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Investment banks in Pakistan.

Investment bank is an institution which facilitates the flow of money from the lender to the borrower. It is a bridge between shortage and excess of capital, or simply a link between the users and providers of capital. The party that desires to raise capital is known as "issuers", for example corporations or companies that issue securities like common stock, preferred stock, bonds, term finance certificates (TFCs) etc., and the other party that provides capital is known as "investors", i.e. individuals or institutions that buy the investment securities of the issuer. An investment bank enables the issuer and the investor to optimize their returns in the most efficient manner. Divisions of an investment bank: Normally an investment bank has three major divisions, which are: (1) Capital market division, (2) Consumer market division, and (3) Research division.

Capital Market Division

This is the main division of an Investment bank and is engaged in the traditional activities of an investment bank. This division performs a number of activities, some of the major functions performed by this division are: Corporate finance; Securities underwriting; Merchant banking; Leveraged buy outs (LBOs); Private placements; Money market instruments; Privatization.

* Corporate Finance: It is normally the major function performed by the bank. There are three objectives of corporate finance, i.e. to obtain the lowest cost of capital, to obtain capital that most properly matches sources to uses, and to obtain optimum value for investments. The activities includes scrutinization, facilitating mergers and acquisitions, merchant banking, money markets, etc.

* Securities Underwriting: While offering the shares of a company to general public, the company signs an underwriting agreement with the bank, that in case the offer is not fully subscribed, then the bank will buy the remaining shares from the company. Another form of underwriting is that, the investment bank buys the securities from the issuer at a specific price and sell these securities to the investors at a price which the bank feels is appropriate. In this type of underwriting all the risk is borne by the investment bank because if the bank has asked for higher price, the offer may get under-subscribed, and the bank will be stuck up with the un-subscribed shares, thus blocking its capital. On the other hand if the offer gets fully subscribed or over-subscribed, then the bank will enjoy the whole profit. The types of securities that are underwritten by the bank are preferred stock, common stock, convertible debentures, corporate bonds, and some instruments of money markets are also included.

* Merchant Banking: This function of capital market division provide financial services to the businesses, like facilitating merges and takeovers, and advising and arranging share and loan issues for the institutions or clients.

* Leveraged Buy Outs (LBOs): In a LBO situation, company's shareholders are bought out by the company's management and other private investors using borrowed funds. An investment bank provides LBO facilities through four different approaches:-

* To raise finances for client led LBOs for specific operating companies.

* To raise finances for third party general LBO funds

* To structure and manage the investment bank's own LBO of a specific business concern or a subsidiary.

* To establish and manage the investment bank's own general LBO fund.

* Private Placement: In private placement, the equity or debt instruments/securities are offered to individual or institutional investors under lenient regulations than those for a public offering. It is the process through which the funds are raised from private investors by limited partnerships, project or product financing etc. by issuing non-public securities.

* Money Market Instruments: An investment bank may involve itself in the process of raising and trading of money market instruments like treasury bills (T-Bills), Federal Investment Bonds (FIBs), Certificates of Deposit (COIs), Certificates of Investment (COAs), commercial papers etc.

* Privatisation: An investment bank may also take up a role of advisor to advise governments on privatization of the publicly owned companies, and also arranges the underwriting facilities for them. Other services provided by an investment bank include, risk management, swaps, project finance, product finance, venture capital, asset based finance, asset management for institutions etc.

Consumer Market Division

The functions of this division are sale and distribution of financial securities, and to perform all the activities from the creation of a new financial product till the management of new product's system. However, some other areas that this division deals with are the establishment of financial products and funds for retail consumers and institutions, and to provide limited partnership of various types e. g. partnership in research and development etc. This division of consumer markets is related to the main function of investment banks, as it provides a vehicle for distribution of financial securities due to which it helps in increasing confidence in underwriting, when the institutional support is minimal. This is specially true because the bank has the capability to distribute sell the securities of the company that the bank has underwritten.

3) Research Division: As the investment banks bring together the issuer and the investor, for the maximization of return on wealth, due to which the investment banks are also engaged in research activities for the screening and matching of right lender and borrower to be brought together. Similarly the research is also helpful to the investment bank in its other activities like LBOs, private placements, privatization, underwriting etc. The research department is helpful in minimizing the risk involved while engaging in the previously mentioned activities, because the research division evaluates the candidates on specified criteria to assess the default risk attached.

* Investment banks in Pakistan: There are 35 banks listed on Karachi Stock Exchange (KSE), with a total paid-up capital of Rs. 10462.39 million. Out of these 16 are investment banks with a paid-up capital of Rs. 3730.842 million, 13 are commercial banks having Rs. 6218.92 million as paid-up [TABULAR DATA OMITTED] capital, and the remaining 6 banks are engaged in the securities business with a paid-up capital of Rs. 512.628 million. The largest investment bank listed on KSE in terms of paid-up capital is Bankers Equity Limited with Rs. 655.79 million as paid-up capital.

The first investment bank was listed on KSE in 1957, whereas the second investment bank was listed after a gap of 32 years in 1989. During a period of 5 years, i.e. 1989-1994 the number of investment banks have grown upto 16. The maximum number of investment banks listed on KSE were in the years 1992 and 1993, during 1994 only one investment bank was offered to public. All the investment banks listed on KSE are performing quite well. These banks are fulfilling their traditional duties and are helping to bring together the issuer and investor for generating the funds for each others requirement, thus indirectly helping the economy of the country through industrialization, payment of taxes to the government by these industries and also by providing employment to the unemployed educated and skilled persons.

The performance of investment banks could be judged from the criteria that during the year 1993 only one investment bank has suffered losses and that is due to the fact that the bank started its operation in September 1993 and only after a period of three months it published its annual accounts. Even now when the stocks are volatile and their prices have shed all the fat, only one investment bank is quoted below par, whereas the market price of rest of the investment banks are quoted above per value. So far only a few investment banks have published their annual accounts for the year 1994, whereas in the year 1993, PICIC generated the highest profits.

During the past few months, the stocks position of KSE was deteriorating and the share prices of the listed joint stock companies were constantly falling. However, the banking sector depicted its strength by being the last one to be adversely affected by the falling prices of the stock in general. In the same context, while the share prices have recently shown a rising trend, again the banking sector has confirmed its strength by being the first to be in the limelight of recovery.
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Author:Salam, M.T.
Publication:Economic Review
Article Type:Industry Overview
Date:Mar 1, 1995
Words:1350
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