INVESMENT BANKING/BASEL NORMS/ ISLAMIC BANKING

GFMP III Semester ProjectDone bySenthil Kumar.V

INDEX

Introduction to bank.

CONCEPT INVESTMENT BANKS...

The banking scenario in India is itself huge, covering the different facets of the economy.

By and large, investment banks in India are itself an institution which generates funds in two different ways.

The first manner in which it works is by drawing public funds via the capital market by way of selling stock in their company.

The other way in which it operates is to seek for venture capital or private equity, as a substitute for a stake in their company

INTRODUCTION

An individual or institution which acts as an underwriter or agent for corporations and municipalities issuing securities.

Most also maintain broker/dealer operations, maintain markets for previously issued securities, and offer advisory services to investors.

Investment banks also have a large role in facilitating mergers and acquisitions, private equity placements and corporate restructuring.

Unlike traditional banks, investment banks do not accept deposits from and provide loans to individuals. also called investment banker

ROLE OF AN INVESTMENT BANK

The major work of investment banks includes a lot of consulting. For instance, they offer advices on mergers and acquisitions to

companies. The role that an investment bank plays sometimes gets

overlapped with that of a private brokerage house. The usual advice of buying and selling is also given by

investment banks. There is no demarcating line between the investment banking

and other forms of banking in India. This has been observed majorly of late. All banks nowadays want to provide their customers the best of

services and create a niche for themselves and that is why apart from investment banks, all other banks too are aiming at making it big

MAIN ACTIVITIES:

An investment bank is split into 3 parts.1:-Front office2:-Middle office3:-And back office.

TYPICALLY, AN INVESTMENT BANKING GROUP NOWADAYS PROVIDES, WORLD-WIDE SOME OR ALL OF THE FOLLOWING SERVICES, EITHER IN DIVISIONS OF THE BANK OR IN ASSOCIATED COMPANIES WITHIN THE GROUP:-

1. Mergers and Acquisition Advisory 2. Private Placement of Debt and Equity 3. Securities Underwriting 4. Management of Capital issues 5. Management of Buyback and takeovers 6. Corporate Advisory Services 7. Project Advisory Services 8. Other services like Restructuring/Sales,

Real Estate, and Loan Syndication and so on...

THE CORE SERVICES PROVIDED BY THE INVESTMENT BANKS ARE IN THE AREAS OF DEBT MARKET, EQUITY MARKET AND ADVISORY SERVICES:-

The phrase mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance.

In business or economics a merger is a combination of two companies into one larger company.

Merger is a tool used by companies for the purpose of expanding their operations often aiming at an increase of their long term profitability.

An acquisition, also known as a takeover, is the buying of one company (the ‘target’) by another. An acquisition may be friendly or hostile

IPO PROCESS FOLLOWED BY AN INVESTMENT BANKER WHILE GOING PUBLIC

I Issuer company- Initiate the IPO process Appoint lead manager/merchant banker as book

runner Appoint registrar of the issue Appoint syndicate membersII Lead Manger- Pre-Issue Role Prepare draft offer prospectus document for IPO File draft offer prospectus with SEBI Road shows for IPO  

CONT…….

III SEBI- Prospectus Review SEBI review draft offer prospectus Revert it back to Lead Manager if need clarification or changes SEBI approve the draft offer prospectus, the draft offer prospectus is

now become offer prospectus.IV Lead Manger – Pre- Issue Role Submit the offer prospectus to Stock Exchanges, registrar of the

issue and get it approved Decide the issue date and 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

CONT….

V Investor- Bidding for the public issue Public issue open for investors bidding(minimum 5 to maximum 10

days) Investors fill the application forms and place orders to the

syndicate members. Syndicate member provide the bidding information to BSE/NSE

electronically and bidding status gets updated on BSE/NSE 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

CONT…..

VI Lead Manager- Price Fixing Based on the bids received, lead manager evaluate the final issue

price Lead manages update the Red Herring Prospectus with the final issue

price and send it to SEBI and Stock Exchanges.VII Registrar – Processing IPO applications Registrar receives all application forms and cheques from syndicate

members. They feed applicant data and 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 De-Mant account of investors

CONT…..

VIII Lead Manger- Stock Listing Once all allocated shares are

transferred in investors accounts, Lead Manager with the help of Stock Exchange decides Issue Listing date

Finally share of the issuer company listed in stock Market

MERGER AND ACQUISITION

WHAT IS MERGER? A merger is a combination of two or

more companies where one corporation is completely absorbed by another corporation.

WHAT IS ACQUISITION? Acquisition essentially means ‘to

acquire’ or ‘to takeover’. Here a bigger company will take over the shares and assets of the smaller company

HISTORY OF MERGER AND ACQUISITION IN INDIA

The concept of merger and acquisition in India was not popular until the year 1988.

The key factor contributing to fewer companies involved in the merger is the regulatory and prohibitory provisions of MRTP Act, 1969. (Monopolies and Restrictive Trade Practices Act,1969)

The year 1988 witnessed one of the oldest business acquisitions or company mergers in India.

As for now the scenario has completely changed with increasing competition and globalization of business. It is believed that at present India has now emerged as one of the top countries entering into merger and acquisitions

MERGER AND ACQUISITION PROCESS

Preliminary Assessment or Business Valuation- In this process of assessment not only the current financial performance of the company is examined but also the estimated future market value is considered

Phase of Proposal- After complete analysis and review of the target firm's market performance, in the second step, the proposal for merger or acquisition is given.

Exit Plan- When a company decides to buy out the target Firm and the target firm agree, then the latter involves in Exit

Planning. Structured Marketing- After finalizing the Exit Plan, the target

firm involves in the marketing process and tries to achieve highest selling price.

Stage of Integration- In this final stage, the two firms are integrated through Merger or Acquisition.

DIFFERENT TYPES OF MERGERS

A horizontal merger - This kind of merger exists between two companies who compete in the same industry segment.

A vertical merger - Vertical merger is a kind in which two or more companies in the same industry but in different fields combine together in business.

Co-generic mergers - Co-generic merger is a kind in which two or more companies in association are some way or the other related to the production processes, business markets, or basic required technologies.

Conglomerate Mergers - Conglomerate merger is a kind of venture in which two or more companies belonging to different industrial sectors combine their operations.

Friendly acquisition - Both the companies approve of the acquisition under friendly terms.

Reverse acquisition - A private company takes over a public company. Back flip acquisition- A very rare case of acquisition in which, the purchasing

company becomes a subsidiary of the purchased company. Hostile acquisition - Here, as the name suggests, the entire process is done

by force

MOTIVES FOR MERGERS &ACQUISITIONS

Economies of large scale business Large-scale business organization enjoys both

internal and external economies. Elimination of competition It eliminates severe, intense and wasteful

expenditure by different competing organizations. Desire to enjoy monopoly power M&A leads to monopolistic control in the market. Adoption of modern technology Corporate organization requires large resources

CONT…

Lack of technical and managerial talent Industrialization, scarcity of entrepreneurial, managerial and technical talent Impact of Mergers and Acquisitions Employees: Mergers and acquisitions impact the employees or the workers the most. It is a well known

fact that whenever there is a merger or an acquisition, there are bound to be layoffs. Impact of mergers and acquisitions on top level management Impact of mergers and acquisitions on top level management may actually involve a

"clash of the egos". There might be variations in the cultures of the two organizations. Shareholders: Shareholders of the acquired firm:

The shareholders of the acquired company benefit the most. The reason being, it is seen in majority of the cases that the acquiring company usually pays a little excess than it what should. Unless a man lives in a house he has recently bought, he will not be able to know its drawbacks.

Shareholders of the acquiring firm: hey are most affected. If we measure the benefits enjoyed by the shareholders of the acquired company in degrees, the degree to which they were benefited, by the same degree, these shareholders are harmed

STRATEGIES OF MERGER AND ACQUISITION

Then there is an important need to assess the market by deciding the growth factors through future market opportunities, recent trends, and customer's feedback.

The integration process should be taken in line with consent of the management from both the companies venturing into the merger.

Restructuring plans and future parameters should be decided with exchange of information and knowledge from both ends.

TOP 5 INDIAN MERGERS AND ACQUISITIONS

The Reliance – BP deal Essay exits Vodafone GVK Power acquires Hancock Coal Adyta Birla Group to acquire Columbian

Chemicals The Vedanta – Cairn acquisition

 

PORTER’S FIVE FORCES

Rivalry: The industry seems to have low Barriers to entry for small, upstart players but very high barriers to catapulting firms into bulge bracket Status.

Supplier Bargaining Power: Investment banking is essentially a relationships business, and stronger the network of critical

Buyer Bargaining Power One investment bank to another seems to entail few costs. In spite of this, statistical studies show that

Substitutes Historically, there were no clear substitutes for services such as IPOs, underwriting,Distribution, M&A advisory, etc. Technology, however, is changing that. Though still at a germinal stage, it is generating unprecedented alternatives.

Threat of New Entrants Investment banks are also facing a competitive threat from firms like OpenIPO

HDFC (GROUP COMPANIES)

Housing Development Finance Corporation Limited (HDFC Ltd.) was established in 1977 with the primary objective of meeting a social need of encouraging home ownership by providing long-term finance to households

, HDFC has assisted more than 4.3 million customers to own a home of their own, through cumulative housing loan approvals of over Rs. 4.63 trillion and disbursements of over Rs. 3.74 trillion as at March 31, 2012.

SUBSIDIARIES AND ASSOCIATE COMPANIES

HDFC Bank   HDFC Bank was incorporated in 1994 by Housing Development Finance Corporation Limited (HDFC), India's largest housing finance company

HDFC Asset Management Company Ltd HDFC Asset Management Company Ltd (AMC) was incorporated under the Companies Act, 1956,

on December 10, 1999, HDFC Standard Life Insurance Company Limited

It was established after private companies were allowed to enter the insurance industry in the year 2000. HDFC holds 74% of the equity while Standard Life holds 26%

HDFC Sales. HDFC Sales offers financial management solutions to individuals encompassing among other

products like Home Loans, Life Insurance, Mutual Funds, Fixed Deposits and property Solutions.

HDFC ERGO General Insurance Company ltd (formerly HDFC General Insurance Company Ltd)  

The insurance industry over the decade has gone through a fairly dynamic & an interesting phase. Other than increasing number of players we have witnessed De-trifling in the market. Increased competition & deregulation on the pricing front has laid to prices coming down; practically across all line of products.

CONT….

HDFC Reality Buying a dream house is one thing, but the entire process of finding and acquiring your dream space in this world is an experience to be cherished forever.

HDFC RED HDFC RED is a digital information hub that helps you through every stage of the house purchasing process

HDB Financial Services LtdThe Housing Development Finance Corporation Limited (HDFC) was amongst the first to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector, as part of the RBI's liberalization of the Indian Banking Industry in 1994

STATEMENT PURSUANT TO SECTION 2012 OF THE COMPANIES ACT 1956, RELATING TO SUBSIDIARY COMPANIES

SUBSIDIARIES AND ASSOCIATE COMPANIES

ICICI GROUP ICICI Group offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized group companies and subsidiaries in the areas of personal banking, investment banking, life and general insurance, venture capital and asset management. With a strong customer focus, the ICICI Group Companies have maintained and enhanced their leadership positions in their respective sectors

ICICI BankICICI Bank is India's second-largest bank with total assets of Rs. 4,736.47 billion (US$ 93 billion) at March 31, 2012

ICICI Prudential Life InsuranceA leading international financial services group headquartered in the United Kingdom. ICICI Prudential was amongst the first private sector insurance companies to begin operations in December 2000 after receiving approval from Insurance Regulatory Development Authority (IRDA).

CONT….

ICICI Lombard General Insurance Company,ICICI Lombard GIC Ltd. is the largest private sector general insurance company in India with a Gross Written Premium (GWP) of Rs. 6,420 crore for the year ended March 31, 2013. The company issued over 91.8 lakh policies and settled over 50.7 lakh claims as on March 31, 2013. 

ICICI Securities LtdICICI Securities Ltd is an integrated securities firm offering a wide range of services including investment banking, institutional broking, retail broking, private wealth management, and financial product distribution 

ICICI Securities Primary Dealership Limited (‘I-Sec PD’) is the largest primary dealer in Government Securities. It is an

acknowledged leader in the Indian fixed income and money markets, with a strong franchise across the spectrum of interest rate products and services - institutional sales and trading, resource mobilization, portfolio management services and research.

CONT…..

ICICI Prudential Asset Management ICICI Prudential Asset Management Company Ltd. (IPAMC/ the Company) is the joint venture between ICICI Bank, a well-known and trusted name in financial services in India and Prudential Plc, one of UK’s largest players in the financial services sectors

ICICI VentureICICI Venture is a specialist alternative assets manager based in India. The firm is a wholly owned subsidiary of ICICI Bank the largest private sector financial services group in India. 

ICICI FoundationICICI Group has partnered India in its economic growth and development. Promoting inclusive growth has been a priority area for the Group from both a social and business perspective.

ICICI Home Finance Company LimitedICICI Home Finance Company Limited ("ICICI Home Finance" or "ICICI HFC") is one of the leaders in the Indian mortgage finance and realty space

BASEL NORMS

Bank Crisis In 1974 In the 699 days between 11 January 1973 and 6 December 1974, the 

New York Stock Exchange's Dow Jones Industrial Average benchmark lost over 45% of its value, making it the seventh-worst bear in the history of the index. 1972 had been a good year for the DJIA, with gains of 15% in the twelve months. 1973 had been expected to be even better, with magazine reporting, just 3 days before the crash began, that it was 'shaping up as a gilt-edged year'. In the two years from 1972 to 1974, the American economy slowed from 7.2% real GDP growth to −2.1% contraction, while inflation (by CPI) jumped from 3.4% in 1972 to 12.3% in 1974.

Worse was the effect in the United Kingdom, and particularly on the London Stock Exchange's FT 30, which lost 73% of its value during the crash. From a position of 5.1% real GDP growth in 1972, the UK went into recession in 1974, with GDP falling by 1.1%. At the time, the UK's property market was going through a major crisis, and a secondary banking crisis forced the Bank of England to bail out a number of lenders. In the United Kingdom, the crash ended after the rent freeze was lifted on 19 December 1974, allowing a readjustment of property prices; over the following year, stock prices rose by 150%. The definitive market low for the FT30 Index (a forerunner of the FTSE100 today), came on 6 January 1975 when the index closed at 146 (having reached a nadir of 145.8 intra-days). The market then practically doubled in just over 3 months. However, unlike in the United States, inflation continued to rise, to 25% in 1975, giving way to the era of stagflation. The Hong Kong Hang Seng Index also fell from 1,800 in early 1973 to close to 300.

CONT…

About the BIS Established on 17 May 1930 The BIS is the world’s oldest international financial organization Head office is in Basel, Switzerland and representative offices in

Hong Kong SAR and in Mexico City. The BIS currently employs around 550 staff from 50 countries.

Basel committee on Banking Supervision – (BCBS) A set of agreements Regulations and recommendations on Credit risk , market risk

and operational risk Purpose – to have enough capital on account to meet

obligations and absorb unexpected losses

BASEL 1

In 1988, the Basel Committee (BCBS) in Basel, Switzerland, published a set of minimal capital requirements for banks, known as 1988 Basel Accord or Basel 1.

Primary focus on credit risk Assets of banks were classified and grouped in five categories to credit risk weights of

zero ‘0’, 10, 20, and 50 and up to 100%. Assets like cash and coins usually have zero risk weight, while unsecured loans might

have a risk weight of 100%. 0% - cash, central bank and government debt and any OECD government debt

0%, 10%, 20% or 50% - public sector debt 20% - development bank debt, OECD bank debt, OECD securities firm debt, non-OECD

bank debt (under one year maturity) and non-OECD public sector debt, cash in collection 50% - residential mortgages 100% - private sector debt, non-OECD bank debt (maturity over a year), real estate,

plant and equipment, capital instruments issued at other banks

The bank must maintain capital (Tier 1 and Tier 2) equal to at least 8% of its risk-weighted assets. For example, if a bank has risk-weighted assets of $100 million, it is required to maintain capital of at least $8 million.

PITFALLS OF BASEL I

Limited differentiation of credit risk (0%, 20%, 50% and 100%)

Static measure of default risk The assumption that a minimum 8% capital ratio is sufficient to protect banks from failure does not take into account the changing nature of default risk.

No recognition of term-structure of credit risk the capital charges are set at the same level regardless of the maturity of a credit exposure.

Simplified calculation of potential future counterparty riskthe current capital requirements ignore the different level of risks associated with different currencies and macroeconomic risk. In other words, it assumes a common market to all actors, which is not true in reality.

Lack of recognition of portfolio diversification effectsin reality, the sum of individual risk exposures is not the same as the risk reduction through portfolio diversification. Therefore, summing all risks might provide incorrect judgment of risk

BASEL II

Definition of 'Basel II' A set of banking regulations put forth by

the Basel Committee on Bank Supervision, which regulates finance and banking internationally. Basel II attempts to integrate Basel capital standards with national regulations, by setting the minimum capital requirements of financial institutions with the goal of ensuring institution liquidity.

BASEL III

in 2010, Basel III guidelines were released. These guidelines were introduced in response to the financial crisis of 2008. A need was felt to further strengthen the system as banks in the developed economies were under-capitalized, over-leveraged and had a greater reliance on short-term funding. Also the quantity and quality of capital under Basel II were deemed insufficient to contain any further risk. Basel III norms aim at making most banking activities such as their trading book activities more capital-intensive. The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters viz. capital, leverage, funding and liquidity

"People think that Islamic Banking system is based on faith, but it's based on justice. The system is based on justice for the two parties and how you get to the justice is extracted from Islamic faith"

INTEREST IS ONE OF THE MAIN SOURCE OF BANK’S EARNING

A bank generates profit from the differential between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities.

ISLAMIC BANKING

INTEREST PROHIBITED IN ISLAM

The word “Riba” is used in the Holy Quran 8 times. In 30:39,4:161,3:130, 2:276,2:278 and 3 times in 2:275.

“Those who devour usury will not stand except as stand one whom the Evil one by his touch Hath driven to madness. That is because they say: "Trade is like usury," but Allah hath permitted trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge); but those who repeat (The offence) are companions of the Fire: They will abide therein (for ever).” (Quran 2:275)

“O ye who believe! Devour not usury, doubled and multiplied; but fear Allah. that ye may (really) prosper.” (Quran 3:130)

DIFFERENCE BETWEEN ISLAMIC AND CONVENTIONAL BANKING

Islamic banking only deals in “halal” products and services. Thus, all transactions must be SHARIAH COMPLIANT i.e. must be in accordance with the Islamic Jurisprudence.

consideration of collateral to be looked upon separately. However, if the transaction is based on "joint-venture" basis, there should not be any collateral;

In a default or termination situation, the Bank (or financier) normally demand the outstanding sale price. Generally, the sale price is fixed and comprise "principal and profits" predetermined upfront before a contract is signed.

compounding calculation i.e. to conventional practice of "interest upon interest" element is strictly prohibited under Islamic banking system .

ISLAMIC BANKING TERMINOLOGY

1) Mudarabah (profit sharing) Mudarabah is an arrangement between the bank, or a capital provider, and

an entrepreneur, whereby the entrepreneur can mobilize the funds of the former for its business activity. Profits made are shared between the bank and the entrepreneur according to predetermined ratio. In case of loss, the bank loses the capital, while the entrepreneur loses his provision of labor. It is this financial risk, according to the Shariah, that justifies the bank's claim to part of the profit. The profit-sharing continues until the loan is repaid.

2) Musharakah (joint venture) Musharakah is a relationship between two parties or more, of whom contribute

capital to a business, and divide the net profit and loss pro rata. This is often used in investment projects, letters of credit, and the purchase or real estate or property

3)Qard hassan/ Qardul hassan (good loan/benevolent loan) This is a loan extended on a goodwill basis, and the debtor is only required to

repay the amount borrowed. However, the debtor may, at his or her discretion, pay an extra amount beyond the principal amount of the loan (without promising

CONCLUSION

From this Project I learnt the following points Learnt the process how Investment banker approach

or deal IPO and M&A For their client How important role they play for the economy. Who is the Top banker in Global and in India? Learnt about the Porter Five Forces. And went through the Top 2 conglomerate companies

in India. Learnt about how Basel Norms plays a vital role in

Indian banking against the Global standards. How Islamic Banks function and their role