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INVE$TMENT
BANKING
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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.
Worlds oldest known bank has its roots in
Italy. Its The Monte di Piet, or Monte Pio set
up in 1472.
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The need for Investment Banks
First stock market in Antwerp Belgium in 1531 sansthe stock!!
Limited liabilities companies came into existence in the1600s to sponsor trade voyages to the East Indies fromcountries such as Britain, France etc.
Investors spread their risk by investing in severaldifferent ventures at the same time, thereby playingthe 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 outsideinvestors to purchase shares.
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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.
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Investment banks help companies andgovernments and their agencies to raise moneyby issuing and selling securities in the primary
market. They assist public and private corporations in
raising funds in the capital markets (both equityand debt),
as well as in providing strategic advisory servicesfor mergers, acquisitions and other types offinancial transactions.
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Whats the Difference??
Commercial Bank
Individual or small to mid
sized companies.
Loans to buy a house orfuture education etc.
Bank- Creditor & General
Public Debtor
Earns money through theinterest charged on loans
Investment Bank
Companies/ Start-ups
Borrows to finance thegrowth of a company.
Investors Creditor &
Companies Debtor
Earns money through thefees charged for providing
services
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Why an Investment Bank
It performs the following functions
Raise Capital PortfolioManagement
M & A Research
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Principal Businesses of Investment
Banks Arranges financing for corporations and governments.
1] Debt
2] Equity
3] Convertibles
Advises on mergers and acquisitions (M&A) transactions. Asset Management Business
1] Offers equity, fixed income, alternative investments, andmoney market investment products and services to individual
and institutional clients2] For alternative investment products, the firm co-investswith clients in hedge fund, private equity and real estate funds
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Principal Businesses of Investment
Banks
Client Trading
Sells and trades securities
and other financial assets
as intermediary on behalfof investing clients.
Proprietary Trading
Investment activity by the
firm that affects the firm'saccounts, but does not
involve investing clients.
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Investment Banking In India
SBI was the first Indian public sector bank to setup its investment banking division in 1972.
SBI Caps and IDBI Caps are two prime examplesof investment banks in India today.
Currently, there are 300 investment banksregistered with SEBI.
Currently, without holding a certificate ofregistrationgranted by the Securities and Exchange Board ofIndia,no person can act as a investment banker.
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Investments in
India
0
2000
4000
6000
8000
10000
12000
14000
16000
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Deal Value in Million
Source www.livemint.com
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Companies
Start-ups
Mid-sized firms
Large firms
Govt. InstitutionsCommercial 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
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Value Parameters
1] ROI
2] Network
3]Risk factor
4]Fees/Charge/Cost
5]Familiarity/Relationship6]Experience of the bank & the banker
7]Performance
8] Industry Knowledge
9] Personal Attention
10]Time taken to close a deal
http://www.ft.com
The Banker Sept 2011
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Venture Capital n Investment Bank
New Business Venture Capital
Expansion Venture Capital withIB acting as the intermediary
Exit Option Through IPOshandled by the IBs
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FRONT OFFICE
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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 andsell financial products with the goal of making anincremental amount of money on each trade.
Sales desks communicate their clients' orders to the
appropriate trading desks, who can price and executetrades, or structure new products that fit a specificneed.
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Brokerage Rates
Firm Brokerage for Delivery Brokerage for Intraday trading
SBICAP Securities
brokerage charges 0.50% 0.10%
Sharekhan
brokerage charges0.03% - 0.50% 0.03% - 0.10%
Motilal Oswal
brokerage charges0.30% - 0.50% 0.03% - 0.15%
Angel Brokingbrokerage charges
0.50% 0.02% - 0.03%
ICICI direct
brokerage charges0.75% 0.15%
HDFC Securities
brokerage charges0.50% 0.15%
Religare
brokerage charges0.20% - 0.30% 0.02% - 0.03%
Reliance Money
brokerage charges0.01% 0.01%
www.niftyprediction.blogspot.com
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Research is the division which reviewscompanies and writes reports about theirprospects, often with "buy" or "sell" ratings.
Structuring has been a relatively recentdivision as derivatives have come into play,which involves creating complex structuredproducts which typically offer much greatermargins and returns than underlying cashsecurities.
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MIDDLE OFFICE
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Middle Office
Middle office usually consists of traders, analysts, andmanagers who are knowledgeable of trading activitiesbut usually dont engage in market activities
themselves. ( Chinese Wall Policy)Risk Management involves
analyzing the market and credit risk that traders aretaking onto the balance sheet in conducting their dailytrades,
setting limits on the amount of capital that they areable to trade in order to prevent 'bad' trades having adetrimental effect to a desk overall.
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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) correctlyand on time (typically within 30 minutes of
trade execution).
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BACK OFFICE
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Back Office
Operations involves data-checking trades thathave been conducted, ensuring that they arenot erroneous, and transacting the required
transfers. Every major investment bank has considerable
amounts of in-house software, created by theTechnology team, who are also responsible forComputer and Telecommunications-basedsupport.
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IPOs by Region and Globally
0
20
40
60
80
100
120
140
160
180
200
2007 2008 2009 2010 2011
Europe
USA
Asia Pacific
Source The Banker Sept 2011 Issue
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Front End Process (IPO)
1. Company asks for bids
2. Selecting lead managers as per bids
3. Prepare draft offer prospectus document for IPO.
4. Road shows for the IPO
5. Decide the issue date & issue price band with the help ofIssuer Company
6. RHP & IPO Application Forms are printed and posted tosyndicate members; through which they are distributed toinvestors
7. Investor Bidding for the public issue
8. Allocation of shares as per demand
9. Stocks listed on the market
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Institutions/Individuals in IPO process
Lead managers,also known as Book Running Lead Managerand 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, QualifiedInstitutional Bidders (QIB's).)
Advertising agencies.
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Back-end process of an IPO
1) 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 Role3) SEBI Prospectus Review
SEBI reviews draft offer prospectus.
Reverts it back to Lead Manager if needs clarificationor changes.
SEBI approve the draft offer prospectus, the draftoffer prospectus is now become Offer Prospectus.
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Back-end process of an IPO contd..
4) IPO should be graded by a CRA
5) Preparation of Red Herring prospectus
6) Investor Bidding for the public issue7) Lead Manager Price Fixing
8) Registrar - Processing IPO Applications
9) Lead manager Stock Listing
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MARKETING OF IPO
Press Conference
Investors Conference
The prospective investors are called by invitation.The Promoters and Lead Managers give
presentations. They reply to the questions of theinvestors to boost their confidence. HNI are called.Top brokers are also called.
Road ShowsRoad shows are becoming more and more popular
in India.
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MARKETING OF IPO contd..
Newspaper Advertisements.
Printing Prospectus.
The company has to print approved prospectus and provideenough copies to all intermediaries. If any investor asks for a
copy of prospectus it must be provided to him without anyfees. Sufficient quantities should be maintained at theregistered office of the company and with the Lead Managers.
Printing Application Forms
Sufficient number of application forms must be printed much
before the opening of the issue. Each form must containabridged prospectus in SEBI approved format. It is compulsoryto provide stationery to all underwriters and brokers. They willarrange distribution to their sub- brokers and other clients
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MARKETING OF IPO contd..
The reputation of a merchant banker could
expand a firms investor base at a lower cost
than the firm can, since the promotional
efforts of a merchant banker on behalf of thefirm would be more creditable.
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Networking and Promotions
Customer Relationship Managers building the trust
Networking via already existing clients
Pitching by interaction with the CEOs and CFOs ofcompanies
Hiring people from other firms with strong networkand good customer relationships
Holding roadshows
Holding seminars to attract investors
Structured products and services to attract customers .Eg. ICICIdirect money Kitchen
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Need Gaps in the IB sector
Front EndIB is still at a very nascent stage in India andhence needs to be developed and promotedproperly.
The trust factor is still not been built up amongstthe companies and investors. Here there is needof trained analysts to do the same.
Lack of Investor knowhow
Still concentrated only on the metros. Need tomove to the tier-2 and tier-3 cities to tap in morepotential investors.
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Back End
Need to develop more robust risk
management systems.
Use of better technology and systems required
for 2 main purposes
1. To keep track of an investors database better
2. Bring in faster and more intelligent systems
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Thank You
Shweta Kucheria
Ram ShuklaAnand Kumar Mishra
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