Evolution of Investment Banking in India

The origin of investment banking in India can be traced back to the

th

19 century when European merchant banks set-up their agency houses in the
country to assist in the setting of new projects. In the early 20 th century, large
business houses followed suit by establishing managing agencies which acted as
issue house for securities, promoters for new projects and also provided finance to
Greenfield ventures. The peculiar feature of these agencies was that their services
were restricted only to the companies of the group to which they belonged. A few
small brokers also started rendering Merchant banking services, but theirs was
limited due to their small capital base.

In 1967, ANZ Grindlays bank set - up a separate merchant

banking division to handle new capital issues. It was soon followed by Citibank,
which started rendering these services. The foreign banks monopolized merchant
banking services in the country. The banking committee, in its report in 1972, took
note of this with concern and recommended setting up of merchant banking
institutions by commercial banks and financial intuitions. State bank of India
ventured into this business by starting a merchant banking bureau in 1972. In 1972,
ICICI became the first financial institution to offer merchant banking services.
JM finance was set-up by Mr. Nimesh Kampani as an exclusive
merchant bank in 1973. The growth of the industry was very slow during this
period. By 1980, the number of merchant banks rose to 33 and was set-up by
commercial banks, financial institutions and private sector. The capital market
witnessed some buoyancy in the late eighties. The advent of economic reforms in
1991 resulted in sudden spurt in both the primary and secondary market. Several
new players entered into the field. The securities scam in may, 1992 was a major
set back to the industry. Several leading merchant bankers, both in public and
private sector were found to be involved in various irregularities. Some of the
prominent public sector players involved in the scam were Can bank financial

services, SBI capital markets, Andhra bank financial services, etc. leading private
sector players involved in the scam included Fairgrowth financial services and
Champaklal investments and finance (CIFCO).

The market turned bullish again in the end of 1993 after the tainted shares problem
was substantially resolved. There was a phenomenal surge of activity in the
primary market. The registration norms with the SEBI were quite liberal. The low
entry barriers coupled with lucrative opportunities lured many new entrants into
this industry. Most of the new entrants were undercapitalized with little or no
expertise in merchant banking. These players could hardly afford to be discerning
and started offering their services to all and sundry clients. The market was soon
flooded with poor quality paper issued by companies of dubious credentials. The
huge losses suffered by investors in these securities resulted in total loss of
confidence in the market.
Most of the subsequent issues started failing and companies
started deferring their plans to access primary markets. Lack of business resulted in
a major shake out in the industry.
Most of the small firms exited from the business. Many foreign
investment banks started entering Indian markets. These firms had a huge capital
base, global distribution capacity and expertise. However, they were new to Indian
markets and lacked local penetration. Many of the top rung Indian merchant banks,
who had string domestic base, started entering into joint ventures with the foreign
banks. This energy resulted in synergies as their individual strength complemented
each other.
In India, the investment banks have largely concentrated on serving their
foreign clients by using India as a base for their inter globe operations but with
rapid economic growth and demand for a professional in the field of finance have
created a lot of market for investment banks.

120

100

80
Indian (Govt.)
60

International
Indian (Pvt.)

40

20

0
1951

1991

2007

2014

Source- Silicon India.

(http://www.siliconindia.com/shownews/The_number_of_ibanks_increases_in_India-nid-69727-cid-3.html)

According to the data issued by Silicon India the number of investment banks (ibank) in India is increasing day by day. Deepti Chaudhry of Mint says According
to industry estimates, at least 300 i-banks have been set up in India over the past
18 months, compared to only 50-60 new i-banks in 2006-07, when fund-raising
was at its peak
Experts say that the number Indian firms are raising funds for acquisitions now,
though investment-banks have been around for long. And investment-banks are
looking to have a share of benefit.
From the above data we can see that apart from the nationalized banks, others such
as private sector bank of the investment firms run by a single or two partners are
growing at a larger scale and yet the Multi National banks still have a strong hold
over the Indian investment sector.