What is Investment Banking?
Banks or financial institutions provide underwriting services such as investment banking to companies to raise capital. In investment banking, the institution raises capital from investors in the form of debt or equity. Government companies or listed companies which create capital have offered fresh shares in the market ( initial public offer).
Investment bankers underwrite new debt and equity securities for helping with the sale of securities or to help ease the ten processes of merger and acquisition.
Types of underwriting commitments in investment banking
1. Firm commitment
In this case, the underwriter contracts to buy the entire issue at a certain price. He subscribes to the entire capital. If the underwriter doesn’t sell all the shares, then he shall have to subscribe to the remaining capital not taken up by the public.
2. Best efforts
This method is most common. Here, the underwriter is not legally or financially obliged to subscribe to the unpaid capital. He contracts with the company in good faith that he would put in all efforts required to sell as many shares as possible to the public.
3. All or none
In this agreement, the investment banker takes up the responsibility to make sure all shares are sold at the offer price to the public. His commission depends on whether he can sell the entire capital or not. An investment banker takes risk only if he is well aware of the firm and its working.
Why do firms opt for underwriting with investment bankers?
- Underwriting helps fund initial start-up activities as the investment bankers commit to sell or subscribe to capital.
- It reduces the risk of under subscription during Initial Public Offer.
- Owners and promoters feel assured of financial stability.
- The risk of subscription is passed to the investment banker.
- Since investment bankers have better contacts than a start-up, they reach out to larger groups of potential investors
Thus, underwriting helps build relations with potential investors and reduces the burden and risk of capital insufficiency.
Investment Banking in India
Investment Banking cannot be restricted to underwriting services. Financial institutions that facilitate investment banking also provide advice with respect to mergers and acquisitions, trading of securities, custodian services, and many more.
Many foreign investment bankers invest in India because of its low operating cost model. Barclays Capital, Deutsche Bank, JP Morgan, Citigroup Investment Banking, and Bank of America are some of the largest investment banks in India.
The workforce available in India is cheaper as compared to other countries. Our outsourcing capacity also plays a major role for bankers to choose India and a financially viable option.
Indian companies such as WIPRO, TCS, and SYNTEL offer IT, ITES, and KPO services. These are known as back-office services. I.e They facilitate investment banking services in India.
Role of Investment Bank in the economy
- Investment banks stimulate economic growth by helping mobilize funds from one sector of the economy to another.
- It facilitates saving and investment processes.
- Extra money is circulated and invested into productive enterprises. Thus raising the rate of return
- Capital availability firms will further invest in other activities and projects in order to make profits.
- It also helps in job creation.
- Investment banking helps markets gain more liquidity (i.e. cash).
- It also helps in the creation of assets which adds value to the economy
Types of job roles available in investment banking
An undergraduate can get into this field and get 2-3 years of experience. In order to have expertise in this field, MBA finance or post-graduation in finance can prove to be valuable.
1. Analyst/Junior analyst:
This is the entry point, where graduates can start building their careers. People with 1-2 years of experience also get hires for the same. This job demands the presentation of data, analysis, and input services from the job seekers.
2. Associate or Senior analyst
Candidates promotes to a senior analyst from junior analyst after 3-4 years of experience. These analysts are responsible for pitching ideas, finding investors, and convincing potential clients. An MBA degree adds value to this position. Many investment -banking companies seek IIM college students for this position
3. Leadership role
After getting good experience as a senior analyst, opportunities for roles such as Managing director, vice President, etc come up. These are well-paid positions. But they demand a special skill set and experience in this field.
Thus, investment banking is a dynamic field that requires a lot of commitment and hard work.
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