Sohail Copied Black Book Project

8/19/2019 Sohail Copied Black Book Project

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Project Report On

“Investment Banking”

Bachelor of commerce

Banking & insurance

semester v

2015-2016

SubmittedIn Partial ulfillment of the re!uirement for the "#ard of

$egree

of Bachelor of %ommerce-Banking &Insurrance

B

Mohd. Sohail Shaikh

ROLL NO !"

SR## N$R$%$N &'R' (OLL# O) (OMM#R(#

P'( (okhande )arg* %hembur* )umbai-+000,


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*#(L$R$+ION

I Mohd. Sohail Shaikh, the student of B'%om' Banking andInsurance semester v . 2015 / 2016* hereb

$eclare that I have comleted the roect on 3 Investment

Banking4'

he information submitted through this roect is true andoriginal to the best of m kno#ledge'

*$+#

PL$(#M'MB$I

SI&N$+'R#

Mohd. Sohail Shaikh

ROLL NO !"


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(#R+I)I($+#

his is to certif that MR. Mohd. Sohail Shaikh ,ROLL NO. !" of B'com'

Banking and Insurance Semester v . 2015 - 2016 has successfull

comleted the roect on

--Investment Banking--

nder the guidance of MR. rishnan Ramchandran

(O'RS# (OOR*IN$+OR PRIN(IP$L

PRO/#(+ &'I*#0IN+#RN$L #1$MIN#R

#1+#RN$L #1$MIN#R

*$+#

PL$(# M'MB$I


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"%789:(;$)" '7 for being a moral suort to us during a roect'

I e?ress thanks to m college rincial $r' ="@I8$="8 7"=">"$Ifor e?tending her suort'

"nd last but not least I #ould take the oortunit to thank m arents

#ithout #hom the roect #ould have been a distant realit' Sincere thanks to all

m fello# mates and #ell-#isher'


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#2ec3tive S3mmar4

Investment banking encomasses not mearl merchant

banking but other related caital market activities such as /

Stock trading market making* under#riting* and broking andasset management as #ell' Besides the above* investment banks

also rovides a host of secialiAed cororate advisor services in

the areas of roect advisor* Business and financial advisor

and mergers and a!usitions'

Investment banks are from traditional do#n the street in

the sence that it does not kee an deosits #ith itself to a usan interest nor does it graduates the 3safekeeing4 of our

mone' "n take deosits and make commercial and retail loans'

In real ears* >o#ever* the lines bet#een the t#o tes of

structure have blurred eseciall as commercial banks have

offered more investment banking services'


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Introduction

" t a v e r m a c r o l e v e l * I n v e s t m e n t B a n k i n g C a s t h e

t e r m s u g g e s t s * i s concerned #ith the rimar function of

assisting the caital market in itsfunctions of caital intermediation*

i'e' the movement of financial resourcesfrom those #ho have them .theInvestors* to those #ho need to make us of them for generating


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origin to the financial market in S"* due to #hich* "merican

investment banks have been leaders in the "merican and ;uro markets

as #ell'he re fo re * t he t e rm i nve s t me n t ba nk i ngC c a n

a rguab l be sa id to be o f "merican origin' heir counterarts in

7 #ere termed as merchant banksC since the had confinedthemselves to caital market intermediation until the S investment

banks entered the 7 and ;uroean markets and e?tended the

scoe of such businesses'


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investment Banking and Merchant Banking *isting3ished

"t this stage* it #ould be relevant therefore* to dra# a fine line ofdistinction bet#een the terms Investment BankingC and )erchant Bank

ingC as boththese terms are e?tensivel used in this

roect' )erchant BankingC as the te rm sugges ts * i s the

func t ion of in te rmedia t ion in the cai ta l marke t ' I t

consists of assisting issuers to raise caital b lacement of securities

issued b them #ith investors' >o#ever* merchant banking is not merel

aboutmarketing securities in an agenc caacit' he )erchant

Banker has an onerous resonsibilit to#ards the investors #hoinvest in such securities' he regulator authorities re!uire the

merchant banking firms to romote !ualit issues* maintain

integrit an ensure comliance #ith the la# on o#n account and on

behalf of the issuers as #ell' herefore* merchant banking is a fee based

service management of ublic offersE oularl kno# as issue

managementC and for rivate lacement of securities in the caital

market' In India* the )erchant Banker leading a ublic offer is also

called as the(ead)anage r C '9n the o the r hand * the t e rm* Inves tmen

t B a n k i n g C h a s a m u c h # i d e r connotation and is graduall

becoming more of an inclusive term to refer toall tes of caita l

market activit* both fund-based and non-fund

based' h i s d e v e l o m e n t h a s b e e n d r i v e n m o r e b

t h e # a t h e " m e r i c a n investment banks have evolved

over the ast centur'


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andmergers and acqu i s i t i ons . The ac t i v i t y pro l e o f i n v e s t m e n t b a n k s i s discussed in morein detail later in this chapter


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Evolution of American nvestment !anks The earliest events that are relevant for thisdiscussion can be traced to theend of "orld "ar ,by #hich time, commercial banks in the $%A

#erea l re ady p rep a r i ng f o r an ec ono mic re cove ry an d co nse qu en t l y , to th esignicantdemand for corporate nance. t #as e&pected thatAmericancompanies #ould shift their dependencefrom commercial banks to stock and bond market s#herein funds #ere avai lable at a lo#er costand for longer periods of time. n preparation for aboom in the capital markets inthe '()*s, commercial

banks started to acquire stock broking businesses ina bid to have their presence made in such markets. The rst of suchacquisitions happened #hen the +ational ity!ank of +e# -ork acquireda lsey %tuart andompany in '('/. As in the past, in the entire'()*s,investment banking meant under#riting anddistribution of securities.The stock and bond marketboom in '()*s #as as opportunity that bankscould

not miss. !ut since they could not under#riteand sel lsecur it ies d i r e c t l y , t he y o #ne d s e cu r i t y a 0 l ia t e s t h r o ugh ho l d i ng co m pa n i e s . o#ever,they #ere not maintained l ike #ater t ightcompartments. Thea0liates #ere sparsely capitalizedas #ere nanced by the parent banks for theirunder#riting and other business obligations. "hile

the boomlasted,investment banking a0 liates made hugepro ts as under#ri t ing fees ,specially in thesegment called 1-ankee !onds2 issued by overseas issuersin$ % m a r k e t . n t he s t o ck m a r k e t , t he ba nk sma i n l y c o n d u c t e d b ro k in g operations through


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their subsidiaries and lent margin money tocustomers.!ut #ith the passage of the 3c4adden Act in'()5, bank subsidiaries beganunder#riting stock issues as #ell. +ational ity !ank,

hase !ank, 3organand !ank of America #ere the mostaggressive banks present at that time.The stock marketgot over6heated #ith investment banks borro#ingmoneyfrom the parent bank in order to speculate inthe bank2s stock, mostly for short selling. 7nce thegeneral public joined the frenzy, the price6earningratios reached absurd limits and the bubbleeventually burst in 7ctober '()(#iping out millions of

dollars of bank depositors2 funds and bringing do#n#ith itbanks such as !ank of $nited %tates8n order to restorecondence in the banking and nancial system,severallegislation measure #ere proposed, #hicheventually led to the passing of the !anking Act '(99:popularly kno# as ;lass6%teagall Act< thatrestrictedcommercial banks from engaging in secur it ies under#r it ing and tak ing positions or acting

as agents for others in securities transactions. Theseactivities #ere segregated as the e&clusive domain ofinvestment banks.7nthe other hand, investment banks #ere barred f rom deposi t tak ing andco rp or at e le nd in g,# h i c h # e r e c o n s i d e r e d t h e e & c l u s i v e b u s i n es s o f commercial bank. The Act thus provided the #atertight compartments

that#ere needed before. %ince the passing of this Act , i nvest ment bank ing becamenarro#ly dened as the basket of nancial servicesassociated #iththe =oatation of corporate securities, i.e.the creation of primary market for securit ies. t #asalso e&tended to mean at a secondary level,


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secondarymarket making through securities dealing.!y'(9>, investment banking became one of themos t heav ily regulated industries in $%A. The%ecurities Act, '(99 provided for the rst time the


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preparation of o?er documents and registration of ne# securities #ith thef e d e r a l g o v e r n m e n t . T h e % ec u r i t i e s E & c h a n g e A c t , ' ( 9 @ l e d t o t h e es

tablishment of the %ecurities E&change ommission. The3aloney Act of '(9 led to the formation of the+A%BAC, the nvestment ompany Act,'(@* , #h ichbrought mutual funds #ithin the regulatoryambit andthe n v e s t m e n t A d v i s e r s A c t , ' ( @ * # h i c h a l so re g u l a t e d t h e b u s i n e s s o f investment advisersand #ealth managers.After the passing of the ;lass6

%treagall Act of the '(9*s, until the beginningof the )'stcentury, investment banking had been through severalphases of transformation #hich had broken do#n the#ater tight compartments to agrea t e&tent . Bueto the '(59 Arab oi l embargo, #orld economies#ereunder pressure and in=ation and interest ratevolatility became disturbing.

t#a s a t t h i s t i m e t h a t i n s t i t u t i o na l i nve s t o rs ma d d er t h e i r a d v en t i n t o securities markets.t #as also the time #hen the industrial andnanc ia l se rv i ce sec to rs #ere beg inn ing to e&pa nd a nd g l o ba l i ze . B ue t o t he s e developments, investment banking and commercial banking once again became constrained by the very legislation that #as meant to clean up thesystem in the

'(9*s. This led to several rela&ations over theyears such asthe %ecurities Acts Amendments, '(5>#hich had permitted commercial banks to havesubsidiaries :called section )* subsidiaries< that#ere allo#edto under#rite and trade in securities. n'((*, D.. 3organ #as the rst bank to open a section )*


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subsidiary. %ince the ;lass6%treagall Act did not applytoforeign subsidiar ies of $% banks, theycontinued to under#rite int heE u r o bo nd m a r k e t a nd by ' ( @ , t he y ha d

a > ) F m a r ke t s h a re i n t h a t business. !ut there#as sti? competition from Dapanese banks in thismarketand by '(5, they under#rote only )>F of theEurobond issuancesBuring the economic gro#th and globalization ofthe '(*s,investment banking e&panded to several ne# areas andservices #hich had includedcurrency trading, real es

tate, nancia l futures, br idge loans, mortgage6backed securities and several others. !ut the stock market crash of '(5once again brought the focus back to coreareas of specialization. %imilarly,the ambitious e&pansionthat took place on a global scale #as also halted tosomee&tent. o#ever due to technological advancements inthe '((*s andthe availabil ity of global accessthrough the revolution in

communicationte ch no lo g i es fu e l le d th e g l ob a lgr o# th ag a i n . !u t th is t i me th ou gh , investment banking is no more restricted to under#riting ne#issuancesandsecur ity dealing . The shift i s more to#ards providing e&pert ise in ne# products and risks. Apart f rom these activities, investment banking alsoencompasses a considerable spectrum of advisory services in

the areas of corporate restructuring, mergers andacquisitions and G!7s, fundraisingand pri vate equit y. 7n the dealing and t rad ing side, investmen t banks participate in derivatives market, arbitrage and speculation. n the area of structured nance, investment banks also provide


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nancial engineer ingthrough securitization dealsand derivative instruments


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European nvestment !anksn continental Europe :e&cluding $H


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ent it ies involved #ith the primary markets. The $% investment banks #ith their integrated global business model entered $H and Europe and later into Dapan.


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introduction of the Euro currency in '(((, helped the $%invasion further byneutralizing the local currencyadvantages enjoyed by European

universal banks. !y )**', the $% bulge group garnered)(.5F of the investment banking fee generated in Europeas compared to '/.9F by the Europeanuniversalbanks.ost6'(/ , the merchant banks andcommercial banks in $H could notma t ch up t ot h e $ % o n s l a u g h t # h i c h u l t i m a t e l y l e d t ot h e s a l e o f% ; "a r b u r g , t h e m e r c h a n t b a n k t o % # i s s ! a

n k o r p o r a t i o n : # h i c h # a s acquired by $!% later<in '((>. n '((5, +at#est !ank and !arclays !ank e&itedinvestment banking business. 3organ ;renfell, amerchant bank #asso ld to Beut sche !ank in '((* .n t his upheaval, niche p layers such as Bre&el!urnham and !arings !ank also collapsed #ith internaldeciencies.This led to cross border 3IA bet#eenEuropean banks inter6se and their American

counterparts to create bigger investment banks.$!% "arburg#as born out of merger o f $!% and%#iss !ank orporation #hich hadearlier acquired%; "arburg. Beutsche !ank acquired !ankers Trust.


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;lobal ndustry %tructure The investment banking industry on a global scale isoligopolistic in natureranging from the global leaders:kno#n as the 1;lobal !ulge ;roup2< to1ure2

investment banks and 1!outique2 investment banks. Thebulge groupconsisting of eight investment banks hasa global presence and these rmsdominate theleague tables in key business segments. The topten globalrms in terms of their fee billing as in )**' arelisted in Table"ith in the li st ing given in the tablereferred to above are the top 1pure 2 investmentbanks, i.e. #hich do not have commercial banking

connections,#hich are 3errill Gynch, ;oldman %achs and3organ %tanley Bean "itter.Gisted therein are also theleading European $niversal !anks that are calledso dueto their role in both commercial and investmentbanking. The veleading universal banks in the #orldand their important group a0liates aregiven in

TableT h e r e f o r e , t h e g l o b a l i n v e s t m e n t b ank i ng i ndus t r y r a nge s f o r m t he a ck no # l e dge

d global leaders to a larger number of mid6sizedcompetitors ata national or regional level and the rearend is supported by boutique rmsor advisory andsectoral specialists.


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!usiness ortfolio of nvestment !anks;lobally, investment banks handle signicant fund6based

business of their o#n in the capital market along #iththeir non6fund service portfolio #hichis o?ered to clients.o#ever, these distinct segments are handled eitheronthe same balance sheet or through subsidiaries anda0liates depending uponthe regulatory requirementsin the operating environment of eachcountry.All these activities are segmented across three broad pla tfo rms Jequit ymarket activity,

debt market activity and merger and acquisition:3IA


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large nancial po#er houses themse lves, the globa l investment banks play amajor role asinstitutional investors in trading and having largeholdings of capital market securities. As dealers they take

positions and make a marketfor many securities both inequity and derivative segments. They hold large


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inventories and therefore in=uence the direction ofthe market. ;oldman%achs, %alomon !rothers, 3errillGynch, %chroeders, Kothschild and other signicant3arket nvestors both on their o#n account and on behalf

of the billions dollars of funds under theirmanagement.The global mergers and acquisitionsbusiness is very large and measures upto trillions ofdollars annually. nvestment banks play a lead advisoryrole inthis booming segment of nancial advisorybusiness. !esides, they come inas investors inmanagement buy6outs and management buy6intransactions.7n other occasions, #herein investment

banks manage private equity funds,they also representtheir investors in such buy6out deals.n the case ofuniversal banks such as the itigroup or $!% "arburg,loan products form a signicantpart of the debt market business portfolio.ureinves tment banks such as ;oldman %achs,3erri l l Gynch and 3organ%tanley Bean "itter do nothave commercial banking in their portfolio andtherefore,

do not o?er loan products. !esides the larger rms,there areah o s t o f o t h e r d o m e s t i c p l a y e r s p r e s e n t i neac h cou nt r y an d m id 6 s i zed inves tmentbanks, #hich either special ize in local marketsor in ce rt ain product segments.%ome inves tmentbanks in the overseas markets also special izein ni che segments such as Jmanagement of hedge

funds, bullion trade, commodityhedges, real estateand other e&otic markets.


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The ndian %cenario7riginn ndia, though the e&istence of this branch ofnancial services can betraced to over three

decades, investment banking #as largely connedtomerchant banking services. The forerunners ofmerchant banking inndia#ere t he f o re ig n ba nks . ; r i nd l ays !an k: n o # m e rg e d # i t h % t a n d a rd hartered !ank inndia< began merchant banking operations in '(/5 #ithalicense obtained from the K! follo#ed by the itibank in'(5*. These t#o banks #ere providing services for

syndication of loans and raising of equityapart from otheradvisory services.t #as in '(5), that the !ankingommission Keport asserted the need for merchantbanking services in ndia by the public sector banks.!ased on theAmerican e&perience #hich led to thepassing of the ;lass6%treagall Act, theommissionrecommended a separate structure for merchant banksso as todistinct them from commercial banks and

nancial institutions. 3erchant banks #ere meantto manage investments and provide advisoryservices.4ollo#ing the above recommendations, the %!set up its merchant bankingdivision in '(5). 7therbanks such as the J!ank of ndia, entral !ankof ndia, !ank of !aroda, %yndicate !ank, unjab +ational!ank, anara !ank also follo#ed suit to set up theirmerchant banking outts. #as therst nancial

institution to set up its merchant banking division in'(59. Thelater entrants #ere 4 and B! #ith thelatter setting up its merchant


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banking division in '((). o#ever, by the mid eighties an

d early nineties,most of the merchant banking divisions of

public sector banks #ere spun o? as separate

subsidiaries. %! set up %! apital 3arkets Gtd. in '(/.7ther such banks such as Janara !ank, !7!,

+!, ndian bank and icici created seprate

merchant banking entit ies.


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;ro#th3erchant banking in ndia #as given a shot in the

arm #ith the advent of %E! in '( and thesubsequent introduction of free pricing of

primarymarket equity issues in '((). o#ever, post

'((), the merchant bankingindustry #as largely

driven by issue management activity #hich

=uctuated#ith the trends in the primary market.

These have been phases of hect icactivity

follo#ed by a severe setback in business. %E!started to

regulatethe merchant banking ac tivit y in '(() a

nd a majo rity of the merchant bankers #ho register

ed #ith %E! #ere either in issue management or associ

ated act ivity such as under#rit ing or advisorsh

ip . %E! had four categories of merchant bankers

#ith varying eligibility criteria based ontheirnet#orth. The highest number of registered

merchant bankers #ith%E! #as seen in the mid6

nineties, but the numbers have d#indled

since,due t o t he i nac t i v i t y i n t he p r im ary m

ar ket . Th e nu mb er o f reg i s te red merchant

bankers #ith %E! as at the end of 3arch )**9 #as

')@, from

a peak of almost a thousand in the nineties. n the nanci

al year )**)6*9 itself. The number decreased by )'.


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onstraints in nvestment !ankingBue to the over dependence on issuemanagement activ ity in the init i alyears, mostmerchant banks perished in the primary market

do#nturn thatfollo#ed later. n order to stabilize theirbusinesses, several merchant banksdiversied to o?er abroader spectrum of capital market services.o#ever,other than a fe# industry leaders, the othermerchant banks have not beenable to transformthemselves into full service investment banks.;oing bythe service portfolio of the leading full serviceinvestment banks in ndia,

itm a y b e s a i d t h a t t h e i n d u s t r y i n n d i ahas seen more o r l e ss s im i l a r deve lopmentas its #estern counterparts, though the breadth availablein theoverseas capit al market i s st il l not p resentin the ndian capital market.%econdly, due tothe lack of inst i tut ional nancing in a big #ayto fundcapital market act ivity, i t is only thebigger industry players #ho are ininvestment

banking. The third major deterrent has alsobeen the lack of depth in the secondarymarket, especially in the corporate debt segment.


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h a r a c t e r i s t i c s a n d % t r u c t u r e o f n d i a n n vestment !ankingndustrynvestment banking in ndia has evolved in its o#ncharacteristics structureover the years both due to

business realities and the regulatory regime.7n theregulatory front, the ndian regulatory regimedoes not al lo# al l investment banking funct ionsto be performed under one entity fort#oreasonsJ:a< to prevent e&cessive e&posure tobusiness risk under oneentityand :b< to prescribe and monitor capital adequacy and r isk mit igat ion mechanisms. Therefore

bankruptcy remoteness is a key feature in structuringthebusiness lines of an investment bank so that therisks and re#ards aredened for the investors #hoprovide resources to the investment banks. naddit ion,the capital adequacy requirements and leveragingcapability for each business line have been prescribeddi?erently under relevant provisionsof la#. 7n the sameanalogy, commercial banks in ndia have to follo#

the provisions of the !anking Kegulation Act and the K! regulations, #hich prohibit them from e&posing themselves to stock market investments andlending against stocksbeyond certain speciedlimits.Therefore , ndian investment banks st ruc ture the ir bus iness segments indi?erent corporateentities to be able to meet regulatory norms. 4or e.g. itisdesirable to have merchant banking is a separate

company as it requires aseparate merchant bankinglicense from the %E!. 3erchant bankers other thanbanks and nancial institutions are also prohibitedfrom undertakingany other business other than thatin the securities market. o#ever, since


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banks are subject to the !anking Kegulation Act, they can

not performinvestment bank ing to a large e&tent

on the same balance sheet. Assetmanagement

business in the form of a mut ual fund requiresa three6t ier structure under the %E! regulations.

Equity research should be independentof the

merchant banking business so as to avoid the

kind of con= ic t of interest as faced by American

investment banks. %tock broking has to

bes e p a r a t e d i n t o a d i ? e r e n t c o m p a n y a s

i t r e q u i r e s a s t o c k e & c h a n g e membership a

part from %E! registrat ion. A complete overvie

# of theregulatory frame#ork for investment banking

is furnished later.nvestment banking in ndia has also

been in=uenced by business realities toa large e&tent.

The nancial services industry in ndia till the early

'(*s#as driven largely by debt servi ces in t he

form of term nanc ing f romnancial institutions

and #orking capital nancing by commercial

banksand non6banking nancial companies :+!4s


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advisory business. "hile most institutions and commercia

l banks =oated merchant banking divisions and

subsidiaries, +!4s combined their e&isting business#ith

that of merchant banking.7ver the subsequent years,t#o developments have taken place. 4irstly, #iththe

do#nturn in the capital markets, themerchant banking

industry has seen

tremendous shake out and only about a '*F of

them remain in

serious business as pointed out earlier. The other develo

pment is that due to thegradual regulatory developmentsin the capital markets, investment bankingactivities

have come under regulations #hich require

separate registration,licensing and capital

controls.Bue to t he above reasons, the nd ian

investment banking industry has

aheterogeneous structure. The bigger investment

banks have several groupentities in #hich the coreand non6core business segments are

distributed.7thers have either one or more entities

depending upon the activity

prole.The het erogeneous and fragmented struct

ure is evident even i f ndianinvestment banks are

classied on the basis of their activity prole. %ome

of them such as J%!, B!, , G I 4%, Hotak3ahindra, itibank

ando t he r s o f f e r a l m o s t t he e n t i r e g a m ut o f

i n v e s t m e n t ba n k i n g s e r v i c e s permitted in ndia.

Among these, the long term nancial institutions aregrad


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ual ly transforming themselves into ful l service

commercial banks:cal led 1universal banking2 in

the nd ian con te&t


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%ervice ortfolio of ndian nvestment !anksore %ervices3erchant !anking, $nder#riting and !ook KunningTheprimary market #hich #as quite small in ndia, #asrevitalized #ith theabolition of the apital ssues

:ontrol< Act '(@5 and the passing of the%ecuritiesand E&change !oard of ndia Act, '((). The %E!functions asthe regulator for the capital marketssimilar to its counterpart, the %E in$%A. %E! videits guidelines dated Dune '', '(() introduced freepricingof securi t ies in publ ic o? ers for the rstt ime in ndia . 7ver the la st tenyears, there havebeen t#o distinct phases of primary market boom Jthe

rst bet#een '(()6'((/ and the second bet#een '((6)**'. The third #ave of primary market issues couldshape up in the near future. This market is verycloselyregulated by %E!. n the days #hen the public o?ersmarket isveryv ib ran t , t h i s a re a o f se rv i ce f o rms them a i n a c t i v i t y f o r m o s t n d i a n investment banks.n the past fe# years, though public o?ers have been

veryfe#, the private placement market especially inthe debt segment has beenvery active and hasserved as an important source of funds for prime6ratedcorporates. +otable among such o? eringsare re la ted privately placedde be nt ure s i s su edb y p u b l i c s e c t o r c o r p o r a t i o n s a n d l e a d i n g pr i v at e companies. 4inancial inst i tutions have been rais ing funds v ia t he publ ico?ers and hand

holding them in the private placements as #ell.7ncethe private placement markets also come under regulatory stipulations,investment banks #ould have a #ider roleto play in such issuances.


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3ergers and Acquisitions Advisory The mergers and acquisitions industry #as prettynascent in ndia priorto' ( ( @ a n d c o n t i n u e s t o b e t i n y c o m p a r

ed t o t he g loba l s ca le o f such t ransac t i ons .o#ever, t#o main features that have given a big push tothisindustry areLM

The forces of liberation and globalization that have forcedthe ndianindustry to consolidate.M

The institutionalization of corporate acquisitions by %E!

through itsguidelines, popularly kno#n as the Takeoverode.7ne of the cream activities of investmentbanks has al#ays been 3IAadvisory. The largerinvestment banks specialize in 3IA as a coreactivity."hile some of them provide pure advisoryservices in relation to 3IA,others holding validmerchant banking licenses from %E! also managetheopen o?ers arising out of such corporate events.


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3ergers and Acquisitions Advisory The mergers and acquisitions industry #as prettynascent in ndia priorto' ( ( @ a n d c o n t i n u e s t o b e t i n y c o m p a r

ed t o t he g loba l s ca le o f such t ransac t i ons .o#ever, t#o main features that have given a big push tothisindustry areLM

The forces of liberation and globalization that have forcedthe ndianindustry to consolidate.M

The institutionalization of corporate acquisitions by %E!

through itsguidelines, popularly kno#n as the Takeoverode.7ne of the cream activities of investmentbanks has al#ays been 3IAadvisory. The largerinvestment banks specialize in 3IA as a coreactivity."hile some of them provide pure advisoryservices in relation to 3IA,others holding validmerchant banking licenses from %E! also managetheopen o?ers arising out of such corporate events.


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%upport services and !usinesses%econdary 3arket Activities3ost of the universal banks such as , B! and Hotak3ahindra havetheir broking and distribution rms in boththe equity and debt segments of the secondary market.

n addition several other investment banks such as theGI 4% and pure investment banks such as B%3err il l Gynch and D33organ %tanley have a strongpresence in this area of activity. n the pastfe#years, the derivatives segment has been introducedin ndiancapitalmarke t and th i s p rov ide s an add i t i onal av enu e o f spe c ia l i z a t i on f o r i nves tment ba

nks. Berivat ives trading, r isk management andstructured products o?erings are the ne#segments that are fast becoming the areas of futurepotential for ndian investment banks. Thesecurities businessalso provides e&tensive research o?erings and guidance to investors. Thes e c o n d a r y m a r ke t s e r v i c e s ca t e r t o b o t h t h e i n s t i t u t i o n a l a n d n o n 6

institutional investors.Asset 3anagement %ervices3ost of the top nancial groups in ndia #hich haveinvestment banking businesses such as the J, the B!, Hotak 3ahindra, B% 3errillGynch, D33organ %tanley, %! and G I 4% also have their presencein theasset management business through separateentities. As per the three layer structure propounded by

%E!, the parent organization acts as the sponsor of thefund and the fund itself is constituted as a trust. The trustis managed by


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an asset management company and a separatetrust ee company #hichoversees the interests ofthe unit holders in the 3utual 4und. The#holestructure has as arm2s length distance from

the sponsor2s other businessesand entities."ealth 3anagement %ervices :rivate !anking<3any reputed investment banks nurture a separate serv ice segment tomanage the portfolio ofhigh net#orth individuals, households, trustsandother types of non6institutional investors. This can bestructured either asa pure advisory service #herein the investment manager

does not have anyaccess to the funds or as a fundmanagement service #herein the investmentmanager isgiven charge of the funds. n the former case, it becomesa non6discret ionary port foli o and in t he latt ercase, i t becomes adiscret ionary portfolio. %uch activity is regulated underthe %E! guidelines as alreadydiscussed. n other cases,#ealth management may be restricted to

a research based activity #herein the investor is providedgood investmentrecommendations from time to time.nstitutional !ankingnstitutional investors have been a recent phenomenon inthe ndian capitalmarket , #h ich t il l then had thepresence of a handful of publ ic nancial institutions such as the $T and the insurancecompanies. The term lendinginst itut ions such as the

B! and 4 did not part icipate insecondarymarket dealing as a matter of policy. "ith theadvent of liberalization, there


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are presently a large number of domestic inst it

ut iona l inv est ors in thesecondary market apart

from approved foreign institutional investors.

naddition, institutional investments have risensignicantly in the primarymarkets through venture

capital and private equity investments by investorsin

both the domestic and non6domestic categories.

%everal of the leadinginvestment banks either have

dedicated venture funds or private equity fundsthat

invest in primary market. n addition they

make proprietary investmentsin the secondary market

through their dealing and market activities.

The business portfolio of ndian nvestment !anks has

been brie=y discussed in4ig.


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n t e rd e p e n d e nc e b e t # e e n B i ? e r e nt Ne r t i c a ls i n n v e s t me n t !ankingAs is evident from 4igure , there are di?erentverticals in investment banking and they do enjoy syne

rgies #ith one another. "hile some of theservice orbusiness segments form the core of investmentbanking, others provide invaluable support. This inter6dependence and complementarye&istence has beene&plained belo#."hile merchant banking largely relatesto management of public=oatationsof secur it ies or reverse = oat at ions such as buy backs and open o? ers,under#rit ing is

an inherent part of merchant banking for publ i cis sues .%imilarly, bought out deals and marketmaking are a part of the process of = oating issueson the 7T E&change of ndia. The concept ofmarketmaking has no# been introduced for listingof certain scrips in the mainstock e&changes as#ell . Advisory and transact ion service have ac lose l i nk a ge # i t h m e r cha n t ba nk i ng a s m o r

e of t e n t h a n n o t , s u c h s er v i c e s culminate in amerchant banking assignment for a public issue or areverse=oatation. %uch services also help inmaintaining an enduring relationship#ith clientsduring those times #hen merchant banking is not a hotactivitydue to depressed market conditions. Theother segment of primary marketacti vi ty, i. e.venture capital and private equity has equal

synergies#it hm e r cha n t b a nk i ng . !e i ng i n ve n t u r e ca pi t a l b us i n e s s # h i c h e n a b l e s identication ofpotential 7 candidates quite early, #hich helps notonlyin generating good fee income from merchant


41/84

banking services, but alsogood in capital gains forthe venture capital invested at earlier rounds of


42/84

nancing in such companies. %imilarly, being in

private equity businesshelps in harnessing the

potential o?ered by later stage and listed

companies,#hich may approach an investment bankprimarily for merchant bankingservices.The support

business vertical in the secondary market operations also

havesynergies #ith those in the primary equity and debt

market segment as far asinvestment banking is

concerned. %tock broking and primary dealership indebt

markets nurture institutional, corporate and retail

clients #ho can betapped e?ectively for asset

management, portfolio management, and privateequity

business. n addition, presence in the equity

derivative and foreigne&change derivatives

segments can help in o?ering solutions in

treasurymanagement to clients. n addition, the

advisory and transaction

servicesvert ical can d ra# e&p ertise from such s

egment s in providing struc turednancing

solutions to its clients. All these verticals are driven

by supportservices such as sales and distribution and

also equity research and analysis.Gastly but more

importantly, the capability in sales and distribution

alsodetermines the success of the merchant banking

vertical.Thus , i t may be seen that the g ro#t h

and success o f an investment bank depends on

its strengths in each vertical and ho# #ell it combines

them for synergies. To sum up, investment banking is a

business that is very sensitiveto the economic and

capital market scenario and therefore, the broader


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the platform of its operations, the more is likelihood of an

investment bank surviving business cycles and

sudden shocks from the market.


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Kegulatory 4rame#ork for nvestment !ankingAs discussed above, investment banking in ndiais regulated in its variousfacets under separatelegislations or guidelines issued under statute.

There g u l a t o r y p o # e r s a re a l s o d i s t r i b u t e d bet #e en d i ? ere nt reg u l at or sdepending uponthe constitution and status of the investment bank.ureinvestment banks #h ich do not havepresence in the lending orbanking business are governed primarily by the capitalmarket regulator :%E!/ are governedby the provisions of that Act.).nvestment banks that

are incorporated under a separate statute suchasthe %! or the B! are regulated by their respectivestatute.B!i s i n t he p roc ess o f be i ng con ver ted i n t oa c o m p a n y u n d e r t h e ompanies Act.9.$niversal!anks are regulated by the Keserve !ank of ndiaunder theK! Act '(9@ and the !anking Kegulation Act#hich put restrictionson the investment banking

e&posures to be taken by banks. The K!has rela&edthe e&posure limits for merchant banking subsidiariesof commercial banks. Till no#, such companies #ererestricting their


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e&posure to a single entity through theunder#r it ing bus iness andother fund basedcommitments such as standby facilities etc to )>Fof their net o#ned funds :+74 to @>C!< of theKeserve !ank of ndiaAct, '(9@. $nder these sectionsK! is empo#ered to issue

directionsin the area o f resource mob il izat ion , accounts and adminis trat ivecontrols. The follo#ingdirections have been issued by the K! so farLM +on6!anking 4inancial ompanies Acceptance of Beposits:Keserve !ank< Birections, '((.M +!4s rudential +orms :Keserve !ank< Birections,

'((.>.4unc tional ly, di? erentaspects of investment banking are regulatedunder the %ecurit ies E&change !oard of ndia Act,'(() and theguidelines and regulations issued thereunder. These are listed belo#LM3erchant banking business consisting of managementof publico?ers is a licensed and regulated activity

under the %ecuritiesand E&change !oard of ndia:3erchant !ankers< Kules '(()and %ecuritiesE&change !oard of ndia :3erchant!ankers


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• $ n d e r # r i t i n g b u s i n e s s i s r e g u l a t

e d u n d e r t h e % E ! : $ n d e r # r i t e r s < Kul e s ' ( ( 9 a nd t he % E ! :$ nde r #r i t e r s < Kegulations '((9.

M The activity of the secondary market operations includingstock broking are regulated under the relevant by6la#s ofthe stock e&change and the %E! :%tock !rokers and %ub!rokers< Kules'(() and the :%tock !rokers and%ub !rokers< Kegulat ions'((). !esides, for curbingunethical trading practices, %E!has promulgated the %E! :rohibition of nsider Trading.M

The business of asset management as mutual funds isregulatedunder the %E! :3utual 4unds< Kegulations'((/.M

The business of portfolio management is regulatedunder the%E! :ortfolio 3anagers< Kules, '((9 andthe %E! :ortfolio3anagers< Kegulations, '((9.M

The business of venture capital and private equi ty by such funds that are incorporated in ndia isregulated by the %E!:Nenture apital 4unds<Kegulations, '((/ and by those

thatare incorporated outside ndia is regulatedunder the %E!:4oreign Nenture apital 4unds<Kegulations )***.M

The business of institutional invest ing by foreigninvestment banks and other investors in ndian secondar


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y markets isg o v e r n e d b y t h e % E ! : 4o r e i g n n s t i t u t i o n a l n v e s t o r s < Kegulations '((>.


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/ . n v e s t m e n t s b a n k s t h a t a r e s e t u p

i n n d i a # i t h f o r e i g n d i r e c t investment

either as joint ventures #ith ndian partners or as

fullyo#ned subsidiaries of the foreign entities are

governed in respect of the foreign investment by

the 4oreign E&change 3anagement Act,'((( and

the 4oreign E&change 3anagement :Transfer or

issue of %ecurity by a erson Kesident 7utside ndia<

Kegulations )*** issuedthere under as amended from

time to time through circulars issued bythe

K!.5 .A pa r t f r o m the ab ove sp ec i c regu la t i

o n s re l a t i n g t o i n v e s t m e n t banking, investment

banks are also governed by other la#s applicableto all

other businesses such as the Jta& la#, property la#, state

la#s,arbitration la# and other general la#s that are

applicable in ndia.


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Kegulatory 4rame#ork for 3erchant !anking3erchant !ankers are governed by the %E!:3erchant !ankers< Kules'(() and %E!:3erchant !ankers< Kegulations '((). According to

the%E! :3erchant !ankers< Kules '(() a 3erchant!anker means 1a person#ho is engaged in thebusiness of issue management either bymakingarrangements regarding sel l ing, buyingor subscribing to securit ies asmanager, consultant, advisor or rendering corporate advisory service inrelation to such issue management2.;iven thefact that 3erchant !ankers are entrusted #ith the

responsibility of issue management by la#, theregulatory frame#ork is designed to ensurethatthey su0 cient competence and e&ercise diligencein their #ork suchthat the issuers comply #ith allstatutory requirements concerning the issue.At the sametime, the merchant banker shall have high levels ofintegrity sothat quality issues alone are brought tothe primary market. Heeping theseobjectives in

mind and investor protection as the paramountobjective,the%E ! h a s l a i d e m pha s i s o n e n s u r i ng t ha tmerc ha nt b an kers f u l l th ee l ig ib il it y c ri te riaon an on6going basis and has thereforeprovided fo r compulsory registration every threeyears. All 3erchant !ankers need tohave a validregistration certicate under the said rules to perform the

role of 3erchant !ankers to issues. n considering theapplication for registration,%E! shall pay regard to theprofessional qualication in nance, la#or business management, adequate o0ce space, manpo#er, o0ce equipmentand other infrastructure, atleast t#o support sta? members #ho have


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thecompetence to be in the eld of merchantbanking business, e&istence of


51/84

minimum stipulated capital and previous

e&perience to investor

gr ievanceredressa l .The act iv i t ies that a 3erc

h a n t ! a n k e r i s a u t h o r i z e d t o d o a r e i s s ue m a n a g e m e n t a n d as s o c i a t e d a c t i v i t i e s s u c

h a s a d v i s i n g o r p r o v i d i n g consultancy or

marketing services for the issue, under#riting of issues

and portfolio management, though portfolio management

alone requiresadditional registration under the relevant

regulations. 3erchant !ankers

are precluded from carrying on any business or fund6

based activity other thanthat associated #ith the

securities market. 3erchant !ankers are also

bound by the ode of onduct prescribed under the Kegul

ations. n addition,3 e r c h a n t ! a n k e r s h a v e t

o c o m p l y # i t h g e n e r a l o b l i g a t i o n s a n

d responsibilities under the Kegulations.resent ly

there is only one category of 3erchant !ankers

prescribed by%E! :ategory < and the minimum

stipulated net#orth for such 3erchant!ankers is Ks.ve

crore. %uch 3erchant !ankers holding valid certicatesof

registration are alone qualied to manage public

o?ers. %E! levies aone6 time author iza tion fee,

an annual fee and a rene#al fee from

each3erchant !anker.

$nder the regulations, 3erchant !ankers have also

to submit periodicalreturns and any other additional

information that %E! might seek from timeto time. %E!

also has a right of inspection of the books of account,


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recordsand documents of the merchant banker at

any time if required. %E! maysuo moto conduct an

enquiry or launch an investigation into the #orking of a

3erchant !anker or on receipt of a complaintagainst such 3erchant.


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!anker. %E! may even appoint an e&ternal auditor to

inspect the books

andr e p o r t t o % E ! . ! a s e d o n t h e n d i n g s

, % E ! i s e m p o # e r e d t o t a k e a p p r o p r i a t eaction to a#ard penalty points to the erring

3erchant

!anker based on the degree of the default or contravent

ion in accordance #ith the%E! :rocedure for olding

Enquiry by Enquiry 70 cer and mposingenalty<

Kegulations )**). The aggrieved 3erchant !anker

may prefer

toa p p e a l t h e e n t r a l ; o v e r n m e n t u n d e r

t h e % E ! : A p p e a l t o e n t r a l ; o v e r n m e n t <

Kules )**9. t may also be mentioned here that a

3erchant!anker i s deemed to be a connec ted

person to the is suer under the %E! :rohibition of

nsider Trading< Kegulations, '(().


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Anatomy of %ome Geading ndian nvestment !anks.%ecurities Gtd. :6%ec


55/84

%ecurity Bealers nc as a broker6dealer, empo#ering it toengage in a varietyof securities transactions in the $%market . !rokerage %erv ices G imi ted, a mem b er of t he +a t io na l % t oc k E&change of ndia

Gimited, is the domestic broking subsidiary of 6%ec2sdistribution and secondary market services are handled by the brok ingcompany.B% 3errill Gynch Gtd.7riginally incorporated as B% 4inancial onsultantsGtd, its name #aschanged to B% 3errill Gynch :B%63G< in '((/ follo#ing its conversioninto a jointventure #ith 3erri l l Gynch of $%A, a leading

internat ionalcapital raising nancial management andadvisory company. 3errill Gynchhas a @*F equity stakein B%63G. B%63G is a part of the B% group#hichhas been in the securities and brokerage business for '9*years in thendian market, thus pre6dating even the!ombay %tock E&change.B%63G is a leading fullservice nvestment !ank that providesservicesacross debt market, equity market and

corporate advisory segments. talso provides services to private customers on equity anddebt products and#ealth management. t has a full=edged research team serving the needsof both its institutional and retail clients. The company isamong the major players on proprietaryaccount in the debt and equity markets and is also aregistered primary dealer in government securities.


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The functional divisions at B%63G consist of the Jnvestment !anking;roup, the Equity %ales ;roup, theEquity Trading and Bealing ;roup, Bebt%ales ;roup, the3ergers and Acquisitions ;roup, the Kesearch ;roup

andthe rivate lient ;roup. The investmentbanking group generates equityand debt productsemerging from 7s, secondary issues and debtmarketissues as #ell as private placements. t is also aleading under#riter in bothequity and debt products.

These products are distributed through the equitysalesgroup and the debt sales group. !oth themarket ing g roups serve across section of

institutional clients, other non6institutional clientssuch astrusts and investment companies, retailclients and overseas investors. Thesa les groupsalso distr ibute apart from their o#n products,the produc tsemerging from other entities such asB% 3errill Gynch 3utual 4und andother mutual funds.

The sales groups are supported by a nationaldistributionnet#orking comprising of appro&imately

*** sub6brokers and alliance partners.The trading anddealing groups support the broking activity in equitiesandthe primary dealership activities in the debt market.B%63G, is one of thelargest institutional brokingrms in ndia. t is a founding member of The%tockE&change, 3umbai :!%E< and is an active memberof the+ a t i o n a l % t o c k E & c h a n g e : + % E < o f n d i a i n

b o t h t h e e q u i t y s e g m e n t a n d t h e # h o l e s a l edebt market segment. t is an accredited primary dealer#ith theK! and an active participant in the;overnment %ecurities8Treasury billmarke ts. As aprimary dealer, i t makes a market for debtsecur it ies byo? ering to buy and sel l quotes.


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These quotes are also avai lable on#ire s e r v i ce s l i k e Ke u t e r s , r i s i l 3a r k e t # i r e, ! l o om b er g a n d B o # D o n e s +e#s#ires.


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The mergers and acquisit ions advisory hasbeen structured as a separa te specialist groupthat o?ers their clients nancial advice andassistance inrestructuring, divestures, acquisitions, de6

mergers, spin6o?s, jointventures, privatization and takeover defense mechanisms. The research group o?ers products such as Jsectoral reports, company reports and special themeanalyses, daily,#eekly and monthly market vie#s as #ell as specicpolicyforecasts. The private client group o?ers depository,broking and investmentadvisory services to high net#orth individuals, professionals and promotersof business

groups, corporate e&ecutives, trusts and privatecompanies.n '((/, the B% group =oated a separateequity broking company calledB% %ecurities Gtd.#hich is a member of the !%E.


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D3 3organ %tanley vt. Gtd. D3 3organ %tanley :D33%< is a joint venturebet#een the D3 4inancial;roup and 3organ%tanley Bean "itter of the $%A. n '((5,

3organ%tanley #hich #as established in +e# -orkin '(9>, had acquired Bean"itter, an investmentbank founded in '()@ in %an 4rancisco. D33organ%tanley commenced operations in April '(((.o#ever, the association of the t#o partners is limitedonly to the investment banking area. !oth of themhaveseparate asset management companies in ndia #hichrun independentof mutual fund businesses.$nlike B%63G

and 6%ec #hich have an integrated structure, the D3 ;rouphas separate companies handling variouscomponents of the capitalmarket business. The core functions of investment banking are performed byD33%. This company focuses oncapital raising, mergers andacquisitions, private equity and advisory #ork for ndian corporations in both theinternational and domestic capital

markets. The function of distribution andmarketingsecurities is handled by t#o of its #holly o#nedsubsidiaries JD33organ %tanley Ketail %ervices vt.Gtd. :D3K%< and D3 3organ %tanley4i&ed ncome%ecurities vt. Gtd. :D34


60/84

also provides research support for both 4 andndian institutional clients.


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%! apital 3arkets Gtd4ounded in '(/ as a hive6o? of the %! 3erchant!anking division, %!apital 3arkets Gtd. :%! aps< isamongst the oldest players in the ndiancapital market. t

is a full service investment bank that providesinvestment,adv isory and nanc ia l services. n)**', %! aps started its sales anddistributionactivity along #ith equity and debt broking services.%!aps provides services across the follo#ing spectrumLMMergers and AcquisitionsL This group provides advisory services#ith regard to

disinvestment of the government, valuations,mergersand acquis i t ions in the corporate sect o r , n a n c i a l a n d b u s i n e s s restructuring andother areas.MProject advisory and structure fnanceL t is arguably one ofthel e a d i n g g r o u p s i n t h e c o m p a n y t h a t p

r o v i d e s s e r v i c e s s u c h a s restructuring and privatization advisory for public utilities, policyadvisory to entral and %tate ;overnments, regulatorybodies andgovernment departments andorganizations, project structuring andadvisory to theprivate sector and arranging nance for such projects.%!aps has been a major player in governmental #orkand in theinfrastructure sector. The project advisory

services consist of hand6holding from the conceptto commissioning stage involvingprojectstructuring, contract structuring, nancial modeling, preparation of i n f o rm a t i o n m e m o r a n d um , s ynd i ca t i o n o f de b t a nd e qu i t y a nd assis tance in documentat ion and nancia l c losure. 7


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ther servicesinclude appraisals for green6eld andbro#n6eld projects, techno6economic


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a p p r a i s a l f r o m b a n k s a n d n a n c i a l i n s t it u t i o n s f o r establishing the viability of corporaterestructuring plans, and vettingof contracts, loandocuments, project documentation etc.

MCapital marketL This group provides merchant banking servicesinconnection #ith public issues, rights issues and publico?ers forbuy6 backs and open o?ers. t also advises clients on theprivate placements, ABK and ;BK issues and overseas bond issues by the%!.

MTreasury and InvestmentsL This group deals #ith theproprietaryinvestment of the company in theequity, debt and money markets.Kesourcemobilization and management is also undertaken bythisgroup.M

Broking o Equity and e!tL %! aps is a registered broker and amember of the+%E in the equity and #holesale debt segments andisalso a member in the equity segment. The brokinggroup caters to thesecondary market needs of nancialinstitutions, 4s, mutualfunds, banks, other corporates, high net #orth individuals, non6residentinvestors and retail investors. The

company commenced #holesaledebt marketbroking in )**'. The company e&pects to have astrong presence in institutional broking. The company plans to open aderivative trading desk soon.M


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"ales and istri!ution o equity and mutualund productsL %!aps has been a leading mobilizer of funds both forpublic o?ers and private placements.

M#esearc$L This group provides the research support for in6housedepartments and for institutional clients.!esides regular updates onc o m p a n i e s a n d i n d u s t r i e s , t h e r e s e a r c h g r oup br ings out ndia%trategy,Bebt 3arket Kevie# and Baily Bebt 3arket

revie# #hichare circulated to %! aps investmentbanking and broking clients. n i t s a n n u a l r e p o r tf o r t h e y e a r e n d i n g 3 a r c h 9 ' , ) * * ) , % ! a p s r e p o r t e d t h a t i s h a s t # o b u s i n e s s s e gm e n t s J : a < 4e e b a s e d s e g m e n t providing merchant banking and advisory services like issuemanagement, under#riting, arranger, project advisory and structurednance. :b< 4und based segment #hich undertakes

deployment of fundsin leasing, hire purchase andsecurities dealing. o#ever, as a resultof %E! direct ives, fresh lending under leasingand hi re6pu rchase #asstopped from 'st

Duly '((. 4or the period )**'6*), %! aps #asrankedrst among issue managers by K3E database


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Hotak 3ahindra apital ompany!orn in '((> as part of a corporate re6organizat ion as anunl im itedcompa ny. T he Ho tak 3ah ind ra ap i

t a l o m p a n y : H 3 < , i s t h e investment bankingentity belonging to the Hotak 3ahindra ;roup. t isastrategic joint venture bet#een Hotak 3ahindra !ankGimited :H3!G


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unlistedand listed companies. n the advisorybusiness, the %tructured 4inance


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:roject 4inance I Advisory !usiness< ;roup provides e&pert ise invarious vertical segments inthe infrastructure sector including po#er, oil,gas, ports,automobiles, steel I metals and hotels by o?ering

structured nance solut ions t o c li ent s. The 4i&ed ncome %ecuri ti es ;roup atH3 advises %$s, ;overnment companies, nancial institutions, banks and corporates on raising capital by #ay of public or privateplacement of debt. H3 is credited #ith innovating on some bondstructures in the ndian market. Theadvisory group on mergersanda c q u i s i t i o n s p r o v i d e s c o m p l e t e s o l u t i o n

s on st r at e gy fo rm ul at io n identication oftargets or buyers, valuation, negotiations andb i d d i n g , c a p i t a l s t r u c t u r i n g , t r a n s a c t i o n s tr u c t u r i n g , a s s i s t a n c e i n l e g a l documentationand acquisition nancing strategiesand implementation.H3 is supported in itsfunctions by Hotak %ecurities Gtd, a brokingrmincorporated in '((> that is also a joint venture #ith

;oldman %achs#hich handles all the broking,distribution and research business of thegroup. Hotak%ecurities is a member of the debt segment of the +%Eandis also a member of the +ational %tock E&change3embers Association.Hotak %ecurities o?ers services toinvestors, nancial institutions,mutualfunds, religious and charitable trusts, insurance companies, etc. Theinstitutional business

division has a comprehensive research cell#ithsectoral analysts covering all the major areasof the ndianeconomy. nthe int ernat ional arena , i t p rovid esbrokerage serv ices on the ndiansecurities toinstitutional and other investors #ho are based outside


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ndia.Bue to i ts over seas presence, t he compa nyhas market ing int eres ts in ndian ;BK and ABKissues as #ell.


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The research products brought out by Hotak %ecuritiesincludeLM4or the inst itut ional cl ients, a product cal led A

H%E%%, #hich primarily covers secondary market broking. t caters to the needsof foreign and ndianinstitutional investors in ndian equities :bothlocal sharesand ;BKs


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#hich #as formerly a non6banking nance companythathas recently been converted into a bank, theHotak 3ahindra 3utual 4und


71/84

#hich is managed by the Hotak 3ahindra Asset3anagement o. Gtd andthe 73 Hotak Gife nsurance,#hich is a joint venture #ith 7ld 3utual lcof $H andthe Hotak 3ahindra Nenture apital o. #hich

manages the private equity fund of the group.


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Kecent Trends in nvestment !anking7ne of the trends that has been developing in thepast fe# years in theglobal and ndian investmentbanking arena, is the strong emergence of universal

banks ahead of pure investment banks as market leaders. Theseuniversal banks have the additional nancialmuscle of their bankingarms that add to theirinvestment banking strengths. ureinvestment banks have found it unmanageable to maintain leadership positions dueto di0cult market conditionsand the economic do#nturn. The year )**)has beendubbed as the #atershed year in investment banking for

over adecade. ;lobally, universal banks such as theJitigroup, D 3organhase and Beutsche !ank areemerging strongly against pureinvestment banks such as ;oldman %achs and 3organ %tanley. This trend could probably reappear in ndia as #ell#ith the emergence of %!, ,B! and Hotak 3ahindra!ank as strong universal banks. o#ever,in) * * ) , p u r e i nv e s t m e n t b a nk s s uch a s D 3 3

or ga n %t an le y an d B% 3err il l Gynch s t il l occupied top posit ions i n the investment bankingleaguetab les .%ome recent deve lopments in the invest me nt ba nk i ng in d us t r y as reported in somenancial dailies and other press clippings arelisted belo#LInternational

M The "all %treet 7 market has seen the fe#est numberof issuessince '(5 in the calendar year )**9,#ith just ve in the rst


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quarter. These have mostly been from insurance and nancia lservices rms and four of them #ere7s.M

n ) * * ) , t h e r e # a s a d r o p o f ) F i n g l o b a le q u i t y a n d e q u i t y related issuances accordingto Thomson 4inancial. 7s #ere themain causa li ty#ith a drop of 9@F to O/*./ bi l l ion.Europeanm a r k e t s a # a d r o p o f > 9 F d r op i n 7 s a n d > @ F d r o p i n convertiblebond issuances. n Europe, the market focusshiftedf r o m f u n d r a i s i n g t h r o u g h 7 s a n d

p u b l i c i s s u e s t o m o r e restructuring deals. Theseare termed as 1rescue nance2 dealssuchas r i gh t s i s su e an d f u l l y c onv er t i b l e b ond issues by t roubledcompanies .Ericsson, %onera and Purich 4inancial %ervicesaresome companies that made r ights i ssues in)**). Accord ing to Bealogic, the volume of rightsissues in Europe rose from

O)*.5 billion to O)'.> billion in )**). The most popular instrument in$%A and Europe has been the 1mandatory convert ible2 :ful lyconvert ible< bond #hichis considered as a for#ard share sales#hich issuperior in nature to a rights issue.M

The itigroup #as "all %treet2s top stock and bondunder#riter in)**). itigroup a0 liates %alomon

%mith !arney arrangedO@'@ billion of o?erings #ith a '*./F market share according toThomson 4inancial. 3errill Gynch and %4! #ereranked secondand third respectively. o#ever, the totalunder#riting pie fell by>F during the same year.M


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The top 7 investment bank in )**) #as %alomon %mith!arneyfollo#ed by ;oldman %achs. ;oldman arrangedthe largest 7 of

)**), the O@./ bil l ion T ;roup nc. :Tyconternational Gtd


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boom in technology stocks. Bueto the meltdo#n, manyinvestment banks have felt it necessary tospin o? theirprivate equity operations into separate entities.!+aribas, Beutsche !ank, %! and Purich 4inancial

%ervices aresome of these banks.


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MAmerican investors poured more money into debt mutualfunds in)**) accounting to O'99 bil l ion andthere #ere fe# takers for public issues of equity

junk bonds and convertible bonds.%ationalMBuring the year )**', D3 3organ %tanley #hichacted as adviser to3IA deals #orth Ks.'/*)) crore#as rated the top investmentbank i n nd ia . The o th e r p l a ye r s i n t he b ig l ea g u e # e r e A ! + 6 A m ro : K s . ' * @ / * c r o r e < , B %

3 e r r i l l Gy n c h : K s . 5 ' 9 * c r o re < , A r t h u r A n d e rs e n : n o # p a r t o f E I - , K s . 9 > 9 ) c r o r e < , Ho t ak 3 a h i n d r a : K s . ' 5 ' ( c r o r e < , K a b o n d i a 4 i n ance :Ks .9 9 c ro re < and Gaz a rdap it al :Ks .>9/ crore< J:as reported in the Economic Times)'st +ovember )**' mil l ion ;BKs #hich arel istedatG u & e mb o u r g % t o c k E & c h a n g e . n t h i s m a r ket, it ibank #as theleading depository banks

according to nstane& apital onsultants.This #asfol lo#ed by !ank of +e# -ork, Beutsche !ankand D3organ.Mn the 3IA market, the year )**) sa# an increaseof around >F inthe value of 3IA deals in nda.


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Among these, more than >*F #erec ro s s 6b o r d e r d e a l s a c c o r d i n g t o a s u r v e y c o n d u c te d b y H 3 ; orporate 4inance. The deals #eremostly in the %3E segment #ithaverage size not

e&ceeding O)> million. The banking, nance and

insurance sectors contributed almost one6third ofthe total volume.rivatization deals also played asignicant part.MB%63G de6l isted from the stock e&changesince its promoters,emendra Hothari and 3errill

Gynch together held more than (*F of the shares. B%#as rated the 1The !est Bomestic nvestment!ank2i n n d i a f o r ) * * * b y 4 i n a n c e A s i a . Eu r o m o n e y v o t e d i t 1 ! e s t Bomest ic 3IAouse in ndia2 as #el l as 1!est BomesticEquityouse in ndia2 in )***. This distinction hasreturned for three yearsin a ro# #ith B%63G beingnamed as the 1!est Bomestic

%ecuritiesouse2 and 1!est Bomestic nvestment!ank2 for )**)6)**9 byAsiamoney :3ay )**9issue< and The Asset : Danuary )**9issue


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The on=ict of nterest ssue The most burning global issue in the investment bankingindustry is that of con=ict of interest bet#een

investment bankers and their researchanalysisdivisions. n the #ake of the Enron, "orldcomand other corporatedisasters,t he is s ue ha s g a i ne d s om e s ig ni canc e. Th e % ec ur i t ie s an d E& ch an ge ommissionin the $%A :%E< have initiated investigations intoinstances of investment banks issuing over6optimisticresearch and steering shares in hot7s to important

clients for vested interests. n such investigations someof the banks have been imposed nes. 3errill Gynch paidup nes to thee&tento f O' ** mi l l i o n in reg u l a t o r y pro ce ed ings in )**) brought aga inst i t smis lead ingresearch reports. itigroup2s %alomon %mith !arneyis also inthe dock and may nd itself paying the heaviestnes. %4! also nds itself in trouble #ith the regulators.

3ost of the other top investment banks suchas J;oldman %achs, Gehman !rothers, !ear %terns,Beut sche !ank , D3organ hase and others alsofound their names in the nes list in )**).%4! #asned for misleading investors on o?erings in technologyshares.D 3organ on the other hand, has beenunder a cloud for its role in theinfamous o?6balance sheet partnership it had crafted for

Enron.!esides, investment banks have also been thetarget of several la#suits led by aggrieved investors. nlate )**), the 4rench lu&ury goods leader GN3led a'** million euro la#suit against 3organ %tanleyalleging that itsresearch report on GN3 #as biasedbecause of the investment bank2s closeadvisory


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relationship #ith GN32s arch rival ;ucci ;roup +N.3organ%tanley #as also the under#riter of ;ucci2s 7 in'((>

!oth the +-%E and +A%BAC came out #ith 1researchanalysts2 con=ict of interest rul es2 in 3ay )**)#hich #as subsequently approved by

%E.3arket observers have felt that this is a gooddevelopment from the point of v ie# of addressingcon= ict of interest, currently a burning issue intheindustry. "hile an investment bank may beadvising a client on a buy out,its private equity armmay be in the fray for its purchase. An e&ample ofthis#as t he sa le of the po#er storage bus inessof nvensys in )**' #herein3organ %tanley

#as the advisor in the O>*> mil l ion sale toEner%ys acompany o#ned by 3organ %tanleyapital artners :3organ %tanley2s private equityrm


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Alternatively, it could also be that the analystis privy toinsider information being provided by theirmerchantbank ingd iv i s ion and there upon i ssue recom

men da t i on s th a t co u l d am oun t to fraudulentdeceit of investors or gains for select fe#. 7ver theyears,thee t h i ca l # a l l b e t #e e n m e r cha n t b a nk e r s and re se ar c h an al y st s me lt ed especially in theheat of the 7 and the internet boom. Thecompensation patterns of the investment bankers and research analyst #ere also gettingcomplementary to an

e&tent thus undermining their independence.

A study #as conducted by t he %E in )**'on1ful l serv ice investment banks2 in "all %treetfocusing on these con=ictingrelationships. The studydisclosed t#o main areas ofcon=ictJ:a< research recommendations tendingto

become marketing tools for merchant bankingassignments by thesame bank and analysts getting paid share of such investment banking gains, :b


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merchant banking departments and research divisions. The third area has been theregulation of compensatorystructures for research analysts based onthe prots of the merchant banking divisions. The develo

pments in the $%Ahave also resulted in precautionaryamendments to regulations made inndia by %E! though such instances of con=ict of interesthave not surfaced sofar. %E! has amended theregulations that have been in place for 3erchant!ankers,$nder#riters and for the prohibition of insider trading. Asa result,analysts are barred from private trading in sharesthey analyze. There is stillroom for more regulation in

future in this area of importance for the survivalof theinvestment banking industry.n conclusion, it can besaid that the investment banking industry hasbeenthrough di0cult times. 7n one hand, the economicslo# do#n and the crashof the markets that #erepropelled to dizzy heights by the ne# economy


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%tock have battered their bottom lines and led tolarge scale cut back in sta? and operation on theother hand, role of investment banks in corporatescandals and their questionable business practices

and ethics have taken a toll on their reputation andimage. A large scale cleaning up has to take placein their method of #orking and services o?ering.%imilarly, a major resurrection of their condence isrequired through resurgence of the market,#herever that happens. n the meantime, theindustry has to live up to the challenge throughappropriate restructuring and consolidation.


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Conclusion;iven the scope for investment banking in ndia, thefuture looks bright for the indus try as a #ho le in

ndia. 3any more pure investment banksandadvisory rms could convert themselves into fullservice investment banksthat #ould broaden themarket and make the service delivery muchmoree0 cient. n addition, the technological andmarket developments shapingthe capi ta l marketas discussed #ould also provide an addedimpet us togro#th of investment banking. !etter

regulatory supervision and stricter enforcement ofthe code of conduct of market intermediaries #ouldensurethat better quality issuers come to themarket and e&isting issuers #ouldfollo# enhancedstandards of corporate governance. n the long run, allthesedevelopments #ould ensure fair return to investors,and bring back investor support to the market . This#ould augur #el l for the capital market

ingeneral and investment banking in particular.


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