Investment Banking Role in Indian Financial System

Clients for Investment Bankers

Investment banking is a very fast field and has clients from round the world. Investment bankers serve a variety of clients with different services like fund raisers, asset management, mergers and acquisitions etc. Some of the major clients of an investment banker in India include:

• Corporates - These are the key clients for an investment banker and include both public as well as private companies. The investment banker helps them in managing fund raisers, which eventually results in business growth, manage acquisitions or sell some business units. They also act as corporate financial advisors and research for investment.
• Institutions - Institutional investors are those who manage the capital of other investors. Examples of institutional investors include mutual fund companies. Such companies invest capital of other investors and investment bankers provide them research-based advice for the same.
• Government - Government raises money through bonds and treasury bills. Investment bankers help the government in managing them and also help in selling and acquisition of corporations. For instance, the recently announced prospective IPO of Life Insurance Corporation of India (LIC), which is currently a subsidiary of the Indian government will be managed from start to end by an investment banker or investment banking firm.

Functions of Investment Bankers

Investment Banking is often confused with IBD or Investment Banking Division of normal banks. However, both are different entities and serve different purposes. While an investment bank acting as a full-tie investment banker provides services like mergers and acquisitions, underwriting, investment research, commercial and retail banking operations etc., the investment banking division only provides underwriting and merger and acquisition advisory services.

• Managing Mergers and Acquisitions - Investment bankers play a major role by managing all the mergers and acquisitions of corporates from start to end. They act as an advisor for both the buyer as well as sellers.
• Underwriting - Underwriting is a process which is required when a company goes public for the first time. Underwriters act as an intermediary body between the companies and investors and manage the fund raiser..
• Equity Research - Some investment bankers also provide equity research to their clients. These research about the equities help investors in making decisions with respect to investments and support stock trading.
• Sales and Trading - Investment bankers help in trading securities in the secondary market by matching buyers and sellers. These bankers act as an agent for their client and also have authority to trade the capital of the firm.
• Asset Management - Investment bakers help in management of investments for a variety of investors ranging from individual investors to institutions.

Underwriting Services

To understand the role of investment bankers in underwriting services, let us first understand the process of underwriting. The process which helps to raise capital by selling stocks and bonds to investors or public on behalf of companies and institutions is known as underwriting. IPO is an example of such processes. Investment bankers help companies raise capital for their operations by marketing it to potential investors.

Underwriting can be further classified into three categories. Let us now take a look at each of the type of underwriting process:

• All-Or-None - In this process the entire issues need to be sold at the offering price. If, by chance, the issue fails to fetch the offer price, the deal is cancelled and called off. In this case, the issuing company gets nothing.
• Firm Commitment - In such a case, the underwriter signs an agreement for buying the entire issue. The responsibility for any unsold shares lies with the underwriters.
• The Best Efforts - In this process, the underwriter makes a commitment to sell maximum issue at the offer price. However, in this process they can return any unsold shares to the issuing company and have no financial responsibility for them.

Merger and Acquisition Services

Investment bankers act as advisors to merger and acquisitions. They help institutes and businesses in searching, evaluation, and acquisition of entities. This is one of the major functions of investment banking. Banks often have a very vast network of clients and entities which helps them in searching for potential opportunities. They often negotiate and crack deals on behalf of some of their clients. Investment bankers can serve both the purposes, serving any one at a time. They can either act as a banker to the buying party or a banker to the selling party.