Strategic Analysis of Investment Banking In india

STRATEGIC MANAGEMENT

[2009] SYNOPSIS OF INVESTMENT BANK

SUBMITTED TO: Dr. Vidushi Sharma SUBMITTED BY: Daizy Choudhary (101) Anuradha Gupta(106) Vikas Kapil (107) Vinay kumar aggarwal (115) - PGDM III Sem

Motivation of Research • To know the strategic gap in the field of investment banking • Giving our contribution towards the growth and development of investment banking • Understanding the current and potential client for the investment bank their need and wants • Analysis of future growth and prospects of investment banking • Finding out the major player of investment banking and the leaders • To in-depth study of investment banking and corporate finance • Molding our career in the field of investment banking like financial analyst and associate • Understanding the required qualification in the field of investment banking • To learn how the investment banks underwrite new debt and equity securities for corporations and also how they provide guidance to issuers regarding the issue and placement of stock. • Understanding help to facilitate mergers and acquisitions, reorganizations and broker trades for both institutions and private investors. • Understanding that what type of strategy used by these organization.

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INVESTMENT BANKING Introduction Investment banking is a specific division of banking related to the creation of capital for other companies. Investment banks underwrite new debt and equity securities for all types of corporations. Investment banks also provide guidance to issuers regarding the issue and placement of stock. In addition to the services listed above, investment banks also aid in the sale of securities in some instances. They also help to facilitate mergers and acquisitions, reorganizations and broker trades for both institutions and private investors. They can also trade securities for their own accounts

Introduction of the Industry Investment Banks help companies and governments issue securities, help investors purchase securities, manage financial assets, trade securities and provide financial advice. The top investment banks including Goldman Sachs, JP Morgan and Morgan Stanley are said to be in the bulge bracket. Other investment banks are regionally oriented or situated in the middle market (e.g. Piper Jaffray). Others are small, specialized firms called boutiques which might be oriented toward an industry vertical, bond-trading, M&A advisory, technical analysis or program trading. Firms have lots of different areas and groups within them. In most firms, there is sales and trading which works with owners of securities, investment banking which works with issuers of securities (firms and governments) and capital markets which goes in between the other two.

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Industry coverage Corporate Finance In a corporate finance position you would work to help companies raise capital needed for new projects and ongoing operations.

Capital Markets This position can be either in Debt Capital Markets or Equity Capital Markets (ECM).

Mergers and Acquisitions Setting up deals where one company buys another is an important source of fee income for many investment banks.

Project Finance Project finance involves funding infrastructure and oil capital projects off of a company or government's main balance sheet.

Structured Finance Positions in structured finance involve the creation of financing vehicles to redirect cash flows to investors (known as asset-backed securities.

Derivatives Equity and Fixed Income Research Security analysts are usually assigned to an industry or region. You could be responsible for making buy or sell recommendations to investors about a stock or bond.

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Institutional Sales In institutional sales you would be responsible for conveying information about particular securities to institutional investors.

List of major investment bank Investment banks in the world Barclays Capital Blackstone Group CIBC Citigroup Credit Suisse Deutsche Bank Evercore Partners Goldman Sachs HSBC JP Morgan Lazard Moelis & Co Morgan Stanley Nikko Securities Bank of America Merrill lynch

Investment bank in India ICICI Securities Ambit Corp Finance SBI Capital Markets Kotak Mahindra Enam Merrill Lynch HSBC (Blr) Deutsche Bank (Delhi, Bangalore , Mumbai ) Morgan Stanley (Mumbai)) ANZ Lehman Bros Goldman Sache UBS(Hyd & Mumbai) JP Morgan (Mumbai & Bangalore Reliance Money

Evolution of investment banking in India 5

The origin of investment banking in India can be traced back to the 19th century when European merchant banks set-up their agency houses in the country to assist in the setting of new projects. In the early 20th century, large business houses followed suit by establishing managing agencies which acted as issue house for securities, promoters for new projects and also provided 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 their small capital base. In 1967, ANZ Grindlays bank set - up a separate merchant banking division to handle new capital issues. 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 of merchant banking institutions by commercial banks and financial intuitions. 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 in 1973. The growth of the industry was very slow during this period. By 1980, the number of merchant banks rose to 33 and was set-up by commercial banks, 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 both the primary and secondary market. Several new players entered into the field. The securities scam in may, 1992 was a major set back to the industry. Several leading merchant bankers, both in public and private sector were found to be involved in various irregularities. Some of the prominent public sector players involved in the scam were Can bank financial services, SBI capital markets, Andhra bank financial services, etc. leading private sector players involved in the scam included Fairgrowth financial services and Champaklal investments and finance (CIFCO).

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The market turned bullish again in the end of 1993 after the tainted shares problem was substantially resolved. There was a 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 or 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 paper issued by companies of dubious credentials. The huge losses suffered by investors in these securities resulted in total loss of confidence in the market. Most of the subsequent issues started failing and 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 from the business. Many foreign investment banks started entering Indian markets. These firms had a huge capital base, global distribution capacity and expertise. However, they were new to Indian markets and lacked local penetration. Many of the top rung Indian merchant banks, who had string domestic base, started entering into joint ventures with the foreign banks. This energy resulted in synergies as their individual strength complemented each other.

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SCOPE Scope for growth of Investment Banking in India as planning and industrial policy of the country envisaged the setting of up of new industries and technology, greater financial sophistication and financial services are required. There is a well proven link between economic growth and financial technology. Economic development requires specialist financial skills: savings banks to marshal individual savings; finance companies for consumer lending and mortgage finance; insurance companies for life and property cover; agricultural banks for rural development; and a range of specialized government or government sponsored institutions. As new units have been set up and business is expanding, they require additional financial services. A public equity or debt issue is the logical source of fund in this situation and investment banks can tap this opportunity of growth. The areas of great scope could be,

Growth of Primary market: If the primary market grows and number of issues increases, the scope of investment banking will be enhanced.

Entry of Foreign Investors: Now India capital market directly taps foreign capital through euro issues. FDI is increased in capital market. So investment bankers are required to advice them for their investment in India. The increasing number of joint ventures also requires expert services of investment Bankers. If more and more NRIs participate in capital market, there will be great demand for investment banker services.

Changing policy of Financial Institutions: Now the lending policies of financial institutions are based on project orientation, so the investment banker services will be needed by corporate enterprise to provide expert guidance.

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Development of debt markets: If the debt market is enhanced, there will be tremendous scope for investment bankers. Now NSE and OTCEI are planned to raise their fund through debt instruments.

Corporate restructuring: Due to liberalization and globalization Companies are facing lot of competition. In order to compete, they have to go for restructuring, merger, acquisitions or disinvestments. They may offer good opportunities to merchant bankers

The scope could be extended to: 1. Advising the company on designing of its Capital Structure. 2. Advising the company on the instrument to be offered to the public. 3. Pricing of the instrument. 4. Advising the company on Legal/ regulatory matters and interaction with SEBI/ROC/ Stock Exchanges and other regulatory authorities. 5. Assisting the company in marketing the issue. 6. In channelizing the financial surplus of the general public into productive investment avenues. 7. To coordinate the activities of various intermediaries to the share issue such as the registrar, bankers, advertising agency, printers, underwriters, brokers etc. 8. To ensure the compliance with rules and regulations governing the securities market

THE FACTORS ON WHICH GROWTH BANKING DEPENDS:

OF INVESTMENT

1. Planning and industrial policy of the country i.e. India in this case 2. Prevailing Economic condition of the country 3. Regulatory system of the market and economy prevailing in India 9

4. Confidence of the people, traders, buyers, marketers, business houses, financial institutions etc 5. The economic environment of the outside world. 6. Competition among the existing players and the upcoming entrant

ENVIRONMENTAL SCANNING ‘PEST ANALYSIS’ OF INDIAN INVESTMENT BANKING INDUSTRY

Political

1) Financial Institutions are more influenced by Political Stability & correctness. 2) Threats of Internal Rebellion.

Economic

1) Dollar $ Appreciation. 2) Frequent Fluctuation in Market. 3) Emergent market

Social

1) Education:- Financial Knowledge 2) Working Age Population

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Technological

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1) Internet Backbone for knowledgeable Investors. 2) Booming Software Industry for the ease of the Investor.

SWOT ANALYSIS

Strengths: a) Breadth of Financial Services Offerings: investment banking provides various types of services such as trading, private equity, venture capital, M&A, joint venture, and project finance etc. b) Proficient Employees: the major strength of any sector is its employees. In investment banking all the workings are done by professionals because it requires deft and proficient personnel. c)Technological Advancement: Due to technical advancement, working efficiency has been increased and works are done quickly and easily. d) Advance Infrastructure: The country is equipped with all the latest and advances amenities such as better telecommunication, transportation, potable water, internet, land etc.

Weaknesses: a) Unawareness of Investors: the major weakness is the unawareness of its services among investors, due to which after 40 years of odyssey it could not reach to the level where It should have been. b) Excessive Dependence on Trading Sectors: As per the data collected by the team and experiences shared by Sr. managers, it is quite apparent that investors are more dependent on the trading sector for their investments rather than any other field.

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Opportunities: a) Growing demand for Investment Banking: The knowledge of investment banking is increasing among investors and they are diversifying their investment into many sectors besides trading. It can be seen by looking at the number of mergers and acquisitions, various projects in the countries and the level of Sensex in the country. b) Removal of International Trade Barrier: 1991 reform policy and recent amendments in international trade have widened the area and scope of investment banking in India. c) Financially Attractive Country: India is a financially attractive country. Recent experience of ‘Recession’ shows that, India is among the few countries (China, Brazil and India) who not only survived in this difficult era but shows the path to developed countries to overcome this calamity.

Threats: a) Increasing competition: competition in investment banking is increasing day by day. New players are foraying to the market due to this market share of each existing company is getting affected and profit as well. b) Decentralized management: each branch manager in a company is given the authority of taking decisions in their respective branches. The decisions made by different managers are diverse and any wrong decision may lead to heavy losses to the company.

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RESEARCH METHODOLOGY Problem Definition:

Strategy Implications in Investment Banking Type of Research: DESCRIPTIVE RESEARCH • Surveys & fact-finding enquiries • Try to discover causes

QUALITATIVE RESEARCH Involves quality or kind Helps in having insight into problems or cases

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Nature of Data Collected: Only PRIMARY DATA is used. Primary data are those which are collected fresh and for the first time and thus happen to be original character.

Data Collection Method: For the collection of primary data a set of logically sequenced Questionnaire Method was adopted seeing the objective of the research.

Sampling Technique Cluster Sampling: if the total area of interest happens to be a big one, a convenient way in which a sample can be taken is to divide the areas into a number of smaller non-overlapping areas.

Sample Size: 10

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Functional Areas of Investment Banking

Investment Banking Trading

Private Equity/ Venture Capital

Res p. 1

Investm ent Banking

Tradin g Private Equity Adviso ry Servic es Project Financ e

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Res p. 2

Resp. 3

Advisory Services

Resp. 4

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Project FinancefFinanceFin

Acceptanc e of Responde nts Resp. 5

Resp. 6

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BCG Matrix: It Involves people those who are dealing with the Different Financial Areas.

The Financial Areas of Trading & Advisory Services falls in the category of Stars

Private Equity & Project Finance comes in this Segment of the BCG matrix.

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Awareness among Responden ts

Investm ent Banking

Tradin g Private Equity Adviso ry Servic es Project Financ e

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Total

Res p. 1

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Res p. 9

Res p. 10

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Following is the list of those Investment Banks which are providing services to Respondents:

a) b) c) d) e) f)

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Kotak Securities Reliance Money ICICI Bank ICICI Securities SBI Capital & HSBC