Public companies undertake several kinds of corporate actions throughout their existence. Various entities come into the equation during such corporate actions. While some of them are the primary parties to the transaction, others act as middlemen who help complete such actions.
In this article, we will discuss one such entity which acts as an intermediary for various corporate transactions having a material impact on stakeholders. We will discuss the role of investment banks, the responsibility of investment bankers and how it differs from commercial banking.
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What is investment banking?
Investment banks are financial organisations that aid public limited companies in their transactions.
Investment banking refers to all the functions handled by investment banks, assisting companies with large-scale dealings like IPO (Initial Public Offering), mergers and acquisitions, restructuring, underwriting, etc.
The main objective of investment banking is to provide consulting services to public companies.
The role of investment banks
Investment banks are specialists in different fields of finance. Some of the important functions of investment banking companies are:
Advisory services during mergers and acquisitions
Investment banks play a critical role in executing mergers and acquisitions. Investment banks act as intermediaries at each step from company valuations, assessing financial statements, and determining the terms and conditions for such agreements to finalising the transaction between two companies.
Advisory services during an IPO
They act as mediators between issuing companies and investors in an IPO. They assist companies in drafting the red herring prospectus that contains all the information on the IPO and handle all the legal and regulatory aspects regarding the public offering.
Brokers for securities market transactions
Investment banks play the role of brokers in buying and selling securities like stocks, bonds, derivatives, etc. Individual clients and small-scale institutions who do not have direct access to trade on the stock exchange platform choose the broker route. While boutique investment banks provide brokerage services alone, bulge-bracket investment banks have a trading wing through which they trade on behalf of their clients.
Underwriting services
Underwriting is one of the significant functions of investment banks. It is where they buy all the issuing company’s shares during an IPO and then sell it in the secondary market. Underwriting saves the issuing company from the risk of non-subscription and helps to raise the required capital on time. Investment banks charge a premium from the issuing company for underwriting services, which is a fee for taking over the risk.
Asset management
Investment banking companies also act like mutual fund managers. The objective of this function is the expand the value of the client’s money by investing it in profitable avenues. Simply put, it is the process of managing the client’s fund and increasing the wealth over a period
Merchant banking
While merchant banking is not really a part of investment banking, bulge-bracket investment banks include this in their service portfolios. It is where investment banks play the role of commercial banks to a certain extent and provide financial assistance to clients by helping in fundraising activities, offering loans, etc.
Research
Investment banks also provide research services to clients, where they conduct studies and surveys around financial markets, instruments and the economy as a whole, which helps the government, corporations and even individuals in making investment decisions.
Also read: Understanding the difference between equity and debt IPO for the right investment
What do investment bankers do?
Investment bankers are those who work for investment banks and assist their clients with financial services.
For more clarity on the roles of investment banks and bankers, the functions of investment banks are divided into two main categories – the buy side and the sell side. Investment bankers are also divided into buy-side bankers/analysts and sell-side bankers/analysts.
Again, the extent of services depends on the size of the investment banks. Boutique banks are specialised banks that specialise in a particular service, say buy-side services. On the other hand, bulge bracket banks are large investment banks that provide both buy and sell side services under the same roof.
As the name suggests, buy-side analysts or bankers help their clients with buying decisions, i.e., they assist clients in making investments to increase their wealth.
Example: Acquiring another company, buying stocks of a company, etc.
Sell-side analysts work on the opposite side, where they help clients make money through selling their assets. It includes selling stocks, announcing an IPO, offering the company for acquisition, etc.
Apart from these two major functions, investment bankers perform several operational roles in the middle and back office, where they help with post-trade activities, such as settlement, recording, etc.
Example
The Walmart-Flipkart acquisition is one of the most well-known transactions in the e-commerce industry.
J P Morgan and Barclays were the buy-side investment banks that assisted Walmart in acquiring Flipkart.
Goldman Sachs was the sell-side investment bank that assisted Flipkart in completing the acquisition process.
Also read: Why do financial services companies invest in each other?
How are investment banks different from commercial banks?
Commercial and investment banks are financial institutions, however, there is a vast difference in the portfolio of services they provide.
While the primary activities of commercial banks are to lend loans and accept deposits, investment banks mainly work as agents who deal with corporate actions involving various financial securities like stocks, derivatives, commodities, etc.
Commercial banks are necessary for the functioning of the entire economy, while the focus of investment banks is wholly on the financial markets.
However, they both contribute greatly to the finances of the country. Today, commercial banks have subsidiaries offering investment banking services, and investment banks have a wing to offer the services of commercial banks.
Investment banks in India
Some of the largest investment banks in the world having enormous presence in India are:
Goldman Sachs, J P Morgan, Morgan Stanley, Bank of America Merrill Lynch, Credit Suisse, etc.
Indian banks offering investment banking services:
Edelweiss Financial Services, Motilal Oswal Investment Advisors, Anand Rathi Group, ICICI Securities, Kotak Investment Banking, etc.
Bottomline
The names of investment banks and their opinions are heard on a daily basis on financial news channels, which shows how significant a role they play in the economy.
Investment banks are institutions that help in executing major financial deals for individuals, corporations and even the government. They also act as advisors to all three in making informed and profitable investment decisions.
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