Investment Banking

• It is an institution assisting the capital

market in its function of capital
intermediation. (Movement of financial
resources from savers to investors)
• It is similar to what commercial banks are
in money market. Nevertheless, it is much
wider in its scope and functions which are
evolved over a period of time
 Functions of Investment Banks
• Core Business portfolio
– Fund based
– Non fund based
• Support activity portfolio
– Non fund based
 Core Business Portfolio
• Fund based
– Equity portfolio – Underwriting, market making
– Debt portfolio – Underwriting, market making
– M & A portfolio – Investing in private equity
• Non - fund based
– Equity portfolio – Issue management
– Debt portfolio – Issue management,
structured finance like securitization
– M & A portfolio – advisory service
 Support activity portfolio
• Non fund based
– Equity portfolio – equity broking, distribution,
assets management, custodial service, wealth
management, and research
– Debt portfolio – Debt market broking,
distribution, assets management and
research
– Derivative portfolio – Derivative broking, risk
management, custodial services
 Indian Scenario
• It was confined to merchant banking services
• Mainly by foreign banks
• In 1972 The Banking Comm.Report suggested
need for merch.banking by public sector banks
• SBI and many PSBs are into merch.banking
• Merch.banking in India started growing after
1988 inception of SEBI
• Post 1992 merch.banking largely driven by issue
management
 Structure of Indian Invst.Banking
• Regulators does not allow all merch.
banking functions to be performed by one
entity. This is because
– To prevent excessive exposure to risk
– To prescribe and monitor capital adequacy
• Indian merch.banks structure their
business segments in different companies
 Structure of Indian Invst.Banks
• Separate company for
– Merch. banking
– Assets mgt. in the form of Mutual Fund
– Equity research company
– Stock broking company
• Opening of capital mkt. in early 90s and primary
mkt. boom, invst.banking florished
• Stringent regulation is a hurdle in further growth
• E.g.ICICI, IDBI, Kotak, Merrill Lynch, IL&FS,
Mogan Stanley, SBI, PNB, Canara Bank etc.
Services by Indian Invst. Banks
• Core service
– Merch.banking, underwriting and book
running
• Mergers and Acquisitions Advisory
– Liberalization and issue of takeover code
made M & A advisory a cream activity
• Corporate advisory
– Project finance
– Corporate restructuring
Services by Indian Invst. Banks
• Secondary market services
– Broking in equity and debt segment
– Derivative trading and risk management
• Asset management services
– Parent organization act as a sponsor of fund
– Fund is constituted as Trust
– Trust is managed by assets management Co.
Services by Indian Invst. Banks
• Wealth management service
– Portfolio mgt. of HNI
– Equity research
• Institutional investment
– Investment through venture capital subsidiary
– Private equity investment
– Proprietary (on their own) investment in the
secondary market and market making
activities
 Regulation of Invst. banking
• Regulation of invst.banks depends upon
its constitution and status
• Pure invst.banks, without presence in
banking business are regulated by SEBI
• Universal banks and NBFCs are regulated
by RBI and SEBI
 Regulation of Invst. banking
• All invst.banks incorporated under Indian
Companies Act are governed by that Act
• Invst.banks of separate statute are
governed by their respective Act like SBI
• Universal banks are regulated by RBI and
Banking Regulation Act
• NBFCs invst.banks by RBI directives
– Acceptance of deposit direction
– Prudential norms direction
 Regulation of Invst. banking
• Different activities of Invst.banking by
SEBI as under
• Merch.banking business of mgt. of IPOs
under Merch.bankers Regulation 1992
• Underwriting business by Underwriting
Regulation 1993
• Mutual Fund by M.Fund Regulation 1996
• Portfolio Mgt by Portfolio Regulation 1993
 Regulation of Invst. banking
• Venture capital and private equity by
Venture capital fund Regulation 1996 and
Foreign venture capital fund Regu.2000
• Institutional investing by foreign
invst.banks is governed by FIIs Regu.1995
• Invst.banks with FDI or JV with Indian Co.
are governed by FEMA 1999 and RBI
• Other laws of the land like, tax law,
contract law, local state law etc.