o Misleading Information/Advice: Providing biased or incomplete advice.
• Governance Issues:
o Role of the Board of Directors (Client Company): Ensuring the board properly evaluates M&A
proposals, acts in shareholders' best interests, and oversees the process.
o Shareholder Rights: Protecting shareholder rights, including voting on major transactions and
receiving fair value.
o Executive Compensation: Scrutiny over "golden parachutes" or excessive executive bonuses
related to M&A.
o Internal Controls and Compliance within Investment Banks:
▪ Establishing robust internal controls, "Chinese Walls" (information barriers between
departments), and compliance mechanisms to prevent legal and ethical breaches.
▪ Ensuring a strong culture of ethics and integrity.
o Transparency in Fees and Services: Clear disclosure of fees charged by investment banks.
o Accountability: Holding individuals and firms accountable for misconduct.
Book
Okay, I will provide elaborated notes for each unit and topic based on the syllabus images you've provided.
Let's start with Unit 1: Investment Banking. I'll go through each topic listed under it from the syllabus image.
Unit 1: Investment Banking (9 hours)
Topic 1.1: Investment Banking: Introduction: Concept
• Concept of Investment Banking:
o Investment Banking is a specialized segment of financial services primarily focused on raising
capital for corporations, governments, and other entities. They act as intermediaries
between those who need capital (issuers of securities) and those who have capital to invest
(investors).
o Unlike commercial banks that primarily take deposits and make loans, investment banks
engage in activities like underwriting new debt and equity securities, facilitating mergers and
acquisitions (M&A), corporate reorganizations, and providing strategic advisory services.
o They also offer services such as brokerage for institutional clients and sometimes engage in
proprietary trading (trading for their own account).
o The core function is to help entities access capital markets. For example, if a company wants
to go public through an Initial Public Offering (IPO), an investment bank will manage the
entire process.
o Key Activities:
▪ Capital Raising: Assisting in issuing stocks (equity) and bonds (debt).
▪ Advisory Services: Providing strategic financial advice, especially for M&A,
divestitures, and restructuring.
▪ Trading & Sales: Facilitating the buying and selling of securities.
▪ Research: Providing analysis on companies, industries, and markets to support
investment decisions.
▪ Asset Management: Managing investment portfolios for clients.
Topic 1.2: Investment Banking: Introduction: Importance
• Importance of Investment Banking:
1. Capital Formation & Economic Growth: Investment banks play a crucial role in channeling
savings and investments into productive ventures. By helping companies and governments
raise funds, they facilitate capital formation, which is essential for economic growth,
infrastructure development, job creation, and innovation.
2. Efficient Allocation of Resources: They help allocate capital to its most efficient uses by
evaluating businesses and projects, thereby directing funds to deserving enterprises.
3. Facilitating Mergers and Acquisitions (M&A): M&A activities, guided by investment banks,
can lead to synergies, increased efficiency, market expansion, and industry consolidation,
which can benefit the economy.
4. Price Discovery: Through underwriting and trading activities, investment banks contribute to
the price discovery mechanism in financial markets, helping to determine fair values for
securities.
5. Market Liquidity: By acting as market makers and brokers, they enhance the liquidity of
securities, making it easier for investors to buy and sell.
6. Financial Innovation: Investment banks are often at the forefront of developing new and
complex financial products and services (e.g., derivatives, structured products) that can help
businesses and investors manage risk or achieve specific financial objectives.
7. Advisory Role: Their expertise is invaluable for corporations making complex financial
decisions, such as restructuring, divestitures, or navigating challenging market conditions.
8. Global Capital Flows: They facilitate cross-border investments and capital flows, integrating
national economies into the global financial system.
9. Job Creation: The investment banking industry itself, and the businesses it supports, are
significant sources of employment.
Topic 1.3: Commercial Banks vs. Investment Banks
• Commercial Banks:
o Primary Function: Accept deposits from the public and provide loans to individuals and
businesses. Focus on retail and commercial lending.
o Source of Funds: Primarily customer deposits (savings accounts, current accounts, fixed
deposits).
o Use of Funds: Lending (consumer loans, mortgages, business loans), investing in government
securities.
o Revenue Model: Primarily interest rate spread (difference between interest earned on loans
and interest paid on deposits), fees for services (account maintenance, transaction fees).
o Regulation: Heavily regulated, with a focus on depositor safety and financial stability (e.g., by
RBI under the Banking Regulation Act).
o Risk Profile: Generally considered lower risk due to diversified loan portfolios and deposit
insurance.
o Clientele: Broad, including individuals, small businesses, and large corporations.
o Relationship: Often long-term, deposit and loan-based relationships.
• Investment Banks:
o Primary Function: Raise capital for clients through underwriting securities, advise on M&A,
facilitate trading, and manage assets.
o Source of Funds: Borrowing from capital markets, proprietary capital, client funds under
management, fees from services.
o Use of Funds: Underwriting securities, investing in complex financial instruments, funding
M&A deals, proprietary trading.
o Revenue Model: Fees for underwriting and advisory services, commissions on trades, profits
from proprietary trading, asset management fees.
o Regulation: Regulated (e.g., by SEBI in India for capital market activities), with a focus on
market integrity, investor protection, and managing systemic risk.
o Risk Profile: Generally higher risk due to market volatility, complexity of deals, and potential
for large losses in trading or underwriting.
o Clientele: Primarily corporations, governments, institutional investors, and high-net-worth
individuals.
o Relationship: Often transaction-oriented, though advisory relationships can be long-term.
• Key Distinctions Summarized:
| Feature | Commercial Bank | Investment Bank |
| :----------------- | :----------------------------------- | :-------------------------------------- |
| Core Business | Deposits & Loans | Capital Raising & Advisory |
| Primary Revenue| Interest Spread | Fees & Commissions |
| Main Customers | General Public, Businesses | Corporations, Governments, Institutions |
| Risk Level | Generally Lower | Generally Higher |
| Regulation Focus| Depositor Safety | Market Integrity, Investor Protection |
• Blurring Lines: Historically, regulations like the Glass-Steagall Act in the U.S. separated commercial
and investment banking. However, many of these restrictions have been relaxed globally, leading to
the emergence of "Universal Banks" that offer both types of services (e.g., large financial
conglomerates like JPMorgan Chase, Citigroup). In India too, many large banks have investment
banking arms or subsidiaries.
Topic 1.4: Functions of Investment Banks
1. Capital Raising (Underwriting):
o Equity Underwriting: Helping companies issue shares to the public (IPOs, FPOs) or through
private placements. Investment banks assess the company, price the shares, market the issue
to investors, and often guarantee the sale (firm commitment underwriting) or agree to use
their best efforts to sell the shares (best efforts underwriting).
o Debt Underwriting: Assisting companies or governments in issuing bonds or other debt
instruments to raise funds.
2. Mergers & Acquisitions (M&A) Advisory:
o Buy-Side Advisory: Assisting companies looking to acquire other businesses. This includes
identifying targets, valuation, due diligence, negotiation, and structuring the deal.
o Sell-Side Advisory: Helping companies looking to sell themselves or a part of their business.
This involves valuing the business, preparing marketing materials, identifying potential
buyers, and negotiating the sale.
3. Sales and Trading (Market Making):
o Sales: Marketing securities (stocks, bonds, derivatives) to institutional investors (e.g.,
pension funds, mutual funds, hedge funds) and high-net-worth individuals.
o Trading: Buying and selling securities on behalf of clients (agency trading) or for the bank's
own account (proprietary trading).
o Market Making: Providing liquidity for certain securities by being willing to buy and sell them
continuously, profiting from the bid-ask spread.
4. Research:
o Equity Research: Analyzing companies and their stocks, providing buy/sell/hold
recommendations to clients.
o Fixed Income Research: Analyzing bonds and other debt securities, focusing on
creditworthiness and interest rate movements.
o Macroeconomic Research: Analyzing economic trends, monetary policy, and geopolitical
events that can impact markets.
5. Asset Management:
o Managing investment portfolios for individuals (especially High Net Worth Individuals -
HNIs), pension funds, endowments, sovereign wealth funds, and other institutional investors
to meet their specific investment objectives.
6. Financial Restructuring:
o Advising companies that are in financial distress or undergoing significant strategic changes.
This can involve reorganizing debt, selling assets, or other measures to improve financial
health and viability.
7. Merchant Banking: (Often used interchangeably with investment banking in India) Encompasses a
broad range of activities including issue management, corporate advisory, project counseling, and
portfolio management.
8. Syndication of Loans: Arranging and structuring large loans for corporations by forming a syndicate
of lenders (banks and financial institutions) to share the credit risk.
9. Financial Advisory and Consulting: Providing expert advice on a wide range of financial matters
beyond specific transactions, such as capital structure optimization, risk management, and strategic
financial planning.
Topic 1.5: Types of Investment Banking Operations
This often refers to the internal structure or divisions within an investment bank, categorized by the functions
they perform:
1. Front Office: Directly client-facing and revenue-generating roles.
o Investment Banking Division (IBD):
▪ Focuses on origination and execution of capital raising (equity and debt) and M&A
advisory.
▪ Involves industry coverage groups (e.g., Technology, Healthcare, Energy) and product
groups (e.g., M&A, Leveraged Finance, Equity Capital Markets - ECM, Debt Capital
Markets - DCM).
o Sales & Trading (S&T) / Markets Division:
▪ Sales: Building relationships with institutional clients and marketing financial
products.
▪ Trading: Executing trades for clients or the bank's own account (proprietary trading,
though this has been curtailed by regulations like the Volcker Rule in the US).
▪ Structuring: Designing complex financial products tailored to client needs.
o Research Division:
▪ Provides independent research on equities, fixed income, commodities, and
economics to support internal trading desks and external clients. Often separated by
a "Chinese Wall" from IBD to prevent conflicts of interest.
o Asset Management / Investment Management Division:
▪ Manages investment funds (mutual funds, hedge funds, private equity funds) and
separate accounts for institutional and individual clients.
o Wealth Management / Private Banking:
▪ Provides comprehensive financial planning, investment advice, and other financial
services to high-net-worth individuals and families.
2. Middle Office: Supports the front office by managing risk, ensuring compliance, and calculating
profits and losses.
o Risk Management: Identifying, measuring, monitoring, and controlling various risks (market
risk, credit risk, operational risk, liquidity risk).
o Compliance: Ensuring the bank adheres to all relevant laws, regulations, and internal
policies.
o Treasury: Managing the bank's funding, liquidity, and capital.
o Financial Control / Product Control: Verifying trading profits and losses, valuing positions.
3. Back Office (Operations): Provides administrative and support services essential for the bank's
functioning.
o Trade Confirmation and Settlement: Ensuring trades are accurately recorded, confirmed,
and settled.
o IT & Technology: Developing and maintaining the bank's technology infrastructure, trading
platforms, and software.
o Human Resources (HR): Managing recruitment, training, compensation, and employee
relations.
o Legal Department: Providing legal advice and support across all divisions.
o Accounting & Finance: Managing the bank's overall financial records, reporting, and tax
matters.
Topic 1.6: Investment Banking in India - Evolution, characteristics
• Evolution:
o Pre-1970s: Rudimentary stage, with managing brokers handling new issues. Foreign banks
had a limited presence.
o 1970s-1980s (Early Development):
▪ Nationalized commercial banks started setting up merchant banking divisions (e.g.,
SBI Capital Markets by SBI in 1972, ICICI's merchant banking division).
▪ Focus was primarily on issue management, loan syndication, and project appraisal.
▪ Foreign Exchange Regulation Act (FERA), 1973, impacted foreign participation.
o Late 1980s - Early 1990s (Growth & Regulation):
▪ Establishment of SEBI (Securities and Exchange Board of India) in 1988 (statutory
powers in 1992) was a landmark. SEBI started regulating merchant bankers.
▪ More private players and specialized firms emerged.
o Post-1991 Liberalization (Rapid Expansion):
▪ Economic reforms opened up the Indian economy, leading to a surge in capital
market activity.
▪ Increased foreign investment (FIIs) and participation by global investment banks.
▪ Growth in IPOs, FPOs, private equity, and M&A.
▪ Demutualization and corporatization of stock exchanges.
▪ Introduction of screen-based trading and depositories (NSDL, CDSL).
o 2000s Onwards (Maturation & Sophistication):
▪ Development of a more sophisticated debt market.
▪ Increase in cross-border M&A deals involving Indian companies.
▪ Growth of new financial products and services.
▪ Strengthening of regulatory framework by SEBI.
▪ Rise of boutique investment banks focusing on niche areas.
• Characteristics of Investment Banking in India:
1. Dominated by Bank-led Subsidiaries: Many leading investment banks are subsidiaries or arms of
large commercial banks (e.g., SBI Capital Markets, ICICI Securities, Axis Capital).
2. Presence of Global Players: Major international investment banks (e.g., Morgan Stanley, Goldman
Sachs, JP Morgan, BofA Securities) have a significant presence.
3. Emergence of Domestic Boutique Firms: Specialized firms focusing on mid-market M&A, private
equity advisory, or specific sectors.
4. Strong Regulatory Oversight: SEBI plays a proactive and stringent role in regulating merchant
banking activities, focusing on investor protection, fair market practices, and disclosure norms.
5. Equity Market Focus: Historically, a strong focus on equity capital markets (IPOs, FPOs), though the
debt market is also developing.
6. Growing M&A Activity: Both domestic and cross-border M&A has seen significant growth.
7. Increasing Role in Infrastructure Financing: Investment banks are involved in structuring finance for
large infrastructure projects.
8. Developing Private Equity and Venture Capital Ecosystem: Investment banks play a role in advising
and facilitating PE/VC investments.
9. Concentration in Major Financial Centers: Activities are largely concentrated in cities like Mumbai
and Delhi.
Topic 1.7: Investment Banking in India - Recent Developments and the way ahead
• Recent Developments:
1. Increased Technology Adoption (FinTech Integration): Use of AI, data analytics for deal
sourcing, valuation, due diligence, and client servicing. Digital platforms for IPO applications
(UPI mechanism).
2. Rise of Special Purpose Acquisition Companies (SPACs): Though nascent in India, global
trends have an influence.
3. Focus on ESG (Environmental, Social, Governance): Growing demand for ESG-compliant
investments and green financing, influencing advisory and capital raising.
4. Insolvency and Bankruptcy Code (IBC) Impact: Creating opportunities for M&A in distressed
assets and restructuring advisory.
5. Regulatory Changes: Continuous evolution of SEBI regulations regarding IPOs, takeovers,
disclosures, and intermediary conduct.
6. Growth in Alternative Investment Funds (AIFs): Investment banks advising and helping raise
capital for AIFs.
7. Increased Retail Participation in Capital Markets: Driving demand for IPOs and secondary
market services.
8. Competition from Boutique Firms and Digital Platforms: Challenging traditional models.
9. Impact of Geopolitical and Economic Factors: Global uncertainties influencing cross-border
deals and capital flows.
• The Way Ahead (Future Trends & Outlook):
1. Continued Digital Transformation: Greater use of technology to enhance efficiency, reduce
costs, and improve client experience.
2. Deepening of Debt Markets: Further development of the corporate bond market will
provide more avenues for capital raising.
3. Specialization and Niche Focus: More boutique firms likely to emerge, focusing on specific
sectors or services.
4. Enhanced Focus on Risk Management and Compliance: Given increasing complexity and
regulatory scrutiny.
5. Growth in Sustainable Finance: Investment banks will play a key role in mobilizing capital for
green projects and ESG initiatives.
6. Greater Role in Infrastructure and SME Financing: Supporting national priorities.
7. Consolidation in the Industry: Potential for some consolidation among smaller players.
8. Talent Development: Need for skilled professionals with expertise in new areas like FinTech,
data science, and sustainable finance.
9. Increased Cross-Border Activity: As the Indian economy integrates further with the global
economy.
10. Adapting to Evolving Investor Preferences: Catering to a more informed and diverse investor
base.
Topic 1.8: Structure of Investment Banks
This refers to how investment banks are typically organized in terms of their legal form and size/scope.
• Legal Structure:
o Partnerships (Historically): Many older investment banks (e.g., Goldman Sachs) started as
partnerships, where partners shared profits and liabilities.
o Publicly Traded Corporations (Predominantly Now): Most large investment banks today are
publicly listed companies. This allows them to access larger pools of capital but also subjects
them to greater public scrutiny and regulatory requirements.
o Private Companies: Some smaller or boutique investment banks may be privately held.
• Size and Scope (Categorization):
1. Bulge Bracket Banks:
▪ These are the largest, global, full-service investment banks with a strong presence
across all major financial centers and offering a comprehensive range of products
and services (equity, debt, M&A, research, asset management, etc.).
▪ They handle the largest and most complex transactions.
▪ Examples: Goldman Sachs, Morgan Stanley, JP Morgan Chase, Bank of America
Securities, Citigroup, Barclays, Credit Suisse (though its future is uncertain), Deutsche
Bank, UBS.
2. Middle Market Banks (Mid-Market):
▪ Focus on serving medium-sized companies.
▪ Offer a similar range of services as bulge brackets but cater to smaller deal sizes.
▪ May have a strong regional presence or specialize in certain industries.
▪ Examples: Jefferies, Houlihan Lokey (strong in restructuring), Baird, William Blair.
3. Boutique Investment Banks:
▪ Smaller firms that typically specialize in particular areas or industries.
▪ Elite Boutiques: Often focus exclusively on high-profile M&A advisory and
restructuring, competing with bulge brackets for top talent and deals. They generally
don't have large balance sheets for underwriting or trading. Examples: Evercore,
Lazard, Moelis & Company, Centerview Partners, PJT Partners.
▪ Industry-Specific Boutiques: Focus on specific sectors like technology, healthcare,
energy, or media.
▪ Regional Boutiques: Focus on clients within a specific geographic area.
• Internal Organizational Structure (Reiteration from Topic 1.5):
o Organized into divisions like Investment Banking Division (IBD), Sales & Trading (Markets),
Research, Asset Management, often with a Front Office, Middle Office, and Back Office
support structure.
o Hierarchical structure within divisions (Analyst -> Associate -> Vice President (VP) ->
Director/Executive Director (ED) -> Managing Director (MD)).
Topic 1.9: SEBI guidelines for Merchant Bankers
Merchant Bankers in India are regulated by SEBI under the SEBI (Merchant Bankers) Regulations, 1992 (and
subsequent amendments). These guidelines are crucial for ensuring orderly market conduct and investor
protection.
• Definition of Merchant Banker: As per SEBI, any person engaged in the business of issue
management either by making arrangements regarding selling, buying, or subscribing to securities or
acting as manager, consultant, advisor, or rendering corporate advisory service in relation to such
issue management.
• Key SEBI Guidelines:
1. Registration:
▪ Mandatory registration with SEBI to act as a Merchant Banker.
▪ Categorization of Merchant Bankers (though earlier categories like I, II, III, IV existed,
the current framework focuses on lead managers and other intermediaries fulfilling
specific roles). A key role is that of the Lead Manager for public issues.
2. Capital Adequacy Norms:
▪ Prescribed minimum net worth requirements to ensure financial soundness. For
example, a merchant banker must have a net worth of not less than ₹5 crore.
3. Obligations and Responsibilities:
▪ Due Diligence: Merchant bankers (especially Lead Managers) are required to
conduct thorough due diligence regarding the issuer company, its promoters, its
business, the objects of the issue, and all information contained in the offer
document. They must issue a due diligence certificate to SEBI.
▪ Offer Document Compliance: Ensure that the offer document (e.g., Prospectus,
Letter of Offer) contains all material disclosures, is true and fair, and complies with
SEBI (Issue of Capital and Disclosure Requirements - ICDR) Regulations and other
relevant laws.
▪ No Misleading Statements: Must not make any misleading or false statements in
offer documents or advertisements.
▪ Timely Disclosures: Ensure timely disclosures to SEBI, stock exchanges, and
investors.
▪ Investor Grievance Redressal: Ensure proper mechanisms for handling investor
complaints related to issues they manage.
▪ Issue Management: Detailed guidelines for managing various aspects of public
issues, rights issues, private placements, including appointment of other
intermediaries, marketing of issues, allotment procedures, and post-issue
compliance.
4. Code of Conduct:
▪ Merchant bankers must adhere to a strict code of conduct prescribed by SEBI, which
emphasizes integrity, professionalism, fairness, avoidance of conflicts of interest, and
protection of investor interests.
5. Maintenance of Books and Records:
▪ Proper maintenance of books of accounts, records, and documents related to their
activities for a specified period.
6. Appointment of Compliance Officer: To ensure compliance with regulatory requirements.
7. Restrictions on Activities: Certain restrictions may apply, e.g., on engaging in fund-based
activities without specific approvals or meeting higher net worth criteria.
8. Inspections and Disciplinary Actions: SEBI has the power to inspect the books and records of
merchant bankers and take disciplinary action (e.g., suspension, cancellation of registration,
monetary penalties) for violations.
Topic 1.10: Pre-issue and Post-issue regulatory framework
This primarily refers to the regulations and procedures, largely governed by SEBI (especially the ICDR
Regulations), that an issuer and its merchant bankers must follow before and after a public issue of
securities.
• Pre-Issue Regulatory Framework (Activities before the issue opens):
1. Appointment of Intermediaries: Issuer appoints SEBI-registered merchant bankers (Lead
Managers), registrars, bankers to the issue, legal advisors, auditors, etc.
2. Due Diligence: Lead Manager(s) conduct extensive due diligence on the issuer and the
proposed issue.
3. Preparation of Offer Document:
▪ Drafting the offer document (Draft Red Herring Prospectus - DRHP for book-built
issues; Draft Prospectus for fixed-price issues). This document contains
comprehensive information about the issuer, its business, financials, risks, objects of
the issue, terms of the issue, management, etc.
4. Filing with SEBI & Stock Exchanges:
▪ Filing the DRHP/Draft Prospectus with SEBI and the stock exchanges where the
securities are proposed to be listed.
▪ The document is made public for comments.
5. SEBI Observations/Comments:
▪ SEBI reviews the draft offer document and may issue observations or seek
clarifications within a stipulated timeframe (e.g., 30 days).
▪ The issuer and Lead Managers must address these observations and make necessary
changes to the offer document.
6. RoC Filing:
▪ Once SEBI observations are incorporated (and pricing is finalized in book-built
issues), the final Red Herring Prospectus (RHP) or Prospectus is filed with the
Registrar of Companies (RoC).
7. Marketing & Roadshows (for Book-Built Issues):
▪ Conducting roadshows and marketing efforts to gauge investor interest and build the
book (collect bids).
▪ Announcement of the price band (for book-built issues).
8. Underwriting Agreement: Formal agreement between the issuer and underwriters, where
underwriters commit to subscribe to any unsubscribed portion of the issue.
9. Public Announcement: Announcing the issue opening and closing dates, price band, etc.,
through advertisements.
• Post-Issue Regulatory Framework (Activities after the issue closes):
1. Issue Closure & Subscription Collection: Issue closes, and subscription figures are compiled.
Application money is held in escrow accounts.
2. Basis of Allotment:
▪ Finalizing the allocation of shares to different categories of investors (QIBs, Non-
Institutional Investors, Retail Individual Investors) as per SEBI guidelines.
▪ Ensuring fair and transparent allotment, especially in case of oversubscription (e.g.,
proportionate allotment for retail investors after ensuring minimum lot for a certain
number of applicants).
▪ Done in consultation with the designated stock exchange.
3. Refunds & Allotment:
▪ Processing refunds to unsuccessful applicants or for excess application money.
▪ Crediting shares to the Demat accounts of successful allottees.
4. Listing and Trading Approval:
▪ Obtaining final listing and trading approvals from the stock exchange(s).
5. Commencement of Trading: Securities commence trading on the stock exchanges on a
notified date (typically within a few days of allotment).
6. Post-Issue Reports & Compliance:
▪ Lead Manager submits various post-issue compliance reports to SEBI (e.g., final
subscription details, report on utilization of funds at intervals).
7. Monitoring of Issue Proceeds: If the issue size exceeds a certain threshold (e.g., ₹100 crore),
the utilization of funds raised through the issue is monitored by a monitoring agency (often a
bank).
