Regulatory Framework

Service Portfolio of Indian Investment Banks

Service Portfolio

Core Investment
Allied Business
Banking

Merchant Banking,
Assets Management
Underwriting and Securities Business
Service
BRLM

Broking, Trading,
M & A advisory
Sales and Distribution

Investment Advisory,
Corporate Finance
P/F, Wealth
Advisory
Management
Lehman Brothers
https://www.youtube.com/watch?v=59AANmpmTjU
Regulatory Framework for Investment
Banking Business in India
1. All investment banks incorporated under CA, 2013 are governed
by CA, 2013.
2. MNCs banks are regulated by RBI and BR Act, 1949
I. No bank shall hold shares in any company of an amount exceeding 30% of
the paid up share capital of that company or 30% of its own capital
3. Banks are allowed to own 100% in IB through subsidiaries
4. Exposure of these subsidiaries to underwriting business can be up
to 20 times of their net owned funds
5. NBFCs are regulated by RBI
Regulatory Framework for Investment
Banking Business in India
1. MB business consisting of management of public offer is under SEBI
(Merchant bankers) Rules, 1992 and SEBI (Merchant bankers) Regulation,
1992
2. Underwriting business is regulated under SEBI (Underwriters) Rules, 1993
and SEBI (Underwriters) Regulation, 1993
3. Stock broking activity is regulated by the bye-laws of stock exchange and SEBI
(Stock Brokers and Sub-Brokers) Regulation, 1992
4. SEBI (Prohibition of Insider trading) Regulation, 1992 and SEBI (Prohibition of
Fraudulent and Unfair Trade Practices Relating to Securities Markets)
Regulation, 1995
 Regulatory Framework for Investment
Banking Business in India
1. Asset Management is regulated as SEBI (Mutual Funds) Regulations, 1996
2. Portfolio Management is regulated under the SEBI ( Portfolio Managers) Regulations, 1993
3. Venture Capital is regulated by SEBI (Alternative Investment Funds) Regulation, 2012 and foreign
entities are regulated by SEBI (Foreign Venture Capital Funds) Regulation, 2000
4. Institutional Investing by foreign investment banks is regulated by SEBI (Foreign Portfolio Investors)
Regulations, 1995
5. IB set up in India with FDI as JV or fully owned subsidiaries are regulated by FEMA (Foreign Exchange
Management Act), 1999 and notifications issued by RBI
6. Investment bank are also governed by law such as tax law, contract law, property law, local state laws,
arbitration law and other general law applicable in India.
Conflict of Interest in Investment
Banking
1. Firewalls were introduced to prevent IB to access funds from their
parent commercial banks. However, there have been instances
where firewalls could not prevent disasters
2. IB have research division whose job is to advise their clients in
secondary market operation and new issues coming to public.
Conflict can arise if research division promotes a share which is
publicly offered through MB
3. Cases such as Enron, WorldCon are examples of this
Conflict of Interest in Investment
Banking
SEC reported that
1. Research recommendation tending to become marketing tools for merchant
banking assignment by the same bank and analysts getting paid share of such
investment banking gains
2. Ownership of stock by research analysis in the companies that they
recommended or research.
SEC reported that analysts leveraged their position in pumping up
recommendation in companies that they are interested in when they went
public.
 Conflict of Interest in Investment Banking

1. Merrill Lynch paid fines to the extent of $100 million in 2002 for its misleading research
reports
2. J.P. Morgan, Deutsche banks, Lehman Brothers, Bear Sterns, etc. were fined in 2002
3. J.P. Morgan has its role in Enron.
4. In 2002, French luxury goods leader , LVMH, file a 100 million euro suit against Morgan
Stanley alleging that its research report on LVMH was biased because of the Investment
bank’s close advisory relationship with LVMH’s arch rival Gucci Group. Morgan Stanley was
the underwriter of Gucci IPO in 1995.
5. In 2002, NYSE and NASDAQ came out with research analysts conflict of interest rules which
was approved by SEC where analyst had to disclose their interest in the recommendation
and water –tight compartment in IB divisions and research divisions
Buy Side of Investment Banking

1. To help the institutional investors in buying the securities

2. They raise money form Institutional investor and invest across various asset
classes
3. Around 50% of the money is of retails investors, while around 30% is of
banks, pension funds, insurance companies
Sell side of investment Banking
It refers to the help the companies to raise capital (Debt/equity) by
selling shares to mutual funds, hedge funds, insurance companies,
pension funds etc.
◦ Primary market
◦ Secondary market
Difference Between Buy side and Sell Side
S.No. Buy side
1 Asset managers, Institutional
investors, hedge funds, retail
investors
2 No. of analysts are less
3 Has a pool of funds for investment.
4 Are looking for buying assets
5 Long Hierarchical structure: MD, VP,
AVP, analyst
6 Easy and more bargaining power
7 Use reports of Sell side and do their
analysis. Not available on public
domain
Sell Side
IB, commercial banks, stock brokers, market
makers etc.
Number of analyst are more
Are looking for investment
Are looking to sell assets
Lean Hierarchical structure: Marketing
Executive, Researcher, P/F Manager
Difficult and less bargaining power
They give recommendation and reports are
available on public domain.