INVE$TMENT BANKING

History (contd..)

• Modern banking finds its roots in Italy in the 13th century.

• The cities financed its developmental activities and wars through issuance of bonds or from borrowing through public.

• World’s oldest known bank has its roots in Italy. It’s The Monte di Pietà, or Monte Pio set up in 1472.

The need for Investment Banks• First stock market in Antwerp Belgium in 1531– sans the

stock!!• Limited liabilities companies came into existence in the

1600s to sponsor trade voyages to the East Indies from countries such as Britain, France etc.

• Investors spread their risk by investing in several different ventures at the same time, thereby playing the odds against all of them ending in disaster.

• This kind of business model led to risk management .• Dutch East India company was the 1st to allow outside

investors to purchase shares.

The need for Investment Banks

• Share trading at the Jonathan coffee shop in London.

• Investors who wished to buy or sell securities posted the details at the coffee shop and the trade happened.

• A formal stock exchange was built in 1773.• NYSE came around 19 years later.

• Investment banks help companies and governments and their agencies to raise money by issuing and selling securities in the primary market.

• They assist public and private corporations in raising funds in the capital markets (both equity and debt),

• as well as in providing strategic advisory services for mergers, acquisitions and other types of financial transactions.

Whats the Difference??

Commercial Bank• Individual or small to mid

sized companies.• Loans to buy a house or

future education etc.• Bank- Creditor & General

Public – Debtor• Earns money through the

interest charged on loans

Investment Bank• Companies/ Start-ups

• Borrows to finance the growth of a company.

• Investors – Creditor & Companies – Debtor

• Earns money through the fees charged for providing services

Why an Investment Bank

It performs the following functions

Raise Capital

Portfolio Managemen

t

M & A Research

Principal Businesses of Investment Banks

• Arranges financing for corporations and governments.1] Debt2] Equity3] Convertibles• Advises on mergers and acquisitions (M&A) transactions.• Asset Management Business1] Offers equity, fixed income, alternative investments, and money market investment products and services to individual and institutional clients2] For alternative investment products, the firm co-invests with clients in hedge fund, private equity and real estate funds

Principal Businesses of Investment Banks

• Client Trading• Sells and trades securities

and other financial assets as intermediary on behalf of investing clients.

• Proprietary Trading Investment activity by the firm that affects the firm's accounts, but does not involve investing clients.

Investment Banking In India

• SBI was the first Indian public sector bank to set up its investment banking division in 1972.

• SBI Caps and IDBI Caps are two prime examples of �investment banks in India today.

• Currently, there are 300 investment banks registered �with SEBI.

• Currently, without holding a certificate of registration�granted by the Securities and Exchange Board of India,no person can act as a investment banker.

Trends in Investments in India

19992000

20012002

20032004

20052006

20072008

20092010

20110

2000

4000

6000

8000

10000

12000

14000

16000

Deal Value in Million

Source – www.livemint.com

Companies

• Start-ups• Mid-sized firms• Large firms• Govt. Institutions• Commercial Banks

Investors

• High Networth Ind.• Venture Capitalists• Based on age group• Based on profession• Based on investing knowhow

Functioning

• SEBI• Rating Agencies• Due Diligence firms• Underwriters• Stock exchange• Brokerage Firms

Value Parameters1] ROI2] Network3]Risk factor4]Fees/Charge/Cost5]Familiarity/Relationship6]Experience of the bank & the banker7]Performance8] Industry Knowledge9] Personal Attention10]Time taken to close a deal

http://www.ft.comThe Banker Sept 2011

Venture Capital n Investment Bank

New Business – Venture Capital

Expansion – Venture Capital with IB acting as the intermediary

Exit Option – Through IPOs handled by the IBs

FRONT OFFICE

Front Office

• Pitching to various clients and institutions• Setting the terms and conditions for any form of deal• Trading of securities on behalf of clients In the process of market making, traders will buy and

sell financial products with the goal of making an incremental amount of money on each trade.

Sales desks communicate their clients' orders to the appropriate trading desks, who can price and execute trades, or structure new products that fit a specific need.

Brokerage Rates

Firm Brokerage for Delivery Brokerage for Intraday trading

SBICAP Securitiesbrokerage charges

0.50% 0.10%

Sharekhanbrokerage charges 0.03% - 0.50% 0.03% - 0.10%

Motilal Oswalbrokerage charges 0.30% - 0.50% 0.03% - 0.15%

Angel Brokingbrokerage charges

0.50% 0.02% - 0.03%

ICICI directbrokerage charges 0.75% 0.15%

HDFC Securitiesbrokerage charges 0.50% 0.15%

Religarebrokerage charges 0.20% - 0.30% 0.02% - 0.03%

Reliance Moneybrokerage charges 0.01% 0.01%

www.niftyprediction.blogspot.com

• Research is the division which reviews companies and writes reports about their prospects, often with "buy" or "sell" ratings.

• Structuring has been a relatively recent division as derivatives have come into play, which involves creating complex structured products which typically offer much greater margins and returns than underlying cash securities.

MIDDLE OFFICE

Middle Office

Middle office usually consists of traders, analysts, and

managers who are knowledgeable of trading activities but usually don’t engage in market activities themselves. ( Chinese Wall Policy)

Risk Management involves • analyzing the market and credit risk that traders are taking

onto the balance sheet in conducting their daily trades, • setting limits on the amount of capital that they are able to

trade in order to prevent 'bad' trades having a detrimental effect to a desk overall.

• Another key Middle Office role is to ensure that the above mentioned economic risks are captured accurately (as per agreement of commercial terms with the client) correctly and on time (typically within 30 minutes of trade execution).

BACK OFFICE

Back Office

• Operations involves data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers.

• Every major investment bank has considerable amounts of in-house software, created by the Technology team, who are also responsible for Computer and Telecommunications-based support.

IPOs by Region and Globally

2007 2008 2009 2010 20110

20406080

100120140160180200

EuropeUSAAsia Pacific

Source – The Banker Sept 2011 Issue

Front End Process (IPO)1. Company asks for bids2. Selecting lead managers as per bids3. Prepare draft offer prospectus document for IPO.4. Road shows for the IPO5. Decide the issue date & issue price band with the help of Issuer

Company6. RHP & IPO Application Forms are printed and posted to syndicate

members; through which they are distributed to investors7. Investor – Bidding for the public issue8. Allocation of shares as per demand9. Stocks listed on the market

Institutions/Individuals in IPO process

• Lead managers,also known as Book Running Lead Manager and Co Book Running Lead Managers.

• Registrars.• Legal advisors.• Auditors.• SEBI.• Credit rating agencies.• Syndicate members.( generally banks )• Investors (Retail Individual Investor (RII), High Net worth Individual

(HNI), Non-institutional bidders, Qualified Institutional Bidders (QIB's).)

• Advertising agencies.

Back-end process of an IPO1) Issuer Company - IPO Process Initialization

Appoints lead manager as book runner. Appoints registrar of the issue. Appoints syndicate members.

2) Lead Manager's - Pre Issue Role 3) SEBI – Prospectus Review

SEBI reviews draft offer prospectus. Reverts it back to Lead Manager if needs clarification or

changes. SEBI approve the draft offer prospectus, the draft offer

prospectus is now become Offer Prospectus.

Back-end process of an IPO contd..

4) IPO should be graded by a CRA5) Preparation of Red Herring prospectus6) Investor – Bidding for the public issue 7) Lead Manager – Price Fixing 8) Registrar - Processing IPO Applications 9) Lead manager – Stock Listing

Fees taken at diff stages of an IPOSR NO Particulars % of Issue size1. Lead Managers (0.2 – 1 )%2.

Syndicate Fees, and Selling Commission(3-4) %

3.Advertising, and Marketing Expenses

(1-2) %

4.Printing and Stationary Expenses

(1-2) %

5.

Miscellaneous Expenses-Filing Fess With SEBI, BSE & NSE, Registrar’s Fees, Legal Advisor’s Fees, IPO Grading, Listing Fees, Others

(1-2) %

6. Total (8-10 ) %

MARKETING OF IPOPress Conference Investors ConferenceThe prospective investors are called by invitation. The Promoters and Lead Managers give presentations. They reply to the questions of the investors to boost their confidence. HNI are called. Top brokers are also called. Road Shows Road shows are becoming more and more popular in India.

MARKETING OF IPO contd.. Newspaper Advertisements. Printing – Prospectus.The company has to print approved prospectus and provide enough copies to all intermediaries. If any investor asks for a copy of prospectus it must be provided to him without any fees. Sufficient quantities should be maintained at the registered office of the company and with the Lead Managers. Printing Application FormsSufficient number of application forms must be printed much before the opening of the issue. Each form must contain abridged prospectus in SEBI approved format. It is compulsory to provide stationery to all underwriters and brokers. They will arrange distribution to their sub- brokers and other clients

MARKETING OF IPO contd..

• The reputation of a merchant banker could expand a firm’s investor base at a lower cost than the firm can, since the promotional efforts of a merchant banker on behalf of the firm would be more creditable.

Networking and Promotions

• Customer Relationship Managers building the trust• Networking via already existing clients• Pitching by interaction with the CEOs and CFOs of

companies• Hiring people from other firms with strong network and

good customer relationships• Holding roadshows• Holding seminars to attract investors• Structured products and services to attract customers .

Eg. ICICIdirect money Kitchen

Need Gaps in the IB sector

• Front End IB is still at a very nascent stage in India and hence

needs to be developed and promoted properly. The trust factor is still not been built up amongst the

companies and investors. Here there is need of trained analysts to do the same.

Lack of Investor knowhow Still concentrated only on the metros. Need to move to

the tier-2 and tier-3 cities to tap in more potential investors.

• Back End Need to develop more robust risk

management systems. Use of better technology and systems required

for 2 main purposes1. To keep track of an investor’s database better2. Bring in faster and more intelligent systems

Thank You

Shweta KucheriaRam Shukla Anand Kumar Mishra