoters at some agreed p.ice so us to"book som. prorit. In addition to the arrangement reached for disposal of purchased securities, the safety net provider may negotiate remuneration to be paid by the issuer company for its services. Safety net was used in some public in earlier years such as Infotech Enterprises Ltd. wherein the lead manager IDBI Bank had offered a safety net. In recent times, the RBI instructed banks to refiain from providing such services in connection with public offers. However, other financial intennediaries may still do so.

:l

9.9

UNDERWRITING-US MODEL

Underwriting is the core function of investment banks in the US with regard to floatation of new securities in the primary market. This is the reason that many a time they are referred to as underwriters or lead underwriters instead of being called lead managers as in India. Given the crucial ,ot. pruy"a-iy underwriters in the US public offer delivery model, the entire issue activity is largely determined through underwriters and their syndicates. The lead underwriters not only syndicate underwriting but also decide on the issue pricing, allocations to underwriters and syndicate members. The syndicaie members and securities firms play an influential role in determining the allocations to their investors. The top equity underwriters in US market include Goldman Sachs, Merrill Lynch, Morgan Stanley Dean Witter, Credit Suisse First Boston and J.P. Morgan. Top debt underwriters incrude Menill tynci, Donardson Lufkin Jenrette and Morgan Stanley Dean Witter.

r{i.r:$::l,itr]TiqFirir?.f

1., fl fi

r}Irffi t qlws]ru.iiilM

9.12

Investnrcnt

Bor*irg

9.9.1 Definition

the Indian perspective is more of contingent Underwriting as-discussed so far in this chapter l'rom - nf nrrhlic XJITf According to rhe Broomberg u,a rouo*, a differenr model. ? ,.--:a: ^^ a ,.ire htt -^--;fi-,] bv price ^ specified ,to the issuer of securities

;;ffi

#::1ffi:ilffi#,";;;;";;;;; guarariee, as to
lltill;tlXlillfilii#" i,
thereby

;:,:i#"ffi #;;;#;;;;;t;;i{?I'ni::1,',1";::3::'^:',;':H:1X'J::
suarantee

Zi,lli,iii";,,i,:";;;;:,';,,; '",;;;r;;;;';:;'' "*,'::";:r:;::::,U:;':;,"":;:;i;;'"iii"i*"'''i

7"JJ,i,'il7,,ii,,i1^'.";,," r';;;;',;"i,""' ;;;,-4

An underwriter has thus ri r"i'g secttrities to -nrurket' Aful --t ^^^.,,..i+i-o hnw n and
"nrrrrrnnl rrom a contparuv thit btqs art isstte ar secrtrities .1 r ,-- t-.^--cnl o
- -^,,-ix, - securitv sate' finn from a

-^- L-o thrrc

ttrc ti,,;;t 'ar*' stnratltees the proceeds to

effect taking otvnership of the securities" and sale' It guarantees ,.tdei"riting u, p"itt above definition is a contract ofpurchase " by the underwriter at a specified price' The the issuer company the purchase of specified securities This function of unclerwriting is performed by underwriter resells the purchased securities to investors. new security 'A grottp of investntent banks that work together to sell the underwriting syndicate which is ltead of a is'the who by the leacl underwriter offerings investors'.The underwriting syndicate is led a secondary or securities an initiil ptblic offiring of s.vttdicate of financiat fin s that arc sportsoring

At the outset,

-,

offering of securities''

9.9.2

of underwriting-(a) firm underwriting and under the existing uS law, there are broadly two types route since the risk to the issuing (b) best pfforts underwriting. Most of the issuerc pr"f.. the first are not

TYPes

of Underwriting

underwriting is used when the underwriters company is passed on to the underwriter. Best effort confident of being able to sell the issue to the investors' contract with the company' The price of In firm underwriting, the undenvriter enters into a purchase mondng of the date on which the registration the securities is fieezed a clay befbre or usually on the would have completed the road shows and statement becomes effective. By such time, the underwriters pre-sold the issue to investors although technically' marketing for the issue and would have practically statement becomes effective' Therefore' the investors' bids cannot be accepted until the regiitiation and the spread required by the underwriters' price is freezed based on the response received fro-m investors negotiaies with the company finalises the The lead underwriter in consultation with other underwriters to issue is sold to investors through allocations price of the securities for the public offer. Thereafter, the various syndicate members and dealers' the US market' the underwriting is more on In best efforts underwriting, which is very uncommon in hottses in India' The investment banks the lines of an agency function as is the case with brokerage sold is not issued by the company' Therefore' would make best efforts to sell the stock and whatever is not the underwriter' There is only an agreement in this model. there is no contract for purchase and sale by is a non-fund activity for investment banks and to market the securities for a consideration. Therefore it are small and relatively unknown' as such not very popular. It is resorted to when companies

)t
1'
I

9.9.3 Underwriting Documentation

up in firm underwriting' The first and most There are mainly three underwriting contracts that are clrawn new which is 'the cotttract befi'veen a corporation issuing

important is the 'Underwriting Agreement' publictl, offbrcd securities and the managing unilenvrifer as agent

lead.underwriter, which.is a contract for purchase agreement is signed between the issuer co*p*y and the agrees to purchase the securities at an and sale of the securities being issued. f^he ieaa underwriter
,I

for

the mtderwriting group'' This

in

.e

this happens hours just before the contract is signed' As already stated' a$eed price that is determined provides fbr the terms effective. The unJerwriting agreement before the registration statemen; becomes 6uV and pay for the securities' the P of the offering, which include the underwrlt"t;' "p.*ttntation also provides if any, available to the underwriter' The agreement timing of the offer and green shoe option date but eft-ective the after offer unaerwJrer may withdrarv the a cancellation clause whereby tt e for
reasons' before closing date due to specified

the mutual obligations Amortg [Jnderuriters'that defines The second contract isthe'Agreement inter s.e' It designates the syndicate manager between all the members of the ;nderwriting 'yidi"ut" This agreement underwriier is usually the syndicate manager' who would represert them. The lead of the members of the syndicate' 'agreement akin to a ;;;, ,p the underwriting obligations ,Deale, Agrnrorr:rt;, *rrl.r, is basically a distribution rhe is conrract third The the 'sel/ing Sroltp' tt securities. The dealers, known as into, to *.t brokerage conract in India entered "i "no role in underwriting the offer' They are securities syndicate and have are not pafi of ,r-,. ,rra"t*Jting firmsthatarecontracrcdmerelytodistributethesecuritiesandmovethenrarket.UnlikebrokerageContracts Instead' the us offers-*" t* paid a fee for distribution services'oft'er price so in India for a public offer, dealers in at a discount to the dealers to purchase securities generally dealer agreement provides fbr the make a profit on the secutities dtui"" rrr"t"r*",*th"
at the issue that they can sell them to investors offer' dealt with by them for the public

fri.l.

g.g.4 Underuniting Compensation

shtement becomes

just before the registration the pricing of the offer is detennined As stated above, in firm underwriting tace of the whichs**t:i":'

prospectusundth","to.e,thepricett,"i,,",to,,puvro,subscribingtothesecuritiesonoft.er.Thisis which is issuer cJrnpany gets a lou'er price'

"t'f""ti'"'

Howevir' tni'

i' tt'Jp'ice

at

T:^*l::::"ti"

company gets' The however not the price which the issuer to the investor onitt*titer, ]he spread between the price f"ta the with negotiations through determined ,,u.,.,1,*,riti:: It is also known by other names is known u, tilr" and price received uy ttre issuer tnembers of the syndicate '8r?'ts spread' ot 'sellirtg concession"All the such as 'wtdenuritirtg discorutt'or risk taken up by each and varying umottnt of undel-writing obligation are paid out of this spread. The schedule' member is ieflected in the compensation

:e:d'.

,yrii.u,"

underwriter is also paid

'ntt structurlng 1::.,lt"nttng on the issuer company' fbnctions of due diligence review kJy the tor.onJu.ting compensation the offer and syndicating the underwriting' as advertisement' iegal expenses the underwriting syndicate such To cover the expenses incurred by paid by the ,h;;ff;rrrg, an 'underwriting allowance' is also and out of pocker expenses to distribute

Inadditiontotheunderwritingspreadwhichisbasicallythereturnfortheunderwritingrisk,thelead t:-11::-:l: the offer' ;:*111uitn

a 'nLanager's

f"':';'

t*liffi:lJ

ro dearers isa,selling conunission,that is paid they accept to sell' This is amount of the ;; b"'; dealers 'ecuiities that is allocated among all the earlier' structured as a dealer discount as explained

(se,ing group) under rhe dealer agreement

Fromtheabovediscussion,itisevidentthataleadunderwritergetsthreetypesofcompensationfrom underwriting r"t, (b) the underwriting allowance and (c) the underwnttng the issuer company-(a) the manag"r', the of share th; underwritinr_rot"oo and a spread. The other syndicate members s:t a portion of the underwriting The dealers get selling commission and allowance from the lead underwriter.
allowance from the syndicate members'

l,

ffi

'r::re.,?ryw$wsTiTF'

rlrgn_qri,iieli*!s$r1q$,m

Illustration ' American Corporalion wishes tu make

shows, the lead una"*ritri Morgan stanley is negotiated tind obovu O'""'mettt, tltl price to the issaer int estorsat $ 25 per share. Based on the isiue and ruanager's fee at 0'5Vo' T{i Expenses are tapp'ed at l7a of the per shareZZ,5 at $ .fixed the tolal wtdemvriting' Each ih|"'" mkrng I 57o .of syn"dicate consists of faur otlter unclerwriters-;i;h af 5Vo'

t'rfitkes on ,,rrnrrrrnn, ,ho,

** fubl\ offer-.'I.'^?:::':::,:f:::;;y:" be sold to

the isstrc could

underwriter hns a d"nle' nenvork'

eo'l'

Delermine the compensation schedule'

''t'iai'loJ"

r""nbe') negofi;tes a dealer discotutt

solutinn
The

contpany *-oulcl be $ 225 million leqs size is $, 250millian and the cttsh to Issrter million'Therefore of i.SW:af the size of the issue' i'e' $3'75 deductionsfor expenses amounting to'atont of the issue size' 11'57o nn1iig the total issue expenses net cash to Qompqny wloukt bn $ iZt.ZS million be 28'75 tnillion: This
The total

ffir

seltiyS nrttl cash kitty avsilable ta undeiwriters:an.d"the

qro!

ivoutd

Yuird consists of an underwriting spreed oS.S..ZS.nfii;ii,te*pense

oY S Z.SO

$ rnillion and manager"i{ee

"'! ' f,ir|'lliiil*rite:rb

amo'tmrin's to $ i;ttin'stut*'" underwritins obtigatian is 4avo of the isstre is $ 10 milliort' Deater d;ieouiit slnrz A'SZ,iy'r The totat underwriting spreatl to-b" ur"lvni

thereottantountsto$l'25persharcdrnnunttittgta$5million'Netund'ertt'ritingsprqad'to':ledd' in'tuding other components would be as follows: underwiter is $ 5 millisn, rue torat coni[i:iriiiSn

Mamager,s

Fete
: .

Expenses

::u":!,::,,:":,:,,:::::i:.", l9o af undent:riting obligution

l, ' ' '
following

Net underwriting

sPread
receives the

= 1'25a'ata.'0"" = 1'00A''004 = t-?'r?,1^9!,

'

. :, ,.. Tbtal., 'irin ,ynairorc member 2. Total

' r

'

"" ""

7'25A;00O''"'

3- ' Alt setling group rnembers 4. Reconciliation

.lp,adundenttriter
Synclicate rnembers

' ,, ' 2;250,000..,, 'n of $ l2'5 nittion' receive a collective'compensatu ,::

a.250,00t0

,, :

r.

i.,,,,,,

=:,9;
:rt
ia
.;g

Dealers
Total'

:k

9.9.5 Underwriter's Risks in Firm Underwriting

I
.t!

the syndicate syndicate and a selling group' While The lead underwriter assembles the entire underwriting

,i

takesontheunderwritingrisksintheoffer,the'"ttingg"toupdo"'-'otassume"l,{ti*lT]:1i::1":::t: amons syndicate bv entering into the agreement ;il, ;; ilffi;ffi";rr.iiirs rirr across trre l^.,1 rrnrlemzrifer ---- ^.^ *L^ is underwriter lead ffi'",.}jffi"i,r"rrr"J "r;;r.i;.;;", in firniunderwriring conrracts, r the , - ^L1:-^+:^i. ,:.:oi::l r,.,".1,,q"1v,r!l'_tT:T*,"r"*:: "^r'pod :$:xilriJil:J;;:" of the securities from,r," the lead fi:[tli::;;Jr:'"?t, the lead underwriter. As far as the issuer companv is concerned'
underwriter is resPonsible.

{.
*i '.q.i.
,9,1

UnderYvri

9.15

fl, ,fu;
lfirl .#*
Li.

waiting ffiunderwritinginthis.mode1is,t1reriskofbeingsadd1edwithunsa1eab]estock. pricinirisk and marteting risk' a clmuinxioffi;;;;;irk,

According to

Thornas,,"*,inir,,

fl
tr
bl
Lit
I

market risk is the risk of adverse

;::",},'ff

#I ;l JffiI,

[1"

agreemenr is not yer

at this smse the'lrnderwntrng " ;dT"H ;; ;;'$#"iiY:'' alrangements for shelf to some Lxtent by making

*:'q'u:l':.q*::::Xm:*n::::,*:ffi:iT::ffi:Jf;:#
bv

il"

rfl*H:,'-,f:n*[iYlt*Xfn'iry'Ji]J,h:-::.:::borne

fi jril
f;!.
&:;'
Y:i '#:;. 'si,,.

fl,,
Sii' F;:

underwri'lers rhe risk tire registration statement just before'[he the inderwriting agreement ."""rr" tor the lead i.r" mitigation mechanism have been u"""ta adequately ,r".J market goes the time market ifri, the when 'i"'ia beconres effective. fV th" u.tu"r pricing risk occurs n1lil decision. pdcing underwriter to take rhe agreenrenl. signing.of the underwriting ro n1itigute this risk, the lead in the days till*i"i,rre
adverse

"r,;;;i^;".

riis rist l, *itigutto

il',

*i
ii,
{:

i: 'i;
ti,:,

marke'I ro.he *o-u" 'ihe widely' it also ',no is spread _HfrX1:l-J::*.}r**;|,jf^;:#:?il';:fi::;J;"$"#]ilil;;;; ;;tiso in "t "."*"*",oaaing. if unJ".*riting sbck not only prior;;;.; risk' Liu*,,:h::' is an additionai signiricant arises risk il:if?:lJ,ffq:1Tl';;';*", in uitt' *u*"t trading'-This ut u.t# ,nt .,'r* price is

'#*TJ.i*liU:

,,*"iruairg was im?roPer or there which is the risk "r,i" issue;r"J;;;;;^j1:l^:n:,*-oeting the or since it tanrishes when the orter was overpricecl, is a major ,i,t to, und.-erwriters This rnve-Stors. from short-term undue selling pressure

ii'

I ii
i;

i
I

theirimageandcredibilityint}re,.*i,,u",.,-,orket.Insuchcases,theunderwritersresorttoprlce i' aon"' seC *rtt do not allow ; incurred due to ';l;ion stabilization o, ,'""ii?"'il;;;"'**t the pu"hu" price' Losses than *o'" ui ,,ou,iru,io" underwriters 1t pti"" tontinut' to fall" ro serl the ,ro.* pr*ilur:a';i';; Ho*t'"'' t"d;;;;;' are the by equally underwriters this risk' stabilization ,,." ,t or.J iir..etion' ln c,,dt' to mitigate trr"i, ut about turn are-cho.sv may withdraw sturr,l-Jut-io',ilrpp.,r, The selling syntli-tatts in rnd d;;;" preferred to prevent Jfi;rfti.ut.r. rheir are abour choosy institutionat investors ,r*" i" placem"* bulk time, firms allocate shares-to their investors. I\4any a investors, the securities ron_institutional ot with short-term perspectlve pressure. r,vJn-in the case
selling
a1ld

underwriters

investors based on

,*r, i*.*

disqualify

,n"r"'\vn; ,"gularly

discoura,ge in'estors record with them. Tliey of listing' ,.il ,"..,.ii"sin tne first 15-30 rlays

.,

l;1:t",.3r:T:;:::,:$l], i* p:r^Y";;; in chapter 5. Green ,n".

*0,:: ,y1:""'''g

underthe Indiar capital

'r'," *1J",'^1.ltte is huge demand "Oii"r, tff"r. In il;;"*t; pruri. shoe option can be securitiJs-iir', issue additional at the issue p'itt' dtttn securities adclitionil oi irJ.," ri",,ir" tntctive date' The additional the SEC regutations ;;;i; issue sizJ;i;it 30 days oltne l5a/o ,auul"rr, an exercised,p ro cover t']ttl-t". *r:l.tTrt",ff[*s, is the utiderrvriters *".urirr", si,oulcl be used to under the US system, it

us

cor.panies to reguiations'that allorv issuer

mlkelhas

been dissussed

for secuntres'

rhe Pr'sPec'[us

""::1 -iii;;;l;1}ilff:[T:i;;.}i,lJtil],1'[:.*':ii{1#i*;T1il':;;Jffi[[ ,i-," gr".n ,n* Iollj""ffi""; ro.iir.,o, ::.n*T',*:,r;,:t:;J":#:: ,r.,. disclor" has ro uito.u,io* itT:I."..:ffi;{:m*X':;::'i'i,[lT underwriteito make excess an option given to the
shoe is theretbre

$:::iiF:{eunderwritins i} required in a hot issue'

compensations Green

\/

9.16

Inyesrment

9.IO

COMPARATIVE TABLE OF INDIAN AND US MODELS

3ff:'"X11rffff,:H:T,TJ::

ffii,f'.ffiji;Xff:'truct

a comparative anarvsis orrhe respecrive

Table 9.1

Comparative Scheme of Unrlerwriting

Nature of service Method of underwriting

Fee-based. Becomes contingently fund-based. Standby support that would devolve on the underwriter orrly if,the issue is under-subscribed

Fund-based.

3.

Nature of underwriting contract

It provides a contin-sent obligation on the underw,riter to purchase the securities on offer.

Firm underwriting wherein the underwriters guarantee the issue irrespective of investors, response. It is a contract of purchase and sale wherein underwriters purchase
price and sell thern to investors at the offer price.
securities from the issuer at a lower

4. Purchase price of securities

At the offer price.

At a discount to offer price. The Iead underwriter on behalf of the syndicate negotiates the price with the issuer company. Sometimes this could be through competitive bidding between different
underwriting syndicates, especially the issuer is a large corporation. The price at which dealers get the securities is negotiated by each

if

Extent of obligation to
purchase

syndicate member with its respective dealer network. To the extent of devolvement. To the extent of amount

Role of underrvriter

underwritten. Providing marketing supporr! moving the market through distribution and taking up devolvement if any. Underwriting cornmission. This is to the underwriting obligation.
a fee earmarked as a percentage

Taking the risk of guaranree, pricing the offer, moving the market
and allocations to dealers and investors.

7.

Compensation

Main compensation is the underwriting spread, i.e. the spread

between offer price and the price paid to the issuer company. This is a profit (or loss) on the purchase and sale of securities.

8.

Nature of underwriting risk

Contingent risk that is a function of market risk. waiting risk and pricing risk.

pricing risk.

Actual risk which is a lunction of market risk, waiting risk and

,

(Contd.)

Undenvriting 9.17
(Contd.)
P

rocess

Indiu
Decided by the issrrer. Used in an over-subscribed offer to provide additional allotments to investors.

USA

9.

Green shoe optioo

Decided by the underwriter. Used in an over-subscribed issue to provide additional allocations to investors.

10.

Price stabilisation

Compulsory when green shoe option is exercised. Price stabilization is used to prevent price crash due to excess liquidity. Funds used for price stabilisation are those collected from investors out ofthe green shoe option. There would not be any losses on account of price stabilisation. Price stabilisation is complementary to green shoe option. Allotments are made directly to investors as per SEBI guidelines by
the issuer company in consultation with the stock exchange. Post-issue lead manager oversees the function. Therefore, allotments are governed by statutory norms.

in an under-subscribed or weak offer to supporl issue price in after market trading. Funds used for price support are those of the underwriters. Losses arising from price stabilisation are borne by underwriters. Price stabilisation is the antithesis ol green shoe option.
Lrsed

I.

Allocations

The Lead underwriter decides allocation of shares to syndicate members. The syndicate members in tum decide allocations to their investors and dei. ;rs. Dealers decide allocations to their investors. Allocations are entirely at the discretion of underwriters.' Underwritin g Agreement-between
issuer and lead underwriter. greement among underwriters-

12. Documentation

Undelwriting Agreementhetween issuer and each

underwriter.

Broker Agreement-between
issuer and broker to issue.

Inter se between syndicate members Dealer Agreement-between

syndicate member and dealer.

9.11

BOUGHT OUT DEALS

Bought Out Deals (BODs) were of common occurrence in the IPO boom in the early nineties in India during which several companies went public through a BOD and subsequent offer for sale to the public. BOD is an alternative to a straight IPO (retail or book built) whereby a company places ceftain amount of stock with an investment bank with the understanding that it would take the company public by making a secondary offer within an agreed time frame. The term 'bought out deal' refers to the fact that the investment bank buys the entire stock meant to be issued to the public from the issuer company. Thereafter, at the appropriate time, usually within 9-12 months, the investment bank-makes an offer for sale to the public thereby listing the company. The risk in a bought out deal is similar but not exactly the same as that in firm underwriting. In a firm underwriting for an issue, the risk is in terms of being saddled with stock that would be listed but not having demand with investors. In a bought out deal the risk is in terms of being saddled with unlisted

liilru

9.78

Investment Bankin

around 6-12 months' tlowevIr, iir" not reach their rosicar "ri".irr" ending rir."

view the ultimaie public return with an exit within a given

sbb, **,1;;{::"#1"fiTT.;i#X,jfi:.i:ffi"*:l"T.5j;*,u*companies in re,ms orsaving t"'"iiipor. a.t ttre rr*. ri*",irr" company rnvestors that are *: is assured of funds from the l' u fruri. issue unress ilH; underwrirten. structured keeping in *1T;a usuary,
in time and expenses of making

n',lJrj:::";::T;:]:lJ#:T#il:,H,T""frT:;[:r,ff il,I:il,:l.;. ji:h"J-,x'X,j:fl n,o. BoD is a recogni-sed roure ror c.,mnqnio. ]^ Hin[#n':J::::.:lr,i]1;:"jf;ji,i. ^^ _..r r. f#fffi :il:Tl-"orlndia"oii"a",",;jid:.:dffi,["iffiff H":[J:[:f :il,;mm:l:
jr*rars 9rr*rf*,ir", a;r"1,,'ir-."
the BoD is are assuredoiu, "^p""t"d rrr, had a normar marurity profire of lgii,there were severar BoDs that courd one such company was Divi.s

,i;;;;

.eoo,. **ters co,apsed in

investment banks cannot take unlimir"a

;,11.?,"*ll&j:I:ffi :li*:i:,;*;r#[,"j;b;:,,*:*; as 'Bought Deals'' The first t"rt at,i General Motors Acceptance "rrion. in rq6il; csm *,r,", it bought the enrire
corporation wiinout putting

enrireissueorg;d;"i!;FJif

-,.-?,1;:;;?fl1l|'lil:

:rT;$'ii"-i,iou,uook-uu,iro,,""soo, are rare i{.',"i:Hf#:;* l;'fu;l'*tj:i-::g:rssue sizes have gone up significan,iy La therefore, */.r". usr.d{"i ,\1,,,, as 'bought cteat,. rtwas rirst
used in the eurobond

"#.1,

rr.

rrr.rrrri'rrrffirr".

;,il:JT'irtrffiH:";:H1,"J-;""*"'ir,,"oe

i',fl :'ffi;#::m i"; ili ,,,l,!|"Jf, *1r,*X**I'J[.;ff In the US market sincepublic off"r, u.? i.signed p.r-*ry ir. r]rrtrt to a public issue being uorrrt investors, a BoD is sordentirely ;;;;;" akin Ir.g" irr"rtorr. no**"., in rhe
lx
ov-an

i, piu." u*nderwriting

issue of syndicate. It is possible underwri,er w o u, d be buy up,he

rr""r,,*#i"nk

wirh

Indian conrexr, a BoD view ,o,ur"ir," company

CH

.HEVIEW
wh
i

predominaurryur."-bu,"

*fll"j:":::r:'"

rJJff l"Hi:,':,[1'"jf"H'J."jl#:.i # n:y* ::-, :1J,,,, g ch or ry is an ;'rm: l",Txiffi:.y;imlx;?*#1i:e$:J",#:tH#1vffi1 H:Tff :'3g;gff ,[**:x;rifu**.iili#;3il:H'i"i"iti::11*ffi *:::;:,X
n

on

mpofl a n,

ru us

.o;;i;;.:*h*ii3: j;;*;#fi ;ff ;i;,:i1.#i,T"-,Irffi

TEA NTNG

\r/ith, in.detail. ffif,il*gJ

rerateal:jilT:f*f ,"3::fd,'n tii". thbrougll kno*,.d*u or rhe ir :,,1:'J:*::Tfl,H;*:H,"I#=#* ;T:""#JiiTs:if*[:[H jilil,J.[:;#;fi

underwriting and underwriting / sub-underwiring
'

After a study of this

ch

Ag'rei*na, iiritiig#"yr:y:ir*r,ii-i.iilaatnideiwrifing ff;-,y;;;:f:,;r,;;n'i'ion'; io**;:'i";:; / ,cowmissian ,serins

Devotvement Notice / saferv 'underwrirers / Deater

/ t)nderwiting

tur:,

/ IJnderwritin6 Agreement / Devorvement t-i* #h:r:*,r,errii:igoi / ry1;r11y1i;s tasi;;tuot.amins

Commission

creen shoe option

diseount/ Grasi

Baughtbat

irr* '

9.19

Whv is it 1. What is underwriting?

necessary tn an

2.

r;rru*;lT|::T"::xffi +ri#rg ii t"t"*r:lLerwrirers i 4.Inacontractorono",'ilIii,*in"us**to,io*aotheunderwritersdisposeofthesecunttes ;6. #*H'il";";.n*"'"1:*::Tt:':f"::Tffffi:i:#;Lffi[?;"#,'l'fr:ou'[come?. ih" in"'t*"* o"n:'^:3XTffil':;i6;'i'i"t'uni'*'' lil;;'il.'Y,'l::.:'H.'JtH|[']TLT " 7.
In abought out dear' 'f
Exprain the different

Is underwriting u

t'"-uu'i'i

;;{:-1::.:j}::::::t

:;;',T',1,o,,,

that thev dispose or the securities

;. il*n

shoe opttons In t the working of green

:.!

ffi

,*,

,,uud,i