“Strategic Analysis on Investment Banking” Submitted in partial fulfilment of the requirements for the award if Degree of BBM (Professional) Summer Internship Project Report By Ashley Geo Thodukayil Reg No. 132603009 (October, 2015) Under the Guidance of Mr. Adithya Shetty Assistant Professor
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“Strategic Analysis on Investment Banking”
Submitted in partial fulfilment of the requirements for the award if
Degree of BBM (Professional)
Summer Internship Project Report
By
Ashley Geo Thodukayil
Reg No. 132603009
(October, 2015)
Under the Guidance of
Mr. Adithya Shetty
Assistant Professor
Department of Commerce,Manipal University, Manipal-576104
Acknowledgment
Project is a milestone in every student’s life. I hereby take privilege to acknowledge management for providing an opportunity to study in their esteemed institution.
I wish to place on report my grateful thanks to Mr. Sandeep Shenoy, HOD, Department of Commerce, BBM, Manipal University, for providing me with continuous encouragement and support.
I express my sincere thanks to Mrs. E Geetha, Assitant Professor & Project Co-ordinator, for her motivating support.
I would also like to express my sincere thanks to my project guide Mr. Adithya Shetty, for his suggestions and co-operation.
Finally, I would like to thank all teaching and non-teaching staff of department of commerce BBM, Manipal University, friends, parents and those who either directly or indirectly helped me by providing useful suggestions which gave me new ideas.
Declaration
I, Ashley Geo Thodukayil (132603009), Department of Commerce, Manipal University, declare that the Project Report entitled “Strategic Analysis on Investment Banking”, being submitted to the Department of Commerce, Manipal University, in partial fulfillment of the requirements for the award of degree o BBM (Professional), is my original work and the same is/was not earlier submitted to any other Degree, Diploma, Fellowship or any other similar title or prizes.
Signature:
Index
1 Executive Summary2 Objectives3 Research Methodology4 Data Collection5 Introduction6 Definition7 Registration of Investment Banks8 Registration Charges9 Code of Conduct10 Offering & Services of Investment Banks11 Functions of IB
12 Organization Structure
13 Skills Suggested for Investment Bankers
14 Evolution of Investment Banking in India
15 SWOT Analysis
16 Top Ten Investment Banks
17 Conclusion
Executive Summary
The project on “Strategic Analysis of Investment Banking “ has been undertaken
with a view to study the overall investment banking industries in India and their
products offering, services , operations , client management systems and other
part of the industry.
In the above study, I have highlighted the key regulatory parameters regarding
Investment banks like Definition of Investment Banks, Registration of Investment
Banks, Code of Conducts for Investment Banks, Registration Charges & Function
of Investment Banks.
Objectives
The main objectives of the project are to:
Study the overall view of the Indian Investment Banks.
Study the Regulatory Requirement for Registration of Investment
Banks.
To analyze the strengths and weakness of investment banks
Research Methodology
The research methodology used for the project report is descriptive and research
is based on secondary data sources. This include “Top Ten Investment Banks.” As
far as other information is concerned I had personally visited various websites
including SEBI and RBI.
Data Collection
The objective of this exercise is to get the overview of the Investment Banking
Structures in India. I have collected the data from following data sources.
Data related to Registration, Functions, Code of Conducts of Investment
Banks taken from the SEBI Website and Investment Banking book of R
Machiraju.
Introduction
Investment banks play a significant role in the financial services sector. However,
Investment banking, as advisory financial services, emerged rather late. Formal
Investment banking service in India originated with the setting up of the
Investment banking division by the Grind lays Bank in 1969 for undertaking
management of public issue and financial consultancy, followed by other foreign
banks.
Pursuant to the recommendations of the Banking Commission (1972), State Bank
of India started Investment banking service in 1973. The ICICI Ltd was the first
development finance institution to initiate such service in 1974. The period
following the mid-seventies witnessed a boom in the growth of Investment
banking organizations in the country which were sponsored by banks, financial
institutions, NBFCs Brokers and so on. This led to diversification into the scope of
these activities such as loan syndication, portfolio management, corporate
Investment banking is a particular form of banking which finances capital
requirements of an enterprise. Investment banking assists as it performs IPOs,
private placement and bond offerings, acts as broker and carries through mergers
and acquisitions.
But the scope of such services was neither defined nor was a set of rules and
regulations governing them in place. The formation of SEBI in 1992 was a
landmark in the evolution of Investment banking as a professional service in the
country. Investment banking organizations have to be mandatorily registered with
SEBI. While Investment bankers are currently providing a variety of services,
registration with SEBI is required for (i) Capital issues related activities : both pre-
issued and post-issue, (ii) mergers and acquisitions, and (iii) Portfolio
Management.
Definition
“An Investment banker is any who is engaged in the business of issue
management either by making arrangements regarding selling, buying or
subscribing to securities or acting as manager/consultant / advisors or rendering
corporate advisory service in relation to such issue management.”
Registration of Investment Bank
Compulsory Registration:
Investment bankers require compulsory registration with the SEBI to
carry out their activities. They fall under four Registration categories
Category I – Investment bankers can carry on any activity related to
issue management, that is , the preparation of prospectus and other
information relating to the issue, determining the financial structure,
tie up of financiers, final allotment of securities, refund of the
subscription and also act as advisors, consultants, managers,
underwriters or portfolio Managers.
Category II – Investment bankers can act as advisors, consultants , co-
managers, underwriters and portfolio Mangers.
Category III – Investment bankers can act as underwriters, advisors and
consultants to an issue.
Category IV – Investment bankers can act only as adviser or consultant
to an issue.
Thus, only category I Investment bankers could act as lead managers to
an issue. With effect from December 9, 1997, however, only Category I
Investment bankers are registered by the SEBI. To carry on activities as
portfolio managers, they have to obtain separate certificate of
registration from the SEBI.
Net worth requirement for Registration is as follow:
Category I : Rs. 5,00,00,000
Category II : Rs. 50, 00, 000
Category III :Rs. 20, 00, 000
Category IV : Nil
Registration Charges
An Investment banker has to pay to the SEBI
1. Application fee of Rs.25,000;
2. Registration , Rs. 10 Lakhs and
3. Renewal fee of Rs. 5 lakhs every three years from the fourth year from the
date of initial registration.
Code of Conduct
1. Make all efforts to protect the interest of investors.
2. Maintain high standards of integrity, dignity and fairness in the conduct of
its business.
3. Fulfill its obligations in a prompt, ethical and professional manner.
4. At all times exercise due diligence, ensure proper care and exercise
independent professional judgments
5. Endeavour to ensure that (a) inquiries from investors are adequately dealt
with; (b) grievances of investors are redressed in a timely and appropriate
manner ;(c) where a complaint is not remedied promptly, the investor is
advised of any further steps which may be available to him under the
regulatory system.
6. Ensure that adequate disclosures are made to the investors in a timely
manner in accordance with the applicable regulations and guidelines so as
to enable them to make a balanced and informed decision.
7. Endeavour to ensure that the investors are provide with true and adequate
information without making any misleading or exaggerated claims or any
misrepresentation and are made aware of the attendant risk before taking
any investment decision.
8. Endeavour to ensure that copies of the prospectus, offer document, letter
of offer or any other related literature is made available to the investors at
the time of issue or the offer.
9. Not discriminate amongst its clients, save and except on ethical and
commercial considerations.
10. Not make any statement, either oral or written, which would misrepresent
the services that the Investment banker is capable of performing for any
client or has rendered to any client.
11. Avoid conflict of interest and make adequate disclosure of its interest.
12. Put in place a mechanism to resolve any conflict of interest situation that
may arise in the conduct of its business or where any conflict of interest
arises, should take reasonable steps to resolve the same in an equitable
manner.
13. Make appropriate disclosure to the client of its possible source or potential
areas of conflict of duties and interest while acting as Investment banker
which would impair its ability to render fair, objective and unbiased
services.
14. Always endeavor to render the best possible advice to the clients having
regards to their needs.
15. Not divulge to anybody either or in writing, directly or indirectly , any
confidential information about its clients which has come to its knowledge,
without taking prior permission of its clients, except where such disclosures
are required to be made in compliance with any law for the time being in
force
16. Ensure that any change in registration status / any penal action taken by
the SEBI or any material change in the Investment bankers’ financial status,
which may adversely affect the interests of clients / investors, is promptly
informed to the clients and any business remaining outstanding is
transferred to another registered intermediary in accordance with any
instructions of the affected clients.
17. Not indulge in any unfair competition, such as weaning away the clients on
assurance of higher premium or advantageous offer price or which is likely
to harm the interests of other Investment bankers or investors or is likely to
place such other Investment bankers in a disadvantageous position which
competing for or executing any assignment.
18. Maintain arms length relationship between its Investment banking activity
and any other activity.
19. Have internal control procedures and financial and operational capabilities
which can be reasonably expected to protect its operations, its clients,
investors and other registered entities from financial loss arising from theft,
fraud, and other dishonest acts, professional misconduct or omissions.
20. Not make untrue statement or suppress any material fact in any
documents, reports or information furnished to the SEBI.
21. Maintain an appropriate level of knowledge and competence and abide by
the provisions of the SEBI Act / regulations / circulars and guidelines, which
may be applicable and relevant to the activities carried on by it.
22. Ensure that the SEBI is promptly informed about any action, legal
proceedings, etc, initiated against it in respect of material breach or non-
compliance by it, of any law , rules, regulations , directions of the SEBI or of
any other regulatory body.
23. (a) Not render, directly or indirectly, any investment advice about any
security in any publicly accessible media, whether real-time or non real-
time , unless a disclosure of his interest including a long or short position, in
the security has been made, while rendering such advice; (b) In the event of
an employee of the Investment banker rendering such advice, the
Investment banker should ensure that such employee should also disclose
the interests, if any, of himself , his dependent family members and the
employer Investment banker, including their long or short position in the
security , while rendering such advice.
24. Demarcate the responsibilities of the various intermediaries appointed by it
clearly so as to avoid any conflict or confusion in their job description.
25. Provide adequate freedom and powers of its compliance officer for the
effective discharge of his duties.
26. Develop its own internal code of conduct its internal operations and laying
down its standards of appropriate conduct for its employee and officers in
carrying out their duties. Such a code may extend to the maintenance of
professional excellence and standards, integrity, confidentiality, objectivity,
avoidance or resolution of conflict of interest, disclosure of shareholding
and interest etc.
27. Ensure that good corporate policies and corporate governance are in place.
28. Ensure that any person it employees or appoints to conduct business is fit
and proper and otherwise qualified to act in the capacity so employed or
appointed.
29. Ensure that it has adequate resources to supervise diligently and does
supervise diligently persons employed or appointed by it in the conduct of
its business, in respect of dealings in securities market.
30. That the senior management, particularly decision makers have access to
all relevant information about the business on a timely basis.
31. Not be a party to or instrument for (a) creation of false market ;(b) price
rigging or manipulation or; (c) passing of unpublished price sensitive
information in respect of securities which are listed and proposed to be
listed in any stock exchange to any person or intermediary in the securities
market.
Offering & Services of Investment Banks
• Project Counseling:
Project counseling includes preparation of project reports, deciding upon the
financing pattern to finance the cost of the project and appraising the project
report with the financial institutions or banks. It also includes filling up of
application forms ` relevant information for obtaining funds from financial
institutions and obtaining government approval.
• Issue Management:
Management of issue involves marketing of corporate securities viz. equity
shares, preference shares and debentures or bonds by offering them to public.
Investment banks act as an intermediary whose main job is to transfer capital
from those who own it to those who need it. After taking action as per SEBI
guidelines, the Investment banker arranges a meeting with company
representatives and advertising agents to finalize arrangements relating to date of
opening and closing of issue, registration of prospectus, launching publicity
campaign and fixing date of board meeting to approve and sign prospectus and
pass the necessary resolutions. Pricing of issues is done by the companies in
consultant with the Investment bankers.
• Underwriting of Public Issue:
Underwriting is a guarantee given by the underwriter that in the event of under
subscription, the amount underwritten would be subscribed by him.
Banks/Investment banking subsidiaries cannot underwrite more than 15% of any
issue.
• Managers, Consultants or Advisers to the Issue:
The managers to the issue assist in the drafting of prospectus, application forms
and completion of formalities under the Companies Act, appointment of Registrar
for dealing with share applications and transfer and listing of shares of the
company on the stock exchange. Companies can appoint one or more agencies as
managers to the issue.
• Portfolio Management:
Portfolio refers to investment in different kinds of securities such as shares,
debentures or bonds issued by different companies and government securities.
Portfolio management refers to maintaining proper combinations of securities in
a manner that they give maximum return with minimum risk.
• Advisory Service Relating to Mergers and Takeovers:
A merger is a combination of two companies into a single company where one
survives and other loses its corporate existence. A takeover is the purchase by
one company acquiring controlling interest in the share capital of another existing
company. Investment bankers are the middlemen in setting negotiation between
the two companies.
• Off Shore Finance:
The Investment bankers help their clients in the following areas involving foreign
currency.
(a) Long term foreign currency loans
(b) Joint Ventures abroad
(c) Financing exports and imports
(d) Foreign collaboration arrangements
• Non-resident Investment:
The services of Investment banker includes investment advisory services to NRI in
terms of identification of investment opportunities, selection of securities,
investment management, and operational services like purchase and sale of
securities.
• Loan Syndication:
Loan syndication refers to assistance rendered by Investment bankers to get
mainly term loans for projects. Such loans may be obtained from a single
development finance institution or a syndicate or consortium. Investment bankers
help corporate clients to raise syndicated loans from banks or financial
institutions.
• Corporate Counseling:
Corporate counseling covers the entire field of Investment banking activities viz.
project counseling, capital restructuring, public issue management, loan
syndication, working capital, fixed deposit, lease financing acceptance credit, etc.
Organizational Structure
Front Office Middle Office Back Office
- Investment Banking - Risk - Operations
- Sales & Trading - Finance - Technology
- Research - Compliance
- Custodian
- Investment Mgmt
Main activities and units
An investment bank is split into the so-called front office, middle office, and back
office. Investment banks offer security to both corporations issuing securities and
investors buying securities. In the case of corporations, investment bankers offer
information on when and how to place their securities in the market. The
corporations do not have to spend on resources with which it is not equipped. To
the investor, the responsible investment banker offers protection against unsafe
securities. The offering of a few bad issues can cause serious loss to its reputation,
and hence loss of business. Therefore, investment bankers play a very important
role in issuing new security offerings
Front office
Investment banking is the traditional aspect of the investment banks which also
involves helping customers raise funds in the capital markets and advise on
mergers and acquisitions. Investment banking may involve subscribing investors
to a security issuance, coordinating with bidders, or negotiating with a merger
target. Another term for the investment banking division is corporate finance, and
its advisory group is often termed mergers and acquisitions (M&A). The
investment banking division (IBD) is generally divided into industry coverage and
product coverage groups. Industry coverage groups focus on a specific industry
such as healthcare, industrials, or technology, and maintain relationships with
corporations within the industry to bring in business for a bank. Product coverage
groups focus on financial products, such as mergers and acquisitions, leveraged
finance, equity, and high-grade debt and generally work and collaborate with
industry groups in the more intricate and specialized needs of a client.
Sales and trading: On behalf of the bank and its clients, the primary function of a
large investment bank is buying and selling products. In market making, traders
will buy and sell financial products with the goal of making an incremental
amount of money on each trade. Sales is the term for the investment banks sales
force, whose primary job is to call on institutional and high-net-worth investors to
suggest trading ideas (on caveat emptor basis) and take orders. Sales desks then
communicate their clients' orders to the appropriate trading desks, who can price
and execute trades, or structure new products that fit a specific need. Structuring
has been a relatively recent activity as derivatives have come into play, with
highly technical and numerate employees working on creating complex structured
products which typically offer much greater margins and returns than underlying
cash securities. Strategists advise external as well as internal clients on the
strategies that can be adopted in various markets. Ranging from derivatives to
specific industries, strategists place companies and industries in a quantitative
framework with full consideration of the macroeconomic scene. This strategy
often affects the way the firm will operate in the market, the direction it would
like to take in terms of its proprietary and flow positions, the suggestions
salespersons give to clients, as well as the way structures create new products.
Banks also undertake risk through proprietary trading, done by a special set of
traders who do not interface with clients and through "principal risk", risk
undertaken by a trader after he buys or sells a product to a client and does not
hedge his total exposure. Banks seek to maximize profitability for a given amount
of risk on their balance sheet. The necessity for numerical ability in sales and
trading has created jobs for physics and math P.H.D.s who act as quantitative
analysts.
Research is the division which reviews companies and writes reports about their
prospects, often with "buy" or "sell" ratings. While the research division generates
no revenue, its resources are used to assist traders in trading, the sales force in
suggesting ideas to customers, and investment bankers by covering their clients.
There is a potential conflict of interest between the investment bank and its
analysis in that published analysis can affect the profits of the bank. Therefore in
recent years the relationship between investment banking and research has
become highly regulated requiring a Chinese wall between public and private
functions.
Custody and agency services: is the division which provides cash management,
lending, and securities brokerage services to institutions. Prime brokerage with
hedge funds has been an especially profitable business, as well as risky, as seen in
the "run on the bank" with Bear Stearns in 2008.
Investment management is the professional management of various securities
(shares, bonds, etc.) and other assets (e.g. real estate), to meet specified
investment goals for the benefit of the investors. Investors may be institutions
(insurance companies, pension funds, corporations etc.) or private investors (both
directly via investment contracts and more commonly via collective investment
schemes eg. mutual funds). The investment management division of an
investment bank is generally divided into separate groups, often known as Private
Wealth Management and Private Client Services.
Middle office
Risk management involves analyzing the market and credit risk that traders are
taking onto the balance sheet in conducting their daily trades, and 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. 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 counterparty),
correctly (as per standardized booking models in the most appropriate systems)
and on time (typically within 30 minutes of trade execution). In recent years the
risk of errors has become known as "operational risk" and the assurance Middle
Offices provide now includes measures to address this risk. When this assurance is
not in place, market and credit risk analysis can be unreliable and open to
deliberate manipulation.
Finance areas are responsible for an investment bank's capital management and
risk monitoring. By tracking and analyzing the capital flows of the firm, the
Finance division is the principal adviser to senior management on essential areas
such as controlling the firm's global risk exposure and the profitability and
structure of the firm's various businesses. In the United States and United
Kingdom, a Financial Controller is a senior position, often reporting to the Chief
Financial Officer. Corporate strategy often falls under the finance division as well.
Compliance areas are responsible for an investment bank's daily operations'
compliance with government regulations and internal regulations. Often also
considered a back-office division.
Back office
Operations involve data-checking trades that have been conducted, ensuring that
they are not erroneous, and transacting the required transfers. While some
believe that operations provides the greatest job security and the bleakest career
prospects of any division within an investment bank, many banks have
outsourced operations. It is, however, a critical part of the bank. Due to increased
competition in finance related careers, college degrees are now mandatory at
most Tier 1 investment banks. A finance degree has proved significant in
understanding the depth of the deals and transactions that occur across all the
divisions of the bank.
Technology refers to the information technology department. Every major
investment bank has considerable amounts of in-house software, created by the
technology team, who are also responsible for technical support. Technology has
changed considerably in the last few years as more sales and trading desks are
using electronic trading. Some trades are initiated by complex algorithms for
hedging purpose.
Skills Suggested for Investment Bankers
Technical Skill
Academic Background: In the early days of investment banking, not much
importance was attached to academic background. Today, the business has
become very complicated and the skill requirements have multiplied.
Consequently, investment banks find it important to recruit people with the
right academic credentials. Typically, for most of the important jobs, an MBA is
a must. Investment banks rely heavily on campus recruitments
Conceptual Soundness: One of the major benefits for a professional in an
investment bank is the learning associated with work. The financial skills of an
Academic BackgroundConceptual SoundnessProduct SpecializationLegal KnowledgeKnowledge of Capital Markets and FunctioningKnowledge of Regulatory Bodies involved in the Various OperationsKnowledge of International Business Scenario and Economic TrendsKnowledge of Software Tools, Developments in the Field of Information Technology
Technical Skill
Ability to Cater to the Audience According to its Awareness Levels- Negotiation SkillsPersonality Traits