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August 05, 2014

Investment Banking System


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The Investment Banking refers to a system where banks provide long-term finance to meet the fixed capital requirements. So it is also called industrial banking. The investment banker acts as middlemen and connects both the issues (public bodies as well as private business firms) of securities who require capital and the ultimate investors (both institutional and individual) who have surplus funds to invest. They channelize the savings and facilitate the flow of needed capital. Start up and expanding business units, governmental and non-governmental organizations seek the assistance of investment bankers to meet their finance requirements.

Industries require finance not only for short periods but also for long periods. For example, in India IDBI, UTI, LIC and GIC are considered as investment institutions. UTI mobilized funds by introducing various schemes. LIC and GIC collect premiums on insurance policies of life and general. The money so mobilized is invested in shares and bonds of companies.

Basically, the system  of investment banking was born in Germany, it has spread to Denmark and Switzerland. Investment banks are classified as Originators,  Underwriters and Retailers. As originators, they bring out new issue of the securities and as Underwriters they under write the issue and as the retailers they retail the securities to individual and institutional investors. Under this system every lending is preceded by through investigation. The bank inspects the premises of industry, studies its plans and provides finance only after it is fully convinced of the soundness of the industry.

As an investment banker, thus, performs a highly useful service to the business world by providing the necessary capital for providing long term capital needs of industry. The investing public are also benefited by the activities of the investment banker. This is because of the independent and comprehensive analysis, which he makes in order to gauge the desirability of securities, which they propose to underwrite. Instances do not wanting where unscrupulous bankers have cheated the public thereby damaging the goodwill of the entire investment banking system, However it is gratifying to note that many countries have already enacted protective legislation providing for the prosecution of dishonest security dealers.

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