INTRODUCTION & DEFINITION
Investment Banks help companies and governments raise money by issuing and selling securities in the capital markets (both equity and debt), as well as providing advice on transactions such as mergers and acquisitions. Until the late 1980s, the United States and Canada maintained a separation between investment banking and commercial banks.
Division of banking encompassing business entities dealing with the creation of capital for the companies, in addition to acting as agents or underwriters for companies in the process of issuing securities, investment banks also advise companies on matter related to the issue & placement of Investment Banking.
A majority of investment banks offer strategic advisory services for mergers, acquisitions, divestiture or other financial services for clients, such as the trading of derivatives, fixed income, foreign exchange, commodity, and equity securities.
Trading securities for cash or securities (i.e., facilitating transactions, market-making), or the promotion of securities (i.e., underwriting, research, etc.) is referred to as the “sell side.”
Dealing with the pension funds, mutual funds, hedge funds, and the investing public who consume the products and services of the sell-side in order to maximize their return on investment constitutes the “buy side”. Many firms have buy and sell side components
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An investment bank is different from your traditional bank down the street in the sense that it does not keep any deposits with itself to pay you an interest nor does it guarantees the “safekeeping” of your money.
An investment bank is more specialized organization that takes in your money and after analyzing the possible risks and economic conditions gives you advice to convert it into more money. The services provided by Investment Banks takes many forms: securities underwriting, stock and bond trading, facilitating mergers and acquisitions, arranging and funding syndicated loans and providing financial advice to companies on aspects like pricing of securities. A broader and better definition of investment banking is to think of investment banking as an industry, which either trades directly in capital market products or uses the underlying capital markets, to construct different financial products, So an Investment Banker is an individual or institution who/which acts as an underwriter or agent for corporations and municipalities issuing securities. Most also maintain broker/dealer operations, maintain markets for previously issued securities, and offer advisory services to investors. Investment banks also have a large role in facilitating mergers and acquisitions, private equity placements and corporate restructuring.
An individual or institution which acts as an underwriter or agent for corporations and municipalities issuing securities. Most also maintain broker/dealer operations, maintain markets for previously issued securities, and offer advisory services to investors. investment banks also have a large role in facilitating mergers and acquisitions, private equity placements and corporate restructuring. Unlike traditional banks, investment banks do not accept deposits from and provide loans to individuals, also called investment banker.
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Investment banking is an investing opportunity provided through investment banks. Investment banks are financial intermediary who, much like commercial banks, have a principal purpose of bringing borrowers and lenders together. However, where commercial banks borrow money from individual in the form of savings and checking deposit to lend to other individuals and businesses, investment banks help lenders invest directly in the business of borrowers. Investment Banks issue securities on behalf of the companies & governments, trade securities in the primary & secondary markets on behalf of individual & institutional investors, manage portfolios of clients, and provide other financial advice & support services. Investment banks also engage in a lot of proprietary activities in the financial market.
Investment Banks can be classified mainly into three groupings:
(a) Full-Service investment banks are large institutions who provide a complete set of services to their clients with top expertise in most of the areas and who operate on global basis.
(b) Regional investment banks differ from full-service banks in exactly the manner in which their name implies, their operations are concentrated in a particular region.
(c) Boutiques are much smaller firms who specialize in particular product or industry. Boutiques are often started b successful bankers who leave the larger firms with their extensive networks for the prestige and money associated with their own firm.
During most of the 1990s, the investment banking has enjoyed tremendous prosperity, linked very close to the longest bull market in the history. As the stock prices have grown much faster and longer ever, with the financial news receiving increasing press coverage, the amount of activity in the financial services industry has grown as well. Financial innovations such as Mutual funds have been very popular, leading to increased revenues for the brokerage arms of the investment banks that execute the trades in the market.
HISTORY AND DEVELOPMENT OF
Investment banking began in the United States around the middle of the 19th century. Prior to this period, auctioneers and merchants—particularly those of Europe—provided the majority of the financial services. The mid-1800s were marked by the country’s greatest economic growth. To fund this growth, U.S. companies looked to Europe and U.S. banks became the intermediaries that secured capital from European investors for U.S. companies. Up until World War I, the United States was a debtor nation and U.S. investment bankers had to rely on European investment bankers and investors to share risk and underwrite U.S. securities. For example, investment bankers such as John Pierpont (J. P.) Morgan (1837-1913) of the United States would buy U.S. securities and resell them in London for a higher price.
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During this period, U.S. investment banks were linked to European banks. These connections included J.P. Morgan & Co. and George Peabody & Co. (based in London); Kidder, Peabody & Co. and Barling Brothers (based in London); and Kuhn, Loeb, & Co. and the Warburgs (based in Germany).
Since European banks and investors could not assess businesses in the United States easily, they worked with their U.S. counterparts to monitor the success of their investments. U.S. investment bankers often would hold seats on the boards of the companies issuing the securities to supervise operations and make sure dividends were paid. Companies established long-term relationships with particular investment banks as a consequence.
In addition, this period saw the development of two basic components of investment banking: underwriting and syndication. Because some of the companies seeking to sell securities during this period, such as railroad and utility companies, required substantial amounts of capital, investment bankers began under-writing the securities, thereby guaranteeing a specific price for them. If the shares failed to fetch the set price, the investments banks covered the difference. Underwriting allowed companies to raise the funds they needed by issuing a sufficient amount of shares without inundating the market so that the value of the shares dropped.
Because the value of the securities they underwrote frequently surpassed their financial limits, investment banks introduced syndication, which involved sharing risk with other investment banks. Further, syndication enabled investment banks to establish larger networks to distribute their shares and hence investment banks began to develop relationships with each other in the form of syndicates.
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The syndicate structure typically included three to five tiers, which handled varying degrees of shares and responsibilities. The structure is often thought of as a pyramid with a few large, influential investment banks at the apex and smaller banks below. In the first tier, the “originating broker” or “house of issue” (now referred to as the manager) investigated companies, determined how much capital would be raised, set the price and number of shares to be issued, and decided when the shares would be issued. The originating broker often handled the largest volume of shares and eventually began charging fees for its services.
In the second tier, the purchase syndicate took a smaller number of shares, often at a slightly higher price such as I percent or 0.5 percent higher. In the third tier, the banking syndicate took an even smaller amount of shares at a price higher than that paid by the purchase syndicate. Depending on the size of the issue, other tiers could be added such as the “selling syndicate” and “selling group.” Investment banks in these tiers of the syndicate would just sell shares, but would not agree to sell a specific amount. Hence, they functioned as brokers who bought and sold shares on commission from their customers.
From the mid-i800s to the early 1900s, J. P. Morgan was the most influential investment banker. Morgan could sell U.S. bonds overseas that the U.S. Department of the Treasury failed to sell and he led the financing of the railroad. He also raised funds for General Electric and United States Steel. Nevertheless, Morgan’s control and influence helped cause a number of stock panics, including the panic of 1901.
Morgan and other powerful investment bankers became the target of the muckrakers as well as of inquiries into stock speculations. These investigations included the Armstrong insurance investigation of 1905, the Hughes investigation of 1909, and the Money Trust investigation of 1912. The Money Trust investigation led to most states adopting the so-called blue-sky laws, which were designed to deter investment scams by start-up companies. The banks responded to these investigations and laws by establishing the Investment Bankers Association to ensure the prudent practices among investment banks. These investigations also led to the creation of the Federal Reserve System in 1913.
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Beginning about the time World War I broke out, the United States became a creditor nation and the roles of Europe and the United States switched to some extent. Companies in other countries now turned to the United States for investment banking. During the 1920s, the number and value of securities offerings increased when investment banks began raising money for a variety of emerging industries: automotive, aviation, and radio. Prior to World War 1, securities issues peaked at about $ 1 million, but afterwards issues of more than $20 million were frequent.
The banks, however, became mired in speculation during this period as over 1 million investors bought stocks on margin, that is, with money borrowed from the banks. In addition, the large banks began speculating with the money of their depositors and commercial banks made forays into underwriting.
The stock market crashed on October 29, 1929, and commercial and investment banks lost $30 billion by mid-November. While the crash only affected bankers, brokers, and some investors and while most people still had their jobs, the crash brought about a credit crunch. Credit became so scarce that by 1931 more than 500 U.S. banks folded, as the Great Depression continued.
As a result, investment banking all but frittered away. Securities issues no longer took place for the most part and few people could afford to invest or would be willing to invest in the stock market, which kept sinking. Because of crash, the government launched an investigation led by Ferdinand Pecora, which became known as the Pecora Investigation. After exposing the corrupt practices of commercial and investment banks, the investigation led to the establishment of the Securities and Exchange Commission (SEC) as well as to the signing of the Banking Act of 1933, also known as the Glass-Steagall Act. The SEC became responsible for regulating and overseeing in-vesting in public companies. The Glass-Steagall Act mandated the separation of commercial and investment banking and from then—until the late 1980—banks had to choose between the two enterprises.
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Further legislation grew out of this period, too. The Revenue Act of 1932 raised the tax on stocks and required taxes on bonds, which made the practice of raising prices in the different tiers of the syndicate system no longer feasible. The Securities Act of 1933 and the Securities Exchange Act of 1934 required investment banks to make full disclosures of securities offerings in investment prospectuses and charged the SEC with reviewing them. This legislation also required companies to regularly file financial statements in order to make known changes in their financial position. As a result of these acts, bidding for investment banking projects became competitive as companies began to select the lowest bidders and not rely on major traditional companies such as Morgan Stanley and Kuhn, Loeb.
The last major effort to clean up the investment banking industry came with the U.S. v. Morgan case in 1953. This case was a government antitrust investigation into the practices of 17 of the top investment banks. The court, however, sided with the defendant investment banks, concluding that they had not conspired to monopolize the U.S. securities industry and to prevent new entrants beginning around 1915, as the government prosecutors argued.
By the 1950s, investment banking began to pick up as the economy continued to prosper. This growth surpassed that of the 1920s. Consequently, major corporations sought new financing during this period. General Motors, for example, made a stock offering of $325 million in 1955, which was the largest stock offering to that time. In addition, airlines, shopping malls, and governments began raising money by selling securities around this time.
During the 1960s, high-tech electronics companies spurred on investment banking. Companies such as Texas Instruments and Electronic Data Systems led the way in securities offerings. Established investment houses such as Morgan Stanley did not handle these issues; rather, Wall Street newcomers such as Charles Plohn & Co. did. The established houses, however, participated in the conglomeration trend of the 1950s and 1960s by helping consolidating companies negotiate deals.
The stock market collapse of 1969 ushered in a new era of economic problems which continued through the 1970s, stifling banks and investment houses. The recession of the 1970s brought about a wave of mergers among investment brokers. Investment banks began to expand their services during this period, by setting up retail operations, expanding into international markets, investing in venture capital, and working with insurance companies.
While investment bankers once worked for fixed commissions, they have been negotiating fees with investors since 1975, when the SEC opted to deregulate investment banker fees. This deregulation also gave rise to discount brokers, who undercut the prices of established firms. In addition, investment banks started to implement computer technology in the 1970s and 1980s in order to automate and expedite operations. Furthermore, investment banking became much more competitive as investment bankers could no longer wait for clients to come to them, but had to endeavor to win new clients and retain old ones.
The biggest investment banks include Goldman Sachs, Merrill Lynch, Morgan Stanley, Credit Suisse First Boston, Citigroup’s Global Corporate Investment Bank, JPMorgan Chase and Lehman Brothers, among others. Of course, the complete list of I-banks is more extensive, but the firms listed above compete for the biggest deals both in the U.S. and worldwide. You have probably heard of many of these firms, and perhaps have a brokerage account with one of them. While brokers from these firms cover every major city in the U.S., the headquarters of every one of these firms is in New York City, the epicenter of the I-banking universe. It is important to realize that investment banking and brokerage go hand-in-hand, but that brokers are one small cog in the investment banking wheel. As we will cover in detail later, brokers sell securities and manage the portfolios of retail” (or individual) investors.
Many an I-banking interviewee asks, “Which firm is the best?” The answer, like many things in life, is unclear. There are many ways to measure the quality of investment banks. You might examine a bank’s expertise in a certain segment of investment banking. For example, Citigroup was tops in 2003 in total debt and equity underwriting volume, but trailed Goldman Sachs in mergers and acquisitions (“M&A”) advisory. Goldman Sachs has a stellar reputation in equity underwriting and M&A advisory but is not as strong in debt issuance. Those who watch the industry pay attention to “league tables,” which are rankings of investment banks in several categories (e.g., equity underwriting or M&A advisory).
The most commonly referred to league tables are published quarterly by Thomson Financial Securities Data (TFSD), a research firm based in Newark, N.J. TFSD collects data on deals done in a given time period and determines which firm has done the most deals in a given sector over that time period. Essentially, the league tables are rankings of firm by quantity of deals in a given area.
The history of Glass-Steagall
The famous Glass-Steagall Act, enacted in 1934, erected barriers between commercial banking and the securities industry. A piece of Depression-Era legislation, Glass-Steagall was created in the aftermath of the stock market crash of 1929 and the subsequent collapse of many commercial banks. At the time, many blamed the securities activities of commercial banks for their instability. Dealings in securities, critics claimed, upset the soundness of the banking community, caused banks to fail, and crippled the economy. Therefore, separating securities businesses and commercial banking seemed the best solution to provide solidity to the U.S. banking and securities’ system.
In later years, a different truth seemed evident. The framers of Glass- Steagall argued that a conflict of interest existed between commercial and investment banks. The conflict of interest argument ran something like this:
1) A bank that made a bad loan to a corporation might try to reduce its risk of the company defaulting by underwriting a public offering and selling stock in that company;
2) The proceeds from the IPO would be used to pay off the bad loan; and
3) Essentially, the bank would shift risk from its own balance sheet to new investors via the initial public offering.
Academic research and common sense, however, has convinced many that this conflict of interest isn’t valid. A bank that consistently sells ill-fated stock would quickly lose its reputation and ability to sell IPOs to new investors.
Glass-Steagall’s fall in the late 1990s In the late 1990s, before legislation officially eradicated the Glass-Steagall Act’s restrictions, the investment and commercial banking industries witnessed an abundance of commercial banking firms making forays into the I-banking world. The feeding frenzy reached a height in the spring of 1998. In 1998, NationsBank bought Montgomery Securities, Société Génerale bought Cowen & Co., First Union bought Wheat First and Bowles Hollowell Connor, Bank of America bought Robertson Stephens (and then sold it to BankBoston), Deutsche Bank bought Bankers Trust (which had bought Alex. Brown months before), and Citigroup was created in a merger of Travelers Insurance and Citibank. While some commercial banks have chosen to add I-banking capabilities through acquisitions, some have tried to build their own investment banking business. J.P. Morgan stands as the best example of a commercial bank that entered the I-banking world through internal growth, although it recently joined forces with Chase Manhattan to form J.P. Morgan Chase. Interestingly, J.P. Morgan actually used to be both a securities firm and a commercial bank until federal regulators forced the company to separate the divisions. The split resulted in J.P. Morgan, the commercial bank, and Morgan Stanley, the investment bank. Today, J.P. Morgan has slowly and steadily clawed its way back into the securities business, and Morgan Stanley has merged with Dean Witter to create one of the biggest I-banks on the Street.
What took so long?
So why did it take so long to enact a repeal of Glass-Steagall? There were several logistical and political issues to address in undoing Glass-Steagall.
For example, the FDIC and the Federal Reserve regulate commercial banks, while the SEC regulates securities firms. A debate emerged as to who would regulate the new “universal” financial services firms. The Fed eventually won with Fed Chairman Alan Greenspan defining his office’s role as that of an “umbrella supervisor.” A second stalling factor involved the Community Reinvestment Act of 1977 – an act that requires commercial banks to re-invest a portion of their earnings back into their community. Senator Phil Gramm (R-TX), Chairman of the Senate Banking Committee, was a strong opponent of this legislation while then-President Clinton was in favor of keeping and even expanding CRA. The two sides agreed on a compromise in which CRA requirements were lessened for small banks.
In November 1999, Clinton signed the Gramm-Leach Bliley Act, which repealed restrictions contained in Glass-Steagall that prevent banks from affiliating with securities firms. The new law allows banks, securities firms, and insurance companies to affiliate within a financial holding company (“FHC”) structure. Under the new system, insurance, banking, and securities activities are “functionally regulated.”
The main activities and units
On behalf of the bank and its clients, the primary function of the bank is buying and selling products. Banks 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.
An investment banking activities are split into following three categories:
* Front Office:
* Investment Banking is the traditional aspect of investment banks which involves helping customers raise funds in the Capital Markets and advising on mergers and acquisitions. These jobs tend to be extremely competitive and difficult to land. Investment banking may involve subscribing investors to a security issuance, coordinating with bidders, or negotiating with a merger target. Other terms for the Investment Banking Division include Mergers & Acquisitions (M&A) and Corporate Finance. The Investment Banking Division (commonly referred to as IBD in industry parlance) is generally divided into industry coverage and product coverage groups. Industry coverage groups focus on a specific industry such as Healthcare 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 & Acquisitions, Financial Sponsors, and Leveraged Finance.
* 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 e.g. 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. Asset Management deals with institutional investors, while Private Wealth Management manages the funds of high net-worth individuals.
* Sales & Trading 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 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 division 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. The necessity for numerical ability has created jobs for physics and math Ph.D.s who act as quants.
* Merchant banking is a private equity activity of investment banks. Examples include Goldman Sachs Capital Partners, JPMorgan Partners, etc. Sometimes, merchant banking is a part of Alternative Investment division.
* 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.
* Strategy is the division which advises 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 structurers create new products.
* 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.
* Compliance areas are responsible for an investment bank’s daily operations’ compliance with FSA regulations and internal regulations. Often also considered a back-office division.
* Operations involve data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers. While some believe it provides the greatest job security with the bleakest career prospects of the divisions within an investment bank, many have outsourced operations. It is however a critical part of the bank that involves managing the financial information of the bank and ensures efficient capital markets through the financial reporting function. In recent years 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 IT department. 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. Technology has changed considerably in the last few years as more sales and trading desks are using electronic trading platforms. These platforms can serve as auto-executed hedging to complex model driven algorithms.
An investment bank can also be split into private and public functions with a Chinese wall which separates the two to prevent information from crossing. The private areas of the bank deal with private insider information that may not be publically disclosed, while the public areas such as stock analysis deal with public information.
In the UK more graduates apply to Investment Banks than for any other career because of the exciting city based work, good compensation benefits package and prestige of firms such as UBS, Deutsche Bank, Goldman Sachs and JP Morgan. In 2007 a survey by WikiJob.co.uk found that over 40% of all UK graduates held an interest in a career in Investment banking, and that almost 20% made one or more applications for graduate roles at Investment Banks after leaving University.
Similarly, the same trend seemed to apply to Singapore where career with such banks are deemed prestigious.
BREAK DOWN OF I-BANKING
Generally, the breakdown of an investment bank includes the following areas:
* Corporate Finance (equity)
* Corporate Finance (debt)
* Mergers & Acquisitions (M&A)
* Equity Sales
* Fixed Income Sales
* Syndicate (equity)
* Syndicate (debt)
* Equity Trading
* Fixed Income Trading
* Equity Research
* Fixed Income Research
This overview section covers the nuts and bolts of the business, providing an overview of the stock and bond markets, and how an I-bank operates within them.
The bread and butter of a traditional investment bank, corporate finance generally performs two different functions: 1) Mergers and acquisitions advisory and 2) Underwriting. On the mergers and acquisitions (M&A) advising side of corporate finance, bankers assist in negotiating and structuring a merger between two companies. If, for example, a company wants to buy another firm, then an investment bank will help finalize the purchase price, structure the deal, and generally ensure a smooth transaction. The underwriting function within corporate finance involves shepherding the process of raising capital for a company. In the investment banking world, capital can be raised by selling either stocks or bonds (as well as some more exotic securities) to investors.
Sales are another core component of any investment bank. Salespeople take the form of:
1) the classic retail broker,
2) The institutional salesperson,
3) The private client service representative.
Retail brokers develop relationships with individual investors and sell stocks and stock advice to the average Joe. Institutional salespeople develop business relationships with large institutional investors. Institutional investors are those who manage large groups of assets, for example pension funds, mutual funds, or large corporations. Private Client Service (PCS) representatives lie somewhere between retail brokers and institutional salespeople, providing brokerage and money management services for extremely wealthy individuals. Salespeople make money through commissions on trades made through their firms or, increasingly, as a percentage of their clients’ assets with the firm.
Traders also provide a vital role for the investment bank. In general, traders facilitate the buying and selling of stocks, bonds, and other securities such as currencies and futures, either by carrying an inventory of securities for sale or by executing a given trade for a client.
A trader plays two distinct roles for an investment bank:
(1) Providing liquidity: Traders provide liquidity to the firm’s clients (that is, providing clients with the ability to buy or sell a security on demand).
Traders so this by standing ready to immediately buy the client’s securities (for sell securities to the client) if the client needs to place a trade quickly. This is also called making a market, or acting as a market maker. Traders performing this function make money for the firm by selling securities at a slightly higher price than they pay for them. This price differential is known as the bid-ask spread. (The bid price at any given time is the price at which customers can sell a security, which is usually slightly lower than the ask price, which is the price at which customers can buy the same security.)
(2) Proprietary trading: In addition to providing liquidity and executing traders for the firm’s customers, traders also may take their own trading positions on behalf of the firm, using the firm’s capital hoping to benefit from the rise or fall in the price of securities. This is called proprietary trading. Typically, the marketing-making function and the proprietary trading function is performed by the same trader for any given security. For example, Morgan Stanley’s Five Year Treasury Note trader will typically both make a market in the 5-Year Note as well as take trading positions in the 5-Year Note for Morgan Stanley’s own account.
Research analysts follow stocks and bonds and make recommendations on whether to buy, sell, or hold those securities. They also forecast companies’ future earnings. Stock analysts (known as equity analysts) typically focus on one industry and will cover up to 20 companies’ stocks at any given time. Some research analysts work on the fixed income side and will cover a particular segment, such as a particular industry’s high yield bonds. Salespeople within the I-bank utilize research published by analysts to convince their clients to buy or sell securities through their firm. Corporate finance bankers rely on research analysts to be experts in the industry in which they are working. Reputable research analysts can generate substantial corporate finance business for their firm as well as substantial trading activity, and thus are an integral part of any investment bank.
The hub of the investment banking wheel, the syndicate group provides a vital link between salespeople and corporate finance. Syndicate exists to facilitate the placing of securities in a public offering, a knock-down dragout affair between and among buyers of offerings and the investment banks managing the process. In a corporate or municipal debt deal, syndicate also determines the allocation of bonds.
Size of Industry:
Global investment banking revenue increased for the third year running in 2005, to $52.8 billion. This was up 14% on the previous year, but 7% below the 2000 peak. The recovery in the global economy and capital markets resulted in an increase in M&A activity, which has been the primary source of investment banking revenue in recent years. Credit spreads are tightening and intense competition within the field has ensured that the banking industry is on its toes.
The US was the primary source of investment banking income in 2005, with 51% of the total, a proportion which has fallen somewhat during the past decade. Europe (with Middle East and Africa) generated 31% of the total, slightly up on its 30% share a decade ago. Asian countries generated the remaining 18%. Between 2002 and 2005, fee income from Asia increased by 98%. This compares with a 55% increase in Europe, and a 46% increase in the US, during this time period.
Investment banking is one of the most global industries and is hence continuously challenged to respond to new developments and innovation in the global financial markets. Throughout the history of investment banking, it is only known that many have theorized that all investment banking products and services would be commoditized. New products with higher margins are constantly invented and manufactured by bankers in hopes of winning over clients and developing trading know-how in new markets. However, since these can usually not be patented or copyrighted, they are very often copied quickly by competing banks, pushing down trading margins.
For example, trading bonds and equities for customers is now a commodity business but structuring and trading derivatives is highly profitable. Each OTC contract has to be uniquely structured and could involve complex pay-off and risk profiles. Listed option contracts are traded through major exchanges, such as the CBOE, and are almost as commoditized as general equity securities.
In addition, while many products have been commoditized, an increasing amount of profit within investment banks has come from proprietary trading, where size creates a positive network benefit (since the more trades an investment bank does, the more it knows about the market flow, allowing it to theoretically make better trades and pass on better guidance to clients).
The fastest growing segment of the Investment Banking Industry are called PIPEs, otherwise known as Private Investments into Public Companies (otherwise known as Regulation D or Regulation S).
Such transactions are privately negotiated between companies and accredited investors. These PIPE transactions are non-rule 144A transactions. Large Buldge Bracket Brokerage firms and smaller boutique firms compete in this sector. SPACs (Special Purpose Acquisition Companies or Blank Check Corporations) have been created from this industry.
Possible Conflict Of Interest
Potential conflicts of interest may arise between different parts of a bank, creating the potential for financial movements that could be market manipulation. Authorities that regulate investment banking (the FSA in the United Kingdom and the SEC in the United States) require that banks impose a Chinese wall which prohibits communication between investment banking on one side and equity research and trading on the other.
Some of the conflicts of interest that can be found in investment banking are listed here:
* Historically, equity research firms were founded and owned by investment banks. One common practice is for equity analysts to initiate coverage on a company in order to develop relationships that lead to highly profitable investment banking business. In the 1990s, many equity researchers allegedly traded positive stock ratings directly for investment banking business. On the flip side of the coin: companies would threaten to divert investment banking business to competitors unless their stock was rated favorably. Politicians acted to pass laws to criminalize such acts. Increased pressure from regulators and a series of lawsuits, settlements, and prosecutions curbed this business to a large extent following the 2001 stock market tumble.
* Many investment banks also own retail brokerages. Also during the 1990s, some retail brokerages sold consumers securities which did not meet their stated risk profile. This behavior may have led to investment banking business or even sales of surplus shares during a public offering to keep public perception of the stock favorable.
* Since investment banks engage heavily in trading for their own account, there is always the temptation or possibility that they might engage in some form of front running. Front running is the illegal practice of a stock broker executing orders on a security for their own account (and thus affecting prices) before filling orders previously submitted by their customers.
The Buy-Side vs. the Sell-Side
The traditional investment banking world is considered the “sell-side” of the securities industry. Why? Investment banks create stocks and bonds, and sell these securities to investors. Sell is the key word, as I-banks continually sell their firms’ capabilities to generate corporate finance business, and salespeople sell securities to generate commission revenue.
Who are the buyers (“buy-side”) of public stocks and bonds? They are individual investors (you and me) and institutional investors, firms like Fidelity and Vanguard, and organizations like Harvard University and state and corporate pension funds. The universe of institutional investors is appropriately called the buy-side of the securities industry. Fidelity, T. Rowe Price, Janus and other mutual fund companies now represent a large portion of the buy-side business. Insurance companies like Prudential and Northwestern Mutual also manage large blocks of assets and are another segment of the buy-side. Yet another class of buy-side firms manage pension fund assets – frequently, a company’s pension assets will be given to a specialty buy-side firm that can better manage the funds and hopefully generate higher returns than the company itself could have.
There is substantial overlap among these money managers – some, such as Putnam and T. Rowe, manage both mutual funds for individuals as well as pension fund assets of large corporations.
Who needs Investment Banking?
Any firm contemplating a significant transaction can benefit from the advice of an investment bank. Although large corporations often have sophisticated finance & contact network, allows for efficient use of client personnel and is vitally interested in seeing the transaction close.
Most small to medium sized companies do not have a large in-house staff, and in a financial transaction may be at a disadvantage versus large competitor. A quality investment banking firm can provide the service required to initiate and execute a major transactions, thereby empowering small to medium sized companies with financial and transaction experience without the addition of permanent overhead.
What to look for in Investment Banking?
Investment Banking is service business, and the client should expect top-notch service from the investment banking firm. Generally only the large client firm will get this type of service from the major Wall Street Investment Banks: companies with less than about $100 million in revenues are better served by smaller investment banks. Some criteria to consider include:
For all functions except sales and trading, the service should go well beyond simply making introductions, or “brokering” a transaction. For example, most projects will include detailed industry & financial analysis, preparation of relevant documentation such as an offering memorandum or presentation to the board of Directors, assistance with the due diligence, negotiating the terms of transaction, coordinating legal, accounting and other advisors and generally assisting in all phases of the project to ensure successful completion.
It is extremely important to make sure that experienced, senior members of the investment banking firm will be active in the project on a day-to-day basis. Depending on the type of transaction, it may be preferable to work an investment bank that has some background in your industry segment. The investment bank should have a wide network of relevant contacts, such as potential investors or companies that could be approached for acquisition.
Record of Success:
Although no reputable bank will guarantee success, the firm must have a demonstrated record of closing transactions.
Ability to Work Quickly:
Often, investment banking projects have very specific deadlines, for example when bidding for a company that is for sale. The investment bank must be willing and able to put right people on the project & work diligently to meet critical deadline.
Generally, an investment bank will charge an initial retainer fee, which may be one-time or monthly, with majority of the fee contingent upon successful completion of the transaction. It is important to utilize a fee structure that aligns the investment bank’s incentive with your own.
Having worked on the transaction b for the company, the investment bank will be intimately familiar with company’s business. After the transaction the good investment bank should become the trusted business advisor that can be called upon informally to advice and support on an on going basis.
As investment banks are intermediaries, and generally not providers of capital some executives elect to execute transactions without an investment bank in order to avoid he fees. However, an experienced, quality investment bank adds significant value to transactions & can pay for their fees many times over.
The investment banker has a vested interest in making sure the transactions closes, that the project is completed in an efficient time frame, and with terms that provide maximum value to the client. At the same time, the client is able to focus on running the business, rather than on the day to day details of the transactions, knowing that the transaction is being handled by individuals with experience in executing similar projects.
Typically, the hierarchy structure in an Investment Bank is as follows:
However, in an Equity Research set-up (mainly a sell-side research player), the typical structure is as follows:
Global Investment Banking Scenario:
What’s the big deal?
Recent years have seen the return of the big bank merger. First came the October 2003 announcement that Bank of America would be acquiring FleetBoston for approximately $49 billion. In accepting the offer to merge, Fleet Boston’s chairman and CEO Charles “Chad” Gifford said that “it became increasingly clear to us that scale is a tremendous advantage, if properly managed,” adding that “Bank of America was the one bank that was taking advantage of this scale.” At the time, it looked like the large scale merger would create the second-biggest U.S. banking firm behind Citigroup and JPMorgan Chase. But to the chagrin of BofA, a couple of months later, in January 2004, JPMorgan Chase announced that it would be acquiring Bank One in a deal worth more than $58 billion, solidifying JPMorgan Chase’s spot as No. 2 in the U.S. The transaction will also give perennial No.1 Citigroup a run for its money, as the Bank One acquisition created a financial services giant with $1.1 trillion in assets, rivaling Citi’s $1.2 trillion. The Fleet acquisition, which is expected to result in 12,500 employees losing jobs, closed in April 2004. The Bank One acquisition, which could see as many as 10,000 positions lost, closed in July 2004.
Determined not to be left out of the merger madness, Wachovia Corporation, the fourth-largest banking firm in the U.S., agreed to pay $14.3 billion to acquire SouthTrust Corporation in June 2004. The transaction, expected to close in the fourth quarter of 2004, would give the Charlotte, N.C.-based Wachovia a significantly stronger foothold in the Southeast. Wachovia estimates that 4,300 jobs will be eliminated as result of the acquisition.
Killer year for combos
As well as working on their own mergers, banks had their hands full with other firms’ combinations in 2003. According to Thomson Financial, $523.7 billion worth of mergers and acquisitions were announced in 2003, a nice 19 percent bump from 2002 figures. And during the 2003 fourth quarter, deal value more than doubled over fourth quarter 2002 totals, as $209.4 billion in M&A transactions were announced. Of course, the return of the M&A market had a lot to do with the rise of the stock market and continued low interest rates, both of which made it easier and cheaper for purchasers to finance deals during the year. In an interview with the Journal in early January 2004, Jack Levy, global head of M&A at Goldman Sachs, summed up the merger market during the previous 12 months: “The year started on a very challenging note, but by December, it felt as though we were emerging from the three-year deal downturn.” Indeed, the largest U.S. M&A deals all came near the end of 2003. In addition to BofA’s acquisition of Fleet (the world’s largest deal inked during the year), other big deals in the second half of the year included Anthem’s $16.4 billion purchase of WellPoint Health Networks, and St. Paul Cos.’ $16 billion acquisition of Travelers Property Casualty. Thanks in large part to the Fleet deal, commercial banking was the top M&A sector for the year, comprising about $137 billion of the total volume. As for the 2003 league tables, the same three firms held the same three top spots for both global and U.S. M&A. According to Thomson Financial, Goldman Sachs led the field with 298 deals worth $392.7 billion, Morgan Stanley placed second with 239 transactions worth $239.5 billion, and Citigroup rounded out the top three with 307 deals worth $219.6 billion. In U.S. M&A, Goldman’s deal value outdistanced second-place Morgan Stanley and third-place Citigroup combined, as Goldman announced $239 billion worth of M&A transactions, compared to Morgan’s $117 billion and Citi’s $100 billion. Incidentally, both Goldman and Morgan, along with Banc of America Securities, advised Bank of America on its acquisition of Fleet.
The M&A market continue its rise during the first three months of the 2004, with total deal volume hitting $530 billion, double the $265 billion announced in the first quarter of 2003. Both globally and in the U.S., first quarter 2004 volume was at its highest since the fourth quarter of 2000. However, by total number of transactions, deal volume slipped 10 percent on a global basis to about 7,000, compared to the fourth quarter of 2003. As they did in 2003, banking deals played more than a small part to make the first quarter of 2004 a strong one in M&A. Along with JPMorgan Chase’s announced acquisition of Bank One, Regions Financial agreed to buy Union Planters for $5.8 billion and North Fork Bancorp inked a $6.3 billion deal to swallow GreenPoint Financial. According to Thomson Financial, in the global M&A league tables for the quarter, Goldman Sachs and Morgan Stanley held on to the No. 1 and No. 2 spots, respectively, while JPMorgan Chase took the No. 3 spot, thanks to its work on its own acquisition of Bank One (without that mandate, JPMorgan Chase would’ve ended the quarter at No.4).
Current Investment Banking Scenario In India
Unlike Goldman Sachs, Merrill Lynch and Morgan Stanley, Citigroup and JPMorgan do not have joint ventures with local partners in India’s booming investment banking market. But they have climbed to the top of league tables for mergers and acquisitions as well as stock deals on the back of strong corporate ties.
“The strength of the Citigroup platform is the 1,000 plus corporate relationships in India that we have,” said Pramit Jhaveri, head of investment banking in India for Citigroup.
Both groups are competing intensely for investment banking fees that are expected to grow by up to 40 percent this year, fueled by an economy growing at about 7 percent and foreign institutions flocking to invest.
After a relatively late launch of investment banking in India since 2000, Citigroup has grown to be the top M&A adviser for the last two years. JPMorgan, meanwhile, jumped to third in 2004 after not even reaching the top 10 in 2003.
The story is similar for securities underwriting. Citigroup has become the world’s largest securities underwriter, with JPMorgan and Switzerland’s UBS using their own relationships to build business.
To be sure, Goldman, Merrill and Morgan Stanley remain strong in India. They were the top three underwriters of stock offerings last year as equity issuance rose to $9.95 billion from $1.90 billion, according to data firm Dealogic.One key advantage of their joint venture structure is retail distribution.
Morgan Stanley has teamed up with JM Financial Group, Goldman is aligned with Kotak Mahindra Bank Ltd. and Merrill works with DSP Financial Consultants Ltd.
“A year ago, the conventional wisdom in our industry was if a company wanted to raise $200 million, they had to leave the country,” said Rajeev Gupta, joint managing director for DSP Merrill. “The threshold for going overseas today is $2 billion, not $200 million.”
The local network enjoyed by the joint ventures becomes more important as the domestic market gets bigger.
How the Deal Is Conducted At Investment Banking?
Process of Capital Raising
Most successful capital raising efforts are directed as follows:
1.The process begins with Capitalization Planning: Running a Financial Feasibility Analysis; Developing Comprehensive 5-Year Financial and Capitalization Plans calculated to GAAP (Generally Accepted Accounting Principals) standards; Valuating the Companies/Venture Based on Future Financial Performance; Analyzing the Internal Rates of Returns on the many different types of securities that can be used to capitalize the company or venture; Analyzing the effects of equity ownership; Determine the Quantity, Type and Price of the securities and; Creating the ultimate “Marketable Deal Structure” that can be used to develop a securities offering that sells.
2. The next step is conducting a “Seed” capital round using a private placement securities offering under Regulation D 506 – no limit to amount raised. Capital can be raised from accredited investors, if done in compliance with the various securities regulations and from friends and family too.
3. A portion of the “Seed” capital is used to:
(a) Further the protection of the company’s assets, i.e. intellectual property; (b) Expand business operations; (c) Provide ample working capital to pay executive and staff compensation (d) More importantly, to fund a Broker Dealer relationship when you are ready and qualify for that relationship, to finish off your capitalization. And a Portion is used to produce the next securities offering document for an INTRA-State registered offering known as a SCOR offering – limit $1,000,000 per 12-month period and a Portion is used to fund the advertising and promotion of the securities.
4. For large corporate capitalizations or if the founders are ready to start liquidating some or all of their holdings, Investment Bankers assists company in the listing of its securities on the Pink Sheets, over-the-counter bulletin board, or Duly Listing services in exchanges.
Commercial Banking vs. Investment Banking
While regulation has changed the businesses in which commercial and investment banks may now participate, the core aspects of these different businesses remain intact. In other words, the difference between how a typical investment bank and a typical commercial operate bank can be simplified: A commercial bank takes deposits for checking and savings accounts from consumers while an investment bank does not.
A commercial bank may legally take deposits for checking and savings accounts from consumers. The federal government provides insurance guarantees on these deposits through the Federal Deposit Insurance Corporation (the FDIC), on amounts up to $100,000. To get FDIC guarantees, commercial banks must follow a myriad of regulations. The typical commercial banking process is fairly straightforward. You deposit money into your bank, and the bank loans that money to consumers and companies in need of capital (cash).
You borrow to buy a house, finance a car, or finance an addition to your home. Companies borrow to finance the growth of their company or meet immediate cash needs. Companies that borrow from commercial banks can range in size from the dry cleaner on the corner to a multinational conglomerate. The commercial bank generates a profit by paying depositors a lower interest rate than the bank charges on loans.
Importantly, loans from commercial banks are structured as private legally binding contracts between two parties – the bank and you (or the bank and a company).
Banks work with their clients to individually determine the terms of the loans, including the time to maturity and the interest rate charged. Your individual credit history (or credit risk profile) determines the amount you can borrow and how much interest you are charged. Perhaps your company needs to borrow $200,000 over 15 years to finance the purchase of equipment, or maybe your firm needs $30,000 over five years to finance the purchase of a truck. Maybe for the first loan, you and the bank will agree that you pay an interest rate of 7.5 percent; perhaps for the truck loan, the interest rate will be 11 percent. The rates are determined through a negotiation between the bank and the company. Let’s take another minute to understand how a bank makes its money. On most loans, commercial banks in the U.S. earn interest anywhere from 5 to 14 percent. Ask yourself how much your bank pays you on your deposits – the money that it uses to make loans. You probably earn a paltry 1 percent on a checking account, if anything, and maybe 2 to 3 percent on a savings account. Commercial banks thus make money by taking advantage of the large spread between their cost of funds (1 percent, for example) and their return on funds loaned (ranging from 5 to 14 percent).
An investment bank operates differently. An investment bank does not have an inventory of cash deposits to lend as a commercial bank does. In essence, an investment bank acts as an intermediary, and matches sellers of stocks and bonds with buyers of stocks and bonds.
Note, however, that companies use investment banks toward the same end as they use commercial banks. If a company needs capital, it may get a loan from a bank, or it may ask an investment bank to sell equity or debt (stocks or bonds).
Because commercial banks already have funds available from their depositors and an investment bank typically does not, an I-bank must spend considerable time finding investors in order to obtain capital for its client. (Note that as investment banks are increasingly seeking to become “one-stop” financing sources, many I-banks have set aside billions of dollars of their own capital that they can use to loan to clients directly.)
Question of equity
Investment banks underwrite stock offerings just as they do bond offerings. In the stock offering process, a company sells a portion of the equity (or ownership) of itself to the investing public. The very first time a company chooses to sell equity, this offering of equity is transacted through a process called an initial public offering of stock (commonly known as an IPO).
Through the IPO process, stock in a company is created and sold to the public. After the deal, stock sold in the U.S. is traded on a stock exchange such as the New York Stock Exchange (NYSE) or the Nasdaq. We will cover the equity offering process in greater detail in Chapter 6. The equity underwriting process is another major way in which investment banking differs from commercial banking.
Commercial banks (even before Glass-Steagall repeal) were able to legally underwrite debt, and some of the largest commercial banks have developed substantial expertise in underwriting public bond deals. So, not only do these banks make loans utilizing their deposits, they also underwrite bonds through a corporate finance department. When it comes to underwriting bond offerings, commercial banks have long competed for this business directly with investment banks. However, as a practical matter, only the biggest tiers of commercial banks are able to do so, because the size of most public bond issues is large and Wall Street competition for such deals is quite fierce.
Outsourcing of Investment Banking Activities
First came IT outsourcing. Now comes investment banking.
After years of outsourcing technology support and other back-office operations to countries like India and China, financial institutions are increasingly looking to move large portions of their investment banking operations abroad, according to a recent report by Deloitte Touche Tohmatsu.
Faced with a dearth of skilled workers and shrinking profit margins, banks that want to remain competitive in the global marketplace can’t afford to miss out on high-quality — and cheaper — foreign talent, the report said.
As a result, what began as technology support is now morphing into more analytic operations.
“Most of the large financial institutions were in the IT side of outsourcing but as they leveraged that experience, they got more interested” in moving more of their investment banking and research activities abroad, said Niket Patankar, chief executive of outsourcing firm Adventity Inc.
Among the leaders in outsourcing and offshoring are the big investment banks: Citigroup (Research), Morgan Stanley (Research), Lehman Brothers (Research) and JPMorgan Chase (Research).
Typically, those banks have moved their research analysis operations offshore in order to take advantage of the time difference between the U.S. and Asia as well as the cheaper labor.
“Investment banking has a lot of number crunching that to a large degree can be done anywhere,” said Alenka Grealish, manager of the banking group at Celent LLC. “By taking press releases and data feeds and digesting them offshore, the components can be made into basic analyst reports” that are available to clients early in the morning.
Going one step further
JPMorgan Chase, however, is taking it’s investment banking activities abroad a step further. The company was one of the first investment banks to not only transfer the company’s back-office and call-center operations but to also hire research analysts in India, Hong Kong and Singapore to complement its U.S.-based research team.
After piloting the program in 2003 with about 1,200 employees in India, the company announced late last year that it plans to have a total of 9,000 employees in India by the end of 2007, with one-third of those employees working for the company’s investment banking unit. Not only will the Indian workers handle research and analysis for the bank but will also be responsible for its foreign exchange trades and its highly complicated credit derivatives contracts.
Some experts expect that as banks become more comfortable with their offshore operations and foreign talent becomes more attuned to the companies’ way of doing business, financial institutions may even shift some deal-making responsibility onto its foreign employees.
The Deloitte Touche Tohmatsu report indicated that offshore operations give financial services companies a foothold in new and emerging markets such as China, where there are more revenue opportunities than mature markets like the U.S. The report also predicts that driven by the need to take aggressive cost-cutting measures, the financial services industry will move 20 percent of its total costs base offshore by the end of 2010, compared to the current average of 3.5 percent.
Although no numbers are yet available, Peter Lowes, principle and head of outsourcing advisory services at Deloitte Consulting LLP, said in a few years, banks may increasingly rely on offshore talent to conduct due diligence and to screen prospective clients for investment banking business.
And while there is no single, authoritative source on the specific number of U.S. investment banking jobs that could be lost to offshoring, Forrester Research predicts that within 10 years, at least 3.3 million U.S. jobs across industries will be shipped to lower-cost and developing countries such India, China and the Philippines.
A competitive necessity
“I believe the industry has reached such a level of globalization that it matters less and less where the actual (research) is generated and matters more what the cost of generating those products are” said Richard Bove, analyst at Punk Ziegel & Co. “Banks can’t afford not to do (outsourcing) anymore.”
It takes about three years for banks to see full benefits from an offshoring program, said Deloitte’s Lowes, as companies overcome the initial learning curve of doing business abroad and gradually build their scale. Firms that aggressively expand their scope and scale will deliver much higher returns on the foreign investments than those that simply dabble in the practice, he said. Top performers can see cost savings of up to 60 percent while bottom performers report savings of less than 20 percent, Lowes said.
Lowes added that those companies that reinvest some of their cost savings towards continuing to expand their operations offshore are going to be the true long-term winners.
“The economics (of offshoring in banking) are strong and the risks are being successfully mitigated” he said. “Today it’s a competitive necessity.”
Case Study on SBI Capital Markets Limited (SBICAP)
At SBI Capital Markets Limited (SBICAP), they have a dedicated team of professionals with vast experience in a wide range of investment banking services. They have consistently been ranked as the number one fund-raiser in the domestic market both for public issues and private placements.
They pride theirselves as solution providers with wide experience in executing large offerings and the capacity to play the role of an advisor and arranger to a number of infrastructure projects (Power, Telecom, Railways, Ports) and Government agencies.
The services offered at SBI Capital Markets Limited are:
* Mergers and Acquisitions and Advisory
* Project Advisory and Structured Finance
* Capital Markets
* Treasury and Investment Group
They are the Investment Bank of choice for issuers desirous of raising funds through the public issue route and have been ranked as the No. 1 Lead Manager in 6 out of the last 9 years.
SBICAP has with its innovative structuring skills many firsts to its credit in the field of Capital Markets:
* The first Floating Rate Bonds, issued by SBI in 1993.
* First to introduce price discovery through “Dutch Auction” in Indian markets in the HPCL issue in 1995.
* Structuring and management of the first retail offering of Tax-free Bonds for Konkan Railway Finance Corporation Ltd. in 1997.
* First domestic disinvestment through a public offer by Government of India – Offer for sale of shares in Videsh Sanchar Nigam Limited in 1999.
SBICAP offers comprehensive range of solutions for fund raising from Domestic & International markets. With their deep understanding of client needs & extensive relationships with institutional investors, they are able to syndicate resources through private placements.
SBICAP is also active in the field of assisting its clients in buyback programmes. SBICAP has already completed 8 such transactions in the past and is currently working on a few more deals. With the recent addition of the Broking Services, SBICAP is in a position to offer comprehensive solutions to accomplish Buyback programmes.
Mergers and Acquisitions and Advisory:
The Mergers and Acquisitions and Advisory group of SBICAP was set up in June 1990 and has handled a variety of assignments over the years. The group is staffed with bright young finance executives from reputed Institutes of Business Management and Chartered Accountants and has been able to bring high standards of professionalism to its work.
SBICAP is the leading domestic player in the privatisation business, with more than 7 years of experience in this field. They started with being the sole advisors to the first privatisation attempt made by GOI with Indian Iron and Steel Company Ltd.
Over the years, their relationship with the Central and the State Governments has strengthened manifold. They advise the Government of India and various State Governments for restructuring their companies and inviting private participation in the State-owned enterprises.
With time, SBICAP has also strengthened its presence in private sector M&A transactions. Besides handling several open offer transactions SBICAP has successfully completed certain high value and complex private sector M&A transactions.
Project Advisory and Structured Finance Group:
Project Advisory & Structured Finance (PA&SF) Group of SBICAP undertakes a wide range of project related financial advisory and fund arranging activities.
Increasingly, corporates are requiring a comprehensive choice of products, specialist skills and excellence of service both locally and globally. The PA&SF Group, with its unmatched reputation, credibility and wide acceptability, meets this demand by integrating corporate and investment banking activities and offering highly-specialised financial services and solutions aimed to meet the financial needs of our clients.
Their leading position in the industry gives them the appropriate scale and stature to guarantee the excellence of service expected by their clients. By combining their banking parentage with in-depth product knowledge in both corporate and investment banking, they deliver a broad range of benefits, including:
* Sector Expertise
* Integrated Product Offering
* Local Presence
* Innovative and Bankable Product Structuring
With its impressive array of prestigious domestic and foreign clients, SBICAP is not only the leading financial advisor / arranger for infrastructure projects, but also a prominent name in India and overseas in project advisory.
The PA&SF Group, has over the years, maintained a formidable presence in infrastructure development in the Country. The services rendered include Restructuring and Privatisation Advisory for Public Utilities, Policy Advisory to Central and State Governments, Regulatory Bodies and Govt. Departments/Organisations, Project Structuring Advisory to Private Sector Entrepreneurs and Arranging of Finance for the Projects
The PA&SF Group provides services in the following broad sectors:
* Urban Infrastructure
The Capital Markets handles fund raising for Corporate, Banks, Financial Institutions, PSUs, State Govt. Undertakings etc. both from the domestic as well as international capital markets.
They have been ranked as the No.1 Fund Mobiliser in terms of total funds raised through private placement, public issues of debt and equity on a consistent basis for the last few years. They have mobilised funds in excess of Rs. 1050 bn. through public, rights issues and private placement of debt during the past 5 years.
* Public Issues and Rights Issues.
* Advisory services for GDRs.
* Private placement of equity.
* Buy back of securities.
Treasury and Investment Group:
The Group manages the proprietary investments of the Company in the equity, debt and money markets. Resource mobilization and management is also undertaken by the Group.
SBI Capital Markets Limited has obtained the following credit ratings from ICRA.
Instruments | Ratings* | Amount Rated |
Short Term Deposit Programme | A1+ | Rs. 70 crores |
Commercial Paper Programme | A1+ | Rs. 30 crores |
Non-Convertible Debenture Programme | LAAA | Rs. 100 crores |
* Rating “A1+” / “LAAA” indicates highest safety. The prospect of timely payment of debt/obligation is the best.
SBI Capital Markets Limited is a member of the National Stock Exchange of India Ltd. in the Capital Markets as well as the Wholesale Debt Market segment and is also a member of The Stock Exchange, Mumbai in the Capital Markets segment.
The Broking Group has been set up to cater to the secondary market needs of Financial Institutions, Foreign Institutional Investors, Mutual Funds, Banks, Corporate’s, High Net Worth Individuals, Non resident Investors and retail investors.
Services Currently Offered:-
1) Equity Broking
2) Debt Broking
Services envisaged in future:-
1) Derivates Trading
3) Equity /Debt for HNI, Corporate’s, Retail
Percentage Share of Major Services in the Revenues of SBI CAPITAL MARKETS
(1 Unit = 1 Percent)
At a very macro level, ‘Investment Banking’ as term suggests, is concerned with the primary function of assisting the capital market in its function of capital intermediation, i.e., the movement of financial resources from those who have them (the Investors), to those who need to make use of them for generating GDP (the Issuers).
Banking and financial institution on the one hand and the capital market on the other are the two broad platforms of institutional that investment for capital flows in economy.
Therefore, it could be inferred that investment banks are those institutions that are counterparts of banks in the capital markets in the function of intermediation in the resource allocation. Nevertheless, it would be unfair to conclude so, as that would confine investment banking to very narrow sphere of its activities in the modern world of high finance. Over the decades, backed by evolution and also fuelled by recent technologies developments, an investment banking has transformed repeatedly to suit the needs of the finance community and thus become one of the most vibrant and exciting segment of financial services. Investment bankers have always enjoyed celebrity status, but at times, they have paid the price for the price for excessive flamboyance as well.
I have collected the information through following sources:
* WWW.financial mart.com
* International Banking
* Vaults career guide to Investment Banking
* The Indian Bankers.