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INVESTMENT BANKINGMeaning of investment banking Investment Banking as the term suggests, is concerned with the primary function of assisting the capital market in its function of capital market intermediation, i.e. the movement of financial resources from those who have them means investors, to those who need to make use of them means issuer for generating profit.
DEFINITION:According to Bloomberg: investment bank is a financial intermediary that performs a variety of services, including aiding in the sale of securities, facilitating mergers and other corporate re-organizations, acting as brokers to both the individual and the institutional clients and trading in its own account.
According to John F. Marshall & M.E Ellis investment banking is what investment banks do.
By the middle of 1800s, professional investment banks had sprung up in the US to help government raise funds for infrastructure projects and the civil war. In the 1830s, commercial banks started adding investment banking services to their regular banking activities in the US. Investment Banking hit a milestone in the 1870s when a syndicate of banks from Europe and US teamed up to buy $50 million worth of US Treasury Bonds for resale to public. History of IB Advising clients on mergers and acquisitions and public offerings was the main focus of major Wall Street partnerships. These firms included: Goldman Sachs, Morgan Stanley, Lehman Brothers, First Boston and others.That trend began to change in the 1980s as a new focus on trading propelled firms such as Salomon Brothers, Merrill Lynch and Drexel Burnham Lambert into the limelight22 Grindlays bank which has now merged with Standard Chartered bank in India started the banking operations in 1967 with the license from the RBI followed by Citibank in 1970.Origin in India In India, the existence of IB can be traced to over three decades (30 yrs.) , investment banking was largely limited to merchant banking services. For example : SBI set up SBI Capital Markets Ltd. In 1986 ICICI, Indian Bank any many other created separate merchant baking entities.
However around 1980s most of the public sector banks were transformed into separate subsidiaries.Need Of The Investment Banking
Investment banks help companies and governments and their agencies to raise money by issuing and selling securities in the primary market.
They assist public and private corporations in raising funds in the capital markets (both equity and debt),
as well as in providing strategic advisory services for mergers, acquisitions and other types of financial transactions.
The investment bankers act as an intermediary between the investors and capital market which consists of primary market and secondary market. The investment bankers with their intense research guide them to invest their money in banks/FI, Capital and money market, foreign exchange market, commodity market, real estate/gold etc. Proper deployment of funds will help the investors to earn good returns with safety of their initial invested funds. Functions of investment bankingCapital and Security Underwriting
Investment banks are middlemen between a company that wants to issue new securities and the buying public. So when a company wants to issue, say, new bonds to get funds to retire an older bond or to pay for an acquisition or new project, the company hires an investment bank. The investment bank then determines the value and riskiness of the business in order to price, underwrite, and then sell the new bonds.
Merger and acquisition: Banks advise buyers and sellers on business valuation, negotiation, pricing and structuring of transactions, as well as reorganization.JP Morgan, Goldman Sachs, Morgan Stanley, BofA /Merrill Lynch, and Citigroup, are generally recognized leaders in M&A advisory and are usually ranked high in M&A deal volume.
The scope of the M&A advisory services offered by investment banks usually relates to various aspects of the acquisition and sale of companies and assets such as business valuation, negotiation, pricing and structuring of transactions, as well as procedure and implementation
Sale equity and trading :Banks match up buyers and sellers as well as buy and sell securities out of their own account to facilitate the trading of securities Sales& Trading and Equity Research Institutional investors such as pension funds, mutual funds, university endowments, as well as hedge funds use investment banks in order to trade securities. banks charge commission fees.INVESTMENT BANKFRONT OFFICEClient interaction: generates revenue & profit for the bankMIDDLE OFFICERisk management , transaction, P&l.BACK OFFICEOperations and technologyStructure of investment banking1)Front Office : The front office generates the banks revenue and consists of three primary divisions: investment banking, sales & trading, and research. Investment banking is where the bank helps clients raise money in capital markets and also where the bank advises companies on mergers & acquisitions.sales and trading : the larger Banks will buy & sell securities on behalf of the bank & its clients . Research is where banks review companies and write reports about future earnings prospects. Other financial professionals buy these reports from these banks and use the reports for their own investment analysis. Research: the division reviews companies and writes reports about them with a buy and sell rating2) Middle office: Ultimately, the goal of the middle office is to ensure that the investment bank doesnt engage in certain activities that could be detrimental to the banks overall health as a firm.a)Risk management: Risk management involves analyzing the market and credit risk that an investment bank or its clients take onto their balance sheet during transactions or trades.b)Corporate treasury is responsible for an investment bank's funding, capital structure management, and liquidity risk monitoring.c)Financial control tracks and analyzes the capital flows of the firm, the finance division is the principal adviser to senior management on essential areas such as controlling the firm's global risk exposure and the profitability and structure of the firm's various businesses . d)Internal corporate strategy tackling firm management and profit strategy, unlike corporate strategy groups that advise clients, is non-revenue regenerating yet a key functional role within investment banks.3) Back office: The back office provides the support so that the front office can do the jobs needed to make money for the investment bank. a)Operations: This involves data-checking trades that have been conducted, ensuring that they are not wrong, and transacting the required transfers. Many banks have outsourced operations. It is, however, a critical part of the bank.b)Technology: Every major investment bank has considerable amounts of in-house software, created by the technology team, who are also responsible for technical support. Technology has changed considerably in the last few years as more sales and trading desks are using electronic trading. Some trades are initiated by complex algorithms for hedging purposes. SCOPE OF INVESTMENT BANK IN INDIAGrowth of primary market:If the primary market grows and number of issues increases, the scope of investment banking will be increased.Entry of foreign investors: now India capital market directly taps foreign capital through euro issues. FDI is increased in capital market. So investment bankers are required to advice them for their investment in India. If more and more NRIs participate in capital market, there will be great demand for investment banker services.Changing policy of financial institutions:Now, the lending policies of financial institutions are based on project orientation, so the investment banker services will be needed by corporate enterprise to product expert guidance.Development of debt market: If the debt market is enhanced, there will be tremendous scope for investment bankers. Corporate restructuring: Due to liberalization and globalization companies are facing lot of competition. In order to complete, they have to go for restructuring, merger, acquisition or disinvestments. They may offer good opportunities to merchant bankers.INVESTMENT BANKING IN INDIA
STATE BANK OF INDIA SBI was the first Indian public sector bank to set up its investment banking division in 1972. SBI Caps and IDBI Caps are two prime examples of investment banks in India today. Currently, there are 300 investment banks registered with SEBI. Currently, without holding a certificate of registration granted by the Securities and Exchange Board of India, no person can act as an investment banker. SBI Capital Markets (SBICAPS) is an investment bank founded in August 1986. It is a wholly owned subsidiary of State Bank of India (SBI).Project Advisory and Structure Finance: It performs the function of collecting funds from the international and Indian financial market for the infrastructure sector including transportation, power, telecommunication, energy and urban infrastructure. We offer seamless investment banking advice in buying or selling other businesses.
FINANCING ASSISTANCE: It is entrusted with the duty of raising funds for banks, corporate, PSUs, financial institutions and undertakings of state governments. In the last five years, SBICAP has mobilized more than Rs. 16000 billion as funds through rights issues, public issues and private placements.
INNOVATION:We develop innovative fund raising solutions both for domestic and international fundraising in debt, equity and hybrids.
Merger and Acquisition Advisory: It was formed in 1990 with the aim of taking part in the privatization business. It has successfully worked out many privatization deals with the central and state government. SBI Capital marketsLIST OF MAJOR INDIAN INVESTMENT BANKS BASED OUT OF INDIAAvendus
Bajaj capital
Barclays capital
ICICI securities limited
IDFC
IDFC private equity
Industrial development bank of India
Industrial finance corporation of India
Kotak Mahindra capital company
SBI capital market
Tata investment corporation limited
Yes bank
TYPES OF PLAYERS IN INVESTMENT BANKINGFull-Service Firms- These are type of investment banks who have significant presence in all areas like underwriting, distribution, M&A, brokerage, structured instruments, asset management etc. Commercial Banks- Commercial Banks operating through Section 20 subsidiaries referring to the subsidiaries formed under section 20 of the Glass- Steagall Act which were allowed to carry on limited investment banking services.Boutique Firms-These are the type of players which specialist in particular areas of investment banking. Brokerage Firms- These firms offers only trading services to retail & institutional clients. They have huge investor base which is also used by underwriters to place issues.Asset Management Firms- These firms offer on investment services. This includes activities like fund management, wealth management, cash management, portfolio management depending on the type of investors, purpose of investments, type of instrument invested etc,Swot Analysis of investment banking Breadth of financial services offerings: such as trading, private equity, venture capital, M&A, joint venture, project finance etc. Proficient Employees: In investment banking all the workings are done by professionals because it requires deft and proficient personnel.Technological advancement: due to technological advancement, working efficiency has been increased and works are done quickly and easily.Advance infrastructure: the country is equipped with all the latest and advances amenities such as better telecommunication, transportation, potable water, internet, land etc.
Unawareness of investors: the major weakness is the unawareness of its services among investors.Excessive dependence on trading sectors: investors are more dependent on the trading sector for their investments rather than any other field.
strengthWeakness:Growing demand for investment banking: the knowledge of investment banking is increasing among investors and they are diversifying their investment into many sectors besides trading. It can be seen by looking at the number of mergers and acquisitions, various projects in the countries and the level of sensex in the country.Removal of international trade barrierFinancially attractive country: India is a financially attractive country. Recent experience of recession show that India is among the few countries (china, Brazil and India), who not only survived in this difficult era but shows the path to developed countries to overcome this calamity.
Increasing Competition: competition in investment banking is increasing day by day. New players are foraying to the market due to this market share of each existing company is getting affected and profit as well.Decentralized management: each branch manager in a company is given the authority of taking decisions in their respective branches. The decisions made by different managers are diverse and by wrong decisions may lead to heavy losses to the companyOpportunities :Threats:Investment Banking could be termed as a relatively American phenomenon.The investment banks are inventing and manufacturing new products with higher margins in hope of winning over clients.
Investment banking provides a platform for investors to build and maintain their investments as they have teams of experienced professionals who offer knowledgeable insights into the stock exchange. Additionally, they have the expertise in terms of investing in the most profitable areas in different industries
Investment banking is one of the most global industries and hence is continuously to grow with the new developments and innovations in the global financial market.conclusion
