By: 1. Kenneth A. Kim John R. Nofsinger And 2. A. C. Fernando

Lesson 11

 Last Lecture Review ◦ A BoDs is a body of elected or appointed members who jointly oversee the activities of a company. ◦ BoDs are appointment at the public Annual General Meeting of shareholders. ◦ BoDs main primary function is to safeguard the shareholder’s interest.

 Board Committees ◦ An Executive Committee ◦ A Finance Committee ◦ A Public Relation Committee  Board Sub Committees ◦ Audit Committee ◦ Compensation Committee ◦ Nomination Committee

◦ More attention on Directors ◦ What is a “Good Board”?  Experienced members  Having different back ground i.e. technical as well as non technical  Independent board-having fraction of non-insider directors (difficult to find unambiguously independent directors)  Small board

 Good for Goose, good for Gander ◦ One form of board may be/may not be good for others. ◦ Small board may be/may not be good for others firms and vice versa. ◦ Can good board lead to better firm performance?  No positive correlation between the board quality and firm performances.  Normally board are reactive, not proactive  Sometimes inside directors are good for board (e.g. infant or new firms or when the firm has to make any huge financial/investment decision) and some times outside directors (e.g. when audit as well as compensation matters are required)

 Some potential problems with today's board ◦ Outside Directors relationship with the top management (e.g. CEO) ◦ Outside directors full motivation is still a question mark for firm’s board. ◦ Inexperienced as well as busy outside directors are fruitless for the board

 Lecture Outlines ◦ What is Investment Bank? ◦ Examples of Investment banks ◦ What does Investment Bank actually do? ◦ What is “Security”? ◦ Who are analysts in Investment Banks? ◦ Duties and responsibilities of “Analysts”. ◦ Methods of issuing stocks and bonds  Underwriting method  Best effort method ◦ What is “IPO”?

 Investment Bank ◦ An investment bank is a financial institution that assists corporations and governments to raise capital by underwriting and acting as the agent in the issuance of securities.  Investment banks also assist companies involved in mergers and acquisitions.  Unlike commercial banks and retail banks, investment banks do not take deposits

 In recent years, however, the lines between the two types of structures have blurred, especially as commercial banks have offered more investment banking services.

 Examples of Investment Banks in Pakistan ◦ Invest Bank Ltd ◦ Islamic Investment Bank ◦ IGI Investment bank ◦ First Credit and Investment Bank (Joint venture of NBP and WAPDA) These are some of leading Pakistani investment banks providing financial management and advisory services.

 Investment bankers ◦ investigate, ◦ analyze, ◦ research, ◦ underwrite and ◦ distribute

 Security ◦ A security is a negotiable instrument representing financial value and signifies an ownership interest in something tangible. ◦ That may be freely bought, sold and transferred.

 Investment banks should; ◦ Sell “good” securities i.e. They should not be selling securities of a poorly run firm  Analysts should; ◦ recommend “good” securities i.e. They should not be recommending stocks that they think will go down in value.

 Investment banks offers variety of services but their most notable business is selling newly-created securities.  When a private firm wants to become a public firm, it requires an investment bank for two reasons; ◦ To design and ◦ To sell the new stocks for the investing public to purchase.

 An existing firm can also take the services of Investment banks for additional capital growth.  Investment bank is an intermediary to sell securities on behalf of firms.  Jobs of the analysts are; ◦ To evaluate securities and make recommendations in buying and selling of securities ◦ To make earning forecasts for the firms as well as the investors.

 Both investment banks and analysts; ◦ Evaluate the firms position ◦ Bring investment opportunities ◦ Possess better information for the investors ◦ In better position to monitor firms ◦ To identify problems for shareholders.

Investment Banking Activities  To help companies issue new debt and equities securities.  Banks advises the company on the optimal security (stocks, bonds etc) for the amount of capital being raised, keeping in mind the company’s situation.  The bank charge the company for this service.

Methods of Issuing Stocks and Bonds 1. Underwriting the bank will guarantee that the company will receive a specific amount of capital, if not then bank will compensate and buy the shares. 1. Best Efforts the bank will not guarantee that the company will receive a specific amount of capital but do maximum efforts.

 The fee charge is much lower for the best- efforts methods than for underwriting.  The process of selling securities to public investors first involves; ◦ Registering securities with SEC and ◦ Documents  Preliminary prospectus containing information about the security issue and  The company  Financial condition  Business activities  Management experience  How the fund raised will be used.

 The prospectus and the banker’s “road show” relay information about the company to investors.  The “road show” is the marketing campaign done by bankers to generate interest and to market the issue.  To sell to individual investors, investment banks use their brokerage operations.

 The crucial importance of investment banks arises when the firm is new.  Investments banks experience greater risk when underwriting an IPO  An initial public offering (IPO), referred to simply as an "offering" or "flotation", is when a company (called the issuer) issues common stock or shares to the public for the first time.

 Summary ◦ What is Investment Bank? ◦ Examples of Investment banks ◦ What does Investment Bank actually do? ◦ What is “Security”? ◦ Who are analysts in Investment Banks? ◦ Duties and responsibilities of “Analysts”. ◦ Methods of issuing stocks and bonds  Underwriting method  Best effort method ◦ What is “IPO”?