Sohail Copied Black Book Project

Project Report On “Investment Banking” Bachelor of commerce Banking & insurance semester v 2015-2016 Submitted In Partial Fulfillment of the requirement for the Award of Degree of Bachelor of Commerce-Banking &Insurrance By Mohd. Sohail Shaikh ROLL NO :30

SREE NARAYAN GURU COLLEGE OF COMMERCE P.L Lokhande Marg, Chembur, Mumbai-400089

DECLARATION

I Mohd. Sohail Shaikh, the student of B.Com. Banking and Insurance semester v ( 2015 – 2016), hereby Declare that I have completed the project on “ Investment Banking”.

The information submitted through this project is true and original to the best of my knowledge. DATE: PLACE:MUMBAI

SIGNATURE: Mohd. Sohail Shaikh ROLL NO: 30

CERTIFICATE

This is to certify that MR. Mohd. Sohail Shaikh ,ROLL NO. 30 of B.com. Banking and Insurance Semester v ( 2015 - 2016 ) has successfully completed the project on ''Investment Banking'' Under the guidance of MR. Krishnan Ramchandran

COURSE COORDINATOR

PRINCIPAL

PROJECT GUIDE/INTERNAL EXAMINER

EXTERNAL EXAMINER

DATE: PLACE: MUMBAI

ACKNOWLEDGENT All these years we have just studying and passing. But this time we have got an opportunity to make such a project study . So it is very obvious for me to thank all those people associated with the making of the project . I owe a great many thanks to my project guide Mr. Krishnan

Ramchandran, Who has been constant support and guidance throughout the making of my project and for monitoring my project with attention and care. Shehas taken the pains to go through the project and make necessary correction as needed.

I would also like to thank our course coordinator MRS. KARISHMA .K for being a moral support to us during a project.

I express thanks to my college principal Dr. RAVINDRAN KARATHADI for extending her support.

And last but not least I would take the opportunity to thank my parents without whom the project would have been a distant reality. Sincere thanks to all my fellow mates and well-wisher.

Executive Summary Investment banking encompasses not mearly merchant banking but other related capital market activities such as – Stock trading market making, underwriting, and broking and asset management as well. Besides the above, investment banks also provides a host of specialized corporate advisory services in the areas of project advisory, Business and financial advisory and mergers and aqusitions. Investment banks are from traditional down the street in the sence that it does not keep any deposits with itself to pay us an interest nor does it graduates the “safekeeping” of your money. An take deposits and make commercial and retail loans. In real years, However, the lines between the two types of structure have blurred especially as commercial banks have offered more investment banking services.

Introduction At a very macro level, ‘Investment Banking’ as the t e r m s u g g e s t s , i s concerned with the primary function of assisting the capital market in its functions of capital intermediation, i.e. the movement of financial resourcesfrom those who have them (the Investors), to those who need to make us of them for generating GDP (the Issuers). As already discussed banking and financial institutions on the one hand and the capital market on the other arethe two broad platforms of institutional intermediation for capital flows inthe economy. Therefore, it could be inferred that investment banks are thosei n s t i t u t i o n s t h a t a r e t h e c o u n t e r p a r t s o f b a n k s i n t h e f u n c t i o n o f intermediation in resource allocation. Nevertheless, it would be unfair toconclude so, as that would confine investment banking to a very narrows p h e r e o f i t s a c t i v i t i e s i n t h e m o d e r n w o r l d o f h i g h f i n a n c e . O v e r t h e decades, backed by evolution a n d a l s o f u e l l e d b y r e c e n t t e c h n o l o g i c a l developments, 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 excessive flamboyance as well. To c o n t i n u e f r o m t h e a b o v e , i n t h e w o r d s o f J o h n F. M a r s h a l l a n d M . E . Ellis, ‘investment banking is what investment banks do’. This definition can be explained in the context of how investment banks have evolved i n their functionality and how history and regulatory intervention have shaped such as evolution. Much of investment banking in its present form thus owes its

origin to the financial market in USA, due to which, American investment banks have been leaders in the American and Euro markets as well.T h e r e f o r e , t h e t e r m ‘ i n v e s t m e n t b a n k i n g ’ c a n a r g u a b l y b e s a i d t o b e o f American origin. Their counterparts in UK were termed as ‘merchant banks’ since they had confined themselves to capital market intermediation until the US investment banks entered the UK and European markets and extended the scope of such businesses.

investment Banking and Merchant Banking Distinguished At this stage, it would be relevant therefore, to draw a fine line of distinction between the terms ‘Investment Banking’ and ‘Merchant Bank ing’ as boththese terms are extensively used in this project. ‘Merchant Banking’ as the t e r m s u g g e s t s , i s t h e function of intermediation in the capital market. It consists of assisting issuers to raise capital by placement of securities issued by them with investors. However, merchant banking is not merely aboutmarketing securities in an agency capacity. The Merchant Banker has an onerous responsibility towards the investors who invest in such securities. The regulatory authorities require the merchant banking firms to promote quality issues, maintain integrity an ensure compliance with the law on own account and on behalf of the issuers as well. Therefore, merchant banking is a fee based service management of public offers; popularly know as ‘issue management’ and for private placement of securities in the capital market. In India, the Merchant Banker leading a public offer is also called as the ‘LeadManager’.O n t h e o t h e r h a n d , t h e t e r m , ‘ I n v e s t m e n t B a n k i n g ’ h a s a m u c h w i d e r connotation and is gradually becoming more of an inclusive term to refer toall types of capital market activity, both fund-based and non-fund based.T h i s d e v e l o p m e n t h a s b e e n d r i v e n m o r e b y t h e w a y t h e A m e r i c a n investment banks have evolved over the past century. Given this situation,investment banking encompasses not merely merchant banking but other r e l a t e d c a p i t a l m a r k e t a c t i v i t i e s s u c h a s – s t o c k t r a d i n g , m a r k e t m a k i n g , underwriting, broking and asset management as well. Besides the above, i n v e s t m e n t b a n k s a l s o p ro v i d e a h o s t o f s p e c i a l i z e d c o r p o r a t e a d v i s o r y services in the areas of project advisory, business and financial advisory

andm e r g e r s a n d a c q u i s i t i o n s . T h e a c t i v i t y p r o fi l e o f i n v e s t m e n t b a n k s i s discussed in more in detail later in this chapter

Evolution of American Investment Banks The earliest events that are relevant for this discussion can be traced to theend of World War I, by which time, commercial banks in the USA werea l r e a d y p r e p a r i n g f o r a n e c o n o m i c r e c o v e r y a n d c o n s e q u e n t l y , t o t h e signifi cant demand for corporate fi nance. It was expected that Americancompanies would shift their dependence from commercial banks to stock a n d b o n d m a r ke t s w h e re i n f u n d s w e re a v a i l a b l e a t a l o w e r c o s t a n d f o r longer periods of time. In preparation for a boom in the capital markets inthe 1920s, commercial banks started to acquire stock broking businesses in a bid to have their presence made in such markets. The fi rst of suchacquisitions happened when the National City Bank of New York acquiredH a l s e y S t u a r t a n d C o m p a n y i n 1 9 1 6 . A s i n t h e p a s t , i n t h e e n t i re 1 9 2 0 s , investment banking meant underwriting and distribution of securities.The stock and bond market boom in 1920s was as opportunity that banksc o u l d not miss. But since they could not underwrite and sell s e c u r i t i e s d i r e c t l y , t h e y o w n e d s e c u r i t y a ffi l i a t e s t h r o u g h h o l d i n g c o m p a n i e s . However, t h e y w e re n o t m a i n t a i n e d l i ke w a t e r t i g h t c o m p a r t m e n t s . T h e affiliates were sparsely capitalized as were financed by the parent banks for their underwriting and other business obligations. While the boom lasted,i n v e s t m e n t b a n k i n g a ffi l i a t e s m a d e h u g e p ro fi t s a s u n d e r w r i t i n g f e e s , specially in the segment called ‘Yankee Bonds’ issued by overseas issuers inU S m a r k e t . I n t h e s t o c k m a r k e t , t h e b a n k s m a i n l y c o n d u c t e d b r o k i n g operations through

their subsidiaries and lent margin money to customers.But with the passage of the McFadden Act in 1927, bank subsidiaries began underwriting stock issues as well. National City Bank, Chase Bank, Morganand Bank of America were the most aggressive banks present at that time.The stock market got over-heated with investment banks borrowing moneyfrom the parent bank in order to speculate in the bank’s stock, mostly for short selling. Once the general public joined the frenzy, the priceearningratios reached absurd limits and the bubble eventually burst in October 1929wiping out millions of dollars of bank depositors’ funds and bringing downwith it banks such as Bank of United States/In order to restore confi dence in the banking and fi nancial system, severallegislation measure were proposed, which eventually led to the passing of the Banking Act 1933 (popularly know as Glass-Steagall Act) that restrictedc o m m e rc i a l b a n k s f ro m e n g a g i n g i n s e c u r i t i e s u n d e r w r i t i n g a n d t a k i n g positions or acting as agents for others in securities transactions. Theseactivi ties were segregated as the exclusive domain of investment banks. Ont h e o t h e r h a n d , i n v e s t m e n t b a n k s w e r e b a r re d f ro m d e p o s i t t a k i n g a n d c o r p o r a t e l e n d i n g , which were considered the exclusive busine s s o f commercial bank. The Act thus provided the water tight compartments thatw e r e n e e d e d b e f o re . S i n c e t h e p a s s i n g o f t h i s Ac t , i n v e s t m e n t b a n k i n g became narrowly defined as the basket of financial services associated withthe floatation of corporate securities, i.e. the creation of primary market for s e c u r i t i e s . I t w a s a l s o ex t e n d e d t o m e a n a t a s e c o n d a r y l e v e l ,

s e c o n d a r y market making through securities dealing.B y 1935, investment banking became one of the m o s t h e a v i l y re g u l a t e d industries in USA. The Securities Act, 1933 provided for the fi rst time the

preparation of offer documents and registration of new s ecurities with thef e d e r a l g o v e r n m e n t . T h e S e c u r i t i e s E x c h a n g e A c t , 1 9 3 4 l e d t o t h e es tablishment of the Securities Exchange Commission. The Maloney Act of 1938 led to the formation of the NASDAQ, the Investment Company Act,1 9 4 0 , w h i c h b ro u g h t m u t u a l f u n d s w i t h i n t h e re g u l a t o r y ambit and theI n v e s t m e n t A d v i s e r s A c t , 1 9 4 0 w h i c h a l s o r e g u l a t e d t h e b u s i n e s s o f investment advisers and wealth managers.After the passing of the GlassStreagall Act of the 1930s, until the beginningof the 21 st century, investment banking had been through several phases of transformation which had broken down the water tight compartments to ag re a t ex t e n t . D u e t o t h e 1 9 7 3 A r a b o i l e m b a rg o , w o r l d e c o n o m i e s w e re under pressure and inflation and interest rate volatility became disturbing. Itw a s a t t h i s t i m e t h a t i n s t i t u t i o n a l i n v e s t o r s m a d d e r t h e i r a d v e n t i n t o securities markets. It was also the time when the industrial and fi nancials e r v i c e s e c t o r s w e r e b e g i n n i n g t o e x p a n d a n d g l o b a l i z e . D u e t o t h e s e developm e n t s , i n v e s t m e n t b a n k i n g a n d c o m m e rc i a l b a n k i n g o n c e a g a i n became constrained by the very legisla tion that was meant to clean up thesystem in the 1930s. This led to several relaxations over the years such asthe Securities Acts Amendments, 1975 which had permitted commercial banks to have subsidiaries (called section 20 subsidiaries) that were allowedto underwrite and trade in securities. In 1990, J.P. Morgan was the first bank to open a section 20

subsidiary. Since the Glass-Streagall Act did not applyt o f o re i g n s u b s i d i a r i e s o f U S b a n k s , t h e y continued to underwrite in theE u r o b o n d m a r ke t a n d b y 1 9 8 4 , t h e y h a d a 5 2 % m a r k e t s h a r e i n t h a t business. But there was stiff competition from Japanese banks in this marketand by 1987, they underwrote only 25% of the Eurobond issuances During the economic growth and globalization of the 1980s, investment banking expanded to several new areas and services which had includedc u r re n c y t r a d i n g , re a l e s t a t e , fi n a n c i a l f u t u re s , b r i d g e l o a n s , m o r t g a g e backed securities and several others. But the stock marke t crash of 1987once again brought the focus back to core areas of specialization. Similarly,the ambitious expansion that took place on a global scale was also halted tosome extent. However due to technological advancements in the 1990s andthe availability of global access through the revolution in communicationt e c h n o l o g i e s f u e l l e d t h e g l o b a l g r o w t h a g a i n . B u t t h i s t i m e t h o u g h , investmen t banking is no more restricted to underwriting new issuances ands e c u r i t y d e a l i n g . T h e s h i ft i s m o re t o w a rd s p ro v i d i n g ex p e r t i s e i n n e w products and risks. Apart f rom these activities, investment banking alsoencompass es a considerable spectrum of advisory services in the areas of corporate restructuring, mergers and acquisitions and LBOs, fund raisinga n d p r i v a t e e q u i t y. O n t h e d e a l i n g a n d t r a d i n g s i d e , i n v e s t m e n t b a n k s participate in derivati ves market, arbitrage and speculation. In the area of s t r u c t u re d fi n a n c e , i n v e s t m e n t b a n k s a l s o p ro v i d e

fi n a n c i a l e n g i n e e r i n g through securitization deals and derivative instruments

European Investment Banks In continental Europe (excluding UK), the concept of a ‘Universal Bank’had been the undercurrent since the late nineteenth century, when most of t h e s e b a n k s w e r e s e t u p . T h e t e r m ‘ u n i v e r s a l b a n k i n g ’ m e a n t t h e c o - existence of commercial banking (lending activity) along with investment banking (investment and distribution activity). Their universality was in thesense of harnessing the vast retail customer base that these banks enjoyed tomarket security issuances by their investment banking arms. These issueswere mostly in the local markets designated in the local currencies. France’sBanques d’affiars and Germany’s Universalbanken are good examples.The United Kingdom, which is considered as Europe’s largest investment banking market, had its own structure evolv ed from history. The oldestm e r c h a n t b a n k i n L o n d o n was Barings Brothers which had played a prominent role in the nineteenth century. Securities distri bution was thefunction of stock brokers, secondary market trading was held by jobbers andadvisory services were provided by merchant bank. The term ‘merchant bank’ was evolved so as to distinguish between commercial banks and thosethat provided capital market advice. However, the breaking down of such barriers in 1986 by allowing banks to own broking o utfits led to ac o n s o l i d a t i o n a n d m o s t o f t h e b ro k i n g fi r m s g o t a b s o r b e d b y l a rg e r a n d diversifi ed entities. Around the same time, the US too was witnessing thedisappearance of distinction between pure broking entities restricted to thes e c o n d a r y m a r ke t s a n d i n v e s t m e n t b a n k i n g

e n t i t i e s i n v o l v e d w i t h t h e primary markets. The US i nvestment banks with their integrated global business mo del entered UK and Europe and later into Japan.

introduction of the Euro currency in 1999, helped the US invasion further byneutralizing the local currency advantages enjoyed by European universal banks. By 2001, the US bulge group garnered 29.7% of the investment banking fee generated in Europe as compared to 16.3% by the Europeanuniversal banks.Po s t - 1 9 8 6 , t h e m e rc h a n t b a n k s a n d c o m m e rc i a l b a n k s i n U K c o u l d n o t m a t c h u p t o the US onslaught which ultimately led to the sale of S G Wa r b u r g , t h e m e r c h a n t b a n k t o S w i s s B a n k C o r p o r a t i o n ( w h i c h w a s acquired by UBS later) in 1995. In 1997, Natwest Bank and Barclays Bank exited investment banking business. Morgan Grenfell, a merchant bank wass o l d t o D e u t s c h e B a n k i n 1 9 9 0 . I n t h i s u p h e a v a l , n i c h e p l a y e r s s u c h a s Drexel Burnham and Barings Bank also collapsed with internal deficiencies.This led to cross border M&A between European banks inter-se and their American counterparts to create bigger investment banks. UBS Warburgw a s b o rn o u t o f m e rg e r o f U BS a n d S w i s s B a n k C o r p o r a t i o n w h i c h h a d earlier acquired SG Warburg. Deutsche Bank acquired Bankers Trust.

Global Industry Structure The investment banking industry on a global scale is oligopolistic in natureranging from the global leaders (known as the ‘Global Bulge Group’) to‘Pure’ investment banks and ‘Boutique’ investment banks. The bulge groupconsisting of eight investment banks has a global presence and these fi rmsdominate the league tables in key business segments. The top ten globalfirms in terms of their fee billing as in 2001 are listed in TableWi t h i n t h e l i s t i n g g i v e n i n t h e t a b l e re f e r re d t o a b o v e a re t h e t o p ‘ p u re ’ investment banks, i.e. which do not have commercial banking connections,which are Merrill Lynch, Goldman Sachs and Morgan Stanley Dean Witter.Listed therein are also the leading European Universal Banks that are calledso due to their role in both commercial and investment banking. The fi veleading universal banks in the world and their important group affiliates aregiven in TableT h e r e f o r e , t h e g l o b a l i n v e s t m e n t b a n k i n g i n d u s t r y r a n g e s f o r m t h e acknowledge d global leaders to a larger number of mid-sized competitors ata national or regional level and the rear end is supported by boutique firmsor advisory and sectoral specialists.

Business Portfolio of Investment Banks Globally, investment banks handle significant fund-based business of their own in the capital market along with their non-fund service portfolio whichis offered to clients. However, these distinct segments are handled either onthe same balance sheet or through subsidiaries and affiliates depending uponthe regulatory requirements in the operating environment of each country.A l l t h e s e a c t i v i t i e s a re s e g m e n t e d a c ro s s t h re e b ro a d p l a t f o r m s – e q u i t y market activity, debt market activity and merger and acquisition (M&A)a c t i v i t y. I n a d d i t i o n , g i v e n t h e s t r u c t u r e o f t h e m a r k e t , t h e r e i s a l s o a segmentation based on whether a particular investment bank belongs to a banking parent or is a stand-alone pure investment bank. Figure representsthe broad spectrum of global investment acitivity.F r o m t h i s d i a g r a m , i t m a y b e a p p r e c i a t e d t h a t i n v e s t m e n t b a n k i n g encompas ses a wide area of capital market based businesses and servicesa n d h a s a s i g n i fi c a n t fi n a n c i a l ex p o s u re t o t h e c a p i t a l m a r ke t . T h o u g h investment banks also earn a signifi cant component of their income fromnon-fund based activity, it is their capacity to support clients with fund- based services, which distinguishes them from pur e merchant banks. In theUS capital market, investment banks underwrite issues or buy them outrighta n d s e l l t h e m l a t e r t o r e t a i l i n v e s t o r s t h e r e b y t a k i n g u p o n t h e m s e l v e s significant financial exposure to client companies. Besides, being such

largefi n a n c i a l p o w e r h o u s e s t h e m s e l v e s , t h e g l o b a l i n v e s t m e n t b a n k s p l a y a major role as institutional investors in trading and having large holdings of capital market securities. As dealers they take positions and make a marketfor many securities both in equity and derivative segments. They hold large

inventories and therefore infl uence the direction of the market. GoldmanSachs, Salomon Brothers, Merrill Lynch, Schroeders, Rothschild and other significant Market Investors both on their own account and on behalf of the billions dollars of funds under their management.The global mergers and acquisitions business is very large and measures upto trillions of dollars annually. Investment banks play a lead advisory role inthis booming segment of financial advisory business. Besides, they come inas investors in management buy-outs and management buy-in transactions.On other occasions, wherein investment banks manage private equity funds,they also represent their investors in such buy-out deals.In the case of universal banks such as the Citigroup or UBS Warburg, loan products form a significant part of the debt market business portfolio. Purei n v e s t m e n t b a n k s s u c h a s G o l d m a n S a c h s , M e r r i l l Ly n c h a n d M o r g a n Stanley Dean Witter do not have commercial banking in their portfolio andtherefore, do not off er loan products. Besides the larger fi rms, there are ah o s t o f o t h e r d o m e s t i c p l a y e r s p r e s e n t i n e a c h c o u n t r y a n d m i d - s i z e d investment b a n k s , w h i c h e i t h e r s p e c i a l i z e i n l o c a l m a r ke t s o r i n c e r t a i n product segments.S o m e i n v e s t m e n t b a n k s i n t h e o v e r s e a s m a r ke t s a l s o s p e c i a l i z e i n n i c h e segments such as –management of hedge funds, bullion trade, commodityhedges, real estate and other exotic markets.

The Indian ScenarioOrigin In India, though the existence of this branch of fi nancial services can betraced to over three decades, investment banking was largely confi ned tomerchant banking services. The forerunners of merchant banking in Indiaw e r e t h e f o r e i g n b a n k s . G r i n d l a y s B a n k ( n o w m e r g e d w i t h S t a n d a r d Chartered Bank in India) began merchant banking operations in 1967 with alicense obtained from the RBI followed by the Citibank in 1970. These two banks were providing services for syndication of loans and raising of equityapart from other advisory services.It was in 1972, that the Banking Commission Report asserted the need for merchant banking services in India by the public sector banks. Based on theAmerican experience which led to the passing of the Glass-Streagall Act, theCommission recommended a separate structure for merchant banks so as todistinct them from commercial banks and fi nancial institutions. Merchant banks were meant to manage investments and provide advisory services.Following the above recommendations, the SBI set up its merchant bankingdivision in 1972. Other banks such as the –Bank of India, Central Bank of India, Bank of Baroda, Syndicate Bank, Punjab National Bank, Canara Bank also followed suit to set up their merchant banking outfi ts. ICICI was thefirst financial institution to set up its merchant banking division in 1973. Thelater entrants were IFCI and IDBI with the latter setting up its merchant

banking division in 1992. However, by the mid eighties an d early nineties,most of the merchant banking divisions of public sector banks were spun off as separate subsidiaries. SBI set up SBI Capital Markets Ltd. in 1986. Other s u c h b a n k s s u c h a s – C a n a r a B a n k , BO B , P N B , I n d i a n b a n k a n d i c i c i c re a t e d s e p r a t e m e rc h a n t b a n k i n g e n t i t i e s .

Growth Merchant banking in India was given a shot in the arm with the advent of SEBI in 1988 and the subsequent introduction of free pricing of primarymarket equity issues in 1992. However, post 1992, the merchant bankingindustry was largely driven by issue management activity which fluctuatedw i t h t h e t re n d s i n t h e p r i m a r y m a r ke t . T h e s e h a v e b e e n p h a s e s o f h e c t i c activity followed by a severe setback in business. SEBI started to regulatet h e m e rc h a n t b a n k i n g a c t i v i t y i n 1 9 9 2 a n d a m a j o r i t y o f t h e m e rc h a n t bankers who register ed with SEBI were either in issue management or a s s o c i ated activity such as underwriting or advisorsh i p . S E B I h a d f o u r categories of merchant bankers with varying eligibility criteria based ontheir networth. The highest number of registered merchant bankers withSEBI was seen in the midnineties, but the numbers have dwindled since,d u e t o t h e i n a c t i v i t y i n t h e p r i m a r y m a r k e t . T h e n u m b e r o f r e g i s t e r e d merchant bankers with SEBI as at the end of March 2003 was 124, from a peak of almost a thousand in the nineties. In the financi al year 2002-03 itself. The number decreased by 21.

Constraints in Investment Banking Due to the over dependence on issue m a n a g e m e n t a c t i v i t y i n t h e i n i t i a l years, most merchant banks perished in the primary market downturn thatfollowed later. In order to stabilize their businesses, several merchant banksdiversified to offer a broader spectrum of capital market services. However,other than a few industry leaders, the other merchant banks have not beenable to transform themselves into full service investment banks. Going bythe service portfolio of the leading full service investment banks in India, itm a y b e s a i d t h a t t h e i n d u s t r y i n I n d i a h a s s e e n m o r e o r l e s s s i m i l a r development as its western counterparts, though the breadth available in theo v e r s e a s c a p i t a l m a r ke t i s s t i l l n o t p re s e n t i n t h e I n d i a n c a p i t a l m a r ke t . S e c o n d l y , d u e t o t h e l a c k o f i n s t i t u t i o n a l fi n a n c i n g i n a b i g w a y t o f u n d c a p i t a l m a r ke t a c t i v i t y , i t i s o n l y t h e b i g g e r i n d u s t r y p l a y e r s w h o a re i n i n v e s t m e n t b a n k i n g . T h e t h i rd m a j o r d e t e rre n t h a s a l s o b e e n t h e l a c k o f depth in the secondary market, especially in the corporate debt segment.

Characteristics and Structure of Indian Inv e s t m e n t B a n k i n g Industry Investment banking in India has evolved in its own characteristics structureover the years both due to business realities and the regulatory regime.O n t h e re g u l a t o r y f ro n t , t h e I n d i a n re g u l a t o r y re g i m e does not allow allinvestment banking functions t o b e p e r f o rm e d u n d e r o n e e n t i t y f o r t w o reasons–(a) to prevent excessive exposure to business risk under one entitya n d ( b ) t o p re s c r i b e a n d m o n i t o r c a p i t a l a d e q u a c y a n d r i s k m i t i g a t i o n mechanisms. Therefore bankruptcy remoteness is a key feature in structuringthe business lines of an investment bank so that the risks and rewards aredefined for the investors who provide resources to the investment banks. Inaddition, the capital adequacy requirements and leveraging capability for each business line have been prescribed differently under relevant provisionsof law. On the same analogy, commercial banks in India have to follow the provisions of the Banking Regulation Act and the RBI r egulations, which prohibit them from exposing themselve s to stock market investments andlending against stocks beyond certain specified limits.T h e re f o re , I n d i a n i n v e s t m e n t b a n k s s t r u c t u re t h e i r b u s i n e s s s e g m e n t s i n different corporate entities to be able to meet regulatory norms. For e.g. it isdesirable to have merchant banking is a separate company as it requires aseparate merchant banking license from the SEBI. Merchant bankers other than banks and fi nancial institutions are also prohibited from undertakingany other business other than that in the securities market. However, since

banks are subject to the Banking Regulation Act, they can not performi n v e s t m e n t b a n k i n g t o a l a r g e ex t e n t on the same balance sheet. Assetmanagement b u s i n e s s i n t h e f o r m o f a m u t u a l f u n d re q u i re s a t h re e - t i e r structure under the SEBI regulations. Equity research should be independento f t h e m e rc h a n t b a n k i n g b u s i n e s s s o a s t o a v o i d t h e k i n d o f c o n fl i c t o f interest as faced by American investment banks. Stock broking has to bes e p a r a t e d i n t o a d i ff e r e n t c o m p a n y a s i t r e q u i r e s a s t o c k e x c h a n g e membership a p a r t f r o m S E B I re g i s t r a t i o n . A c o m p l e t e o v e r v i e w o f t h e regulatory framework for investment banking is furnished later.Investment banking in India has also been influenced by business realities toa large extent. The fi nancial services industry in India till the early 1980sw a s d r i v e n l a rg e l y b y d e b t s e r v i c e s i n t h e f o r m o f t e r m fi n a n c i n g f ro m fi nancial institutions and working capital fi nancing by commercial banksand non-banking fi nancial companies (NBFCs). Capital market serviceswere mostly restricted to stock broking activity which was driven by a noncorporate unorganized body industry. M e r c h a n t b a n k i n g a n d a s s e t management services came up in a big way only with the opening up of thecapital markets in the early nineties. Due to the primary market boom duringthat period, many fi nancial business houses such as fi nancial institutions, banks and NBFCs entered the merchant banking, underwriting and

advisory business. While most institutions and commercia l banks floated merchant banking divisions and subsidiaries, NBFCs combined their existing businesswith that of merchant banking.Over the subsequent years, two developments have taken place. Firstly, withthe downturn in the capital markets, themerchant banking industry has seen tremendous shake out and only about a 10% of them remain in serious business as pointed out earlier. The other develo pment is that due to thegradual regulatory developments in the capital markets, investment bankingactivities have come under regulations which require separate registration,licensing and capital controls.D u e t o t h e a b o v e re a s o n s , t h e I n d i a n investment banking industry has a heterogeneous structure. The bigger investment banks have several groupentities in which the core and non-core business segments are distributed.Others have either one or more entities depending upon the activity profile.T h e h e t e ro g e n e o u s a n d f r a g m e n t e d s t r u c t u re i s e v i d e n t e v e n i f I n d i a n investment banks are classified on the basis of their activity profile. Some of them such as –SBI, IDBI, ICICI, IL & FS, Kotak Mahindra, Citibank ando t h e r s o f f e r a l m o s t t h e e n t i r e g a m u t o f i n v e s t m e n t b a n k i n g s e r v i c e s permitted in India. Among these, the long term financial institutions areg r a d

u a l l y t r a n s f o rm i n g t h e m s e l v e s i n t o f u l l s e r v i c e c o m m e rc i a l b a n k s ( c a l l e d ‘ u n i v e r s a l b a n k i n g ’ i n t h e I n d i a n c o n t ex t ) . T h e y a l s o h a v e f u l l service investment banking under their fold. Other entities such as NBFCs or subsidiaries of public sector banks mainly offer merchant banking and other capital market services. There are also several others who are providing onlyc o r p o r a t e a d v i s o r y s e r v i c e s b u t p r e f e r t o h o l d m e r c h a n t b a n k i n g o r underwriting registrations.Presently, there are no global Indian investment banks although there is a bulge bracket of investment banks in India that have some overseas presenceto serve Indian issuers and their investors. At the middle level are several niche players including the merchant banking subsidiaries of some publicsector banks. Some of these subsidiaries have been either shut down or soldoff in the wake of two securities scam seen in 1993 and in 2000. However,c e r t a i n b a n k s s u c h a s C a n a r a B a n k a n d Pu n j a b N a t i o n a l B a n k h a v e h a d successful merchant banking activities. Among the middle level players arealso merchant banks structured as nonbanking financial services companiessuch as Rabo India Finance Ltd, Alpic Finance etc. There are also in themiddle level, some pure advisory fi rms such as – Lazard Capital, Ernst &Young, KPMG, Price Waterhouse Coopers etc. At the lower end are severalniche players and boutique firms, which focus on one or more segments of the investment banking spectrum.

Service Portfolio of Indian Investment BanksCore Services Merchant Banking, Underwriting and Book RunningThe primary market which was quite small in India, was revitalized with theabolition of the Capital Issues (Control) Act 1947 and the passing of theSecurities and Exchange Board of India Act, 1992. The SEBI functions asthe regulator for the capital markets similar to its counterpart, the SEC inUSA. SEBI vide its guidelines dated June 11, 1992 introduced free pricingo f s e c u r i t i e s i n p u b l i c o ff e r s f o r t h e fi r s t t i m e i n I n d i a . O v e r t h e l a s t t e n years, there have been two distinct phases of primary market boom –the first between 1992-1996 and the second between 19982001. The third wave of primary market issues could shape up in the near future. This market is veryclosely regulated by SEBI. In the days when the public offers market is veryv i b r a n t , t h i s a r e a o f s e r v i c e f o r m s t h e m a i n a c t i v i t y f o r m o s t I n d i a n investment banks. In the past few years, though public offers have been veryfew, the private placement market especially in the debt segment has beenvery active and has served as an important source of funds for primeratedc o r p o r a t e s . N o t a b l e a m o n g s u c h o ff e r i n g s a re re l a t e d p r i v a t e l y p l a c e d d e b e n t u r e s i s s u e d by public sector corporations and leading p r i v a t e c o m p a n i e s . Fi n a n c i a l i n s t i t u t i o n s h a v e b e e n r a i s i n g f u n d s v i a t h e p u b l i c off ers and hand holding them in the private placements as well. Once the private placement markets also come under regulator y stipulations,investment banks would have a wider role to play in such issuances.

Mergers and Acquisitions Advisory The mergers and acquisitions industry was pretty nascent in India prior to1 9 9 4 a n d c o n t i n u e s t o b e t i n y c o m p a r e d t o t h e g l o b a l s c a l e o f s u c h transactions. However, two main features that have given a big push to thisindustry are: • The forces of liberation and globalization that have forced the Indianindustry to consolidate. • The institutionalization of corporate acquisitions by SEBI through itsguidelines, popularly known as the Takeover Code.O n e o f t h e c re a m a c t i v i t i e s o f i n v e s t m e n t b a n k s h a s a l w a y s b e e n M & A advisory. The larger investment banks specialize in M&A as a core activity.While some of them provide pure advisory services in relation to M&A,others holding valid merchant banking licenses from SEBI also manage theopen offers arising out of such corporate events.

Mergers and Acquisitions Advisory The mergers and acquisitions industry was pretty nascent in India prior to1 9 9 4 a n d c o n t i n u e s t o b e t i n y c o m p a r e d t o t h e g l o b a l s c a l e o f s u c h transactions. However, two main features that have given a big push to thisindustry are: • The forces of liberation and globalization that have forced the Indianindustry to consolidate. • The institutionalization of corporate acquisitions by SEBI through itsguidelines, popularly known as the Takeover Code.O n e o f t h e c re a m a c t i v i t i e s o f i n v e s t m e n t b a n k s h a s a l w a y s b e e n M & A advisory. The larger investment banks specialize in M&A as a core activity.While some of them provide pure advisory services in relation to M&A,others holding valid merchant banking licenses from SEBI also manage theopen offers arising out of such corporate events.

Support services and BusinessesSecondary Market Activities Most of the universal banks such as ICICI, IDBI and Kotak Mahindra havetheir broking and distribution firms in both the equity and debt segments of the secondary market. In addition several other investment banks such as theI L & FS a n d p u re i n v e s t m e n t b a n k s s u c h a s D S P M e r r i l l Ly n c h a n d J M Morgan Stanley have a strong presence in this area of activity. In the pastfew years, the derivatives segment has been introduced in Indian capitalm a r k e t a n d t h i s p r o v i d e s a n a d d i t i o n a l a v e n u e o f s p e c i a l i z a t i o n f o r investment ba nks. Derivatives trading, risk management and s t r u c t u re d products offerings are the new segments that are fast becoming the areas of future potential for Indian investment banks. The securities business also provides extensive research offerings and guidance t o investors. Thes e c o n d a r y m a r k e t s e r v i c e s c ater to both the institutional and noninstitutional investors. Asset Management Services Most of the top fi nancial groups in India which have investment banking businesses such as the – ICICI, the IDBI, Kotak Mahindra, DSP MerrillLynch, JM Morgan Stanley, SBI and IL & FS also have their presence in theasset management business through separate entities. As per the three layer structure propounded by SEBI, the parent organization acts as the sponsor of the fund and the fund itself is constituted as a trust. The trust is managed by

an asset management company and a separate t r u s t e e c o m p a n y w h i c h oversees the interests of the unit holders in the Mutual Fund. The wholestructure has as arm’s length distance from the sponsor’s other businessesand entities. Wealth Management Services (Private Banking) M a n y re p u t e d i n v e s t m e n t b a n k s n u r t u re a s e p a r a t e s e r v i c e s e g m e n t t o manage the portfolio of high networth individuals, households, trusts andother types of non-institutional investors. This can be structured either as a pure advisory service wherein the investment manager does not have anyaccess to the funds or as a fund management service wherein the investmentmanager is given charge of the funds. In the former case, it becomes a non-d i s c re t i o n a r y p o r t f o l i o a n d i n t h e l a t t e r case, it becomes a d i s c re t i o n a r y portfolio. Such activity is regulated under the SEBI guidelines as alreadydiscussed. In other cases, wealth management may be restricted to a research based activity wherein the investor is provided good investmentrecommendations from time to time. Institutional Banking Institutional investors have been a recent phenomenon in the Indian capitalm a r ke t , w h i c h t i l l t h e n h a d t h e p re s e n c e o f a h a n d f u l o f p u b l i c fi n a n c i a l institutions such as the UTI and the insurance companies. The term lendingi n s t i t u t i o n s s u c h a s t h e IDBI and IFCI did not participate in s e c o n d a r y market dealing as a matter of policy. With the advent of liberalization, there

a re p re s e n t l y a l a rg e n u m b e r o f d o m e s t i c i n s t i t u t i o n a l i n v e s t o r s i n t h e secondary market apart from approved foreign institutional investors. Inaddition, institutional investments have risen signifi cantly in the primarymarkets through venture capital and private equity investments by investorsin both the domestic and non-domestic categories. Several of the leadinginvestment banks either have dedicated venture funds or private equity fundsthat invest in primary market. In addition they make proprietary investmentsin the secondary market through their dealing and market activities. The business portfolio of Indian Investment Banks has been briefly discussed inFig.

I n t e r d e p e n d e n c e b e t w e e n D i ff e r e n t Ve r t i c a l s i n I n v e s t m e n t Banking As is evident from Figure , there are diff erent verticals in investment banking and they do enjoy syne rgies with one another. While some of theservice or business segments form the core of investment banking, others provide invaluable support. This interdependence and complementaryexistence has been explained below.While merchant banking largely relates to management of public floatationso f s e c u r i t i e s o r re v e r s e fl o a t a t i o n s s u c h a s b u y b a c k s a n d o p e n o ff e r s , u n d e r w r i t i n g i s a n i n h e re n t p a r t o f m e rc h a n t b a n k i n g f o r p u b l i c i s s u e s . Similarly, bought out deals and market making are a part of the process of fl o a t i n g i s s u e s o n t h e O TC E xc h a n g e o f I n d i a . T h e c o n c e p t o f m a r ke t making has now been introduced for listing of certain scrips in the mains t o c k exc h a n g e s a s w e l l . Ad v i s o r y a n d t r a n s a c t i o n s e r v i c e h a v e a closel i n k a g e w i t h m e r c h a n t b a n k i n g a s m o r e o f t e n t h a n n o t , s u c h s e r v i c e s culminate in a merchant banking assignment for a public issue or a reversefl oatation. Such services also help in maintaining an enduring relationshipwith clients during those times when merchant banking is not a hot activitydue to depressed market conditions. The other segment of primary marketa c t i v i t y , i . e . v e n t u re c a p i t a l a n d p r i v a t e e q u i t y h a s e q u a l s y n e rg i e s withm e r c h a n t b a n k i n g . B e i n g i n v e n t u r e c a p i t a l b u s i n e s s w h i c h e n a b l e s identification of potential IPO candidates quite early, which helps not onlyin generating good fee income from merchant

banking services, but alsogood in capital gains for the venture capital invested at earlier rounds of

fi nancing in such companies. Similarly, being in private equity businesshelps in harnessing the potential offered by later stage and listed companies,which may approach an investment bank primarily for merchant bankingservices.The support business vertical in the secondary market operations also havesynergies with those in the primary equity and debt market segment as far asinvestment banking is concerned. Stock broking and primary dealership indebt markets nurture institutional, corporate and retail clients who can betapped effectively for asset management, portfolio management, and privateequity business. In addition, presence in the equity derivative and foreignexchange derivatives segments can help in off ering solutions in treasurymanagement to clients. In addition, the advisory and transaction servicesv e r t i c a l c a n d r a w ex p e r t i s e f ro m s u c h s e g m e n t s i n p r o v i d i n g s t r u c t u re d fi nancing solutions to its clients. All these verticals are driven by supportservices such as sales and distribution and also equity research and analysis.Lastly but more importantly, the capability in sales and distribution alsodetermines the success of the merchant banking vertical.T h u s , i t m a y b e s e e n t h a t t h e g ro w t h a n d s u c c e s s o f a n i n v e s t m e n t b a n k depends on its strengths in each vertical and how well it combines them for synergies. To sum up, investment banking is a business that is very sensitiveto the economic and capital market scenario and therefore, the broader

the platform of its operations, the more is likelihood of an investment bank surviving business cycles and sudden shocks from the market.

Regulatory Framework for Investment Banking As discussed above, investment banking in India is regulated in its variousfacets under separate legislations or guidelines issued under statute. Ther e g u l a t o r y p o w e r s a r e a l s o d i s t r i b u t e d b e t w e e n d i ff e r e n t r e g u l a t o r s depending upon the constitution and status of the investment bank. Purei n v e s t m e n t b a n k s w h i c h d o n o t h a v e p re s e n c e i n t h e l e n d i n g o r b a n k i n g business are governed primarily by the capital market regulator (SEBI).However, universal banks and NBFC investment banks are also regulated primarily by the RBI in their core business of banking or lending and so far as the investment banking segment is concerned, they are also regulated bySEBI. An overview of the regulatory framework is furnished below:1 . A t t h e c o n s t i t u t i o n a l l e v e l , a l l i n v e s t m e n t b a n k i n g c o m p a n i e s incorporated u n d e r t h e C o m p a n i e s Ac t , 1 9 5 6 a re g o v e rn e d b y t h e provisions of that Act.2.Investment banks that are incorporated under a separate statute such as the SBI or the IDBI are regulated by their respective statute. IDBIi s i n t h e p r o c e s s o f b e i n g c o n v e r t e d i n t o a c o m p a n y u n d e r t h e Companies Act.3.Universal Banks are regulated by the Reserve Bank of India under theRBI Act 1934 and the Banking Regulation Act which put restrictionson the investment banking exposures to be taken by banks. The RBIhas relaxed the exposure limits for merchant banking subsidiaries of commercial banks. Till now, such companies were restricting their

ex p o s u re t o a s i n g l e e n t i t y t h ro u g h t h e u n d e r w r i t i n g b u s i n e s s a n d other fund based commitments such as standby facilities etc to 25% of their net owned funds (NOF). Therefore these companies are now on par with other investment banks which can do so up to 20 times their NOF.4 . I n v e s t m e n t b a n k i n g c o m p a n i e s t h a t a re c o n s t i t u t e d a s n o n - b a n k i n g fi n a n c i a l c o m p a n i e s a re re g u l a t e d o p e r a t i o n a l l y b y t h e R B I u n d e r Chapter IIIB (sections 45H to 45QB) of the Reserve Bank of IndiaAct, 1934. Under these sections RBI is empowered to issue directionsi n t h e a re a o f re s o u rc e m o b i l i z a t i o n , a c c o u n t s a n d a d m i n i s t r a t i v e controls. The following directions have been issued by the RBI so far: • Non-Banking Financial Companies Acceptance of Deposit s(Reserve Bank) Directions, 1998. • NBFCs Prudential Norms (Reserve Bank) Directions, 1998.5 . Fu n c t i o n a l l y , d i ff e re n t a s p e c t s o f i n v e s t m e n t b a n k i n g a re re g u l a t e d u n d e r t h e S e c u r i t i e s E xc h a n g e B o a r d o f I n d i a Ac t , 1 9 9 2 a n d t h e guidelines and regulations issued there under. These are listed below: • Merchant banking business consisting of management of publicoff ers is a licensed and regulated activity under the Securitiesand Exchange Board of India (Merchant Bankers) Rules 1992and Securities Exchange Board of India (Merchant Bankers)Regulations 1992.

 Underwriting business is regulat e d u n d e r t h e S E B I ( U n d e r w r i t e r s ) Ru l e s 1 9 9 3 a n d t h e S E B I ( U n d e r w r i t e r s ) Reg ulations 1993. • The activity of the secondary market operations including stock broking are regulated under the relevant by-laws of the stock exchange and the SEBI (Stock Brokers and Sub Brokers) Rules1 9 9 2 a n d t h e ( S t o c k B ro ke r s a n d S u b B ro ke r s ) Re g u l a t i o n s 1992. Besides, for curbing unethical trading practices, SEBI has promulgated the SEBI (Prohibition of Insider Trading)R egulations 1992 and the SEBI (Prohibition of Fraudulent andU n f a i r Tr a d e P r a c t i c e s R e l a t i n g t o S e c u r i t i e s M a r k e t s ) Regulations 1995. • The business of asset management as mutual funds is regulatedunder the SEBI (Mutual Funds) Regulations 1996. • The business of portfolio management is regulated under theSEBI (Portfolio Managers) Rules, 1993 and the SEBI (PortfolioManagers) Regulations, 1993. • T h e b u s i n e s s o f v e n t u re c a p i t a l a n d p r i v a t e e q u i t y b y s u c h funds that are incorporated in India is regulated by the SEBI(Venture Capital Funds) Regulations, 1996 and by those thata re i n c o r p o r a t e d o u t s i d e I n d i a i s re g u l a t e d u n d e r t h e S E B I (Foreign Venture Capital Funds) Regulations 2000. • The business of institutional investing by foreign investment banks and other investors in Indian secondar

y markets isg o v e r n e d b y t h e S E B I ( F o r e i g n I n s t i t u t i o n a l I n v e s t o r s ) Regulations 1995.

6.Investments banks that are set up i n I n d i a w i t h f o r e i g n d i r e c t investment either as joint ventures with Indian partners or as fullyowned subsidiaries of the foreign entities are governed in respect of the foreign investment by the Foreign Exchange Management Act,1999 and the Foreign Exchange Management (Transfer or issue of Security by a Person Resident Outside India) Regulations 2000 issuedthere under as amended from time to time through circulars issued bythe RBI.7 . A p a r t f r o m t h e a b o v e s p e c i fi c r e g u l a t i o n s r e l a t i n g t o i n v e s t m e n t banking, investment banks are also governed by other laws applicableto all other businesses such as the –tax law, property law, state laws,arbitration law and other general laws that are applicable in India.

Regulatory Framework for Merchant Banking M e rc h a n t B a n ke r s a re g o v e r n e d b y t h e S E B I ( M e rc h a n t B a n ke r s ) Ru l e s 1992 and SEBI (Merchant Bankers) Regulations 1992. According to theSEBI (Merchant Bankers) Rules 1992 a Merchant Banker means ‘a personw h o i s e n g a g e d i n t h e business of issue management either by m a k i n g a rr a n g e m e n t s re g a rd i n g s e l l i n g , b u y i n g or subscribing to securities asmanager, consult a n t , a d v i s o r o r re n d e r i n g c o r p o r a t e a d v i s o r y s e r v i c e i n relation to such issue management’.Given the fact that Merchant Bankers are entrusted with the responsibility of issue management by law, the regulatory framework is designed to ensurethat they suffi cient competence and exercise diligence in their work suchthat the issuers comply with all statutory requirements concerning the issue.At the same time, the merchant banker shall have high levels of integrity sothat quality issues alone are brought to the primary market. Keeping theseobjectives in mind and investor protection as the paramount objective, theS E B I h a s l a i d e m p h a s i s o n e n s u r i n g t h a t m e r c h a n t b a n k e r s f u l fi l t h e e l i g i b i l i t y c r i t e r i a o n a n o n - g o i n g b a s i s a n d h a s t h e re f o re p ro v i d e d f o r compulsory registration every three years. All Merchant Bankers need tohave a valid registration certificate under the said rules to perform the role of Merchant Bankers to issues. In considering the application for registration,SEBI shall pay regard to the professional qualifi cation in fi nance, law or business management, adequate office space, manpo wer, office equipmentand other infrastructure, at least two support staff members who have

thecompetence to be in the fi eld of merchant banking business, existence of

minimum stipulated capital and previous experience to investor grievanceredressal.T h e a c t i v i t i e s t h a t a M e r c hant Banker is authorized to do are issu e management and associated activities suc h a s a d v i s i n g o r p r o v i d i n g consultancy or marketing services for the issue, underwriting of issues and portfolio management, though portfolio management alone requiresadditional registration under the relevant regulations. Merchant Bankers are precluded from carrying on any business or fundbased activity other thanthat associated with the securities market. Merchant Bankers are also bound by the Code of Conduct prescribed under the Regul ations. In addition,M e r c h a n t B a n k e r s h a v e t o comply with general obligations an d responsibilities under the Regulations.Pre s e n t l y t h e re i s o n l y o n e c a t e g o r y o f M e rc h a n t B a n ke r s p re s c r i b e d b y SEBI (Category I) and the minimum stipulated networth for such MerchantBankers is Rs.five crore. Such Merchant Bankers holding valid certificatesof registration are alone qualifi ed to manage public off ers. SEBI levies ao n e - t i m e a u t h o r i z a t i o n f e e , a n a n n u a l f e e a n d a re n e w a l f e e f ro m e a c h Merchant Banker. Under the regulations, Merchant Bankers have also to submit periodicalreturns and any other additional information that SEBI might seek from timeto time. SEBI also has a right of inspection of the books of account,

recordsand documents of the merchant banker at any time if required. SEBI maysuo moto conduct an enquiry or launch an investigation into the working of a M e rc h a n t B a n ke r o r o n re c e i p t o f a c o m p l a i n t a g a i n s t s u c h M e rc h a n t .

Banker. SEBI may even appoint an external auditor to inspect the books andr e p o r t t o S E B I . B a s e d o n t h e fi n d i n g s , S E B I i s e m p o w e r e d t o t a k e appropriate action to award penalty points to the erring Merchant Banker based on the degree of the default or contravent ion in accordance with theSEBI (Procedure for Holding Enquiry by Enquiry Offi cer and ImposingPenalty) Regulations 2002. The aggrieved Merchant Banker may prefer toa p p e a l t h e C e n t r a l G o v e r n m e n t u n d e r t h e S E B I ( A p p e a l t o C e n t r a l Government) Rules 2003. It may also be mentioned here that a MerchantB a n ke r i s d e e m e d t o b e a c o n n e c t e d p e r s o n t o t h e i s s u e r u n d e r t h e S E B I (Prohibition of Insider Trading) Regulations, 1992.

Anatomy of Some Leading Indian Investment Banks.ICICI Securities Ltd. (I-Sec). I-Sec is a part of the ICICI group whose parent company is the ICICI Bankmwhich till recently was a fi nancial institution that converted itself into auniversal bank by it merger with its own commercial bank, the ICICI Bank in 2003. I-Sec, which was initially a joint venture with J.P. Morgan of theU S , b e c a m e f u l l y o w n e d b y I C I C I a f t e r J . P . M o r g a n e x i t e d f r o m t h e business.I-Sec is a full service investment bank that provides services across all thesegments spanning –debt market, equity market, derivatives and corporatea d v i s o r y s e r v i c e s . I t h a s s u p p o r t s e r v i c e s i n re s e a rc h a n d b ro k i n g . T h e a d v i s o r y b u s i ness focuses on merger and acquisitions, c r o s s b o r d e r acquisitions, equity and bidding for a number of reputed companies. Theequity business offers research, sales and execution services to institutionalinvestors in the secondary market and capital market related services such ase x e c u t i o n o f p u b l i c o ff e r i n g s , s t r u c t u r i n g a n d r e g u l a t o r y a n d l e g a l documentation services.In order to assist/provide corporate clients and institutional investors withi n v e s t m e n t b a n k i n g s e r v i c e s i n t h e U S A . I - S e c s e t u p t w o U S b a s e d subsidiaries namely ICICI Securities Holding Inc and ICICI Securities Inc.I C I C I S e c u r i t i e s I n c re g i s t e re d i t s e l f w i t h t h e National Association of

Security Dealers Inc as a broker-dealer, empowering it to engage in a varietyof securities transactions in the US market.I C I C I B r o k e r a g e S e r v i c e s L i m i t e d , a m e m b e r o f t h e N a t i o n a l S t o c k Exchange of India Limited, is the domestic broking subsidiary of ISec’sd i s t r i b u t i o n a n d s e c o n d a r y m a r ke t s e r v i c e s a re h a n d l e d b y t h e b ro k i n g company. DSP Merrill Lynch Ltd. Originally incorporated as DSP Financial Consultants Ltd, its name waschanged to DSP Merrill Lynch (DSPML) in 1996 following its conversioni n t o a j o i n t v e n t u re w i t h M e r r i l l Ly n c h o f U S A , a l e a d i n g i n t e r n a t i o n a l capital raising financial management and advisory company. Merrill Lynchhas a 40% equity stake in DSP-ML. DSP-ML is a part of the DSP group which has been in the securities and brokerage business for 130 years in theIndian market, thus pre-dating even the Bombay Stock Exchange.DSP-ML is a leading full service Investment Bank that provides servicesacross debt market, equity market and corporate advisory segments. It also provides services to private customers on equity and debt products andwealth management. It has a full fledged research team serving the needs of both its institutional and retail clients. The company is among the major players on proprietary account in the debt and equity markets and is also aregist ered primary dealer in government securities.

The functional divisions at DSP-ML consist of the – Investment BankingGroup, the Equity Sales Group, the Equity Trading and Dealing Group, DebtSales Group, the Mergers and Acquisitions Group, the Research Group andthe Private Client Group. The investment banking group generates equityand debt products emerging from IPOs, secondary issues and debt marketissues as well as private placements. It is also a leading underwriter in bothequity and debt products. These products are distributed through the equitys a l e s g ro u p a n d t h e d e b t s a l e s g ro u p . B o t h t h e m a r ke t i n g g ro u p s s e r v e a cross section of institutional clients, other non-institutional clients such astrusts and investment companies, retail clients and overseas investors. Thes a l e s g ro u p s a l s o d i s t r i b u t e a p a r t f ro m t h e i r o w n p ro d u c t s , t h e p ro d u c t s emerging from other entities such as DSP Merrill Lynch Mutual Fund andother mutual funds. The sales groups are supported by a national distributionnetworking comprising of approximately 8 000 sub-brokers and alliance partners.The trading and dealing groups support the broking activity in equities andthe primary dealership activities in the debt market. DSP-ML, is one of thelargest institutional broking fi rms in India. It is a founding member of TheStock Exchange, Mumbai (BSE) and is an active member of the NationalS t o c k E x c h a n g e ( N S E ) o f I n d i a i n b o t h t h e e q u i t y s e g m e n t a n d t h e wholesale debt market segment. It is an accredited primary dealer with theRBI and an active participant in the Government Securities/Treasury billm a r ke t s . A s a p r i m a r y d e a l e r , i t m a ke s a m a r ke t f o r d e b t s e c u r i t i e s b y o ff e r i n g t o b u y a n d s e l l q u o t e s .

T h e s e q u o t e s a re a l s o a v a i l a b l e o n w i re s e r v i c e s l i k e R e u t e r s , C r i s i l M a r k e t w i r e , B l o o m b e r g a n d D o w J o n e s Newswires.

T h e m e rg e r s a n d a c q u i s i t i o n s a d v i s o r y h a s b e e n s t r u c t u re d a s a s e p a r a t e specialist group that off ers their clients fi nancial advice and assistance inrestructuring, divestures, acquisitions, demergers, spin-offs, joint ventures, privatization and takeover defense mechanisms . The research group offers products such as –sectoral rep orts, company reports and special themeanalyses, daily, weekly and monthly market views as well as specific policyforecasts. The private client group offers depository, broking and investmentadvisory services to high net worth individuals, professionals and promotersof business groups, corporate executives, trusts and private companies.In 1996, the DSP group fl oated a separate equity broking company calledDSP Securities Ltd. which is a member of the BSE.

JM Morgan Stanley Pvt. Ltd. JM Morgan Stanley (JMMS) is a joint venture between the JM FinancialG ro u p a n d M o rg a n S t a n l e y D e a n Wi t t e r o f t h e U S A. I n 1 9 9 7 , M o rg a n Stanley which was established in New York in 1935, had acquired DeanWitter, an investment bank founded in 1924 in San Francisco. JM MorganStanley commenced operations in April 1999. However, the association of the two partners is limited only to the investment banking area. Both of themhave separate asset management companies in India which run independentof mutual fund businesses.Unlike DSP-ML and I-Sec which have an integrated structure, the JM Grouphas separate companies handling various components of the capital market business. The core functions of investment bankin g are performed byJMMS. This company focuses on capital raising, mergers and acquisitions, private equity and advisory work for Indian c orporations in both theinternational and domestic capital markets. The function of distribution andmarketing securities is handled by two of its wholly owned subsidiaries –JMMorgan Stanley Retail Services Pvt. Ltd. (JMRS) and JM Morgan StanleyFixed Income Securities Pvt. Ltd. (JMFI). JMRS provides equity distributions e r v i c e s f o r p r i m a r y m a r k e t p r o d u c t s , m u t u a l f u n d s , e q u i t y s a l e s a n d marketing support for the group broking activity and wealth managementa n d p o r t f o l i o m a n a g e m e n t s e r v i c e s t o h i g h n e t w o r t h i n d i v i d u a l s . J M F I off ers similar services in fi xed income (debt) securities. A third company,JM Morgan Stanley Securities Pvt. Ltd. handles all the broking operationsfor the group and provides services to institutional clients and others. It

also provides research support for both FII and Indian institutional clients.

SBI Capital Markets Ltd Founded in 1986 as a hive-off of the SBI Merchant Banking division, SBICapital Markets Ltd. (SBI Caps) is amongst the oldest players in the Indiancapital market. It is a full service investment bank that provides investment,a d v i s o r y a n d fi n a n c i a l s e r v i c e s . I n 2 0 0 1 , S B I C a p s s t a r t e d i t s s a l e s a n d distribution activity along with equity and debt broking services.SBI Caps provides services across the following spectrum: • Mergers and Acquisitions : This group provides advisory serviceswith regard to disinvestment of the government, valuations, mergersa n d a c q u i s i t i o n s i n t h e c o r p o r a t e s e c t o r , fi n a n c i a l a n d b u s i n e s s restructuring and other areas. • Project advisory and structure fi nance : I t i s a rg u a b l y o n e o f thel e a d i n g g r o u p s i n t h e c o m p a n y t h a t p r o v i d e s s e r v i c e s s u c h a s restructuring and pr ivatization advisory for public utilities, policyadviso ry to Central and State Governments, regulatory bodies andgovernment departments and organizations, project structuring andadvisory to the private sector and arranging finance for such projects.SBI Caps has been a major player in governmental work and in theinfrastructure sector. The project advisory services consist of hand-holding from the concept to commissioning stage involving projectstructuring, contract structuring, fi nancial m odeling, preparation of i n f o r m a t i o n m e m o r a n d u m , s y n d i c a t i o n o f d e b t a n d e q u i t y a n d assist a n c e i n d o c u m e n t a t i o n a n d fi n a n c i a l c l o s u re . O

t h e r s e r v i c e s include appraisals for green-fi eld and brown-fi eld projects, techno-economic

a p p r a i s a l f r o m b a n k s a n d fi n a n c i a l i n s t i t u t i o n s f o r establishing the viability of corporate restructuring plans, and vettingof contracts, loan documents, project documentation etc. • Capital market : This group provides merchant banking services inconnection with public issues, rights issues and public offers for buy- backs and open offers. It also advises clients on the private placements, ADR and GDR issues and overseas bo nd issues by theSBI. • Treasury and Investments : T h i s g ro u p d e a l s w i t h t h e p ro p r i e t a r y investment of the company in the equity, debt and money markets.Resource mobilization and management is also undertaken by thisgroup. • Broking of Equity and Debt : SBI Caps is a registered broker and amember of the NSE in the equity and wholesale debt segments and isalso a member in the equity segment. The broking group caters to thesecondary market needs of financial institutions, FIIs, mutual funds, banks, other corporates, high net worth individuals , non-residentinvestors and retail investors. The company commenced wholesaledebt market broking in 2001. The company expects to have a strong presence in institutional broking. The company pl ans to open aderivative trading desk soon. •

Sales and Distribution of equity and mutual fund products : S B I Caps has been a leading mobilizer of funds both for public offers and private placements. • Research : T h i s g ro u p p ro v i d e s t h e re s e a rc h s u p p o r t f o r i n - h o u s e departments and for institutional clients. Besides regular updates on companies and industries, the research gro u p b r i n g s o u t I n d i a Strategy, Debt Market Review and Daily Debt Market review whichare circulated to SBI Caps investment banking and broking clients.I n i t s a n n u a l r e p o r t for the year ending March 31, 2002, SBI Capsreported that is has two business seg m e n t s – ( a ) F e e b a s e d s e g m e n t providing merch ant banking and advisory services like issuemanagemen t, underwriting, arranger, project advisory and struc turedfinance. (b) Fund based segment which undertakes deployment of fundsin leasing, hire purchase and securities dealing. However, as a result of S E B I d i re c t i v e s , f re s h l e n d i n g u n d e r l e a s i n g a n d h i re - p u rc h a s e w a s stopped from 1 st July 1998. For the period 2001-02, SBI Caps was rankedfirst among issue managers by PRIME database

Kotak Mahindra Capital Company B o rn i n 1 9 9 5 a s p a r t o f a c o r p o r a t e re o rg a n i z a t i o n a s a n u n l i m i t e d c o m p a n y. T h e K o t a k M a h i n d r a C a p i t a l C o m p a n y ( K M C C ) , i s t h e investment banking entity belonging to the Kotak Mahindra Group. It is astrategic joint venture between Kotak Mahindra Bank Limited (KMBL)a n d t h e G o l d m a n S a c h s G ro u p L L P o f U S A. K M C C i s a f u l l s e r v i c e investment bank whose core business centers on equity issuances andfixed income securities, mergers and acquisitions and advisory services.A s a n i n v e s t m e n t b a n k , K M C C i s r e g i s t e r e d w i t h S E B I a n d i s a l s o registered as a non-banking fi nancial company with RBI. It is also anactive member of the association of Merchant Bankers of India (AMBI).KMCC has two wholly owned subsidiaries –(a) Kotak Mahindra (UK)Limited, which is registered with the Securities and Futures Association,UK and regulated by the Financial Services Authority, UK and (b) Kotak Mahindra Inc based in USA, which is registered with the Securities andExchange Commission, USA. KMCC is the first Indian investment bank to have sought such regulations in USA and UK. A third company calledKotak Mahindra (International) Limited., based in Mauritius providesdistribution and other client services to non-resident investors.In KMCC, the Equity Capital Markets group focuses on structuring andexecuting diverse equity financing transactions in the public and privatemarkets for corporates, banks, financial institutions and the Government.P r o d u c t s i n c l u d e i n i t i a l p u b l i c o ff e r i n g s ( I P O s ) , r i g h t s o ff e r i n g s , convertible offerings, private placements and private equity for

unlistedand listed companies. In the advisory business, the Structured Finance

( P ro j e c t Fi n a n c e & Ad v i s o r y B u s i n e s s ) G ro u p p r o v i d e s ex p e r t i s e i n various vertical segments in the infrastructure sector including power, oil,gas, ports, automobiles, steel & metals and hotels by offering structuredfi n a n c e s o l u t i o n s t o c l i e n t s . T h e Fi xe d I n c o m e S e c u r i t i e s G ro u p a t KMCC advises PSUs, Go vernment companies, fi nancial institutions, banks an d corporates on raising capital by way of public or private placement of debt. KMCC is credited with innovating on s ome bonds t r u c t u re s i n t h e I n d i a n m a r ke t . T h e a d v i s o r y g ro u p o n m e rg e r s anda c q u i s i t i o n s p r o v i d e s c o m p l e t e s o l u t i o n s o n s t r a t e g y f o r m u l a t i o n identifi cation of targets or buyers, valuation, negotiations and bidding,c a p i t a l s t r u c t u r i n g , t r a n s a c t i o n s t r u c t u r i n g , a s s i s t a n c e i n l e g a l documentation and acquisition financing strategies and implementation.KMCC is supported in its functions by Kotak Securities Ltd, a broking firm incorporated in 1995 that is also a joint venture with Goldman Sachswhich handles all the broking, distribution and research business of thegroup. Kotak Securities is a member of the debt segment of the NSE andis also a member of the National Stock Exchange Members Association.Kotak Securities offers services to investors, financial institutions, mutualf u n d s , re l i g i o u s a n d c h a r i t a b l e t r u s t s , i n s u r a n c e c o m p a n i e s , e t c . T h e institutional business division has a comprehensive research cell withsectoral analysts covering all the major areas of the Indian economy. Int h e i n t e r n a t i o n a l a re n a , i t p ro v i d e s b ro ke r a g e s e r v i c e s o n t h e I n d i a n securities to institutional and other investors who are based outside

India.D u e t o i t s o v e r s e a s p re s e n c e , t h e c o m p a n y h a s m a r ke t i n g i n t e re s t s i n Indian GDR and ADR issues as well.

The research products brought out by Kotak Securities include: • Fo r t h e i n s t i t u t i o n a l c l i e n t s , a p ro d u c t c a l l e d A K S E S S , w h i c h primarily covers secondary market broki ng. It caters to the needsof foreign and Indian institutional investors in Indian equities (bothlocal shares and GDRs). • The Daily Forex Monitor which tracks the Indian and internationalforeign exchange markets and opines on currency strategies on adaily basis. • The Weekly Money Market Update which gives the details of thedevelopments in markets and provides a shortterm interest rateview along with indicative pricing for Triple A credits. • The CURRENCY WATCH captures the monthly developments inthe Indian foreign exchange markets, analyses the key influencingi s s u e s , a s s e s s f u t u r e o u t l o o k a n d a l s o r e c o m m e n d s h e d g i n g strategies. • Monthly FINSEC and FINSEC Focus.Ko t a k S e c u r i t i e s i s a l s o a re g i s t e re d p r i m a r y d e a l e r w i t h t h e R B I i n t h e government securities market. As a primary dealer, the company acts as am a r k e t m a k e r a n d a l s o p r o v i d e s t w o w a y q u o t e s , a c t s a s r e t a i l e r a n d marketing agent, provides underwriting support on government securitiesissues and participates in auctions held by the RBI.B e s i d e s , t h e a b o v e c o m p a n i e s , t h e K o t a k G r o u p i n c l u d e s t h e K o t a k Mahindra Bank

which was formerly a non-banking fi nance company thathas recently been converted into a bank, the Kotak Mahindra Mutual Fund

which is managed by the Kotak Mahindra Asset Management Co. Ltd andthe OM Kotak Life Insurance, which is a joint venture with Old Mutual Plco f U K a n d t h e Ko t a k M a h i n d r a Ve n t u re C a p i t a l C o. w h i c h m a n a g e s t h e private equity fund of the group.

Recent Trends in Investment Banking One of the trends that has been developing in the past few years in theglobal and Indian investment banking arena, is the strong emergence of universal banks ahead of pure investment banks as market leaders. Theseuniversal banks have the additional fi nancial muscle of their bankingarms that add to their investment banking strengths. Pure investment banks have found it unmanageable to maint ain leadership positions dueto difficult market conditions and the economic downturn. The year 2002has been dubbed as the watershed year in investment banking for over adecade. Globally, universal banks such as the –Citigroup, JP MorganChase and Deutsche Bank are emerging strongly against pure investment banks such as Goldman Sachs and Morgan St anley. This trend could probably reappear in India as well with the emergence of SBI, ICICI,IDBI and Kotak Mahindra Bank as strong universal banks. However, in2 0 0 2 , p u r e i n v e s t m e n t b a n k s s u c h a s J M M o r g a n S t a n l e y a n d D S P M e r r i l l Ly n c h s t i l l o c c u p i e d t o p p o s i t i o n s i n t h e i n v e s t m e n t b a n k i n g lea gue tables.S o m e r e c e n t d e v e l o p m e n t s i n t h e i n v e s t m e n t b a n k i n g i n d u s t r y a s reported in some fi nancial dailies and other press clippings are listed below: International • The Wall Street IPO market has seen the fewest number of issuess i n c e 1 9 7 8 i n t h e c a l e n d a r y e a r 2 0 0 3 , w i t h j u s t fi v e i n t h e fi r s t

q u a r t e r. T h e s e h a v e m o s t l y b e e n f ro m i n s u r a n c e a n d fi n a n c i a l services firms and four of them were IPOs. • In 2002, there was a drop of 28% in global e q u i t y a n d e q u i t y related issuances according to Thomson Financial. IPOs were them a i n c a u s a l i t y w i t h a d ro p o f 3 4 % t o $ 6 0 . 6 b i l l i o n . E u ro p e a n m a r k e t s a w a d r o p o f 5 3 % d r o p i n I P O s a n d 5 4 % d r o p i n convertible bond issuances. In Europe, the market focus shiftedf r o m f u n d r a i s i n g t h r o u g h I P O s a n d p u b l i c i s s u e s t o m o r e restructuring deals. These are termed as ‘rescue finance’ deals sucha s r i g h t s i s s u e a n d f u l l y c o n v e r t i b l e b o n d i s s u e s b y t r o u b l e d companies. Ericsson, Sonera and Zurich Financial Services ares o m e c o m p a n i e s t h a t m a d e r i g h t s i s s u e s i n 2 0 0 2 . Ac c o r d i n g t o Dealogic, the volume of rights issues in Europe rose from $20.7 billion to $21.5 billion in 2002. The most popular in strument inU S A a n d E u ro p e h a s b e e n t h e ‘ m a n d a t ory convertible’ (fullyconvertible) bond which i s c o n s i d e re d a s a f o r w a rd s h a re s a l e s which is superior in nature to a rights issue. • The Citigroup was Wall Street’s top stock and bond underwriter in2002. Citigroup affi liates Salomon Smith Barney arranged $414 billion of offerings with a 10.6% market share accor ding toThomson Financial. Merrill Lynch and CSFB were ranked secondand third respectively. However, the total underwriting pie fell by5% during the same year. •

The top IPO investment bank in 2002 was Salomon Smith Barneyfollowed by Goldman Sachs. Goldman arranged the largest IPO of 2 0 0 2 , t h e $ 4 . 6 b i l l i o n C I T G ro u p I n c . ( Ty c o I n t e rn a t i o n a l L t d ) unit. • T h e re p o r t e d f e e o f A m e r i c a n I n v e s t m e n t b a n k s f e l l b y 2 1 % i n 2002 to $14.1 billion. Salomon took the highest fee of around $2 billion followed by the other two with around $1.2 billi on each.Since April 2001, 78000 jobs were slashed in this industry in USAaccounting for about 10% of the total strength. • Global M&A market was also dull in 2002 witnessing a sharp fallof 47% to stand at $996 billion from $1887 billion in the previousy e a r. T h e b i g g e s t d e a l s i n 2 0 0 2 w e r e H P - C o m p a q , A m g e n - Immunex Corp, AOL Time Warner-AOL Europe, BayerAventisC r o p S c i e n c e , C o m c a s t C o r p AT & T B ro a d b a n d , P h i l i p s P e t r o l e u m C o n o c o a n d S i e m e n s Ro b e r t B o s c h - A t c c s Mannesmann. • Some of the big universal banks such as JP Morgan Chase took major hits in their private equity businesses due to the technologymeltdown. Incidentally, JP Morgan, which is one of Wall Street’slargest private equity operators with a fund base of $28 billion,g e n e r a t e d $ 1 3 0 m i l l i o n i n re v e n u e s i n p r i v a t e e q u i t y i n 2 0 0 1 fuelled mainly by the IPO market

boom in technology stocks. Dueto the meltdown, many investment banks have felt it necessary tospin off their private equity operations into separate entities. BNPParibas, Deutsche Bank, HSBC and Zurich Financial Services aresome of these banks.

• American investors poured more money into debt mutual funds in2 0 0 2 a c c o u n t i n g t o $ 1 3 3 b i l l i o n a n d t h e re w e re f e w t a ke r s f o r public issues of equity junk bonds and convertible bonds. National • During the year 2001, JM Morgan Stanley which acted as adviser toM&A deals worth Rs.16022 crore was rated the top investment bank i n I n d i a . T h e o t h e r p l a y e r s i n t h e b i g l e ague were ABN-Amro(Rs.10460 crore), DSP M e r r i l l Ly n c h ( R s . 7 1 3 0 c r o r e ) , A r t h u r A n d e r s e n ( n o w p a r t o f E & Y , R s . 3 5 3 2 c ro re ) , Ko t a k M a h i n d r a ( R s . 1 7 1 9 c r o r e ) , R a b o I n d i a Fi n a n c e ( R s . 8 3 3 c r o r e ) a n d L a z a r d Capital (Rs.53 6 c ro re ) – ( a s re p o r t e d i n t h e E c o n o m i c Ti m e s 21 st November 2001). • I n 2 0 0 2 , t h e re w a s o n l y o n e G D R / A D R i s s u e a s c o m p a re d t o 6 i n 2001 and 9 in 2000. This was made by Mascon Global which raised$ 1 0 m i l l i o n t h ro u g h i s s u e o f 2 . 5 m i l l i o n G D R s w h i c h a re listed atL u xe m b o u r g S t o c k E x c h a n g e . I n t h i s m a r k e t , C i t i b a n k w a s t h e leading depository banks according to Instanex Capital Consultants. T h i s w a s f o l l o w e d b y B a n k o f N e w Yo r k , D e u t s c h e B a n k a n d J P Morgan. • In the M&A market, the year 2002 saw an increase of around 5% inthe value of M&A deals in Inda.

Among these, more than 50% werec r o s s border deals according to a survey conduct e d b y K P M G Corporate Finance. The deals were mostly in the SME segment withaverage size not exceeding $25 million. The banking, fi nance and insurance sectors contributed almost one-third of the total volume.Privatization deals also played a significant part. • D S P- M L d e - l i s t e d f ro m t h e s t o c k ex c h a n g e s i n c e i t s p ro m o t e r s , Hemendra Kothari and Merrill Lynch together held more than 90% of the shares. DSP was rated the ‘The Best Domestic Investment Bank’i n I n d i a f o r 2 0 0 0 b y F i n a n c e A s i a . E u r o m o n e y v o t e d i t ‘ B e s t Domestic M&A House in India’ as well as ‘Best Domestic E q u i t y House in India’ in 2000. This distinction has returned for three yearsin a row with DSP-ML being named as the ‘Best Domestic SecuritiesH o u s e ’ a n d ‘ B e s t D o m e s t i c I n v e s t m e n t Bank’ for 2002-2003 byAsiamoney (May 2003 issue) and The Asset (January 2003 i s s u e ) magazine respectively

The Conflict of Interest Issue The most burning global issue in the investment banking industry is that of confl ict of interest between investment bankers and their research analysisdivisions. In the wake of the Enron, Worldcom and other corporate disasters,t h e i s s u e h a s g a i n e d s o m e s i g n i fi c a n c e . T h e S e c u r i t i e s a n d E x c h a n g e Commission in the USA (SEC) have initiated investigations into instances of investment banks issuing over-optimistic research and steering shares in hotIPOs to important clients for vested interests. In such investigations some of the banks have been imposed fines. Merrill Lynch paid up fines to the extento f $ 1 0 0 m i l l i o n i n r e g u l a t o r y p r o c e e d i n g s i n 2 0 0 2 b r o u g h t a g a i n s t i t s misleading research reports. Citigroup’s Salomon Smith Barney is also inthe dock and may find itself paying the heaviest fines. CSFB also finds itself in trouble with the regulators. Most of the other top investment banks sucha s – G o l d m a n S a c h s , Le h m a n B ro t h e r s , B e a r S t e rn s , D e u t s c h e B a n k , J P Morgan Chase and others also found their names in the fi nes list in 2002. CSFB was fined for misleading investors on offerings in technology shares.J P M o rg a n o n t h e o t h e r h a n d , h a s b e e n u n d e r a c l o u d f o r i t s ro l e i n t h e infamous offbalance sheet partnership it had crafted for Enron.Besides, investment banks have also been the target of several lawsuits filed by aggrieved investors. In late 2002, the French luxury goods leader LVMHfi led a 100 million euro lawsuit against Morgan Stanley alleging that itsresearch report on LVMH was biased because of the investment bank’s closeadvisory

relationship with LVMH’s arch rival Gucci Group NV. MorganStanley was also the underwriter of Gucci’s IPO in 1995

Both the NYSE and NASDAQ came out with ‘research analysts’ conflict of i n t e re s t r u l e s ’ i n M a y 2 0 0 2 w h i c h w a s s u b s e q u e n t l y a p p ro v e d b y S E C . Market observers have felt that this is a good development from the point of v i e w o f a d d re s s i n g c o n fl i c t o f i n t e re s t , c u rre n t l y a b u rn i n g i s s u e i n t h e industry. While an investment bank may be advising a client on a buy out,its private equity arm may be in the fray for its purchase. An example of thisw a s t h e s a l e o f t h e p o w e r s t o r a g e b u s i n e s s o f I n v e n s y s i n 2 0 0 1 w h e re i n M o rg a n S t a n l e y was the advisor in the $505 million sale to E n e r S y s a company owned by Morgan Stanley Capital Partners (Morgan Stanley’s private equity firm).So how does the confl ict of interest really arise? Most investment banksh a v e i n house research divisions which act as a su p p o r t f u n c t i o n a s discussed earlier. The research divisions perform vital function of trackingcorporates and making recommendations to their clients in the secondarymarket operations or to their own dealing rooms. They also issue reviewsand ratings to new issuances hitting the market. The confl ict could arise if the research analyst promotes a share, the public offering for which is beinghandled by the merchant bank.

Alternatively, it could also be that the analystis privy to insider information being provided by their merchant bankingd i v i s i o n a n d t h e r e u p o n i s s u e r e c o m m e n d a t i o n s t h a t c o u l d a m o u n t t o fraudulent deceit of investors or gains for select few. Over the years, thee t h i c a l w a l l b e t w e e n m e r c h a n t b a n k e r s a n d r e s e a r c h a n a l y s t s m e l t e d especially in the heat of the IPO and the internet boom. The compensation patterns of the investment bankers and r esearch analyst were also gettingcomplementary to an extent thus undermining their independence. A study was conducted by the SEC in 2001on ‘ f u l l s e r v i c e i n v e s t m e n t banks’ in Wall Street focusing on these conflicting relationships. The studydisclosed two main areas of conflict–(a) research recommendations tendingto become marketing tools for merchant banking assignments by the same bank and analysts getting paid share of such invest ment banking gains, (b)o w n e r s h i p o f s t o c k s b y r e search analysts in the companies that they recommend or research. The study disclosed that analysts leveraged their position in pumping up recommendations in compa nies that they areinterested in when they went public.In the revised dispensation, one of the main provisions is that analysts haveto disclose their interests in their recommendations. In addition, there iss o u g h t t o b e a water tight compartment in the working of the

m e rc h a n t banking departments and research divisions. The third area has been theregulation of compensatory structures for research analysts based on the profits of the merchant banking divisions. The develo pments in the USAhave also resulted in precautionary amendments to regulations made in India by SEBI though such instances of conflict of interest have not surfaced sofar. SEBI has amended the regulations that have been in place for MerchantBankers, Underwriters and for the prohibition of insider trading. As a result,analysts are barred from private trading in shares they analyze. There is stillroom for more regulation in future in this area of importance for the survivalof the investment banking industry.In conclusion, it can be said that the investment banking industry has beenthrough difficult times. On one hand, the economic slow down and the crashof the markets that were propelled to dizzy heights by the new economy

Stock have battered their bottom lines and led to large scale cut back in staff and operation on the other hand, role of investment banks in corporate scandals and their questionable business practices and ethics have taken a toll on their reputation and image. A large scale cleaning up has to take place in their method of working and services off ering. Similarly, a major resurrection of their confi dence is required through resurgence of the market, wherever that happens. In the meantime, the industry has to live up to the challenge through appropriate restructuring and consolidation.

Conclusion Given the scope for investment banking in India, the future looks bright for t h e i n d u s t r y a s a w h o l e i n I n d i a . M a n y m o re p u re i n v e s t m e n t b a n k s a n d advisory firms could convert themselves into full service investment banksthat would broaden the market and make the service delivery much moreeffi cient. In addition, the technological and market developments shapingt h e c a p i t a l m a r ke t a s d i s c u s s e d w o u l d a l s o p ro v i d e a n a d d e d i m p e t u s t o growth of investment banking. Better regulatory supervision and stricter enforcement of the code of conduct of market intermediaries would ensurethat better quality issuers come to the market and existing issuers wouldfollow enhanced standards of corporate governance. In the long run, all thesedevelopments would ensure fair return to investors, and bring back investor s u p p o r t t o t h e m a r ke t . T h i s w o u l d a u g u r w e l l f o r t h e c a p i t a l m a r ke t i n general and investment banking in particular.