Investment banking

1. Topics of Investment Banking:-
Introduction
Meaning
Overview
~Evolution of Investment Banking
~Its Mechanism (statement of investment banking)
Products/Services Offered
~Lists of explanation
~Special services
How these services server the purpose of clients?
Risks associated with investment banking?
~Types
~Explanation (example){problem impact}
How the risks are managed effectively?
~Why risks management?
~Ways (example){problem action}
Future Scenario
Conclusion
INTRODUCTION
At a very macro level, ‘Investment Banking’ as term suggests, is concerned with the primary
function of assisting the capital market in its function of capital intermediation, i.e., the
movement of financial resources from those who have them (the Investors), to those who need to
make use of them for generating GDP (the Issuers). Banking and financial institution on the one
hand and the capital market on the other are the two broad platforms of institutional that
investment for capital flows in economy. Therefore, it could be inferred that investment banks are
those institutions that are counterparts of banks in the capital markets in the function of
intermediation in the resource allocation. Nevertheless, it would be unfair to conclude so, as that
would confine investment banking to very narrow sphere of its activities in the modern world of
high finance. Over the decades, backed by evolution and also fuelled by recent technologies
developments, an investment banking has transformed repeatedly to suit the needs of the finance
community and thus become one of the most vibrant and exciting segment of financial services.
Investment bankers have always enjoyed celebrity status, but at times, they have paid the price for
the price for excessive flamboyance as well.
To continue from the above words of John F. Marshall and M.E. Eills, ‘investment
banking is what investment banks do’. This definition can be explained in the context of how
investment banks have evolved in their functionality and how history and regulatory intervention
have shaped such an evolution. Much of investment banking in its present form, thus owes its

2. origins to the financial markets in USA, due o which, American investment banks have banks have
been leaders in the American and Euro markets as well. Therefore, the term ‘investment banking’
can arguably be said to be of American origin. Their counterparts in UK were termed as
‘merchants banks’ since they had confined themselves to capital market intermediation until the
US investments banks entered the UK and European markets and extended the scope of such
businesses.
Investment banks help companies and governments and their agencies to raise money by issuing
and selling securities in the primary market. They assist public and private corporations in raising
funds in the capital markets (both equity and debt), as well as in providing strategic advisory
services for mergers, acquisitions and other types of financial transactions.
Investment banks also act as intermediaries in trading for clients. Investment banks differ from
commercial banks, which take deposits and make commercial and retail loans. In recent years,
however, the lines between the two types of structures have blurred, especially as commercial
banks have offered more investment banking services. In the US, the Glass-Steagall Act, initially
created in the wake of the Stock Market Crash of 1929, prohibited banks from both accepting
deposits and underwriting securities; Glass-Steagall was repealed by the Gramm-Leach-Bliley Act
in 1999. Investment banks may also differ from brokerages, which in general assist in the
purchase and sale of stocks, bonds, and mutual funds. However some firms operate as both
brokerages and investment banks; this includes some of the best known financial services firms in
the world.
More commonly used today to characterize what was traditionally termed” investment banking” is
“sells side." This is trading securities for cash or securities (i.e., facilitating transactions,
market-making), or the promotion of securities (i.e. underwriting, research, etc.).
The "buy side" constitutes the pension funds, mutual funds, hedge funds, and the investing public
who consume the products and services of the sell-side in order to maximize their return on
investment. Many firms have both buy and sell side components.
Definition
An individual or institution, which acts as an underwriter or agent for corporations and
municipalities issuing securities. Most also maintain broker/dealer operations, maintain markets
for previously issued securities, and offer advisory services to investors. Investment banks also
have a large role in facilitating mergers and acquisitions, private equity placements and corporate
restructuring. Unlike traditional banks, investment banks do not accept deposits from and provide
loans to individuals. Also called investment banker.
Who needs an Investment Bank?
Any firm contemplating a significant transaction can benefit from the advice of an investment
bank. Although large corporations often have sophisticated finance and corporate development
departments provide objectivity, a valuable contact network, allows for efficient use of client
personnel, and is vitally interested in seeing the transaction close.
Most small to medium sized companies do not have a large in-house staff, and in a financial
transaction may be at a disadvantage versus larger competitors. A quality investment banking firm
can provide the services required to initiate and execute a major transaction, thereby empowering
small to medium sized companies with financial and transaction experience without the addition
of permanent overhead, an investment bank provides objectivity, a valuable contact network,
allows for efficient use of client personnel, and is vitally interested in seeing the transaction close.

3. Most small to medium sized companies do not have a large in-house staff, and in a financial
transaction may be at a disadvantage versus larger competitors. A quality investment-banking
firm can provide the services
Organizational structure of an investment bank
The main activities and units
The primary function of an investment bank is buying and selling products both on behalf of the
bank's clients and also for the bank itself. Banks undertake risk through proprietary trading, done
by a special set of traders who do not interface with clients and through Principal Risk, risk
undertaken by a trader after he or she buys or sells a product to a client and does not hedge his
or her total exposure. Banks seek to maximize profitability for a given amount of risk on their
balance sheet
An investment bank is split into the so-called Front Office, Middle Office and Back Office. The
individual activities are described below:
Front Office
Investment Banking is the traditional aspect of investment banks which involves helping
customers raise funds in the Capital Markets and advising on mergers and acquisitions.
Investment bankers prepare idea pitches that they bring to meetings with their clients,
with the expectation that their effort will be rewarded with a mandate when the client is
ready to undertake a transaction. Once mandated, an investment bank is responsible for
preparing all materials necessary for the transaction as well as the execution of the deal,
which may involve subscribing investors to a security issuance, coordinating with bidders,
or negotiating with a merger target. Other terms for the Investment Banking Division
include Mergers & Acquisitions (M&A) and Corporate Finance (often pronounced "corpfin").
Investment management is the professional management of various securities (shares,
bonds etc) and other assets (e.g. real estate), to meet specified investment goals for the
benefit of the investors. Investors may be institutions (insurance companies, pension
funds, corporations etc.) or private investors (both directly via investment contracts and
more commonly via collective investment schemes eg. mutual funds) .
Financial Markets is split into four key divisions: Sales, Trading, Research and Structuring.
o Sales and Trading is often the most profitable area of an investment bank ,
responsible for the majority of revenue of most investment banks In the process
of market making, traders will buy and sell financial products with the goal of
making an incremental amount of money on each trade. Sales is the term for the
investment banks sales force, whose primary job is to call on institutional and
high-net-worth investors to suggest trading ideas (on caveat emptor basis) and
take orders. Sales desks then communicate their clients' orders to the appropriate
trading desks, which can price and execute trades, or structure new products that
fit a specific need.

4. o Research is the division which reviews companies and writes reports about their
prospects, often with "buy" or "sell" ratings. While the research division generates
no revenue, its resources are used to assist traders in trading, the sales force in
suggesting ideas to customers, and investment bankers by covering their clients.
In recent years the relationship between investment banking and research has
become highly regulated, reducing its importance to the investment bank.
o Structuring has been a relatively recent division as derivatives have come into play,
with highly technical and numerate employees working on creating complex
structured products which typically offer much greater margins and returns than
underlying cash securities.
Middle Office
Risk Management involves analysing the market and credit risk that traders are taking
onto the balance sheet in conducting their daily trades, and setting limits on the amount
of capital that they are able to trade in order to prevent 'bad' trades having a detrimental
effect to a desk overall. Another key Middle Office role is to ensure that the above
mentioned economic risks are captured accurately (as per agreement of commercial terms
with the counterparty) correctly (as per standardised booking models in the most
appropriate systems) and on time (typically within 30 minutes of trade execution). In
recent years the risk of errors has become known as "operational risk" and the assurance
Middle Offices provide now include measures to address this risk. When this assurance is
not in place, market and credit risk analysis can be unreliable and open to deliberate
manipulation.
Back Office
Operations involve data-checking trades that have been conducted, ensuring that they are
not erroneous, and transacting the required transfers. While it provides the greatest job
security of the divisions within an investment bank, it is a critical part of the bank that
involves managing the financial information of the bank and ensures efficient capital
markets through the financial reporting function. The staff in these areas are often highly
qualified and need to understand in depth the deals and transactions that occur across all
the divisions of the bank.
Recent evolution of the business
New products
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. Throughout the
history of investment banking, many have theorized that all investment banking products and
services would be commoditized. New products with higher margins are constantly invented and
manufactured by bankers in hopes 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.
For example, trading bonds and equities for customers is not a commodity business but
structuring and trading derivatives is highly profitable .Each OTC contract has to be uniquely
structured and could involve complex pay-off and risk profiles. Listed option contracts are traded

5. 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).
Possible conflicts of interest
Potential conflicts of interest may arise between different parts of a bank, creating the potential
for financial movements that could be market manipulation. Authorities that regulate investment
banking (the FSA in the United Kingdom and the SEC in the United States) require that banks
impose a Chinese wall which prohibits communication between investment banking on one side
and research and equities on the other.
Some of the conflicts of interest that can be found in investment banking are listed here:
Historically, equity research firms were founded and owned by investment banks. One
common practice is for equity analysts to initiate coverage on a company in order to
develop relationships that lead to highly profitable investment banking business. In the
1990s, many equity researchers allegedly traded positive stock ratings directly for
investment banking business. On the flip side of the coin: companies would threaten to
divert investment banking business to competitors unless their stock was rated favorably.
Politicians acted to pass laws to criminalize such acts. Increased pressure from regulators
and a series of lawsuits, settlements, and prosecutions curbed this business to a large
extent following the 2001 stock market tumble
Many investment banks also own retail brokerages. Also during the 1990s, some retail
brokerages sold consumers securities which did not meet their stated risk profile. This
behavior may have led to investment banking business or even sales of surplus shares
during a public offering to keep public perception of the stock favorable.
Since investment banks engage heavily in trading for their own account, there is always
the temptation or possibility that they might engage in some form of front running.
Types of investment banks
Investment banks "underwrite" (guarantee the sale of) stock and bond issues, trade for their own
accounts, make markets, and advise corporations on capital markets activities such as mergers
and acquisitions.
Merchant banks were traditionally banks which engaged in trade financing. The modern definition,
however, refers to banks which provide capital to firms in the form of shares rather than loans.
Unlike Venture capital firms, they tend not to invest in new companies.

6. Investment banks provide four primary types of services:
Raising capital, advising in mergers and acquisitions, executing securities sales and trading, and
performing general advisory services. Most of the major Wall Street firms are active in each of
these categories. Smaller investment banks may specialize in two or three of these categories.
Raising Capital
An investment bank can assist a firm in raising funds to achieve a variety of objectives, such as to
acquire another company, reduce its debt load, expand existing operations, or for specific project
financing. Capital can include some combination of debt, common equity, preferred equity, and
hybrid securities such as convertible debt or debt with warrants. Although many people associate
raising capital with public stock offerings, a great deal of capital is actually raised through private
placements with institutions, specialized investment funds, and private individuals. The
investment bank will work with the client to structure the transaction to meet specific objectives
while being attractive to investors.
Mergers and Acquisitions
Investment banks often represent firms in mergers, acquisitions, and divestitures. Example
projects include the acquisition of a specific firm, the sale of a company or a subsidiary of the
company, and assistance in identifying, structuring, and executing a merger or joint venture. In
each case, the investment bank should provide a thorough analysis of the entity bought or sold,
as well as a valuation range and recommended structure.
Sales and Trading
These services are primarily relevant only to publicly traded firms, or firms, which plan to go
public in the near future. Specific functions include making a market in a stock, placing new
offerings, and publishing research reports.
General Advisory Services:
Advisory services include assignments such as strategic planning, business valuations, assisting in
financial restructurings, and providing an opinion as to the fairness of a proposed transaction.
Terms Related To Investment Bank
Buying and Selling
Buying
Deciding on the proper time to purchase a security that you would like to add to your holdings
can be a daunting task. If the price drops immediately after you buy, it may seem as if you missed
out on a better buying opportunity. If the price jumps right before you make your move, you may
feel as if you paid too much. As it turns out, you should not let these small fluctuations influence
your decision too much. As long as the fundamentals that led you to decide on the purchase have
not changed, a few points in either direction should not have a large impact on the long-term
value of your investment.
Similarly, the fact that an investment has been increasing in value of late is not a sufficient reason
for you to purchase it. Momentum can be very fickle, and recent movement is not necessarily an
indicator of future movement. Therefore, buying decisions should be based on sound and
thorough research geared toward discerning the future value of a security relative to its current
price. This analysis will probably not touch upon price movement in the very recent past. As you
learn more about investing you'll get better at deciding when to buy, but most experts
recommend that beginners avoid trying to time the market, and just get in as soon as they can

7. and stay in for the long haul.
The proper time to buy a security is quite simply when it is available for less than its actual value.
These undervalued securities are actually not as rare as they sound. However, the problem is
simply that they are never sure bets. The value of a security includes estimates of the future
performance of factors underlying the value of the security. For stocks, these factors include
things like earnings growth and market share. Changes can be predicted to a degree, but they are
subject to fluctuation due to forces both within and beyond the control of the company.
The overall economic climate, changes in the industry or even bad decisions by management can
all cause a security poised to ascend in value to become an under performer. Therefore, it is
essential to practice your analysis before putting your money into action. Make some mock
purchases based on your personal analysis technique and track the results. Not all of your
decisions will lead to the results you were expecting, but if most of your choices turn out to be
good and there are mitigating factors that you can learn from to explain your missteps, then you
may be ready to put your analysis technique and investing strategy into action.
At this point, the need to continuously monitor your investments does not disappear. Both under
performers and overachievers should be studied carefully to fine-tune your strategy. You should
also regularly look at your securities to make sure that the fundamentals for success that led you
to buy in the first place are intact. If not, you may need to prepare to cash in and start looking for
the next opportunity.
One way to avoid the hassles of deciding when to buy altogether is to practice dollar-cost
averaging. This strategy advocates investing a fixed dollar amount at regular intervals. The price
when you first invest is relatively unimportant (as long as the fundamentals are sound) because
you will be purchasing shares at a different price each time you buy. The success of your
investment then lies not with short-term fluctuations, but with the long-term movement of the
value of the security.
Selling:
There comes a time when investments must be liquidated and converted back into cash. In a
perfect world, selling would only be necessary when investment goals have been reached or time
horizons have expired, but, in reality, decisions about selling can be much more difficult. For one
thing, it can be just as hard to decide when to sell as it can be to decide when to buy. No one
wishes to miss out on gains by selling too soon, but, at the same time, no one wishes to watch an
investment peak in value and then begin to decline.
Investors often seek to sell investments that have dropped in value in the short-term. However, if
conditions have not changed significantly, drops in price may actually represent an opportunity to
buy at a better price. If the initial research, which led to the purchase, was sound, a temporary
decline does not preclude the success that was originally predicted. Of course, things change, and
if the security no longer meets the criteria that led to its purchase, selling may in fact be the best
option.
Selling may also become necessary if investment goals change over time. You may need to reduce
the amount of risk in your portfolio or you may have the opportunity to seek out greater returns.
Additionally, a security may have increased in value to the point that it is overvalued. This creates
an excellent opportunity to cash in and seek out new undervalued investments. Often you will
need to make this type of sale in the course of rebalancing a portfolio necessitated by gains and
losses in different areas.
Selling can be especially difficult when an under performing stock must be dumped. Some
investors let their emotions dictate their actions and hold on to stocks that have fallen in value
rather than to sell, thinking that selling at a loss is like admitting that they made a mistake.
However, realizing the loss and moving on to better investments is often preferable to continuing
to hold onto a loser in the hopes that it will somehow rebound.
When considering any sale, you must factor in the costs of the sale itself. Fees and taxes will eat
into profits, so they must be subtracted from any increases in value to understand the true impact

8. of the transaction. Capital gains taxes are higher for gains on investments held less than one year,
so it's often wise to invest for the long term rather than to buy and sell quickly. On the other hand,
it can be dangerous to hold an investment longer than you want to, simply to reduce the tax
burden.
It is essential to remember that just because an investment increases in value after it has been
sold does not necessarily mean that it was sold prematurely. Managing risk and diversification are
often more important than capitalizing on short-term gains in a particular security. Keeping in
mind the initial goals for the investment and adjusting them to fit your present goals will allow
you to make smarter decisions about selling.
Principles of Investing
1. Start Investing Now
We say this not just to discourage procrastination, but because an early start can make all the
difference. In general, every six years you wait doubles the required monthly savings to reach the
same level of retirement income. Another motivational statistic: If you contributed some amount
each month for the next nine years, and then nothing afterwards, or if you contributed nothing for
the first nine years, then contributed the same amount each month for the next 41 years, you
would have about the same amount. Compounding is a beautiful thing.
2. Know Yourself
The right course of action depends on your current situation, your future goals, and your
personality. If you don't take a close look at these, and make them explicit, you might be headed
in the wrong direction.
Current Situation: How healthy are you, financially? What's your net worth right now?
What's your monthly income? What are your expenses (and where could they be reduced)? How
much debt are you carrying? At what rate of interest? How much are you saving? How are you
investing it? What are your returns? What are your expenses?
Goals: What are your financial goals? How much will you need to achieve them? Are you on
the right track?
Risk Tolerance: How much risk are you willing and able to accept in pursuit of your
objectives? The appropriate level of risk is determined by your personality, age, job security,
health, net worth, amount of cash you have to cover emergencies, and the length of your
investing horizon.
3. Get Your Financial House In Order
Even though investing may be more fun than personal finance, it makes more sense to get started
on them in the reverse order. If you don't know where the money goes each month, you shouldn't
be thinking about investing yet. Tracking your spending habits is the first step toward improving
them. If you're carrying debt at a high rate of interest (especially credit card debt), you should
unburden yourself before you begin investing. If you don't know how much you save each month
and how much you'll need to save to reach your goals, there’s no way to know what investments
are right for you.

9. If you've transitioned from a debt situation to paycheck-to-paycheck situation to a saving some
money every month situation, you’re ready to begin investing what you save. You should start by
amassing enough to cover three to six months of expenses, and keep this money in a very safe
investment like a money market account, so you're prepared in the event of an emergency. Once
you've saved up this emergency reserve, you can progress to higher risk (and higher return)
investments: bonds for money that you expect to need in the next few years, and stocks or stock
mutual funds for the rest. Use dollar cost averaging, by investing about the same amount each
month. This is always a good idea, but even more so with the dramatic fluctuations in the market
in the past 10 years. Dollar cost averaging will make it easier to stomach the inevitable dips.
And remember; never invest in anything you don't understand.
4. Develop A Long Term Plan
Now that you know your current situation, goals, and personality, you should have a pretty good
idea of what your long-term plan should be. It should detail where the money will go: cars,
houses, college, and retirement. It should also detail where the money will come from. Hopefully
the numbers will be about the same.
Don't try to time the market. Get in and stay in. We don't know what direction the next 10% move
will be, but we do know what direction the next100% move will be.
Review your plan periodically, and whenever your needs or circumstances change. If you are not
confident that your plan makes sense, talk to an investment advisor or someone you trust.
5. Buy Stocks
Now that you've got a long term view, you can more safely invest in 'riskier' investments, which
the market rewards (in general). This requires patience and discipline, but it increases returns.
This approach reduces the entire universe of investment vehicles to two choices: stocks and stock
mutual funds. In the long run, they're the winners: In this century, stocks beat bonds 8 out of 9
decades, and they're well in the lead again. According to Ibbotson's Stocks, Bonds, Bills and
Inflation 1995 Yearbook, here are the average annual returns from 1926 to 1994 (before inflation):
Stocks: 10.2% (and small company stocks were 12.1%)
Intermediate term treasury bonds: 5.1%
30-day T-bills: 3.7%
But is it really worth the additional risk just for a few percentage points? The answer is yes. 10% a
year for 20 years is 570%, but 7% a year for 20 years is only 280%. Compounding is God's gift to
long-term planners.
If you buy outstanding companies, and hold them through the market's gyrations, you will be
rewarded. If you aren't good at selecting stocks, select some mutual funds. If you aren't good at
selecting mutual funds, go with an index fund (like the Vanguard S&P 500).
6. Investigate Before You Invest
Always do your homework. The more you know, the better off you are. This requires that you keep
learning, and pay attention to events that might affect you. Understand personal finance matters
that could affect you (for example, proposed tax changes). Understand how each of your
investments fits in with the rest of your portfolio and with your overall strategy. Understand the
risks associated with each investment. Gather unbiased, objective information. Get a second
opinion, a third opinion, etc. Be cautious when evaluating the advice of anyone with a vested
interest.

10. If you're going to invest in stocks, learn as much as you can about the companies you’re
considering. Understand before you invest. Research, research, Read books. Consider joining an
investment club or an organization like the American Association of Individual Investors.
Experiment with various strategies before you put your own money on the line. Examine historical
data or participate in a stock market simulation. Try a momentum portfolio, a technical analysis
portfolio, a bottom fisher portfolio, a dividend portfolio, a price/earnings growth portfolio, an
intuition portfolio, a mega trends portfolio, and any others you think of. In the process you'll find
out which ones work best for you. Learn from your own mistakes, and learn from the mistakes of
others.
If you don't have time for all this work consider mutual funds, especially index funds.
7. Develop the Right Attitude
The following personality traits will help you achieve financial success:
Discipline: Develop a plan, and stick with it. As you continue to learn, you’ll become more
confident that you're on the right track. Alter your asset allocation based on changes in your
personal situation, not because of some short-term market fluctuation.
Confidence: Let your intelligence, not your emotions; make your decisions for you.
Understand that you will make mistakes and take losses; even the best investors do.
Re-evaluate your strategy from time to time, but don't second-guess it.
Patience: Don't let your emotions be ruled by today's performance. In most cases, you
shouldn't even be watching the day-to-day performance, unless you like to. Also, don't ever
feel like it's now or never. Don't be pressured into an investment you don’t yet understand or
feel comfortable with.
The following personality traits will hurt your chances of financial success:
Fear: If you are unwilling to take any risk, you will be stuck with investments that barely
beat inflation.
Greed: As an investment class, 'get rich quick' schemes have the worst returns. If your
expectations are unrealistically high, you'll go for the big scores, which usually don’t work.
It is generally a good idea to avoid making financial decisions based on emotional factors.
8. Get Help If You Need It
The do-it-yourself approach isn't for everyone. If you try it and it's not working, or you're afraid to
try it at all, or you just don't have the time or desire, there's nothing wrong with seeking
professional assistance.
If you want others to handle your financial affairs for you, you will nevertheless want to remain
involved to some degree, to make sure your money is being spent wisely.

11. Initial Public Offerings
Initial Public Offerings (IPOs) are the first time a company sells its stock to the public. Sometimes
IPOs are associated with huge first-day gains; other times, when the market is cold, they flop. It's
often difficult for an individual investor to realize the huge gains, since in most cases only
institutional investors have access to the stock at the offering price. By the time the general public
can trade the stock, most of its first-day gains have already been made. However, a savvy and
informed investor should still watch the IPO market, because this is the first opportunity to buy
these stocks.
Reasons for an IPO
When a privately held corporation needs to raise additional capital, it can either take on debt or
sell partial ownership. If the corporation chooses to sell ownership to the public, it engages in an
IPO. Corporations choose to "go public" instead of issuing debt securities for several reasons. The
most common reason is that capital raised through an IPO does not have to be repaid, whereas
debt securities such as bonds must be repaid with interest. Despite this apparent benefit, there
are also many drawbacks to an IPO. A large drawback to going public is that the current owners of
the privately held corporation lose a part of their ownership. Corporations weigh the costs and
benefits of an IPO carefully before performing an IPO.
Going Public
If a corporation decides that it is going to perform an IPO, it will first hire an investment bank to
facilitate the sale of its shares to the public. This process is commonly called "underwriting"; the
bank's role as the underwriter varies according to the method of underwriting agreed upon, but its
primary function remains the same.
In accordance with the Securities Act of 1933, the corporation will file a registration statement
with the Securities and Exchange Commission (SEC). The registration statement must fully disclose
all material information to the SEC, including a description of the corporation, detailed financial
statements, biographical information on insiders, and the number of shares owned by each insider.
After filing, the corporation must wait for the SEC to investigate the registration statement and
approve of the full disclosure.
During this period while the SEC investigates the corporation's filings, the underwriter will try to
increase demand for the corporation's stock. Many investment banks will print "tombstone"
advertisements that offer "bare-bones" information to prospective investors. The underwriter will
also issue a preliminary prospectus, or "red herring", to potential investors. These red herrings
include much of the information contained in the registration statement, but are incomplete and
subject to change. An official summary of the corporation, or prospectus, must be issued either
before or along with the actual stock offering.
After the SEC approves of the corporation's full disclosure, the corporation and the underwriter
decide on the price and date of the IPO; the IPO is then conducted on the determined date. IPO’s
are sometimes postponed or even withdrawn in poor market conditions.
Performance
The aftermarket performance of an IPO is how the stock price behaves after the day of its offering
on the secondary market (such as the NYSE or the NASDAQ). Investors can use this information to
judge the likelihood that an IPO in a specific industry or from a specific lead underwriter will
perform well in the days (or months) following its offering. The first-day gains of some IPO’s have
made investors all too aware of the money to be had in IPO investing. Unfortunately, for the small
individual investor, realizing those much-publicized gains is nearly impossible. The crux of the
problem is that individual investors are just too small to get in on the IPO market before the jump.
Those large first-day returns are made over the offering price of the stock, at which only large,
institutional investors can buy in. The system is one of reciprocal back scratching, in which the

12. underwriters offer the shares first to the clients who have brought them the most business
recently. By the time the average investor gets his hands on a hot IPO, it's on the secondary
market, and the stock's price has already shot up.
SEBI Guidelines
The Government has setup Securities Exchange Board of India (SEBI) in April 1988.
For more then three years, it had no statutory powers. Its interim functions during the period were:
i. To collect information and advise the Government on matters relating to Stock and
Capital Markets.
ii. Licensing and regulatory and Merchant Banks, Mutual Fund, etc..
iii. To prepare the legal drafts for regulatory and developmental role of SEBI and
iv. To perform any other functions as may be entrusted to it by Government.
The need for setting up independent Government agency to regulate and develop the
Stock and Capital Market in India as in many developed countries was recognised since
the Seventh Five Year was launched (1985) when some major industrial policy changes
like opening up of the economy to out side the world and greater role to the Private Sector
were initiated. The rampant malpractices noticed in the Stock and Capital Markets stood
in the way of infusing confidence of investors, which is necessary for mobilisation of large
quantity of funds from the public, and help the growth of the industry.
The malpractices were noticed in the case of companies, Merchant Bankers and
Brokers who are all operating in Capital Markets. The need to curb the malpractices and to
promote healthy Capital Market in India was felt. The security industry in India has to
develop on the right lines for which a competent Government agency as in UK (SIB) or in
USA (SEC) is needed.
As referred to earlier, malpractices have been reported in both the
primary market and secondary market. A few examples of malpractices in the primary
market are as follows:
a) Too may self styled Investment Advisers and Consultants.
b) Grey Market or unofficial premiums on the new issues.
c) Manipulation of markets before new issues is floated.
d) Delay in allotment letters or refund orders or in dispatch of Share Certificates
e) Delay in listing and commencement of trading in shares.
A few examples of malpractices in the Secondary Market are as fallows:
a) Lack of transparency in the trading operations and prices charged to clients.
b) Poor service due to delay in passing contract notes or not passing contracts notes, at all.
c) Delay in making payments to clients or in giving delivery of shares.
d) Persistence of odd lots and refusal of companies to stop this practice of allotting shares in
odd lots, which disappeared with the introduction of Demat form of trading.
e) Insider trading by agents of companies or brokers rigging and manipulating prices.
f) Takeover bids to destabilise management.
Objectives:

13. The SEBI has been entrusted with both the regulatory and development function. The
objectives of SEBI are as follows:
a) Investor protection, so that there is a steady flow of savings into the Capital
Markets.
b) Ensuring the fair practices by the issuers of securities, namely, companies so that
they can raise resources at least cost.
c) Promotion of efficient services by brokers, merchant bankers and others
intermediaries so that they become competitive and professional.
SEBI AND FREE PRICING OF EQUITY SHARES
With the repeat of Capital Issuers Control Act of 1947 in May 1992, the SEBI
issued fresh guidelines for new Capital issues from June 11, 1992. Pricing of Shares expect in case
of new companies with no track record is left to free market forces. The new Companies have to
issues shares at par only. The existing unlisted companies if they desire listing can make public
issue upto 20% of equity and price can be determined by free market forces, as determined by the
issuer or the lead manager. Similarly, an existing listed company can also fix the price of issue
depending on the markets forces. In all these cases, the reasons for such price fixation,
transparency and proper disclosers are insisted upon by the SEBI. The draft letter of offer to the
public is to be vetted by SEBI, which was delegated to lead merchant bankers by SEBI after 1996.
As per SEBI guidelines, 12 months should elapse between bonus issue and public
or rights issue. A private placement of promoters’ quota is not permitted. Merchant bankers held
responsible for ensuring that prospectus is fair and disclosures are full and correct and that
highlights and risk factors are slept out in all issues. Although free pricing is permitted, the
rationale of such fixation is to be provided to the SEBI when it examines the drafts letter of offer.
SEBI POWERS
The SEBI powers on stock exchanges and their member brokers and sub brokers were exercised
under SEBI (stock brokers and sub brokers) Regulations of October 23 1992. These relate to
registration, licensing, code of conduct, and inspection of books accounts, etc. These powers were
exercised under Section 12 of SEBI Act.
SEBI was delegated more powers of administration of SC (R) Act in respect of
many provisions including recognition of stocks exchanges (Sec.3, 4&5) and control and
regulation of stocks exchanges under Sections 7, 13, 18, 22 and 28 etc., These were concurrent
powers wielded by both Government and SEBI, effective from September1993.
Subsequently, by an ordinance in January 1995, the SEBI was given further powers
to impose penalties on insider trading and capital markets intermediaries for violation of SEBI
regulations and companies for not complying with Listing agreement. In particular penalties can
be imposed in monetary terms, for failure to furnish books of accounts, failure to enter into
agreements with clients, failure to redress investor grievances, defaults in case of mutual funds,
and non-disclosures of acquisition of shares and take over etc.
Venture capital funds like mutual funds were brought under the control of SEBI.
Earlier to that, the SEBI has started licensing and regulations the underwriters, debenture trustees,
collecting bankers, and all intermediaries in the capital market.
SEBI in the New Millennium:
SEBI has got all the needed powers to regulate the Capital Market including all
affairs of listed Companies, Venture Funds, MMMFs, etc. Already it has been regulating the foreign

14. agencies or a body operating in the capital market and it has announced guidelines for all players
in markets, including a code of conduct.
Institutional Agencies:
All the FIIs together can invest upto 24-30% of the company’s paid up capital, of
which a limit of 50% is allowed to foreign individuals and corporates investing in India through FIIs;
this limit of 30% was raised to 40% by the Central Budget for 2000-01.
The SEBI has also allowed the domestic Mutual Funds to invest in foreign listed securities and to
manage foreign portfolios. According to some amendments to Mutual Fund regulations of SEBI,
the Mutual Funds are required to send a complete statement of their portfolios to all unit holders
within one month from the close of each half-year. In order to deter mutual funds from delay in
despatch of redemption warrants, SEBI has directed mutual funds to provide for payment of
interest to the unit holders on this delayed payment, wherever applicable.
Latest Primary Markets Reforms
In pursuance with the recommendations of the Informal Group on Primary
Markets, the SEBI has dispensed with the requirements of issuing shares at fixed par value of
Rs.10 and Rs.100. They are now free to issue shares at any value of Rs.1 and above. The SEBI
modified the existing framework for the book building. Some issues following the book building
process have already been issued in 1999-2000.
In order to encourage Initial Public Offer, the SEBI has relaxed the guidelines
stipulating “the ability to pay” criteria in place of existing criteria of “actual payment of dividend”
by the issuing companies to be eligible to make public offers. The regulations for Credit Rating
Agencies were finalised and published by the SEBI. The categories of promoters who are eligible to
promote CRA’s are laid down.
Book Building Process:
The changes in book building guidelines:
The modified framework makes display of demand at terminals optional. The reservation
of 15% of issue size for individual investors bidding upto 10 marketable lots is no longer
compulsory. Allotment in Book Building process should be in Demat form only and other
requirements shall be the same as for any public issue. The issuer is allowed to disclose either the
issue size or number of securities to be offered to the public.
The regulatory mechanism on secondary market was strengthened during
1999-2000, through the rationalisation and refinement of margin system and through mark to
market margins, volatility margins, incremental carry forward margins, etc. The circuit breakers
for the volatility have been fixed by SEBI at 8% to 12% to be raised upto 16%. The exposure limits
for members are also fixed.
Informal Group on Primary Market

15. As part of its efforts to receive the dressed primary market, the SEBI has relaxed
the listed norms for I.T. sector companies to make initial public offers with a minimum offer of
10%, instead of 25% for all other companies. Book building norms are to encourage new issues.
The norm of 90% subscription as the minimum for enabling the company offering public issue to
make allotment was waived. Similarly, the stipulation of actual payment of dividend in three out of
the past 5 years for the company to come out with a public issue was replaced by requirements of
“ability to pay” the dividends. As recommended Informal Group on primary market, measures
initiated to improve the sentiment in the Primary Market. The SEBI has given freedom to the
Companies to determine the par value of shares issued by them in accordance with section 13(4)
of the Companies Act, 1956. the companies with dematerialized shares have been allowed to alter
the par value of share indicated in the Memorandum and Articles of Association Reference was
already to changes in Book Building Norms.
SEBI has also accepted the introduction of a system of using the existing
infrastructure of stocks Exchanges for marketing of IPOs and NSE has offered these services
through its wide network terminals spread all over the country.
Demat Coverage:
From January 2000, the scrips for trading in Demat form was raised to 200. With
this, the compulsory trading in Demat form has raised the proportion of market deliveries in
Demat form to 90% of the total deliverers. The physical deliverers of shares has come down
drastically. The transaction costs have been reduced and volume have increased phenomenally
due to electronic form of trading and in demat form.
Committee on Market Making:
A committee on the Market Making under the Chairmanship of Shri G.P. Gupta
was set by the SEBI to study the various facets of the market making, including the merits and
demerits of order driven system and quote driven system. The committee was of the view that
shares should be classified into the categories namely liquid and illiquid and market making
facility should be provided to the illiquid category of shares. Market making should be made
compulsory in such cases and market markers have to give two way quotes for each such scrip.
The mechanism pf market making and risked involved in it are to be understood by market
makers.
Legal Framework:
In the legal field, the securities Laws, 1999 was passed by the Parliament in
December 1999. This has incorporated the derivative instruments in the definition of securities
under Securities Contract Regulation Act, 1956, as also the units of Collective Investments
Schemes, with a view to facilitating their transaction and regulation. The new Act provided for
transfer of Appellate functions under the securities Laws Securities Appellate Tribunal (SAT). The
stamp duty payable on derivative transactions those in demat Form was withdrawn by necessary
legal changes. Banks now accept the ownership pf securities in Demat Form.

16. Negotiated Deals:
A negotiated deal in listed company has to be reported to stock exchange within
15 minutes and information in such deals has to be disseminated to all Stock Exchanges. A
negotiated deal is defined as any transaction which has on order value of 25 lakhs or trade volume
of not less than 10,000shares at one price, not formed on Stock Exchanges and through the order
matching system. But with a view to enhance the price discovery process and improve the
transparency, SEBI made such deals not permissible in 1999. Guidelines were issued to permit
negotiated deals only if they are executed on the screen of Stock Exchange, following the price
and order matching system of the exchange.
SEBI Committee on Corporate Governance:
The committee on Corporate Governance, set up by SEBI has reported and the
report was accepted by SEBI and implemented. The Stock Exchanges listing agreement was
amended to include a clause on corporate governance to be observed by listed companies. It is an
important tool for corporates listed on Stock Exchange. The SEBI code on Corporate Governance
was released in January 2000 for adoption by listed companies. It is expected that this measures
may raise the standard of corporate governance in India and improve the disclosure standards and
investor protection.
SEBI Guidelines on Listing:
In February 2000, the SEBI has asked the Stock Exchanges to amend the listing agreement
by adding clause 49, providing for corporate governance mandatory for companies seeking listing
for the first time. The companies which are included Group A of BSE and in S&P CNX Nifty Index
have to comply with the requirements by March 31, 2001. Besides listed companies with paid up
capital of Rs.10crores and above or networth of Rs.25crores or more have to comply with this
requirement by March end 2002. Other listed companies with a paid up capital of Rs.3crores and
above have to comply with this requirement of corporate governance by March end 2003.
The SEBI has also directed the companies listed, to reduce the No-delivery period to one
week in the case of Demat shares. A committee was set up to streamline the existing risk
containment measures namely the margin system and simplify it.
SEBI’s Record:
The SEBI has set a creditable record of regulation for the growth of a healthy
Capital Market during the period of 1995-2000. In the year 2000, it has set for itself the tasks of
speeding up the following measures.
1) Pursuit of healthy Corporate Governance Regulations.
2) Strengthening of Rolling Settlement System by adding 500 more scrips to its.
3) Introduction of Derivative Trading.
4) Development of the internet practices by brokers.
5) Promotion of trading in debt market and in securities debt instruments.

17. Products and Services
Venture Capital:
Venture capital is risks money, which is used in risky enterprises either as equity
or debt capital. It may be in new sunshine industries or older risk enterprises. The funds, which
finance such risky, venture capital funds.
Ventures capital was originated & popularised in USA in sixties. In developed
countries, this capital came from pension funds, insurance companies & even large banks. Some
large companies with excess funds may provide this capital to achieve diversification, market
expansion & ‘window on technology’ or to share in this result of R&D of others.
In India, as the majority of the above institutions are in the public sector, only the
government or public financial institutions can provide the funds for venture capital.
What is Venture Capital?
Venture capital is a post-war phenomenon in the business world, mainly
developed as a sideline activity of the rich in USA. To connote the risk & adventure & some
element of investment, the generic name of ‘venture capital’ was coined. In the late 1960’s a new
breed of professional investors called venture capitalists emerged whose specialty was to combine
risk capital with entrepreneurial management & to use advance technology to launch new
products and companies in the markets place. Undoubtedly, it was ‘venture capitalists’ astute
ability to assess and manage enormous risks & export from them tremendous returns that
changed the face of America.
Innovative, hi-tech ideas are necessarily risky. It is here that the concept of
venture capital steps in. Venture Capital provides long start up costs to high risks & returns
project. Typically, these projects have mortality rates and therefore are unattractive to
risks-averse bankers & private sectors companies.
Venture Projects:
Proposals come to the venture capitalists in the form of business plans. He
appraises the same, giving due regard to the credentials of the founders, the nature of the
product or services to be developed, the market to be saved & the financing required. If satisfied,
he will invest his own money in the equity shares of the new company, known as the assisted
company.
In addition to money, managerial & marketing assistance may also be provided
that is, the venture capitalist not only provides funds but also on line operational advice. In short,
he identifies himself with the project as much as the innovator promoter & as such works hard to
accomplish ambitious targets & consequents higher appreciation of his capital.
Indian Position:
In India, most project financing schemes require at least 25 per cent of the
project cost to be contributed by the promoters, while the latter can raise barely 5-10 percent. For
long, there were a few agencies such as IFCI’s subsidiary company, Risks Capital And Technology
Foundation of India, which provides finance to bridge the shortfall in the promoter’ contribution,
but they could fulfill the requirements of a great many budding entrepreneurs. As results of
promoters not being able to bring in those vital initial inputs of money, many of their good
projects were hanging fire. Venture capital could remedy this situation as well.

18. A beginning was made in this direction by the setting up of venture capital
divisions under the aegis of ICICI, IDBI & IFCI. Encouraged by the response to technology
financing, ICICI floated a separate company ---Technology Development and Information
Company of India (TDICI) includes, apart from venture capital financing, technology, consultancy
as well as entrepreneur escort services such as marketing, business management, vendor
development etc. The successful operation of this fund will hopefully spark off some interest from
the private sector, which will then consider entering this line of activity. Ultimately, it is only when
venture capital financing becomes more broad-based and widespread that it will truly taking root
in economy. In tune with its tradition of pioneering new ideas, ICICI deviated from the beaten path
to usher in an unusual type of financial support. Addition to equity participation (up to maximum
of 49 percent) undertaken by typical venture capital companies, TDICI offer the conditional loans.
The entrepreneur neither pays interest on it nor does he have to repay the principal amount. If the
venture capital succeeds, TDICI recoups its investment in the form of royalty on sales which
ranges between two and eight percent. On the other hand, if the venture fails to take off even
after five years TDICI will consider writing off the loan.
Public financing agencies :
It is to be noted that the floating venture capital companies are the financial
institutions or banks (the Andhra Pradesh Industrial Development Corporation, Canara bank and
others). This can be directly attributed to the Government guidelines, which restrict private sector
participation in venture capital funds to a maximum of 20 percent.
But if the concept is to make a mark in the economy it needs private sector
initiative and not institutional or government patronage. In fact, herein lies the strategic
significance of the venture capital. It paves, the way for the private sector to share the burden of
industrial finance, particularly risk finance with the public sector.
The activities of the venture capital fund of ANZ Grindlays bank include making
equity investments in new companies, which may or may not involve any new technology or other
such related risk. This activity of the direct subscriptions by financial institutions and banks has
been going on for decades and cannot be termed as venture capital activity. The difference in ANZ
Grindlays bank activity id one of the nomenclature and not of means of financing. Also, on the
whole, venture capital is provided more in the nature of mezzanine loans than equity.
Private Agencies:
One Venture Capital fund set up the private sector in India is Credit Capital
Venture Capital (India) or CVF for the short, the principal shareholders of which are Credit Capital
Finance Corporation, Bank of India, Asian Development Bank, and CommonWealth Development
Corporation. Another set up in the private sector jointly by the ICICI 20th Century Finance
Corporation, bank of Baroda, Asian development Bank and Asian Finance and investment
Corporation is the 20th Century Venture Capital Corporation Ltd. One reason why private
capitalists are generally shy may be the high rate of capital gains tax applicable to the profit of
Venture Capital Funds. Though the guidelines provide for a concessional rate of capital gains tax,
the move can hardly be deemed as a ‘concession’ in view of the enormous risks involved in the
activity.
Policy Initiatives:
The idea of providing venture capital finance (VCF) to the new entrepreneurs in
India was mooted by the then finance minister in the long-term fiscal policy announced by him in
1985. A fresh reference to the “difficulties faced by new entrepreneurs in raising equity capital”

19. was made by the finance minister in his 1988-89 budget speech and detailed guidelines for
providing such finance by registered companies or funds were announced.
In India, the government has set up a Venture Capital Funds with a contribution of
Rs.10crore. The fund was brought into operation on 1st April 1986 by the IDBI. For financing
this fund, a levy was imposed on all payments made by Indian industries for the acquisition of
foreign technologies. This fund finance projects with minimum and maximum project costs of
Rs.5lakhs and Rs.250lakhs respectively.
Grindlays Bank has set up the Indian Investment Fund to Finance the start up cost
of entrepreneurs. This fund was subscribed mainly by Non-resident Indians. The Government
of India also announced on 1989 a National Equity Fund for financing small-scale
entrepreneurs setting up units in rural areas and urban areas population of below Rs.5lakhs.
Institutions like ICICI,IFCI,SBI Capital Markets Canbank Financial Services and others have also
set up their own funds for providing Venture Capital Finance.
However, in general, the experience is that the Indian financial institutions are yet to reorient
their financing policies to meet the Venture Capital maxims. The traditional conservation of
these organisations makes their approach unacceptable. They fail to recognise that normal
criteria of debt-equity ratio, existence of security etc., are not the criteria for evaluating
venture capital projects.
The policy of Government with regard to Venture Capital Funds has changed in
1999-2000. The Government has allowed a free hand and transparency for I.T. Venture Funds
Foreign Funds are allowed freely into these Funds.
Difficulties in India:
Fundamentally, there are no private pools of the capital of finance risk ventures in India. The
financial institutions perforce occupy a dominant position in the provision of long-term capital to
Indian industry. They and the State development agencies do provide limited amount of equity
finance to assist the development of new business but there is no private, professionally managed
investment capital sources. There are no private sector insurance companies or the pension funds
gathering regular premium income and virtually no private banks willing to devote a small portion
of their resources to the venture capital niche. It is unlikely that such enterprises will be created in
the foreseeable future to mobilise private saving for investments. As an answer the situation,
mutual funds and investment trusts are permitted to set up and to commit the part of their
resources to the venture capital area. As a part of the broader equity investment fund, given
suitable standards of the valuation for unquoted investments, it should be possible for the fund
managers to commit the portion of there portfolios to venture capital situations. The participation
of the private sector in venture capital funding, as it has come to be defined in the narrow Indian
context, is not possible in isolation from the opportunity to develop a broadly spread investment
business.
Tax Treatment:
The tax treatment of the venture capital funds in India is ungenerous and falls
well short of what is required. Whereas the Mutual Funds established by the government
controlled financial institutions and nationalised commercial bank suffer no tax on either income
or capital gains, a venture capital fund would suffer at 20 per cent on dividend income and a
similar rate on long-term capital gains. Given an adequate investment spread and tax incentives,
mutual funds step into the early stage financing arena, professionally assess and the monitor
investments assist the launch of new medium size businesses. SBI Mutual Fund is really
undertaking investment work with its ‘brought deals’. The creation of more funds to participate in
this area of the market is now clearly seen. Early stage financings could then be syndicated
between number of professionally managed funds and sound, competitive situation between them
might also be created.
The Government has since 1995-96 been treating the venture funds like Mutual
funds for tax benefits and brought them under Regulation of SEBI. The SEBI has set out the

20. guidelines for their registration and control by itself a code of conduct for them to operate as in
the case of capital market mutual funds and for their investment and operations on the fund. In
the Central Budget for 2000-01 the income of the Venture Capital Fund is taxed at the rate of 20%,
although the dividends declared in the hands of the investors are tax-free.
Need for Growth of Venture Capital:
There is need for encouragement of risk capital in India, as this will widen the
industrial base of, high-tech industries and promote the growth of technology.
The initial step might be to permit the launch of the mutual fund by all those
banks authorise to conduct business in India, at the same time extending the investment range of
such funds to embrace unquoted stocks.
Liberating the capital market would bring greater depth to the capital market as a
whole, introducing more genuine investors of substance with long time horizons, provide avenues
for the institutions to realise their equity portfolios more easily (freeing funds for more new
investments), and generally improve market liquidity. This would improve equity cult.
So moves towards a freer and less regulated market are important in considering
measures to simulate the entry of the private sector into the risk capital formation.
Latest Policy Charges:
In the year of 2000 of new millennium, the I.T. industry along-with many start up
industries like Telecom, Biotech, Multimedia etc…have experienced rapid growth potential but
with Scarcity of the Venture Funds. To encourage Venture Capital Funds to grow rapidly to help
these industries, the Government has announced the following measures early in 2000.
1. SEBI to be the sole authority for the regulation of Venture Capitals.
2. The single window clearance facility is extended without the need for going for clearance
with the government RBI and I.T. Authorities.
3. In the first Millennium Budget, 2000-2001, Venture Capital have got “on par” Status with
Mutual Funds for the purpose of the tax treatment under section 10(23D) of I.T. Act. Tax
exemption is granted to Venture Capitals like those of Mutual Funds, so that double
taxation is avoided and tax is levied only at one level, namely at the hands of investors.
4. The IPO norms are liberalised for the Venture Capital Funds for the purpose of listing.
Appraisal and finding are allowed to extent of 10% of the equity capital of a start-up
company. The condition of 3 years track record of profitability is waived. Even a public
issue of 10% of paid up capital is enough for the I.T companies for the purpose of listing.
5. The Government have set up a separate ministry of I.T and started an I.T Venture Fund of
Rs.100crores for the financing new start up I.T projects.
6. Venture Funds were set up by ICICI, UTI, IDBI, Tatas etc.
Venture Capital Vs. Mutual Fund
In the matters of tax, venture capital funds and mutual fund are kept on par.
Foreign Venture funds are given a free hand tom flow in for the investments permitted for foreign
investment. During the first quarter of 2000, about $17 billon have flowed in as Venture Funds
mostly invested in the technology based small companies, according to a Survey Conducted by
price waterhouse coopers (PWC) Company.
Among the measures to promote the capital market banks are now allowed to
invest in equities and bonds on a discretionary basis and to invest in Venture Capital Funds
beyond the permitted ceiling of 5% of their funds in shares and securities of the companies during
1999-2000.

21. Rules on Venture Capital Funds:
The norms of Venture Capital Funds are liberalized early January 2000. While
earlier, a Venture Capital Funds could not acquire more than 40% of equity of a high risk
business or a start up company, now there is no such ceiling and Venture Capital Funds is free
to invest as it likes. However, the only restriction that remains is that the Venture Capital
Funds cannot invest more than 25% of its own Fund base in any one company. Now Venture
Capital Funds can hold upto even 100% of equity of a start up the company as that ceiling of
40% is now removed, but it can now hold up to 25% of its own fund in any company’s equity.
Foreign Venture Capital is made eligible to participate in book building process
since July 2001. There is no lock in period for the pre issue share capital of an unlisted
company held by Venture Capital Funds and FVCFs. Mutual Funds are now eligible to invest in
units of the Venture Capital Funds, like investments in listed and unlisted securities. There
has been a considerable liberalisation in investments by Venture Capital Funds as much as
investments in Venture Capital Funds.
Merchant banking
What is Merchant Banking?
Merchant banks are issue houses rendering such services to industrial projects or corporate
units as floatation of new ventures and new companies, preparation, planning and execution of
new projects, consultancy and advice in technical, financial, managerial and organisational fields.
A number of other function such as restructuring, revaluation of assets, takeovers, acquisitions,
etc, are also undertaken by them.
A major function of merchant banking is the issue management. The issue can be public
issue through prospectus, offer of sale, or private placements etc.
Issue Management
The issue management involves the following functions in respect of issue through
prospectus:
(a) Obtaining approval for the issue from the SEBI
(b) Arranging underwriting for the proposed issue.
(c) Drafting and finalizing of the prospectus and obtaining its clearance from the underwriters,
stock exchanges, auditors, solicitors, Registrar of Companies and other necessary consents
required for filing the prospectus.
(d) Drafting and finalization of other documents such as application forms, stock exchanges.
(e) Selection of the registrar to the issue, printing press, advertising agencies underwriters,
brokers and bankers to the issue and finalisation of the fees and charges to be paid to them.
(f) Arranging through the advertising agency the press, brokers and investor's conferences.
(g) Co-coordinating the printing, and advertisements relating to the issue, and work of the
registrars to the issue, the receipt and processing of applications and preparation of the basis of
allotment, negotiation of the same with the stock exchanges and preparation of register of
allotment.
In the case of management of debentures, apart from the Managers to the issue have to do the
following things:
(a) To finalize the terms of the issue which will make the debenture issue attractive; and
(b) To assist in the finalisation of the relative security or mortgage documents and obtaining
approval there to from the Company's solicitors and trustees
Other Functions

22. Merchant banks in foreign countries undertake a larger number of activities. They operate
both in the money market and capital market, undertake direct and indirect lending portfolio
management for institutions, trusts, charities, etc, funds management for existing companies,
underwriting for new and old companies etc. They are also active in the money market and
discount market operations in undertaking bills discounting and investing the short-term funds in
treasury bills, commercial bills and other money market instruments. In India, these functions are
carried on by banks themselves with the result that their merchant banking divisions confine to
underwriting, consultancy, new issue business, involving management of issues and related
activities. The Indian merchant banking is still in its infancy and their activities are, therefore,
limited to a few selected activities of new issues market at present such as project planning,
financial consultancy, advice and planning and execution of these projects, involving the
preparation for the public issue, observance of necessary formalities for such issued applications
to SEBI, RBI and for listing on the stock exchange, collection and allotment of share application
moneys, underwriting etc .s
Offer of Sale
Usually, when the closely-held companies, whose shares are not listed on the stock exchange,
approach the financial institutions for assistance for the expansion of their existing operations or
diversification, the financial institutions stipulate a condition that the company should get its
shares listed. Where the capital base of the company is already large and issuing further equity
capital is not justified from the servicing angle, the promoters can offer such part of their exist
holding for sale through a letter of offer to the members of the public as Is necessary to get the
equity shares of the company listed on the stock exchange. Although the letter of offer is not
governed by the provisions of the Companies Act, 1956, in practice, the letter of offer contains all
the similar provisions which are to be found in the prospectus.
The offer for sale must give all material particulars relating to the company as if it were a
prospectus issued under the Companies Act. In particular, it should include information regarding
the shares on offer and the terms of sale, its capital structure, and capitalisation of reserves, any
revaluation of assets or schemes of arrangements or reorganizations, last five years' profit and
loss account summarised accordance with the prescribed listing requirements.
Any document by which the offer for sale to the public is made shall, for all purposes, be
deemed to be a prospectus issued by the company and all enactments and rules of law as to the
contents of prospectuses and as to the liabilities in respect of statement’s or omissions from
prospectuses otherwise relating to the prospectus, shall apply as if the shares or debentures had
been offered to the public for subscription and as if the persons accepting the offer in respects of
any shares or debentures were subscribers for those shares or debentures.
The said letter of offer will have to be signed by the persons offering the shares or debentures
for sale in the same manner as the directors of the company sign the prospectus in terms of
Section 60 of the Companies Act.
The offers collectively and individually accept full responsibility for the accuracy of the
information given in this offer of sale and confirm that to the best of their knowledge and belief
there are no other facts, the commission of which makes any statement in the offer for sale
misleading, and they further confirm that they have made all reasonable inquiries to ascertain
such facts.
The offers have to certify that neither the stock exchange to which an application for official
quotation is made nor the Central Government or SEBI has any responsibility for the financial
soundness of this offer, or for the price at which the offer of sale is made, or for the statements
made or opinions expressed in the offer of sale.
The initial issues should normally be at par and if further issues are made at a premium, this
has to be justified by acceptable norms by the merchant bankers.
Private Placement

23. When the financial institutions directly subscribes to the equity/preference shares and/or
debentures issued by the company, the company is said to have privately placed these securities
with the financial institutions. This does not require either a prospectus or letter of offer. The
terms and conditions subject to which the financial institutions agree to subscribe to the privately
placed shares or debentures are usually incorporated in the debenture subscription agreement or
the investment agreement entered into between the financial institutions and the company.
The company could, if it so desires, approach, in the place of financial institutions, a
well-identifiable body of persons like merchant banks for private placement. The provision of the
Act are to be interpreted strictly and therefore, if the company sends the offer to Mr. X and the
offer is accepted by Mrs.X to whom the allotment is finally made, it could deem to be the public
offer necessitating compliance of requirements of the prospectus.
This exercise is, therefore, to be undertaken with great caution to see that the final transfer takes
place only to those for whom the original offer was made. In practice, till recently the companies
hardly took any recourse to this mode of private placement of their securities due to these
restrictions.
The company has to agree upon the list of persons to whom the offer is to be sent much in
advance and its is thereafter necessary that the company should send offers to the same persons
as per the list approved by the Company with a clear-cut instructions to the officers that the
securities offered are strictly to be subscribed for by them and them alone and the officers are not
supposed to pass on the offer of the company to someone else. He would also ensure that the
company would receive subscription only from those persons to whom the original offers had
been sent by the company and finally, the company would allot securities to the same persons.
Services of Merchant Banks
Merchant banking is normally considered to be related only to the services associated
with public issue management but they also offer domestic project finance syndication.
Large merchant banks in the country offer a wide range of services. Merchant banks offer
generally the following services.
(a) Pre-investment studies for investors: These are in the nature of financial feasibility
explorations in selected areas of interest of the client. They include such studies for
foreign companies wishing to participate in joint adventures in India, and often involve a
package covering advice on the nature of participation and Government regulatory factors.
(b) Project finance: Once the decision embark on a particular
project/expansion/modernisation scheme has been taken, assistance in working out a
comprehension package for the project funding and pattern of financing is available from
the merchant banks. They work in close liaison with the client, his technical consultants,
and the funding institutions, prepare and submit complete e financial dossiers, and
arrange for the various sources of finance. Assistance in legal documentation for the
finance arranged is also provided.
(c) Working capital: Finance for working capital, particularly for new ventures, often
needs to be syndicated on behalf of the promoters, and merchant banks assist in this as
well. For existing companies, non/traditional sources such as through the issue of
debentures for this purpose, and others have been successfully tapped by merchant
bankers.
(d) Foreign currency finance: Of late, India has become increasingly active in the
international money markets, and this trend is likely to continue. For import of capital
goods and services from overseas, the arrangement of various kinds of export credits
from different countries is also required.
In addition to this wide range of services, some of the larger banks are also involved in
areas such as the arrangement of lease finance, and assistance in acquisitions and
mergers etc.

24. Why Merchant Banks?
The following are some of the reasons why specialist merchant banks have a crucial
role to play in India:
1. Growing industrialisation and increase of technologically advanced industries.
2. Need for encouragement of small and medium industrialists, who require
specialist services.
3. Growing complexity in rules and procedures of the Government.
4. Need to develop backward areas and states which require different criteria.
5. Exploring the possibility of joint ventures abroad and foreign markets.
6. Promoting the role of New Issue Market in mobilising savings from of public.
Functions
With increasing industrialisation of the country and the growing emphasis in the Five
Year Plans on industrialisation, merchant banking in India has a very extensive role to play.
The National & Gsrindlays Bank was the first to set up merchant banking division in India
followed by the State Bank of India and other banks.
Functions of the merchant banking divisions are as follows:
1 advice and liaison obtaining consent of the Central and Stat e Government, for the
project if necessary;
2. Preparation of economic, technical and financial feasibility reports;
3. Initial project preparation, pre-investment survey, and market studies;
4. Help in raising rupee resources from financial institutions and commercial banks;
5. Underwriting and also for subscription, if necessary, to the new issues or syndication
of loans, etc;
6. Assistance in raising foreign exchange resources so as to enable the industrial
concerns to import machinery and technical know-how and secure foreign collaboration.
7. Advice on setting up turnkey project s in foreign countries and locating foreign
markets;
8. Help in financial management and in designing proper capital structure and
debt-equity ratio, etc, for the company.
9. Advice on restructuring of capital, amalgamation, mergers, takeovers, etc;
10. Management of investment trust, charitable trusts etc;
11. Management aid and entrepreneurial aid (management audit providing designs of the
complete system, operational research and management consultancy); and
12. Recruitment (selection of technical and managerial personnel), etc.
Role of Merchant Banks
To promote the new issue market there is need for a qualitative improvement in the
offer of new issues both in terms of time taken and the cost of floatation. The time taken
for organising a new issue is between 12 to 18 months and the cost of raising new capital
varied from 3% to 8% and sometimes even 20%. This has been brought down relatively by
specialised merchant banking institutions by catering to the requirements of both large
and small industrial units. Cost of floatation of equity and preference capital is higher for
new companies than for existing companies, indicating thereby the difficulties
experienced by new companies in making a new issue. Merchant banks help saving in the
cost of new companies and of small companies.
The new issue market has not succeeded fully in mobilising savings partly due to the
preferences of the public to company deposits and partly due to low yields on equities as
compared to those on fixed interest securities. There has been a decline in the
proportion of share capital in the total capital employed due to the steep rise in the cost
of new issues. There are certain minimum costs to be incurred in respect of fees to
brokers, promoters' expenses, underwriting commission etc, irrespective of the size of
the project. While bigger companies are able to manage this, small units find it extremely
difficult to meet this minimum cost with uncertain prospects of their own internal

25. resources in order to avoid the high cost of making public issues.
Underwriting
The main work of merchant banks relates to underwriting of new issues and rising of
new capital for the corporate sector. Of the amount underwritten, some part devolves on
the underwriters, which varies depending on the state of the capital market, and the
intrinsic worth of the project. The SEBI has made underwriting
Compulsory for all issues offered to Public first but later it was made optional. SEBI made
it necessary for merchant bank to undertake or make a firm commitment for 5% of issued
amount to the public.
Type of Expertise Required
The type of staff required for a merchant bank will depend upon its functions which are
themselves flexible. The merchant bank should have an organisation large enough to deal
with a number of applications at a time. The issue house which acts as the merchant
banker normally pays visits to the company's plant, warehouses, and other physical assets
and if a company is making its first issue, it might secure independent reports from
Chartered Accountants, industrial consultants, technical experts etc. The issue house,
which is a merchant bank also, requires, plant, management, labour, competitors, profit
margins, taxations, etc. They have to keep ready all the information needed in the form of
dossiers with respect to the affairs of the company generally enquired into by the
investing public, lending financial institutions and the government.
Secondly, a merchant bank has to suggest an appropriate time of issue and provisional
terms. Once these terms are settled the share certificates, prospectus and other
documents are drafted by the merchant bank with the assistance of lawyers, accountants
and others. They have to satisfy the Companies Act and other SS requirements of law.
Subsequently, the merchant bank may have to get ready the application to the SEBI for the
public issues. This requires familiarity with the regulations under the Companies Act and
the SEBI guidelines and the procedures to be followed and the authorities to be
approached. The provisions under the MRTP Act regulating monopoly practices and other
activities of big industrial houses should also be looked into.
Thirdly, they may have to make an application to the appropriate stock exchange for
quotation and satisfy the stock exchange authorities with respect to the terms of issue
and prospectus.Listing requirements are to be observed and familiarity with the stock
exchange rules and bye-laws as well as the provisions of the Securities Contracts
Regulations) Act would be essential. They may have to advise on the desirability or
otherwise of listing on the stock exchange as well as help the companies go through the
process of getting their shares listed. Advertisements containing all the information
legally required to be given in the prospectus must be published in all the leading
proposed date of opening and closing, a summary of the company’s business history,
balance sheet, etc, to which a reference was made earlier. Once the issue made, the work
of the merchant bank relates to arranging for the allotment of shares in consultation with
the company and the stock exchange authorities with the help of Registrars.
SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) MERCHANT BANKING -ROLE &
FUNCTIONS
(a) Authorisation
Any person or body proposing to engage in the business of Merchant Banking would
need authorisation by SEBI in the prescribed format. This will apply to those presently
engaged in the Merchant Banking activity, including as Manager, Consultants or Advisers
to issues.

26. (b) Authorised Activity
(i) Issue Management
(ii) Corporates Advisory services relating to the issue
(iii) Underwriting
(iv) Portfolio Management Services
(v) Managers, Consultants or Advisers to the issue
(c) Authorisation Criteria
All Merchant Bankers are expected to perform with high standards of integrity and
fairness in all their dealings. A code of conduct for the Merchant Bankers is prescribed by
SEBI which will take into account the following:
(i) Professional Competence
(ii) Personnel, their adequacy and quality and other infrastructure
(iii) Capital Adequacy
(iv) Past track record, experience, general reputation and fairness in all their transactions.
(d) Terms of Authorisation
(i) All Merchant bankers shall have a minimum net worth of Rs.5 crore.
(ii) The Authorisation will be for an initial period of 3 years.
(iii) All issues should be managed by at least one authorised to Merchant banker
functioning as the Lead Manager or sole Manager.
Issue Amount No. of Lead Managers
Up to Rs. 50crores Not more than 2
Over Rs. 50 crores not more Not more than 3
Than Rs.100 crores
Over Rs.100 crores Not more than 4
(iv) The Merchant Bankers shall exercise due diligences independently verifying the
contents of the prospectus. The Merchant Bankers of the issues shall certify to this effect
to SEBI.
(v) In respect of issues managed by the Merchant Bankers, they would be required to
accept a minimum 5% underwriting obligation in the issue subject to a ceiling of Rs. 25
lakh.
(vi) Lead managers would be responsible for ensuring timely refunds and allotment of
securities to the investor.
(vii) The merchant banker’s involvement will continue till the complete on of essential
follow-up steps including listing of the shares and dispatch of certificates and refund.
(viii) The Merchant Banker shall make available to SEBI such information, returns and
reports as may be called for.
(ix) Merchant Bankers shall adhere to the code of conduct which shall prepared by SEBI.
(x) Merchant Bankers to ensure that Publicity / Advertisement material accompanying
the application form to the issue meets the requirement of GOI/SEBI.
(xi) SEBI shall be informed well before the opening of the issue the Inter allocation of
activities/sub-activities, among lead managers to the issue.

27. (xii) Merchant Bankers performing or planning to perform portfolio management services
shall furnish the details in the prescribed format.
(e) Classification of merchant Bankers
---------------------------------------------------------------------------
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Category Requirement Authorised to Act as
(1) (2) (3)
---------------------------------------------------------------------
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Category 1 Minimum Net worth Rs.50 crore Lead
Manager/co.manager
Adviser/consultant to an issue,
Portfolio manager and
underwriter to an issue is
Mandatory required.
---------------------------------------------------------------------------
--------------------------------------------
(f) Grading of Prospectus
Grading of Prospectus will be done by SEBI using the following parameters:
(i) Objective description of the project, its status and implementation.
(ii) Track record of the promoters and their competence.
(iii) Disclosure about Demand - Supply position, Market and Marketing arrangements,
Raw materials availability and infrastructural facility.
(iv) Disclosure of Risk factors.
(v) Objective assessment of Business prospects and profitability.
If highlights are provided the following deficiencies will attract negative points:
1. Absence of Risk Factor
2. Absence of Listing
3. Extraneous contents in prospectus
The Maximum grading points of prospectus will be 10
Points Category
More than or Equal to 8 +A
More than or equal to 6 but less than 8
A
More than or equal to 4 but less than 6
B
Less than 4 C
(g) Penalty Point System
SEBI has introduced penalty point system for Merchant Bankers who fail to comply with
the various provisions. The areas of non-compliance/defaults have been categorised into
following four categories. The activities are classified within these four categories:

28. Type Nature Penalty Points
---------------------------------------------------------------------------
--------------------------------------------
I General Defaults 1
II Minor Defaults 2
III Major Defaults 3
IV Serious Defaults 4
INVESTOR PROTECTION
Introduction
The term "Investor Protection” is a wide term encompassing various measures
designed to protect the investors from malpractices of companies, brokers, merchant
bankers issue managers, Registrars of new issues, etc. "Investors Beware" should be the
watchword of all programmes for mobilisation of savings for investment. As all
investment has some risk element, this risk factor should be borne in mind by the
investors and they should take all precautions to protect their interests in the first place.
If caution is thrown to the winds and they invest in any venture without a proper
assessment of the risk, they have only to blame themselves. But if there are malpractices
by companies, brokers, etc, they have every reason to complain. Such grievances have
been increasing in number in more recent years.
The complaints of investors come from two major sources:
(i) Against member brokers of Stock Exchanges;
(ii) Against companies listed for trading on the Stock Exchanges.
Besides, there can be complaints against sub-brokers, agents, merchant bankers,
issue managers, etc, which cannot be entertained by the stock exchanges as per their
rules. However, complaints against registered sub-brokers can be entertained.
Complaints against Members
Investors have complaints against brokers regarding the price, quantity etc. at which
transactions are put through, defective delivery or delayed delivery, delayed payment or
non-payments etc, non-settlement of vyaj badla ducs, non-payment of agreed brokerage
to authorised assistants, etc. In the event of default of a member broker, the dues of
clients are also to be looked into.
There is a Grievance Cell in many Stock Exchanges which attends to investor
complaints. Of the total, nearly 95% are against companies and they are more difficult to
settle, as many companies do not attend to the complaints promptly despite reminders
and warnings by the stock exchange, in view of the fact that penal powers of the
Exchange are limited SEBI has been given these penal powers in respect of listed
companies by an amendment to the SEBI Act in 1995 and many other subsequent a
amendments including the latest in 2002.

29. The grievance procedure in respect of complaints against members is as follows:
(a) Joint meeting of member’s vis-à-vis the clients for an
amicable settlement.
(b) Arbitration proceedings by the committee under the bye-laws.
(c) Special committee appointed by the Executive Director for
settlement
(d) Disciplinary proceedings including warnings, fines penalties, etc.
particularly in cases of fraud, cheating, etc. by the members.
Grievances Cell
Complaints against members were in the nature of non-payment of sale proceeds,
non-settlement of accounts etc. Of the total complaints against members, about 85% are
settled during the year, itself.
Complaints against Companies
The complaints against companies are in the nature of non-receipt of allotment
Letters, refund orders, non receipt of dividends, interest etc., delay in transfer of shares
and in splitting and consolidation. The clearance of these complaints is also attended to
by the Cell by writing to the companies, follow-up telexes, etc. and finally by warning to
delist the companies concerned. But the clearance of these complaints is slow due to the
non-compliance or slow compliance by the companies to the References made by the Cell.
The powers of the Stock Exchange are limited to warnings and delisting of shares and as
such compliance by the companies was poor.
Customers' Protection Fund
The Customers' Protection Fund is constituted by all Stock Exchange to safeguard the
interests of the investor clients from defaults of the stock brokers. The Fund is financed
by way of a levy on the turnover of members and from out of the listing fees, earmarked
by the Exchanges.
Investors Beware
Investors in stock and capital market need a word of caution. Firstly, these
investments are more risky, returns are uncertain and share values are subjected to wide
fluctuations. Secondly, such investments require an art and expertise to pick up the right
stocks, failing which the investors would burn their fingers. Thirdly, the players in the
market namely, Brokers and issuers of securities, companies’ etc are not rated high for
their honesty with the result that the investor’s complaints against stock brokers and
companies have been increasing over the years.
Specific Goals
The investor should be clear in the objectives of the income, capital appreciation, short term gains or long
term gains etc. He should have made already enough investments in housing and for a regular income to meet his
minimum needs and comforts of life. Even if all the stock market investments are wiped out due to a market crash,
the investor should not be pauper on the streets. Besides, if the investor spends sleepless nights on the fall of share
prices, he cannot be a good stock market investor.
Pre-requisites of Investor
The investor should have abundant common sense and a strong heart to withstand the vicissitudes of fortune.
He need not be a holder of high academic degrees like an MBA from Harvard or a finance graduation from the Wharton