September 2013 A Financial Newsletter Volume 4 Issue 38

CHRISTUNIVERSITYINSTITUTEOFMANAGEMENT,KENGERICAMPUS

INVESTMENT

BANKING

INVESTMENT BANKING| September 2013 Page 3

Investment banking industry in India is

there are about fifteen multinational I-banks,

fifteen to twenty large home grown I-banks,

about five-hundred I-banks that have a team of

around five to five-hundred members and

approximately thousand I-banks with one or two

partners running the entire show. This last

stratum is now known as the boutique

investment banks; which have shown a sudden

upsurge in the recent past. Boutique I-banks

typically handle sub-$25 million (Rs115 crore)

deals, aiding fund-raising, debt, and private

equity (PE) and venture capital investments. The

industry dynamics have pushed even big I-banks

to tread into deals of $25-75 million, below their

usual $100 million benchmark. However, the key

lies in creating a niche for itself.

The fundamental reason behind the growth of a

plethora of boutique investment banks is the

swarm of small and mid-sized deals in India in the

past two years. Nearly, 342 M&A deals worth $6

billion sub $100 -million (the floor amount of I-

while the number of $100-200 million range deals

were 29, worth $4.1 billion. Only three deals

worth $1.3 billion took place in the range of $400-

500 million in India in 2011. In 2012, there were no

deals in the $400-500 million category. In the

sub $100 million category, about 112 deals

worth $2.2 billion have materialized in 2012.

The growing numbers of smaller deals have

created a demand for the boutique investment banks in India. These banks charge nearly two to

three percent of the deal size. With more cross-

border acquisitions happening for Indian

companies, boutique I-bankers are finding an

opportunity to form alliances with global

partners as well. The recent collapse of the big

players in the I- banking industry across the globe

International banks have a fee benchmark, which

is sizeable in the Indian context, which permits

only handful Indian deals to be eligible for global

banking advisory. This phenomenon has

disappeared owing to the lack of any big deals

The surge of small ticket PE deals has also remained the strong reason for the entry of these boutique banks to tap the growing market of small-sized M&A deals. Against one deal worth $400 million, Indian PE space had seen 431 deals worth $6 billion under the $100-million category in 2011. In 2012, only two PE deals took place in the $200-300 million range. Analysts, however, believe this is just a fad and will lose its sheen when the big boys bounce back, once the economy starts improving and the mammoth I-banks will find it lucrative to enter the fray.

space are part of the slowdown. Also, boutique

However, co- existence of investment banking advisory with a supermarket approach by offering broking and asset management services

sheet investment banks (essentially for funding needs of clients) and boutiques (real advice to clients) will co- exist. However, players in the middle, running super-

INTRODUCTION: RISE OF BOUTIQUE INVESTMENT BANKS IN INDIA ANINDITA NATH F1

transitioning through a different stage. In India,

bank deal) category were concluded last year,

is a blessing for these boutique Investment banks.

given the current market dynamics domestically

and across the border.

Industry believes that the changes in the I-banking

banks have limitations in the IPO domain, wherethey will not be able to handle the distribution,

while they can manage the valuations.

is passe. But it is needless to say that big balance

markets in India are likely

to shut down.

As per the latest bulletin of RBI, they have identified

certain building blocks for the reorientation of the

banking structure with a view to addressing various

issues such as enhancing competition, financing

higher growth, providing specialised services and

furthering financial inclusion. It has also emphasised

the need to address the concerns arising out of such

changes with a view to managing the trade-off for

ensuring financial stability. The envisaged policy will

have to be in the backdrop of a strong regulatory

and supervisory regime with increased intensity of

supervision for the systemically important banks.

The overall thrust of the reorientation is to impart

dynamism and flexibility to the evolving banking

structure, while ensuring that the structure remains

resilient and promotes financial stability.

In view of the prevailing market conditions, it has been decided that until further notice and with effect from the close of business in India as on August 14, 2013, the interest rate ceiling on FCNR(B) Deposits will be as under:

On floating rate deposits, interest shall be paid within the ceiling of swap rates for the respective currency/maturity plus 200 bps/ 400 bps as the case may be. For floating rate deposits, the interest reset

period shall be six months.

It has been decided further to retain the limit of 400% of the net worth of the Indian Party for the

financial commitments funded by way of eligible

External Commercial Borrowing (ECB) raised by

the Indian Party as per the extant ECB guidelines

issued by the Reserve Bank of India from time to

time.

In this connection, the Government of India has

decided to increase the rate of interest

subvention on the existing sectors from the

present 2% to 3% with effect from August 1, 2013.

Accordingly, banks may reduce the interest rate

chargeable to exporters as per Base Rate

system for existing sectors, eligible for export credit subvention by the amount of subvention

available subject to a floor rate of 7%. Banks may

ensure to pass on the benefit of 3% interest

Source: www.rbi.org

Page 4 Volume

RBI COLUMN R VISHNU VARTHANA F2

Maturity Period Existing Revised

1 year to less than 3

years

LIBOR/Swap

plus 200 basis

points

No change

3 - 5 years

LIBOR/Swap

plus 300 basis

points

LIBOR/

SWAP plus

400 basis

points

subvention in entirety to the eligible exporters.

Conviction of Deutsche Bank, JPMorgan Chase & co.

and Depfa Bank Plc by Milan judge for their role in

overseeing fraud by their bankers in the sale of derivatives to the City of Milan raised hundreds of

questions regarding the prevailing governance

system in these investment banks in the current

scenario.

Investor related frauds include Letter of Credit Fraud,

Prime Bank Note Fraud, Pyramid Schemes, Market

Manipulation or “Pump and Dump” Fraud.

There are certain techniques where an investor could be invited for a seminar, promising an investment expert to advice on the management of personal funds. But, the fact is these seminars or management institutions make money by charging attendance fees, selling over-priced reports or books and selling property and investments without letting you get independent advice. They often make misleading or deceptive claims or pressure you to buy into investments that will end up with you losing your money. Share promotions and ‘hot tips’, also known as ‘share ramping’, are scams that usually come in the form of an email or a message on an internet forum. The messages usually encourage the investors to buy shares in a company that they predict is about to increase in value. The person offering this advice is usually the fraudulent advisor. ‘Cold calling’ is an unexpected or unsolicited telephone call offering investments or financial advice. The investments they offer usually guarantee high returns or encourage you to invest in overseas companies. The scams sound professional and may have other resources to support their claims. Cold callers often claim to be stock-brokers or portfolio managers. Superannuation scams are schemes which offer to give you early access to your superannuation (‘early release’), often through a self-managed super fund, for a fee. As per CNBC, published by Reuters:

1. In February, the SEC won a freeze on a Swiss account linked to suspicious trading in H.J. Heinz Co call options before the ketchup maker was bought by Warren Buffett's Berkshire Hathaway Inc and

Brazilian firm 3G Capital 2. On 1st July 2013 Scott London, a former senior partner with accounting firm KPMG whose clients included Herbalife Ltd and Skechers USA, pleaded guilty before a federal judge in Los Angeles to a charge of securities fraud arising from his involvement in insider trading. Investment banks since time immemorial have been

accused of being fraudulent and involved in anti-

have left the investors in trance. What is bothering

everyone is why these frauds are occurring?

According to David Petterson, a forensic accountant

with the NZ chapter of the Association of Certified

Fraud Examiners, building a strong team spirit and

public praise for staff helps reduce fraud. A strong

internal audit system can lower opportunity levels.

With internet banking on the rise, frauds are just a

click away.

It is possible that the scrupulously honest man may not grow rich as fast as the unscrupulous and dishonest one; but the success will be of a truer kind, earned without fraud or injustice. And even though a man should, for a time be unsuccessful, still he must be honest: better lose all and save character. For character is itself a fortune...

- Samuel Smiles Reference:

http://www.valuewalk.com/2013/04/deutsche-bank-

investigated-for-12b-fraud/

http://flatrock.org.nz/topics/money_politics_law/fra

ud_occurs_when_this_exists.htm

http://www.scamwatch.gov.au/content/index.phtm

INVESTMENT BANKING| September 2013 Page 5

INVESTMENT BANKING: IS IT REALLY AS CLEAN AS IT LOOKS?

ASHWINI CHANDRA, F2

money laundering cases. But these frauds, rising YOY

Page 6

NEW TRENDS AND CONCERNS IN INVESTMENT BANKING ANUSHREE PAI, F2

Investment banking industry is growing very fast

followed by these companies. After what happened

in Europe and in a scenario where the world econ-

omy is sluggish, low scope of growth, many of in-

vestment banking clients which are mainly the big

companies under pressure (since their main objec-

tive is to grow their business and somehow make

acquisitions which are transformative) are backing

out. In this scenario, investment banker plays an

important role. Companies like Goldman Sachs,

being the main player of the industry helps them in

their biggest concern; that is fund management.

very critical. Initially it was only in the CFO’s do-

main to manage the funds but it is more of a stra-

from the capital market as opposed to banking institutions. In Europe, the trend is reversed.

Today, if you look at Germany, for example, only

10% of funding comes from capital market and 90%

from banks. While banks have added enough of

capital, their balance sheets are under pressure to

shrink. As size is shrinking, a significant amount of

funding made to these corporates have to be

pushed to the capital markets.

Taking all these things into consideration,

scope of the future investment banking trend can

be captured with following points:-

Amid the alphabet soup of regulatory require-ments that investment banks must deal with, Ac-centure sees five key trends that will shape the industry for 2013, and beyond. Changing the business model to be sustainable in an evolving regulatory environment. Forward-looking banks are looking to the long term to de-termine the impact that regulatory change will have on their business model—and redefining themselves accordingly. Some examples include consolidation, outsourcing capital-consuming busi-ness processes and increasing specialization.

Using capital to prioritize business deci-sions. Accenture expects that investment banks will shift toward making business decisions based on the marginal cost of capital required to exe-cute, rather than previous methods based on per-ceived transaction profitability. In this respect, get-ting accurate information on capital will be ex-tremely important.

Redefining legal structures. Based on capital, banks may decide whether to continue trading high-risk, high-capital products (like rates, credit products and proprietary trading) in favour of low-er-capital businesses. It is likely that banks that wish to continue proprietary trading may have to create a separate legal entity, or ring fence retail from investment banking operations.

Revising e-commerce strategies. MiFID II and Dodd-Frank are forcing banks to examine their in-ternal pricing, booking and confirmation models—and specifically, their robustness and suitability to operate and compete on an electronic exchange.

Rebuilding reputations. Today's nervous market-

place means that reputation can be a competitive

differentiator. Banks must establish a strong mar-

ket presence and protect their credit ratings.

Reference:

http://www.accenture.com/us-en/blogs/accenture-

trading-blog/archive/2013/01/08/five-observations-

for-investment-banks-in-2013.aspx

but there still are a lot of rules and regulations to be

The companies today find fund management to be

tegic decision now, to be made for the company

for which investment bankers are paid big money.

Nearly, 70% funding in US companies comes

INVESTMENT BANKING| September 2013 Page 7

PERSONALITY OF THE MONTH DIBYA NANDAN MISHRA F2

William R. "Bill" Hambrecht (born 1935) is an American investment banker and chairman of WR Hambrecht + Co which he founded in 1998, from San

Francisco, California. Hambrecht is a 1957 graduate of Prince-

ton University. He has been listed as one of the top political donors in the country, giving most-ly to Democratic candidates, and credits Nancy Pelosi, whom he met in the 1970s, for inspiring him to get involved in politics. William Hambrecht is on the Board of Trustees of the American University of Beirut, Lebanon.

He helped persuade Google to use an Internet-based auction for their Initial Public Ofering (IPO) in 2004, instead of a more traditional method using banks and other financial compa-nies to find buyers. He is credited with popular-izing this "Open IPO" model, using Dutch auc-tions to allow anyone, not just investing insid-ers, to buy stock in an IPO, potentially raising more money for start-ups. Some of the compa-nies he has helped have an IPO like this include Overstock.com, Ravenswood Winery, Ando-ver.net and Salon.com. Hambrecht is also credited as one of the first major investors to recognize the value of tech-nology and biotech companies, helping to take Apple Computer, Genentech and Adobe Sys-tems Netscape, MP3.com, and Amazon.com public in the 1980s.

Marissa Ann May-er (born May 30, 1975) is President and CEO of Ya-hoo! Previously, she was a long-time executive and key spokes-person for Google. Mayer was born

in Wausau, Wisconsin. Studied in Wausau West High School, Mayer graduated with honors from Stanford University with a B.S. in symbolic systems and an M.S. in computer science in artificial intelligence. In 2009, the Illinois Institute of Technology granted May-er an honoris causa doctorate degree in recognition of her work in the field of search. Mayer joined Google in 1999 as employee number 20 and was the company's first fe-male engineer. On July 16, 2012, Mayer was appointed Presi-dent and CEO of Yahoo! effective the follow-ing day. She is also a member of the compa-ny's Board. On May 20, 2013, Mayer led Yahoo to acquire Tumblr in a $1.1 billion dollar acquisition. In 2013, Mayer ranked 32 in the Forbes list of 100 most powerful women.

As well as sitting on the Boards of Walmart, Jawbone and Yahoo!, Mayer is also a member

National Design Museum, New York City Ballet,San Francisco Ballet and San Francisco Museum of Modern Art. Mayer was ranked number 14 on the list of America's most powerful businesswomen of 2012 by Fortune magazine.

He was on the Board of Motorola from 2008-11and the Board of AOL Inc. from Dec 2010 to Feb2011.

of several Non-profit Boards like Cooper-Hewitt,

INVESTMENT BANKING| September 2013 Page 8

MARKET ROUND UP ANKIT MEHROTRA F2

1. Government unveils new norms for telecom licenses.

2. GSK patent for cancer drug revoked.

3. Obama administration vetoes US trade body’s ban on some iPhones and iPads.

4. Hyundai lines up new launches, takes aim at Maruti Suzuki’s market leadership.

5. Contamination fears prompt countries to ban import of milk products from Fonterra.

6. Amazon founder Jeff Bezos to buy Washington Post.

7. Yahoo! acquires social browsing start-up RockMelt.

8. China fines milk powder makers $110 million for price fixing.

9. New Companies Bill gets Rajya Sabha nod.

10. China all set to become Tata Motors’ largest market by revenue.

11. SingTel to raise its stake in Bharti Airtel.

12. Samsung grabs no.1 spot in Indian handset market.

13. Iran demands $1 million for release of Indian vessel carrying oil.

14. RBI gives nod to open India’s first NBFC that follows Islamic banking.

15. RBI’s open market debt purchase may support market rally.

16. US FDA hikes approval fees for generic drug makers.

17. Idea Cellular becomes Aditya Birla group’s most valuable business.

18. Weak rupee triggers a surge in exports for the month of August 2013.

INVESTMENT BANKING| September 2013 Page 9

ECONOMIC ROLLERS ANUBHA F1

Repo Rate: 7.25%

Reverse Repo Rate: 6.25%

CRR: 4%

SLR: 23%

CBLO (as on 5th Sep 2013):10.25%

Inflation as on July 2013:

WPI: 5.79 %

Food inflation: 11.91%

IIP growth rate (for June 2013): (2.2) %

91 Days T bills (as on 5th Sep 2013): 10.85%

10 year G- Sec Yield (as on 5th Sep 2013): 8.22%

Exports during May 2013: $25.83 billion

Imports during May 2013: $38.10 billion

Source: Finance Ministry, Office of Economic Advisory, HDFC Securities Reports, Ministry of Com-

merce, RBI

Forex Reserve ( as on 14th June, 2013): $ 277.72 billion

INVESTMENT BANKING| September 2013 Page 10

STOCK ANALYSIS AJO JOSEPH F1

The BSE barometer Sensex showed gains for the third day on Friday, gaining 290 points, on

the backing of FII buying in banking, capital goods and refinery stocks.

Continuing recovery in the rupee versus dollar also boosted equity markets. Rupee was trad-

ing at Rs 65.2 levels compared to close of Rs 66.01.

After new RBI Governor Raghuram Rajan`s announcement of a number of measures which

from lower levels has being witnessed. After surging 739 points in the last two trading

sessions, the Sensex rose by 290 points, to reach 19,270 as 20 stocks in the Sensex stocks

closed in the green. This was the second week of gains for the 30-

by 650.28 points.

The broad-based NSE index rose by 87.45 points to 5,680.40. Also, MCX-SX's SX-40 index rose

183.35 points to settle at 11,391.56. The banking sector index gained the most by 2.89 per cent

to 11,333.44 as ICICI Bank surged by 7.3 per cent, HDFC Bank by 1.2 per cent, IndusInd Bank by

3.5 per cent, Yes Bank by 1.9 per cent and Axis Bank by 2.8 per cent.

7,443.02, followed by Oil and Gas index by 2.20 per cent to 8,572.54. The heavyweights on the

Sensex -Reliance Industries jumped up by 0.73 per cent to Rs 867.55, ITC by 1.51 per cent to Rs

316.20 and Infosys by 0.41 per cent to Rs 3,014.90.

Reference: www.hsbcdirectinvest.in

will boost the currency as well as the economy, investor confidence has revived and buying

share index which jumped

The capital goods sector index was the second best performer by gaining 2.77% to touch

INVESTMENT BANKING| September 2013 Page 11

FINANCE BUZZ NAVEEN KUMAR M F2

Hypothecation

e.g, that are used as collateral for money loaned from a brokerage. Hypothecation also refers to the use of revenues from a particular tax for a particular purpose.

Peril

A specific risk or cause of loss covered by an insurance policy, such as a fire, windstorm, flood, or theft. A named-peril policy covers the policyholder only for the risks named in the policy in contrast to an all-risk policy, which covers all causes of loss except those specifically excluded.

Escrow account

Funds that a lender collects to pay monthly premiums in mortgage and homeowners insurance, and some-times to pay property taxes.

Flying Plateau

A flying plateau is a pattern that forms after a stock has made a strong move up. Strong stocks will consol-idate gains sometimes in a flat, sideways pattern in a tight range instead of selling back. This is a very bull-ish pattern, especially if it is formed on low volume.

Wire House

An individual or organization that solicits or accepts orders to buy or sell futures contracts or options on futures and accepts money or other assets from customers to support such orders.

Undue hardship

A substantial financial loss that would result to a taxpayer from making payment on the due date of the amount of taxes with respect to which the extension is desired. Undue hardship is a condition precedent to the granting of an extension of time to make a tax payment.

Sweep Account

Many Banks have introduced a savings cum fixed deposit product called a "Sweep Account". Here the ac-count holder decides the minimum amount to be kept in his/her savings account. Any excess over it auto-matically gets swept to a fixed deposit account. Whenever cash is needed,the bank can just transfer or 'sweep' in funds to the savings account.

Pugree

An Indian term used to describe an interest free security deposit given to landlords which is refundable at the expiry of the lease term to the outgoing tenant by the successive tenant.

Jobbers

Members of a stock exchange who stand ready to buy and sell shares in which they specialize are called jobbers.

The pledging of securities or other moveable assets as collateral for a loan; securities in a margin account, for

INVESTMENT BANKING| September 2013 Page 12

PHOTO FIND T KIRUTHIKKA DEVI F1

INVESTMENT BANKING| September 2013 Page 13

FINANCE QUIZ AMOGHAVARSHA P F2

1. The two main lines of business in investment banking are?

2. What kind of information does the private area of an investment bank deal with?

4. Which is the nodal point for the assimilation and dissemination of information relating to the

merchant banking industry in India?

5. Name the largest investment bank in the world.

6. What is the sales presentation by an investment bank to a prospective or current client, mar-

keting the firm’s services and products or a specific transaction called?

whose investment banking clients are usually large corporations, institutions, and govern-

ments?

8. What is the worth of assets that are under management, with JP Morgan?

9. Name the investment bank that was fined 59.5 million pounds by the City watchdog, the Finan-

cial Services Authority (FSA) for manipulating a benchmark interest rate known as LIBOR?

10. What does FTSE 100 stand for?

3. Apart from investment banking, what are the other two product segments that investment

banks are into?

7. Which is the world's largest and most profitable multi-national investment bank

INVESTMENT BANKING| September 2013 Page 14

ANSWERS

PHOTO FIND

1. Logo of B.N.P.Paribus

2. Mr. Uday Kotak, Executive vice chairman and Managing Director of Kodak Mahindra Bank

3. Mr. Lloyd Blankfein, CEO and Chairman of Goldman Sachs

4. Logo of Barclays Investment Bank

5. Logo of Bank of America

6. Mrs. Meera Sanyal, Chairperson and Country Executive of Royal Bank of Scotland in India

FINANCE QUIZ

1. Trading of securities & Promotion of securities

2. Insider Information

3. Asset management and Trading and principal investments

4. Association of Investment Bankers (AIBI)

5. JP Morgan Chase

6. Pitch

7. Bulge Bracket

8. $1.5trillion

9. Barclays’

10. The Financial Times Stock Exchange index

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