What Is The Future of Investment Banking in India

February 17, 2024 Bhavni Sikdar

India is a rapidly developing economy. The country has made many advancements in various sectors. The economic sector has seen a lot of growth in recent years. Several factors are causing this growth. One of the sectors that has become very popular is the Investment Banking sector. It has also gained popularity as a career choice for many people. This article will discuss what caused the emergence of this popularity and the future of investment banking in India.

THE FUTURE OF INVESTMENT BANKING IN INDIA-compressed (1)

What is Investment Banking?

Investment banking is a part of a bank or a financial institution. Investment banking helps businesses and customers with financial services. The various tasks performed are advisory service, mergers and acquisitions (M&As), providing underwritings, asset management, and procuring stocks, bonds, and other products.

Investment banks also bridge the gap between large corporations and investors. They can be considered as the “middlemen” who help conduct financial transactions between two entities.

Banks hire financial experts in the field known as investment bankers. An investment banker is required to keep up with the constantly shifting market trends and current news. They are thus, able to provide the clients with advice and help them understand how the financial market functions.

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What Is Involved in The Domain of Investment Banking in India?

Investment banks in India perform different financial services to help their clients understand how the finance industry works. Investment banking in India serves as a crucial link in the financial ecosystem, fostering economic growth and facilitating capital flow for diverse entities across industries.

Some of the Important Role of Investment Banks in the Development of the Country is Explained Below-

Capital Formation and Promote Industry Capital- is one of the most important aspects of any business or industry. Investment banks remove the deficiency of capital by stimulating savings and investment. It assembles the small and dispersed savings of the public and makes it accessible for investment in industrious enterprises.
GDP Growth and Investment Banking- Investment banks have made direct and indirect investments in the economic development of India over the years. As the amount generated by investment banks increases it offers a healthy contribution to the growth of the country’s GDP.
Create employment opportunities- in a developing country like India creation of employment opportunities is of massive importance. As the number of investment banks increases along with an increase in business volume, it creates employment opportunities in the country. This is done by generating capital funds for diverse industries.
Infrastructure Development- the Indian Government undertakes various projects for the country’s infrastructural development. For implementing these projects funds are required that are generated by the investment banks. This in turn boosts the development of the economy.
Technological Improvement- we are living in a digital era and technology plays a crucial role. Banks employ the use of technological software that enables accurate and efficient trading and other financial operations. These technological improvements will be the cornerstone of the future of investment banking in India.

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How Does Investment Banking Work?

Let’s understand how investment banks work with the help of an example.

For instance, a technology company A has decided to go public. The company partners with two different investment banks- X and Y for the IPO underwriting.

Now X purchases 150,000 shares of company A at $30 per share, therefore the total deal amounts to $4.5 million. At the same time, Y purchases 100,000 shares at $32 per share, in a competitive bid, thus the total deal amounts to $3.2 million.

Company A chooses both banks. Both the banks then underwrite a part of the IPO. Following the IPO launch, the stock price increases to $35 per share. X sells all the shares at a profit, making a total of $750,000.

However, Y decides to only sell 80% of the shares it has at the increased price of $35 per share and hold the remaining 20% of the shares. They make a profit of $240,000 from the 80,000 shares sold at the price of $35.

The price of the stocks keeps rising, reaching up to $40 per share. And Y decides to sell the remaining 20% of shares at this profitable price, making another $160,000.

Thus finally, Y recovered the initial investment made and on top of that made a profit of but also made a substantial profit of $400,000 ($2.4 million from the first sale + $160,000 from the second sale). As shown in this example, investment banks can secure profitable deals and also understand the changing landscape of the financial markets.

What Is the Role of Investment Bankers?

Investment bankers are a body of people who are experts and have high knowledge of the present investing climate. They may choose to work with either organizations, government bodies, or other groups to strategize and manage their investing projects.

An investor banker may work with individual clients as well. The main purpose is to help them save money, and time and identify the risks involved in the projects. Businesses require investment bankers to advise them about the best strategies for development.

Thus, investment bankers use their expertise and knowledge to provide recommendations based on current financial affairs.

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Functions Of Investment Banks

Research Services- various research services are provided by investment banks to help advise clients about the buying and selling of securities, analysis of annual financial statements, financial forecasting, and financial modeling. The financial analysts regularly study economic trends and current news to provide clients with research in various areas of equity, analytical, finance, and support asset management.
Sales and Trading- Investment banks play a role in bridging the gap between large corporations and investors. They handle the sales and trading of security in the secondary market. They aid and advise governments and organizations in preparing to meet financial challenges along with helping them procure stocks, bonds, and other products.
Raising capital- investment banks help their clients raise capital through debt and equity offerings. This is primarily done through IPO (Initial Public Offerings) and the FPO process or private placements. In turn, the bank earns revenue from the consulting fees paid.
Underwriting- Underwriting of securities and broking are other services provided by investment banks. The bank by underwriting equity guarantees its client that the investor is ensured to buy their newly issued stocks. Thus, the bank is an intermediate between its client and the investor.
Merger and Acquisition- Banks also aid their clients in mergers and acquisitions. Different models of mergers and acquisitions are created for this. They perform accretion or dilution analysis to analyze the company, check synergies analysis, and market research.
Risk Management- Risk management is a process that involves investment bankers setting a limit on the capital amount that can be used for trade. This prevents bad trades from occurring, that can have a negative consequence. This is an ongoing process that takes place by continuously analyzing the market and credit risk that the bank or its client is taking on during their trade.

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Current Status of Investment Banking in India

We can trace back the history of investment banking in India to the 19^th century when trading houses were set up by European merchant banks. The country’s investment and merchant banking services activities have ever since been dominated by foreign banks.

Then in the 1970s, SBI (State Bank of India) stepped into the business and formed the Bureau of Merchant Banking. Along with this ICICI Securities offered merchant banking services making it the first Indian financial institution to do so.

By 1980 there were more than 30 merchant banks. A rapid proliferation of commercial banks and financial institutions took place due to this growth. Following this in the 1990s merchant banking rapidly gained pace as there was a registration of more than 1500 merchant bankers with SEBI (Securities and Exchange Board of India).

The AIBI (Association of Investment Bankers of India) was formed as a governing body over all the newly opened banks. This completely changed the landscape and the future of investment banking in India.

The main purpose of AIBI was to confirm that the members were compliant with the regulations laid out and to check and monitor their activities. Thus, ensuring that ethical and legal practices are being adhered to along with promoting investment banking across the country.

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List of Major Investment Banks in India (AIBI members) –

A.K. Capital Services Ltd.
Axis Bank Ltd.
Axis Capital Ltd.
Barclays Bank Plc
Birla Capital & Financial Services Ltd.
Canara Bank
Central Bank of India
Citigroup Global Markets India Pvt. Ltd.
Credit Suisse Securities (India) Pvt. Ltd.
Deutsche Equities India Pvt. Ltd.
DSP Merrill Lynch Ltd.
Edelweiss Financial Services Ltd.
HDFC Bank Ltd.
ICICI Securities Ltd.
IDBI Capital Market Services Ltd.
IDFC Securities Ltd.
JP Morgan India Pvt. Ltd.
Kotak Mahindra Capital Co. Ltd.
Morgan Stanley India Co. Pvt. Ltd.
Motilal Oswal Investment Advisors Pvt. Ltd.
Rothschild (India) Pvt. Ltd.
SBI Capital Markets Ltd.
Union Bank of India
Vivro Financial Services Pvt. Ltd.
Yes Bank Ltd.

Challenges to the Future of Investment Banking in India

A few challenges are being faced by banks in the current financial climate. These issues and factors can have an impact on the future of investment banking in India.

Financial regulations- banks are required to adhere to the financial regulations. They have to meet the requirements of the IFRS 9 which relates to the financial models and assets. Along with this is the set of measures known as BASEL-3, developed by the Basel Committee on Banking Supervision. It aims to strengthen the regulation and risk management of the banks.
Scare capital- the focus has shifted to OTC (Over-the-Counter) products and ROE (Return of Equity) due to the BASEL-3 requirements. Its priority is reducing short-term lending and increasing long-term funding. This will have a crucial impact on the future of investment banking in India.
Transformation costs- with all the technological advancements taking place around the world, banks are being asked to stay up to date with the latest technologies concerning their mode of operation and processing. This is going to cost a massive amount for the banks.
Cross-selling in boutique banks- a large customer base leads to greater capital generation for banks. Thus, the banks are now trying to retain their customer base by effectively upselling products.
Regtech- the BCBS 239 (Basel Committee on Banking Supervision) will be compulsory for banks to adhere to. Banks will have to deal with a massive cost for just changing the ‘principal’ sets.
Legacy systems challenged- the smaller banks with outdated infrastructure are struggling to survive in today’s digital era. In the future of investment banking in India, these banks may not be able to keep up with the rapid technological changes taking place.
Norms for client onboarding- Banks are required to adhere to the procedures of KYC (Know Your Customer). This change requires higher costs for implementation, changes in business models, and retention of customer base from different regions.

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The Changing Investment Banking Landscape That Is Leading To The Growth Of Future In Investment Banking

The COVID-19 pandemic had a great impact on different sectors like healthcare, business, the economy, and society in general. The pandemic produced a lot of challenges for the investment banking industry as well.

These obstacles included a drop in share prices, changes in financial laws, pricing pressure, liquidity stress, change to remote or work-from-home environments, and advancement of technology.

In light of this, the future of investment banking in India will shift to two types of broker systems. One is the “client-capturer”, who is involved in front-office tasks and the second is the “flow-players” who are involved in middle-office functions.

These two types will operate in a globally connected, possibly virtual ecosystem. This system of reorganization will require banks to transform their tools and rethink their business models and servicing platforms.

The focus will have to be on the clients, technologies, regulations, and workplace and employee development.

Emerging Trends in Investment Banking That Will Boost The Future Of Investment Banking

Several emerging trends have been observed in recent times, let’s understand what these are and their impact on the future of investment banking in India.

Digital Transformation

Over the last few years, technology has developed at an astonishingly rapid pace. Investment banking is being altered due to the emergence of AI, AR, VR, digital applications, and interactive platforms. This is putting forward an urgent need for banks to improve and unify their trading systems.

Post the pandemic, the transition to digitalization has been imperative and has had a tremendous impact on the future of investment banking in India. There is an expectation on the side of customers for rapid, reliable, and effective digital solutions.

Fintech firms are also focusing on creating digital solutions that keep the customer at the forefront. A few examples of this are robo-advisory services- which provide desirable investment options by processing large chunks of personalized data, chatbots-provide answers to customers’ questions, and gamification- which imparts financial literacy on users for increasing democratization of the market and data.

A Deloitte report stated that investment banking is now moving towards a new operating model called connected flow. It is aimed at improving the customers’ experience and at the same time creating a provision for standardized and centralized non-differentiated services across the industry.

Blockchain

Blockchain is a digital tool that aims to reduce fees, provide speeded-up payments, increase security, and eliminate fraud. At present Decentralized Finance or Defi is most popular within the financial service industry.

Defi is a system that operates on blockchain and comparable technology. It provides real-time transactions between the holders of digital assets. It is not a centralized entity thus, has also been called a bankless finance.

This comes with a larger chance of risks but also better control and reduced processing fees for customers. Some of the largest banks in the world like Goldman Sachs are now starting to use bitcoins and cryptocurrencies. Along with this, there is an increase in innovations due to the greater influx of new users and projects.

Impact of Fintech on Investment Banking

The Fintech space has the potential to change the future of investment banking in India. It has thus far been observed to be the most technologically advanced and innovative within the financial industry.

Traditional finance establishments are moving towards partnering with Fintech firms to expand their potential and a competitive upper hand.

However, it has also been noted by financial experts that the new emerging fintechs do not have enough power to compete with the existing large legacy financial institutes.

A large percentage of market shares is being derived from regional and local banks and not from the top banks.

These fintechs have a lower balance and are gaining new customers who are from the younger demographic versus the older banks that attract an older demographic. This is because age has a direct correlation with money present in a bank account.

Sustainable Investing in India

The banking and financial services sector is increasingly focused on environmental, social, and governance (ESG) issues. The future of investment banking in India is moving towards sustainability. Sustainable finance products are emerging as a viable solution, and fintech is providing the ideal opportunity to create new sustainable finance products that can help the industry transition to a more environmentally friendly future.

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Future Prospects for Investment Bankers in India

Morgan Stanley, a US-based Investment Banking Firm on November 08, 2022, in a thematic report, Research Bluepaper, stated that India has a bright future with growth prospects.

Ridham Desai, Morgan Stanley’s Chief Equity Strategist for India opined that India by 2027 will become the third largest economy in the world, surpassing Japan and Germany.

Additionally pointing out that by the end of the decade, the country will have the third-largest stock market. Further, India is a rapidly developing country making its mark in the world power order, these will provide further opportunities for investors and companies.

The firm’s analysts from various sectors have noted the astounding changes that could be brought about through India’s rapid economic development. These are namely-

A boost in India’s share of global manufacturing
Expansion of credit availability
Creation of new businesses
Improvement in quality of life
Spurring a boom in consumer spending

Chetan Ahya, Morgan Stanley’s Chief Asia Economist, recognized that India is offering opportunities to global investors in a world that is presently deficit of growth to opine that, in a world currently starved of growth.

India has registered an average GDP growth of 5.5% in the last ten years, this has put the country on the “path of unprecedented economic growth”. Analysts have predicted a further increase in GDP by 2031, doubling from the current $ 3.5 trillion to cross $ 7.5 trillion. Several factors have been said to cause India’s remarkable growth-

1. India is Creating a Global Workforce for the World

Desai states that the work environment has shifted post-Covid. CEOs of companies are comfortable shifting to a hybrid work environment.

He opines, that there will be a double in the number of Indians who are employed for jobs outside the country, along with an increase from $180 billion per year to around $500 billion by 2030 as global spending on outsourcing.

The bank observes that the Multinational Corporations’ stance is very positive for the future of investment banking in India.

Upasana Chachra, Chief India Economist sees, the various multinationals being excited about the prospectus of investment in India and the government aiding to drive capital investment in manufacturing and infrastructure.

Thus, the GDP of manufacturing’s share can increase from the present 15.6 % to 21 % by 2031, in turn doubling India’s export market share.

2. Digitalization, Credit, and the Consumer

Over a decade ago India laid the foundation for becoming a digital economy by initiating the National Identification Program called Aadhaar across the country. This has contributed to digitizing financial transactions along with other advantages.

Desai’s team predicts the ratio of credit to GDP will increase in the country from 57% to 100% over the following decade.

A shift in income distribution is also expected from $ 2 trillion in 2022 to $ 4.9 trillion by the end of the decade over the next decade. Thus, the consumers in the country will have more disposable income.

3. Rise of Energy Consumption

According to Girish Achhipalia, India Utilities and Industrials analyst at Morgan Stanley, the boost in consumption of energy coupled with the transitions in energy, will unleash a new segment that will increase investment growth. There will be a boost in jobs, income, savings, and more investments due to the rise in capital investments.

Frequently Asked Questions

Q. Is investment banking a good profession in India?

The investment banking profession is a lucrative one, and the future of investment banking in India can be considered very bright. The functions will generally include helping clients through corporate finances, mergers, and acquisitions. The potential rewards include- effective networking, focused coworkers, benefits packages, higher salary, and never-ending improvement.

Q. What is the impact of AI on investment banking?

Even though AI will revolutionize business procedures; it cannot replace investment bankers. AI can make complicated decision-making processes easier and provide reasonable decisions. However, it cannot replace investment bankers because at the heart of investment banking lie issues that are centered on human perception and connections.

Q. What are the strengths of investment banking?

Investment bankers need to work long hours. Investment banking occurs regardless of the market being open or on holiday. Among the major drawbacks of investment banking, poor work-life balance is included. Bankers also work under very stressful conditions. Yet, with dedication and grit a worthwhile career can be achieved.

Q. What are the investment banking risks?

Macro risks and market risks are an inevitable part of the investment banking business. They include inflation-related losses, interests, and exchange rates.

Conclusion

Finally, the future of investment banking in India can be characterized as one that is fraught with opportunities for growth and hurdles to overcome. Investment banks have to change their way of doing business concerning client desires and digital-oriented innovators. Nevertheless, with all the digital and technological developments being incorporated, India may be portrayed as moving towards advances. Thus, this radical re-organization and globalizing of the investment banking field will become one massive job source; therefore, investment bankers have a great future ahead.

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