Investment Banking - A Field of Banking


By

L.Rajarajeswari
Asst. Professor
Department of Business Administration
Arul Anandar College
Karumathur, Madurai District
 


INTRODUCTION:

Investment banking is a particular form of banking which finances capital requirements of an enterprise. Investment banking assists as it performs IPOs, private placement and bond offerings, acts as broker and carries through mergers and acquisitions. Investment banking is a field of banking that aids companies in acquiring funds. In addition to the acquisition of new funds, investment banking also offers advice for a wide range of transactions a company might engage in.

Traditionally, banks either engaged in commercial banking or investment banking. In commercial banking, the institution collects deposits from clients and gives direct loans to businesses and individuals.

Through investment banking, an institution generates funds in two different ways. They may draw on public funds through the capital market by selling stock in their company, and they may also seek out venture capital or private equity in exchange for a stake in their company.

An investment banking firm also does a large amount of consulting. Investment bankers give companies advice on mergers and acquisitions, for example. They also track the market in order to give advice on when to make public offerings and how best to manage the business' public assets. Some of the consultative activities investment banking firms engage in overlap with those of a private brokerage, as they will often give buy-and-sell advice to the companies they represent.

The line between investment banking and other forms of banking has blurred in recent years, as deregulation allows banking institutions to take on more and more sectors. With the advent of mega-banks which operate at a number of levels, many of the services often associated with investment banking are being made available to clients who would otherwise be too small to make their business profitable.

At a very macro level, 'Investment Banking' as term suggests, is concerned  with the primary function of assisting the capital market in its function of capital intermediation, i.e., the movement of financial resources from those who have them (the Investors), to those who need to make use of them for generating GDP (the Issuers). Banking and financial institution on the one  hand and the capital market on the other are the two broad platforms of institutional that investment for capital flows in economy. Therefore, it could be inferred that investment banks are those institutions that are counterparts of banks in the capital markets in the function of intermediation in the resource allocation.

Nevertheless, it would be unfair to conclude so, as that would confine investment banking to very narrow sphere of its activities in the modern world of high finance. Over the decades, backed by evolution  and also fuelled by recent technologies developments, an investment  banking has transformed repeatedly to suit the needs of the finance community and thus become one of the most vibrant and exciting segment of financial services. Investment bankers have always enjoyed celebrity
status, but at times, they have paid the price for the price for excessive flamboyance as well.

In the words of John F. Marshall and M.E. Eills, "investment banking is what investment banks do". This definition can be explained in the context of how investment banks have evolved in their functionality and how history and regulatory intervention have shaped such an evolution. Much of investment banking in its present form, thus owes its origins to the financial markets in USA, due o which, American investment banks have banks have been leaders in the American and Euro markets as well. Therefore, the term 'investment banking' can arguably be said to be of American origin.

What is Investment Banking?

    * A person or organization sometimes acts as an underwriter or mediator for corporations and municipalities issuing securities.

    * Most of them also preserve broker-dealer operations to maintain markets for formerly issued securities and suggest advisory services to investors.

    * Investment banking also has a large role in facilitating mergers and acquisition, private equity placements and corporate restructuring.

Few facts about Investment Banking

    * Unlike traditional banks, investment banks do not accept deposits from and provide loans to individuals also called investment banker.

    * Investment banks help companies and governments (or their agencies) raise money by issuing and selling securities in the capital market (both equity and debt).

    * Almost all investment banks also offer strategic advisory services for mergers, acquisition, divestiture or other financial services for clients, such as:

        * trading of derivatives
        * fixed income
        * foreign exchange
        * commodity
        * Equity security.

    * Trading securities for hard cash or securities (i.e., facilitating dealings, market-making), or the endorsement of securities (i.e., underwriting, research, etc.) is referred to as the "sell side".

      * On the other hand the "buy side" constitutes :

          * the pension fund,
          * mutual funds,
          * hedge funds,

      * The investing public who use the goods and services of the sell-side with the intention of make best use of their return on investment.

      * Many firms have both buy and sell side mechanism.

Functions of Investment Banking:

Investment banks have multilateral functions to perform. Some of the most important functions of investment banking can be jot down as follows:

    * Investment banking help public and private corporations in issuing securities in the primary market, guarantee by standby underwriting or best efforts selling and foreign exchange management. Other services include acting as intermediaries in trading for clients.

    * Investment banking provides financial advice to investors and serves them by assisting in purchasing securities, managing financial assets and trading securities.

    * Investment banking differs from commercial banking in the sense that they don't accept deposits and grant retail loans. However the dividing line between the two fraternal twins has become flimsy with loans and securities becoming almost substitutable ways of raising funds.

    * Small firms providing services of investment banking are called boutiques. These mainly specialize in bond trading, advising for mergers and acquisitions, providing technical analysis or program trading.

Basics of Investment Banking:

The banking sector is one of the biggest contributors to a nation's economy, provided it is managed in an innovative and professional environment. Investment banking is one rapidly growing form of banking.

An investment bank is a type of financial intermediary that performs a variety of functions such as underwriting, facilitating mergers and acquisitions or brokerage services for institutions. The work of an investment bank begins right from the counseling before the underwriting sessions, and stretches right till the securities are properly handled and distributed. Investment banks play a very crucial role in market transactions on behalf of, or for private and public investors, government and corporations. There are a number of investment banks that also provide highly professional services in assisting their clients with industrial know-how on various parameters.

Industries from diverse sectors like media and telecommunications, real estate, industry, finance, health care, consumer products and various such segments are provided assistance by investment banking services. Along with these, an investment bank also deals in the securities, trading services, credit counseling, financial engineering and merchant banking. The primary source of income for investment bankers is the commissions, fees and gain margins on transactions provided for the above mentioned institutions.

The role of an investment bank as a mediator is to directly familiarize the nature of the investment and the entity being invested in. In case of conventional banking, people deposit finances in the form of cash, assets and so on with a bank. The bank in turn can lend to a borrower under some standard norms to utilize in his own way. In the case of investment banking, there is a direct familiarization of both the investor and the borrower. This means that an individual or institutional investor has an option to choose his type of investment or division of investment into any given entity looking out for funds. An investment bank can also assist investment in the financial market.

Investment banks provide companies with expert guidance and formulate strategies on their behalf for disinvestment, and also to merge or acquire new entities. Good investment banking involves procedures to maintain and upgrade the quality of services and keep a close watch on the emerging trends in the market, where their customer's money can be invested. It also incorporates risk management services in order to streamline the flow of capital, check its overuse, and come up with a detailed analysis of credit risks.

The investment banking market was increasing leaps and bounds, until the present recession struck. Banks all over the world are trying to recoup the losses. The US is the biggest market for investment banks, followed by Europe, Middle East, Africa and Asia. The global hubs of investment banking are a few economically sound centers like London, New York and Tokyo. However, investment banking is not restricted in its scope to a few regions of the world. It caters to a global community which makes it highly sensitive to global ups and downs, along with innovative fluctuations.

Recent Scenario of Investment Banking:

    * Struggle for investment banking jobs is severe. Investment banks and financial services firms are hiring, but competition for jobs is fierce.

    * Knowledge & financial skills are crucial. In particular, greater financial skills and experience are essential for potential applicants to attain an aggressive circumference in the interview and hiring process.

Role of Investment Banking Companies in India:

Investment banking companies generally help their clients to access capital through equity, debt and other kinds of investment products. These firms also trade in equities and derivative products and also help companies with merger and acquisition deals.

About a couple of years back, when the world economy was reeling under a recession, many investment banking firms either collapsed or were on the brink of closure. Even a few firms in India were affected by this global downturn. This led to many skeptics writing off the revival of these firms.

Challenges:

Investment banking is one of the most global industries and is hence continuously challenged to respond to new developments and innovation in the global financial markets. Throughout the history of investment banking, it is only known that many have theorized that all investment banking products and services would be commoditized. New products with higher margins are constantly invented and manufactured by bankers in hopes of winning over clients and developing trading know-how in new markets. However, since these can usually not be patented or copyrighted, they are very often copied quickly by competing banks, pushing down trading margins.

For example, trading bonds and equities for customers is now a commodity business structuring and trading derivatives retains higher margins in good times - and the risk of large losses in difficult market conditions, such as the credit crunch that begin in 2007. Each over-the-counter contract has to be uniquely structured and could involve complex pay-off and risk profiles.

In addition, while many products have been commoditized, an increasing amount of profit within investment banks has come from proprietary trading, where size creates a positive network benefit. The fastest growing segments of the investment banking industry are private investments into public companies. Such transactions are privately negotiated between companies and accredited investors.

The Future of Investment Banking Services in India:

Investment banking India has always been very crucial for the smooth flow of market transactions between various investors, companies, firms and the government. These banks will have a role to play even in the future, irrespective of the economic conditions in the country.

Conclusion:

Investment banking is a field of banking that aids companies in acquiring funds. In addition to the acquisition of new funds, investment banking also offers advice for a wide range of transactions a company might engage in.

Traditionally, banks either engaged in commercial banking or investment banking. In commercial banking, the institution collects deposits from clients and gives direct loans to businesses and individuals.

Investment banking is a particular form of banking which finances capital requirements of an enterprise. Investment banking assists as it performs IPOs, private placement and bond offerings, acts as broker and carries through mergers and acquisitions.

Bibliography:

Books Referred:

Investment Banking and Securities Trading.

Internet Websites:

www.google.com

www.wikipedia.org
 


L.Rajarajeswari
Asst. Professor
Department of Business Administration
Arul Anandar College
Karumathur, Madurai District
 

Source: E-mail August 7, 2012

          

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