What is Investment Banking
“A specific division of banking related to the creation of capital for other companies. Investment banks underwrite new debt and equity securities for all types of corporations. Investment banks also provide guidance to issuers regarding the issue and placement of stock.” An investment bank is a financial institution that helps companies take new bond or stock issues to market, usually acting as the intermediary between the issuer and investors. In addition to the services listed above, investment banks also aid in the sale of securities in some instances. They also help to facilitate mergers and acquisitions, reorganizations and broker trades for both institutions and private investors. They can also trade securities for their own accounts. Investment banks are also responsible for preparing the company prospectus, which presents important data about the company to potential investors. Generally speaking, an investment bank is an institution that advises and raises money for companies, governments and wealthy individuals. Investment banking is predominantly a securities business. Investment bank performance is strongly influenced by stock market performance. Investment banking is split into front office, middle office, and back office activities. Investing in general is the idea of using money to make money. The sub-prime crisis of 2008 has been a hammer blow for pure play investment banks.
Importance of Investment Banking
* For corporations - raising its capital.
* It facilitates the trading of securities thereby, increasing the liquidity of the securities. * Most of the corporations get advisory services from the investment banks regarding the mergers, acquisitions. * For Individuals- It provides investment opportunities.
* 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).
Investment Banking In India
For more than three decades, the investment banking activity was mainly confined to merchant banking services. The foreign banks were the forerunners of merchant banking in India. The erstwhile Grindlays Bank began its merchant banking operations in 1967 after obtaining the required license from RBI. Soon after Citibank followed through. Both the banks focused on syndication of loans and raising of equity apart from other advisory services. In 1972, the Banking Commission report asserted the need for merchant banking activities in India and recommended a separate structure for merchant banks totally different from commercial banks’ structure. The merchant banks were meant to manage investments and provide advisory services. The SBI set up its merchant banking division in 1972 and the other banks followed suit. ICICI was the first financial institution to set up its merchant banking division in 1973. The advent of SEBI in 1992 was a major boost to the merchant banking activities in India and the activities were further propelled by the subsequent introduction of free pricing of primary market equity issues in 1992. Post-1992, there was lot of fluctuations in the issue market affecting the merchant banking industry. SEBI started regulating the merchant banking activities in 1992 and a majority of the merchant bankers were registered with it. The number of merchant bankers registered with SEBI began to dwindle after the mid nineties due to the inactivity in the primary market. Many of the merchant bankers were into issue management or associated activity such as underwriting or advisory. Many merchant bankers succumbed to the downturn in the primary market because of the over-dependence on issue management activity in the initial years. Also not all the merchant bankers were able to transform themselves into full-fledged investment banks. Currently bigger industry players who...
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