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[Investment Banking][Pakistan]

Salman Ahmed (09)

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Presented to:

Prof Shehla Sohail

Presented by:

Salman Ahmed

Roll No. (09)

Investment Banking In Pakistan

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ACKNOWLEDGEMENT

The most important acknowledge is to our Lord Most Merciful Most Wise by Whose mercy

we were able to begin this project, His Mercy is such that unworthy slaves like ourselves are

given the ability to work hard and to be grateful towards all He has given us.

Allah states in the Quran:

"Then remember Me; I will remember you.

Be grateful to Me,

And do not reject Me"

(Ch#2: V# 152)

We would like to express our love, gratitude and sincere regards to the following person to

whom we are grateful for her support and help without which we would not have been

able to make this Project.

Prof. Shehla Sohail. (IBA P.U.)

May Allah accept our humble!

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1. Introduction:

This assignment will analyze the investment banking scenario of Pakistan. Assignment discusses the beginning of investment banking in Pakistan and scope of it. Global and Pakistan’s investment banking regulations are discussed and emerging model of investment banking in Pakistan and its critical success factors are discussed in this.

1.1. The Beginning:

Investment Banking in Pakistan is a nascent industry that takes its roots to 1987. On September17, 1987 the Government of Pakistan issued a notification, SRO 585(1) 87 under which the private sector could establish Investment Banks and Investment Finance Companies.

1.2. Scope of Investment Banks:

The scope of the Investment Banks' activities as described under SRO 585(1)87 is as follows:

Money Market activities, including the issuance of short term COIsor own paper of not less than 30 days maturity;

Capital Market activities, including trading in equity and non-equity instruments, underwriting floating and managing mutual funds, providing margin loans and offering cash management accounts;

Project Financing through investments in projects and the provision of guarantees; and

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Corporate Financial Services, such as advisory, Placement of Debt and Equity, locally and abroad.

2. Investment Banking Regulations:

2.1. Global:

Historically, in the developed countries, Investment Banks were given protection by restricting the Commercial Banks from getting into high-risk activities pertaining to Capital Markets and those activities were left for more specialized Investment Banks. By the time those restrictions were removed (Sixty six years later 1933 -1999), Investment Banking Sector had already grown to the size that could defend for themselves and compete with large Commercial Banks. In the US, the Glass-Steag-all Act of 1933 prevented conflict of interest between Commercial Banks and Investment Banks. It restricted the asset powers of Commercial Banks to underwrite, buy and resell risky business securities and Investment Banks were prohibited from engaging in Commercial Banks' businesses.

2.2. Pakistan:

Although Investment Banks in Pakistan have never favored or demanded Industry Specific Protection Regimes, the fact remains that in the pre SECP era, Investment Banks were not provided any protection as was available in other developed countries, at the

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infancy stage. Another reason why the Investment Banks in Pakistan could not flourish initially was because it was perceived that Investment Banking was about mega Mergers and High-Worth activities only, which were not available in the Country at that time. The relatively lower end activities like Intermediation in Securities (Brokerage) were not focused upon by Investment Banks at that early stage.

3. Investment Banks in Pakistan:

1.    BMA Capital Management Limited

2.    Invest Capital Investment Bank Limited

3.    AMZ Securities

4.    Orix Leasing (Pakistan) Limited

5.    Trust Investment Bank Limited

6.    JS Investment Bank Limited

7.    Atlas Investment Bank Limited

4. Emerging Model for Investment Banks in Pakistan

In today’s dynamic financial sector, sustainable success is most likely to be achieved by those institutions that take the broadest view of their responsibilities. Most of the Investment Banks have made a conscientious choice to remain Investment Banks within the new NBFC Structure, designed and regulated by the SECP.

Their emerging Product / Services Matrix would look as hereunder:

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Investment Banks continue to provide a full array of capital market products and advisory services. Specifically Investment Banks offer research, trading, structuring and distribution capabilities of Equity and Fixed Income Products. Most Investment Banks continue to focus on building its client/customer Business Model. These customer flow activities represent a majority of the investment banking revenues. In addition to its customer flow activities, the Investment Banks also take Proprietary Positions, the success of which is dependent on their ability to anticipate economic and market trends.

5. Typical Business Segments of Investment Banks in Pakistan

5.1.Corporate Finance/Advisory Services:

Most investment Banks in Pakistan boast an active Corporate Finance Services Suite as part

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of their daily operations. Investment banks via their Corporate Finance Operations are responsible for developing and maintaining relationships with issuing clients, gaining a thorough understanding of their specific borrowing needs.

5.2. Description of Typical Corporate Finance Activities:

Arrangement of Syndicated facilities underwriting of public debt/equity issues

Issuance of Corporate Bonds (known as Term Finance Certificates in Pakistan) for Corporate Entities

Financial Advisory Services with regard to new Projects, Mergers, Acquisitions and new Equity Issues

Trusteeship -engaged in acting as Trustees for privately placed or public issues of TFCs.

Strategic Advisory to GOP on privatization of SOE's.

5.3. Focus for the Future:

Continued focus on pursuing Corporate Debt Market through Advisory and Underwriting Arrangements in new TFC issues

Aggressive marketing in Corporate Finance by operating avenues for Syndications and role of Advisor & Arranger

Advisory on M&A Continued aggressive focus on Trusteeship Leverage itself through conventional as well as non conventional

sources like Discounting, Asset Securitization, etc Advisory services to project financing and sick unit revival

5.4. Credit & Asset Side Activities of Investment Banks:

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Investment Banks' credit activities engage in three primary functions: managing in matching book activities, supplying secured financing to customers, (although not clearly stated in the rules of Business of SECP) and providing funding for the ongoing activities. Matched book funding involves borrowing and lending cash on a short-term basis to institutional customers collateralized by marketable securities, typically government or corporate debt securities. Similarly Investment Banks enter into Agreements to generate profits from the difference between interest earned and interest paid. It is typical for Investment Banks to work within other departments namely Corporate Finance and Treasury to identify customer that have cash to invest and/or securities to pledge to meet the financing and investment objectives.

 

5.5. Description of Typical Credit Activities:

Margin Financing Short / Long Term Finance facilities Purchase of invoice / Bill Discounting facilities Bankers Acceptances Some Investment Banks have entered into Musharakah (profit & loss

sharing) transactions with firms engaged in the business of trading of commodities

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6. Road Map and Critical

Success Factor

The matrix below sets out the Five-Year Road Map for the Investment Banking Sector. These basic factors are integral for each institution in order to accomplish the overall Vision of the Sector. The Roadmap is followed by the key Critical Success Factors, which are vital for the successful implementation of the Roadmap.

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Tasks 2006 2007 2008 2009 2010

Revitalizing IBAP as a vehicle for self regulation / development / promotion / facilitation of Investment Banking Sector with specific emphasis on Advisory Services and Services related to Money & Capital Markets

Maintain an ongoing interaction with the SECP in order to promote higher standards of Governance and Best Business Practices

Develop a Code of Conduct for members of IBAP and build a consensus on setting out minimal acceptable parameters

Build on our success, both in terms of Financial Indicators as well as Qualitative aspects

Further widen the spectrum of Products & Services, based on contemporary International Financial Structures

Product Innovations and Diversifications

Geographical Diversification

Conduct Road Shows / Seminars / Conferences in Smaller Cities to create Investor awareness and improve the breadth of Capital Markets

Conduct Investment Conferences abroad at major financial centers of the world to promote investment in Pakistan in key Sectors e.g. Oil & Gas, Power, Telecom, Textiles

Advise GOP and potential foreign and / or local investors on Privatization and Joint Venture Opportunities

To build a partnership with Local and International Universities / Business Schools, Institute of Bankers in Pakistan, National Institute of Banking and Finance for aligning Financial and Business curricula to the specific practical requirements of the Investment

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Banking Industry including Certification of professionals working in the Capital Market Operations etc.

Develop a working relationship with similar Associations like LIBA, SIBA, etc

Work towards development of quality human resource

Automation and Work Process Re‐engineering

Compete effectively through even greater cost efficiency

Develop execution ability, pricing, advertising and sales efforts and the skills of its personnel

7. Critical Success Factors

In order to implement the essence of Investment Banking in Pakistan, it is imperative that not only should the Sector's Vision be shared by all the Stakeholders but complete support with respect o the following critical issues should be provided:

Enabling Regulatory Environment in general Consistency of Policies by the Regulators, in particular and Government

of Pakistan (GOP) in general Removal of the irritant relating to renewal of license on yearly basis

(especially in the presence of negative clauses in the Rules) Resolution of Issues arising out of Accounting Treatment of New

Investment Banking Products e.g. interpretation / calculation of Exposures Limits and netting off of Future Sales / Purchases

Quality of Governance at the Stock Exchanges Rationalization of newly imposed taxes on Stock Market transactions Immediate resolution of Long outstanding issues of Rate of Taxation

(Company Vs. Banking Company Rate)

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Conducive, consistent & stable macro economic conditions Enabling environment for Foreign Investment e.g. Law and Order,

Issues related to Country image The imperative of “Level Playing Field” and uniform “Application of

Specialized Regulation” should be provided. The Investment Banking activities of Commercial Banks should be brought into the Specialized Regulatory Jurisdiction of SECP by directing the Commercial Banks to incorporate separate Investment Banking Subsidiaries

The will of the Regulators and GOP to see through the Implementation of the current set of Reforms and induction of the next Generation of Reforms

8. Conclusion:

Assignment discusses the beginning of investment banking in Pakistan and scope of it. Global and Pakistan’s investment banking regulations are discussed and emerging model of investment banking in Pakistan and its critical success factors are discussed in this.