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How do investment banks work?

What comes to your mind when you hear the term ’investment bankers’? Dapper looking men and women conversing in financial jargon and making much money? You are at the right place if you have always wanted to know what they do for real.

Read on to know more about it.

What is investment banking?

In simple terms, investment banking refers to financial consulting services. It differs from other banks in the services that they offer and their client base. Investment bankers cater to governments, large corporates or HNWIs (high net-worth individuals). They help in executing their financial deals and capital requirements.

What are the services that investment banks in India offer?

Investment banks offer various services. These include:

• Research - Investment bank analysts conduct extensive research on stocks and trading securities. They also cover financial due diligence on multiple companies as part of their job. For example - a company looking to acquire another organisation can seek the help of investment bankers to analyse the target company and advise if the takeover is profitable.

• Underwriting - Investment banks help corporations to raise funds from investors. This typically takes place by issuing equity or debt funds. Investment banks help in making public offerings. They absorb the risk by agreeing to hold some securities if they are unable to find investors in the market.

• Mergers and Acquisitions - Investment banks advise corporations on strategic moves like mergers and acquisitions. They assist both parties, at sell-side and buy-side. They help clients to sell their companies and make money. In other scenarios, they help clients to buy other companies. They can assist in either searching the right company to purchase or raise funds for the deal.

• Advisory - Organisations have various needs as far as their business is concerned. Investment bankers offer tailor-made solutions for each of their clients.

How do investment banks make money?

Like any other consulting firm, investment bankers charge clients for their services. The fee is generally fixed before the project starts. These charges could be as effort-based or on fixed-percentage.

In the first case, they charge a fixed rate for each hour or day required to complete their project. In the second case, they charge a fixed percentage of money involved in the deal.

Investment firms also charge a fee to help clients raise funds. If they are raising capital from a third party, they charge a certain percentage of the total amount. If they are extending money as a loan to the client, they charge interest on the lent amount.

If the client is availing trading services, they have to pay a certain fee on each transaction.

Investment banking started in India in the 19th century with the entry of European banks. It was only in the 1970s that Indian companies began to foray into this territory.

Today there are several homegrown as well as foreign banks operating in the industry. The Association of Investment Bankers in India regulates and oversees the operation of investment banks.