PROBLEMS FACED BY INVESTMENT BANKS IN INDIA

WITH REFERENCE TO MUMBAI SUBURBS.

INTRODUCTION

DEFINITION OF INVESTMENT BANKING

1. Investment banking is a category of financial services that specializes primarily in
selling securities and underwriting the issuance of new equity shares to help companies
raise capital. Investment banking is different from commercial banking, which
specializes in deposits and commercial loans.
2. Investment banking is a special segment of banking operation that helps
individuals or organisations raise capital and provide financial consultancy services to
them. They act as intermediaries between security issuers and investors and help new
firms to go public. They either buy all the available shares at a price estimated by their
experts and resell them to public or sell shares on behalf of the issuer and take
commission on each share.
3. The Investment Banking definition is an elite financial service to
advise companies, individuals, and governments on financial and investment decisions.
They also help them raise equity and debt capital. Investment banks help companies
develop their investment portfolios and expand access capital markets. Capital markets
include the stock and bond markets. Investment bankers are known to be the well-
trained and effective contributors in the financial market. Because large firms raise
significant capital through selling securities, they usually use the services of an in-house
security issuance division or an investment banking institution. These banks often offer
cost savings compared to maintaining an in house security issuance division.

WHAT IS INVESTMENT BANKING?

Investment banking is a specific division of banking related to the creation of capital for
other companies, governments and other entities. Investment banks underwrite new debt
and equity securities for all types of corporations, aid in the sale of securities, and help to
facilitate mergers and acquisitions, reorganizations and broker trades for both institutions
and private investors. Investment banks also provide guidance to issuers regarding the issue
and placement of stock. At a very macro level, ‘Investment Banking’ as the term suggest, 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
Investor), to those who need to make us of them for generating GDP( the Issuers). As
already discussed banking and financial institutions on the one hand and the capital market
on the other are the two broad platforms of institutional intermediation for capital flows in
the economy. Therefore, it could be inferred that investment banks are those institutions
that are the counterparts of banks in the function of intermediation in resource allocations.
Nevertheless, it would be unfair to conclude so, as that would confine investment banking
to a very narrow sphere of its activities in the modern world of high finance. Over the
decades, backed by evolution and also fuelled by recent technological development,
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 Banker have always enjoyed celebrity status, but at times they have paid the
price for excessive flam boy as well. To continue from the above, in the words of John F.
Marshall and M.E. Ellis, ‘investment banking is what investment banks do’. This definition
can be explained in the context of how history and regulatory intervention have shaped
such as evolution. Much of the investment banking in its present form thus owes its origin
to the financial market is USA, due to which, American Investment bank 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. Their counterparts in UK and European markets
and extended the scope of such business.

UNDERSTANDING OF INVESTMENT BANKING

Many large investment banking systems are affiliated with or subsidiaries of larger banking
institutions, and many have become household names, the largest being Goldman Sachs,
Morgan Stanley, JP Morgan Chase, Bank of America Merrill Lynch and Deutsche Bank.
Broadly speaking, investment banks assist in large, complicated financial transactions. They
may provide advice on how much a company is worth and how best to structure a deal if
the investment banker’s client is considering an acquisition, merger or sale. It may also
include the issuing of securities as a means of raising money for the client groups, and
creating the documentation for the Securities and Exchange Commission necessary for a
company to go public.
Investment banking is among the most complex financial mechanisms in the world. They
serve many different purposes and business entities. They provide various types of financial
services, such as proprietary trading or trading securities for their own accounts, mergers
and acquisitions advisory which involves helping organisations in M&As,; leveraged finance
that involves lending money to firms to purchase assets and settle acquisitions,
restructuring that involves improving structures of companies to make a business more
efficient and help it make maximum profit, and new issues or IPOs, where these banks help
new firms go public.
Let’s understand how an investment bank earns money by providing acquisition
advisories.

Think of company ABC buying another company XYZ. ABC is not sure how much company
XYZ is really worth and what will be the long-term benefits in terms of revenues, costs, etc.
In this scenario, the investment bank will go through the process of due diligence to
determine the value of the company, settle the deal by helping ABC prepare necessary
documents and advising it on the appropriate timing of the deal.Here the investment bank
works on the buy side and some other investment banks may be working on the sell side to
help XYZ. The bigger the deal size, the more commission the bank will earn.
Bank of America, Barclays Capital, Citigroup Investment Banking, Deutsche Bank, and JP
Morgan are some of the largest investment banks in India.

HISTORY OF INVESTMENT BANKING

investment banking as an industry in the United States has come a long way since its
beginnings. While the term ‘investment bank’ gained popularity in the late 19th – early 20th
century, and largely in relation to the US, investment banking services existed long before
Wall Street. Most of the oldest investment banks started out as merchants trading in
commodities such as spices, silk, metals and so on. In the UK, whose capital still remains
one of biggest financial centres in the world, the term ‘merchant bank’ is used to describe
an investment bank.
The nineteenth century saw the rise of several prominent banking partnerships such as
those created by the Rothschild, the Barings and the Browns. At this point, investment
banking had started to evolve into its modern form, with banks underwriting and selling
government bonds. Below is a brief review of the history:

1896-1929
Prior to the great depression, investment banking was in its golden era, with the industry in
a prolonged bull market. JP Morgan and National City Bank were the market leaders, often
stepping in to influence and sustain the financial system. JP Morgan (the man) is personally
credited with saving the country from a calamitous panic in 1907. Excess market
speculation, especially by banks using Federal Reserve loans to bolster the markets, resulted
in the market crash of 1929, sparking the great depression.

1929-1970
This dramatic rise, however, was not without consequences. Excessive market speculation,
and unsustainable surges in stock prices, among other things, triggered the market crash of
1929, which in turn sparked the Great Depression. The Great Depression was a difficult time
for investment banks, some of which were forced to merge to survive. The crash also
triggered more stringent regulation for the industry, including the famous Glass-Steagall Act
of 1933 which required the separation of commercial banking from investment banking. JP
Morgan for instance was forced to spin off its securities underwriting division to form
Morgan Stanley & Co as an independent investment bank.

DuringDuring the Great Depression, the nation’s banking system was in shambles, with 40%
of banks either failing or forced to merge. The Glass-Steagall Act (or more specifically, the
Bank Act of 1933) was enacted by the government with the intent of rehabilitating the
banking industry by erecting a wall between commercial banking and investment banking.
Additionally, the government sought to provide the separation between investment
bankers and brokerage services in order to avoid the conflict of interest between the desire
to win investment banking business and duty to provide fair and objective brokerage
services (i.e., to prevent the temptation by an investment bank to knowingly peddle a client
company’s overvalued securities to the investing public in order to ensure that the client
company uses the investment bank for its future underwriting and advisory needs). The
regulations against such behaviour became known as the "Chinese Wall."

Golden Age
The second half of the 20th century marked another golden age for investment banks,
which benefitted from a surge in deal making. Banks profited from being advisers on
mergers and acquisitions as well as public offerings of securities.

This trend started changing in the 1980s when the focus shifted from deal making to
trading. This process was underpinned by advances in computer technologies which
enabled banks to use algorithms to develop and execute trading strategies, profiting from
small changes in stock prices. The spirit of the times is perfectly captured in Oliver Stone’s
1987 movie ‘Wall Street’.

The second golden age of investment banks continued in the 1990s, characterized by the
dot-com boom and bubble. The end of the decade, however, brought the repeal of the
Glass-Steagall Act, which effectively removed the separation between Wall Street
investment banks and commercial banks, exacerbating the financial crisis of 2007.

The Financial Crisis

The biggest hit to investment banks since the Great Depression was brought by the
speculative bubble in housing prices, as well as overreliance on sub-prime mortgage lending
which damaged financial institutions globally. Among the investment banking victims of the
global financial crisis were Bear Stearns and Lehman Brothers. On the other side of the
Atlantic, the UK government was forced to bail out Royal Bank of Scotland and Lloyds, while
Barclays turned to the Middle East to raise capital privately. The financial crisis triggered
consolidation in the industry, with JPMorgan & Chase acquiring Bear Sterns, while Bank of
America snapped up Merrill Lynch.

On Stranger Tides
While the financial crisis now remains in history, its repercussions can still be felt today. One
of the most notable consequences is the weakened dominance of Wall Street which,
however, has partly facilitated the rise of new financial centers around the world, such as
Singapore and Hong Kong which are taking advantage of the economic boom in China and
Southeast Asia. Also, much like in the wake of the Great Depression, banks are facing more
stringent regulations such as stress tests, while the UK for instance is looking to implement
ring-fencing rules which, similarly to the Glass-Steagall Act, aim to separate lenders’ retail
operations from riskier investment banking.

Still, despite the heavy hit from the financial crisis, trust in the investment banking industry
has started to creep back. Investment banks are also seeing their profits rise, benefitting
from the M&A frenzy seen in the past few years, which is now soaring to pre-crisis levels.
And while even the best of experts would have a hard time predicting where the industry is
currently headed, if the seemingly cyclical history of investment banking is anything to go
by, then another golden age might as well be on the cards.

EVOLUTION OF INVESTMENT BANKING

The Financial services industry, is one place where change is a constant factor. This is
why the most challenging thing for any person or organization in this field, is to ensure that
they keep are always on top of their game, adapting and evolving to the various changes.
One of the most important tasks, is to ensure that a financial services company, must
provide innovative services to respond perfectly to the needs of their customers.
Apart from this, there are a few standard challenges that every company out there
has to deal with, say for example higher capital charges, market electrification,digitalization,
a fixed cost base, inflexible and layered technology, with an increase in complexity or
regulation and reporting. All the various changes in this field can be classified as just the
start of a steadily developing ecosystem.