What are the main functions of an investment bank? Describe the various stages in the underwriting process and the various types of equity offerings

Answer 1. Functions :

1. Investment banks help companies to manage their IPOs. They chalk out the financial details amd appoint underwriters for the completion of the projects.

2. They help in mergers and acquisitions and make strategical plans for two companies.

3. Investment banks helps companies in managing their risk whether credit risk, financial risk or business risk. They help in recognizing the loss areas.

4. They perform various types of merchant banking functions like helpsnin raising finance for a client, arrange broker in Stock exchange, Project management, Money market operations, leasing service, Portfolio management, Handling government consent for industrial projects, Managing public issue of a company, Special assistance to small companies and entrepreneurs.

5. They guide investors in purchasing various types of investments and help them in deciding their portfolios.

Answer 2. Stages in the underwriting process :

Process of underwriting involves the determination of price and risk of particular security. This process is generally followed during IPOs. In this process investment banks first buy the shares of an issuing entity and then later sell those shares to the general public or in security market. This process ensures full subscription of shares to the issuing company and the company will get full amount of their capital. Lots of documentation is required in this process and investment banks charge their commission from the issuing companies. There are three main phases in underwriting process :

1. Planning : Here investment banks will try to identify the investors and reason behind their investments. Demand and supply analysis will done in this stage.

2. Timing and Demand : Current market conditions i.e. boom or depression, investor's appetite for the investment, their nature whether they are bold, neutral or risk averse, current news about the companies are many factors to be discussed in this stage.

3. Issue structure : Whether the issue will be domestic or international, investors will be institutional or retail in nature, how will the sale occur is considered in launching the issue.

Underwriters can make three types of commitments: 1. Firm commitment : Here , the underwriter fully commits to the offering by buying the entire issue and taking financial responsibilities for any unsold shares. 2. Best efforts or marketed deal : Thid type of commitment imposes no financial responsibility on the underwriter, regardless of the performance of the deal. The underwriter is not liable for any unsold shares. 3. An all-or-none commitment : In this, the underwriter will not be compensated at all unless the entire issue is sold at the agreed price.

Answer 3. Various types of equity offerings :

1. Offering through IPOs : Here company first time offer its shares, it issues the prospectus and investors who are interested in purchasing the shares can apply for the same.

2. Private Placements : Here company sells its securities by appointing institutional broker or through private placements. This method is convenient and economical also.

3. Offer through intermediary : Here company offer its shares through intermediaries like stock exchange brokers, commercial banks and financial institutions. This method is almost similar to above one.

4. Offer to inside cotrie : This means offer shares to promoters or directors of the company. This method is totally free of cost.