Investment Banking

Investment Bank means that a bank which deals with the underwriting of new issues and advises corporations on their financial affairs. In other words, it describes a financial institution that underwrites corporations and government sectors that issue bonds, treasury bills, and stocks. The financial institution handles acquisitions, mergers, and corporate restructuring. Investment banks work mainly with corporations, and not with individual investors or small businesses How investment banking works? This type of investing works when the client purchases assets from the bank. The bank then must invest clients money and use it toward business ventures. Clients expect that their purchased asset capital will grow and gain dividends. The main job of investment banks is to advise corporations about funds and raising money. Some do this by selling the companys equity and others do so by offering advice about debt issues. Types of Investment Banking firms A bulge bracket firm is a term to describe banks that comprise 15,000 to 50,000 employees throughout the world. Smaller firms are known as boutique investment banks, and have between 500 and 3,000 employees. These days, boutique investment banks are starting to make their mark on the technology industry. Many of these smaller investment banks tend to narrow down their niche securities, and many of them have been merging their resources with the tech industry Major Global Investment Banks Banco Santander, Bank of America, Barclays, JP Morgan Chase, Citigroup, Deutsche Bank, Goldman Sachs, Kotak Mahindra, Merrill Lynch, Scotia Capital, UBS, and Wells Fargo.

Functions of investment banker

Management of Debt and Equity Offerings: This forms the main function of the merchant banker. He assists the companies in raising funds from the market. The undergoing tasks include instrument designing, pricing the issue, registration of the offer document, underwriting support, marketing of the issue, allotment and refund and listing on stock exchanges. Placement and Distribution: The merchant banker helps in distributing various securities like equity shares, debt instruments, mutual funds, insurance products, and commercial paper, to name a few. The distribution network of the merchant banker can be classified as institutional and retail in nature. The institutional network consists of mutual funds, foreign institutional investors; private equity funds pension funds, financial institutions, etc. Corporate Advisory Services: Merchant bankers offer customized solutions to their clients financial problems. Financial structuring includes determining the right debt-equity ratio and the framing of appropriate capital structure theory. Project Advisory Services: Merchant bankers help their clients in various stages of the project undertaken by the clients. They assist them in conceptualizing the project idea in the initial stage. Once the idea is formed, they conduct feasibility studies to examine the viability of the proposed project. Loan Syndication: Merchant bankers arrange to tie up loans for their clients. This takes place in a series of steps. Firstly, they analyze the pattern of the clients cash flows, based on which the terms of the borrowings can be defined. Then the merchant banker prepares a detailed loan memorandum, which is circulated to various banks and financial institutions and they are invited to participate in the syndicate. The banks then negotiate the terms of lending on the basis of which the final allocation is done. Providing Venture Capital Financing: Merchant bankers help companies in obtaining venture capital financing for financing their new and innovative strategies.

Investment Banking Role:

1. Initial public offerings : An initial public offering (IPO) is the process by which a private company transforms itself into a public Company. The company offers, for the first time, shares of its equity (ownership) to the investing public. These shares subsequently trade on a public stock exchange like the New York Stock Exchange (NYSE) or the NASDAQ.

The first question you may ask is why a company would want to go public. Many private companies succeed remarkably well as privately owned enterprises. One privately held company, Cargill, tops $50 billion in revenue each year. And until recently, Wall Street's leading investment bank, Goldman Sachs, was a private company. However, for many private companies, a day of reckoning comes for the owners when they decide to sell a portion of their ownership in their firm. The primary reason for going through the rigors of an IPO is to raise cash to fund the growth of a company. For example, industry observers believe that Goldman Sachs' partners wished to at least have available a publicly traded currency (the stock in the company) with which to acquire other financial services firms. From an investment banking perspective, the IPO process consists of these three major phases: hiring the mangers, due diligence, and marketing. Hiring the Managers. The first step for a company wishing to go public is to hire managers for its offering. This choosing of an investment bank is often referred to as a "beauty contest." Typically, this process involves meeting with and interviewing investment bankers from different firms, discussing the firm's reasons for going public, and ultimately nailing down a valuation. In making a valuation, I-bankers, through a mix of art and science, pitch to the company wishing to go public what they believe the firm is worth, and therefore how much stock it can realistically sell. Perhaps understandably, companies often choose the bank that provides the highest valuation during this beauty contest phase instead of the best-qualified manager. Almost all IPO candidates select two or more investment banks to manage the IPO process. Due Diligence and Drafting. Once managers are selected, the second phase of the process begins. For investment bankers on the deal, this phase involves understanding the company's business as well as possible scenarios (called due diligence), and then filing the legal documents as required by the SEC. The SEC legal form used by a company issuing new public securities is called the S-1 (or prospectus) and requires quite a bit of effort to draft. Lawyers, accountants, I-bankers, and of course company management must all toil for countless hours to complete the S-1 in a timely manner. Marketing the third phase of an IPO is the marketing phase. Once the SEC has approved the prospectus, the company embarks on a road show to sell the deal. A road show involves flying the company's management coast to coast (and often to Europe) to visit institutional investors potentially interested in buying shares in the offering. Typical road shows last from two to three weeks, and involve meeting literally hundreds of investors, who listen to the company's canned presentation, and then ask scrutinizing questions. Often, money managers decide whether or not to invest thousands of dollars in a company within just a few minutes of a presentation. The marketing phase ends abruptly with the placement of the stock, which results in a new security trading in the market. Successful IPOs trade up on their first day (increase in share price), and tend to succeed over the course of the next few quarters. Young public companies that miss their numbers are dealt with harshly by institutional investors, who not only sell the stock, causing it to drop precipitously, but also blame management and lose faith in the management team.

2. Follow-on offerings: A company that is already publicly traded will sometimes sell stock to the public again. This type of offering is called a follow-on offering, or a secondary offering. One reason for a followon offering is the same as a major reason for the initial offering: a company may be growing rapidly, either by making acquisitions or by internal growth, and may simply require additional capital. Another reason that a company would issue a follow-on offering is similar to the cashing out scenario in the IPO. In a secondary offering, a large existing shareholder (usually the largest shareholder, say, the CEO) may wish to sell a large block of stock in one fell swoop. The reason for this is that this must be done through an additional offering (rather than through a simple sale on the stock market through a broker), is that a company may have shareholders with unregistered stock who wish to sell large blocks of their shares. By 19 SEC decree, all stock must first be registered by filing an S-1 (or S-2) document before it can trade on a public stock exchange. Thus, pre-IPO shareholders who do not sell shares in the initial offering hold what is called unregistered stock, and are restricted from selling large blocks unless the company files an S-2 form. (The equity owners who hold the shares sold in an offering, whether it be an IPO or a follow-on, are called the selling shareholders.) An Example of a Follow-on Offering: "New" and "Old" Shares There are two types of shares that are sold in secondary offerings. When a company requires additional growth capital, it sells "new" shares to the public. When an existing shareholder wishes to sell a huge block of stock, "old" shares are sold to the public. Follow-on offerings often include both types of shares. Let's look at an example. Suppose Acme Company wished to raise $100 million to fund certain growth prospects. Suppose that at the same time, its biggest shareholder, a venture capital firm, was looking to "cash out," or sell its stock. Assume the firm already had 100 million shares of stock trading in the market. Let's also say that Acme's stock price traded most recently at $10 per share. The current market value of the firm's equity is: $10 x 100,000,000 shares = $1,000,000,000 ($1 billion) Say XYZ Venture Capitalists owned 10 million shares (comprising 10 percent of the firm's equity pre-deal). They want to sell all of their equity in the firm, or the entire 10 million shares. And to raise $100 million of new capital, Acme would have to sell 10 million additional (or new) shares of stock to the public. These shares would be newly created during the offering process. In fact, the prospectus for the follow-on, called an S-2 (as opposed to the S-1 for the IPO), legally "registers" the stock with the SEC, authorizing the sale of stock to investors. The total size of the deal would thus be 20 million shares, 10 million of which are "new" and 10 million of which are coming from the selling shareholders, the VC firm. Interestingly, because of the additional shares and what is called "dilution of earnings" or "dilution of EPS," stock prices typically trade down upon a follow on offering announcement. (Of course, this only happens if the stock to be issued in the deal is "new" stock.) After this secondary offering is completed, Acme would have 110 million shares outstanding, and its market value will be $1.1 billion if the stock remains at $10 per share. And, the shares sold by XYZ Venture Capitalists will now be in the hands of new investors in the form of freely tradable securities.

Market Reaction. What happens when a company announces a secondary offering indicates the market's tolerance for additional equity. Because more shares of stock "dilute" the old shareholders, the stock price usually drops on the announcement of a follow-on offering. Dilution occurs because earnings per share (EPS) in the future will decline, simply based on the fact that more shares will exist post-deal. And since EPS drives stock prices, the share price generally drops. The Process. The follow-on offering process changes little from that of an IPO, and actually is far less complicated. Since underwriters have already represented the company in an IPO, a company often chooses the same managers, thus making the hiring the manager or beauty contest phase much simpler. Also, no valuation is required (the market now values the firm's stock), a prospectus has already been written, and a road show presentation already prepared. Modifications to the prospectus and the roadshow demand the most time in a follow-on offering, but still can usually be completed with a fraction of the effort required for an initial offering.

3. Bond offerings: When a company requires capital, it sometimes chooses to issue public debt instead of equity. Almost always, however, a firm undergoing a public bond deal will already have stock trading in the market. (It is very rare for a private company to issue bonds before its IPO.) The reasons for issuing bonds rather than stock are various. Perhaps the stock price of the issuer is down, and thus a bond issue is a better alternative. Or perhaps the firm does not wish to dilute its existing shareholders by issuing more equity. These are both valid reasons for issuing bonds rather than equity. Sometimes in down markets, investor appetite for public offerings dwindles to the point where an equity deal just could not get done (investors would not buy the issue). The bond offering process resembles the IPO process. The primary difference lies in: (1) the focus of the prospectus (a prospectus for a bond offering will emphasize the company's stability and steady cash flow, whereas a stock prospectus will usually play up the company's growth and expansion opportunities), and (2) the importance of the bond's credit rating (the company will want to obtain a favorable credit rating from a debt rating agency like S&P or Moody's, with the help of the credit department of the investment bank issuing the bond; the bank's credit department will negotiate with the rating agencies to obtain the best possible rating). As covered in Chapter 5, the better the credit rating - and therefore, the safer the bonds the lower the interest rate the company must pay on the bonds to entice investors debt rating on the issue. Clearly, a firm issuing debt will want to have the highest possible bond rating, and hence pay a low interest rate (or yield).

Mergers & acquisitions:

In the 1980s, hostile takeovers and LBO acquisitions were all the rage. Companies sought to acquire others through aggressive stock purchases and cared little about the target company's concerns. The 1990s were the decade of friendly mergers, dominated by a few sectors in the economy. Mergers in the telecommunications, financial services, and technology industries have been commanding headlines as these sectors go through dramatic change, both regulatory and financial. But giant mergers have been occurring in virtually every industry (witness the biggest of them all, the merger between Exxon and Mobil). M&A business has been consistently brisk, as demands to go global, to keep pace with the competition, and to expand earnings by any possible means have been foremost in the minds of CEOs. After a slow period, LBOs have experienced resurgence in recent years. According to The Daily Deal, LBO funds raised over $120 billion from 1997-2000. "If the public markets won't validate a strong business model, the private markets usually will," J.P. Morgan market strategist Doug Cliggott told The Street.com in March 2000. "As some very well-run companies start to trade at three or four times earnings, I don't see how we won't see a groundswell of leveraged buyouts." As boom markets suffered "corrections" in the spring of 2000 many industry analysts predict that sinking stock prices would yield leverage buyouts. When a public company acquires another public company, the target company's stock often shoots through the roof while the acquiring company's stock often declines. Why? One must realize that existing shareholders must be convinced to sell their stock. Few shareholders are willing to sell their stock to an acquirer without first being paid a premium on the current stock price. In addition, shareholders must also capture a takeover premium to relinquish control over the stock. The large shareholders of the target company typically demand such an extraction. For example, the management of the selling company may require a substantial premium to give up control of their firm. M&A transactions can be roughly divided into either mergers or acquisitions. These terms are often used interchangeably in the press, and the actual legal difference between the two involves arcane of accounting procedures, but we can still draw a rough difference between the two. Acquisition - When a larger company takes over another (smaller firm) and clearly becomes the new owner, the purchase is called an acquisition. Typically, the target company ceases to exist post-transaction (from a 21 legal corporation point of view) and the acquiring corporation swallows the business. The stock of the acquiring company continues to be traded. Merger - A merger occurs when two companies, often roughly of the same size, combine to create a new company. Such a situation is often called a merger of equals. Both companies' stocks are tendered (or given up), and new company stock is issued in its place. For example, both Chrysler and Daimler-Benz ceased to exist when their firms merged, and a new combined company, DaimlerChrysler was created. M&A advisory services For an I-bank, M&A advising is highly profitable, and there are many possibilities for types of transactions. Perhaps a small private company's owner/manager wishes to sell out for cash and retire. Or perhaps a big public firm aims to buy a competitor through a stock swap. Whatever the case, M&A advisors come directly from the corporate finance departments of investment banks. Unlike public offerings, merger transactions do not directly involve salespeople, traders or research analysts.

In particular, M&A advisory falls onto the laps of M&A specialists and fits into one of either two buckets: seller representation or buyer representation (also called target representation and acquirer representation). Representing the target An I-bank that represents a potential seller has a much greater likelihood of completing a transaction (and therefore being paid) than an I-bank that represents a potential acquirer. Also known as sell-side work, this type of advisory assignment is generated by a company that approaches an investment bank and asks the bank to find a buyer of either the entire company or a division. Often, sell-side representation comes when a company asks an investment bank to help it sell a division, plant or subsidiary operation. Generally speaking, the work involved in finding a buyer includes writing a Selling Memorandum and then contacting potential strategic or financial buyers of the client. If the client hopes to sell a semiconductor plant, for instance, the I-bankers will contact firms in that industry, as well as buyout firms that focus on purchasing technology or high-tech manufacturing operations. Buyout Firms and LBOs Buyout firms, which are also called financial sponsors, acquire companies by borrowing substantial cash. These buyout firms (also called LBO firms) implement a management team they trust, and ultimately seek an exit strategy (usually a sale or IPO) for their investment within a few years. These firms are driven to achieve a high return on investment (ROI), and focus their efforts toward streamlining the acquired business and preparing the company for a future IPO or sale. It is quite common that a buyout firm will be the selling shareholder in an IPO or follow-on offering. Representing the acquirer In advising sellers, the I-bank's work is complete once another party purchases the business up for sale, i.e., once another party buys your client's company or division or assets. Buy-side work is an entirely different animal. The advisory work itself is straightforward: the investment bank contacts the firm their client wishes to purchase, attempts to structure a palatable offer for all parties, and make the deal a reality. However, most of these proposals do not work out; few firms or owners are willing to readily sell their business. And because the I-banks primarily collect fees based on completed transactions, their work often goes unpaid.

Consequently, when advising clients looking to buy a business, an I-bank's work often drags on for months. Often a firm will pay a non-refundable retainer fee to hire a bank and say, "Find us a target company to buy." These acquisition searches can last for months and produce nothing except associate and analyst fatigue as they repeatedly build merger models and work all-nighters. Deals that do get done, though, are a boon for the I-bank representing the buyer because of their enormous profitability. Typical fees depend on the size of the deal, but generally fall in the 1 percent range. For a $100 million deal, an investment bank takes home $1 million. Not bad for a few months' work.

What are Depositary Receipts?

DRs are securities representing ownership in underlying shares of foreign companies. The depositary bank becomes the legal owner of the shares but conveys beneficial ownership to the DR investors via the receipts. DRs offer the same economic corporate and voting rights enjoyed by investor holding underlying shares directly. Types of Depository receipts 1) ADR (American Depositary Receipts) 2) GDR (Global Depositary Receipts) ADR (American Depositary Receipts)

An American Depositary Share ("ADS") is a U.S. dollar denominated form of equity ownership in a non-U.S. company. It represents the foreign shares of the company held on deposit by a custodian bank in the company's home country and carries the corporate and economic rights of the foreign shares, subject to the terms specified on the ADR certificate. One or several ADSs can be represented by a physical ADR certificate. The terms ADR and ADS are often used interchangeably. ADSs provide U.S. investors with a convenient way to invest in overseas securities and to trade non-U.S. securities in the U.S. ADSs are issued by a depository bank, such as JPMorgan Chase Bank. They are traded in the same manner as shares in U.S. companies, on the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX) or quoted on NASDAQ and the over-the-counter (OTC) market. Although ADSs are U.S. dollar denominated securities and pay dividends in U.S. dollars, they do not eliminate the currency risk associated with an investment in a non-U.S. company. GDR (Global Depositary Receipts)

Global Depository Receipts (GDRs) may be defined as a global finance vehicle that allows an issuer to raise capital simultaneously in two or markets through a global offering. GDRs may be used in public or private markets inside or outside US. GDR, a negotiable certificate usually represents companys traded equity/debt. The underlying shares correspond to the GDRs in a fixed ratio say 1 GDR=10 shares. How does investment banking help FDI Corporate Finance The bread and butter of a traditional investment bank, corporate finance generally performs two different functions: 1) Mergers and acquisitions advisory and 2) Underwriting. On the mergers and acquisitions (M&A) advising side of corporate finance, bankers assist in negotiating and structuring a merger between two companies. If, for example, a company wants to buy another firm, then an investment bank will help finalize the purchase price, structure the deal, and generally ensure a smooth transaction. The underwriting function within corporate finance involves shepherding the process of raising capital for a company. In the investment banking world, capital can be raised by selling either stocks or bonds to investors. Sales Sales is another core component of any investment bank. Salespeople take the form of: 1) the classic retail broker, 2) the institutional salesperson, or 3) the private client service representative. Brokers develop relationships with individual investors and sell stocks and stock advice to the average Joe. Institutional salespeople develop business relationships with large institutional investors. Institutional investors are those who manage large groups of assets, for example pension funds or mutual funds. Private Client Service (PCS) representatives lie

somewhere between retail brokers and institutional salespeople, providing brokerage and money management services for extremely wealthy individuals. Salespeople make money through commissions on trades made through their firms. Trading Traders also provide a vital role for the investment bank. Traders facilitate the buying and selling of stock, bonds, or other securities such as currencies, either by carrying an inventory of securities for sale or by executing a given trade for a client. Traders deal with transactions large and small and provide liquidity (the ability to buy and sell securities) for the market. (This is often called making a market.) Traders make money by purchasing securities and selling them at a slightly higher price. This price differential is called the "bid-ask spread." Research Research analysts follow stocks and bonds and make recommendations on whether to buy, sell, or hold those securities. Stock analysts (known as equity analysts) typically focus on one industry and will cover up to 20 companies' stocks at any given time. Some research analysts work on the fixed income side and will cover a particular segment, such as high yield bonds or U.S. Treasury bonds. Salespeople within the I-bank utilize research published by analysts to convince their clients to buy or sell securities through their firm. Corporate finance bankers rely on research analysts to be experts in the industry in which they are working. Reputable research analysts can generate substantial corporate finance business as well as substantial trading activity, and thus are an integral part of any investment bank. Syndicate The hub of the investment banking wheel, syndicate provides a vital link between salespeople and corporate finance. Syndicate exists to facilitate the placing of securities in a public offering, a knock-down drag-out affair between and among buyers of offerings and the investment banks managing the process. In a corporate or municipal debt deal, syndicate also determines the allocation of bonds. The breakdown of these fundamental areas differs slightly from firm to firm, but typically an investment bank will have the following areas: The functions of all of these areas will be discussed in much more detail later in the book. In this overview section, we will cover the nuts and bolts of the business, providing an overview of the stock and bond markets, and how an I-bank operates within them.

MEANING OF BUY BACK

A buy-back is defined as a company buying back its own shares that it had issued in the market earlier. The share capital so bought back has the effect of reducing the share capital and there is cash outflow from the company to the extent of the quantum of shares bought and at the price at which the shares were bought. It is different from the term redemption of share capital. Buy-back of shares results into the shareholders, whose shares are bought, ceasing to be the shareholders of the company. WHY BUY-BACK OF SHARES Increase Share Price

Share price is determined basically by two factors: supply and demand. Demand is the public's desire to own a piece of the company. Supply is the number of outstanding shares. Companies can increase demand if they have good news to share with the public. If there is no news forthcoming and the share price is falling, the company doesn't have a way to increase

demand. However, a stock buyback allows the company to decrease the supply. The result is the same. The share price increases. Increase Dividends

When the company has profits that it is willing to pay out to shareholders, the amount of money is divided by the number of issued shares. By buying back shares, the number of issued shares is reduced. When the company divides the total dividend amount by fewer shares, the amount of dividend paid out per share is increased. This is a positive indicator to investors that makes the company more attractive to investors. Preparing for/Preventing a Takeover

By buying back shares of a company, management may be showing it is preparing to purchase another company or trying to protect itself against a takeover from another company. Offering shares of company stock as an incentive to shareholders is a common element in one company's purchase of another company. So if a company owns more shares of itself, it can offer more in a buyout deal. Also, if there are fewer issued shares in a company, it means there are fewer shares available for another company to begin buying them up in order to take over the company. Unused Cash: If the company has huge surplus cash available and there is lack of opportunities to invest, it can utilize the surplus cash for buying its own shares so as to increase the underlying value of its shares. To increase promoters holding: When a company resorts to buy back, there is reduction in the number of shares, post buy-back, which ultimately leads to increase in promoters shareholding without any expenditure on the part of the promoters. REGULATORY FRAMEWORK FOR BUY-BACK OF SHARES A company can buy-back its own shares (equity or preference) or any other securities as defined in Clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956. Buy-back of shares should be authorized by the Articles of Association of the company It has to comply with any terms and conditions stipulated for approval or permission required in any joint venture, loan or any other agreement, memorandum of understanding etc. Board of Directors approval if the funds to be utilized for buy-back of shares are less than 10% of the total paid up equity capital and free reserves of the Company. Special resolution to be passed in general meeting of shareholders if the funds to be utilized for buy-back of shares are more than 10% of the total paid up equity capital and free reserves of the company. Buy-back of shares is restricted to 25% of the total paid up capital and free reserves of the company, provided the buyback of equity shares in any financial year shall not exceed 25% of its total paid up equity capital in that financial year.

The debt equity ratio should not exceed 2:1 after buy-back or such higher ratio as may be prescribed by the Central Government for a class or classes of companies. The expression debt includes all amounts of unsecured and secured debts. All the shares or other specified securities for buy-back are fully paid up. The shares are not subject to any lock in period [Regulation 19(5) of SEBI Buyback Regulations]. Every buy-back of shares must be completed within 12 months from the date of passing the Special Resolution. If for any reason, the buy-back could not be completed within 12 months, the Board of Directors should give the reasons for the failure to complete the buy-back within the time specified, in the Directors Report to shareholders. Companies shall not make any further issue of the same kind of shares or securities bought back within a period of 6 months from the date they complete the process of buyback of their shares except by way of bonus issue or conversion of warrants/preference shares/debentures into equity shares. DIFFERENT METHODS OF BUY-BACK OF SHARES According to Securities and Exchange Board of India (Buy Back of Securities) Regulations, 1998 (SEBI Regulations), a listed company may buy back its shares: (a) From the existing shareholders on a proportionate basis through tender offer; (b) From open market through; (i) book-building process; or (ii) Stock Exchange; (c) From odd-lot holders. A company must not buy back its shares from any person through negotiated deals whether on or off the stock exchange or through spot transactions or through any private arrangement. Thus, no listed company can buy back its equity shares from its Shareholders in any manner other than those permitted. Buy-back of equity shares can be done through any of the following methods: Open Market Purchase: In an open market purchase, a company can buy its shares directly from the stock market through brokers. Open market purchases are resorted to when the number of shares to be bought back is relatively small. The company has to fix the maximum price for an open market offer; stipulate the number of shares it intends to purchase, and announce the closing date of Buy Back of Shares Comprehensive Analysis Articles the offer. A company intending to buy back its equity shares in accordance with this method has to comply with the provisions of Section 77A as well as Regulations 14 to 18 contained under Chapter IV of SEBI Regulations. Tender Offer: A tender offer is made when the number of shares to be bought back is large. Such an offer is a fixed price offer, i.e., the company fixes a particular price for the maximum number of shares it is willing to purchase and sends a letter of offer to all the Non-promoter shareholders. It also fixes an outer time limit for accepting the offer. The offer price is usually fixed at a premium in order to encourage shareholders to surrender their shares. The company accepts the shares on a proportionate basis if the offer is over subscribed. The Company is allowed to buy back its shares on a proportionate basis in accordance with the provisions of Chapter III of the SEBI Regulations (Regulation 6). But if offer is under-subscribed, the company may either accept whatever is tendered or extend the time limit. Regulations 8, 9, 10, 11, 12 of the SEBI Regulations govern the buyback of shares by tender offer.

 Book building process to Buy-back shares Companies can also use the book building process to buy back shares. The book building process is a mechanism of price discovery which helps determine market price of securities. If the book building option is used, a draft prospectus has to be filed with SEBI. The prospectus should contain all the details of the offer, except the price at which the securities will be offered (a price band is specified). The copy of the draft prospectus is filed with SEBI and is circulated among institutional buyers by a leading merchant banker acting as the book runner. Institutional investors specify the price as well as the volume of shares they intend to buy. The book runner, on receiving the above information, determines the price at which the offer is to be made to the public. Target buy-back method Besides the above methods, companies can also use the targeted buyback methods to repurchase shares from a select group of shareholders. This kind of buyback is called greenmail and is undertaken with the objective of eliminating unfriendly/hostile shareholders from the company and protecting it from any hostile takeovers. VALUATION OF BUYBACK OF SHARES There are two ways companies determine the buyback price. They use the average closing price (which is a weighted average for volume) for a period immediately before to the buyback announcement. Based on the trend and value a buyback price is decided Shareholders are invited to sell some or all of their shares within a set price range. The low point of the range is at a discount to the market price, while the top of the price range is set at a premium to the market price. Investors are given more say in the buyback price than in the above arrangement. Still this method is rarely used. Generally, the price is fixed at a mark up over and above the average price of the last 12-18 months.

Four majors Ratios which gets impacted due to buyback. They are as follows: Return on Assets: ROA = Net Income / Total Assets Return on Equity: ROE = Net Income / Shareholders Equity Earning per Share: EPS = profit after tax / number of shares Price Earning Ratio: P/E ratio = market value of share / EPS Example: Company B Ltd Pre Buy Back 1000 10000 1500 Post Buy Back 625 9625 1500

Particulars Cash Asset Earnings O/S

Share Equity Share Reserve Equity Market Share Price

150 1500 200

125 1250 75

1700 10

1325 15

Financial Ratios Return On Asset Return On Equity Earning Per Share Price Earning Ratios

Pre 0.15

Post 0.16

0.88

1.13

10

12

1.25

Explanation: 1. Return on Assets: We can see that ROA has increased after buyback. The reason behind this increase is that there is a reduction in the total assets. Total assets have gone down from Rs.10, 000 to Rs.9625, income remaining same. 2. Return on Equity: It has also increased from 0.88% to 1.13%. This is due to decrease in the shareholders equity, which has gone down from Rs.1500 to Rs.1250. 3. Earnings per Share: It has also increased from Rs.10 to Rs.12. The reason behind the increase of EPS is that the numbers of shares have reduced from 150 to 125, causing EPS ratio to increase. 4. Price Earnings Ratio: Here market value of the share has increased from Rs.10 toRs.15, which is a 50% hike in the price. On the other hand EPS has also increased from10 to 12, which is a 20% hike. Since the overall increase in the market value of the share is much more than the increase of EPS. Therefore we can see an increase in the price-earnings ratio

Effects on the Shareholder Tax Benefits: When a company has surplus cash, they can either pay it off as dividend or buy back shares. When a company pays dividend they are entitled to pay tax at the rate of 15%. This cost has to be borne by shareholders, who receive less cash then what is declared. Therefore by Buying back shares, company gives surplus cash to the shareholder and saves tax for the shareholders. Example: A company has surplus cash of Rs.150 crore and if they declare ore as dividend then company has to pay tax of Rs.22.5 crore. So the net amount which would be received by the shareholder would be Rs.127.5 crore. If a company decides to go for buyback of shares then the entire amount of Rs.150 crore is received by the shareholder. Thus shareholders save tax of Rs.22.5 crore, which they would have incurred, if the company would have given them surplus cash by way of dividend. Higher Proportion of share: When a company goes for buyback, number of shares outstanding reduces. That means proportion of an individual investor increases. This can be explained with the help of an example: A company which has 1000 outstanding shares goes for buyback of 250 shares. So after 100% buyback, company would have 750 shares outstanding If an individual investor has 50 shares then its proportional share in the companys total paid up equity share capital would be 5% before buyback and after buyback it would be6.67%. Thus there is an increase in his/her proportional share Higher Share Price: One of the reasons why a company goes for a buyback is that they think that their shares are undervalued. That is why they buyback share at a premium or at a price that they think it should command in the market. For example a company market price of the share is Rs.500 and company believes that the price of their share should be at Rs.600 based of their fundamental and technical analysis therefore company buys back share at Rs.600 from the market and thus increasing the market value of the share from Rs.500 to Rs.600 ROCESS OF MAKING A BUY BACK -Under SEBI buy back regulations, it is mandatory to engage a merchant banker to prepare a L of O (Letter of Offer) and manage buy back offer -Pricing mechanism fixed by the board of companies -Requirement of an escrow account to be opened under the Tender Offer and the book building methods to the extent specified under regulations -The offer shall not open before 7 days and not after 30 days from the specified date and shall be kept open for a minimum of 15 days and a maximum of 30 days.

BUY BACK IS UNFRIENDLY AND IS NOT LIKELY TO BENEFIT THE SMALL INVESTORS FOR THE FOLLOWING REASONS : Small investor may not be in a position to cash out in the market because, the offer for buy-back is not under tender offer method but an open market route. The existing shareholders cannot participate in the proposed further issue of shares namely QIP . The interests of the small investors are not protected from the inevitable reduction or dilution in their holding / value following the increase of capital. Though the above proposal by DLF Ltd. is not in violation of any provisions of Companies Act, but the small investors may not be in a position to cash out in the market on attractive terms in the buy-back offer. Checklist for investors before accepting the buyback offers of companies If the trend of the share price movement immediately before the buy-back is on the rise, then the prima facie assumption is that the promoters are trying to play tricks and the buy back offer should be looked at with suspicion. Investors should look at the debt-equity ratio. If the company has huge debts, then it is unlikely that it will have surplus cash. Companies which have just come to the capital markets or which have just completed their IPO are not good companies for buy-back. When the Board/shareholders have passed the respective resolutions as the case may be with lot of publicity empowering the Board to buy back whenever allowed, then there is enough scope that it should be looked with suspicion as anybody with genuine intention of buy back shares to enhance the shareholders wealth would try to do so with minimum publicity so that the share price does not flare up due to speculators in the market.

RATIONAL BEHIND BUYBACK OF SHARE The equity buy back (or stock buy back) is the repurchase of the shares from the market by the company. There are various reasons for a company to buy back its shares from the market. 1) The management thinks that the companys shares are undervalued in the market and they expect the company to perform much better than the value currently perceived by the market. 2) The promoters want to increase their control over the company. So, they go for buy back of shares to increase their equity holding in the company. 3) The company can reduce the risk of hostile takeover by buying back the shares. 4) If the company wants to leave a particular country or want to close the company, it goes for buy back of shares. 5) The company can go for buy back to show rosier picture as explained below:

When the company buy back its shares the Earning per share increases as EPS = Profit After Tax / Shares outstanding. After buy back outstanding shares will reduce and subsequently EPS will increase. This will result in reduction of Price Earning (P/E) ratio.

For example Assume a company has 1 million outstanding shares, its market price is Rs 60 and its profit after tax is Rs 4 million. So current Earning Per Share (EPS) is 4 (4,000,000 / 1,000,000) and P/E ratio is 15 (60/4). Now if the company buy back 0.3 million shares, then it is left with 0.7 million shares and profit after tax will still be Rs 4 million. so, EPS after buy back will be Rs 5.71 and P/E ratio will be around 10.51. The lower value of P/E will show that the company is relatively undervalued and will attract more investment. The company can improve various other financial ratios by buying back its shares like Return on Assets (ROA) will improve as the asset reduces from the balance sheet as cash is also an asset, Return on Equity (ROE) increase because the company reduces the outstanding equity after buy back. Increase in ROA and ROE are considered positive for the company as they will give the impression of improved performance. The best example of such a buyback in the Indian context: The best example of such a buyback in the Indian context was the buyback of shares undertaken by the Great Eastern Shipping Company Ltd. (GESCO) to protect itself from a hostile takeover bid led by the A H Dalmia group. In October 2000, the A H Dalmia group of Delhi made a hostile bid for a 45 per cent stake in the Great Eastern Shipping Company Ltd. (GESCO) at Rs. 27 per share. The price offered was less than half of the book value per share. The offer and counter offers made by the A H Dalmia group and the promoters of GESCO pushed up the bidding cost. The A H Dalmia group ultimately sold its 10.5% stake (around 3 million shares) at Rs. 54 per share for a consideration of Rs. 163 million before the year end. The A H Dalmia group had acquired the 10.5% stake in Gesco at an average cost of Rs. 24 per share for a consideration of Rs. 72 million. Hence, the A H Dalmia group was able to make a profit of Rs. 91 million through greenmail transaction in less than six months. Out of the various methods enumerated above, only open market purchase method and tender offer method are being resorted to by the companies for buy-back and among these two, open market purchase method is most sought after because of its cost advantage.

RIGHTS ISSUE
Definition: New stock (share) issue offered to existing stockholders (shareholders) in proportion to their current stock/shareholding, for a specified period and at a specified (usually discounted) price. Its objective is to afford them the opportunity to maintain their percentage of ownership of the firm. (1) Right issue gives the existing shareholders an opportunity to maintain their pro-rata share in the earning and surplus of the company and the voting power as before. (2) The goodwill of the company increases in the eyes of existing shareholders. (3) The cost of issue of such shares will also be lower. (4) The financial management is relived of the botheration of selling the shares. (5) If right shares are offered by the shareholders enthusiastically, it proves that financial position of the company is sufficiently good, and the company can obtain more loans at lower rate of interest.

IN FIXING OF THE PRICE OF THE RIGHT SHARES, FOLLOWING CONSIDERATIONS SHOULD BE BORNE IN MIND:(i) The first consideration is as to what can the market bear. If the amount collected by issue of right shares is not invested in securities yielding a good return or normal return, the market price of shares in the long run will go down. In that case, rights will not be used and investors will invest their funds in alternative investments. (ii) The other consideration in the state of capital market. The company should keep vigil on the market price and see how its shares have been moving in the market in the past and how these are likely to move, if the rights are fixed at a particular price. (iii) The company should also take the general price trend in the capital market into consideration i.e., whether the general prices are stable or fluctuating. If trend is not stable, the investors will not like to invest funds in securities hence rights cannot be favoured. (iv) The profit-earning capacity of shares also affect the price of right shares. If they have no capacity or low capacity or low capacity to earn profits, they will not be offered by the shareholders howsoever low their price may be. On the other hand, if profit earning capacity of the shares are somewhat, higher, regular an dependable, the rights will attract the existing shareholders as well as their nominees whether rights are priced a bit higher. (v) The prospects of proposed plans of expansion also affects the pricing issue. If plans seem profitable, the right may be priced a bit high. On the other hand, if the plans are not attractive or slow, the price will be fixed differently. (vi) Dividend policy of the enterprise is also an important factor. If conservative policy of dividend is adopted by to be company, the shareholders shall not be interested in purchasing the rights. The price may be fixed much lower. If they are getting good dividend, the price may be fixed much lower. If they are getting good dividend, the price may be fixed somewhat higher. (vii) The resource position of the company also affects the pricing of right issue. If financial position of the company is sound, the shareholders will be attracted to invest and the price may be fixed at somewhat higher level otherwise the position will be reserved. But, whatsoever the pricing policy of rights, the enterprise will have to take into consideration to basic facts-Firstly, it should fix the premium, not so low, nor so high an secondly, it should yield the shareholders a fair return. The enterprise should struck a judicious balance between the two. PROCEDURE OF RIGHT ISSUE First, the offer must be made by giving a notice to the existing shareholders, mentioning therein the number of shares offered and the time within which the offer must be accepted. Such period shall not be less than 15 days from the date of offer, however it may be more than 15 days keeping in mind that shareholders must have sufficient time to make up their mind judiciously. The notice must also indicate that if the offer is not accepted within the specified period, it shall be deemed to have been declined. Again the notice must also state that they have the right to renounce all or any of the shares offered to them in favour of their nominee(s). Shareholders shall inform the company within stipulated period, of other acceptance of right or the name of the nominee to whom he wants to renounce his right. An existing shareholder may also apply for the additional shares but a shareholder who has

renounced his right in favour of any person is not entitled to apply for additional shares. The Controller of Capital Issues takes decision an application for right issue in concurrence with the company. Certain conditions are imposed by him on the company making an offer of right. If the right shares are not fully taken up, the balance left over shall be distributed equally among the applicants for additional shares with reference to the shares held by them in the company. Subject to stock exchange on which the company's shares are listed. Any balance left after making allotment of additional shares, the company may deal with in any manner it likes.

VALUATION OF RIGHT ISSUE

The right shares are issued by the company at par or at a premium but less than the ruling market price. It is deliberately kept so, so that shareholders may offer the right with a hope of some capital gain. The gain on shares is the value of right. When calculate it in the following manner. First, the market price of the existing shares is to be calculated, then add to it the issue price of right shares. The total of these two prices should be averaged. This average shall be the value of right share and the difference between the market price and the average price is the value of right. For example, if a company makes right issue of one share for every three share held. The market value of existing shares is Rs. 20 (for Rs. 10/- share). The issue price of right share is Rs. 13 per share. (Finance value Rs. 10/-). The value of right shall be calculated as under:-

Total mkt price of 3 existing share Issue price of right share Total for four share Avg price per share Value Of right

20x3

Rs 60 Rs 13 Rs 73

73/4 Rs 20 - Rs 18.25

Rs18.25 Rs 1.75

IMPACTS OF RIGHTS ON FINANCIAL POLICY As we know, that right shares are issued at a price much lower than the market price of the existing shares. The market price is expected to fall by the issue of right shares, to a considerable extent. The problem should be considered by the company well in advance taking in view the fall in market price of shares of eh company. (2) If the existing shareholders decline the offer, the shares are offered to other persons at the same price. The customers are tempted to purchase such shares at lower price even though, a decline in market price in obvious if the company has a good record of payment of dividend, because they expect an increase in the market price of shares after a short spell and if it is so, the goodwill of the company also goes up.

(3) Right issue has another adverse effect on the market due to lower payment of dividend. It is but natural that due to increase in the number of shares the dividend per share will be lower. It is, of course, on the presumption that additional amount realised through the issue of rights will not be put to profit immediately and it will take time in increasing the profits. Accordingly, a situation might arise that even good shareholders might fill disinclined to continue with the enterprise and began to sell their holding. Such a trend will affect the market adversely and the prices of shares will go down. The company should take proper care and ensure that a healthy balance is struck between the use of amount invited and the income from the investment failing which market will be adversely affected. (4) Another factor that needs consideration is the capacity to purchase shares of the existing shareholders. In case, they are fully subscribed by the shareholders, the market will not be very adversely affected. But on the other hand, if they do not have capacity to purchase shares, they will either surrender their rights or renounce it in favour of their nominee. In that case even, the nominee will also surrender such shares thereby making these shares available in the market and the market well be affected adversely. It is better, in such circumstances, to offer rights in lower proportions. (5) The another factor is the fluctuation in the market price of the shares of the company. If the shares are favorably traded in the market, without having any fluctuation in the price of a considerable degree, the rights will attract the shareholders and the price may be fixes somewhat higher. But if on the other hand, the shares invariably fluctuate, the issue will adversely affect the market and the company will have to fix the price of the right share much lower. (6) Usually share market in respect of that particular share comes under heavy pressure in preoffering period just after it is known to the public that company is about to offer rights shares. This pre-offering pressure is usually considerably great and the financial management should take every effort to check that pressure otherwise, its financial policy will be adversely affected. (7) There are usually downward trends during the period of right issue and even the existing shares will come under heavy strains. In case financial management does not move swiftly on the terms, its whole financial policy might come under unbearably heavy strains.

CAPITAL STRUCTURE
In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells $20 billion in equity and $80 billion in debt is said to be 20% equity-financed and 80% debt-financed. The firm's ratio of debt to total financing, 80% in this example is referred to as the firm's leverage. In reality, capital structure may be highly complex and include dozens of sources. Gearing Ratio is the proportion

of the capital employed of the firm which come from outside of the business finance, e.g. by taking a short term loan etc.A mix of debt, preferred stock, and common stock with which the firm plans to finance its investments. Objective is to have such a mix of debt, preferred stock, and common equity which will maximize shareholder wealth or maximize market price per share WACC depends on the mix of different securities in the capital structure. A change in the mix of different securities in the capital structure will cause a change in the WACC. Thus, there will be a mix of different securities in the capital structure at which WACC will be the least. An optimal capital structure means a mix of different securities which will maximize the stock price share or minimize WACC.

The Modigliani-Miller theorem, proposed by Franco Modigliani and Merton Miller, forms the basis for modern thinking on capital structure, though it is generally viewed as a purely theoretical result since it disregards many important factors in the capital structure decision. The theorem states that, in a perfect market, how a firm is financed is irrelevant to its value. This result provides the base with which to examine real world reasons why capital structure is relevant, that is, a company's value is affected by the capital structure it employs. Some other reasons include bankruptcy costs, agency costs, taxes, and information asymmetry. This analysis can then be extended to look at whether there is in fact an optimal capital structure: the one which maximizes the value of the firm. Factors determining the capital structure A variety of factors are to be considered while determining the capital structure. Basically, the three basic factors i.e., Risk, Cost and Control determine the capital structure of a firm at a given point of time. The finance manager should attempt to design the capital structure in such a manner that the risk and cost are the least and the control of the existing management is diluted to the least extent. In addition to Risk, Cost and control, there are also other factors like flotation costs, marketability, flexibility etc. Cash Flow Definitions Levered free cash flow The amount of cash available to stockholders after interest payments on debt are made. A company with a large amount of debt will have to spend more money on interest payments, which in turn will limit the amount of money that can be sent to stockholders in the form of dividends. The Levered Free Cash Flow shows you the amount of cash available to pay shareholders after it has paid its debt. It can be a very important figure if you want to see if you are going to be able

to get a large dividend from the company or if you want to see if a company is making a lot of money after paying off its debt. Obviously this figure is pretty important and the higher the number is the better that is for the investor because it shows you that the company can make money. The formula looks like this (Cash flow from operations) (Capitol expenditures) This number is very important because unlike earnings or income statements, which can be easily tweaked, it is very hard to manipulate cash flow. It all comes down to the money, where it is and how much of it is staying after the expenses have been paid. If a company doesnt have good cash flow it probably wont be around for very long. It is also important because the amount of cash a company has after paying its bills can be used to help make shareholders money. For example a company can use their earning to reinvest in the company which can help to expand the company (which would be good for you in the long term). Another reason why you would want to see a large levered free cash flow is because of dividends. If a company has a lot of extra cash flow they can decide to do with their profits is to give out money to their shareholders as dividends. This means more income for the investors, which can be a great thing. When a company does have a high levered free cash flow it can be the best of both worlds. It is best to find one that pays out dividends as well as reinvest in itself. You do not want to invest in a company that has lots of cash flow but foolishly spends it. Unlevered Free Cash Flow Unlevered free cash flow ("UFCF") is the cash flow available to all providers of capital, including debt, equity, and hybrid capital. A business or asset that generates more Cash than it invests provides a positive FCF that may be used to pay interest or retire debt (service debt holders), or to pay dividends or buy back stock (service equity holders). Projection Intervals Most DCF analyses use annual projection intervals. Theoretically, the shorter the projection interval, the more accurate the DCF valuation. However, projecting smaller intervals usually requires several additional assumptions that may more than offset the additional accuracy. Certain situations (for example, seasonal businesses) require adjustments to projection intervals to more accurately reflect the timing of UFCF. Additionally, using an annual projection interval may require a shorter stub period for the first interval (to reflect that a deal would close mid-year, for example). Projection Period UFCFs should be projected to the time when the business attains maturity and experiences steady-state growth and profitability (growth and profitability that can be sustained over a long period of time without substantial new investment). Most DCF analyses use 5 or 10-year projection periods. Projecting cash flows over a longer period is inherently more difficult. A shorter projection period increases the accuracy of the projections, but also places greater emphasis on the contribution of terminal value (TV) to the total valuation.

Value the leverage strategy

In finance, leverage (sometimes referred to as gearing in the United Kingdom) is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:

A public corporation may leverage its equity by borrowing money. The more it borrows, the less equity capital it needs, so any profits or losses are shared among a smaller base and are proportionately larger as a result. A business entity can leverage its revenue by buying fixed assets. This will increase the proportion of fixed, as opposed to variable, costs, meaning that a change in revenue will result in a larger change in operating income. Hedge funds often leverage their assets by using derivatives. A fund might get any gains or losses on $20 million worth of crude oil by posting $1 million of cash as margin.

Conservative Strategy

A conservative financing strategy uses long-term funds to finance all of a firm's projected needs and uses short-term funds only in emergencies In a pure sense this is hard to implement since it is nearly impossible to avoid the use of "spontaneous" short-term financing sources such as accounts payable and accruals Cost Considerations o Higher cost since long-term financing is more expensive and not actually needed throughout the period during which the firm pays interest on it o Should lead to low profitability

Aggressive strategy An investment strategy in which one takes higher risks in order to achieve higher returns. One using an aggressive investment strategy often seeks to invest in young industries with high growth potential, rather than low-risk, low-yield vehicles. For example, during a market bubble, aggressive investors are more likely to make speculative investment than to buy Treasury bonds. Net Income (NI) Approach
Cos t

ke, ko

ke

kd

ko kd

 According to NI approach both the cost of debt and the cost of equity are independent of the capital structure; they remain constant regardless of how much debt the firm uses. As a result, the overall cost of capital declines and the firm value increases with debt. This approach has no basis in reality; the optimum capital structure would be 100 per cent debt financing under NI approach. Net Operating Income (NOI) Approach
Cost ke

ko kd

Debt

According to NOI approach the value of the firm and the weighted average cost of capital are independent of the firms capital structure. In the absence of taxes, an individual holding all the debt and equity securities will receive the same cash flows regardless of the capital structure and therefore, value of the company is the same. An Example 1 Q.1. Consider the following data for a company reviewing its capital structure. Number of Shares Price Per Share Market Value of Shares Market Value of Debt Interest Rate Tax Rate Outcomes: Q.2. As a simple example, consider two firms, U and L. Firm U has no debt and firm L has issued Debentures worth $400 at the current interest rate of 10 percent; otherwise the firms are the same. Depending on the state of the economy, EBIT may be as predicted, below average or above average. If EBIT is $250, as predicted, earnings per share are $250/100 = $2.50 and Return on equity is $2.50/$20 = 0.125 or 12.5 percent. 100 $20 $2,000 $0 10% 0%

Outcomes: Firm U EBIT -Interest EBT Tax (34%) PAT No. of equity shares EPS= PAT/ No of eq. shr 100 0 100 -34 66 100 0.66 Firm L 100 -40 60 -20.4 39.6 60 0.66

Implications: This simple example shows that interest tax deductibility increases the value of the firm that is levered.

The tax bill of L is $13.6 less than that of U In effect, the government is paying 34 percent of the interest expense of L.

Review: The capital structure decision is a crucial one for the firm and is fundamentally linked to questions of valuation Firms trade-off the tax benefits of debt financing against the costs of financial distress Finding the right capital structure is difficult in practice

Financial Ratio Analysis - Investment Banking and Securities Dealing Financial ratios can be used to compare how a company in the Investment Banking and Securities Dealing industry is performing relative to its peers. Financial ratio statistics are calculated from the industry-average for income statements and balance sheets. Liquidity Ratios - Investment Banking and Securities Dealing Liquidity Ratios measure how liquid a business is. Bankers and suppliers may use these to determine creditworthiness and identify potential threats to a company's financial viability. Current Ratio Measures a firm's ability to pay its debts over the next 12 months Quick Ratio (Acid Test) Calculates liquid assets relative to liabilities, excluding inventories

Efficiency Ratios - Investment Banking and Securities Dealing Efficiency Ratios measure how quickly products and services sell, and effectively collections policies are implemented. Receivables Turnover Ratio If this number is low compared to the industry average, it may mean your payment terms are too lenient or that you are not doing a good enough job on collections. Average Collection Period Based on the Receivables Turnover Ratio, this estimates the collection period in days. Calculated as 365 divided by the Receivables Turnover Ratio Inventory Turnover Ratio a low turnover rate may point to overstocking, obsolescence, or deficiencies in the product line or marketing effort. Fixed-Asset Turnover Ratio generally, a higher ratio is better, since it indicates the business has less money tied up in fixed assets for each dollar of sales revenue. The ten global investment banks as of December 31, 2010, are as follows (by total fees): Rank Company Fees ($m) 1. J.P. Morgan $5,533.85 2. Bank of America Merrill Lynch $4,581.59 3. Goldman Sachs $4,386.52 4. Morgan Stanley $4,055.48 5. Credit Suisse $3,379.12 6. Deutsche Bank $3,286.80 7. Citi $3,238.67 8. Barclays Capital $2,864.44 9. UBS $2,614.44 10. BNP Paribas $1,433.89

Bloomberg Markets' latest ranking of the best-paid investment banks.

Services offered in India by Investment banking. 1.KARVI.

Karvi

Capital Issues it undertakes management of public issues under the Book Building method and Fixed Price method. Our offerings include IPO, FPO, Rights Issue, Preferential Issues, (QIPs) and Debt placements. We focus on organizations growth and success in the long term by constantly advising them on various strategies for growth. Debt Private Placements The assistance provided by our team in Debt Private Placements helps the companies to get the most appropriate source of financing. Buybacks advise its clients on the need for a buyback and the mode to be adopted given the prevailing market conditions. We help the companies to optimally price the buyback and carry out all the due diligence and regulatory activities involved. Takeover provides advisory services on the following:

Need for a takeover and locating Target Company Advise on various takeover strategies that should be adopted for strategic business plans of clients and carry out the regulatory procedures involved Financial Analysis and Valuation of the Target Company Our teams professional and analytical approach provides unique insights to our clients and ensures that synergy is created between organizations Advises and ensures various compliances involved in takeover, specifically related to, SEBI Rules/ Regulation in case of listed entities

Valuation provides valuation services with respect to the following:

Securities issued upon exercise of option under ESOPs/ESOS for calculation of Fringe Benefit Tax (`FBT`) Securities issued upon scheme of arrangement for listing on Stock Exchanges For re-instatement of listing Securities issued upon acquisition of overseas companies for RBI/FIPB

Delistingadvice companies on the need for delisting, which is executed by our team of qualified professionals with highest service standards and adhering to all regulatory requirements.

ESOPs/ ESPS we assist organizations in designing and structuring of ESOP scheme including Secretarial Compliance, pricing and related matters. We ensure that the schemes are in compliance with the relevant guidelines and certify Schedule V for obtaining in-principle approval from the Stock Exchanges.

2. J.P. MORGAN
Is a leading provider of advisory and capital markets services to clients across a broad range of industries? Based on global, regional and India-specific expertise a leading advisor to clients in the following industries: Real Estate Recognized as the leading advisor to India's major real estate companies, J.P. Morgan sources strategic opportunities on a global basis, advises clients on acquisitions and divestments, and provides capital markets solutions to meet associated funding requirements. Energy & Natural Resources J.P. Morgan's Energy & Natural Resources team is highly regarded and involved in some of the largest transactions in India. The firm is well placed to participate in ongoing rationalization of both public and private sector entities. Financial Institutions J.P. Morgan counts India's major banks and insurance companies among a broad client base in the finance sector. The firm is a leading advisor to financial institutional clients on both asset and equity capital pricings and strategic advisory transactions. General Industrials J.P. Morgan has global expertise in a wide range of specialist sectors, including infrastructure, transportation and power. Telecommunications & Technology J.P. Morgan has leading global teams focused on providing strategic and financial advice to clients across these sectors. The India team is actively involved in working with colleagues globally to advise both domestic and international players in these evolving industries. Healthcare J.P. Morgan's healthcare team is actively involved in strategic and financing discussions with clients across the sector. The firm has helped several clients raise funds domestically and internationally. Compensation & Salary Surveys for Employees Working in Investment Banking and Securities Dealing Compensation statistics provides an accurate assessment of Investment Banking and Securities Dealing jobs and national salary averages. This information can be used to identify which positions are most common, and high, low, and average annual wages.

Management occupations 10% Chief executives 0% General and operations managers 2% Business and financial operations occupations 22% Financial analysts 5% Personal financial advisors 8% Sales and related occupations 28% Securities, commodities, and financial services sales agents 26% Office and administrative support occupations 33% Brokerage clerks 8% Customer service representatives 6% Office clerks, general 5%

RIGHTS ISSUE
A rights issue is a way in which a company can sell new shares in order to raise capital. Shares are offered to existing shareholders in proportion to their current shareholding, respecting their pre-emption rights. The price at which the shares are offered is usually at a discount to the current share price, which gives investors an incentive to buy the new shares if they do not, the value of their holding is diluted. A rights issue by a highly geared company intended to strengthen its balance sheet is often a bad sign. Profits are already low (or negative) and future profits are diluted. Unless the underlying business is improved, changing its capital structure achieves little. A rights issue to fund expansion can usually be regarded somewhat more optimistically, although, as with acquisitions, shareholders should be suspicious because management may be empire-building at their expense (the usual agency problem with expansion). The rights are normally a tradeable security themselves (a type of short dated warrant). This allows shareholders who do not wish to purchase new shares to sell the rights to someone who does. Whoever holds a right can choose to buy a new share (exercise the right) by a certain date at a set price. Investment BankingIssuing and Selling New Securities When a company or other organization wants to raise funds, it frequently does so by issuing and selling new securities, such as stocks or bonds. An investment bank usually helps in this process by providing expertise and customers to buy the securities. A company does not need to use an investment bank, but it usually does, because it is less costly than trying to sell securities directly to the public. An investment bank is not a bank in the usual sense. It doesn't have checking or savings accounts, nor does it make auto or home loans. It is a bank in the general sense, in that it helps businesses, governments, and agencies to get financing from investors in a similar way that regular banks help these organizations get financing by lending money that the banks' customers have deposited in the banks' savings, checking, and money market accounts. In other words,

connecting the need for money with the source of money.An investment bank helps an organization, which may be a company, or a government or one of its agencies, in the issuance and sale of new securities. It is usually a division of a brokerage firm, because many of their activities are related. When an organization needs funds, it will first discuss the options and possibilities with an investment banker: how much money will be needed, what type of security to sell and any special features it might have, at what price, and how much this will cost the company. Syndicate of Investment BankingIssuing and Selling New Securities

CONCLUSION
Investment banking is the process of raising capital for businesses through public Flotation and private placement of securities. Investment banking is thus critical to the existence of businesses intending to grow by employing external capital. Investment banks therefore play crucial role in the IPOs and capital raising process. IPOs generally involve the issue of equity securities by business for the first time and generally involve the use of investment banks in achieving this goal.

Any model to guide businesses in choosing the capable investment banker (Manaster and Carter, 1990), it might fail in achieving this objective. Capabilities of investment banks, which are critical to the IPO process, have been found to lead to the development of competitive advantages for the investment banks. These capabilities include, competitive pricing of services, knowledgebase developed by the investment banker, provision of ancillary services, experience of the investment banker in its area of business and the integrity of its stakeholders. The Ghanaian investment banking industry exhibits low level of competition with only 4 active out of the 14 registered investment banks (LDMs). Most of the capabilities of an ideal investment banker are also lacking. It is recommended that Ghanaian investment banks must improve on these capabilities. This would lead to increased competition within the investment banking industry and subsequently attract more firms to go public.