Investment Banking

Refer to Chapter 5

Huges & Macdonald

Meaning Investment banking is a field of banking that

provides strategic advisory, financing and risk management entities .

Core activities - managing capital issues , including

underwriting ; managing buy backs - market making - advisory services regarding acquisition,

restructuring , spin offs , consolidation etc. - supplementary businesses are forex trading ,

securitisation , loan syndication , project financing and leasing , etc.

Investment Banking in UAE Banks in the UAE are divided into two major categories: 

- Locally Incorporated Banks - these are public shareholding companies licensed in accordance with provisions of Union Law No. (10) of 1980, and - Branches of Foreign Banks which have obtained Central Bank's licenses to operate in the country as per provisions of the said Law.

Union Law No. (10) of 1980 defined investment bank as bank that does not accept deposits whose maturities are less than two years, but may borrow from its head office, from local or foreign banks, or from financial markets. Investment banks are licensed under the Regulation No. 21/2/88 dated 14/6/1988.

UAE Central BankBoard of Directors ResolutionNo. 21/2/88 dated 14/6/1988___________________________REGARDING THE SYSTEM OF THE INVESTMENT BANKS IN THE STATE

Article (1) : The investment banks are meant by virtue of this system, the banks which are usually called the banks of business or development or investment or those who grant the long and medium term loans or other similar expression or nomination.

Article (2) : The main objectives of the investment banks are promoting new activities, financing the progress of the existing business through participation in the capital of the companies and providing the long and medium term loans.

Licensing Article (4) : The local companies who are

desirous to obtain 1icences to practice their activities as investment banks should apply in writing to the Central Bank and the application should be attached with a copy of the "Memorandum and articles of Association" of the company together with a list of the Founders, as well as the documents that support the fulfillment of the required conditions in accordance with the rules of this resolution, provided that the Founders have obtained an initial approval from the Central Bank.

Investment banking activities : Article 5 Participating in the capital of the commercial companies, provided that

participation should not exceed 25% of the capital of the concerned Firm/ Company, or 10% of the shareholders equity of the investment bank whichever is less. It is meant by the shareholders equity, the total of the paid up capital, reserves and retained profits, after covering any decrease in the value of the assets

Project financing : Granting medium and long-term loans to finance the projects. Working capital financing : Providing the working capital in the shape of credit

facilities for periods not less than two years for the companies in which the investment bank participates, or to any party that the investment bank may have granted a medium or long-term loan.

Opening L/C's pertaining to authorised loans provided by the investment bank. Issuing the guarantees on behalf of the parties indicated in the above mentioned

article no.3. Managing Capital issue s : Obtaining the funds through issuing securities, including

deposit certificates, in accordance with the conditions decided by the Central Bank. Accepting the medium or the long-term deposits in Dirhams or in foreign,

currencies from the clients for a period not less than two years. Opening the current accounts in Dirhams and/or in foreign currencies in the name

of the companies that the investment bank has granted them loans and also in the names of the clients for whom the bank is acting as a financial agent.

Borrowing or accepting deposits in Dirhams and/or in foreign currencies for a period not less than three months from the Head Office or the local or foreign banks or from the financial market.

Acting as a financial agent on behalf of other parties in accordance with the rules. Managing the investment portfolios for others. Maintaining the researches and studies for identifying new investments opportunities. Doing any other activity, which is usually, considered as one of the investments banks

activities after obtaining the approval of the Central Bank.

Prohibited activities Article (6) : The investment banks in the state are forbidden top

exercise any activities not stated in the fifth article herein and in particular they are forbidden to exercise the following activities :Opening the current accounts for any of the clients not allowed for the same in accordance with the rules stipu1ated in this resolution.

Allowing overdraft exceeding the limit of the credit facilities granted in accordance with the article mentioned.

Discounting the Commercial Bills. Opening the L/Cs other than those pertaining to approved loan. Granting the personal loans. Financing the purchasing of consumable commodities. Doing operations in the monetary or financial markets or

dealing with foreign currency which have no connection with the operation it is allowed to practice.

Classification of Merchant banking in India Category I, that is—   (i)  to carry on any activity of the issue management,

which will, inter alia, consist of preparation of prospectus and other information relating to the issue, determining financial structure, tie up of financiers and final allotment and refund of the subscriptions; and

  (ii)  to act as adviser, consultant, manager, underwriter, portfolio manager;

  (b)  Category II, that is to act as adviser, consultant, co-manager, underwriter, portfolio manager;

  (c)  Category III, that is to act as underwriter, adviser, consultant to an issue;

 (d)  Category IV, that is to act only as adviser or consultant to an issue.

Capital requirement Category Minimum Amount Category I  Rs. 5, 00, 00, 000 Category II Rs. 50, 00, 000 Category III Rs. 20, 00, 000 Category IV Nil

Dubai International Financial Centre (DIFC) On 13 July 2003, the Federal Cabinet of the United Arab

Emirates approved Federal Decree No. 35 of 2004 allowing for the full establishment of the DIFC as a Financial Free Zone with a substantial degree of sovereignty from the Central Bank of the United Arab Emirates. Consequently, the “Law of the Dubai International Centre No. 9 of 2004” was passed on 17 September 2004, which completed the legislative steps required in order to make the DIFC operational, and to formally establish the financial and administrative independence of the DIFC.

The DIFC is intended to be a well regulated hub for commercial and investment banks, and other financial institutions that wish to take advantage of the wealth of opportunities in the region by providing services in respect of underwriting, mergers and acquisitions, venture capital/private equity, foreign exchange trading, trade finance, capital market and Islamic finance operations.

DIFC… The DIFC is a wholesale financial centre catering primarily to institutional investors and accordingly does not

cater for retail financial businesses. The DIFC focuses on the following financial services sectors 1. Banking Services : DIFC offers a wholesale platform for investment banks and financial intermediaries

looking to establish underwriting, M&A advisory, venture capital, private equity, private banking, trade finance and brokerage service operations and to take advantage of the numerous associated opportunities in the region.

2.Capital Markets : The Dubai International Financial Exchange (“DIFX”) provides a liquid and transparent market for the hundreds of successful privately owned companies in the region and soon to be privatised businesses which require listings on a liquid, transparent and efficient stock exchange. It also offers facilities to companies from outside the region to be dual listed.

3. Asset Management & Fund Registration : More than a trillion dollars of wealth is held by institutional and private investors in the region. Many regional companies and retail banks outsource the management and administration of these funds to specialist providers outside the region. The DIFC offers a highly attractive opportunity for asset management firms and private banks to gather and manage this growing pool of assets closer to their client base.

4. Insurance and Reinsurance : With economic growth, industrialisation and improved regulation, the region is experiencing a changing attitude towards risk and an increasing awareness of the need for insurance. Due to slow growth in more mature traditional markets, the world’s insurance and reinsurance companies are now assessing markets such as the Middle East. The DIFC has set out to create a global [re-]insurance hub to foster the development of a thriving insurance market by attracting global insurance and reinsurance companies, brokers, captives and other service providers.

5. Islamic Finance : The global market for Islamic financial products is worth over $260 billion and is expected to grow at 12 to 15 per cent a year over the next ten years. It is likely to account for some 50 to 60 per cent of the total savings of the world's 1.2 billion Muslims within the next decade. There is a growing number of infrastructure projects within the region requiring Sharia compliant finance, but the market is still under-developed and fragmented. Dubai aims to become a major centre for product innovation for Islamic investors and borrowers.

List of various financial activities that may be carried out within the DIFC

- Accepting deposits - Providing Credit- Dealing in Investments as Principal- Dealing in Investments as Agent- Arranging credit or deals in Investments- Managing Assets- Advising on Financial Products- Operating a Collective Investment Scheme- Providing Custody- Arranging Custody- Effecting Contracts of Insurance- Carrying out Contracts of Insurance- Insurance Broking- Insurance Management- Providing money services- Managing profit sharing investments

Issue Management Activities in India The activities or sub-activities may be grouped on the following lines: (a) Capital structuring with the relative components and formalities such as composition of

debt and equity, type of instruments, etc. (b) Drafting and design of the offer document and of the advertisement or publicity

material including newspaper advertisement and brochure or memorandum containing salient features of the offer document.

(c) Selection of various agencies connected with issue, such as registrars to the issue, printers, advertising agencies, etc.

(d) Marketing of the issue, which shall cover, inter alia, formulating marketing strategies, preparation of publicity budget, arrangements for selection of (i) ad-media, (ii) centres for holding conferences of stock brokers, investors, etc., (iii) bankers to the issue, (iv) collection centres as per schedule III, (v) brokers to the issue, and (vi) underwriters and underwriting arrangement, distribution of publicity and issue material including application form, prospectus and brochure and deciding upon the quantum of issue material.

(e) Post-issue activities, like follow-up with bankers to the issue and Self Certified Syndicate Banks to get quick estimates of collection and advising the issuer about the closure of the issue, based on correct figures, finalisation of the basis of allotment or weeding out of multiple applications, listing of instruments, despatch of certificates or demat credit and refunds and coordination with various agencies connected with the post-issue activity such as registrars to the issue, bankers to the issue, Self Certified Syndicate Banks, etc.

Ordinarily, one lead merchant banker shall be responsible for the post-issue activities.  Even if many of the post-issue activities are handled by other intermediaries, the designated

lead merchant banker shall be responsible for ensuring that these intermediaries fulfil their obligations.

The IPO life cycle1. Issuer Company - IPO Process Initialization

1.Appoint lead manager as book runner.2.Appoint registrar of the issue.3.Appoint syndicate members.

2. Lead Manager's - Pre Issue Role - Part 1 1. Prepare draft offer prospectus document for IPO. 2.File draft offer prospectus with SEBI. 3.Road shows for the IPO.

3. SEBI – Prospectus Review 1.SEBI review draft offer prospectus. 2.Revert it back to Lead Manager if need clarification or changes

(Step 2). 3.SEBI approve the draft offer prospectus, the draft offer

prospectus is now become Offer Prospectus.

The IPO life cycle4. Lead Manager - Pre Issue Role - Part 2 

Submit the Offer Prospectus to Stock Exchanges, registrar of the issue and get it approved. Decide the issue date & issue price band with the help of Issuer Company. Modify Offer Prospectus with date and price band. Document is now called Red Herring Prospectus. Red Herring Prospectus & IPO Application Forms are printed and posted to syndicate members; through

which they are distributed to investors.

5. Investor – Bidding for the public issue 

Public Issue Open for investors bidding. Investors fill the application forms and place orders to the syndicate members (syndicate member list is

published on the application form). Syndicate members provide the bidding information to BSE/NSE electronically and bidding status gets

updated on BSE/NSE websites. Syndicate members send all the physically filled forms and cheques to the registrar of the issue. Investor can revise the bidding by filling a form and submitting it to Syndicate member. Syndicate members keep updating stock exchange with the latest data. Public Issue Closes for investors bidding.

 6.Lead Manager – Price Fixing 

Based on the bids received, lead managers evaluate the final issue price. Lead managers update the 'Red Herring Prospectus' with the final issue price and send it to SEBI and Stock

Exchanges.

The IPO Life Cycle7. Registrar - Processing IPO Applications 

Registrar receives all application forms & cheques from Syndicate members. They feed applicant data & additional bidding information on computer

systems. Send the cheques for clearance. Find all bogus application. Finalize the pattern for share allotment based on all valid bid received. Prepare 'Basis of Allotment'. Transfer shares in the demat account of investors. Refund the remaining money though ECS or Cheques.

 8. Lead manager – Stock Listing

Once all allocated shares are transferred in investors dp accounts, Lead Manager with the help of Stock Exchange decides Issue Listing Date.

Finally share of the issuer company gets listed in Stock Market.

Eligibility for fixed price IPO An issuer may make an initial public offer, if:

(a) it has net tangible assets of at least Rs 30 million in each of the preceding three full years (of twelve months each), of which not more than 50% are held in monetary assets.

In case more than 50% of the net tangible assets are held in monetary assets, the issuer has made firm commitments to utilise such excess monetary assets in its business or project.

(b) it has a track record of distributable profits in terms of section 205 of the Companies Act, 1956, for at least three out of the immediately preceding five years. This does not include extraordinary items.

(c ) it has a net worth of at least Rs. 10 million in each of the preceding three full years (of twelve months each).

(d) the aggregate of the proposed issue and all previous issues made in the same financial year in terms of issue size does not exceed five times its pre-issue net worth as per the audited balance sheet of the preceding financial year.

(e) if it has changed its name within the last one year, at least 50% of the revenue for the preceding one full year has been earned by it from the activity indicated by the new name.

Otherwise the issuer has to opt for book building issues.

Book Building process The Issuer who is planning an offer nominates lead merchant banker(s) as

'book runners'. The Issuer specifies the number of securities to be issued and the price

band for the bids. The Issuer also appoints syndicate members with whom orders are to be

placed by the investors. The syndicate members input the orders into an 'electronic book'. This

process is called 'bidding' and is similar to open auction. The book normally remains open for a period of 5 days. Bids have to be entered within the specified price band. Bids can be revised by the bidders before the book closes. On the close of the book building period, the book runners evaluate the bids

on the basis of the demand at various price levels. The book runners and the Issuer decide the final price at which the

securities shall be issued. Generally, the number of shares are fixed, the issue size gets frozen based

on the final price per share. Allocation of securities is made to the successful bidders. The rest get

refund orders.

ISSUE TYPE OFFER PRICE DEMAND PAYMENT RESERVATIONS

Fixed Price Issues

Price at which the securities are offered and would be allotted is made known in advance to the investors

Demand for the securities offered is known only after the closure of the issue

100 % advance payment is required to be made by the investors at the time of application.

50 % of the shares offered are reserved for applications below Rs. 1 lakh and the balance for higher amount applications.

IssuesA 20 % price band is offered by the issuer within which investors are allowed to bid and the final price is determined by the issuer only after closure of the bidding.

Demand for the securities offered , and at various prices, is available on a real time basis on the BSE website during the bidding period..

10 % advance payment is required to be made by the QIBs along with the application, while other categories of investors have to pay 100 % advance along with the application.

50 % of shares offered are reserved for QIBS, 35 % for small investors and the balance for all other investors.

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