INVESTMENT BANKING

Investment banking is a segment of banking that helps individuals & organisations raise
capital & provide financial consultancy. It includes underwriting mew debt & equity
securities, mergers & acquisition & market making
There are two side of IB – Buy side and Sell side

Fs- FINANCIAL SYSTEM

1. WHAT IS FINANCIAL SYSTEM
 The financial system refers to the collection of institutions, instruments, markets,
and mechanisms that facilitate the flow of funds and the allocation of resources in an
economy. It includes entities like banks, stock exchanges, insurance companies, and
regulatory bodies, as well as financial instruments like bonds, stocks, and loans.

 It aims to manage money and investments, allowing individuals, businesses, and

governments to save, invest, and make transactions.

2. HOW FS WORKS

In a financial system, there are typically two main participants: savers and borrowers.
 Savers deposit their money in banks and earn interest on their savings.
 Borrowers approach banks to obtain loans, which they repay with interest over time.
Banks act as intermediaries between these two parties. They lend out the money deposited by
savers to borrowers and, in return, earn interest from the loans. The bank pays a portion of
this interest to the savers as a return on their deposits.
Example:
If I deposit ₹300,000 in a bank at an interest rate of 6%, and another individual takes a loan
of ₹300,000 from the same bank at an interest rate of 9%, the bank earns a profit from the
3% interest rate spread. This difference between the interest earned on loans and the
interest paid on deposits represents the bank's net interest income, which is a major source
of its profit.
So the difference between that deposited interest and loan interest amount is the profit for
bank.

3. ROLE OF FS IN ECONOMY?
Financial system acts as the BACKBONE of the economy.
 It encourages both savings and investment.
 It helps in mobilization of savings
 Facilitation of investment
 Efficient allocation of resources
 Provision of liquidity
 Price discovery
So, it plays a crucial role in growth of the economy.

4. STRUCTURE / COMPONENTS / ELEMENTS OF FS?

 Fin. Instruments
 Fin. Services
 Fin. regulators
 Fin. market
 Fin. participants

5. DIRECT FINANCING
It’s a method of financing where borrowers borrow money from the FM without the help
of financial intermediary.

6. INDIRECT FINANCING
It is a method of financing where borrowers borrow money from
the FM with the help of intermediary.

[Link] MARKET
Marketplace where people buy and sell goods, but instead of fruits and vegetables, the
financial market deals with money, investments, and assets.
It is a system that allows individuals and institutions to trade financial instruments like
stocks, bonds, currencies, and derivatives.
 Liquidity
 Price discovery
 Accessibility
 Market transparency
 Regulation and oversight

7. LIQUIDITY
One of the primary functions of the secondary market is to provide liquidity to
investors. Investors can buy and sell securities quickly and easily, converting their
investments into cash whenever needed. This liquidity is essential for the efficient
allocation of capital.
 8. TYPES OF FM?
 Capital market
 Primary market
 Secondary market
 Money market
 Quote driven market
 Order driven market

The capital and money markets are based on Maturity

Quote and order driven are based on price discovery

9. CAPITAL MARKET
 Capital Market is a part of financial market where long-term securities are
traded, which has maturity for more than one year.

 It encompasses both equity and debt markets where businesses and governments
raise long-term capital by issuing stocks and bonds. Capital markets contribute
to economic growth by facilitating long-term investment.
BONDS:
Bonds is a debt instrument used by companies, govt., or institutions to raise money from
investors. It provides fixed income. It is capital market instrument. Capital will be returned
after maturity.
OTC – is a decentralised mark. Where trading of fs happens directly between 2 parties
without being listed in stock exchanges.
ODM – is a type of FM where orders are matched without the help of investors. In this
market, CP are unknown, Order execution is not guaranteed, Trades occur only hen the qty,
price, time are matched.
QDM- IN this Prices are determined from bid and ask quotation. Market maker creates the
contract, Order execution is guaranteed, CP are known.

10. DEBENTURES

Debentures are debt instruments issued by companies or governments to raise capital.

They represent a loan to the issuer and typically have a fixed interest rate and maturity
date. Debenture holders are creditors of the issuer and have a claim on the issuer’s assets
in case of default.

For Example  Suppose a company issue $ 10 million worth of debentures with a fixed
interest rate of 5% per year and a maturity period of 10 years. Investors purchase these
debentures providing the company with the funds it needs for expansion or other projects.
Over the next 10 years, interest payment to the debenture holders and repays the principal
amount at the end of the maturity period.
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Debentures are debt market instruments traded in stock exchange which gives fixed income.
It is issued by a company with the objective of raise capital.
When someone buys a Debentures, they are lending money to the company in
exchange for a promise to be paid back later with interest.

FOR EXAMPLE,  Tech Innovations needs money to expand its operations. They
decide to issue debenture worth $10 million, with an interest rate of 5% and a maturity
of 5 years.
When investors buy these debentures, they are lending money to Tech Innovations.
Every year, Tech Innovations pays them 5% interest on their investment, and after 5
years, it repays the original amount of $10 million to the investors.

11. PRIVATE PLACEMENT

PP is a way for companies to raise money by selling shares or securities directly to a
select group of investors, rather than offering them to the general public through a stock
exchange.

TLC
 CLEARING: is a stage where trade get embedded with the counterparties.
It ensure that trade happens without failure.

SETTLEMENT: is a stage where CP meet their obligation either trf.

Securities or funds.

TYPES OF TLC
Based on where transactions takes place, calssified as
1. Exchange TLC
2. OTC TLC
Trade capture refers to internal records get updated with trade data

Internal records are : RMS, RDM, ACCOUNTING, COMPLAINCE

TRADE ENRICHMENT

Additional data will get added to the already captured data.

ADDTITIONAL DATA: Static data , Market dynamic data
CUSTODIAN
 MONEY LAUNDERING

Money laundering is an illegal activity where criminals try to

make illegally obtained money appear legal. That is the money
gained from illegal sources like drug, trafficking, fraud,
corruption, or tax evasion.

It typically involves 3 stages

1. Placement
2. Layering
3. Integration
PLACEMENT
Placement is the first stage ML process. It involves introducing
illegally obtained money into the financial system for the first time.
The goal is to physically move money away from its criminal source
& begin the process of disguising its origin.
Smurfing  In smurfing, Money launderer opens multiple Smurf
accounts in different banks and locations. It also called as money
mule.
Structuring In structuring, they ensure that the transactions doesn’t
go above the threshold in CTR & LTR.
CTR- Any cash deposit more than 2 lac. Bank has to find its origin of
that A/C
LTR – Any transaction more than 10 lac , then bank has to fins out the
origin of that A/C.

EXAMPLE:
A drug trafficker earns a large amount of cash from illegal drug sales.
Since depositing large amounts of unexplained cash directly into a
bank account may raise suspicion, the trafficker breaks the total
amount into smaller chunks (called smurfing) and deposits them into
different bank branches or through multiple individuals. These
deposits are just under the threshold that would trigger mandatory
reporting by the bank.

LAYERING

Layering is the second stage of money laundering.

At this stage, the goal is to hide the illegal origin of the money by
moving it around through many accounts, banks, and countries.

 The money is transferred between multiple bank accounts.

 It may be converted into different currencies or
cryptocurrencies.
 The person may buy and sell assets like gold, real estate, or shares.
 These transactions make the trail confusing and hard to trace.

INTEGRATION
Integration is the 3rd stage of money laundering and can be
accomplished simultaneously with the placement of funds
They consolidate all layered money; with that they do high value
transaction.
During integration, the funds are returned in a usable format to the
criminal source.
PMLA – PREVENTIO OF MONEY LAUNDERING ACT - 2002
SAR
A Suspicious Activity Report (SAR) is a document that financial
institutions must file with the financial intelligence unit (like FIU-
IND in India or FinCEN in the U.S.) when they detect potentially
suspicious or unusual transactions. These can include large cash
deposits, frequent transfers to high-risk countries, or transactions that
do not match the customer’s profile. The goal is to help prevent
money laundering, terrorist financing, or fraud by alerting authorities
to investigate further."

KYC
Stands for Know your Customer, Its main purpose is to Verify the
existence and place of existence of the company. Through
documentary and non-documentary methods
KYC Example:
A customer walks into HDFC Bank to open a savings account.
The bank asks for:
 Identity proof – like PAN card
 Address proof – like Aadhaar card or passport
 A recent photo
 Mobile number & email ID
Once the documents are verified and matched with the customer’s
face and signature, the bank completes the KYC process and opens
the account.
Later, the bank also monitors the account activity to ensure
transactions are consistent with the customer’s profile. If anything,
unusual happens, it may trigger an in check or SAR filing.

KYC Process – Step-by-Step

1. Customer Identification
o The customer provides official ID and address proof.
 Example: PAN card, Aadhaar, Passport, Voter ID
o This step confirms the person's identity and residence.
2. Customer Due Diligence (CDD)
 o The bank or institution collects information to understand:
 Nature of the customer’s business or occupation
 Source of funds or income
 Purpose of the account or transaction
o Risk level (low, medium, high) is assigned.
3. Verification
o The documents are verified physically or electronically.
o In India, e-KYC is common using Aadhaar-based OTP
or biometric.
4. Ongoing Monitoring
o After onboarding, the bank monitors transactions to
ensure they match the customer profile.
o Unusual or suspicious activity may trigger alerts or SAR
(Suspicious Activity Report).
5. Periodic Updates
o KYC details are updated regularly (every 2, 5, or 10
years depending on risk category).
o Customers may be asked to re-submit documents.
IMPORTANCE OF KYC
 Prevents illegal activities like money laundering and terrorist
financing.
 Ensures regulatory compliance under AML laws.
 Builds trust and transparency between banks and customers.

TRANSACTION MONITORING
It means regularly keeping a close watch on the transaction.
It involves checking a customer’s following details:
1. Historical transactions
 2. Customers profile
3. Customer interactions & behaviour
4. A/c or transactional details
T identify any suspicious activity or unusual activity,

1. Threshold based: Monitor transactions exceeding a

predetermined value Eg: cash transaction above AED 100000
2. Transaction Based: Monitor all or a specific percentage of
specific types of transaction
3. Location based: Related to transaction involving a particular
location or jurisdiction
4. Customer based: keep a close watch on transaction with a
particular customer or a class of customers.

CRR 4.5
SLR 18
RBI GOVERNOR – SANJAY MALHOTRA

DERIVATIVES
Derivatives are the financial contract when 2 CP agrees to exchange
an underlying asset at the price in future whether it I high or low.
Every transaction in the asset have price and the price fluctuates.
Parties only get affected by this so that they get into derivatives
contract.

FORWARDS:
Are customised OTC derivative contract
FUTURES:
These are standardised exchange settled forward contract. Here,
conditions are applied by exchange and not by the counter party.
Exchange only determines the expiry date.
OPTIONS:
Buyer of the contract will have the right, but not an obligation. Either
to buy or sell the asset at the strike price on expiry date.
Seller of the contract has an obligation to buy or sell the asset at strike
price on expiry date.
1. Call option
2. Put option
CALL OPTION:
When market price goes up – Long call will have unlimited profit
Short will have unlimited loss

When MP goes down - long call Limited loss and short call will
have limited profit.

PUT OPTION:
When market price goes up – Long put – limited loss
Short put – limited profit

When market price goes down – Long put – unlimited profit

Short put – unlimited loss

SWAPS
It is OTC product
Counter parties agree to exchange two cash flows from an underlying
asset.
Interest rate swap:
CP agrees to exchange cashflows based on 2 different interest rate.
Fixed & floating interest rate.
EXAMPLE:
Company A:
 Has a loan with a fixed interest rate of 6%
 Wants to switch to a floating rate (e.g., based on LIBOR)
Company B:
 Has a loan with a floating rate (LIBOR + 1%)
 Prefers fixed interest payments for stability
Now, they enter into an interest rate swap. The actual loans remain
unchanged , but the interest payments are swapped between them.

ES-EQUITY SWAP
Equity swap is a financial contract between two parties to exchange
the return on an equity for a fixed or floating interest rate over a
specific period.

EXAMPLE
 One party agrees to pay returns based on stock market
performance (like Nifty 50 or a company's shares).
 The other party agrees to pay a fixed or floating interest rate
(like LIBOR + 1%).

FS - FOREX SWAP
Is a financial contract, CP agrees to exchange foreign currency with 2
different value date. E.g.: T+2, T+1.

CS_ CURRENCY SWAP

A Currency Swap is a financial agreement between two parties to
exchange principal and interest payments in different currencies.
It helps companies or governments reduce exchange rate risk or
borrow money in a foreign currency at better terms.

Company A (India):
 Borrows ₹100 crore at 8% interest in INR.
 Needs USD to invest in the U.S.
Company B (U.S.):
 Borrows $12 million at 5% interest in USD.
 Needs INR to invest in India.
They agree to a currency swap:
 Company A pays B 5% interest in USD and repays $12M at
the end.
 Company B pays A 8% interest in INR and repays ₹100 crore
at the end.
➡️Both companies benefit from better interest rates in their home
country while getting the currency they need.

CDS – CREDIT DEFAULT SWAP

Is a product in FIS. CP agrees to exchange credit risk of a bond for a
regular premium payment with transfer ownership.
Example:
Bank A holds ₹100 crore worth of bonds issued by XYZ Ltd.
 It is worried XYZ might default on the bonds.
🔹 Bank A buys a CDS from Insurance Company B:
 Pays a 2% premium annually.
 If XYZ Ltd. defaults, Company B pays the ₹100 crore to Bank
A.
So, Bank A transfers the credit risk of XYZ Ltd. to Company B.

CLN- Credit Linked Note

CLN are bonds in which a credit default swap is attached to it. It is
issued by com. Bank. It has maturity.
 An investor buys a CLN from a bank or financial institution.
 The CLN pays interest like a normal bond.
But if a specific company or borrower (called the reference
entity) defaults, the investor loses part or all the principal.

FRA FORWARD RATE AGREEMENT

It is a contract for locking in the floating interest rate for a future loan.
It helps businesses or banks protect themselves from interest rate
fluctuations on future borrowings or investments.

Mortgage-Backed Securities (MBS) are investment products that

are made by pooling together home loans (mortgages) and selling
them to investors.

How it works:
1. Banks give home loans to many customers.
 2. These mortgages are grouped together and sold to a financial
institution.
3. That institution packages them into securities (MBS) and sells
them to investors.
4. Investors receive monthly payments (like EMIs) from the
homeowners' loan repayments.
Example:
 Bank A gives 1,000 home loans.
 It sells those loans to an MBS issuer (like a government agency
or investment firm).
 The issuer creates an MBS and sells it to investors.
 When homeowners pay their EMIs, those payments are passed
on to the investors.

IRAN - isreal WAR

In my opinion, the Iran–Israel war has had a noticeable impact on
the financial markets by increasing oil prices and global
uncertainty. Investors shifted to safe-haven assets like gold, while
equity markets showed volatility. The conflict also raised concerns
about inflation and supply chain disruptions, especially in energy
sectors."

SET- SETTLEMENT
Settlement refers the process where CP agrees to meet their
obligations either transfer funds or securities. Registrars, Custodian,
CH, Bank, depositories are the participants.
INTERNAL SETTLEMENT:
Both CP have an account with one depository E.G.
Buyer, seller  Euro clear
BRIDGE SETTLEMENT:
One party a/c with Euro clear , and another one’s with clear stream

EXTERNAL SETTLEMENT:
One CP a/c with Clear stream & euro clear opposite CP a/c with other
depository.

Corporate action
Corporate actions are the events initiated by Board of Directors. They
will have the material impact on stakeholders. Eg. Dividends, Rights
issue.
Mandatory Corporate action
It is an event initiated by the BOD which is participation by the
stakeholders are mandatory.
Eg. Dividends,
Voluntary corporate actions
Participation by stakeholders are not mandatory they choose to
participate. E.g. Rights issue

Mandatory with choice

Participation by shareholders is mandatory but they can choose how
to participate. E.g. Company issue dividends or additional share. So
participants choose either can get dividend or additional shares.