Introduction to Investment

Banking
IBS

IB -Definition
IB -Definition
It is a financial institution that related to the creation of

capital for other companies.

Investment banks underwrite new debt and equity securities
for all types of corporations and also provide guidance to
issuers regarding the issue and placement of stock, also aid
in the sale of securities in some instances.
Investment banks also aid in the sale of securities in some
instances.
They also help to facilitate mergers and acquisitions,
reorganizations and broker trades for both institutions and
private investors.
They can also trade securities for their own accounts.
(Proprietary Trading)

Why an Investment Bank

It performs the following functions

Raise Capital

Portfolio
Management

M&A

Research

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, and
money market investment products and services to individual
and institutional clients
2] For alternative investment products, the firm co-invests
with clients in hedge fund, private equity and real estate funds

Principal Businesses of Investment

Banks
Client Trading
Sells and trades
securities and other
financial assets as
intermediary on behalf of
investing clients.
Proprietary Trading
Investment activity by the
firm that affects the firm's
accounts, but does not
involve investing clients.

Function
1. Raising Capital & Security Underwriting
. Banks are middlemen between a company that
wants to issue new securities and the buying public.
2. Mergers & Acquisitions
. Banks advise buyers and sellers on business
valuation, negotiation, pricing and structuring of
transactions, as well as procedure and
implementation.
3. Sales & Trading and Equity Research
. Banks match up buyers and sellers as well as buy
and sell securities out of their own account to
facilitate the trading of securities

4. Providing brokerage services for

trading of stocks, bonds, derivatives,
commodity and equity securities
5. Managing investments
6. Acting as intermediary between an
issuer of securities and the investing
public
7. Facilitating private equity, corporate
restructuring, placements, merger and
acquisitions and others

Origins of Investment Banking

The NYSE traces its origins to a small group of New York
brokers who traded in a handful of securities and
commodities.
A historical 1792 agreement called as a Buttonwood
Agreement was signed among 24 New York brokers to
band the brokers into an investment group.
The name stemmed from the buttonwood tree that
served as the Wall Street meeting place for members of
the group. The tree was located at 68 Wall Street.
The agreement allowed brokers to trade with each other
for a commission.
In the early 1800s, the US government regularly issued
bonds to finance wars, banks and infrastructure which
were sold by merchants along with other commodities.

History of IB
By the middle of 1800s, professional investment banks had
sprung up in the US to help government raise funds for
infrastructure projects and the civil war.
In the 1830s, commercial banks started adding investment
banking services to their regular banking activities in the
US.
Investment Banking hit a milestone in the 1870s when a
syndicate of banks from Europe and US teamed up to buy
$50 million worth of US Treasury Bonds for resale to public.
The syndicate sold billion dollars' worth of government
bonds to large numbers of individual investors through the
use of thousands of salesmen and an extensive advertising
campaign. This venture marked the first mass securitiesselling operation carried out in the United States.

History of IB
In Great Britain, since 1600s, merchant banks or
acceptance houses had been in existence.
These concerns financed foreign trade and later the
acceptance houses also floated foreign issues in London
and accumulated funds for long-term investment abroad.
Also important in the evolution of investment banking
were private banks, many of which were family
enterprises, and finance companies.
European Investment banks (excluding UK) stuck with
the universal banking concept and they remained active
primarily in their local markets through the 1900s.

History of IB
In the early 1900s, JP Morgan and Company put
together another syndicate to reorganize US Steel from
an array of affiliated companies into the first billion dollar
corporation by trading shares of its smaller affiliates for
the merged entity.
The Great Depression in the 1920s and World War 2
was a bad phase for the investment banking industry.
Investment Banks were accused of excessive
speculation and the US government stepped in to curtail
the same.
The Glass-Steagall Act, passed on June 16, 1933, and
officially named the Banking Act of 1933, introduced the
separation of bank types according to their business
(commercial and investment banking), and it founded the
Federal Deposit Insurance Corporation for insuring bank
deposits.

History of IB
In the mid-20th century, large investment banks were
dominated by the dealmakers.
Advising clients on mergers and acquisitions and public
offerings was the main focus of major Wall Street
partnerships.
These firms included Goldman Sachs, Morgan Stanley,
Lehman Brothers, First Boston and others.
That trend began to change in the 1980s as a new focus
on trading propelled firms such as Merrill Lynch and
Drexel Burnham Lambert into the limelight.

History of IB
Investment banks earned an increasing amount of their
profits from proprietary trading.
Advances in computing technology also enabled banks
to use more sophisticated model driven software to
execute trades and generate a profit on small changes in
market conditions.
In the 1980s, leveraged buyouts and hostile takeovers
drove the investment banking business.
Investment banks profited handsomely during the boom
years of the 1990s and into the tech boom and bubble.
IPOs of tech companies was the key investment banking
activity through the 1990s.

Current Scenario
Two collapses of the stock market the tech bubble and
the sub-prime crisis have taken their toll on the
investment banking industry.
Landmark companies including Bear Stearns, Lehman
Brothers and Merrill Lynch have been destroyed in the
sub-prime crisis.
Goldman Sachs and Morgan Stanley have moved from
pure play investment banks to become commercial
banks after the repealing of the Glass-Steagall Act.
But still, investment banking remains a key element of
our capital markets.
Goldman Sachs, UBS, Credit Suisse, HSBC, Barclays
are the major players in the global investment banking
industry.

So what is IB?
In a very broad perspective, Investment Banking as the
term suggests, is concerned with the primary function of
assisting capital market in the movement of financial
resources from those who have them (investors) to those
who want them (issuers).
It can be inferred that investment banks are the
counterparts of banks in the capital markets in
discharging the critical function of pooling and allocation
of capital.
Over the decades, Investment Banking has transformed
itself to suit the technological needs of the world of
finance. Investment bankers have always enjoyed
celebrity status, but at times have paid the price for
excessive flamboyance as well.

IB Defined
The Dictionary of Banking and Finance defines
investment bank as a term used in the US to mean a
bank which deals with the underwriting of new issues
and advises corporations on their financial affairs.
Bloomberg provides a more consolidated definition for
an investment bank a financial intermediary that
performs a variety of services, including aiding in the
sale of securities, facilitating mergers and other
corporate re-organizations, acting as brokers to both
the individual and the institutional clients and
trading in its own account.
Much of the investment banking in its present form owes
its origins to the financial markets in USA, due to which
American investment banks have been leaders in the
world.
Therefore, the term Investment Banking can arguably be
said to be of American origin.

Example - Goldman Sachs A

global investment bank
Goldman Sachs is a bank holding company and a
leading global investment banking, securities and
investment management firm that provides a wide range
of services worldwide to a substantial and diversified
client base that includes corporations, financial
institutions, governments and high-net-worth individuals.
Goldman Sachs is the successor to a commercial paper
business founded in 1869 by Marcus Goldman. On May
7, 1999, the Company converted from a partnership to a
corporation and completed an initial public offering of its
common stock.
On September 21, 2008, the Group became a bank
holding company regulated by the Board of Governors of
the Federal Reserve System under the U.S. Bank
Holding Company Act of 1956 (BHC Act).

Financial Advisory
Financial Advisory includes advisory assignments with
respect to mergers and acquisitions, divestitures,
corporate defense activities, restructurings and spin-offs.
Its mergers and acquisitions capabilities are evidenced
by its significant share of assignments in large, complex
transactions for which the bank provides multiple
services, including one-stop acquisition financing and
cross-border structuring expertise, as well as services in
other areas of the firm, such as interest rate and
currency hedging.
In particular, a significant number of the loan
commitments and bank and bridge loan facilities that the
group enters into arise in connection with its advisory
assignments.

What is Underwriting ?
Securities underwriting refers to the
process by which investment banks raise
investment capital from investors on
behalf of corporations and governments
that are issuing securities (both equity and
debt capital).
The services of an underwriter are
typically used during a public offering.

Underwriting Services of IB
Underwriting services offered - includes public offerings
and private placements of a wide range of securities and
other financial instruments, including:
common and preferred stock,
convertible and exchangeable securities,
investment-grade debt,
high-yield debt,
sovereign and emerging market debt, municipal debt,
bank loans,
asset-backed securities and real estate-related
securities, such as mortgage-related securities and
the securities of real estate investment trusts.

Merchant Banking vs.

Investment Banking
As a general rule, investment banks focus on initial
public offerings (IPOs) and large public and private share
offerings.
Merchant banks tend to operate on small-scale
companies and offer creative equity financing, bridge
financing, mezzanine financing and a number of
corporate credit products.

Merchant Banking vs.

Investment Banking
While investment banks tend to focus on larger
companies, merchant banks offer their services
to companies that are too big for venture capital
firms to serve properly, but are still too small to
make a compelling public share offering on a
large exchange.
In order to bridge the gap between venture
capital and a public offering, larger merchant
banks tend to privately place equity with other
financial institutions, often taking on large
portions of ownership in companies that are
believed to have strong growth potential.

Merchant Banking vs.

Investment Banking
Merchant banks still offer trade financing products to
their clients. Investment banks rarely offer trade
financing because most investment banking clients have
already outgrown the need for trade financing and the
various credit products linked to it.
Merchant banks can also be said as a British term for
investment banks.
Merchant Banker has been defined under the Securities
& Exchange Board of India (Merchant Bankers) Rules,
1992 as "any person who is engaged in the business of
issue management either by making arrangements
regarding selling, buying or subscribing to securities as
manager, consultant, advisor or rendering corporate
advisory service in relation to such issue management".

Merchant Banking vs.

Investment Banking
To conclude the argument, merchant banking has
different connotations in the US and other markets.
In the US it is primarily a fund based activity while in the
UK and in India it is implies intermediation and advisory
activity in connection with public floatation of securities.
Investment Banking thus can be defined as a broader
term which covers both fund and fee based activities.
Merchant banking can either be a fund based activity or
a fee based activity.

The role of equity research

Equity Research is the division which reviews companies
and writes reports about their prospects, often with "buy"
or "sell" ratings.
While the research division generates no revenue, its
resources are used to assist traders in trading, the sales
force in suggesting ideas to customers, and investment
bankers by covering their clients.
There is a potential conflict of interest between the
investment bank and its analysis in that published
analysis can affect the profits of the bank.
Therefore in recent years the relationship between
investment banking and research has become highly
regulated requiring a Chinese wall between public and
private functions.

Investment Banking in India

Grindlays bank began Investment Banking (Merchant
Banking) in India in 1967 with RBI issuing the second
license to Citi in 1970.
These two banks primarily provided services which
included loan syndication, equity raising and other
advisory services.
In 1972, a Banking Commission report asserted the
need for Merchant Banking services in India by public
sector banks.
The commission recommended the same structure as
American investment banks (Glass-Steagall Act).
Merchant banks were meant to manage investments and
provide advisory services.

Investment Banking in India

SBI was the first Indian public sector bank to set up its
merchant banking division in 1972.
This was followed by Bank of India, Central Bank of
India, Bank of Baroda and many more.
SBI Caps and IDBI Caps are two prime examples of
merchant banks in India today.
Currently, there are 136 merchant banks registered with
SEBI.
Currently, without holding a certificate of registration
granted by the Securities and Exchange Board of India,
no person can act as a merchant banker.

Investment Banking In India

SBI was the first Indian public sector bank to set
up its investment banking division in 1972.
SBI Caps and IDBI Caps are two prime
examples of investment banks in India today.
Currently, there are 300 investment banks
registered with SEBI.
Currently, without holding a certificate of
registration granted by the Securities and
Exchange Board of India,
no person can act as a investment banker.

Whats the Difference??

Commercial Bank

Investment Bank

Individual or small to mid

sized companies.
Loans to buy a house or
future education etc.
Bank- Creditor & General
Public Debtor
Earns money through the
interest charged on loans

Companies/ Start-ups
Borrows to finance the
growth of a company.
Investors Creditor &
Companies Debtor
Earns money through the
fees charged for
providing services

Top Investment Bankers in India

Bajaj Capital
Cholamandalam Investment & Finance Company
ICICI Securities Ltd
IDFC
Kotak Mahindra Capital Company
SBI Capital Markets
TATA Investment Corporation Ltd
Yes Bank
UTI Securities Ltd

Global Investment Bankers

Bank of America (Bank of America Merrill
Lynch)
Barclays (Barclays Capital)
BNP Paribas (BNP Paribas CIB)
Citigroup (Citi Institutional Clients Group)
Credit Suisse
Deutsche Bank
Goldman Sachs
HSBC
JPMorgan Chase (J.P. Morgan Investment
Bank)

Conclusion
Investment Banking could be termed as a relatively
American phenomenon.
Indian Investment Banking industry has still a long way
to go before it catches up with its global peers.
The sub-prime crisis of 2008 has been a hammer blow
for pure play investment banks.