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Investment Banking Origin, History in U.S., U.K., etc.
- Anand Bathiya
B.Com., A.C.A., LL.B., D.I.S.A.
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QUICK POINTS
“A financial intermediary that
performs a variety of services.
It includes underwriting, acting as an
intermediary between an issuer and
the investing public, facilitating
mergers and other corporate
reorganizations, and also acting as a
broker for institutional clients”
Definition by ‘Investopedia’
QUICK POINTS
Functions towards ‘capital intermediation’ and hence the term ‘bank’.
‘Investment Banking is what investment banks do’ – John F. Marshalls
Very matured industry in the developed nations. At nascent stage in India.
Work specific regulatory registration in India.
INTRODUCTION Discussion Points
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What’s in the Name?
The distinction between commercial banking and investment banking was unique and
confined to the United States and Japan, where legislation separated them.
Issuer Investment Bank Investor
Bank is derived from the Italian for bench, ‘banco’, as in a counter
The term Bankrupt is a corruption of the Italian ‘banca rotta’, or broken bench
Investment Bank? Merchant Bank? Issuing Bank? Accepting House?
Merchant banking has different connotations in the US and other
markets.
In the US it is primarily a fund based activity while in the UK and in
India it implies intermediation and advisory activity in connection with
public floatation of securities
Banking
Commercial Investment
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History of U.K. Merchant Banking
They financed the British government to purchase shares of the Suez Canal, helped America purchase
the State of Louisiana from Napoleon by raising loans from money market in London
Lazard Brothers granted loan to Government of India for Durgapur Steel Plant.
“There are six great powers in Europe: England, France, Prussia, Austria, Russia, and
Baring Brothers.” —Duc de Richelieu, Prime Minister under Louis XVIII
• The first European Banking institutions emerged in cities of Italy (12th century).
• The first financial instrument was ‘a proportionate representation in ownership’ - (Italy, 12th
century)
• The republic of Venice issues long-term loans called ‘prestiti’ which were publicly traded
and listed.
• Medici bank of Florence became first bank to have branches in all major Italian cities.
• The five sons of the patriarch, Meyer Amschel Rothschild, established offices in Frankfurt,
London, Paris, Vienna, and Naples – (18th Century)
• Family banks dominated the scenario Warburgs, the Lazards, the Schroders, the Barings,
etc.(jews)
• The first major bankers were “merchant bankers,” traders of commodities and goods
besides capital.
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History of U.S. Investment Banking
1837: the Rothschilds sent as their New York representative August Belmont, who became one
of the wealthiest Americans in the 19th century.
1854: American Mr. Peabody migrated to London and partnered with another american
Spencer Morgan founding the House of Morgan.
The invention of Telegraph enabled the New York ‘Wall Street’ to overtake Philadelphia.
1861: House of Morgan set up a New York Office led by Spencer Morgan’s 24 year-old son,
John Pierpont Morgan (JP Morgan).
1931: JP Morgan dies and Federal Reserve Act passed
1933: The Glass-Steagall Act and The Securities Exchange Act was passed and 1940:
Investment Advisors Act was passed.
Either be ‘deposit-taking and loan-making’ OR ‘securities dealing and
underwriting’
As commercial banks were seperated, standalone I-Banks were born.
Enter Lehman, First Boston, etc.
USA and Japan had split banking rules in place. In 1990, there were
2500 investment banking firms in USA.
“Many prominent Wall Street firms chose not to have nameplates on their headquarters, the prevailing
attitude being that it was beneath the dignity of banks to solicit business.”
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Indian Merchant Banking regime
The Banking Commission in its Report in 1972 has indicated the necessity of merchant banking
service in view of the wide industrial base of the Indian economy. The Commission was in
favour of a separate institutions (as distinct from commercial banks and term lending
institutions) to render merchant banking services.
Merchant banking activity was formally initiated into the Indian capital markets when Grindlays
Bank received the license from Reserve Bank in 1967.
Grindlays started with management of capital issues, production planning, systems design and
market research.
Citibank - 1970, followed by SBI - 1972
Merchant banking activities are regulated by (1) Guidelines of SEBI and Ministry of Finance,
(2) Companies Act, 1956 and (3) Listing Guidelines of Stock Exchange and (4) Securities
Contracts (Regulation) Act, 1956.
Only merchant bankers registered with SEBI can undertake issue
management, underwriting and offer portfolio services. Merchant banking
in India is non-fund based except underwriting.
SEBI has been pressing for merchant banks to be primarily fee based
institutions. Today approx. 200 merchant bankers are registered with
SEBI.
Did you know? – CA firms were earlier allowed to be registered as Merchant Bankers?
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Fund Raising
• Merchant Banking
• Underwriting
• Institutional Placements
• Corporate Bond Issuance
• Equity and Debt Placements
• Market Making
• Securitization
Deal-making
• Buy-Side
• Sell-Side
• Transaction structuring advisory
• Strategic\ Technical partners
• Corporate Restructuring
• Acquisitions & Takeovers
Broad Avenues Discussion Points
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Merchant Bankers with SEBI:
Size of the Investment Banking Industry (Fund raising)
No. of Initial Public Offers:
Private Placement of Corporate Bonds (as reported to NSE):
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2008-09 2009-10 2010-11 2011-12*
No. of Issues 699 647 774 809
Amount (Crs.) 1,24,810 1,43,286 1,53,370 1,33,589
2008-09 2009-10 2010-11 2011-12*
No. of Issues 21 39 53 29*
Amount (Crs.) 2,082 24,696 35,559 4,981*
2008-09 2009-10 2010-11 2011-12*
No. of
participants
134 164 192 199
SEBI Newsletter – December 2011
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Size of the Investment Banking Industry (M&A)
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Thomson Reuters IMAA Analysis
India USA
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Categories of Investment Banks
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• Full Service IB desks
• Banks – BofA, Deutsche Bank, Barclays, UBS, JP Morgan, Kotak, Yes Bank, etc.
• Pure IBs – Lazard, Jefferies, Avendus, Ambit, etc.
• Brokerage Houses – Enam, Religare, Edelweiss, Motilal Oswal, JM, etc.
• Accounting cum Advisory Firms – E&Y, PWC, BDO, KPMG, etc.
• Boutique IBs
• Mid-Market IBs – Singhi Advisors, GCA, Elara, Equirus, MAPE, Candle Partners, etc.
• Sector specific IBs – Industry specific, Geography specific, sell-side specific, etc.
• Service specific IBs – Merchant Bankers, Bond specialists, etc.
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Global Leaders in Investment Banking Space
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Thomson Reuters –Deal Intelligence
Rank Name Deal Value
($m)
1. Morgan Stanley 636,110
2. Goldman Sachs & Co. 631,545
3. JP Morgan 508,991
4. BofA-Merill 387,432
5. Citi 367,376
6. UBS 347,769
7. Credit Suisse 336,918
8. Deutsche 292,919
9. Barclays 267,872
10. Lazard 248,246
The ten largest global investment banks in M&A space in CY 2011, are as follows (by deal value):
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Leading M&A advisors in Indian market – CY 2011
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Thomson Reuters – 2011 M&A
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Compartments of a bulge Investment Bank
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Front-Office Mid-Office Back-Office
Deal Sourcing Risk Management Operations
Marketing Treasury Information Tech
Distribution Valuation Compliance
Project Finance Corporate
Strategy
Internal Audit
Merchant Banking Proprietary
Trading
Training
Research Market Making Internal Research
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Chartered Accountancy and Investment Banking
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• Best-positioned for a career in Investment Banking
• Sound technical knowledge of law, accounting, finance and business
is a robust advantage
• Not a signature profession and competition not just with accounting
professionals
• Few leading Chartered Accountants in the Indian I-Banking space:
• Ashok Wadhwa – Ambit Capital
• Vallabh Bhansali – Enam
• Nimesh Kampani – JM
• Anand Rathi – Anand Rathi Securities
• Motilal Oswal – Motilal Oswal
• Anil Singhvi – Ican Advisors
• Keki Mistry – HDFC
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Thank You
Anand Bathiya B. Com., A.C.A., LL.B., D.I.S.A.