MODULE_2_13_

BANKING &
INVESTMENT LAWS

CERTIFICATE COURSE

DEVELOPED BY
Corp Comm Legal

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MODULE - 2

INVESTMENT BANKING IN INDIA

2.1. INTRODUCTION trust. Investment bankers may gradually replace
merchant bankers in India. SBI was the first Indian
The bane of Indian capital market today is lack of public-sector bank to set up its investment banking
investor confidence. This is reflected in the poor division in 1972. SBI Caps and IDBI Caps are two
performance of both primary & secondary markets. prime examples of investment banks in India today.
The causes for existing situation are many but Currently, there are 300 investment banks
primarily arise because of lack of liquidity, registered with SEBI. Currently, without holding a
unscrupulous issuers & merchant bankers & poor or certificate of registration granted by the Securities
unapprised issues. Investment banking can solve this and Exchange Board of India, no person can act as an
problem because investor would be dealing with investment banker.
reputed investment banker in the primary market
rather than unknown issuers. The investment banks 2.2. ORGANISATIONAL STRUCTURE
whatever be their issue management techniques
have their own capital on hold. The issues are likely Investment banking is split into
to be properly appraised & priced & sponsors have a ▪ Front office
two-year lock-in period. Similarly, investment banks ▪ Middle office
would hold the issues until market conditions are ▪ Back office activities.
appropriate for issue, thus reducing the risk
exposure of investors in gestation for issue. While large service investment banks offer all lines
Investment banks make the primary market of business, both "sell side" and "buy side", smaller
subscription. In sum, the quality of pricing, appraisal, sell-side investment firms such as boutique
& primary market functions will improve in investor investment banks and small broker-dealers focus on
confidence. Since the investment banker lends its investment banking and sales, trading, research,
name to the issue it will imply an issue investor can respectively. Investment banks offer services to
both corporations issuing securities and investors

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buying securities. For corporations, investment merger target. A pitch book of financial information
bankers offer information on when and how to place is generated to market the bank to a potential
their securities on the open market, an activity very Merger and Acquisition client, if it is successful, the
important to an investment bank's reputation. bank arranges the deal for the client. The investment
Therefore, investment bankers play a very banking division is generally divided into industry
important role in issuing new security offerings. coverage and product coverage groups. Industry
coverage groups focus on a specific industry, such as
2.2.1. Front Office healthcare, public finance, financial institutions
group, industrials, TMT (technology, media, and
The revenue generating role is played by the Front telecommunications), P&E (power & energy),
office. There are two main areas within front office :- consumer or retail, food and beverage, corporate
defence and governance and maintain relationships
FRONT OFFICE with corporations within the industry to bring in
business for the bank. Product coverage groups
Investment Banking Markets focus on financial products, such as mergers and
acquisitions, leveraged finance, public finance, asset
▪ Investment banking involves advising finance and leasing, structured finance,
organizations on mergers and acquisitions, restructuring, equity, and high-grade debt—and
as well as a wide array of capital raising generally work and collaborate with industry groups
strategies. on the more intricate and specialized needs of a
client
▪ Markets are divided into "sales and trading"
including "structuring", and "research". 2.2.1.2. Sales and Trading

2.2.1.1. Corporate Finance On behalf of the bank and its clients, a large
investment bank's primary function is buying and
It is the traditional aspect of investment banks. It selling products. In market making, traders will buy
helps customers raise funds in capital markets and and sell financial products with the goal of making
gives advice on mergers and acquisitions which may money on each trade. Sales is the term for the
involve subscribing investors to a security issuance, investment bank's sales force, whose primary job is
coordinating with bidders, or negotiating with a

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to call on institutional and high-net-worth investors Banks also undertake risk through proprietary
to suggest trading ideas and take orders. Sales desks trading, performed by a special set of traders who
then communicate their clients' orders to the do not interface with clients and through
appropriate trading rooms, which can price and "principal risk", risk undertaken by a trader after
execute trades, or structure new products that fit a he buys or sells a product to a client and does not
specific need. Structuring has been a relatively 2h.2e.d1g.3e. hRiEsStEotAaRl eCxHposure.
recent activity as derivatives have come into play,
with highly technical and numerate employees The securities research division reviews companies
working on creating complex structured products and writes reports about their prospects, often with
which typically offer much greater margins and "buy", "hold" or "sell" ratings. Investment banks
returns than underlying cash securities. Strategists typically have sell-side analysts which cover various
advise external as well as internal clients on the industries. Their sponsored funds or proprietary
strategies that can be adopted in various markets. trading offices will also have buy-side research.
Ranging from derivatives to specific industries, While the research division may or may not generate
strategists place companies and industries in a revenue based on policies at different banks, its
quantitative framework with full consideration of resources are used to assist traders in trading, the
the macroeconomic scene. This strategy often sales force in suggesting ideas to customers, and
affects the way the firm will operate in the market, investment bankers by covering their clients.
the direction it would like to take in terms of its Research also serves outside clients with investment
proprietary and flow positions, the suggestions advice such as institutional investors and high-net-
salespersons give to clients, as well as the way worth individuals in the hopes that these clients will
structurers create new products which banks seek execute suggested trade ideas through the sales and
to maximize profitability for a given amount of risk trading division of the bank, and thereby generate
on their balance sheet. The necessity for numerical revenue for the firm. Research also covers credit
ability in sales and trading has created jobs for research, fixed income research, macroeconomic
physics, computer science, mathematics and research, and quantitative analysis, all of which are
engineering Ph.D.’s who act as quantitative analysts. used internally and externally to advise clients but
do not directly affect revenue. There is a potential

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conflict of interest between the investment bank 2.2.3. Back Office
and its analysis, published analysis can impact the
performance of a security in the secondary markets The back-office data-checks trades that have been
or an initial public offering or influence the conducted, ensuring that they are not wrong, and
relationship between the banker and its corporate transacts the required transfers. Many banks have
clients, thereby affecting the bank's profitability. outsourced operations. It is, however, a critical part
of the bank.
2.2.2. Middle Office
2.2.2.1. Technology
This area of the bank includes capital management,
internal controls, and internal corporate strategy. Every major investment bank has abundant in-house
Corporate capital is responsible for an investment software, created by the technology team, who are
bank's funding, capital structure management, and also responsible for technical support. As more sales
liquidity risk monitoring. Internal control tracks and and trading desks are using electronic trading in the
analyses the capital flows of the firm, the finance last few years, technology has changed considerably.
division is the principal adviser to senior Some trades are initiated by complex algorithms for
management on essential areas such as controlling hedging purposes.i Firms are under an obligation to
the firm's global risk exposure and the profitability comply with all local and foreign government
and structure of the firm's various businesses via regulations and internal regulations.
dedicated trading desk product control teams
2.2.4. Front and Middle Offices
Internal corporate strategy tackling firm
management and profit strategy, unlike corporate 2.2.3.1. Risk Management
strategy groups that advise clients, is non-revenue
regenerating yet a key functional role within Risk management involves analysing the market and
investment banks. This list is not a comprehensive credit risk that an investment bank or its clients take
summary of all middle-office functions within an onto their balance sheet during transactions or
investment bank, as specific desks within front and trades. Credit risk focuses around capital markets
back offices may participate in internal functions. activities, such as syndicated loans, bond issuance,
restructuring, and leveraged finance. Market risk

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conducts review of sales and trading activities and Financing group housed in Goldman Sach's
utilizing the model and provide hedge-fund solutions securities division are client-driven franchises.
to portfolio managers. However, risk management groups such as
operational risk, internal risk control, and legal risk
Other risk groups include country risk, operational are restrained to internal business functions
risk, and counterparty risks which may or may not including firm balance-sheet risk analysis and
exist on a bank to bank basis. Credit risk solutions assigning trading cap that are independent of client
are key part of capital market transactions, involving needs, even though these groups may be responsible
debt structuring, exit financing, loan amendment, for deal approval that directly affects capital market
project finance, leveraged buy-outs, and sometimes activities. Risk management is a broad area, and like
portfolio hedging. Front office market risk activities research, its roles can be client-facing or internal.
provide service to investors via derivative solutions,
portfolio management, portfolio consulting, and risk 2.3. ROLE OF INVESTMENT BANKERS IN
advisory. Well-known risk groups in JPMorgan DEVELOPING AN ECONOMY
Chase, Morgan Stanley, Goldman Sachs and Barclays
engage in revenue-generating activities involving Investment Banks & Financial Investment
debt structuring, restructuring, syndicated loans, Institutions (financial economy), Capital Market and
and securitization for clients such as corporates, Money Market (financial economy), Foreign
governments, and hedge funds. J.P. Morgan IB Risk Exchange Market (financial economy), Real Estate
works with investment banking to execute and Gold (real economy), Commodity futures
transactions and advise investors, although its Market (financial economy), Business activity
Finance & Operation risk groups focus on middle Production of goods and services (real economy),
office functions involving internal, non-revenue Investors (generate savings).
generating, operational risk controls. Credit default
swap, for instance, is a famous credit risk hedging ▪ Raising Capital & Security Underwriting:
solution for clients invented by J.P. Morgan's Blythe Banks are middlemen between a company
Masters during the 1990s. that wants to issue new securities and the
The Loan Risk Solutions group within Barclays' buying public.
investment banking division and Risk Management
▪ Mergers & Acquisitions: Banks advise buyers
and sellers on business valuation,

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negotiation, pricing and structuring of ▪ Acting, as merchant bankers for
transactions, as well as procedure and transactions relating to secondary public
implementation. offers, rights issues and composite issues.
▪ Sales & Trading and Equity Research: Banks
match up buyers and sellers as well as buy ▪ Advise companies on pricing and valuation
and sell securities out of their own account to for various types of offers.
facilitate the trading of securities
▪ Retail and Commercial Banking: investment ▪ Advise companies on post-listing issues and
banks now offer traditionally off-limits offerings.
services like commercial bankingii
▪ Advise promoters and help in transactions
2.3.1. Role of Investment Banker in Listed relating to creeping acquisitions, dilution
Companies: management, open offers and preferential
allotments.
Listed companies have several areas where
investment bankers play significant role as advisors ▪ Advise companies on delisting and act as
and issue managers. In some of these areas, apart merchant bankers for the delisting offers.
from playing the statutory role of merchant bankers,
they also take significant financial exposure in ▪ Advise companies on buy banks and act as
underwriting, providing safety nets, market making merchant bankers for such offers.
and in placement obligations to issuer companies.
The functional areas for investment bankers in listed ▪ Advise companies on market capitalization
companies are thus listed subsequently: and related issues

▪ Acting as advisers and arrangers in raising 2.4. REGULATORY FRAMEWORK FOR
debt and equity finance through the capital INVESTMENT BANKING IN INDIA
market.
Investment Banking in India is regulating in its
▪ Acting as advisers and arranges for private various facets under separate legislations or
placement of debt and equity. guidelines issued under statute. The Regulatory
powers are also distributed between different
regulators depending upon the constitution and
status of Investment Bank. Pure investment banks
which do not have presence in the lending or banking
business are governed primarily by the capital

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market regulator (Securities Exchange Board of Under these sections RBI is empowered to
India). However, Universal banks and NBFC issue directions in the areas of resources
investment banks are regulated primarily by the mobilization, accounts and administrative
Reserve bank of India in their core business of controls.iii
banking or lending and so far as the investment ▪ Different aspects of investment banking are
banking segment is concerned, they are also regulated under the Securities and Exchange
regulated by SEBI. An overview of the regulatory Board of India Act, 1992 and guidelines and
framework is furnished below: regulations issued there under.
▪ Investment Banks that are set up in India
▪ At the constitutional level, all invest banking with foreign direct investment (FDI) either as
companies incorporated under the joint ventures with Indian partners or as fully
Companies Act, 1956 are governed by the owned subsidiaries of the foreign entities are
provisions of that Act. governed in respect of the foreign
investment by the Foreign Exchange
▪ Investment Banks that are incorporated Management Act, 1999 and the Foreign
under a separate statute such as the SBI or Exchange Management (Transfer or issue of
IDBI are regulated by their respective Security by a person Resident outside India)
statute. IDBI is in the process of being Regulations, 2000 issued there under as
converted into a company under the amended from time to time through circulars
Companies Act. issued by the RBI.
▪ Apart from the above specific regulations
▪ Universal Banks that are regulated by the relating to investment banking, investment
Reserve Bank of India under the RBI Act, banks are also governed by other laws
1934 and the Banking Regulation Act which applicable to all other businesses such as –
put restrictions on the investment banking tax law, contract law, property law, local
exposures to be taken by banks. state laws, arbitration law and the other
general laws that are applicable in India.
▪ Investment banking companies that are
constituted as non-banking financial
companies(NBFCs) are regulated by the RBI
under Reserve Bank of India Act, 1934.

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2.4.1. Reserve Bank of India Directions, 2016 constitution and status of the investment
2.4.1.1. Investment Advisory Services bank.
▪ Investment banks that do not have
No bank shall undertake the business of investment presence in the banking business are
advisory services (IAS) except through a separate governed primarily by the capital market
subsidiary set up for the purpose or one of its regulator, Securities and Exchange Board of
existing subsidiaries, subject to the following India (SEBI).
conditions: ▪ However, multi-national banks and non-
banking financial corporations which are
▪ Specific prior approval shall be obtained investment banks are regulated primarily by
before offering IAS. the Reserve Bank of India (RBI) in their core
business of banking or lending and insofar as
▪ IAS shall be provided only for products and the investment banking segment is
services in which banks are permitted to deal concerned, they are also regulated by SEBI.
in as per the Banking Regulation Act, 1949. An overview of the regulatory framework is
as under:
▪ A bank presently offering IAS shall
reorganise its operations in accordance with 1. All investment banking companies
these Directions latest by April 21, 2019. incorporated under the Companies Act
1956, are governed by the provisions of
2.5. KEY LAWS GOVERNING INVESTMENT that Act.
BANKING SERVICES IN INDIA:
2. Multi-national banks are regulated by
▪ In the absence of a comprehensive piece of the Reserve Bank of India under the
legislation governing financial services in Reserve Bank of India Act, 1934 and the
India, various services are regulated through Banking Regulation Act, 1949.
a variety of Acts and Rules and by different
regulators. 3. Investment banking companies that are
constituted as non-banking financial
▪ Investment Banking in India is regulated by companies are regulated operationally
various legislations and the regulatory
powers are also distributed between
different regulators depending on the

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by the RBI under Chapter IIIB of the RBI ➢ SEBI (Merchant Bankers)
Act, 1934. Regulations 1992
4. Functionally, different aspects of
investment banking are regulated ➢ SEBI (Buy-Back of Securities)
under the Securities and Exchange Regulations, 1998
Board of India (SEBI) Act, 1992 and the
guidelines and regulations issued ➢ Private Limited Company and
thereunder. These are as follows: Unlisted Public Limited Company

(Buy-Back of Securities) Rules,

1999

➢ SEBI (Issue of capital & ➢ SEBI (Underwriters) Regulations,

Disclosure Requirements) 1993

regulations 2009 ➢ Securities Contracts (Regulation)

➢ SEBI (Substantial Acquisition of Act,1956
Shares and Takeovers)
Investment banks that are set up in India
Regulations 2011 with foreign direct investment are
governed in respect of the foreign
➢ SEBI (Prohibition of Insider investment by the Foreign Exchange
Management Act, 1999.
Trading) Regulations 1992 5. Apart from the above specific

➢ SEBI (Foreign Institutional regulations relating to investment
banking, investment banks are also
Investors) Regulations 1995 governed by other general laws
applicable to all other businesses in
➢ SEBI (Venture Capital Funds) India like tax laws, contract laws,
arbitration law etc.
Regulations 1996

➢ SEBI (Foreign Venture Capital

Investors) Regulations 2000

➢ SEBI (Mutual Funds) Regulations

1996

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i Rajesh Kothari, Financial services in India: Concept and IknAKHf4BCkcQ6AEwAHoECAAQAQ#v=onepage&q=%2
Application, 2Some%20trades%20are%20initiated%20by%20complex%20
https://books.google.co.in/books?id=sZmHAwAAQBAJ&pg= algorithms%20for%20hedging%20purposes.%22&f=false
PA299&lpg=PA299&dq=%22Some+trades+are+initiated+by
+complex+algorithms+for+hedging+purposes.%22&source=b ii https://www.slideshare.net/khansahim/investment-banking-
l&ots=IG2yRhEcx4&sig=ACfU3U1x4CblGeSrLR_2KRYgp in-india-47717258
Lq7gTTFwA&hl=en&sa=X&ved=2ahUKEwjK3Peh2orgAhV iii Sections 45H to 45QB of the RBI Act, 1934.

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