Investment Banking Basics – Concepts for Every Investment Banking

Aspirer
Investment banking has taken the financial division by storm. With Corporate Houses and
Governments by their side, Investment Banks are growing daily, every minute. Despite
bull and bear challenges and being hit by COVID-19, it has taken a U-turn and is
providing promising growth now and in the future. But are you aware of its origin and its
basic concepts? In this article let us ponder on Investment Banking Basics.
The journey of investment banking started in the 19th century. The Dutch East India
Company was the first one to issue its shares to the public. Since then they exercised
control over the market.
In 1970, the State Bank of India took the initiative to create a Bureau of Merchant
Banking. 1973 ICICI Securities became the first Indian establishment to proffer
merchant banking services. Consequently, during 1980, merchant banks increased in
India. The growth of merchant banks and financial institutions was remarkable.
By 1990, nearly 1500 merchant banks had registered themselves with the Securities and
Exchange Board of India. With such a huge number of banks registered, to regulate
banking activities, check their compliance and promote the banking business
Association of Investment Bankers was established. With all these bodies, the banking
business started to flourish in India.
The variety of services offered by investment banks differs from one institution to
another. One of the investment bank’s primary tasks is to assist clients in raising capital
by contacting investors, but they also have a separate duty to provide organizations
with objective of financial advice.
 Research to help investors choose which securities to buy and the development
of new securities
 Brokerage services to help clients trade with one another
 Private equity, which involves investing the bank’s capital in projects rather than
seeking out investors.
 The stock market is also becoming more accessible by investment banks’
participation in the meeting of buyers and sellers.
Key functions of investment banks include:
1. Underwriting: Investment banks help companies issue new securities, such as stocks
or bonds, by underwriting the issuance. They assess the risk and determine the price at
which the securities will be sold to investors.
2. Advisory Services: They provide strategic advice for mergers and acquisitions,
helping clients navigate complex transactions, conduct valuations, and negotiate terms.
3. Sales and Trading: Investment banks facilitate the buying and selling of securities on
behalf of clients and their own accounts. They also provide market-making services.
4. Research: Many investment banks have research departments that analyze various
sectors and companies, providing insights and recommendations to clients.
5. Asset Management: Some investment banks offer asset management services,
managing investments for clients such as institutions and high-net-worth individuals.
6. Private Placements: Investment banks can help companies raise funds through
private placements, selling securities directly to a small number of investors rather than
through public offerings.
Two broadly recognized functions of investment banks include capital market
intermediation and trading, distinguishing investment banks from commercial banks,
which accept deposits and make loans.
Investment banks are critical agents of capital formation and price setting. They help to
coordinate present and future consumption.

Investment Banks vs. Commercial Banks

In 1933, the U.S. Congress passed the Glass-Steagall Act, which created a legal
distinction between the operations of an investment bank and a commercial bank.
 It became illegal for any company to act as both an investment and commercial
bank or for any holding company to hold associate companies of both kinds.
 Investment banks could no longer accept deposits or make loans. Commercial
banks could no longer have security interests in the U.S., although no such
restrictions applied to foreign investments.
  These barriers eased with the Gramm-Leach-Bliley Act of 1999, but the U.S.
remains the only country to have legally separated investment and commercial
banking.
 Investment banks differ from commercial banks, which primarily focus on
deposit-taking and lending activities but Investment banks work with
commercial banks to help determine prevailing market interest rates.
 The critical difference between the two types of banks (Commercial banks and
corporate banks) is who they provide services to.
 Commercial banks accept deposits, make loans, safeguard assets, and work with
many small and medium-sized businesses and consumers. Investment banks
provide services to large corporations and institutional investors.
 Historically, the distinction between the activities of commercial banks and investment
banks was based on the fact that the former provided short-term financing while the latter
focused on long-term financing for governments and companies, through the issuance of
shares and bonds, playing an intermediary role on the markets, the essence, in fact, of the
investment banker business.

Some of the Well-known International Investment Banks Are Listed Here:

 Morgan Stanley
 Deutsche Bank
 JP Morgan Chase
 Bank of America
 Credit Suisse
 Citigroup
 Goldman Sachs

Necessary Skills for Investment Banking Career

 Strong mathematical and analytical skills

 Excellent communication and interpersonal skills
 Time and Project Management Abilities
 Commitment, hard work, and Passion
 Problem-Solving Abilities and Flexibility
 A strong ability to operate well under pressure and handle pressure
 Strong business and financial market knowledge
Career and Scope in Investment Banking

The field of investment banking offers many opportunities. A career in investment

banking is regarded as one of the most fascinating and difficult in the financial
industry.

Since the market is bound to fluctuate, rise and fall, experts in the field of finance must
be dynamically and effectively prepared to function under such conditions and keep up
to date at all times. Therefore, to take on such demanding duties, the work calls for
individuals with high qualifications, through training, and experience.

No doubt, a fulfilling career in investment banking can result in personal as well as

professional advancement. There is a lot of possibility for advancement in this fast-
paced industry. Investment banking enables you to explore jobs in wealth
management, venture capital, and entrepreneurship.

Investment bankers are specialists with outstanding market knowledge and high and
strong financial aptitude. The path to a banking position that involves investing may
appear challenging but finding best courses for investment banking with the right
educational strategy, no career is unbearably hard to enter.

Corporate Banking vs. Investment Banking

Both Corporate banking and investment services fall under the broad umbrella of financial
service providers and serve similar clients, but it’s important to note that there are several critical
differences between the two.

While corporate bankers mainly serve corporations, investment bankers serve both corporations
and the government. Also, in most cases, governments are the key clients of investment banks.

The services offered by corporate banks include management of treasury, managing loans and
lines of credit, risk management, and services related to foreign exchange. On the other hand, the
services offered by investment banks include equity and debt financing, mergers and
acquisitions, sales, and trading.

Additionally, the relationship between corporate banks and their clients is long-term in nature
and helps relinquish their financial needs, but investment banking roles remain confined to a
transactional nature, which means that it provides more of a one-time service.

Roles of Investment Banking

People are often confused when distinguishing between an investment bank and an investment
banking services division in a commercial bank. To dispel some doubts, let us now understand
the roles performed by investment banks:
1) Underwriting Services: Investment bankers help their clients raise money by selling stocks
or bonds to investors. Typically, underwriting is of three main types:

 Firm Commitment: Here, the underwriter takes complete responsibility for unsold stocks and
commits to purchasing any shares that remain unsold.
 Best Efforts: The underwriter undertakes to sell as many shares as possible at the predetermined
offering price but retains the option to return unsold shares to the issuer.
 All-or-none: If the full issuance cannot be sold at the specified offering price, the agreement is
terminated, and the issuing company receives no proceeds.

2) Launching of IPOs: Investment bankers help new companies launch their initial public
offering to go public.

3) Provide Financial Consultation: Investment bankers have expertise in finance, which

qualifies them to offer financial consultation and advice to corporations and even governments.
They assist their clients in raising money by floating a bond, negotiating, issuing a stock, etc.

4) M&A Advisory Services: Investment bankers play a central role for companies seeking to
acquire another company through mergers or acquisitions. They facilitate mergers and
acquisitions as they have specialized knowledge in company valuation, investor
communications, and deal negotiations.

5) Facilitation of Sales & Trading: Investment banking professionals have in-depth knowledge
of markets and securities and assist corporations with sales and trading. They assist clients by
generating orders, facilitating trade, and managing risk.

What Do Investment Banks Do?

There can sometimes be confusion between an investment bank and the investment
banking division (IBD) of a bank. Full-service investment banks offer a wide range of
services that include underwriting, M&A, sales and trading, equity research, asset
management, commercial banking, and retail banking. The investment banking
division of a bank provides only the underwriting and M&A advisory services.

Full-service of Investment banks offer the following services:

 Underwriting – Capital raising and underwriting groups work between investors and
companies that want to raise money or go public via the IPO process. This function
serves the primary market or “new capital”.
 Mergers & Acquisitions (M&A) – Advisory roles for both buyers and sellers of
businesses, managing the M&A process start to finish.
 Mergers and acquisitions (M&A) advisory is the process of helping corporations and
institutions find, evaluate, and complete acquisitions of businesses. This is a key function
in i-banking. Banks use their extensive networks and relationships to find opportunities
 and help negotiate on their client’s behalf. Bankers advise on both sides of M&A
transactions, representing either the “buy-side” or the “sell-side” of the deal.
 Sales & Trading – Matching up buyers and sellers of securities in the secondary
market. Sales and trading groups in investment banking act as agents for clients and
also can trade the firm’s own capital.
 Equity Research – The equity research group research, or “coverage”, of securities helps
investors make investment decisions and supports trading of stocks.
 Asset Management – Managing investments for a wide range of investors
including institutions and individuals, across a wide range of investment styles.
 Banking Clients: Investment bankers advise a wide range of clients on their capital
raising and M&A needs. These clients can be located around the world.
Investment banks’ clients include:
 Governments – Investment banks work with governments to raise money, trade
securities, and buy or sell crown corporations.
 Corporations – Bankers work with both private and public companies to help them go
public (IPO), raise additional capital, grow their businesses, make acquisitions, sell
business units, and provide research for them and general corporate finance advice.
 Institutions – Banks work with institutional investors who manage other people’s money
to help them trade securities and provide research. They also work with private equity
firms to help them acquire portfolio companies and exit those positions by either selling
to a strategic buyer or via an IPO.
Careers in Investment Banking

Getting into i-banking is very challenging. There are far more applicants than there are
positions, sometimes as high as 100 to 1. We’ve published a guide on how to ace an
investment banking interview for more information on how to break into Wall Street.

In addition, you’ll want to check out our example of real interview questions from an
investment bank. In preparing for your interview it also helps to take courses on
financial modeling and valuation.

The most common job titles (from most junior to senior) in i-banking are:

 Analyst
 Associate
 Vice President
 Director
 Managing Director
 Head, Vice Chair, or another special title
Investment Banking Skills

I-banking work requires a lot of financial modeling and valuation. Whether for
underwriting or M&A activities, Analysts and Associates at banks spend a lot of time in
Excel, building financial models and using various valuation methods to advise their
clients and complete deals.

Investment banking requires the following skills:

 Financial modeling – Performing a wide range of financial modeling activities such as

building 3-statement models, discounted cash flow (DCF) models, LBO models, and
other types of financial models.
 Business valuation – Using a wide range of valuation methods such as comparable
company analysis, precedent transactions, and DCF analysis.
 Pitchbooks and presentations – Building pitchbooks and PPT presentations from
scratch to pitch ideas to prospective clients and win new business (check out
CFI’s Pitchbook Course).
 Transaction documents – Preparing documents such as a confidential information
memorandum (CIM), investment teaser, term sheet, confidentiality agreement, building a
data room, and much more (check out CFI’s library of free transaction templates).
 Relationship management – Working with existing clients to successfully close a deal
and make sure clients are happy with the service being provided.
 Sales and business development – Constantly meeting with prospective clients to pitch
them ideas, offer them support in their work, and provide value-added advice that will
ultimately win new business.
 Negotiation – Being a major factor in the negotiation tactics between buyers and sellers
in a transaction and helping clients maximize value creation.


Underwriting Services in Investment Banking

Underwriting is the process of raising capital through selling stocks or bonds to

investors (e.g., an initial public offering IPO) on behalf of corporations or other entities.
Businesses need money to operate and grow their businesses, and the bankers help
them get that money by marketing the company to investors.

There are generally three types of underwriting:

 Firm Commitment – The underwriter agrees to buy the entire issue and assume full
financial responsibility for any unsold shares.
  Best Efforts – Underwriter commits to selling as much of the issue as possible at the
agreed-upon offering price but can return any unsold shares to the issuer without
financial responsibility.
 All-or-None – If the entire issue cannot be sold at the offering price, the deal is called
off and the issuing company receives nothing.

Who are the Main Investment Banks?

The main banks, also known as the bulge bracket banks in investment banking in India
are:

 Bank of America Merrill Lynch

 Barclays Capital
 Citigroup Investment Banking
 Credit Suisse
 Deutsche Bank
 Goldman Sachs
 J.P. Morgan
 Morgan Stanley
 UBS

How Do Investment Banks Influence an

Economy?
 Investment banks are large financial institutions providing capital
financing and engaging in trading.
 They help companies go public and underwrite bond offerings.
 Investment banks help the broader financial markets and the economy
by matching sellers and investors.
 The banks make financial development more efficient and promote
business growth, which in turn helps the economy.
 In contemporary mixed economies, governments and large companies
rely on investment banks to raise funds. Investment banks match those
selling securities with investors. This is known as "adding liquidity" to a
market.


 The world is changing rapidly, and corporations, organisations, and governments often
need expert guidance to understand complex financial transactions and make sound
investment decisions.
This is where investment banking comes into play. It provides specialised services to
facilitate major deals, mergers, acquisitions, and capital-raising activities.
 What is Investment Banking?

 Investment banking is a specialised field within the financial services industry that
primarily assists large organisations, corporations, and governments in raising capital,
facilitating mergers and acquisitions (M&A), and providing financial advisory services.
Investment banks act as intermediaries between companies or entities seeking capital and
investors willing to provide that capital.

 In simple terms, investment banking involves:

 ● Advising clients on various financial matters, such as determining the value of a

company
● Structuring deals for acquisitions or mergers
● Helping companies issue new securities (stocks or bonds) to raise capital

 Investment bankers are experts in the financial markets, and their expertise is crucial for
clients looking to make informed decisions about significant financial transactions.

 History of Investment Banking

 The roots of investment banking can be traced back to the late 19th and early 20th
centuries when merchant banks emerged in Europe and the United States. These
institutions were initially involved in commodity trading but later expanded into
providing financial services, such as underwriting government bonds and facilitating
large business transactions.

 The investment banking industry experienced significant growth during the late 19th and
early 20th centuries, establishing well-known firms like J.P. Morgan, Goldman Sachs,
and Morgan Stanley. However, the industry faced a major setback during the Great
Depression, leading to stricter regulations, including the Glass-Steagall Act of 1933,
which separated commercial banking from investment banking activities.
The second half of the 20th century witnessed another golden age for investment banks,
driven by a surge in mergers and acquisitions and public securities offerings. Despite the
challenges, the industry has proven its resilience time and again, adapting to
technological advancements and market shifts. This gives us confidence in its future.
 Core Functions of Investment Banking

 The core functions of investment banking revolve around three main areas: capital
raising, mergers and acquisitions (M&A), and financial advisory services.
 ● Capital Raising: Investment banks are important in helping companies raise capital by
issuing new securities (stocks or bonds) in the financial markets. This process is known
as underwriting, where the investment bank acts as an intermediary between the company
and investors, ensuring compliance with regulations and facilitating the distribution of
securities.
 ● Mergers and Acquisitions (M&A): Investment banks provide advisory services to
companies seeking to acquire or merge with other businesses. They assist in evaluating
potential targets, conducting due diligence, structuring deals, and negotiating terms.
Investment bankers also help companies defend against hostile takeovers or unsolicited
bids.
 ● Financial Advisory Services: Investment banks offer a range of financial advisory
services to their clients, including corporate restructuring, asset valuation, risk
management, and strategic planning. These services help companies make informed
decisions about their financial strategies and operations.
 The Investment Banking Process

 The investment banking process typically involves several stages, which may vary
depending on the specific transaction or service provided. Here's a general overview of
the process:

 ● Pitch and Mandate: Investment banks compete to win mandates from potential clients
by pitching their services and expertise. If selected, the investment bank receives a formal
mandate to act on behalf of the client.
 ● Due Diligence: Investment bankers conduct extensive due diligence to evaluate the
client's financial situation, market conditions, and potential risks or opportunities
associated with the proposed transaction.
 ● Structuring and Negotiation: Based on the due diligence findings, investment
bankers structure the deal or transaction, considering various factors such as pricing,
financing options, and legal and regulatory requirements. They also negotiate terms and
conditions with relevant parties.
 ● Marketing and Distribution: If the transaction involves issuing new securities,
investment banks are responsible for marketing and distributing them to potential
investors through their networks and market expertise.
 ● Execution and Closing: Once all the necessary preparations are complete, the
investment bank executes the transaction, facilitating the transfer of assets, securities, or
ownership, as applicable.
 ● Post-Transaction Support: After the transaction is completed, investment banks may
continue to provide advisory services to their clients, such as integration support or
ongoing financial guidance.
 Careers in Investment Banking

 Investment banking is a highly competitive and demanding field that attracts talented
individuals from various backgrounds. Common entry-level positions in investment
banking include analyst roles, where individuals typically work long hours and gain
exposure to various aspects of the industry.
 To pursue a career in investment banking, individuals typically need a bachelor's degree
in finance, economics, or a related field. Many aspiring investment bankers also pursue
advanced degrees, such as a Master of Business Administration (MBA) or a Master of
Finance (MFin), to enhance their qualifications and knowledge.

 Regulation and Ethics in Investment Banking

 Investment banking in India is a well-regulated industry with a strong emphasis on

ethical conduct. Here are the key regulatory bodies and ethical principles:

 Regulatory Framework:
 ● Securities and Exchange Board of India (SEBI): The primary regulator for the
securities market. SEBI ensures fair practices, protects investors, and governs stock
exchanges. It mandates disclosures, transparency, and adherence to market laws to
prevent manipulation and fraud.
 ● Reserve Bank of India (RBI): Regulates non-banking financial companies (NBFCs)
that operate in investment banking. The RBI focuses on financial stability and consumer
protection.
 ● Companies Act, 1956: This Act governs the incorporation and operation of all
investment banking companies, including those established under separate statutes like
SBI or IDBI.
 Ethical Principles:
 ● Fair Dealing: Investment banks must treat clients fairly, avoid conflicts of interest, and
ensure the best execution of trades.
● Suitability: Recommending investment products that align with the client's risk
tolerance and financial goals.
● Transparency: Providing clients with clear and accurate information about products,
fees, and risks involved.
● Know Your Client (KYC): Understanding the client's background and investment
objectives to prevent money laundering and ensure suitability.
 Current Trends and Future Outlook of Investment Banking

 The investment banking industry is constantly evolving, influenced by various factors

such as technological advancements, regulatory changes, and shifting market dynamics.
Some of the current trends and future outlooks include:

 ● Digitalisation and Technological Adoption: Investment banks increasingly embrace

digital technologies, such as artificial intelligence (AI), big data analytics, and
blockchain, to streamline processes, enhance decision-making, and improve operational
efficiency.
 ● Emphasis on Sustainable and Ethical Investing: There is a growing focus on
sustainable and ethical investing practices, driven by investor demand and societal
expectations. Investment banks adapt their strategies and offerings to align with
environmental, social, and governance (ESG) principles.
 ● Consolidation and Restructuring: The industry may witness further consolidation
and restructuring as firms seek economies of scale, diversify their offerings, and adapt to
changing market conditions.
 ● Increased Competition: Competition within the investment banking industry is
expected to intensify, with the emergence of fintech companies and non-traditional
players leveraging technology to disrupt traditional business models.
 ● Regulatory Developments: Ongoing regulatory changes and evolving compliance
requirements will continue to shape the investment banking landscape, potentially
impacting operations, risk management practices, and business strategies.
 Conclusion

 Investment banking facilitates complex financial transactions, capital-raising activities,

and strategic decision-making for corporations, organisations, and governments. While
the industry has faced challenges and undergone transformations throughout its history,
its core functions remain vital for enabling economic growth and fostering financial
stability. As the business landscape continues to evolve, investment banks must adapt,
embrace innovation, and uphold ethical standards to maintain relevance and deliver value
to their clients.

1. Introduction
1.1. Background of the topic in the directive
1.2. Rationale of reviewing the directive (if any)
1.3. Objectives
1.4. Significance of reviewing
1.5. Methods (tools) used to review and present the directive ( if any)
2. Overview of the Directive
2.1. Theoretical aspect
2.2. Experience of countries, industry or thematic area
3. Implications of the directive
3.1. Influence Aggregate economy (specifically Finance industry)
3.2. Influence on Siinqee Bank
3.3. Ways Forward for Siinqee Bank