Investment Banking and Current Challenges

Investment banking refers to a specific division of banking related to the creation of capital for other companies.Investment banks underwrite new debt and equity securities for all types of corporations and provide guidance to issuers regarding the issue and placement of stock.In addition,they also aid in the sale of securities sometimes.They also facilitate mergers,acquisitions,reorganizations and broker trades for institutions and private investors.They can also trade securities for their own accounts.Investment banks do not accept deposits like other banks.

Investment banking have two main lines of business-the sell side and the buy side.The sell side involves trading securities for cash or for other securities and their promotion.For example-Underwriting,Research.The buy side involves lending advice to institutions that are concerned with buying investment services.Example-Hedge Funds.Unit Trusts.

The following are the functions of an investment banker-

• Core Business-Underwriting,distributing,advising
• Middle office-Risk management,Corporate treasury,Financial control,Corporate strategy,Compliance
• Back office-Operations,Technology

Importance of Investment banking-

• Importance to corporations-It helps corporations to raise their capital facilitating the trading of securities.This leads to the increase in the liquidity of the securities.
• Importance to Individuals-It provides investment opportunities to individuals and entities.
• Most of the corporations get advisory services from the investment banks regarding the mergers, acquisitions and divestiture.

In India,State Bank of India was the first public sector bank to set up investment banking division in 1972.SBI Caps and IDBI Caps are the two primary examples of investment banks in India today.Currently,there are 300 registered investment banks with SEBI. It is compulsory to hold a certificate of registration granted by SEBI of India to act an an investment banker.The ongoing transformation of the financial services industry has a significant impact on the way investment banks manage and think about their businesses. Widely reported incidents such as unauthorized trading and regulatory issues have given rise to questions over the role of investment banks and the value of some of their activities.  Investment banking activities, business, operations and even management are scrutinized by regulators and the media. Clients have higher standards and expectations and the regulatory framework continues to shift at both the local and global levels.

The investment banking industry faces a period of transformation. Building a long term strategy during this time of uncertainty and regulatory turmoil is a real challenge; nevertheless, the current market environment makes bold changes unavoidable. While there is certainly not a single recipe for success, the adoption of operational flexibility and the involvement of senior management in the design of structural reform in order to respond to emerging rules and opportunities will be key points to survival.

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