Chapter1.

The Investment Banking Paradigm

Definition:
“Division of Banking includes business entities dealing with creation of capital for other
companies. In addition to acting as agent or underwriters for companies in the process of
issuing.

What is Investment Banking ?

Investment banking is a field of banking that aids companies in
acquiring funds. In addition to the acquisition of new funds, investment banking also offers
advice for a wide range of transaction a company might engage it.

Through investment banking, an institution generates funds in two different ways. They
may draw on public funds through the capital market by selling stock in their company, and
they may also seek out private equity in exchange for a stake in their company.

An investment banking firm also does a large amount of consulting. Investment bankers
give companies advice on mergers and acquisitions, for example. They also track in order to
give advice on when to make public offering and how best to manage the business public
assets. Some of the consultative activities investment banking firms engage in overlap with
those of a private brokerage, as they will often give buy & sell to the companies to the
represent.

Who needs an Investment Bank?

Any firm think about a significant transaction can benefit from the advice of an investment
banking. Although large corporations often have sophisticated finance and
corporate developments, an investment banking 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 service required to initiate and execute a major transaction,

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thereby empowering small to medium sized companies with financial and transaction
experience without the addition of permanent overhead.

What to look for in an Investment Bank?

Investment banking is a service business, and the client should expect top-notch service
from the investment banking firm. Generally only large client firm will get this type of
service from type major Wall Street investment banking; companies with less than about
$100 million in revenues are better served investment banking. Some principle to consider
include;

 Experience;
It extremely important that the, senior members of the investment
banking firm will be active in the project on a day-to-day basis. Depending on the
type of transaction, they should preferable to work. The investment bank should have
a wide network of relevant contacts, such as potential investors or companies that
could be approached for acquisition.

 Record of Success:
Although no reputable investment bank will guarantee success,
the firm must have a demonstrated record of closing transaction.

 Ability to Work Quickly;

Often investment banking projects have very specific
deadlines, for example when bidding on a company that is for a sale. The investment
banking must be willing and able to put the right people on the project and work
diligent to meet critical deadlines.

 Fee Structure:
Generally, an investment bank will charge an initial retainer fee, which
may be one-time or monthly, with the fee contingent upon successful completion of
the transaction.

 Ongoing Support:
Having worked on a transaction with the company, the investment bank
will be intimately with the business. After the transaction, an investment bank become
as a trusted business advisor that can be upon informally for advice and support on an
ongoing basis.

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

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1.2 Evolution of American Investment Banking

 Commercial banks in USA were preparing for an economic recovery & consequent to
the significant demand for corporate finance at the end of World War I.
 It was expected that American companies would shift their dependence from
commercial banks to stock & bond market at lower cost & for long time.
 So presence such market in 1920s commercial banks started to acquire stock broking
business in a bid which boom in capital market.
 The first acquisition happened where the National City Bank of New York Acquired
Halsey Stuart & company in 1916. In 1920s investment banking meant underwriting
and distribution of securities.
 In 1920s bank do not want to miss boom opportunity of stock & bond market. But
since they could not underwrite & sell securities directly, they owned security through
holding companies.
 Investment banking affiliate made huge profit as underwriting fees, special segment
called Yankee Bond issues by overseas issues in US market.
 In the stock market the mainly conducted broking operation through their subsidiaries
and lent margin money to customer. But with the passage of the McFadden act 1927,
bank subsidiaries began underwriting as well.
 The stock market got over heated with investment banks borrowing money from the
parent banks in order to speculated in the banks stock mostly for short selling.
 Once the general public joined the frenzy the price earnings ratios reached absurd
limit and the bubble eventually burst in October 1929 wiping out millions of dollars
of bank depositors funds and brining down with it banks such as the Bank of United
States.

Regulation of the Industry

 Banking Act 1933 which was known as Glass-steagall Act passage to commercial
banks that to restricted to engaging in securities underwriting and position or acting as
agent for other securities transaction.
 On the hand investment banks were barred from deposit taking & corporate lending
which were considered the business of commercial Banks.
 Investment Banks become one of the most heavily regulated industries in USA in
1935. The securities Act, 1933 provided for first time preparation of offer document
and registration of new securities with federal government.
 The securities Exchange Act 1938 led to establishment of the securities Exchange
Commission.

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 The Investment Companies Act, 1940 brought mutual funds within the regulatory
ambit & Investment Advisor Act 1940 regulated the business of Investment advices
and wealth manager.

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1.3 Evolution of Indian Investment Banking

In India through the existence of this branch of financial service can be traced to over
three decade investment banking was largely confined to merchant banking service. The
forerunners of merchant banking in India were the foreign banks. Grindlays Banka now
merged with Standard Chartered in India began merchant banking operation in1967banks a
license from the RBI followed by the Citibank in 1970. These two banks were providing
service for syndication of loan and raising of equity apart from other advisory service.

It was in 1972 that the Banking Commission Report asserted the need for merchant
banking service in India by the public sector banks. Based on the American experience which
led to the passage of the glass-steagall Act the commission recommended a separated
structure for merchant banks distinct from commercial banks and financial institution.
Merchant banks were meant to manage investments and provide advisory service.

Following the above recommendation the SEBI up its merchant banking division in
1972. Other banks such as the Bank of India. Central Bank of Baroda, Syndicated banks etc
are suited to set up their merchant banks outfits. ICICI was financial institution to setup a
merchant banks in 1973. The later entrants were IDCI & IDBI with the latter setting up its
merchant banking division in 1992. However by the mid eighties and early nineties most of
the merchant banking division of public sector bank were spun off as separate subsidiaries.
SBI set up SBI capital Market Ltd in1986. Other such as Canara Bank, BOB ,PNB,ICICI and
Indian Bank created separate merchant banking entities. IDBI created IDBI capital , market
much later since ,merchant banking was since banking was initially formed as a division of
IDBI in 1992.

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1.4 Service Portfolio of Indian Investment Banks:

The core service provided by Indian investment banks are in the area equity market, Debt
market and advisory. These are profiled below Merchant;

I. Banking, Underwriting and Books Running;

When the primary market are buoyant, Issue management, books –
building and syndicated underwriting from a very dominate segment of primary
market is also the private placement market, especially for government securities and
commercial paper and bonds floated by public offer and holding them in the private
placement as well SEBI has gradually been increasing its regulation of the private
placement market as well thereby making merchant bankers plays a significant in
them.

II. Mergers and Acquisition Advisory;

One of the cream activity of investment banks has always been M&A
advisory. The larger investment banks specialise M&A as a core activity. While some
of them provide pure Advisory service in relation to M&A other holding valid
merchant banking license from SEBI also manage the offer arising out of such
corporate events.

III. Corporate Advisory;

Investment Banks in India also have large practice in corporate Advisory

service relating to project financing, corporate restructuring , capital restructuring through
equity repurchases, raising private equity , Structuring joint-venture and strategic
partnership and other value specialized area.

1.3.2 Allied business

I. Securities Business;
The universal banks such as SEBI , ICICI ,UTI Bank and Kotak
Mahindra have their brokering and distribution firm in both the equity & debt
segment of the secondary market. In addition several other investment banks such as
the IL & FS and pure investment banks such as DSP Merrill Lynch and JM Morgan
Stanley have a strong presence in this area of activity. After the introduction of the
derivatives segment it had provided an additional area of specialization for investment
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 banks. Derivatives trading risk management & structure product offering are the new
segment that are fast becoming the area of future potential for Indian investment
banks.

II. Asset management Service;

Most of the top financial group in India which have investment banking
business such as the ICICI, DSP Merrill Lynch & JM Morgan Stanley etc. also have
presence in the asset management business through separate entities. Mutual funds
industry grew significant in India from the late nineties and is a force to reckon with
in the capital market. mutual funds provide the common investor the service
sophisticated funds management.
Several Indian investment banks have also ventured in to the business of
starting dedicated venture capital & private equity funds. ICICI, UTI Bank, DSP
Merrill Lynch and other have dedicated venture capital and private equity funds.

III. Investment Advisory & Wealth Management :

Many reputed investment banks nurture a separate service segment to
manage the portfolio of high net worth individuals, household, trust and other types
of non-institutional investors. This can be structured either as a discretionary or non-
discretionary portfolio management. This is a highly regulated activity since it
involves public investible fund. However , in several cases, investment banks do not
offer [portfolio management service but offer investment advice where in the investor
is provided good investment recommendations from time-time.

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 Business Portfolio of Management

Non Fund Based Fund Based

Merchant Banking Service Underwriting

Management of public offer of equity Market making

& Debt instrument
Bought out Deals
Rights Issues Proprietary Investment and treading in
equity, bonds & derivatives
Open Offers under the Takeover code

Buyback offers
Allied Business
De-listing Offers

Asset Management Service

Advisory and transaction Service
Mutual Fund
Project Financing
Portfolio Management
Syndicate Loans
Venture Capital Fund
Private equity/Venture Capital
Private equity funds
Preferential Issues Secondary Market Service
Qualified Institutional Placement Security Business

Business Advisory Brooking

Financial Restructuring Sales and Distribution

Asset recovering agency service Equity research

Investment Advisory
Government disinvestment &
privatization Derivatives

Acquisitions, strategic sales, buyout& Support Service

takeover corporate reorganisations
Registrars and Share transfer agent
such as mergers and demergers, hire-
offs, asset sales. Custodial Service

Other Capital Market Service

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Chapter 2. Underwriting

2.1 Definition:

Underwriting may connote different obligation depending upon the way it

has evolved as an area of capital market service. According to SEBI (underwriters) rules 1993
means “a person who engage in the business of underwriting of an issue of securities of a
body corporate.”

In Investment banking “underwriting is defined as the transaction

between the issuer of the instruments of debt or equity and the firm which has agreed to
liquidate the instruments immediately upon their issuance .” underwriting is one of important
core function of investment banking .

2.1.1 Introduction :

Underwriting is always in connection issue of securities by a body

corporate. It is not a general underwriting between a company and an underwriter. The
specific underwriting commitment has to be documented through an Underwriting
agreement.

Underwriting is an agreement by the underwriter to subscribe to the securities

being issued in case the person to whom they are offered do not subscribed to them.
Therefore , underwriting is a service that consist of taking a contingent obligation to
subscribed to an agreed number of securities to an issue if securities are not subscribed by the
intended investors.

Underwriting is primarily a fee-based service provide by an underwriter

since there is no fundamental obligation to subscribe to the underwritten securities. If the
issue is fully subscribe to by the investors , the underwriter has no further obligation falls
upon the underwriter to pick up the unsubscribe portion of the issues. In addition
underwriting require sufficient resource to be allocated to such activity.

In investment banking underwriting, the government or private entity which

issues the debt or equity instrument has an immediate need for cash ,and has no interest in
waiting to locate buyers for the instruments at an indeterminate or specified date. The issuer

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also usually has no detailed knowledge of the individuals who are capable or interested in the
present or future purchase of the instruments.

2.2 Underwriting Commission

1. The underwriters compensation for the service rendered is the fee that is paid
by the issuer company. The fee, which is known as underwriting commission ,
is paid as percentage of the value of underwriting .
2. Underwriting commission is payable irrespective of whether the underwriter
ultimate has any requirement to purchase the underwritten securities or not.
3. The payment of underwriting commission is governed by section 76 of
companies Act which stipulates a ceiling of 5% with respect to share and 2.5%
with respect to debentures.
4. The government of India fixed a capital 2.5%with respect to equity share. In
case of other securities where in the total issues size is more than Rs.5,00,000
the applicable ceiling is 1% if the issue is fully subscribed by investor.
5. In case the issue is under-subscribed the underwriter can be paid an additional
1% on the securities picked up by them. Within the above ceiling fixed by the
government an issuer company is free to negotiate lower rates of commission
with underwriters.

2.3 Underwriting Regulatory Framework

Underwriting activity in India is regulated under the SEBI Rules 1993 &
SEBI regulation 1993. The regulation Framework for underwriting activity a under above
mention:

 Underwriting business can be taken up by financial institution , Commercial banks,

Mutual funds, Merchant banker registered with SEBI , stock broker and NBFCs

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 All underwriting shall have necessary infrastructure, past experience , minimum of
two employees and shall comply with the minimum capital adequacy requirement as
stipulated from-to-time.
 Underwriter have to enter into legally binding agreement with the issuer companies.
The underwriter agreement have to be approved by the stock exchange wherein the
shares are proposed to be listed.
 In case if financial institution , mutual funds & bank the issuer company has to apply
separately prior to finalisation of the issuer for underwriting support.
 Underwriting commission cannot exceed the statutory ceiling.
 All underwriting contract have to be classified as material contract & disclosed as
such in the offer document & filed with the registrar of companies prior to the offer
document
.
2.4 Underwriting in Fixed Price Offer
Underwriting is a Optional for a fixed price offer, it is
present regulatory framework. Therefore if a issuer company fail that the issue is
strong enough to sell its merits, it may decide to take the risk and decide foe not
undertaking it.
In such case the company only pays brokerage for
marketing in security to investors and saves on underwriting commission. The
underwriting decision is normally taken in consultation with the lead manager who
has a good understanding of market.
The regulation further stimulate that if a fixed price
offer is under taking the lead manager , managing the issue shall undertake a
minimum obligation of 5 % of the total underwritten amount or Rs 25lakhs whichever
is lower . The regulation supposed that in stimulating a mandatory participation of
lead manager in the underwriting risk of the issue, a sense of responsibility would be
included to bring issues to the market.

2.5 Book Building

 Project funding process in the European Countries through mobilization of
money from institution or public is different from the normally adopted public
issue route in India. In countries like U.S.A the fund is collected from the
underwriter to issues through book building.

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  The India Corporate have started adopting the same system while exploring
the international money market at the time of issuance of Global Depository
Receipt. The process necessitates the companies to tie up the issue amount
through road show and in course of this exercise to book runner the role
offered amount from various underwriter/institutional investor. The issue price
is derived and constituted out of this offer received and recorded but the issue
manages.
 Book Building is selling an issues step wise to investor at an expectable price
with the help of a few intermediaries. The basic philosophy of book building is
based on the fact that the price of any script mainly depends upon the
perception of the investor about the corporate. The exercise is normally carried
out of the issuer with the help of few intermediaries who are called as the
Book Runner.
 Book Building is a relatively new optional device to raise ownership (equity)
or borrowed fund (debit) through public issue in the capital market in India
although it has been in vogue in the international financial market. The system
of book building has been introduced in India as a result of the steps taken by
the SEBI to implement the recommendation of the Malegam Committee,
which went into the issue of disclosure requirement.
 Book Building is an international practice which refers to collecting orders
from investment bankers and large investors based on an indicative price
range.

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 Concept

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 Book building is a novel concept to India. Under book building process the issuer is
required to lie up the issue amount by way of private placement. The issues price is
not priced in advance, it determined by offer of potential investor about price which
they may be willing to pay for the issues. To the lie up the issue amount the company
organise road shows and various advertisement campaigns. In course of exercise the
runner notes the amount offered by various investors such as Mutual funds,
Underwriters etc. The price of instrument is weighted average at which the majority
of investors are willing to buy the instrument.

In the Book Building process the issuer company ties up with a

selected group of individuals and agencies for private placement. The entries exercise
is done on wholesale basis whereas in the conventional system, large number system,
large number of brokers and underwriters are involved. It is called “Book Building
Process” because one lead managers build his order book by forming a syndicate of
eligible potential buyers.

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16
 Intermediaries

Book building refers to the collection of Bids from investor which is based on
an indicative price range, the offer price being fixed after the Bid closing date. The
principal parties/intermediaries is involved in a book building process ;

o The company
o A book running lead manager who is category merchant banker registered
with SEBI. The book running lead manager is also the lead merchant banker.
o Syndicate member who are intermediaries register with SEBI and who are
permitted to carry activities as underwriter. A syndicate member are appointed
by the book running lead manager.

2.5 Brought out Deals

i. BOD refers to the fact that the investment bank buys the entire stock meant to be
issued to the public from issuer company. Thereafter at the appropriate times usually
within 9 -12 months the investment bank make a offer for sale to the public thereby
the company.
ii. A BOD occurs when an underwriter, such as an investment bank, purchase security
from an issuer before a preliminary prospectus is filled. The investment bank (or
underwriter) act as principal rather than agent and thus actually “goes long” in the
security. The bank negotiates price with the issuer (usually at a discount to the current
market price if applicable).
iii. The risk in BOD is similar but not exactly the same as that in firm underwriting. In a
firm underwriting for an issues the risk is in terms of being saddled with stock that
would be listed but no having demand with investor.
iv. In a BOD the risk is in terms of saddled with unlisted stocks in case the issues cannot
be made due to adverse market trends setting in after the BOD is done.
v. Due to this risk sometimes an investment bank may bring in syndicate of other
investment bank or otherwise investor if it has to spread the risk. BOD is a recognised
route for companies to go public on the OTC exchange of India.
vi. BODs done to take companies public on other stock exchange have to comply with
the other requirement as applicable to normal IPOs.
vii. BODs were in vogue due to several advantages they offer to smaller companies in
terms of savings in time and expense of making retail IPOs.
viii. The advantages of BODs from the issuer’s perspectives is that they do not have to
worry about financing risk (the risk that the financing can only be done at a discount

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 to steep to market price). This is in contrast to a fully – marketed offering, were the
underwriter have to “ market ”the offering prospective buyers, only after which the
price is set.
ix. At the same time the company assured of fund from the investor that are not granted
in a public issue unless it is fully underwritten.
x. Usually the BODs is structured in keeping in view the ultimate public offering so that
investor are assumed of an expected written with an exit within a given time frame.
BOD done in past had a normal maturity profile of around 6-12 months
xi. Generally BOD occur in present day capital market since issue size have significantly
nd therefore investment bank cannot take unlimited risk.
xii. However in the Indian context a BOD is more of mezzanine around of investment
made by an investment bank with a view to take the company public in a short time
therefore.

Advantages and Disadvantage of the bought out deal from the underwriter’s
perspective include:

1. BODs are usually priced at a larger discount to market than fully marketed to deals,
and thus may be easier to sell; and
2. The issuer/client may only be willing to do a deal if it is bought (as it eliminate
execution or market risk.
3. If it cannot sell the securities , it must hold them. This is usually the result of the
market price failing below the issue price, which means the underwriter loses money.
4. The underwriter also uses up its capital, which would probably otherwise be put to
better use (given sell-side investment banks are not usually in the business of buying
new issues of securities ).

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Chapter 3. Issue Management

III 1. Definition and overview

The term issue management has been define under SEBI (merchant banker) regulatiot
act 1992 as an activity which will inter alia consists of preparation of prospectus and other
information relating to the issue, determing the financial structure, tie of final allotment and
refund of the subscription. As per the fram envisaged under the SEBI (merchant banking )
rule 1992 the main activity of merchant banker is issue management.

Issue management in India encompasses a wider role for merchant banker associated with the
issue. The merchant banker is also thrust with the a responsibility for ensuring disclosure
form an Isser company and statutory compliance with regard to the offer.

In India through term 'Merchant Banker' is used under the SEBI law the term is used to
denote in Issue management is 'lead Manager which has been used in the Regulation. If there
is more than one lead manager would be called the 'lead manager' and other would be known

as 'co-lead manager'.

III. 1 Types of Issue Requiring Issue Manager

If the size of issues is less between than 100-200 core, a maximum of four
lead manager.

If the size of Issue is less between than 200-400 core maximum of five lead
managers.

If the size of issues is above Rs. 400 core maximum, five as may be
approve by SEBI

 All right right issues of a size exceeding Rs. 50 lakh should have a one
issue manager
 All Qualified Institutional Placement should have lead manager.
III. 2 Function of Merchant Banker in Issues Management
Management of Issue involved marketing of
corporate securities viz. quity shares, preferences shares and debenture
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 or bond by offering the to public. Merchant banker act as an
intermediary whose main job is to transfer capital from those who own
it those who need it.
The issues function brodley divide into Pre-issue
management and Post-issue management. In both the satages in legal
requirements have to be complied with and several activities connected
with the issue have to be co-ordinated.

1) Pre-issue Management the various steps involves as under :

a) Obtaining stock exchange to MOA & AOA.

b) Taking action as per SEBI guidelines.
c) Finalising appointment with co-manager, underwriter,
advertisements agency, Brokers, Printer & redistricited to the issue.
d) Advice to a company to appoint Auditos.
e) Drafting the prospectors .
f) Obtaining consent of all parties. Obtaining the approval of draft
prospector from company legal advisor.
g) Approval of prospectors of SEBI.
h) Making an application of stock exchange for listing of share.
i) Publicity of issue through advertisement.
j) Approval prospector through Board of Director & and the same for
all directors.

k) To open subscription to open shares.

2) Post Issue Management the Various steps includes as under :

a) To supervise the allotment procedure as per the stock exchange
guidelines.
b) To ensure refund order allotmemt letter are issued in prper
time.
c) To report periodically about progress in the matter relating to
allotment & refund.
d) To ensure listing of the stock exchange.
e) To attend the investors griveness regarding the public issue.

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 For this merchant banker 0.5% of the
amount of public issue upto Rs. 25 core

0. 2 % of the amount exceeding of Rs. 25 cores.

Chapter 4. Private Equity

4. 1 Private Equity and Investment Banking

Private equity fund is pooled investment vehicle used for making investment in various
equity (and lesser extent debt )securities according to the to one of the investment strategies
associated with private equity. Private equity fund are typically limited partnership with a
fixed term of 10 years (often with annual extension). At inception institutional investors make
an unfunded committee to the limited partnership which is then drawn over the term of the
fund.

A private equity fund is raised and managed by investment professionals of a specific

private equity firm ( the general partner and investment advisor). Typically a single private
equity firm will manage a series of distinct private equity fund and will attempt to raise a new
fund every 3 to 5 years as the previoua fumd is fully invested. Private equity has as a major
service area over for investment bank in helping companies to raise equity capital privately.

It may be noted that companies may issue equity capital to their promoter groups,
working director and employee and group companies. Such allotment also amount to private
placement but they do not concern investment bank as per SEBI. Investment Banking
engaged when there is need to execute transaction. In the context yyo private equity, it could
be being external for client form a part of transaction advisory service rendered by the
investment banking.

The various aspect of raising capital through private placement is in the context of the
following types of transaction:

Raising Venture Capital

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 This related to raising equity capital from institutional venture capital investor for
startup companies to finance business plan that are at early stages of implementation.

Raising Private Equity in Unlisted Companies

This related to transaction for raising capital of private equity investors for later
stages business plan that require growth of financing.

Raising Private Equity in listed company (PIPE)

This is about raising equity capital for mature listed companies privately.

Qualified Institutional Placement

A separate channel for listed to raise equity capital other than through Public Offer
exclusively from QLBs under the QIP guidelines.

Preferential allotment

Allotment made to strategic investor, business collaborates and joint venture partners
where in the primary motive is not fund raising for the company but to facilitate the entry of
investors with business objective.

4. 2 Overview of Arranger's Service for Private Equity

The investment banker play a key advisory role in formulating the transaction for
raising equity and intermediary in the whole process till the transaction is closed successfully.
More specifically arrangement can be broke down into the following components:

 Due Diligence:
It perform comprehensive due diligence service for the purpose of reviewing
and investigating investment opportunities.
 Business Planning :

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 It work closely with company management to develop actionable strategic.
business plan.

 Financial Planning
It provide develop financial projection for emerging businesses, including
income statement, balance sheet and cash flow statement.
 Market Research
It perform strategic market research to assess and validate market
opportunities.
 Marketing Services:
It creates marketing plans, branding strategies, customer acquisition
strategies, and implement integrated internet marketing consulting services to
accelerate business growth.
 Exist Planning :
It assist portfolio companies with the development of realist path to
liquidity events for company management and investors.

4.3 PIPE (Private Investment in Public Equity)

PIPE or Private Investment in Public Equity is one of the
most dynamic area of Investment bank. PIPE is a term used when a
private investment or mutual funds buys common stock for a company at a
discount to the current market value per share.
Other Definitions :
[PIPE is when] a private investment firm's, mutual fund's or
qualified investors purchase of stock exchange in a company at a discount
to the current market value per share for the purpose of raising capital.
There are two main types of PIEs - traditional and structured. A traditional
PIEs is one in which stock, either common or prferred, is issued at set
price to raise capital for the issuer. A structure PIPE, on the other hand,
convertible debt (common or preferred share).

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Chapter 5. Buyback

5. 1 Introduction to share repurchase or share buyback

'Stock repurchase' or 'Stock repurchase' commonly know as 'Share buyback' refers to

the process of company buying back it's own share from its sharholder. In this sense it is the
reserve of an issue of share and is therefore also one of the way in which an 'exict' may be
provided to the shareholder.

5.2 Equity Repurchase in India

Till 1998, Indian companies were not allowed to buy back equity shares from their share
holder or from the secondary market. So the only exit option for the common investor was to
sell through the Secondary market. With the amendments to the companies Act, companies
were allowed to buy back their shares subject to a lot of statutory restrictions. The basic
framework of a share repurchase mechanism in India is to allow it as a step to be

24
implemented from time to time by companies. Share repurchase can be used to meet strategic
objectives including distribution of capital to shareholders but not treasury operations.

Buyback are discussed in the context of investment banking since statutory

regulations provide that appointment of a merchant banker as a manger to the offer is
mandatory for listed companies intending to make a buyback offer to their shareholders. In
such offers, the merchant banker plays a very significant role not only in pricing but in
ensuring compliance with law and in advising the company at every stage.

5.3 General Conditions

The general condition applicable to all types of company for buy-back of securities in terms
of the provision of section 77A and 77B of the companies Act are listed below.
o The buy back by the company has to be financed out of free reserves or securities
premium account or from proceeds earlier issue of dissimilar share of other
securities.
o The maximum time allowed for completion of buy back process in 12 months
from the date of the relevant resolution.
o Two buyback should be a direct purchase by the company and not an indirect
purchase through its subsidiaries or group investment companies.
o Two buy back the programme shall be separated by a period of 360 days even if
they are for dissimilar securities.
o No company shall make a public issue of a same kind of securities that have
bought back within a period of six month from the conclusion of the buyback
programme.
5.4 Investment Banking Perspectives in Share Buyback

PROCESS OF MAKING A BUY BACK

 Under SEBI buy back regulations, it is mandatory to engage a merchant
sbanker to prepare a L of O and manage buy back offer.
 Pricing mechanism fixed by the board of companies
 Requirement of an escrow account to be opened under the Tender offer and
the book building methods to the extent specified under regulations.
 The offer shall not open before 7 days and not after 30 day from the
specified date and shall be kept open for a minimum of 15 days and a
maximum 30days.

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