LIBRARY RESEACH PROJECT

ON

INVESTMENT BANKING

COMPILED BY:
PRITI AGARWAL 01
PURVI AGARWAL 02
SUMIT BHATI 08
SHRUTHIKA MADIVAL 47

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 INDEX

1. Introduction to Investment Banking ……………………………………………………..……2

2. Service portfolio of Indian investment banks………………………………………………….3

3. Understanding I-bank’s fee contracts in mergers and acquisitions……………………….……5

4. Investment Banking perspectives in private equity…………………………………….……...6

5. Investment banking perspectives in corporate restructuring…………………………….…….7

6. Venture capital in India………………………………………………………….…………….8

7. Conflicts of interest in the stock recommendations of investment banks and their

determinants……………………………………………………………………………….……..9

8. Importance of services marketing in investment banking….....................................................10

9. Investment bankers and public offerings..............................................................................….11

10. Investment bank prestige and IPO under pricing….................................................................13

11. Effects of financial turbulence on Investment Banks..............................................................13

12. Subprime crisis and the Glass-Steagall Act….........................................................................14

13. Responding to the subprime mess: the new regulatory landscape….......................................16

14. New boutique banks….........................................................................................................…17

15. Leading Indian investment bank –ICICI Securities Ltd…......................................................17

16. Growth of investment banks in India…...................................................................................18

17. Acknowledgement...................................................................................................................19

18. Bibliography............................................................................................................................19

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ARTICLE 1

Source: VAULT CAREER LIBRARY

Chapters 1&5 (Page Nos. 3, 5, 9-11, 37-42)
Authors: Tom LOTT, Derek Loosvelt and the Staff of Vault

INTRODUCTION IN INVESTMENT BANKING

What is Investment Banking?

Is it investing? Is it banking? Really it is neither. Investment banking or I-banking is the term

used to describe the business of raising capital for companies and advising them on financing
and merger alternatives. Capital means money. Companies need money (cash) in order to grow
and expand their businesses; investment banks sell securities to public investors in order to raise
this cash. These securities can come in the form of stocks or bonds.

General breakdown of an investment bank includes the following areas:

Corporate finance (equity)

Corporate finance(debt)
Mergers & acquisitions (M&A)
Equity sales
Fixed income sales
Syndicate (equity)
Syndicate(debt)
Equity trading
Fixed income trading
Equity research
Fixed income research

Commercial banking vs. Investment Banking

A Commercial bank takes deposits for checking and savings accounts from customers while an
investment bank does not.

Commercial banks:

A Commercial bank may legally take deposits for checking and savings account from customers.
The federal government provides insurance guarantees on these deposits through the Federal

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Deposit Insurance Corporation (the FDIC), on amounts up to $100000. To get FDIC guarantees,
commercial banks must follow a myriad of regulations.

The typical Commercial bank process is fairly straightforward. You deposit money into your
bank, and the bank loans that money to consumers and companies in need of capital (cash). You
borrow to buy a house, finance a car, or finance an addition to your home. Companies borrow to
finance the growth of their company or meet immediate cash needs. Companies that borrow from
commercial banks can range in size from the dry cleaner on the corner to a multinational
conglomerate. The commercial bank generates a profit by paying depositors a lower interest rate
than the bank charges on loans.

Investment banks

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

If companies need capital, it may get a loan from a bank, or it may ask an investment bank to sell
equity or debt. Because commercial banks already have funds available from their depositors an
investment bank typically does not, an I-bank must spend considerable time finding investors in
order to obtain capital for its client.

ARTICLE 2

Source: INTRODUCTION IN INVESTMENT BANKING

Author: Pratap Subramanayam
Page No. 83

SERVICE PORTFOLIO OF INDIAN INVESTMENT BANKS

 IPO

The SEBI functions as the regulator for the capital markets much in the lines of capital market
regulators of other countries such as the SEC in USA. SEBI vide its guidelines introduced free
pricing of securities in public offers for the first time in INDIA. The public offer market is very
closely regulated by SEBI. Hence the primary markets are buoyant issue management book-
building 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 banks have been managing the public offers and hand

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holding them in private placements as well. SEBI has gradually been increasing its regulations of
the private placement market as well, thereby making merchant bankers play a significant role.

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  Mergers and acquisitions

The mergers and acquisitions industry was pretty nascent in India prior to 1994 has grown
significantly post 2000 and cross-border transactions involving Indian companies constitute a
significant chunk. The two main factors that have given this industry boost are:

1) The forces of liberalization and globalization that have forced the Indian industry to
consolidate.

2) The institutionalization of corporate acquisition by SEBI through its guidelines known as the
takeover code. One of the main activities of investment banks has always been M&A advisory.
The larger investment banks specialize in M&A advisory. The larger investment banks specialize
in M&A as a core activity.

 Corporate advisory

Investment banks in India also have a large practice in corporate advisory services relating to
project financing, corporate restructuring, capital restructuring, through equity purchases
including management of buy back offers, raising private equity structuring joint ventures and
strategic partnership and other value added specialized areas.

 Securities business

The universal banks such as SBI, ICICI, IDBI, UTI BANK and KOTAK MAHINDRA have
their broking and distribution firms in both the equity and debt segments of the secondary
market. In addition several other investment banks such as the IL&FS and pure investments
banks such as DSP Merrill Lynch and JM Morgan Stanley have a strong presence in this are of
activity. After introduction of the derivative segment it had provided an additional area of
specialization for investment banks. Derivative trading risk management and structured product
offerings are the new segments that are now fast becoming the areas of future potential for Indian
investment banks.

 Asset management services

Most of the financial groups in India which have investment banking business such as the ICICI,
IDBI, KOTAK MAHINDRA DSP Merrill Lynch, JM Morgan Stanley, SBI and IL&FS also
have their presence in the asset management business through separate entities. Several Indian
investments bank have also ventured in to the business of starting dedicated venture capital and
private equity funds.SBI is reportedly In the process of setting up a venture fund. Besides several
investments banks are tying up with foreign funds to set up in India specific private equity funds.

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ARTICLE 3

Source: PROFESSIONAL BANKER

The ICFAI University Press
March-09 (Page No. 31)

UNDERSTANDING I-BANK’S FEE CONTRACTS IN MERGERS AND

ACQUISITIONS

Mergers and acquisitions are one of the major businesses for investment banking firms.
Investment banks can add value to an acquisition by identifying appropriate acquisition targets
and helping to value the acquisition.

Fee contracts are an important means to control conflicts of interest between Investment Bankers
known as the principals in the business world. In Mergers and acquisitions Tender Offers (TO),
there are four leading players: the bidding firm or the buyer firm, the target firm or the seller
firm, and the two agents representing the two sides.

Types of Fee Contracts:

Both the target and the bidding firms in an M&A TO use of three basic fee contracts mentioned
below:

 Share-based fees
 Value-based fees
 Fixed fees

Share-based fees: Share-based fees are minimum fees plus a bonus to be paid if transaction
is completed based on the number of shares purchased. That is, there is an additional element
of contingency on the level of success. These are of two types based on the number of shares
purchased:

 A linear function share-based fee

 A step function share-based fee

E.g. The contract of Goldman Sachs with AMERICAN Home Products Corp. for its bid for
Brunswick Corp. in 1982 was a linear function. The fee structure was $200000 plus 0.08 cents
per share acquired.

Value-based fees: Value-based fees are a minimum payment plus a bonus to be paid if the
transaction is completed based on the value of the completed transactions. Here also, there is an
additional element of dependency on the level of value achieved. These are also of value
achieved. These are of also two types based on the value of a completed transaction:

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  Total-value fees
 Incremental-value fees

Total- value based fees are also linear functions of the value of a completed transaction. In
this type of transaction both the target firm and the bidding firm agent have strong incentives
to complete a transaction, and additional incentive to seek higher payoff outweighs any
associated reduction in the probability of an acquisition.

Fixed Fees: fixed fees are not contingent on the outcome of the offer and are used primarily
in special circumstances that require little incentives and allow little scope for special
abilities. Target firms often use them when the I-bank provides only an option letter. Bidding
firms use them for low-valued offers in which they have prior control of the target’s equity-
in effect, offers which are “done” deals. But fixed fees are used in a typical situation and are
usually not true advisory fees.

The I-bank’s choice of fee contracts:

Top I-banks can evaluate the combination of two entities more accurately by screening the
bidders and by negotiating specific deal terms.

ARTICLE 4

Source: INTRODUCTION IN INVESTMENT BANKING

Author: Pratap Subramanayam
Page No. 11

INVESTMENT BANKING PERSPECTIVES IN PRIVATE EQUITY

One of the initial tasks in a fund raising programme would be to map the business model of the
company and based on it prepare a comprehensive business plan. This understanding is a
fundamental to the investment banker as it lays the foundation for the transaction also gives an
insight into the likely perception of investors when the plan is presented to them for investment.
The involvement in the business plan preparation helps the investment banker in the following
ways.

1) In understanding the business model so that it stands a test of scrutiny by the investors at a
later date.

2) In providing the key assumptions and inputs required to construct the financial model

3) To prepare the company for investor due diligence at a later date.

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An investment bank plays the role of a transaction adviser in an M&A transaction. This would
consist of understanding the requirements of the client and structuring the transaction
accordingly.

1) Advising the client on the transaction.

2) Facilitating the execution of the transaction.

Therefore the main areas consists of formulation of the transaction and deal structure valuation
identification of the other party to the transaction either from the buy side or the sell side and
thereby facilitating the transaction by hand holding the client during negotiations and until the
deal is closed.

ARTICLE 5

Source: INTRODUCTION IN INVESTMENT BANKING

Author: Pratap Subramanayam
Page No. 13.19

INVESTMENT BANKING PERSPECTIVES IN CORPORATE RESTRUCTURING

Investment banks are retained as advisers by corporate bodies that wish to restructure themselves
to hand hold the entire process of conceptualising and execution of restructuring plans from
financial perspectives. Of course restructuring plans require the collective offer of several other
professionals including accountants, legal advisors and attorneys company secretaries,
management and hr experts. Investment banks have to co-ordinate with all these professionals in
executing restructuring transactions for their clients. Complex restructuring transactions require
expert advice and assessment of the issues involved from the strategic financial transaction
statutory accounting and tax perspectives. The investment bankers role in corporate restructuring
is to give shape to the restructuring proposal as a transaction that meets all requirements.

Strategic objectives

Strategic objectives of a restructuring transaction are the primary driver to the choice of the split
up methodology is:

1) Better Capture of value for an existing line of operations.

2) Strategic exit from a line of business.

3) Disposal of surplus assets to provide liquidity for the company.

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Tax implications

1) Benefit to be derived from deferred tax assets in the balance sheet.

2) Incidence of capital gains tax on the company or shareholders

3) Stamp duty and registration fee for transfer of assets.

4) Admissibility of current depreciation on brought forward assets from the transfer company.

5) Admissibility of brought forward tax deduction and holiday benefits.

6) Admissibility of the expenses of the restructuring scheme.

ARTICLE 6
Source: PROFESSIONAL BANKER
The ICFAI University Press
AUGUST-09 (Page No. 53)

VENTURE CAPITAL IN INDIA

India is one of the fastest growing economies of the world and any development can be possible
only if it receives the most important nutrition, that is, finance. India is becoming an attractive
destination for venture capital funds which is evident from the fact that as many as 40 new funds
are targeting India with most of them from US.

The impact of rising venture capital firms on investment banking sector:

Investment bankers were seeing an early slowdown in the pace at which venture capital-
entrepreneur deals were made. It becomes clear that the impact was severe on the investment
banking sector. According to Srikant Narsimhan, director, Veda Corporate Advisors Pvt Ltd.,
Chennai the investment banking industry’s deal activity was down by 20% due to the uncertainty
in the economy. According to banglore’s Viedea Capital Advisors Pvt. Ltd’s Director and co-
founder Deepak Srinath, valuations dropped by 30-40% and the negotiation stage, which
generally takes up to three weeks, was consuming as much 8-12 weeks.

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ARTICLE 7

Source: EBSCO
http://web.ebscohost.com/ehost/pdf?vid=1&hid=112&sid=b81706c6-e8ef-48ab-adbe-
6fbf9dad82b5@sessionmgr113

CONFLICTS OF INTEREST IN THE STOCK RECOMMENDATIONS OF

INVESTMENT BANKS AND THEIR DETERMINANTS

On account of recent allegations of accounting fraud at Enron, soon followed by allegations of

tainted research at brokerage houses such as Merrill Lynch and Morgan Stanley, investors seem
to have increasingly lost confidence in brokerage analysts’ integrity as far as issuing unbiased
and trustworthy stock recommendations goes. In response to such potential conflicts of interest
among security analysts employed by investment banking firms, on April 28, 2003, the U.S.
Securities and Exchange Commission (SEC) announced a historic agreement with large
investment banks (IBs), known as the Global Analyst Research Settlement. Since then, securities
firms have been required to separate their brokerage from their investment banking activities
because brokerage research analysts may face undue pressure from their respective investment
banking divisions to issue stock reports that favor the interests of their investment banking
clients over those of their brokerage clients.

According to Michaely and Womack (1999), three main sources of income for IBs, for example,
investment banking (such as underwriting issues of publicly traded companies, raising bank
loans, and giving advice on mergers), brokerage services (such as providing investment advice
and conducting equity research), and proprietary trading, may create conflicts of interest within a
bank and between a bank and its clients. To examine whether IBs have constructed a “Chinese
wall” between their investment banking and their brokerage divisions, researchers have seriously
begun to analyze the quality of stock recommendations. Conflicts of interest have often arisen,
and from two scenarios in particular. First, when brokerage analysts’ compensation relates
positively to the profits of the corporate finance division, these analysts are more likely to issue
positively biased recommendations about firms that have business dealings with their corporate
finance divisions, even though those analysts’ outside reputations depend, at least partially, on
the quality of their recommendations. Second, in not wanting to offend their investment banking
clients, analysts may well opt to offer favorable comments on their clients’ stocks.

Thus to include we can say that investment banks (IBs) provide the market with buy
recommendations, but at the same time, their proprietary trading division is selling the very same
recommended stocks is, in a word, troubling. We refer to this type of stock as the stock “most
commonly tied to conflicts of interest with respect to stock recommendations by investment
banks,” or for conciseness in this paper, “conflicts of interest with respect to individual stocks
recommended by investment banks,” or as most frequently used in this paper, simply “conflicts
of interest.”

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ARTICLE 8

Source: MANAGING INVESTMENT BANKS

ICFAI University Press
Page No. 1

IMPORTANCE OF SERVICES MARKETING IN INVESTMENT BANKING

Today’s financial markets are becoming increasingly complex. They are operating on a global
scale. New services are being launched at a rapid pace. Communication media are proliferating.
New distribution channels are appearing. Amidst this, consumers are also changing their way of
interacting with the firms. Major strides in technology have considerably shortened the time and
distance associated with the various operations. The advent of Internet is radically altering the
way many financial services firms do businesses with their customers. It offers the investment
banks opportunities for service innovation, allowing them to create new offerings as well as add
new product elements and introduce new dynamics to communication, pricing and distribution
strategies.

Services marketing involves identifying the unique challenges inherent in marketing and
managing services and developing strategies and tactics used in conventional goods marketing
frequently are inappropriate for services marketing. Crucial areas such as new product
development, pricing, product line policy, segmentation, positioning, service quality, customer
service, and product and service differentiation were excluded from the sphere of marketing
activity of many of the investment banks.

However, the situation is changing. There is an increased focus on customers and the investment
banks are adopting a marketing-oriented culture across a wide range of managerial activities.
This is enabling them to deliver enhanced value to the customers. Today, financial services are
faced with three primary challenges: Knowing and understanding their customers, integration of
delivery channels and creation of a customer-centric culture that places the customer the core of
every marketing strategy.

Advancements in technology are greatly facilitating the investment banks in facing these
challenges. Investment banks are moving from simply understanding the clients to adopting
concepts like customer relationship management. Citigroup, the financial services conglomerate
for instance uses software that helps it analyze customer history by integrating customer data
from various channels. The company then recommends the next product for its customer, based
on this data. This strategy also enables Citigroup to cross-sell products to its customers.
Investment banks are rapidly adopting the marketing concept to market their services wherein
they are shifting their focus from operations, products or sales efforts to building programs,
services and strategies that satisfy customer needs and wants.

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Thus we can say that understanding services marketing is becoming increasingly important for
the investment bankers as they seek to differentiate their services from that of the competitors.
Successful investment bankers in this marketplace will be those who are familiar with the basic
tenets of marketing and are in the continuous process of devising and following customer-
oriented innovative strategies that are well targeted, relevant and dynamic.

ARTICLE 9

Source: MODERN INVESTMENTS AND SECURITY ANALYSIS

Authors-Russell J. Fuller n James L. Sarrell Jr
Page No.17

INVESTMENT BANKERS AND PUBLIC OFFERINGS

Most primary issues of securities are sold by the firm to the public through investment bankers.
The investment banker is a broker-dealer firm which provides a number of services, depending
upon the type of offering, to the issuing firm and the investing public. In a typical public
offering, investment banker will provide three services :( 1) the managing, or advisory, function;
(2) the underwriting, or risk-bearing, function; and (3) the selling, or distribution, function.

In a negotiated underwriting the managing underwriter (the lead investment banker) typically
has been involved with the offering almost from the day the firm issuing the securities originally
decided to raise new capital. The managing underwriter traditionally advises the issuing firm as
to what type of securities the market will be most receptive to, when to issue the securities, and
most importantly, at what price. In addition, the lead underwriter is responsible for ensuring that
all the legal reporting requirements are met.

Another important function of the managing underwriter is the formation of an underwriting

syndicate. The members of the underwriting syndicate literally buy the securities from the
issuing firm on the day of the offering. Thus, the issuing firm is assured that it will receive the
proceeds from the issue without having to worry about whether or not the investing public will
eventually buy the securities. Because the underwriters are the owners of the securities (until
they are resold to the public), the underwriters bear the risk that the securities are properly
priced. As a rule, however, the underwriters presell the issue. That is, the salespeople for the
underwriting firms know that the issue is to be offered on a particular date, and prior to this date
they talk to their customers (the investing public) to see if their customers are interested in
buying the issue and at what price. As a result of this preselling process, the managing
underwriter generally has a very good idea of the price at which the public will be willing to buy
the securities.

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