Investment Bankers and Scope Final
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Transcript of Investment Bankers and Scope Final
DEFINITION OF “INVESTMENT BANK”
A financial intermediary that performs a variety of services. This
includes underwriting, acting as an intermediary between an issuer
of securities and the investing public, facilitating mergers and
other corporate reorganizations, and also acting as a broker for
institutional clients.
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MEANING OF INVESTMENT BANK
an investment banker is a banker who will sell and negotiate the
terms of an investment on behalf of a client. The main function of
an investment banker is to take the responsibilities of the action of
selling and investing away from the client and into more
knowledgeable hands. The importance and value of an investment
banker is that they are responsible for making important sales and
investments based on their knowledge.
it is not the financial investment in the banking sector. But in fact ,
investment is a kind of banking function which is used to help
clients in creating wealth and funds. The commercial banks use
this type of banking in accord with sensible and practical use of
the available resources . Not only this, investment banking and
people engaged in this sector also provides advice on how to
transact in business they are currently in.
Though investment banking , companies can create fund in two
ways . They can either draw on public funds from capital market
by releasing the stock i.e. corporate finance they can go to venture
capitalist or private equities to become shareholders in their
company . The field of investment banking is also engaged in
giving advice and consultation to how manage various takeover
and merging . The handling of mergers and acquisition come
under the corporate finance function of the investment banking .
The margin between investment banking and other forms of
banking has been very unclear for a long period of time now and
for the same time , the function of this banking sector has grown
to covering every field of wealth management .
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THE IMPORTANCE OF INVESTMENT
BANKS
Investment banks exist to help large-scale corporations and
governments get money. They help these clients invest in financial
products that they buy, sell, or create and, hopefully, make a
return on the money they invested in the financial vehicles
suggested by investment banks. Many investment banks also give
loans to their clients, which is one of the leading factors that
influence the lives of individuals not directly associated with such
a firm. In the late 1990s to mid-2000s the now infamous housing
and credit bubbles were stewing, and the American economic
system was undergoing the process of financialization—the
depreciation in value of all exchanges—contributing to the
fragility of the overall economy. Simultaneously the size of
investment banks and other financial entities were rapidly
expanding, until in 2008 experts estimated they were roughly the
same size as traditional commercial and retail banks. During that
time, several commercial and retail banks were writing mortgages
to individuals who would later default; many of those banks
received the funds they were using to make those toxic loans was
borrowed from investment banks. Between 2007 and 2008 there
was a run on these financial entities; investors stopped placing
money with the investment banks and began to withdraw their
funds from them because they were worried about the solvency of
such institutions. More importantly to the overall picture, during
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this time investment banks were borrowing a number of short-
term liquid investment products to finance the purchase of long-
term, illiquid, or otherwise risky assets. Because of the
problematic credit market, what resulted were waves of rapid
deleveraging, or the selling of those long-term assets at a
significantly reduced price. The turmoil between this rapid is
deleveraging and the run on the investment banking industry in
concert with the housing and credit bubbles helped create the
perfect conditions for the financial meltdown that began in 2007.
In a speech to The Economic Club of New York on June 9, 2008,
then New York Federal Reserve Bank president and CEO
Timothy Geithner explained the condition as such:
In early 2007, asset-backed commercial paper conduits, in
structured investment vehicles, in auction-rate preferred securities,
tender option bonds and variable rate demand notes, had a
combined asset size of roughly $2.2 trillion. Assets financed
overnight in tri party repo grew to $2.5 trillion. Assets held in
hedge funds grew to roughly $1.8 trillion. The combined balance
sheets of the then five major investment banks totalled $4 trillion.
In comparison, the total assets of the top five bank holding
companies in the United States at that point were just over $6
trillion, and total assets of the entire banking system were about
$10 trillion. The combined effect of these factors was a financial
system vulnerable to self-reinforcing asset price and credit cycles.
Renowned economist Paul Krugman believes that the run on the
investment banking system is the core cause of the 2007 financial
collapse:
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As the shadow banking system expanded to rival or even surpass
conventional banking in importance, politicians and government
officials should have realized that they were re-creating the kind
of financial vulnerability that made the Great Depression possible
—and they should have responded by extending regulations and
the financial safety net to cover these new institutions. Influential
figures should have proclaimed a simple rule: anything that does
what a bank does, anything that has to be rescued in crises the way
banks are, should be regulated like a bank.
The role of investment banks in the American economic system is
important. The United States is seeing and feeling the impact that
problems in the investment banking industry can have on the
everyday lives of its people, proving that such a financial entity
can touch the lives of individuals who may not even directly
interact with it. Nothing happens or is contained in a vacuum, and
investment banking is certainly no exception.
FUNCTIONS OF INVESTMENT BANKER
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Investment bankers provide service and advice to companies,
organizations and governments. Investment bankers also assist
and advise companies on mergers and acquisitions, which
basically means that they act as the buyer or seller (whatever
position the company is taking) and negotiate the transaction. In
other instances they just provide a strategy for action against an
unwelcome bid. Investment bankers provide a wide array of
services, including underwriting the issuance of equity or debt to
aid a company having financial difficulties. It is the duty of the
investment banker to provide advice on issues such as how to raise
capital through equity or debt instruments.
An investment banker's main goal is to help clients achieve their
goals. Investment bankers will assist their clients with the
implementation of their chosen plan, including but not limited to
buyouts. Investment bankers also must take charge of their own
client load. Investment bankers must identify and secure their own
clientele, so they literally have total control of how much or how
little work they have.
When corporation sells new securities to raise funds, the offering
is called a primary issue. The agent responsible for finding buyers
for these securities is called the investment banker. The
investment banker purchase primary issue from corporation and
arranges immediate resell of these securities to the investors.
Merrill Lynch & Co., Goldman Sachs are some examples of well-
known investment banking firms. Broadly investment bankers
(investment banking firms) perform three functions: Investigation,
Analysis and Research (Origination), Underwriting (Public Cash
offerings) and Distribution. Most of time a single investor banker
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performs all functions, however some investment bankers are
specialized in certain functional areas only.
INVESTIGATION, ANALYSIS AND RESEARCH:
Origination includes the subsidiary operations of discovery,
investigation, and negotiation. Discovery is the finding of a
prospective issue of securities; investigation is the testing of the
investment credit of the prospective security issuer, and the
intrinsic soundness of the issue; negotiation is the determination of
the amount, the price, and the terms of the proposed issue.
Investigation usually involves an analysis of the financial history
of the corporation by accountants, investigation of legal factors, a
survey of its physical property by engineers, and in-depth review
of operations. The purpose of investigation and analysis is to
determine whether a proposed issue has sufficient merit to be
offered to investment community. In other words, function of
investment banking is careful analysis of the soundness and
reliability of the corporation whose securities are seeking the
investment market. The task of investigation and analysing the
numerous factors, which govern the value of investment
securities, varies considerably with the different types of issuing
bodies.
UNDERWRITING (PUBLIC CASH OFFERINGS):
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When a corporation wishes to issue new securities and sell them to
the public, it makes an arrangement with an investment banker
whereby the investment banker agrees to purchase the entire issue
at a set price, known as underwriting. Underwriting also refers to
the guarantee by the investment banker that the issuer will receive
a certain minimum amount of cash for their new securities. The
investment banker buys a new security issue, pays the issuer, and
markets the securities. The underwriter’s compensation is the
difference between the price at which the securities sold to the
public, and the price paid to the company for the securities.
Underwriting can be done either through negotiations between
underwriter and the issuing company (called negotiated
underwriting) or by competitive bidding. A negotiated
underwriting is a negotiated agreed arrangement between the
issuing firm and its investment banker. Most large corporations
work with investment bankers with whom they have long-term
relationship. In competitive bidding, the firm awards offering to
investment banker that bid the highest price.
In certain cases, for large or risky issues a number of investment
bankers get together as a group, they are referred to as syndicate.
A syndicate is a temporary association of investment bankers
brought together for the purpose of selling new securities. One
investment banker is selected to manage the syndicate called the
originating house, which does underwriting of the major amount
of the issue. There are two types of underwriting syndicates,
divided and undivided. In a divided syndicate, each member group
has liability of selling a portion of offerings assigned to them.
However, in undivided syndicate, each member group is liable for
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unsold securities up to the amount of its percentage participation
irrespective of the number of securities that group has sold.
DISTRIBUTION :
Another function of investment banker it to market the security
issues. The investment banker acts as a specialist to distribute
securities efficiently for the corporation. It can be very expensive
and ineffective for a corporation to sell an issue by establishing
marking and selling organization by its own. Investment banker
has established marketing and sales network to distribute
securities. For a reputed invest banker, with its past history of
selecting good companies and pricing securities builds a broad
client base over time, and further increases the efficiency with
which securities can be sold.
Invest banker offers security to both corporation issuing
securities and investors buying securities. For corporations
investment banker offers definite price guaranty on a certain date
for securities to offer. The corporation runs no risk of the
uncertainties of the market and do not have to spend on resources
with which it is not equipped with.
To the investor, the responsible investment banker offers
protection against unsafe securities. The offering of a few unsound
issues can caused serious loss to its reputation, and hence loss of
business. Therefore, investment banker play very important role in
issuing new security offerings.
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THE ROLE OF INVESTMENT BANKERS IN
MERGERS AND ACQUISITIONS
Amid the turmoil of the 2008 credit crisis, the traditional model of
the mega independent investment bank as a highly leveraged,
largely unregulated, innovative securities underwriter and M&A
advisor foundered. Lehman Brothers was liquidated and Bear
Stearns and Merrill Lynch were acquired by commercial banks
J.P. Morgan Chase and Bank of America, respectively. In an effort
to attract retail deposits and borrow from the U.S. Federal Reserve
System (the “Fed”), Goldman Sachs and Morgan Stanley
converted to commercial bank holding companies subject to Fed
regulation.
While the financial markets continue to require investment
banking services, they will be provided increasingly through
“universal banks” (e.g., Bank of America/Merrill Lynch and
Citibank/Smith Barney), which provide the customary commercial
banking as well as investment banking services. In addition to
those already mentioned, traditional investment banking activities
also include providing strategic and tactical advice and acquisition
opportunities; screening potential buyers and sellers; making
initial contact with a seller or buyer; and providing negotiation
support, valuation, and deal structuring guidance. Along with
these investment banking functions, the large firms usually
maintain substantial broker-dealer operations serving wholesale
and retail clients in brokerage and advisory capacities. While the
era of the thriving independent investment banking behemoth may
be over, the role of investment banking boutiques providing
specialized expertise is likely to continue to thrive.
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Investment bankers derive significant income from writing so-
called fairness opinion letters. A fairness opinion letter is a
written and signed third-party assertion certifying the
appropriateness of the price of a proposed deal involving a tender
offer, merger, asset sale, or leveraged buyout. It discusses the
price and terms of the deal in the context of comparable
transactions. A typical fairness opinion provides a range of “fair”
prices, with the presumption that the actual deal price should fall
within that range. Although such opinions are intended to inform
investors, they often are developed as legal protection for
members of the boards of directors against possible shareholder
challenges of their decisions.
The size of an investment banking advisory fee is often contingent
on the completion of the deal and may run about 1–2 present of
the value of the transaction. Such fees generally vary with the size
of the transaction. The size of the fee paid may exceed 1–2
present, if the advisors achieve certain incentive goals. Fairness
opinion fees often amount to about one fourth of the total advisory
fee paid on a transaction (Sweeney, 1999). Although the size of
the fee may vary with the size of the transaction, the fairness
opinion fee usually is paid whether or not the deal is
consummated. Problems associated with fairness opinions include
the potential conflicts of interest with investment banks that
generate large fees. In many cases, the investment bank that
brought the deal to a potential acquirer is the same one that writes
the fairness opinion. Moreover, they are often out of date by the
time shareholders vote on the deal, they do not address whether
the firm could have gotten a better deal, and the overly broad
range of value given in such letters reduces their relevance. Courts
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agree that, because the opinions are written for boards of directors,
the investment bankers have no obligation to the shareholders
(Henry, 2003).
THE INVESTMENT BANKER’S ROLE IN IPO
The investment banker should prove his competence to his clients
and show his areas of core competency to attract clients.
Moreover, he must do so while adhering to the strict regulatory
framework put down by SEBI. The Companies Act , the
government and other regulatory bodies. Therefore , the only way
for him to strive to stay in the competition and be among the best
is neither through great innovations or entrancing creativity , but
rather through just being excellent at his job .
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The investment banker plays a vital role in channelling the
financial surplus of the society into productive investment avenues
. The investment banker has a fiduciary role in relation to the
investors . He has to ensure the adequacy and appropriateness of
the disclosure made in the offer document .
The investment banker is the leader among all the intermediaries
associated with the issue . He is required to guide and co-ordinate
the activities of the registrar to the issue, banker to issue
advertising agency , printers ,underwriters , brokers , etc.
The investment bankers has to ensure the compliance of all the
law and regulation governing the securities market. He may also
be upon to assist the statutory authorities in developing a
regulatory framework for the orderly growth of capital markets
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GENERAL OBLIGATIONS AND
RESPONSIBILITIES
The investment banker must abide by the code of conduct as
specified by SEBI .
An investors banker should not carry on any business other than
that in the securities markets. An exception to this rule is a bank or
a public financial institution that has been granted a certificate of
registration under these regulations .
Every investment bankers must maintain his own books of
account, record and documents. This includes the balance sheet,
profit and loss accounts, copy of auditors to SEBI. This must be
done so that SEBI can monitor the capital adequacy of the
investment banker.
All issue can be managed by at least one investment banker
function as the lead investment banker.
Every lead investment banker must enter into agreement with his
client company and other investment bankers setting out their
mutual rights, liabilities and obligations relating to such issue and
in particular to disclosure, allotment and refund, before taking up
the assignment relating to an issue .
Where there are more than one lead investment banker to the
issue, the responsibilities of each such investment banker must
clearly demarcated and a statement furnished to SEBI .
A lead investment banker cannot manage the issue of any
associated body corporate
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A lead investment banker cannot associate with any other
investment banker without registration under SEBI.
The investment banker, who is responsible for verification
of the contents of the prospectus in respect of an issue and the
reasonableness of the views expressed therein, must submit to
SEBI at least two weeks prior to the opening of the issue for
subscription, a due diligence certificate.
The lead investment banker must submit the particular of
the issue, the draft prospectus and any other literature intended to
be circulated among the shareholders.
The lead manager undertaking the responsibility for refunds
or allotment of securities in respect of any issue must continue to
be associated with the issue till the subscribers have received the
share certificate or refund of excess application money.
The above obligations and responsibilities may be
considered as constraints in mind, the investment banker’s
15
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THE INVESTMENT BANKS: THE LONG-TERM
BENEFITS
They're traditionally one of the most lucrative units of a major
financial firm, fierce competitors for the ample fees buyout shops
toss off. These elite financial sponsors groups generated at least
$7.68 billion in global investment banking fees through M&A
advisory, equity capital markets work and debt financing in the
first half of 2011 alone, accounting for 19% of all the investment
banking fees over that time, according to Dialogic. This
constitutes a major rebound from a decade low in the first six
months of 2009 and nearly equals the first half of 2006, the
second-highest such period on record.
As Matthew Stopnik, the U.S. head of financial sponsors for UBS,
says, "It's a loyal client base, and it's a great driver of
opportunities across the platform, all different products, all
different sectors."
The Deal magazine recently spent several months interviewing
financial sponsors group heads to assess how their teams had
reconstituted themselves after the financial crisis. In this
relationship-driven world, major firms place a premium on
continuity and ensuring that they have bankers with big Rolodexes
and reputations in charge of these groups. The least senior
managing director on Credit Suisse Group's financial sponsors
team has been with the firm 13 years, for instance.
While the independent brands of three major firms were
swallowed up in the turmoil of 2008, many teams and major talent
survived intact. For example, J.P. Morgan Chase & Co. picked
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up its current co-head of financial sponsors, Larry Alletto, and
several other members of the group from the old Bear Stearns
Cos. Bank of America Corp. immediately shot up to the No. 1
ranking for fees in its sponsors business when it acquired Merrill
Lynch & Co. And most strikingly, Barclays Capital, the
investment banking division of Barclays plc, got nearly its entire
sponsors team by absorbing the investment banking unit
of Lehman Brothers Holdings Inc. after the firm's failure. Some
of the Barclays team, including John Miller, head of global
financial sponsors at the firm, not only come from Lehman but
have been together since business school in the '90s.
These relatively small teams at the biggest banks hoard some of
the most profitable deals around. J.P. Morgan, BofA
and Goldman, Sachs & Co. ranked as the top three in FSG fees in
the first half of the year, according to Freeman Consulting
Services and Thomson Reuters. They collectively take in 30% of
all fees paid by sponsors. "J.P. Morgan is still the 800-pound
gorilla in the room," says one banker.
One of the most striking developments in the world of FSGs is the
recent attention given to the middle market -- even at firms that
used to harvest mega buy outs. Morgan Stanley, for instance,
hired Joe Purcell out of J.P. Morgan last year to head up its
middle-market effort. The average value of deals done by the top
10 firms dropped from $4.2 billion in 2006 to $597 million in
2008 before rebounding to $962 million in 2011 through June,
according to Preqin Ltd.
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"What's missing is the very, very large consortium leveraged
buyouts, but the mix of buyouts remains," says J.P. Morgan's
Alletto.
Midmarket-oriented teams are raising their profiles. In August
Jorge Mora, in the sponsors group at UBS through 2008, accepted
a position as head of the U.S. sponsors group at Macquarie
Capital, which has made an aggressive push into private equity
advisory. Shortly after Mora's move, London-based managing
director James Seagrave defected from J.P. Morgan and David
Luse left Bank of America Merrill Lynch to join as managing
directors with the sponsors group at Jefferies & Co., which has
doubled the size of its PE team over the past two years. Just last
year, Lehman veteran Les Gorman joined as co-head of the
expanding financial sponsors group at BMO Capital
Markets; Lazard hired Fotis Hasiotis from BAML to co-head its
European team advising PE firms; and Mark Epley left his post as
global head of financial sponsors at Deutsche Bank AG, where he
had worked for nine years, to head up Nomura Holdings Inc.'s
FSG.
Despite their ubiquity, there are surprisingly few places where
sponsor heads received their training: Most notably, nearly a
dozen managing directors or sponsor heads stem from either
investment bank Donaldson, Lufkin & Jenrette, acquired by Credit
Suisse in August 2000, or its junk bond-pioneering predecessor,
Drexel Burnham Lambert, which, after its demise in 1990,
provided DLJ with much of its talent.
19
Alletto and Adam Sokoloff, head of Jefferies' financial sponsor
group, worked at Drexel together. Stopnik's predecessor at UBS
was Steve Smith, another Drexel alum who now runs UBS'
restructuring department. Macquarie's Mora hails from DLJ, as
does Moelis & Co. founder Ken Moelis (he started out at Drexel)
and others in his sponsors group, which managed to grab 9.6% of
the market share for advisory roles in PE-backed deals through
August, according to Dealogic. Then there's Credit Suisse, whose
team absorbed the DLJ DNA after the 2000 acquisition.
"At both First Boston and DLJ, the goal was to train people to be
well-rounded bankers. That philosophy continues today at Credit
Suisse," says Malcolm Price, Credit Suisse's current head of
financial sponsors in North America. Brian Van Elslander, the
head of FSG at Wells Fargo Securities LLC, came out of Credit
Suisse in 2006.
When asked why being part of these teams made for such long
careers, veteran PE bankers uniformly saw the resiliency of PE in
tough times as vindication of the business model. "The
combination of long-term or sticky money, patient capital
structures and sound operational practices allowed [PE firms] to
successfully manage through the crisis," says Citigroup Inc.'s
head of the alternative investments group, Brad Coleman.
Considering the tectonic shifts in the financial world over the past
decade -- not to say in recent months -- that may be what they'll
have to do again.
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THE RISE OF THE MODERN
INVESTMENT BANK
Perhaps no other organization inspires as much awe, intrigue,
controversy and curiosity as the global investment
bank. Investment banks have a storied history and today, they sit
astride the fast-paced flow of global trade and capital.
This article will provide a brief historical overview of investment
banks, describe the different roles they play in the origination and
distribution of securities, and examine the conflicts of interest that
arise when these functions take place under one corporate roof.
FROM CLIPPER SHIPS TO KKR
Adam Smith famously described capitalism as an invisible
hand guiding the market in its allocation of goods and services.
The financial engines of this hand during the 18th and 19th
centuries were European merchant banks, such as Hope & Co.,
Baring Brothers and Morgan Grenfell. For a time, the
Netherlands, and later Great Britain, ruled the waves of global
commerce in far-flung ports of call such as India and Hong Kong.
The merchant banking model then crossed the Atlantic and served
as the inspiration for the financial firms founded by prominent
families in what could perhaps be called the emerging market of
the day - the United States. The structure and activities of early
U.S. firms such as JP Morgan & Co. and Dillon Read and Drexel
& Co. reflected those of their European counterparts and included
financing new business opportunities through raising and
deploying investment capital.
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Over time, two somewhat distinct models arose from this. The old
merchant banking model was largely a private affair conducted
among the privileged denizens of the clubby world of old
European wealth. The merchant bank typically put up sizable
amounts of its own (family-owned) capital along with that of other
private interests that came into the deals as limited-
liability partners. Over the 19th century, a new model came into
popular use, particularly in the United States. Firms seeking to
raise capital would issue securities to third-party investors, who
would then have the ability to trade these securities in the
organized securities exchanges of major financial center’s such as
London and New York. The role of the financial firm was that
of underwriter - representing the issuer to the investing public,
obtaining interest from investors and facilitating the details of the
issuance. Firms engaged in this business became known as
investment banks.
Firms like JP Morgan didn't limit themselves to investment
banking, but established themselves in a variety of other financial
businesses including lending and deposit taking (i.e. commercial
banking). The stock market crash of 1929 and ensuing Great
Depression caused the U.S. government to reach the conclusion
that financial markets needed to be more closely regulated in order
to protect the financial interests of average Americans. This
resulted in the separation of investment banking from commercial
banking (the Glass-Steagall Act of 1933). The firms on the
investment banking side of this separation - such as Morgan
Stanley, Goldman Sachs, Lehman Brothers and First Boston -
went on to take a prominent role in the underwriting of corporate
America during the post war period; the largest gained fame as the
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so-called "bulge bracket".
The term "merchant bank" came back into vogue in the late 1970s
with the nascent private equity business of firms like Kohlberg,
Kravis & Roberts (KKR). Merchant banking in its modern context
refers to using one's own equity (often accompanied by external
debt financing) in a private transaction, as opposed to
underwriting a share issue via publicly traded securities on an
exchange - the classic function of an investment bank. Many of
the large global firms today conduct both merchant banking
(private equity) and investment banking.
THE REGULATORY INFRASTRUCTURE
In the United States, investment banks operate according to
legislation enacted at the time of Glass-Steagall. The Securities
Act of 1933 became a blueprint for how investment banks
underwrite securities in the public markets. The act established the
practices of due diligence, issuing a preliminary and final
prospectus, and pricing and syndicating a new issue. The
1934 Securities Exchange Act addressed securities exchanges and
broker-dealer organizations. The 1940 Investment Company
Act and 1940 Investment Advisors Act established regulations for
fiduciaries, such as mutual funds, private money managers and
registered investment advisors. In Wall Street parlance, the
investment banks represent the "sell side" (as they are mainly in
the business of selling securities to investors), while mutual funds,
advisors and others make up the "buy side".
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ANATOMY OF AN OFFERING
A company selects an investment bank to be lead manager of a
securities offering; responsibilities include leading the due
diligence and drafting the prospectus. The lead manager forms a
team of third-party specialists, including legal counsel, accounting
and tax specialists, financial printers and others.
In addition, the lead manager invites other banks into an
underwriting syndicate as co-managers. The lead and co-managers
will allot portions of the shares to be offered among themselves.
Because their underwriting fees derive from how much of the
issue they sell, the competition for lead manager and senior
allotment positions is quite intense.
When a company issues publicly traded securities for the first time
through an initial public offering (IPO), the lead manager appoints
a research analyst to write a research report and begin on going
coverage of the company. The report will contain an economic
analysis of the business and its prospects given the market for its
products and services, competition and other factors. Once the
analyst initiates coverage, he or she will make on going
recommendations to the bank's clients to buy, hold or sell shares
based on the perceived fair value relative to current share price.
Distribution begins with the book-building process. The
underwriting syndicate builds a book of interest during the
offering period, usually accompanied by a road show, in which the
issuer's senior management and syndicate team members meet
with potential investors (mostly institutional investors such as
24
pension funds, endowments and insurance companies). Potential
investors receive a red herring, a preliminary prospectus that
contains all materially significant information about the issuer but
omits the final issuing price and number of shares.
At the end of the road show, the lead manager sets the final
offering price based on the prevailing demand. Underwriters seek
to have the offering oversubscribed (create more demand than
available shares). If they succeed, they will exercise a 15%
overallotment option, called a green shoe, which is named after
the Green Shoe Company, the first issuer of such an option. This
permits the underwriters to increase the number of new shares
issued by up to 15% (from the number stated in the prospectus)
without going through any additional registration.
The new issue market is called the primary market. The Securities
and Exchange Commission (SEC) registers the securities prior to
their primary issuance, then they start trading in the secondary
market on the New York Stock Exchange, Nasdaq or other venue
where the securities have been accepted for listing and trading.
WALL STREET'S CHINESE WALL
Investment banking is fraught with potential conflicts of interest.
This problem has intensified through the consolidation that has
swept through the financial services industry, to the point where a
handful of large concerns - the fabled bulge bracket banks -
account for a disproportionate share of business on both the buy
and sell side.
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The potential conflict arising from this is simple to understand.
Buy-side agents - investment advisors and money managers - have
a fiduciary obligation to act solely in the best interests of their
investing clients, without regard for their own economic
incentives to recommend one product or strategy versus another.
Investment bankers on the sell side seek to maximize the results to
their clients, the issuers. When a firm in which the main line of
business is sell side, investment banking acquires a buy-side asset
manager, and these incentives can be at odds.
Unfortunately for investors, the economics of the business are
such that a disproportionate amount of an investment bank's
profits derive from its underwriting and trading businesses. The
competition for mandates is intense, and the pressure is high on all
participants - the bankers, research analysts, traders and
salespeople - to deliver results.
One example in particular is research. The research analyst is
supposed to reach independent conclusions irrespective of the
investment bankers' interests. Regulations mandate that banks
enforce a separation between research and banking, popularly
referred to as a Chinese Wall. In reality, however, many firms
have tied research analysts' compensation to investment banking
profitability. Scrutiny following the collapse of the dotcom bubble
in 2000 has led to some attempts to reform some of these flawed
practices.
26
WHAT ABOUT COMPENSATION?
A discussion on investment banking wouldn't be complete without
addressing the enormous sums of money that investment bankers
are paid. Essentially, a bank's main income-producing assets walk
out of the office building every evening. Deals are completed and
money is made based solely on the relationships, experience and
clever thinking of the professionals who work there.
As such, an investment bank has little to do with the profits it
earns except to pay the folks who produced them. It is not unusual
for 50% or more of top-line revenues to go into the salaries and
bonuses for an investment bank's employees. Most of this goes to
the principal architects of the deals, but is also goes to the
associates and analysts who toil over discounted cash flow spread
sheets and comparable models until the early hours of every
morning.
The catch is that most of this compensation is paid as bonuses.
Fixed salaries are by no means modest, but the big seven-figure
payoffs come through bonus distributions. The risk for an
investment banker is that such pay outs can quickly vanish if
market conditions turn down or the firm has a bad year.
Investment bankers spend an inordinate amount of time trying to
figure out new ways to make money - in good times and bad.
Business areas like M&A, restructuring, private equity
and structured finance, most of which were not part of an
investment bank's repertoire prior to the mid to late 1970s, provide
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evidence of this profession's ability to continually find new ways
to make money.
THE BOTTOM LINE
For all the mystery surrounding investment banks, the role they
have played throughout the evolution of modern capitalism is
fairly straightforward. These institutions provide the financial
means to enable Adam Smith's invisible hand to function.
Investment banks have flourished in a variety of economies, from
the merchant traders of 18th-century London and Amsterdam to
the behemoths of today, whose influence spans the globe. As long
as there is a market economy, there are likely to be investment
bankers coming up with new ways to make money, while the rest
of us marvel at how they manage to do it.
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SIZE OF INDUSTRY
Global investment banking revenue increased for the fifth year
running in 2007, to a record US$84.3 billion,[4] which was up 22%
on the previous year and more than double the level in 2003.
Subsequent to their exposure to United States sub-prime securities
investments, many investment banks have experienced losses
since this time.
The United States was the primary source of investment banking
income in 2007, with 53% of the total, a proportion which has
fallen somewhat during the past decade. Europe (with Middle East
and Africa) generated 32% of the total, slightly up on its 30%
share a decade ago Asian countries generated the remaining 15%.
Over the past decade, fee income from the US increased by
80%. This compares with a 217% increase in Europe and 250%
increase in Asia during this period. The industry is heavily
concentrated in a small number of major financial centres,
including City of London, New York City, Hong
Kong and Tokyo.
Investment banking is one of the most global industries and is
hence continuously challenged to respond to new developments
and innovation in the global financial markets. New products with
higher margins are constantly invented and manufactured by
bankers in the hope of winning over clients and developing
trading know-how in new markets. However, since these can
usually not be patented or copyrighted, they are very often copied
quickly by competing banks, pushing down trading margins.
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For example, trading bonds and equities for customers is now a
commodity business, but structuring and
trading derivatives retains higher margins in good times—and the
risk of large losses in difficult market conditions, such as
the credit crunch that began in 2007. Each over-the-
counter contract has to be uniquely structured and could involve
complex pay-off and risk profiles. Listed option contracts are
traded through major exchanges, such as the CBOE, and are
almost as commoditized as general equity securities.
In addition, while many products have been commoditized, an
increasing amount of profit within investment banks has come
from proprietary trading, where size creates a positive network
benefit (since the more trades an investment bank does, the more
it knows about the market flow, allowing it to theoretically make
better trades and pass on better guidance to clients).
The fastest growing segment of the investment banking industry
are private investments into public companies (PIPEs, otherwise
known as Regulation D or Regulation S). Such transactions are
privately negotiated between companies and accredited investors.
These PIPE transactions are non-rule 144A transactions.
Large bulge bracket brokerage firms and smaller boutique firms
compete in this sector. Special purpose acquisition companies
(SPACs) or blank check corporations have been created from this
industry.
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The ten largest global investment banks as of December 31, 2010,
are as follows:
Rank Company Fees ($m)
1. J.P. Morgan $5,533.85
2. Bank of America Merrill Lynch $4,581.59
3. Goldman Sachs $4,386.52
4. Morgan Stanley $4,055.48
5. Credit Suisse $3,379.12
6. Deutsche Bank $3,286.80
7. Citi $3,238.67
8. Barclays $2,864.44
9. UBS $2,614.44
10. BNP Paribas $1,433.89
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EVOLUTION OF INVESTMENT BANKER IN
INDIA
The evolution can be traced back to the 19th century when
European merchant bank setting up their agencies houses to assist
the new projects. In the early 20th century, large business houses
followed suit by establishing managing agencies which acted as
issue house for securities for new project and also provide finance
to greenfield ventures. The peculiar feature of these agencies was
that their services were restricted only to the companies of the
group to which they belonged. A few small brokers also started
rendering merchant banking services, but theirs was limited due to
small capital base.
In 1967, ANZ Grind lays bank set up a separate merchant banking
division to handle new capital issue. It was soon followed by
Citibank which started rendering these services. The foreign banks
monopolized merchant banking services in the country. The
banking committee, in its report in 1972, took note of this with
concern and recommended setting up merchant banking institution
by commercial bank and financial institution. State bank of India
ventured into this business by starting a merchant banking bureau
in 1972. In 1972, ICICI became the first financial institution to
offer merchant banking services. JM finance was set up by Mr .
Nimesh Kampani as an exclusive merchant bank 1973. The
growth of this industry was very slow during this period.by 1980,
the number of merchant banks rose to 33 and was set up by
commercial bank, financial institutions and private sector. The
capital market witnessed some buoyancy in the late eighties. The
advent of economic reforms in 1991 resulted in sudden spurt in
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both the primary and secondary market. Several new players
entered into the field. The securities scam in May, 1992 was a
major setback to the industry. Several leading merchant bankers,
both in public and private sectors were found to be involved in
various irregularities. Some of the prominent public sector players
where involved in the scam were can bank financial services, SBI
capital market, Andhra bank financial services, etc. leading private
sector players involved in the scam included fair growth financial
services and champaklal investment and finance(CIFCO).
The market turned bullish again in the end of 1993 after the
tainted shares problem was substantially resolved. There was a
very phenomenal surge of activity in the primary market. the
registration norms with the SEBI were quite liberal. The low entry
barriers coupled with lucrative opportunities lured many new
entrants into this industry. Most of the new entrants were
undercapitalized with little no expertise in merchant banking.
These players could hardly afford to be discerning and started
offering their services to all and sundry clients. The market was
soon flooded with poor quality of paper issued by companies
started deferring their plans to access primary markets, lack of
business resulted in a major shake out in the industry. Most of the
small firms exited form the business. Many foreign investment
bank started entering Indian market. These firms had a huge
capital base, global distribution capacity and expertise. However,
they were new to Indian market and lacked local penetration.
Many of the top rung Indian merchant banks, who had strong
domestic base, started entering into joint ventures with the foreign
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banks. This energy resulted in synergies as individual strength
complemented each other .
INVESTMENT BANKERS IN INDIA
Investment bankers play an important role in the issue
management process. Lead managers (category I merchant
bankers) have to ensure correctness of the information furnished
in the offer document. They have to ensure compliance with SEBI
rules and regulations as also guidelines for disclosures and
investor protection. To this effect, they are required to submit to
SEBI a due diligence certificate conforming that the disclosures
made in the draft prospectus or letter of offer are true, fair and
adequate to enable the prospective investors to make a well
informed investment decision. The role of merchant bankers in
performing their due diligence functions has become even more
important with the strengthening of the disclosure requirements
and with the SEBI giving up the vetting up of prospectus. SEBIs
various operational guidelines issued during the year to merchant
bankers primarily addressed the need to enhance the standard
of disclosures. It was felt that a further strengthening of the
criteria for registration of merchant bankers was necessary,
primarily through an increase in the net worth requirements, so
that the capital would be commensurate with the level of activities
undertaken by them. With this in view, the net worth requirement
or category I merchant bankers was raised in 1995-96 to
Rs.5crore. In 1996-96, the SEBI (merchant bankers) regulations,
1992 were amended to require the payment of fees for each letter
of offer or draft prospectus that is filed with SEBI.
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UNDERWRITERS
Underwriters are required to register with SEBI in terms of the
EBI(Underwriters) Rules and Regulations, 1993. In addition to
under writers registered with SEBI in terms of these regulations,
all registered merchant bankers in categories I, II and III and stock
brokers and mutual funds registered with SEBI can function
as underwriters.
POTENTIAL OF INVESTMENT BANKING IN
INDIA
The major problem of Indian capital markets today is the lack of
investor confidence, which is mainly on account of lack of
liquidity, unscrupulous issuers and merchant bankers and poor or
unapprised issues. Investment Banking can solve this problem
because investors would be dealing with reputed investment
bankers in the primary bankers in the primary market rather than
unknown issuers. The issues will be properly appraised and
priced. Similarly, Investment Banks would hold the issue until
market conditions are appropriate for issue, thus reducing the risk
exposure of investors to gestation for issue. Moreover, the price of
reissue will be a better
indicator of issue’s performance. Investment banks make the
primary market for IPOs thus assuring protection to the issuer
about subscription In sum, the quality of pricing, appraisal, and
primary market functions will improve resulting in substantial
improvement in investor confidence. Since the investment bank
lends its name to the issue it implies that investors can trust the
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issue. As a result, Investment bankers are gradually replacing
merchant banking.
LIST OF TOP 10 INVESTMENT BANKS OF INDIA
Bank of America:
This American bank, being one of the leading investment banks in
the world, has even got its branches in the Republic of India.
Operating in the country since the year 1964, this bank provides a
comprehensive range of financial solutions and products to some
of the top most corporates, multinationals and financial
institutions in the nation. Their main office is based in India at the
following address:
Barclays Capital:
This investment banking company is a division of the Barclays
Bank Plc. Focused on meeting the needs of the Indian corporates,
especially in the Small and Medium Enterprise (S. M. E.) sector as
well as the companies of the country who have got a flair for
international growth, this bank offers a range of cash management
and investment products. The India based head office of this
investment bank is located at the following location:
B. N. P. Paribas:
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B. N. P. Paribas started operating in India from the year 1860 from
the city of Kolkata in the name of C. N. E. P. (Comptoir National
d'Escompte de Paris). Presently, they serve many domestic and
international banks with their corporate banking necessities. They
can be contacted at the below mentioned contact details:
Citi Bank:
Operating in India for over 106 years, this is among the famous
financial institutions of Citi Group. Besides offering different
services related to investment banking, this investment bank
provides varied banking services with a capital investment of
about US $ 3.1 billion, which is spread all over the world. The
head office of Citi Bank in this nation is situated at the address
that is provided below:
Credit Suisse A. G.:
Credit Suisse, based in India in the capital cities of New Delhi and
Mumbai, provides an array of security services and investment
banking services in the country. Financial advisory services as
well as equity underwriting to the corporate companies in the
nation are among the specialties of this organization. The contact
details of the Mumbai branch of this bank are as follows:
Deutsche Bank:
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Being a leader of investment banking in the global market, this
bank has got a profitable cum strong client franchise in the private
sector. They offer their unparalleled services to the financial
sector in both the national and the international domain. The
corporate head office of the bank is located at the address that is
given below:
Deutsche Bank A. G.
Deutsche Bank House,
Hazarimal Somani Marg,
Fort, Mumbai - 400 001,
Maharashtra, India.
Tel.: + 91 - 022 - 6658 4600
J. P. Morgan:
This leading bank in the world set up their operations in the
country during the year 1930. This famous foreign bank
specializes in the business of investment advisory services as well
as wholesale investment banking. The contact information of this
bank are given below:
Kotak Mahindra Bank Limited:
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Apart from being listed among the leading banks in India, this
banking organization is even a famous name in the field of
investment banking in the country. Their subsidiary Kotak
Investment Banking provides a complete range of high quality
solutions for capital marketing as well as financial advising. The
main office of this bank in India is situated at the address that is
given below:
The Hong Kong and Shanghai Banking Corporation Limited:
With its origin dating back to the year 1853 in India, this
investment bank, popular as H. S. B. C., has got the following
three business interests in the country:
Equities research and broking
Export and project finance
Worldwide investment banking
Their head office in this nation is situated in the address, which is
as follows:
Yes Bank Limited:
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This customer centric and service driven bank of India has
fructified to the investment banking sector as well as different
other wealth management services in the country since its
establishment from the year 2004. The corporate head quarter of
this Indian Bank is located at Mumbai at the below mentioned
address:
TATA MOTORS COMPLETES ACQUISITION OF JAGUAR LAND ROVER
Tata Motors today acquired the Jaguar Land Rover businesses
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from Ford Motor Company for a net consideration of US $2.3 billion, as announced on March 26, in an all-cash transaction. Ford has contributed about US $600 million to the Jaguar Land Rover pension plans.
Mr. Ratan N. Tata, Chairman of Tata Sons and Tata Motors, was present at the handing over ceremony at the head quarters of Jaguar Land Rover at Gaydon in the UK along with Mr. Don Leclair, the Executive Vice President and Chief Financial Officer of Ford Motor Company, and Mr. Lewis Booth, Executive Vice President of Ford Motor Company, who has responsibility for Ford of Europe, Volvo and Jaguar Land Rover.
Commenting on the occasion, Mr. Tata said, “This is a momentous time for all of us at Tata Motors. Jaguar and Land Rover are two iconic British brands with worldwide growth prospects. We are looking forward to extending our full support to the Jaguar Land Rover team to realise their competitive potential. Jaguar Land Rover will retain their distinctive identities and continue to pursue their respective business plans as before. We recognise the significant improvement in the performance of the two brands and look forward to this trend continuing in the coming years. It is our intention to work closely to support the Jaguar Land Rover team in building the success and preeminence of the two brands.”
Tata Motors confirmed that Mr. David Smith, the acting Chief Executive Officer of Jaguar Land Rover, would be the new CEO of the business. Mr. Smith has 25 years of experience with Jaguar Land Rover and Ford. Before recently returning to Jaguar Land Rover as its Chief Financial Officer, he was Director Finance and Business Strategy for PAG and Ford of Europe.
Mr. Smith said, “We are very pleased with the association with Tata Motors. We look forward to a sustained bright future for the company and its stakeholders.”
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Jaguar Land Rover has been acquired at a cost of US$ 2.3 billion on a cash free, debt-free basis. The purchase consideration includes the ownership by Jaguar and Land Rover or perpetual royalty-free licences of all necessary Intellectual Property Rights, manufacturing plants, two advanced design centres in the UK, and worldwide network of National Sales Companies.
Long term agreements have been entered into for supply of engines, stampings and other components to Jaguar Land Rover. Other areas of transition support from Ford include IT, accounting and access to test facilities. The two companies will continue to cooperate in areas such as design and development through sharing of platforms and joint development of hybrid technologies and powertrain engineering. The Ford Motor Credit Company will continue to provide financing for Jaguar Land Rover dealers and customers for a transition period. Tata Motors is in an advanced stage of negotiations with leading auto finance providers to support the Jaguar Land Rover business in the UK, Europe and the US, and is expected to select financial services partners shortly.
About Tata MotorsTata Motors is India's largest automobile company, with revenues of US$ 8.8 billion in 2007-08. With over 4 million Tata vehicles plying in India, it is the leader in commercial vehicles and among the top three in passenger vehicles. It is also the world's fourth largest truck manufacturer and the second largest bus manufacturer. Tata cars, buses and trucks are being marketed in several countries in Europe, Africa, the Middle East, South Asia, South East Asia and South America. Through subsidiaries and associate companies, Tata Motors has operations in South Korea, Thailand and Spain. It also has a strategic alliance with Fiat.
RNRL, RELIANCE POWER MERGERThe Anil Dhirubhai Ambani Group’s (ADAG’s) gas transportation company, Reliance Natural Resources Ltd (RNRL),
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will merge with sister firm Reliance Power (R-Power) in a Rs 50,000-crore, all-stock deal.
The board of directors of the two companies, in meetings held today, approved a swap ratio of 4:1, meaning RNRL shareholders are to get one R-Power share for every four they hold. The ratio is based on the valuation made by consultancy firm KPMG, a statement issued by the two companies said.
BSE
|NSE
Price
The proposed merger is subject to approvals of the shareholders of R-Power and RNRL, the stock exchanges, the High Court here, and all other requisite permissions, sanctions and approvals, it said.The merger will take the market capitalisation (m-cap) of R-Power to a little over Rs 52,000 crore. Its m-cap was Rs 41,979 crore at the close of trading on Friday and that of RNRL was Rs 10,394 crore.
R-Power will retain the assets and people of RNRL, a company with a turnover of Rs 298 crore, and continue to do business in the areas pursued by it, people close to the development said. After the merger, the company’s net worth will exceed Rs 16,000 crore and it will have 600,000 shareholders. The net worth of RNRL is Rs 1,900 crore, the statement said.
However, the combined market value of the two ADAG firms does not compare well with the Rs 1.23 lakh crore m-cap that R-Power commanded on February 11, 2008 — the day it got listed
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on the stock market after a Rs 11,500-crore initial public offer, the biggest IPO in India’s history.
The listing saw R-Power catapulting into the elite league of Rs 1-trillion companies, with the scrip touching an intra-day high of Rs 599.90. However, it soon slipped below the IPO price of Rs 450 a share, making its membership in the Rs 1-trillion (Rs 1 lakh crore) m-cap group shortlived.
The merger will accelerate R-Power’s plans to set up a 10,000-Mw gas-based power plant, set in train with its Gas Supply Master Agreement with Mukesh Ambani’s Reliance Industries Ltd (RIL) last week. “The move will help R-Power accelerate its backward integration plans from a pure thermal power generation company to quickly venture into other value chains of energy business,” said an industry observer.
R-Power, currently with about 1,000 Mw of generation capacity, plans to implement about 37,000 Mw of power projects. RNRL’s shareholders, about 80 per cent of them also shareholders of R-Power, will now get an opportunity to join the latter’s power dreams. Over 80 per cent of RNRL shareholders had received their shares free on the demerger from RIL in 2006, as part of a settlement within the Ambani family.
Sources said the move would also make R-Power a domestic power company with one of the largest coal reserves. It has about four billion tonnes of coal reserves in Indonesia and India. RNRL has 45 per cent interest in four coal-methane blocks, spread over 3,251 sq km and estimated resources of 193 billion cubic metres, and a 10 per cent share in an oil and gas block in Mizoram, with an acreage of 3,619 sq km and reserve potential of up to 28 bn cu m.
ICICI BANK TO BUY BANK OF RAJASTHAN
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Mumbai: Shareholders of the troubled Bank of Rajasthan Ltd (BoR) are set to get 25 shares of ICICI Bank Ltd for 118 shares of BoR in the ratio of 4.72:1, after the boards of the two banks decided to go ahead with a merger.“This is based on an internal analysis of the strategic value of the proposed amalgamation, average market capitalization per branch of old private sector banks and relevant precedent transactions,” an ICICI Bank release said, after its board gave its in-principle approval to the proposal.BoR promoter Pravin Kumar Tayal termed the proposed merger as a “win-win” situation for all—the banks, their employees and investors.
In a day of high drama, BoR stock rose 19.95% on the Bombay Stock Exchange to close at Rs99.50, its year high, and after trading hours, the bank sent a release to the stock exchanges saying its board will meet in the evening to discuss a proposal of merging the bank with ICICI Bank.
Boads of both banks met in the evening separately, and after the meeting ICICI Bank sent a release, saying, it “has entered into an agreement with certain shareholders of Bank of Rajasthan agreeing to effect the amalgamation of Bank of Rajasthan” with itself.
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ICICI Bank stock was down 1.45% to Rs889.35.
Audit firm Haribhakti and Co. and Deloitte Haskins and Sells will assess the valuation of Bank of Rajasthan and the boards of both banks will meet on 23 May to seal the deal.
“The final determination of the share exchange ratio is subject to due diligence, independent valuation,” ICICI Bank said.
Most banking analysts said the currently proposed swap ratio is highly favourable to Bank of Rajasthan shareholders.
A back-of-the-envelope calculation by analysts values the deal at more than Rs3,000 crore and per branch acquisition cost at Rs7 crore for ICICI Bank, almost equivalent to ICICI’s per branch opening cost.
ICICI Bank, India’s second largest lender, is among banks that held talks to buy a controlling stake in Bank of Rajasthan, The Economic Times reported on 6 May.
This will be ICICI Bank’s third acquisition after Bank of Madura in 2000-01 and Sangli Bank in 2006-07. The first acquisition helped ICICI Bank step up its presence in the south and the second in the west. The BoR acquisition will strengthen its network in northern as well as western India.
BoR has a network of 463 branches and 111 ATMs. About 60% of its branches are in Rajasthan. ICICI Bank, India’s largest private sector lender, has a network of 2,009 branches and 5,219 ATMs.
ICICI Bank has an asset base of Rs3.63 trillion and posted a net profit of Rs4,025 crore in 2010. BoR’s asset base is Rs17,224 crore and in first nine months of fiscal 2010, its net loss was Rs9.82 crore. It posted a net loss of Rs44.70 crore for the December quarter and has not announced March quarter earnings.BoR’s net non-performing assets as a percentage of total loans in December was 1.05%. The comparable figure for ICICI Bank for the year-end is 1.55%.
“The proposed amalgamation would substantially enhance ICICI Bank’s branch network, already the largest among Indian private sector banks, and especially strengthen its presence in northern and western India. It would combine Bank of Rajasthan’s branch
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franchise with ICICI Bank’s strong capital base,” the ICICI Bank release said.
India’s capital markets regulator in March banned BoR promoter Tayal and about 100 companies and people associated with his family from trading in securities for improper disclosure about their holdings in the bank.
According to the Securities and Exchange Board of India, the Tayal family owned 55.01% of the bank in December, even though Tayal claimed his group stake was 28.06%.
BoR has also been under the scanner of the Reserve Bank of India (RBI) for alleged violation of banking regulations, including those on corporate governance.
G. Padmanabhan, BoR managing director and chief executive officer, was appointed by RBI in November for two years with a mandate to improve corporate governance practices at the bank.
RBI has also ordered two major audits of the bank.
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WEBLIOGRAPHY :-
http://www.nabard.org/pdf/report_financial/full%20Report.pdf
http://iimc-finclub.com/finblog/financial-inclusion-in-india
http://www.livemint.com
http://www.indiapost.gov.in/
http://www.oecd.org/
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