INTRODUCTION TO INVESTMENT BANKING

Agenda of the day

Introduction to Investment Banking.

Concepts and definitions.

Business portfolio of investment banks

Service portfolio of investment banks in India.

Contemporary trends

IntroductionAn investment bank is a financial institution that assists individuals, corporations, and governments in raising capital by underwriting or acting as the client's agent in the issuance of securities (or both). An investment bank may also assist companies involved in mergers and acquisitions and provide ancillary services such as market making, trading of derivatives and equity securities, and FICC services (fixed income instruments, currencies, and commodities).Unlike commercial banks and retail banks, investment banks do not take deposits. From 1933 (Glass–Steagall Act) until 1999 (Gramm–Leach–Bliley Act), the United States maintained a separation between investment banking and commercial banks. Other industrialized countries, including G8 countries, have historically not maintained such a separation.

There are two main lines of business in investment banking.

1.Sell Side:-Trading securities for cash or for other securities (e.g. facilitating transactions, market-making), or the promotion of securities (e.g. underwriting, research, etc.) is the "sell side", 2.Buy Side :- It is a term used to refer to advising institutions concerned with buying investment services. Private equity funds, mutual funds, life insurance companies, unit trusts, and hedge funds are the most common types of buy side entities.

Core activities of Investment Banking:-

Front office:-

1. products,

2.Sales and trading ,

3..Research

Middle office:-

1.Risk Management

2.Corporate Strategy

3.Compliance and Financial control.

Back Office:- Operations and Technology

Importance of Investment Banking

1.Corporations- raising its capital. It facilitates the trading of securities thereby, increasing the liquidity of the securities.

2. For Individuals- It provides investment opportunities to the individuals or entities.

3.Most of the corporations get advisory services from the investment banks regarding the mergers, acquisitions and divestiture.

Who are the Clients…?

1.Investment banking clients can vary from sophisticated clients. i.e. major corporations or large, experienced funds to smaller institutions like SME’s usually depending on the size of the banks

2.Some of the smaller Investment banks have focuses on either certain sectors i.e. healthcare or technology or stage related companies i.e. start ups can raise money from investment vehicles .They also provide advice for M&A deals and real estate deals, assess a value.

Problems Of Investment Banking in India

1.Diversification Towards Capitals Markets.

2. No Proper System Of Investment Banking In India

3.Lack Of Institutional Financing

4. Lack Of Depth In The Secondary Markets, especially In the Corporate Debt Segment.

Business Portfolio

Non-fund basedEquity Portfolio – Stand by underwriting, private placements, securities business(broking marketing, distribution and research).Debt Portfolio – Fixed income underwriting and placements, structured financing, securitisation, high yield bonds, CDOs and debt finance advisory.M&A Portfolio – Corporate restructuring, M&A transaction services, merchant banking, corporate finance advisory.

Fund BasedEquity Portfolio – Underwriting, bought deals, secondary market and proprietary trading, equity derivatives and arbitrage trading.Debt Portfolio – Underwriting, secondary market making, proprietary trading, debt derivatives and structured products.M&A Portfolio – Participation as lead or co-investor in buyouts, LBOs/MBOs.

Business Portfolio

Core Investment BankingPublic offers in equities and bonds- domestic offers, foreign listing on domestic markets such as Wall Street, sponsored ADR/GDR programs, underwriting, sales and distribution.Private Placements- bonds and equity institutional placements, global bond underwriting and placements.M&A transactions advisory, tender offers, M&A financing, co-investing, buy-outs and LBOs, high yield M&A bond placements.

Allied BusinessesAsset Management- mutual funds, hedge funds, private equity and venture capital, buyout fundsSecurities business- stock broking, investment advisory, proprietary trading and investments, derivatives, structured productsForex and commodity productsRisk advisory and managementCustodial servicesOther capital market services.

Core Investment Banking and Allied Business Portfolio

Service portfolio of investment

banks

Core Investment Banking Allied Business

Contemporary trend:-

Investment banking metamorphosed from a pure intermediation and service activity of the early era in to a global fund and non-fund business in securities and capital markets. 

Contemporary global investment banks handle significant fund-based business of their own in the capital market along with their non-fund service portfolio.

However, these distinct segments are handled either on the same balance sheet or through a conglomerate structure using subsidiaries and affiliates depending upon the regulatory requirements in the operating environment of each country. 

The requirement of a strong and huge balance sheet has become very important in contemporary investment banking to bag prestigious and big-ticket mandates so as to be on the top of the league tables. 

The banks with big balance sheet s such as Goldman Sachs ($923 billion in 2011, Morgan Stanley ($750 billion in 2011) and universal banks such as JP Morgan,  Citigroup,  and Bank of America Merrill Lynch , provide an idea of how big the investment banking business has grown in terms of a capital driven industry, much like commercial banking.

Conclusion:-Investment banking is completely American phenomenon and it has long way to go in India.