Investment Banking

overview
Introduction Functions

and activities Underwriting Bankers to an issue Debenture trustees Portfolio managers Challenges faced by investment bankers Private equity-functions, strategies, services Recent developments in India

Introduction
Investment

banking is an American synonym of merchant banking. Merchant banking originated in the 13th century in the European countries. These are institutions which provide valuable services like portfolio management, bills of exchange etc.

What is merchant banking?

The

term "merchant bank" came back into vogue in the late 1970s with the nascent private equity business of firms like Kohlberg, Kravis & Roberts (KKR). Merchant banking in its modern context refers to using one's own equity (often accompanied by external debt financing) in a private transaction, as opposed to underwriting a public issue.

Origin of merchant banking

Merchant

banking in Britain started in the 13th century when a few private firms engaged themselves in foreign trade and finance.

Indian scenario
During

19th century, the foreign merchant bankers operated in India. SBI floated its merchant banking division in the year 1972 Other commercial banks followed SBI and started merchant banking activities in ICICI 1973 IFCI -1986 IDBI - 1991

Functions of Merchant Banker

Act

as lead manager in the public and rights issue of new capital Act as consultant or advisor in the public issue of new capital Underwriter offerings of new securities Help companies to privately place issues of new securities Provide venture capital for hightechnology firms and ventures promoted by unproven entrepreneurs Provides corporate restructuring services such as mergers and acquisitions, divestitures etc.

Categories of Merchant Bankers

SEBI grants certificates in four categories in order to perform MB activities

Category I
This class of merchant bankers carry on activities associated with issue management such as preparation of prospectus and other information relating to the issue, determinations of the financial structure, arrangement of financiers, allotment and refund of subscription. They are also permitted to perform the roles of advisor, consultant,

Category II
This

category of Merchant bankers is allowed to carry out the roles of advisor, consultant, co-manager, underwriter and portfolio manager

Category III
This

class of merchant bankers is allowed to act as underwriters, advisor, and consultant

Category IV
This

category of merchant bankers are only allowed to act as advisor, or consultant

Services of Merchant Bankers

1. 2. 3. 4. 5. 6. 7.

Corporate counselling Project counselling Loan syndication Management of capital issues Corporate advisory services Portfolio management Advisory services to mergers and take overs

8. Consultancy to sick industrial units 9. Leasing 10.Issue management

Qualities of Merchant Banker

1.

The merchant banker must have knowledge and information about the capital markets, trends in stock exchange, psychology of the investing public, and technological and economical changes in the country 2. They must have ability to analyse and evaluate various technical, financial and economical aspects concerning

3 they must safeguard the interest of the investing public 4. The merchant banker should realize the changing environment of capital market and keep cordial relationship with the investors 5. They must be able to develop innovative capital market instruments for satisfying the changing needs of investors 6. The merchant banker must be able to restrict the function to be performed and concentrate and develop their strength to keep costs

Problems faced by merchant bankers

Stipulation

of networth of Rs 1 crore for authorisation of merchant bankers creates problems for professional Merchant bankers. Issuing companies not cooperating for timely allotment of shares and refund of application money to the investor.

Future prospects of Merchant banking in India

1. 2. 3. 4. 5.

Growth of primary market Entry of foreign investors Changing policy of financial institutions Development of debt market Corporate restructuring

Principal steps in issue of prospectus

1. 2. 3. 4. 5. 6. 7. 8. 9.

Design and vetting of prospectus Nature of instrument Financial results Risk factors Pricing of the issue Appointment of underwriters Appointment of bankers Appointment of registrars Appointment of brokers and

Filing of the prospectus with the Registrar of Companies

1. 2. 3. 4. 5. 6. 7. 8. 9.

printing and dispatch of prospectus and application form Filing of initial listing application Promotion of the issue Statutory announcement Collection of applications Processing of applications Establishing the liability of underwriters Allotment of shares Listing of the issue