Investment Banking

1. INVE$TMENT BANKING

2. History (contd..) Modern banking finds its roots in Italy in the 13 th century. The cities financed its developmental activities and wars through issuance of bonds or from borrowing through public. World’s oldest known bank has its roots in Italy. It’s The Monte di Pietà , or Monte Pio set up in 1472.

3. The need for Investment Banks First stock market in Antwerp Belgium in 1531– sans the stock!! Limited liabilities companies came into existence in the 1600s to sponsor trade voyages to the East Indies from countries such as Britain, France etc. Investors spread their risk by investing in several different ventures at the same time, thereby playing the odds against all of them ending in disaster . This kind of business model led to risk management . Dutch East India company was the 1 st to allow outside investors to purchase shares.

4. The need for Investment Banks Share trading at the Jonathan coffee shop in London. Investors who wished to buy or sell securities posted the details at the coffee shop and the trade happened. A formal stock exchange was built in 1773. NYSE came around 19 years later.

5. Investment banks help companies and governments and their agencies to raise money by issuing and selling securities in the primary market. They assist public and private corporations in raising funds in the capital markets (both equity and debt), as well as in providing strategic advisory services for mergers, acquisitions and other types of financial transactions.

6. Whats the Difference?? Commercial 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 Investment Bank Companies/ Start-ups Borrows to finance the growth of a company. Investors – Creditor & Companies – Debtor Earns money through the fees charged for providing services

7. Why an Investment Bank It performs the following functions

8. 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

9. 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.

10. 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.

11. Trends in Investments in India Source – www.livemint.com

12. Value Parameters 1] ROI 2] Network 3 ]Risk factor 4 ]Fees/Charge/Cost 5 ]Familiarity/Relationship 6 ]Experience of the bank & the banker 7 ]Performance 8] Industry Knowledge 9] Personal Attention 10]Time taken to close a deal http://www.ft.com The Banker Sept 2011

13. Venture Capital n Investment Bank

14. FRONT OFFICE

15. Front Office Pitching to various clients and institutions Setting the terms and conditions for any form of deal Trading of securities on behalf of clients In the process of market making, traders will buy and sell financial products with the goal of making an incremental amount of money on each trade. Sales desks communicate their clients' orders to the appropriate trading desks, who can price and execute trades, or structure new products that fit a specific need.

16. Brokerage Rates Firm Brokerage for Delivery Brokerage for Intraday trading SBICAP Securities brokerage charges 0.50% 0.10% Sharekhan brokerage charges 0.03% - 0.50% 0.03% - 0.10% Motilal Oswal brokerage charges 0.30% - 0.50% 0.03% - 0.15% Angel Broking brokerage charges 0.50% 0.02% - 0.03% ICICI direct brokerage charges 0.75% 0.15% HDFC Securities brokerage charges 0.50% 0.15% Religare brokerage charges 0.20% - 0.30% 0.02% - 0.03% Reliance Money brokerage charges 0.01% 0.01% www.niftyprediction.blogspot.com

17. Research is the division which reviews companies and writes reports about their prospects, often with "buy" or "sell" ratings. Structuring has been a relatively recent division as derivatives have come into play, which involves creating complex structured products which typically offer much greater margins and returns than underlying cash securities.

18. MIDDLE OFFICE

19. Middle Office Middle office usually consists of traders, analysts, and managers who are knowledgeable of trading activities but usually don’t engage in market activities themselves . ( Chinese Wall Policy) Risk Management involves analyzing the market and credit risk that traders are taking onto the balance sheet in conducting their daily trades, setting limits on the amount of capital that they are able to trade in order to prevent 'bad' trades having a detrimental effect to a desk overall.

20. Another key Middle Office role is to ensure that the above mentioned economic risks are captured accurately (as per agreement of commercial terms with the client) correctly and on time (typically within 30 minutes of trade execution).

21. BACK OFFICE

22. Back Office Operations involves data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers. Every major investment bank has considerable amounts of in-house software, created by the Technology team, who are also responsible for Computer and Telecommunications-based support.

23. IPOs by Region and Globally Source – The Banker Sept 2011 Issue

24. Front End Process (IPO) Company asks for bids Selecting lead managers as per bids Prepare draft offer prospectus document for IPO. Road shows for the IPO Decide the issue date & issue price band with the help of Issuer Company RHP & IPO Application Forms are printed and posted to syndicate members; through which they are distributed to investors Investor – Bidding for the public issue Allocation of shares as per demand Stocks listed on the market

25. Institutions/Individuals in IPO process Lead managers,also known as Book Running Lead Manager and Co Book Running Lead Managers . Registrars. Legal advisors. Auditors. SEBI. Credit rating agencies. Syndicate members.( generally banks ) Investors ( Retail Individual Investor (RII) , High Net worth Individual (HNI), Non-institutional bidders, Qualified Institutional Bidders (QIB's ).) Advertising agencies.

26. Back-end process of an IPO Issuer Company - IPO Process Initialization Appoints lead manager as book runner. Appoints registrar of the issue. Appoints syndicate members. 2) Lead Manager's - Pre Issue Role 3) SEBI – Prospectus Review SEBI reviews draft offer prospectus. Reverts it back to Lead Manager if needs clarification or changes. SEBI approve the draft offer prospectus, the draft offer prospectus is now become Offer Prospectus.

27. Back-end process of an IPO contd.. 4) IPO should be graded by a CRA 5) Preparation of Red Herring prospectus 6) Investor – Bidding for the public issue 7 ) Lead Manager – Price Fixing 8 ) Registrar - Processing IPO Applications 9 ) Lead manager – Stock Listing

28. Fees taken at diff stages of an IPO SR NO Particulars % of Issue size 1. Lead Managers (0.2 – 1 )% 2. Syndicate Fees, and Selling Commission (3-4) % 3. Advertising, and Marketing Expenses (1-2) % 4. Printing and Stationary Expenses (1-2) % 5. Miscellaneous Expenses -Filing Fess With SEBI, BSE & NSE, Registrar’s Fees, Legal Advisor’s Fees, IPO Grading, Listing Fees, Others (1-2) % 6. Total (8-10 ) %

29. MARKETING OF IPO Press Conference Investors Conference The prospective investors are called by invitation. The Promoters and Lead Managers give presentations. They reply to the questions of the investors to boost their confidence. HNI are called. Top brokers are also called. Road Shows Road shows are becoming more and more popular in India.

30. MARKETING OF IPO contd.. Newspaper Advertisements. Printing – Prospectus. The company has to print approved prospectus and provide enough copies to all intermediaries . If any investor asks for a copy of prospectus it must be provided to him without any fees. Sufficient quantities should be maintained at the registered office of the company and with the Lead Managers. Printing Application Forms Sufficient number of application forms must be printed much before the opening of the issue . Each form must contain abridged prospectus in SEBI approved format. It is compulsory to provide stationery to all underwriters and brokers. They will arrange distribution to their sub- brokers and other clients

31. MARKETING OF IPO contd.. The reputation of a merchant banker could expand a firm’s investor base at a lower cost than the firm can, since the promotional efforts of a merchant banker on behalf of the firm would be more creditable.

32. Networking and Promotions Customer Relationship Managers building the trust Networking via already existing clients Pitching by interaction with the CEOs and CFOs of companies Hiring people from other firms with strong network and good customer relationships Holding roadshows Holding seminars to attract investors Structured products and services to attract customers . Eg . ICICIdirect money Kitchen

33. Need Gaps in the IB sector Front End IB is still at a very nascent stage in India and hence needs to be developed and promoted properly. The trust factor is still not been built up amongst the companies and investors. Here there is need of trained analysts to do the same. Lack of Investor knowhow Still concentrated only on the metros. Need to move to the tier-2 and tier-3 cities to tap in more potential investors.

34. Back End Need to develop more robust risk management systems. Use of better technology and systems required for 2 main purposes To keep track of an investor’s database better Bring in faster and more intelligent systems

35. Thank You Shweta Kucheria Ram Shukla Anand Kumar Mishra