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An Appraisal of Investment Banking in India

Article in SSRN Electronic Journal May 2011

DOI: 10.2139/ssrn.1854247

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 AN APPRAISAL
OF
INVESTMENT BANKING
IN
INDIA
Sanjeet Singh, BBSB Engineering College, Fatehgarh Sahib
Gagan Deep Sharma, BBSB Engineering College, Fatehgarh Sahib
Mandeep Manhendru, GJIMT, Mohali

ABSTRACT

Investment banking is a particular form of banking which finances capital

requirements of enterprises. Investment banking assists as it performs IPOs, private
placement and bond offerings, acts as broker and carries through mergers and
acquisitions. son of banking encompassing business entities dealing with creation of
capital for other companies. The present condition of the investment banking in India
and also evaluate the future scope. . Out of the total 111 investment bankers registered
with SEBI on 30th October 2008, depending on the availability of data 10 non bank
investment bankers were selected for study. Various tools (Graphs, tables) have been
used to depict their growth trends and a study of their financial statements show their
profitability and liquidity position. Only secondary data was collected for meeting the
objectives of the study. Data was collected the web site of SEBI and the companies
with the help of internet in the form of text and financial statements of investment
bankers. The data has been evaluated with the help of statistical tools i.e., Trend
analysis, Ratio analysis.

Keywords: Investment Banking, India, SEBI, Capital, Ratio analysis, Trend analysis.

1. INTRODUCTION OF THE STUDY

Investment Banking: Banks earlier confined most of their operations to deposit

mobilization and credit dispensation. But in India, they have diversified their
activities in line with their counterparts in developed countries, and gone into
merchant banking also. This innovative banking has helped many young
entrepreneurs who lacked sufficient experience and had a little capital to invest to
enter into the field of industrial enterprise. This has led to the need for some agency
which can take care of their interests from planning to execution of the projects. With
industrial organisation growing more complex day by day, there is crying need for
industrial rationalisation because of mergers, amalgamations and the integration of
private with public companies. All this require sophisticated planning and
management which cannot be provided by specialised agencies that have a flexible
approach and possess a proper understanding of the problems of the corporate sector.

Electronic copy available at: http://ssrn.com/abstract=1854247

Corporate sector needs the services of these experts to tackle problems in technical,
financial, managerial and organizational fields. A study by the Reserve Bank of India
showed that insufficient project preparation, defective technical planning, inefficient
of indifferent management and financial bottlenecks faced by promoters were
primarily responsible for delay in the implementation of projects. Merchant banks
have a role to play to rectify these defects.

Investment banking is a particular form of banking which finances capital

requirements of enterprises. Investment banking assists as it performs IPOs, private
placement and bond offerings, acts as broker and carries through mergers and
acquisitions. son of banking encompassing business entities dealing with creation of
capital for other companies. In addition to acting as agents or underwriters for
companies in the process of issuing securities, investment banks also advise
companies on matters related to the issue and placement of stock. Investment
Banking, branch of finance concerned with the underwriting, distribution, and
maintenance of markets in securities issued by business firms and public agencies.
Investment bankers are primarily merchants of securities; they perform three basic
economic functions: (1) provide capital for corporations and local governments by
underwriting and distributing new issues of securities; (2) maintain markets in
securities by trading and executing orders in secondary market transactions; and (3)
provide advice on the issuance, purchase, and sale of securities, and on other financial
matters. In contrast to commercial banks, whose chief functions are to accept deposits
and grant short-term loans to businesses and consumers, investment bankers engage
primarily in long-term financing.

According to Investors world, Investment banking services are performed by

Investment banks. An Investment bank can be defined as an individual or institution
which acts as an underwriter or agent for corporations and municipalities issuing
securities. Most also maintain broker/dealer operations, maintain markets for
previously issued securities, and offer advisory services to investors. Investment
banks also have a large role in facilitating mergers and acquisitions, private equity
placements and corporate restructuring. Unlike traditional banks, investment banks do
not accept deposits from and provide loans to individuals also called investment
banker. Financial intermediaries who perform a variety of services, including aiding
in the sale of securities, facilitating mergers and other corporate reorganizations,
acting as brokers to both individual and institutional clients, and trading for their own
accounts. Investment banks are often treated as synonyms of merchant banks. But
there is a difference in the services they perform. This is stated as below.
Merchant banks and investment banks in their purest forms are different kinds of
financial institutions that perform different services. In practice, the fine lines that
separate the functions of merchant banks and investment banks tend to blur.
Traditional merchant banks often expand into the field of securities underwriting,
while many investment banks participate in trade financing activities Pure investment
banks raise funds for businesses and some governments by registering and issuing
debt or equity and selling it on a market. The current offerings of investment banks &
merchant banks vary by the institution offering the services, but there are a
few characteristics that most companies that offer both investment & merchant
banking share.
With the advent of Globalization, latest financial trends and economic development
the line of differences between Investment Banking and Merchant Banks has

Electronic copy available at: http://ssrn.com/abstract=1854247

considerably reduced. It was impossible for Indian banks to stay aloof from
international trends. With merchant banks/ issuing houses in the U.K already
converted to investment banks, India is not far behind. Evidence o this trend is the
adoption of Bought-out deals (BODs), Initial placement of equity, venture capital
funds, and influx of foreign investment banks and acquisition of stake in Indian
merchant banks by foreign investment banks. ICICI is an investment banking outfit
(Machiraju, 2004).

Potential of Investment Banking in India

The major problem of Indian capital markets today is the lack of investor confidence,
which is mainly on account of lack of liquidity, unscrupulous issuers and merchant
bankers and poor or unapprised issues. Investment Banking can solve this problem
because investors would be dealing with reputed investment bankers in the primary
bankers in the primary market rather than unknown issuers. The issues will be
properly appraised and priced. Similarly, Investment Banks would hold the issue until
market conditions are appropriate for issue, thus reducing the risk exposure of
investors to gestation for issue. Moreover, the price of reissue will be a better
indicator of issues performance. Investment banks make the primary market for IPOs
thus assuring protection to the issuer about subscription In sum, the quality of pricing,
appraisal, and primary market functions will improve resulting in substantial
improvement in investor confidence. Since the investment bank lends its name to the
issue it implies that investors can trust the issue. As a result, Investment bankers are
gradually replacing merchant banking (Machiraju, 2004, pp 15)

2. OBJECTIVES OF THE STUDY

To study the level of operations of Investment Banking in India
To study the Liquidity position of Investment Bankers
To study the Profitability position of Investment Bankers

3. REVIEW OF LITRATURE

A number of researchers have been study about the banking and its different branches.
O Brien, Nichols and Lin (2005) examined whether investment banking ties
influence the speed with which analysts convey unfavourable news. They find that
affiliated analysts are slower to downgrade from "Buy" and "Hold" recommendations
and significantly faster to upgrade from "Hold," in both within-analyst and within-
issuer tests. Findings indicated that banking ties increase analysts' reluctance to reveal
negative news, and that reform efforts must carefully consider the incentives of
affiliated and unaffiliated analysts to initiate coverage and convey the results of their
research. Ellis, Michaely, OHara(2006) constructed a comprehensive measure of
overall investment banking competitiveness for follow-on offerings that aggregates
the various dimensions of competition such as fees, pricing accuracy, analyst
recommendations, distributional abilities, market making prowess, debt offering
capabilities, and overall reputation. Mullineaux, Roten (2000) examined underwriting
performances by commercial bank-affiliated firms (Section 20's) and traditional
investment banks over the period 1995-98. They found that gross spreads are
significantly lower in the case of Section 20 underwritings, but that yield spreads are
not. Their sample included a substantial number of observations following changes in
Federal Reserve policies. Livingston, Miller (2000) examined the impact of
investment banker prestige on underwriter spreads, offering yields, and other
expenses for 2,449 nonconvertible industrial debt issues offered during the period
1990 to 1997. Study found that higher prestige underwriters charge significantly
lower underwriting fees. Offering yields are also lower and offering prices are higher
for prestigious underwriter, which indicates that investment banker reputation acts to
certify the value of a debt issue to investors. Kolasinski, Kothari (2004) find evidence
that conflicts of interest arising from M&A relations influence analysts'
recommendations, corroborating regulators' and practitioners' suspicions in a setting,
i.e. M&A relations, not previously examined in research on analyst conflicts. In
addition, the M&A context allowed them to disentangle the conflict of interest effect
from selection bias. They found that analysts affiliated with acquirer advisors upgrade
acquirer stocks around M&A deals, even around all-cash deals, wherein selection bias
is unlikely. Also consistent with conflict of interest, but not selection bias, target-
affiliated analysts publish optimistic reports about acquirers after, but not before, the
exchange ratio of an all-stock deal is set. Jain, Kini (1999) examined variables which
proxy for the incentives of lead underwriters to supply monitoring post-issue. These
variables include lead investment bank reputation and whether warrants are issued to
the underwriter by the issuing firm. They found that lead bank reputation is positively
associated with the post-issue performance of IPO firms. Servaes, Zenner(1996)
compared acquisitions completed with and without investment bank advice over the
1981 to 1982 period. They found that the choice to use an investment bank depends
on the complexity of the transaction, the type of transaction (takeovers versus
acquisitions of assets), the acquirers prior acquisition experience, and the degree of
diversification of the target firm. Benveniste, Ljungqvist, Yu, Wilhelm Jr. (2001)
present evidence that firms attempting IPOs learn from the experience of their
contemporaries. These information spillovers affect revisions in offer terms and the
decision whether to carry through with an offering. The evidence also supports the
argument that IPOs are implicitly bundled as a means of promoting more equitable
sharing of information production costs. One apparent consequence of this behaviour
is that while initial returns and IPO volume are positively correlated in the aggregate,
the correlation is negative among contemporaneous offerings subject to a common
valuation factor. These findings are consistent with the Benveniste, Busaba, and
Wilhelm (2001) argument that the dynamics of volume and initial returns in primary
equity markets reflect, at least in part, an institutional response to information
externalities. Galetovic, Anand (2000) examined how the tension between
relationships and competition is resolved in the investment banking market, which for
decades has been characterized by both relationships and competition. The model
studies the impact on relationships of four different dimensions of competition: non-
exclusive relationships, competition from arm's-length intermediaries, non-price
competition, and endogenous entry. The analysis shows how market equilibrium
adjusts so that relationships are sustained in the face of such competition. Puri, M.
(1996) examined empirically the pricing of bank-underwritten securities as compared
to investment-house-underwritten securities over a unique period in the U.S. (pre-
Glass-Steagall) when both banks and investment houses were allowed to underwrite
securities. The results support a certification role for banks, which is more valuable
for junior and information sensitive securities. Baron, P. (1980) considered a model is
in which an investment banker is better informed about the capital market than is an
issuer of new securities and in which the distribution effort of the banker cannot be
observed by the issuer. The model demonstrates that there can be a positive demand
for investment banking advisement and distribution services. Willman, OCreevy,
Nicholson, Soane(2002) examined the management of traders in financial markets
from the perspectives of agency and prospect theory. Using interview data from a
sample of traders and managers in four investment banks, they argued that managers
focus on avoiding losses rather than making gains. This focus emerged from the
characteristics of managers and the nature of their role Fang, L. (2005) studied the
relation between investment bank reputation and the price and quality of bond
underwriting services. Findings of the study suggested that banks' underwriting
decisions reflect reputation concerns, and are thus informative of issue quality. He
also suggested that economic rents are earned on reputation, and thereby provide
continued incentives for underwriters to maintain reputation. Rau, RP. (1998)
investigated the determinants of the market share of investment banks acting as
advisors in mergers and tender offers. In both mergers and tender offers, bank market
share is positively related to the contingent fee payments charged by the bank and to
the percentage of deals completed in the past by the bank. Ismail, Chahine (2006)
analyzed 635 US M&A transactions from 1985 to 2004. In contrast with prior
research, they distinguished between the target and acquirer fees, and examined their
independent effects on the level of the merger premium. The study provided evidence
of a positive (negative) association between target (acquirer) fees and the level of the
premium. It indicated that the reputation of investment banks affects the level of
merger fees, but does not affect the level of the premium. The findings confirmed the
conflict of interests between target and acquirer firms where the investment banks
efforts are positively related to shareholders interest. McLaughlin, R.M (2002)
revealed through empirical analysis that investment-banker advisory fees in tender
offers average 1.29% of the value of a completed transaction, far below the levels
often alluded to in the business press. Most fees are contingent on offer outcome, with
target-firm fees typically contingent on transaction value and bidding-firm fees on the
number of shares purchased. Ljungqvist, Asker (2005) investigated this conjecture in a
sample of 5,272 equity deals and 12,453 debt deals by large U.S. firms between 1975
& 2003. Using several distinct sources of identification, they found that this
phenomenon is at least as important in determining the choice of lead underwriter as
the banks reputation or the issuing firms existing relationship with the underwriter.
They argued that this finding has important implications for understanding the nature
of competition among investment banks, the success of entrants, & the likely impact
of investment bank mergers on market power. Baum, Rowley (2004) used data on all
underwriting syndicates in Canada over nearly 40 years, and examine whether, and if
so to what extent, managers are aware of and strategic about their network positions
by comparing the effects of partner selection on network position at two levels of
complexity. Their findings showed that when investment banks managers formed
and joined underwriting syndicates, they improved their network positions by
spanning more structural holes. Vives, X. (2001) reviewed the role of competition in
banking against the background of a transforming sector. He used industrial
organization and modern financial intermediation analysis to study the relationships
between the level of competition, risk-taking incentives, and the regulatory frame. The
consequences for market structure of the liberalization process and the need for
competition policy in the sector were high-lighted.

A number of studies have been undertaken regarding competition among Investment

Bankers, their role in acquisition, IPOs etc most of these have been carried out in
USA, and except one study by H Kamalini, there was no information available about
any empirical research carried out in India.

4. RESEARCH METHODOLOGY

The study relates to financial appraisal of Investment bankers in India. Out of the total
111 investment bankers registered with SEBI on 30th October 2008, depending on the
availability of data 10 non bank investment bankers namely IFCI, Almondz Global,
Arihant Capital, Brescon corporate, AK Capital Service, Fortune Financial, India
Infoline ltd, Munoth FinANCIAL services and Pioneer Investcorp were selected for
study. Various tools (Graphs, tables) have been used to depict their growth trends and
a study of their financial statements show their profitability and liquidity position.
Only secondary data was collected for meeting the objectives of the study. Data was
collected from books, journals, and internet in the form of text and financial
statements of investment bankers.

STATISTICAL TOOLS: following statistical tools has been used for the evaluation
of the data.

Trend Analysis
Trend analysis has been employed to measure the growth trends of the sample units
over the last five years through following parameters:
Income from operations
Wage bills
Owned funds
NPAs
Profit before tax
Interest

Ratio Analysis is used to substantiate Trend Analysis to know how well liquidity
and profitability has been maintained over the last five years. Liquidity and
Profitability ratios have been calculated for each of 10 merchant bankers. The
following ratios have been calculated depending upon the availability of data.

LIQUIDITY RATIO - Liquidity refers to the ability of a concern to meet its current
obligations as and when these become due.

Current Ratio it may be defined as the relationship between current assets

and current liabilities. It is a measure of general liquidity and is most widely
used to make the analysis of a short term financial position or liquidity of the
firm.

Current Ratio Current Assets

Current liabilities

Quick Ratio Quick Ratio may be defined as the relationship between

quick/liquid assets and current liabilities. A asset is said to be liquid if it can
be converted into cash within a short period without loss of value.

Quick Ratio Quick Assets

 Current liabilities

Absolute Liquid Ratio Absolute liquid assets include cash in hand and at
bank and marketable securities which can be realised even faster than debtors
and bill receivable.

Absolute Liquid Ratio Absolute Liquid Assets

Current liabilities
PROFITABILITY RATIOS- These ratios are calculated to measure the overall
efficiency of the business. They are calculated either in relation to sales or investment.

Operating Profit Ratio - It is calculated by dividing operating profit by sales.

Operating profit is calculated as:

Operating Profit= Net Sales-operating cost

Operating Profit Ratio Operating Profit

X100
Sales

Net Profit Ratio-It establishes a relationship between net profit (after taxes)
and sales, and indicates the efficiency of the management in manufacturing,
selling, administrative and other activities of the firm.

Net Profit Ratio Net Profit after tax

X100
Sales

Return on Shareholders Investment It is also known as ROI. It is the

return on shareholder funds and is the relationship between net profits
(after interest and tax) and proprietors funds

ROI Net Profit after int and tax

X100
Shareholder funds

Dividend Payout Ratio- It is calculated to find the extent to which earnings

per share have been retained in the business. It is also important because
ploughing back of profits enables a company to grow and pay more dividends
in future

Dividend Payout Dividend per Equity Share

Ratio
Earnings Per Share

Earning Per Share- Earnings per Share is calculated by dividing the net
profit after taxes and preference dividend by the total number of equity shares.
Comparing EPS o various companies, it gives a comparative earnings or
earnings power of a company.

Earning Per NP after tax and Preference dividend

Share
No. of equity shares
5.
FINDINGS AND ANALYSIS

This chapter shows the growth trends of the units of study over the last five years and
the comparison of units through their liquidity and profitability ratios. An attempt has
been made to identify those firms which have been able to grow in the competitive
area and have shown improved performance.

TREND ANALYSIS

1. IFCI FINANCIAL SERVICES LTD

Table 1: IFCI Financial Services Ltd (Absolute figures) (ABOUT TO HERE)

Interprtation
Owned funds increased by 220% in 2008 as compared to that in 2006
After suffering loss for 3 consecutive years, it recorded profit of Rs 1262 cr in
2007 and Rs 1668 cr in 2008
The significant reduction in net NPAs in 2007 resulted from settlements,
restructuring, up gradation of assets and adequate provisioning

Table 2: IFCI Financial Services Ltd (Trends) (ABOUT TO HERE)

Interpretation
As compared to 2004, Income from operations by 81% in 2007 and there
was a light decrease in 2008
Interest shows a falling trend since 2004 due to funds given by
government, the increase since 2006 was due to stoppage of funds by
government.
After showing a decreasing trend till 2006, wage bills show a sharp
increase by 98% in 2006
NPAs were reduced by 40% in 2008 as compared to that in 2004

2. ALMONDZ GLOBAL SECURITIES LTD

TABLE 3: Almondz Global Securities Ltd (Absolute figures) ABOUT TO HERE

Interpretation
Owned funds showed a sharp rise in 2008 to Rs 86.29 cr. This was due to
increase in reserves of the company.
Income from operations increased to Rs 86 cr, an increase of 67% from 2004.
There were nil NPAs
Interest formed a small percentage of expenses, not rising significantly.

Table 4: Almondz Global Securities Ltd (Trends) ABOUT TO HERE

Interpretation
Wage bills in 2007 were highest in the five year period and decreased in
2008.
Profit before tax decreased in 2007 from 2006 but increased in 2008 by
147%
Owned funds did not show significant increase till 2007 and it increased
by approx 700%
3. ARIHANT CAPITAL MARKETS
Table 5: Arihant Capital Markets (Absolute figures) ABOUT TO HERE

Interprtation

Owned funds continuously increased till 2007 and in 2008 increased to Rs 40

cr from Rs 11.54 cr.
The company recorded income from operations at Rs 19.26 cr, highest in five
years in spite of increase in wage bill in 2008.
Overall the company showed a good position during the five year period

Table 6: Arihant Capital Markets (Trends) ABOUT TO HERE

Interpretation
All the parameters showed an upward trend in 2006 and 2007, signalling a
strong growth of the company. Out of these income from operations showed
the highest growth by approximately 100% growth in 2008 from 2007.
Interest paid showed increase of 650% in 2008 from 2004.
The 254% increase in owned funds from 2007 to 2008 is the second best
figure for owned funds after India Infoline, whose funds increased by 262% in
2008

4) BRESCON CORPORATE ADVISORS LTD

Table 7: Brescon Corporate Advisors Ltd (Absolute figures) ABOUT TO HERE

Interpretation

Owned funds showed a continuous increase in the five year period which was
mainly due to increase in reserves of company whereas the equity capital
remained almost same.
Profit before tax decreased in 2007 from 2006 but rose in 2008.
Overall the company showed and improvement in operations over the previous
year.

Table 8: Brescon Corporate Advisors Ltd (trends)

Interpretation
Owned funds and profit before tax showed a sharp upward trend from 2007 to
2008, increasing by 128% and 208% respectively.
Income from operations showed a stabilized trend since 2006 increasing by
mere .3% in 2007 and 4% in 2008.
Wage bills grew at an average of 24% every year, not showing any significant
increase in 2007 and 2008.

5. A.K. CAPITAL SERVICES LTD

Table 9: AK Capital services Ltd (Absolute figures) ABOUT TO HERE

Interprtation
 The Company delivered superior financial performance during the financial
year ended 31March 2008 with improvement across all parameters.
Wage bills was Rs.7 cr for the financial year ended 31March 2008 as against
Rs 4 cr in the previous financial year.
Owned funds increased due to issue of Preference shares and increase in
reserves of the company.

Table 10: AK Capital services ltd (Trends) ABOUT TO HERE

Interpretation
Although full data for AK Capital services was not available, the trends with
the available data depict upward trend in all the parameters. Although interest
paid increased over the years, still the company managed to earn high income
form operations.
Owned funds increased by approx 522% in 2008 from 2004, on account of
issue of preference shares.

6. FORTUNE FINANCIAL SERVICES (INDIA) LTD

Table 11: Fortune Financial Services (India) Ltd( Absolute figures) ABOUT TO
HERE

Interpretation
The company showed increase in all parameters in 2008 from 2007.
Increase in owned funds was due to first time allotment of preference shares
Income from operations in 2008 has led to increase in the amount of reserves
of the company adding to the rise in owned funds

Table 12: Fortune Financial Services (India) Ltd (Trends)

Interpretation
Wage bills show an upward trend since 2007, it was mainly on account of
recruitment of additional man-power due to expansion activities
Profit before tax dipped in 2007 but again rose in 2008 by 65%
There was a sharp increase in income from operations and interest during
2007-08 rising by approx100% and 700% respectively.

7. INDIA INFOLINE LTD

Table 13: India Infoline Ltd (Absloute figures) ABOUT TO HERE

Interpretation
Owned funds rose by 220% in 2007 from Rs 52 cr in 2006 to Rs 168 cr in
2007 mainly due to conversion of convertible bonds into shares and allotment
of shares to employees under its ESOP scheme.
Income from operations also showed a significant increase in 2007 and 2008
being Rs 8.8 cr in 2004 to Rs 55 cr and Rs 134 cr in 2007 and 2008
respectively.

Table 14: India Infoline Ltd (Trends) ABOUT TO HERE

Interpretation
 In 2008 owned funds increased to Rs 1049 cr, a growth of 262% in the same
period among all the 10 companies considered or the study.
Interest increased consistently since 2005 till 2008.
Wage bills showed an upward trend since 2006 rising by Rs 134 cr from 2004
to 2008.

8. MUNOTH FINANCIAL SERVICES LTD

Table 15: Munoth Financial Services Ltd (Absolute figure) ABOUT TO HERE

Interpretation

Owned funds did not show any wide fluctuations during the five year period,
equity capital remained same while there were minor changes in reserves of
the company.
The company earned highest income from operation in 2006 of Rs 2 cr but
decreased in 2007 and 2008 by respectively.
Profit before tax showed an erratic trend rising and falling in alternate years.

Table 16: Munoth Financial Services Ltd (Trends) ABOUT TO HERE

Interpretation
The trend line of the company show an erratic trend with wide fluctuations, all
the parameters except profit before tax show a downward trend after 2006.
Profit before tax show a stable trend rising marginally over the period

9. PIONEER INVESTCORP LTD.

Table 17: Pioneer Investcorp Ltd.(Absolute figures) ABOUT TO HERE

Interpretation
The company recorded its lowest owned funds at Rs 8 cr, while it recorded
highest funds in 2008; it was because of share application money and increase
in reserves of the company.
Income from operations also showed huge increase in 2008 rising by 213%
from 2007
Profit before tax from Rs .32 cr in 2004 to Rs 28 cr in 2008

Table 18: Pioneer Investcorp Ltd.(Trends) ABOUT TO HERE

Interpretation
Till 2006 all the parameters were almost at same level, post 2006 all the
parameters showed an upward trend.
In 2007, interest paid was less and profit before tax was high, post 2007
interest increased, lowering the level of profits.
However income from operation increased at a steady pace.

10. SMIFS CAPITAL MARKETS LTD

Table 19: SMIFS Capital Markets Ltd (Absolute figures) ABOUT TO HERE

Interpretation
 Owned funds of the company increased gradually over the period, mainly due
to increase in the reserves of the company and the equity capital remained
same.
It recorded loss of Rs 15 cr in 2004 but recovered in 2005 with a profit of Rs
39 cr, an increase of 350%, but income decreased drastically in 2006 with
mild recoveries in 207 and 2008.
Company incurred loss in 2005 & 2005 and earned profits till 2008. However
profits fell in 2008 by 70% of 2007.

Table 20: SMIFS Capital Markets Ltd (Trends) ABOUT TO HERE

Interpretation
The trends of the company show inconsistency in its operations. There was a
sharp rise in profits in 2005 followed by a sharp fall in 2006, which rose
marginally in following years.
Decrease in interest paid post 2005 led to increase in profits, but profits fall
after 2007 even when the interest paid shows a decline.
Wage bills however showed rising trend can be a reason for decline in profits.

RATIO ANALYSIS
Table 21: Liquidity Ratios ABOUT TO HERE

INTERPRETATION
In 2004, Almondz Global maintained the highest current ratio at 5.02, followed by
Pioneer Investcorp at 3.64 and Fortune Financial at 3.56.
Fortune Financial showed a consistent pattern as they maintained the highest liquidity
ratios in 2004, 2005 and 2006
In 2006, India Infoline was the only company to maintain current and quick ratio
above 6, however it maintained lower levels in 2007 and 2008.
In 2007 & 2008, Almondz maintained overall highest current ratio at 8.15 and 10.18
respectively.
AK Capital Service recorded the lowest figures for liquidity ratios at .22 approx in
2008

PROFITABILITY RATIOS
Table 22: Profitability Ratios I ABOUT TO HERE

INTERPRETATION
IFCI & SMIFS gave negative returns due to loss incurred but gave positive returns
once they earned profits post 2007.
Highest NP ratio was of Brescon Corporate at 201% in 2008 followed by SMIFS at
115% in 2004, while the lowest NP ratio was of SMIFS of 947% in 2005, due to loss.
Highest ROI was recorded for Fortune Financial at 160% 2007, a 320% increase from
2006
Overall Brescon Corporate showed superior performance over the five year period
among all companies by earning consistent profits and giving out increased returns on
investment.

PROFITABILITY RATIOS
Table 23: Profitability Ratios II ABOUT TO HERE

Interpretation
 The maximum EPS was of AK Capital at Rs 48.47 in 2008, lowest being of
IFCI at -51.28 in 2004. Maximum increase in EPS was for Arihant Capital, a
growth of approx 400% from Rs 7.98 in 2007 to Rs 39.05 in 2008. On the
other hand, SMIFSs EPS declined from Rs 27.99 in 2007 to Rs 10.92 in
2008.
There was no dividend paid by Munoth Financial services throughout the five
year period due to lack of sufficient profits.

6. CONCLUSION

Merchant banks and Investment Banks are used interchangeably in Indian context;
even SEBI issues guidelines for Merchant Bankers only. During 1997-1998, due to
sharp decline in the number of public issues, structural changes were introduced by
abolishing multiple categories and replacing by a single category. Thus time was ripe
to adapt, innovate and broad base their activities.
Investment Bankers assist companies on numerous issues like IPOs Project
Counselling, underwriting, Portfolio management etc. thereby reducing their cost
while providing specialized services. There are big names like Reliance, HDFC,
AXIS bank, ICICI and multinational corporations like ABN Amro, Goldman Sachs,
and JP Morgan etc carrying out Investment Banking functions in India. They have
shown exceptional growth from having a single office in a city to have presence in
major cities of India. Their profits have increased manifolds during small period of
starting their operations.
The aim of the study was to examine the extent of operations of Investment Banks in
India and importance of their services to corporate world. Analysis of the financial
statements of the sample reveals that their performance has improved over a period of
time. The companies which incurred losses successfully recovered and regained their
competitive position.
With an increase in the growth rate of the country and boom in the capital market in
2006 and 2007, they made unprecedented growth. But now when the economic
growth is shrinking and India is facing slowdown, it will be interesting to see how
their performance will be affected at a time when companies are emphasising on cost
cutting and are hesitating to start new venture. With increased presence, wider
acceptability and expanding markets the future of Investment Banking appears very
promising

7. REFERENCES

Baron, P. (1980), A Model Of The Demand For Investment Banking Advisement

And Distribution Services For New Issues
Baum, Rowley (2004), Sophistication Of Interfirm Network Strategies In The
Canadian Investment Banking Industry,
Benveniste, Ljungqvist, Yu, Wilhelm Jr. (2001), Evidence of Information
Spillovers in the Production of Investment Banking Services
Chemmanur, Fulghieri (1994), Investment Bank Reputation, Information
Production, And Financial Intermediation, The Journal Of Finance, Vol, XLIX,
No. 1
 Fang, L. (2005), Investment Bank Reputation and the Price and Quality of
Underwriting Services, Kolasinski, Kothari (2004) Investment Banking and
Analyst Objectivity: Evidence from Analysts Affiliated With M&A Advisors,
Ljungqvist, Asker (2005), Sharing Underwriters with Rivals: Implications for
Competition in Investment Banking,
Machiraju, H.R,[2004], Merchant Banking: Principles & Practices, New Age
Publishers, Edition 3.
McLaughlin, R.M (2002), Investment-Banking Contracts In Tender Offers : An
Empirical Analysis,
Mullineaux, Roten (2000), Debt Underwriting by Commercial Bank-Affiliated
Firms and Investment Banks: More Evidence http://ssrn.com/abstract=236843
O Brien, Nichols and Lin (2005) Analyst Impartiality and Investment Banking
Relationships Puri, M. (1996), Commercial Banks In Investment Banking
Conflict Of Interest Or Certification Role?, Journal of Financial Economics,
Volume 40, Issue 3, March 1996, Pages 373-401
Rau, RP. (1998), Investment Bank Market Share, Contingent Fee Payments, And
The Performance Of Acquiring Firms, Servaes, Zenner(1996), The Role Of
Investment Banks In Acquisitions

TABLES & FIGURES

TABLE.1
Rs in crores

2004 2005 2006 2007 2008

Owned funds 1522.39 1515.37 1510.93 1941.79 3324.87

Interest 1335.63 957.98 762.17 730.94 821

Income from operations 1096.14 1293.37 1645.69 1989.73 1963

Wage bills 86.09 39.21 25.41 33.98 121.33

Profit/loss before tax -2763.78 -625.05 -265.93 1262.34 1668

NPA's 2402.16 916 1130 15.28 -953

TABLE.2
IFCI Percentage change

2004 2005 2006 2007 2008

Owned funds 100 99.53 99.24 127.54 218.39

Cost of borrowings 100 71.72 57.06 54.8 61.66

Income from operations 100 118.04 150.13 181.52 179.08

Wage Bills 100 45.54 29.51 127.54 218.39

Profit/loss before tax 100 22.61 9.62 45.67 60.35

NPA's 100 38 47.04 0.63 -39.67

 TABLE.3

Rs Crore

2004 2005 2006 2007 2008

Owned funds 8.57 13.03 19.08 25.74 86.29

Interest paid 0.51 2.16 2.61 2.4 3.21

Income from operations 21.81 32.43 51.61 43.73 86.38

Wage bills 1.25 2.33 4.53 7.06 6.52

Profit/loss before tax 2.86 6.75 13.05 9.09 13.28

NPA's Nil Nil Nil Nil Nil

TABLE.4

Percentage change

2004 2005 2006 2007 2008

Owned funds 100 152.04 222.63 300 1006.8

Cost of borrowings 100 423.52 511.76 470.58 629.41

Income from operations 100 148.69 236.63 200.5 395.64

Wage bills 100 186.4 362.4 564.8 521.6

Profit/loss before tax 100 236.01 456 317.83 464.33

NPA's - - - - -

TABLE.5
Rs Crore

2004 2005 2006 2007 2008

Owned funds 5.7 6.66 9.33 11.54 39.07

Interest 0.02 NA NA NA 0.33

Income from operations 0.8 1.94 3.58 10.34 19.26

Wage bills 0.52 0.73 1.68 4.54 9.24

Profit/loss before tax 1.98 1.79 4.27 4.27 19.52

NPA's - - - - -

TABLE.6

Percentage change
2004 2005 2006 2007 2008
Owned funds 100 116.84 163.68 22.45 685.43
Interest 100 Nil Nil Nil 1650
Income from operations 100 242.5 184.53 1292.5 2407.5
Wage bills 100 140.38 323.07 873.07 1776.92
Profit/loss before tax 100 89.89 215.66 215.65 985.85
NPA's - - - - -
TABLE.7
Rs Crore

2004 2005 2006 2007 2008

Owned funds 6.81 9.44 16.6 20.36 29.03

Interest - - - - -

Income from operations 6.45 9.83 13.65 13.76 14.23

Wage bills 2.17 2.9 3.92 4.53 4.8

Profit before tax 2.82 5.04 7.62 6.89 12.68

NPA's NA NA NA NA NA

TABLE.8

Percentage change

2004 2005 2006 2007 2008

Owned funds 100 138.61 243.75 298.92 426.2

Interest - - - - -

Income from operations 100 152.4 211.62 213.33 220.62

Wage Bills 100 133.64 180.64 208.75 221.19

Profit/loss before tax 100 178.72 270.21 241.48 449.64

NPA's - - - - -

TABLE.9

Rs Crore

2004 2005 2006 2007 2008

Owned funds NA 16.3 25.25 34.71 101.46

Interest NA NA 0.23 0.5 0.72

Income from operations NA 14.4 26.8 46.91 87.59

Wage bills NA 1.45 2.65 4.37 7.19

Profit before tax NA 7.03 12.98 17.7 40.08

NPA's Nil Nil Nil Nil Nil

TABLE.10
Percentage change

2004 2005 2006 2007 2008

Owned funds NA 100 154.9 212.94 622.45

Interest NA NA 100 217.39 313.04

Income from operations NA 100 186.11 325.76 688.26

Wage bills NA 100 182.75 301.37 495.86

Profit/loss before tax NA 100 184.63 251.77 570.12

NPA's Nil Nil Nil Nil Nil

TABLE.11
Rs Crore

2004 2005 2006 2007 2008

Owned funds 9.34 10.9 16.27 43.56 53.12
Interest 0.22 0.14 0.25 0.52 4.45
Income from operations 1.62 4.98 14.65 17.19 32.69
Wage bills 0.45 0.71 1.45 2.13 5.01
Profit before tax 0.83 2.94 9.21 9.8 16.24
NPA's nil nil nil Nil Nil

TABLE.12

Percentage change

2004 2005 2006 2007 2008

Owned funds 100 116.72 174.19 466.38 568.73

Interest 100 63.63 113.63 236.36 2022.72

Income from operations 100 307.4 904.32 1061.11 2017.9

Wage bills 100 157.77 322.22 473.33 1113.33

Profit/loss before tax 100 354.21 1109.63 1180.72 1956.62

NPA's Nil Nil Nil Nil Nil

TABLE.13

Rs Crore

2004 2005 2006 2007 2008

Owned funds 47.04 52.32 168.93 289.7 1049.6

Interest NA 0.03 2.17 6.39 21.1

Income from operations 8.8 21.21 20 269.7 616.1

Wage bills 0.35 0.92 1.94 55.87 134.7

Profit before tax 6.82 3.22 39.7 79.6 236.6

NPA's Nil Nil Nil Nil Nil

TABLE.14

Percentage change

2004 2005 2006 2007 2008

Owned funds 100 111.22 359.11 615.85 2231.29

Interest NIL 100 7233.33 21300 70333

Income from operations 100 241.02 227.27 3064.77 7001.36

Wage bills 100 262.85 554.28 15962.85 38485.71

Profit/loss before tax 100 47.21 582.11 1167.15 3469.2

NPA's NA NA NA NA NA

TABLE.15

Rs Crore

2004 2005 2006 2007 2008

Owned funds 8.29 8.51 9.26 9.43 9.97
Interest 0.14 0.07 0.19 0.15 0.04
Income from operations 1.99 1.35 2.28 1.96 1.82
Wage bills 0.49 0.47 0.31 0.31 0.14
Profit before tax 0.71 0.33 1.11 0.33 0.5
NPA's - - - - -
TABLE.16

Percentage change

2004 2005 2006 2007 2008

owned funds 100 102.65 111.7 113.75 120.26

interest 100 50 135.71 107.14 28.57

income from operations 100 67.83 114.57 98.49 91.45

wage bills 100 95.91 63.26 63.26 28.57

profit/loss before tax 100 102.65 111.7 113.75 120.26

NPA's - - - - --

TABLE.17

Rs Crore

2004 2005 2006 2007 2008

owned funds 26.58 8.78 17.74 26.6 85.61
Interest 0.04 0.43 0.8 0.91 4.95
Income from operations 1.35 1.65 6.04 18.5 58.01
wage bills 0.47 0.25 0.37 0.93 5.57
profit before tax 0.32 0.45 3.47 12.76 28.11
NPA's - - - - -

TABLE.18

Percentage change

2004 2005 2006 2007 2008

owned funds 100 33.03 66.74 100.07 322.08

interest 100 1075 2000 2275 12375

income from operations 100 122.22 447.4 1370.37 4297.03

Wage bills 100 53.19 78.72 197.87 1185.1

profit/loss before tax 100 140.62 1084.37 3987.5 8784.37

NPA's - - - - --
 TABLE.19

Rs Crore

2004 2005 2006 2007 2008

owned funds 45.32 47.01 50.18 59.75 65.2

Interest 2.08 0.72 0.64 0.7 0.29

Income from operations -15.85 39.77 8.98 17.14 15.32

wage bills 0.54 0.65 0.77 1.17 1.45

profit before tax -13.91 -1.21 10.13 13.51 3.97

NPA's NA NA NA NA NA

TABLE.20

Percentage change

2004 2005 2006 2007 2008

owned funds 100 103.72 110.72 131.84 143.86

interest 100 37.5 30.76 33.65 13.9

income from operations 100 250.91 56.65 108.13 96.65

Wage Bills 100 120.37 142.59 216.67 268.51

profit/loss before tax 100 8.69 72.85 97.12 28.5

NPA's NA NA NA NA NA

TABLE.21

2004 2005 2006 2007 2008

Current Quick AbsLiqui Current Quick AbsLiquid Current Quick AbsLiqui CR QR ALR CR QR ALR
ratio ratio d ratio Ratio Ratio Ratio Ratio Ratio d Ratio

IFCI
1.08 1.08 0.079 1.28 1.28 0.16 2.25 2.25 1.01 2.5 2.5 1.02 2.81 2.81 2.13
Almondz Global 5.02 .73 NA 4.61 .83 NA 3.45 1.35 NA 8.15 2.08 NA 10.1 5.29 NA
8
Arihant Capital 2.22 2.22 .25 1.59 1.59 .14 1.19 1.19 .04 1.01 1.01 .29 1.34 1.34 .58

Brescon 1.93 1.62 NA 3.77 3.26 NA 2.05 2.04 NA 2.18 2.17 NA 1.98 1.97 NA
corporate

AK Capital Service NA NA NA 1.78 1.78 .45 4.07 4.07 .80 3.64 3.64 .95 .22 .22 .19

Fortune Financial 3.56 3.54 2.5 3.35 3.34 1.21 2.69 2.69 2.12 3.91 3.91 2.91 2.02 2.02 .77

India Infoline ltd 3 3 1.03 4.19 4.19 .5 6.44 6.44 .07 1.5 1.5 .32 1.29 1.29 .31

Munoth Fin 1.93 1.89 NA 2.67 2.55 NA 2.17 2.16 NA 2.57 2.5 NA 2.53 2.27 NA
Services
Pioneer 3.64 3.58 NA 6.75 6.6 NA 3.31 3.28 NA 4.35 1.56 NA 2.96 2.04 NA
Investcorp
SMIFS 2.55 2.32 NA 2.86 2.57 NA 1.32 1.25 NA 2.41 1.42 NA 1.52 1.3 NA
 TABLE.22

2004 2005 2006 2007 2008

NP ROI Op profit NP ROI Op profit NP ROI Op profit NP ROI Op profit NP ROI Op profit
IN % Ratio Ratio Ratio % Ratio Ratio Ratio ratio Ratio Ratio Ratio

IFCI
NA -212 NA NA -21.4 NA NA -4.9 NA NA 46.2 NA NA 30.6 NA
Almondz 13.09 22.2 10.16 26.01 34.15 12.16 39.72 42.29 38.87 51.52 23.07 24.23 154.8 10.3 20.23
8
Global
Arihant 32.71 24 57.7 29.05 20.6 42.9 24.93 32.15 36.74 17.2 26.77 24.2 24.12 36.2 29.07
9
Capital
Brescon 19.5 27.7 15.24 38.73 30.84 31.59 59.11 30.84 51.51 75.05 23.18 62.63 201.5 33.5 110.81
5
corporate
AK Capital NA NA NA NA 32.33 NA NA 39.72 NA NA 39.35 NA NA 26.2 NA
1
Service
Fortune NA 8.35 NA NA 20.2 NA NA 38.78 NA NA 160.9 NA NA 22.1 NA
1
Financial
India NA 14.39 NA NA 33.39 NA NA 15.62 NA NA 17.99 NA NA 15.0 NA
2
Infoline ltd
Munoth Fin 20.68 3.61 29.31 18.48 2.33 27.73 36.94 8.09 22.59 9.03 1.80 34.18 30.21 6.63 36.26
services
Pioneer 4.48 .37 6.27 18.3 13.18 44.44 48.73 16.29 84.73 58 39.24 85.83 51.27 34.7 81.51
3
Investcorp
SMIFS 115.4 -31.31 85.18 -520.8 -5.31 -947.9 111.55 20.20 -8.91 91.72 26.15 53.04 6.93 9.35 3.43

TABLE.23

2004 2005 2006 2007 2008

EPS Div EPS Div EPS Div EPS Div EPS Div
Payout Payout payout payout payout
IFCI -51.28 NA -5.79 NA 1.3 NA 13.93 NA 15.22 NA
Almondz Global 1.8 NA 4.19 NA 6.2 NA 3.71 NA 4.29 NA
Arihant Capital 3.86 NA 3.83 .26 9.23 .16 7.98 .18 39.05 .46
Brescon corporate 6.29 NA 11.35 NA 14.8 NA 12.67 NA 28.18 NA
AK Capital Service 8.08 Nil 10.54 .14 20.07 .12 27.33 .12 48.47 .07
Fortune Financial 2 NA 5.71 .26 16.36 .09 9.04 .13 11.75 .18
India Infoline ltd 2.56 NA 6.45 NA 6.23 NA 11.25 NA 29.77 NA
Munoth Fin Services 1.31 NIL .52 NIL 1.61 NIL .62 NIL .95 NIL

Pionee Investcorp .16 NA .52 NA 3.47 3.47 12.56 18.84 28.15 42.22
SMIFS -25.41 NIL -4.47 NIL 18.16 NIL 27.99 .03 10.92 .09

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