INVESTMENT BANKING

Compiled by:Name Sonam Gehi Chiranjiv karkera Vrushali Apurva Shende Roll No. 6 16 26 46

Introduction
An investment bank is a financial institution that assists individuals, corporations and governments in raising capital. An investment bank may also assist companies involved in mergers and acquisitions, and provide services such as market making, trading of derivatives, foreign exchange, commodities, and equity securities. Unlike commercial banks and retail banks, investment banks do not take deposits. From 1933 to1999, the United States maintained a separation between investment banking and commercial banks.

There are two main lines of business in investment banking: Trading securities for cash & the promotion of securities is the "sell side. Dealing with pension funds, mutual funds and the investing public constitutes the "buy side". An investment bank can also be split into private and public functions with a Chinese wall which separates them. The private areas of the bank deal with private insider information that may not be publicly disclosed, while the public areas deal with public information.

Organizational Structure
Main Activities
Investment banking is split into

- front office - middle office - back office

Front office
Investment banking is the traditional aspect of investment banks which also involves helping customers raise funds in capital markets and giving advice on mergers and acquisitions (M&A). Another term for the investment banking division is corporate finance. The investment banking division (IBD) is generally divided into: -industry coverage group -product coverage group. Sales And Trading On behalf of the bank and its clients, a large investment bank's primary function is buying and selling products. In market making, traders will buy and sell financial products with the goal of making money on each trade.

Research Research is the division which reviews companies and writes reports about their prospects, often with "buy" or "sell" ratings. While the research division may or may not generate revenue, its resources are used to assist traders in trading. Research also serves outside clients with investment advice.

Middle Office
Risk management involves analyzing the market and credit risk that traders are taking in order to prevent bad trades. It also ensure that the economic risks are captured accurately, correctly and on time. In recent years the risk of errors has become known as "operational risk. Corporate treasury is responsible for an investment bank's funding, capital structure management, and liquidity risk monitoring. Financial control tracks and analyzes the capital flows of the firm on essential areas such as controlling the firm's global risk exposure and the profitability. Corporate strategy, along with risk, treasury, and controllers also often falls under the finance division.

 Compliance areas are responsible for an investment bank's daily operations compliance with government regulations and internal regulations.

Back Office
Operations involves data-checking trades that have been conducted, ensuring that they are not incorrect, and transacting the required transfers. While some believe that operations provides the greatest job security and the bleakest career prospects of any division within an investment bank,smany banks have outsourced operations. It is, however, a critical part of the bank. Technology refers to the information technology department. Every major investment bank has considerable amounts of inhouse software, created by the technology team, who are also responsible for technical support. Technology has changed considerably in the last few years as more sales and trading desks are using electronic trading.

Investment policies of banks

Commercial banks are engaged principally in accepting deposits from large numbers of depositors and lending money to wide variety of borrowers, but investment in securities an important part of their operation. The manner in which they invest in securities is strongly conditioned by the structure of their assets and liabilities, by the relative size of their sources of income and by provision of RBI.

Capital adequacy ratio

Bankers pay a great deal of attention to the adequacy of their capital to support the risks they assume in their loans and investments. Differences in capital adequacy often influence their decision and ability to assume risk of loss of principal invested in securities. Risk minimization policies are imposed on banks by conditions under which they operate, by RBI. Inability and unwillingness to assume very high level of risk in terms of financial abilities of issuers to pay back causes commercial banks to limit their almost entirely to highly rated securities.

 The fundamentals objectives of the new framework should be to strengthen the soundness and stability of the banking system. Secondly, that the framework should be fair and have a high degree of consistency in its application to banks in different countries with a view to diminishing an existing source of competitive inequality among the international banks. In the context of the varying minimum capital requirement and taking into account. RBI has decided that a new uniform prescription for capital adequacy should be introduced . In the long run, such an approach, incorporating both on-balance sheet and off-balance sheet exposures of a bank into its capital ratio according to the level of perceived risk would encourage the banks to be more risk-sensitive and to structure their balance sheets in a more prudent manner.

 The regulatory restrictions on banks have greatly reduced many of the risks in the financial system. Earlier the deposits were taken at mandated rates and loaned out at stipulated rates. The interest rates therefore remained unaffected by market pressures. It can be classified as:

Domestic operations
1. 2. Funded Risk Assets Off Balance Sheet Item

Over Seas Operations 1. Funded Risk Assets 2. Non Funded Risk Assets

Liquidity Requirements
Liquidity essentially means the ability to meet all contractual obligations as and when they arise, as well as the ability to satisfy funds requirements to meet new business opportunities. Liquidity planning involves an analysis of all major cash flows that arise in the bank as a result of assets and liability transactions and projecting these cash flows over the future. Balance sheet projection should be prepared each month which will enable treasury manager to identify any potential liquidity problems that may rise in the future and take action which initiate the bank liquidity.

 Liquidity analysis involves an analysis of the maturity profile of

existing assets and liabilities over which are superimposed the impact of transactions that are planned for the future. Effective liquidity management requires careful attention to balance sheet growth and structure. A balanced sheet that is growing rapidly needs careful scrutiny to determine whether the liquidity of bank is being adversely affected.
Very often banks put up excessive assets in the form of cash credit lending's or investments in securities without having matching sources of funds of similar tenors. This mismatch in maturities of assets and liabilities results in the bank being subjected to liquidity risk, because the bank starts depending chronically and excessively on the most easily accessible source of funds i.e. the interbank call money markets.

Investments Considerations
As investment provide a major source of income to banks next

only to advances, management of that of managing a credit portfolio. Therefore banks must frame suitable policies for managing the investment portfolio. They are expected to use professional approach while managing their investment portfolio subject to ones own norms as well as the regulations/guidelines framed by the RBI From time to time. The investment portfolio of commercial banks in India is comprised of both approved and non-approved securities.

 This investment policy should cover the following subjects: 1. The overall investment policy 2. Guidelines to be framed for conducting transaction in securities. 3. Classification of securities under the current and permanent investment category. 4. Exposure to various banks, institutions and investment.

 While selecting a security for its investment portfolio the bank should give due weight age to the certain important criteria like: 1. Maturity 2. Yield 3. Composition

APPROVED SECURITIES:
Central and state govt. securities. Treasury bills of 91 and 364 days. Bonds issued by municipal corporations.

NON-APPROVED SECURITIES:
Bonds issued by public. Units of UTI. Equity shares and debentures of joint stock companies.

 Banks are required to invest in the approved securities to comply with the statutory liquidity ratio requirements It has been observed that the approved securities form more than

95% of total SLR components. The bank also invests its fund in the non-approved securities including corporate securities in conformity with the guidelines issued by the RBI from time to time and section 19(2) of the banking regulations act,1949.

The investment function purely from compliance with SLR requirement only which is a conservative approach. Instead of this, investment portfolio is to be looked upon as a source of income as well as liquidity.

TYPES OF FUNDS
Money market fund Equity fund Sector fund Bond fund International fund Balanced fund Asset allocation and flexible funds Index fund

What actually A Investment Banker do?

Investment bankers are agents. They dont create anything and they dont buy anything; they just sell things that arent ours to begin with. And make a lot of money doing that. If the business world were like Entourage, bankers would be the agents, private equity firms and large companies would be the studios, and companies would be the actors and movies. Private equity firms buy and sell companies. Studios buy and sell actors and movies. Bankers make introductions and try to sell things. Agents make introductions and sell their Clients.

Fee structure
Operating Expenses Front-End load Back-End load 12b-1 Charges
They are the cost incurred by the mutual fund in operating the portfolio. Shareholder do not receive an bill for these operating expenses.
It is a commission or sales charge paid when you purchase the shares. Payee to the brokers who sell the funds, may not exceed 8.5%,but higher than 6%. It is a redemption or exit fee incurred when you sell your shares. It start from 5% or 6% & reduce them by 1% point for every year funds are left invested. An annual marketing or distribution fee on a mutual fund. The securities and exchange commission allows the managers of so called 12b-1 funds to use fund asset.

Advantages of investment banking

An investment banking helps an organization, which may be a company, or a government or one of its agencies, in the issuance and sale of new securities. An investment bank usually helps in this process by providing expertise and customers to buy the securities. In other words, connecting the need for money with the source of money. The bane of Indian capital markets today is lack of investor confidence which effect the poor performance in both primary and secondary markets. The cause for existing situation are many but primarily arise on account of lack of liquidity Investment banking can solve this problem because investors would be dealing with reputed investment bankers in the primary market rather than unknown issuers.

Thank you!!!