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investment banking


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MEANING A financial intermediary which operates at the 'wholesale end' of the financial markets. The 'middleman' between companies issuing securities to raise funds and the investors who buy the paper. An investment bank is a financial institution which raises capital, trades securities, and manages corporate mergers and acquisitions. Another term used for investment banking is corporate finance. An investment bank is different from the traditional bank it does not keep any deposits nor does it guarantees the "safekeeping" of money. It is more specialized organization that takes money and after analyzing the possible risks and economic conditions gives you advice to convert it into more money


HISTORY OF INVESTMENT BANKING Started in USA. Earlier for in mid of1800’s, professional investment banks had sprung up in the US to help government raise funds for infrastructure projects and the civil war. In the 1830’s, commercial banks started adding investment banking services to their regular banking activities in the US. Investment Banking hit a milestone in the 1870’s when a syndicate of banks from Europe and US teamed up to buy $50 million worth of US Treasury Bonds for resale to public.This venture marked the first mass securities-selling operation carried out in the United States. The Great Depression in the 1920’s 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 INVESTMENT BANKING In the 1980’s, leveraged buyouts and hostile takeovers drove the investment banking business.That trend began to change in the 1980s as a new focus on trading propelled firms such as Salomon Brothers, Merrill Lynch and Drexel Burnham Lambert into the limelight. 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. Advising clients on mergers and acquisitions and public offerings was the main focus of major Wall Street partnerships. Investment banks earned an increasing amount of their profits from proprietary trading. Investment banks profited handsomely during the boom years of the 1990s and into the tech boom and bubble. IPO’s of tech companies was the key investment banking activity through the 1990’s.


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. 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


FUNCTIONS Investment banks carry out multilateral functions like : They helps public and private corporations in issuance of securities in the primary market. They also act as intermediaries in trading for clients. They provides financial advice to investors and helps them by assisting in purchasing and trading securities &  managing assets They differs from commercial banking as investment banks don't accept deposits neither do they grant retail loans. Small firms which provide services of investment banking are called boutiques. Their functions are mainly Bond trading, Suggestions for mergers and acquisitions.

Role of an Investment Bank :

Role of an Investment Bank 1. Underwriter : 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)As an underwriter, an investment bank purchases all new securities of a company and resells them to the public which are unsubscribed. 2. Principal Trader : As a principal trader, an investment bank buys shares from other investment banks and investors and keeps them in its inventory. It may sell these shares at a higher price in the future. The term ‗principal trading‘ simply means that the trader of securities is also its owner or principal. e.g. after ABC Steel‘s shares are sold to the public, an investment bank may purchase some of these shares from the market. It may sell these shares later when the price rises.

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3. Broker or Agent : As an agent or broker, an investment bank buys and sells securities on behalf of a company. The key here is that the investment bank does not own these securities. It only trades in them for a commission. The important thing to remember here is that the brokerage or agency represents buyers or sellers who are the principals or owners of the securities . 4. Prime Broker : A prime broker offers a range of services to professional investors, including: Administrative and operational support for trading Lending of securities Management and safeguarding of securities Financing Without a prime broker, it would be difficult for professional investors to trade with several different brokers and manage their cash and securities from one centralized account. 5. Advisor : Investment banks provide a range of advisory services on complex transactions such as mergers and acquisitions. They also advise companies on the different options to raise capital. They provide high net-worth individuals with customized wealth management services.

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INVESTMENT BANKING STRUCTURE Front Office : The front office of an investment bank typically handles the following functions: Investment management Investment banking Research Strategy Trading and sales Structuring of complex financial instruments such as derivatives Middle Office : The middle office of an investment bank manages risk. For an investment bank, risk can be of two types: Market risk – the risk of decrease in value of investments due to market fluctuations Credit risk – the risk of loss due to non-payment of a loan The middle office calculates profits and losses. It also analyzes the risk of trading portfolios and ensures compliance with regulations. It works closely with both the front and back office. Back Office : The back office consists of the operational and administrative functions of the investment bank. Typically, the back office handles the following functions: clearing Settlement Regulatory compliance Record-keeping Reporting of transactions


CORE ACTIVITIES Investment banking . 2. Sales and trading 3. Research. 4. Global transaction banking


INVESTMENT BANKING It is the traditional aspect of investment banks . It involves helping customers raise funds in the capital markets . They also advise them on mergers and acquisitions. They can also involve subscribing investors to a security issuance, negotiating with a merger target and coordinating with bidders.


SALES & TRADING The main function of a large investment bank is buying and selling of financial products. In market making, the traders will buy and sell securities or financial products with the goal of earning an incremental amount of money on every trade. Primary job of the sales force is to call on institutional and high-net-worth investors to suggest trading ideas and take orders.


RESEARCH It is the division of investment banks It reviews companies and makes reports about their prospects, often with "buy" or "sell" ratings. Although the research division generates no revenue, its resources can be used to assist traders in trading, It can also be used by the sales force in suggesting ideas to the customers, and by the investment bankers for covering their clients.


GLOBAL TRANSACTION BANKING It is the division which provide cash management, custody services, lending, and securities brokerage services to institutions world wide. Prime brokerage with hedge funds has been an especially profitable business, as well as risky.

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TYPES OF PLAYER IN THE INVESTMENT BANKING INDUSTRY Full-Service Firms : Significant presence in all areas like underwriting, distribution, M&A, brokerages, structured instruments, asset management, etc. Commercial Banks : Operating through “Sec 20” subsidiaries (referring to the subsidiaries formed under Sec 20 of the erstwhile Glass Steagall Act) which were allowed to carry on limited investment banking services. Boutique Firms : Specialists in particular areas of investment banking . Brokerage Firms : Offers only trading services to retail and/or institutional clients (their huge investor base is also used by underwriters to place issues ). Asset Management Firms : Offer only investment services (the activities are also known as fund management, wealth management, cash management or portfolio management depending on the type of investors, purpose of investments, type of instruments invested in etc.)

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INVESTMENT BANKING PRODUCTS & SERVICES : In the past, investment banking meant helping companies raise capital or take strategic decisions on mergers or acquisitions. Today‘s investment banks have expanded and consolidated with several other industries such as brokers and commercial banks. They offer an overwhelming range of investing and financing services that can be roughly classified into the following categories: Equity investments (access equity markets) Fixed income (bond & debt markets) Derivatives markets Prime brokerage services Foreign exchange Investment management


REGULATORY FRAMEWORK FOR INVESTMENT BANKING IN INDIA All investment banks incorporated under the Companies Act, 1956 are governed by the provisions of that Act. Those investment banks that are incorporated under a separate statute are regulated by their respective statute. Ex: SBI, IDBI. Universal banks that function as investment banks are regulated by RBI under the RBI Act, 1934. All Non-banking Finance Companies that function as investment banks are regulated by RBI under RBI Act, 1934. SEBI governs the functional aspects of Investment banking under the Securities and Exchange Board of India Act, 1992. Investment banks that carry FDI either through joint ventures or as fully owned subsidiaries are governed by Foreign Exchange Management Act, 1999.


MERCHANT BANKING VS. INVESTMENT BANKING investment banks focuses on IPOs and large public and private share offerings. Merchant banks tend to operate on small-scale companies and offer creative equity financing. 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. 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

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Market shares of Global Investment Banks Merrill Lynch 9.0 % Goldman Sachs 7.5 % Credit Suisse First Boston 7.2 % Salmon Smith Barney ( Citigroup ) 6.7 % Morgan Stanley 6.3 % J.P. Morgan 5.5 % UBS Warburg 4.6 % Lehman Brothers 3.6 % Deutsche Bank 3.5 % Bank of America 2.4 %

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