NATIONAL LAW UNIVERSITY, JODHPURWINTER SESSION (2015)

ASSIGNMENT SUBMISSIONOnInvestment Banking in India vis--vis Other Tier I and II Economic NationsTowards partial fulfilment of evaluation in the subject ofPrinciples and Practices of BankingDate: 30th March 2015Submitted By: Submitted To:Dhruva Sareen (955) Dr. Rituparna DasVI SemesterFaculty of ManagementBBA - LLB (H.)N.L.U. Jodhpur

Word Count: 7982

IntroductionA 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. Investment banks also provide guidance to issuers regarding the issue and placement of stock is known as investment banking.[footnoteRef:1] Investment banking is comprised of three main areas: investment banking division (IBD), sales and trading (S&T), and asset management. The large global banks typically offer all three services, with smaller banks usually focusing more on the investment banking division side covering advisory and mergers and acquisitions (M&A). The investment banking division is sometimes referred to as corporate finance and is broadly split into 2 sectors, products and industries. The purpose of both is to provide advisory on transactions, mergers and acquisitions and to arrange (and sometimes even provide) financing for these transactions.[footnoteRef:2] Investment banks are categorized as a "bulge bracket" bank, regional bank or a boutique. Larger banks are considered to be bulge bracket banks and offer a full service approach to clients. [1: Investopedia as available on http://www.investopedia.com/terms/i/investment-banking.asp] [2: What is investment banking?, Wall Street Oasis as available on http://www.wallstreetoasis.com/faq/what-is-investment-banking]

The bulge bracket is comprised of nine top banks that include Bank of America, Merrill Lynch, Morgan Stanley, Citigroup, Deutsche Bank, UBS, Goldman Sachs, Credit Suisse, Barclays Capital and JP Morgan Chase.[footnoteRef:3] The global economy is recovering from the worst financial crisis since the great depression with the significant contribution of banking sector. Even the regulators should remain vigilant while making the policy to balance the economic growth. Keeping the current global and Indian banking industry trends in view, the current paper deals with the investment pattern of Indian banking which concludes that Indian banks are more concentrating on advances as compare to investment out of their total deposits. With this, there is also a downfall in income of banks, because ROI is lesser as compare to interest income. To sum up in the near future, banking sector need to support the growth momentum in the economy while giving due attention to balance emerging return and risk and using scale-neutral technology to compete in the globalized era. [3: Id.]

Functions of Investment BankingAn investment bank is a financial institution that helps companies take new bond or stock issues to market, usually acting as the intermediary between the issuer and investors. Investment banks may underwrite the securities by buying all the available shares at a set price and then reselling them to the public. Or the banks may act as agents for the issuer and take a commission on the securities they sell. Investment banks are also responsible for preparing the company prospectus, which presents important data about the company to potential investors. In addition, investment banks handle the sales of large blocks of previously issued securities, including sales to institutional investors, such as mutual fund companies.[footnoteRef:4] [4: Financial Dictionary as available on http://financial-dictionary.thefreedictionary.com/Investment+banking]

Unlike a commercial bank or a savings and loan company, an investment bank doesn't usually provide retail banking services to individuals. [footnoteRef:5] [5: http://www.slideshare.net/businessdesign2011/investment-banking-14036143?related=1]

According to Investors world, Investment banking services are performed by Investment banks. An Investment bank can be defined as an individual or institution which acts as an underwriter or agent for corporations and municipalities issuing securities. Most also maintain broker/dealer operations, maintain markets for previously issued securities, and offer advisory services to investors. Investment banks also have a large role in facilitating mergers and acquisitions, private equity placements and corporate restructuring. Unlike traditional banks, investment banks do not accept deposits from and provide loans to individuals also called investment banker. Financial intermediaries who perform a variety of services, including aiding in the sale of securities, facilitating mergers and other corporate reorganizations, acting as brokers to both individual and institutional clients, and trading for their own accounts. Investment banks are often treated as synonyms of merchant banks. But there is a difference in the services they perform. This is stated as below. Merchant banks and investment banks in their purest forms are different kinds of financial institutions that perform different services. In practice, the fine lines that separate the functions of merchant banks and investment banks tend to blur. Traditional merchant banks often expand into the field of securities underwriting, while many investment banks participate in trade financing activities Pure investment banks raise funds for businesses and some governments by registering and issuing debt or equity and selling it on a market. The current offerings of investment banks & merchant banks vary by the institution offering the services, but there are a few characteristics that most companies that offer both investment & merchant banking share. With the advent of Globalization, latest financial trends and economic development the line of differences between Investment Banking and Merchant Banks has considerably reduced. It was impossible for Indian banks to stay aloof from international trends. With merchant banks/ issuing houses in the U.K already converted to investment banks, India is not far behind. Evidence o this trend is the adoption of Bought-out deals (BODs), Initial placement of equity, venture capital funds, and influx of foreign investment banks and acquisition of stake in Indian merchant banks by foreign investment banks. ICICI is an investment banking outfit.[footnoteRef:6] [6: Machiraju, H.R,[2004], Merchant Banking: Principles & Practices, New Age Publishers, Edition 3.]

Investment banking in the leading economies of the World Investment banking arose in some form in all industrial nations of the world in the nineteenth century, almost by definition. A look at several different countries during this period reveals both common patterns and idiosyncratic differences.[footnoteRef:7] [7: Caroline Fohlin, A Brief History of Investment Banking from Medieval Times to the Present, November 12, 2014 as available on http://ssrn.com/abstract=2524636]

England England began industrializing ahead of most of the rest of the world, and the early industries there used small scale production based on relatively simple technology. Growing industrial development created new demands for investment banking services in England, especially at the turn of the nineteenth century.[footnoteRef:8] Infrastructure projects, such as canals, public utilities, and ultimately the massive endeavor of railway construction spurred increasing needs for long-term capital. As in most countries, however, the pool of public share companiesand therefore the business of placing industrial equities remained constrained until later in the nineteenth century, particularly until the liberalization of joint-stock incorporation under the Limited Liability Act in 1856 and its expansion in the Companies Act of 1862. [8: Lejot, Paul, Investment Banks (June 30, 2012). Gerard Caprio (ed.) Handbook of Key Global Financial Markets, Institutions, and Infrastructure (Elsevier, 2013), Available at SSRN: http://ssrn.com/abstract=2256392 or http://dx.doi.org/10.2139/ssrn.2256392]

Once in place, new corporations formed, many converted from existing private firms.[footnoteRef:9] Investment banking services included both pure intermediation and full underwriting of new issues. Specialized investment banking firms, organized as private partnerships, dominated the nineteenth- and early twentieth century investment banking scene in England. The best known institutions came out of the merchant banking tradition: Baring was the first and one of the most highly reputed of the British merchant/investment bankers, having been founded as a merchant house in 1763.[footnoteRef:10] The merchant banks focused heavily on international trade and finance, as was their founding purpose, and their engagement in investment banking activities picked up along with the increased use of joint-stock companies toward the end of the nineteenth century, but their progress in new issues underwriting remained slow well into the 20th century.[footnoteRef:11] [9: See White, E. (1986). "Before the Glass-Steagall Act: An analysis of the Investment Banking Activities of National Banks," Explorations in Economic History, vol. 23(1), pages 33-55 ] [10: http://www.baringarchive.org.uk/materials/yousseff_cassis.pdf ] [11: See Chambers, D. and E. Dimson (2009) IPO underpricing over the very long-run. Journal of Finance, 64(3): 1407-1443.]

Less famous but earlier participants in corporate investment banking are the finance companies of the mid-19th century, such as the International Financial Society, General Credit and Finance Company, and London Financial Association.[footnoteRef:12] Another form of institution, the company promoter, also performed investment banking type functions. Rising to the fore in the latter decades of the 19th century, as more English manufacturing firms took on joint-stock limited liability form, company promoters usually bought up an entire private company and sold off equity shares in the public market.[footnoteRef:13] In the process, the company promoters earned some disrepute for paying too little to founders or passing off poor prospects onto illinformed investors. Because of the large numbers and informal organization of these entrepreneurial financiers (some performed these functions as an adjunct to other professions), it is difficult to make broad generalizations about their impact, but some gained a reputation for running a serious business that presaged the modern venture capitalist.[footnoteRef:14] The most famous of the group was Henry OHagan, who floated several major companies in the 1890s, using what appeared to be the unusual practice of holding shares on his own account and working to ensure high quality corporate governance and management.[footnoteRef:15] [12: See Cottrell (1974) "Investment Banking in England, 1856-1882: Case Study of the International Finance Society" Ph.D. thesis, University of Hull.] [13: See Davis, L. and R. Gallman (2001), Evolving Financial Markets and International Capital Flows: Britain, the Americas, and Australia, 1865-1914. New York: Cambridge University Press.] [14: See Nye, J. (2014) Boom, Crisis, Bust, in Schifferes S. and R. Roberts (Eds.), The Media and Financial Crises: Comparative and Historical Perspectives. New York: Routledge.] [15: ]

European Continent Most of the European continent set up some form of universal banks. The advent of limited liability and publicly-traded equity shares allowed risk spreading and further enabled financial institutions to grow and take on outside investors. Belgium and the Netherlands Belgiums long tradition in trade and its close connections with England, along with rich coal and iron resources, favored early industrial development. Indeed, Belgium imported its heavy industry directly from England starting with the continents first steam engine in 1720. Even before its independence from the Netherlands in 1830, Belgium introduced the first large-scale mixed or universal bank.[footnoteRef:16] In this early period of industrialization, mixed banks sometimes took large direct equity stakes in firms they promoted, and they also placed directors on the companies boards.[footnoteRef:17] Stock market regulations finally relaxed in 1867.[footnoteRef:18] Thereafter, the exchange grew rapidly, particularly after the liberalization of incorporation in 1873. [16: Caroline Fohlin, A Brief History of Investment Banking from Medieval Times to the Present, November 12, 2014 as available on http://ssrn.com/abstract=2524636] [17: See Conant, C. (1910) The National Bank of Belgium, Washington, DC: National Monetary Commission. ] [18: Van der Wee, H. and M. Goossens (1991) Belgium, in R. Cameron and I. Bovykin (eds.) International Banking 1870-1914, New York: Oxford University Press.]

The combination of the two forces naturally spurred the need for investment banking services: converting existing firms into joint-stock companies and floating their shares on the exchange. The largest mixed banks continued to provide the majority of these services for Belgium, and universality of one form or another remained the norm throughout the pre-war period. The Dutch Republic (Kingdom of the Netherlands), which now remain as The Netherlands, started out the 19th century considerably wealthier and more urbanized and literate due to its prior commercial success and naval prowess. The Napoleanic Wars hit the Netherlands hard, dismantling its international trade business, dispersing the Amsterdam merchant banking community, and imposing enormous government debt.[footnoteRef:19] It is argued that the conservatism of the Dutch commercial elite, slowed the adoption of new technology well after the industrial revolution took root in nearby England and Belgium.[footnoteRef:20] [19: De Vries and Van Der Woude (1997), The First Modern Economy. Success, Failure, and Perseverance of the Dutch Economy, 1500-1815, Cambridge University Press.] [20: Mokyr, J. (2000) The industrial revolution and the Netherlands: Why did it not happen? in De Economist, Volume 148, Issue 4, pp 503-520kyr (2000). ]

The failure of a large investment bank can also cause widespread financial instability because of its importance to financial market infrastructure. For instance, if an investment bank became insolvent, the removal of its clearing services would require all financial institutions that had been reliant on the investment bank to migrate to another provider. These institutions would be unable to trade in financial markets in the interim. The Netherlands extensive canals and waterways tended to make railroads less profitable, thereby removing one of the key engines of continental industrialization, and its manufacturing base had resided largely in what was now Belgium. The countrys lack of coal deposits and high interest rates may have further disadvantaged its industrial development.[footnoteRef:21] Despite its early lead in merchant banking and financial markets, the development of modernized financial system, including incorporation and corporate governance laws, also lagged behind that of its neighbors. Few industrial firms went public, with the first few appearing on the Amsterdam Stock Exchange in the 1880s. Firms could access short-term, rolled-over loans from a network of notaries, lawyers, and brokers who gathered funds from investorsthe so-called prolongatie system.[footnoteRef:22] Numerous private bankers operated as brokers and investment bankers throughout the 19th century, mostly in Amsterdam, some descending from the original merchant banking families. Without an extensive domestic demand for investment banking services, many of these bankers helped channel significant volumes of Dutch financing into US railroad securities in the building boom of the mid- to late-19th century.[footnoteRef:23] [21: Fernihough, A. and K. H. O'Rourke (2014) Coal and the European Industrial Revolution, NBER Working Paper No. 19802. ] [22: De Jong, A., and A. Rell (2005) Financing and Control in the Netherlands. In A History of Corporate Governance Around the World, edited by R. K. Mork, 467 506. Chicago: University of Chicago Press.] [23: See Veenendaal, A. J. (1996) Slow Train to Paradise: How Dutch Investment Helped Build American Railroads. Stanford University Press.]

Domestic industry and banking both began to pick up after 1895, and new stock issues appeared in the market. The banks provided investment banking services, underwriting new issues, but avoided long-term financing with their own resources and did not take direct equity stakes. The banks did place directors in the supervisory boards (similar to outside directors in a unitary board system) of some firms they financed and also maintained indirect relationships via associates holding seats on both a bank and industrial firms supervisory boards.[footnoteRef:24] [24: Jonker, J. (1995) Spoilt for Choice? Banking Concentration and the Structure of the Dutch Banking Market, 1900-1940, in The Evolution of Financial Institutions and Markets in Twentieth Century Europe, edited by Y. Cassis, G. D. Feldman, and U. Olsson, 187 208. Aldershot: Scholar Press.]

France France began to industrialize somewhat after Belgium but well before the Netherlands. As in most other countries, investment-banking services first emerged in France among merchant families. This class of haute banque arose in stages, mostly from Protestant and Jewish immigrants from Germany and Switzerland. These merchant banks maintained close connections to the Bank of France and in some cases heavy interest in the issuance in the governments debt.[footnoteRef:25] Beginning around 1830, and expanding particularly toward the end of the July monarchy (1848), these private, family-run firms joined together into investment associations and promoted many savings banks, insurance companies, industrial firms (especially in mining and metals), and railways. [25: Stoskopf, N. (2009) What is the Parisian Haute Banque in the Nineteenth Century? http://hal.inria.fr/docs/00/44/11/64/PDF/STOSKOPF_PARISIAN_HAUTE_BANQ UE.pdf]

With a new law in 1848 allowing incorporation of joint-stock banks, a wave of new banks appeared. The Comptoir National dEscompte de Paris (CNEP) started in the fallout of the 1848 revolution to provide discount facilities to firms but built up an extensive investment banking business, underwriting both government and corporate securities. Soon after, the first investment bank of the Belgian typeand a key institutional innovation in investment banking targeted at industrializationarose in the form of the famed Crdit Mobilier. Founded by the Pereire brothers in 1852, in a break from their long-standing relationship with James de Rothschild, the bank immediately became actively engaged in the promotion of industrial companies, particularly railroads and real estate, as well as shipping and even other financial institutions; notably one of the earliest German universal banks, the Bank fr Handel und Industrie in Darmstadt. The bank engaged in industry reorganizations, such as that of Parisian gas companies and Loire coal and railroads.[footnoteRef:26] The Crdit Mobilier took substantial equity in the companies it financed and also placed its associates on the companies boards of directors.[footnoteRef:27] [26: Paulet, E. (2002) The Role of Banks in Monitoring Firms: The Case of the Credit Mobilier, New York: Routledge.] [27: Ibid. ]

Austria and Switzerland Austria followed a very similar path to Germanys. The first Austrian universal bank, the Credit-Anstalt, was founded in 1855, similar to the German Bank fr Handel und Industrie and the French Crdit Mobilier. A small number of similar banks appeared shortly thereafter, mainly in the Austrian portion of the empire. Like many of their counterparts in other countries, the large Austrian banks initially focused on railroad financing and remained primarily engaged in the conversion of large, relatively safe firms. On the commercial side of their business, they secured their credits with the bestquality securities. Thus, the banks' investment services tended to exclude smaller, potentially riskier ventures. The universal banks developed along the lines of the German institutions, with some equity participation and board memberships. Swiss banking followed the more international merchant tradition, going back to the role of Geneva in international trade as early as the 14th century.[footnoteRef:28] The merchant focus, like those in England, Belgium, Netherlands, and Italy, continued well into the 19th century. Moreover, early industrialists managed a substantial proportion of self financing. Yet like most of the continent, Switzerland faced the need for large-scale industrial finance with the onset of railroads and heavy manufacturing industry and began to set up large joint-stock banks by the middle of that century. Crdit Suisse, founded in 1856, followed the model of the French Crdit Mobilier with great success.[footnoteRef:29] Later in the nineteenth century, a number of large banks created investment companies to help fund large industrial concerns, such as electrical companies. [28: Cassis, Y. (1994) Banks and Banking in Switzerland in the Nineteenth and Twentieth Centuries, in Pohl, M. (Ed.) Handbook on the History of European Banks, Frankfurt: European Association of European Banks.] [29: Cassis, Y., Tanner, J. (1992) Finance and financiers in Switzerland, 1880-1960, in Y. Cassis (Ed.) Finance and Financiers in European History 1880-1960. New York: Cambridge University Press, pp. 293-316.]

Italy Although Italy followed a pattern of financial development quite similar to that of other European countries in the early nineteenth century, its industrial and financial development proceeded later and more slowly than that of its northern neighbors. It followed the familiar path of private merchant banking early on; but perhaps because of its lateness in developing large-scale industry, the demand for investment banking also lagged. Italy's first investment bank, the Banca Generale (B.G.), appeared only in 1871. The B.G. and the Credito Mobiliare Italiano were the leading investment banks until the financial crisis of the early 1890s. As in other countries, the investment banks tended to concentrate on metals, mining, and engineering; but having overinvested in the building sector, these and several smaller banks failed in the face of liquidity shortages from 1891 to 1893. In the following two years, coalitions of continental European banks with heavy involvement from Germanyformed two new universal banks, Banca Commerciale Italiana (the Comit) and Credito Italiano (the Credit), both of which closely resembled their founders. The two banks engaged actively in investment banking, yet they balanced those services with a greater proportion of commercial business than had their predecessors. The Comit and Credit, particularly the former, obtained significant numbers of board positions and, as in Germany and Austria, focused on the largest firms. Their involvement with industry, however, spanned a broad range of sectors. Japan Japan launched into industrialization later than most of northwestern Europe, but it had already set the stage under the Togugawa regime with transportation and agricultural infrastructure. The Meiji Restoration of 1868 marks a natural political start to the countrys new era of development, just as unification did in Germany and Italy around the same time.[footnoteRef:30] The Meiji government began developing legal and financial institutions to support industrial development in the 1870s and 1880s.[footnoteRef:31] It privatized government factories in the 1880s and worked to develop a market-based economy, borrowing and adapting a variety of institutions from the United States and Europe. In 1882, the Bank of Japan began operation and instituted lender of last resort facilities.[footnoteRef:32] [30: Allen, F., F. Capie, C. Fohlin, H. Miyajima, R. Sylla, G. Wood, Y. Yafeh (2012) How Important Historically Were Financial Systems for Growth in the U.K., U.S., Germany, and Japan? Wharton Financial Institutions Center Working Paper.] [31: Miwa and M. Ramseyer (2002) The Value Of Prominent Directors: Corporate Governance And Bank Access In Transitional Japan, Journal of Legal Studies, vol. XXX, pp. 273-301.] [32: Hoshi, T. and A. Kashyap (2001) Corporate Financing and Governance in Japan: The Road to the Future. Cambridge: MIT Press.]

Japanese banks formed as joint-stock corporations and provided a range of financial services, including securities dealing, but in the pre-World War I period they almost always stopped short of securities underwritingthe foundation of investment banking. These so-called ordinary banks discounted bills, made advances on real estate, offered loans, and also traded in securities, gold, and foreign exchange. But they engaged to a minor extent in investment banking services in this period. Major banks underwrote public bonds and the small amount of corporate bonds that were issued.. They got involved in equity finance at most indirectly, lending extensively on collateral of corporate stock. Independent industrial firms, particularly those in the important cotton spinning industry and other light industries, often started out as joint-stock companies, but they also tended to be closely held by insiders in the industry and related merchants.[footnoteRef:33] When companies wanted to raise more capital and attract outside investors, they turned to successful and reputable merchants, sometimes known as business coordinators. The latter operated much like a private investment banker would, supplying capital to the issuing firm, taking over the issue of the shares, and using their built up capital, reputation, and contacts to attract subscriptions from the ultimate investors.[footnoteRef:34] [33: See Teranishi, Juro (2007) Were Banks Really at the Center of the Prewar Japanese Financial System? Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, 25 (1), pp. 4976.] [34: S Allen, F., F. Capie, C. Fohlin, H. Miyajima, R. Sylla, G. Wood, Y. Yafeh (2012) How Important Historically Were Financial Systems for Growth in the U.K., U.S., Germany, and Japan? Wharton Financial Institutions Center Working Paper.]

The most famous of the business coordinator/investment bankers is Eiichi Shibusawa, who worked his way up from farming origins to government service and then to lead the ministry of finance in the early Meiji years. Using his business success and government and finance connections, he began an active career in helping take industrial firms public, ultimately becoming one of Japans wealthiest investors at the turn of the 20th century.[footnoteRef:35] He also sat on the boards of many industrial firms, even when he no longer held personal equity stakes.[footnoteRef:36] [35: See Iishi (2007) and sources cited there. ] [36: See Miwa and Ramseyer (2002) on the value of prominent directors on corporate boards. 38 See Harmao, Hoshi, and Okazaki (2005). ]

Spurred by and, in turn, facilitating these new industrial stock issues, stock markets began developing in 1878 with the opening of the Tokyo Stock Exchange (another project aided by Eiichi Shibusawa). Many other exchanges opened and closed over the succeeding decades, and listings rapidly increased in the pre-World War I years.38 Notably, the vast majority of listed stocks in the early years came from national banks, which were closely regulated with shareholder rights under the National Bank Act. Listings rose even more in the late 1880s, and railroads and textile companies began replacing some of banks in the market. Company law appeared first in 1893, but it was the 1911 revision that instituted corporate governance regulations that most actively protected small, outside shareholders. In a context of poor legal protections for shareholders, markets remained locally oriented, with investors placing their capital in nearby firms that they could better observe.[footnoteRef:37] By 1915, 160 companies listed on the TSE, representing a range of industries from energy (including the newly emerging electrical industry) to textiles to commodities, while nationalization of the main railroads in 1906 reduced the share of that industry. [footnoteRef:38] [37: http://www.nber.org/chapters/c10274.pdf] [38: See Harmao, Hoshi, and Okazaki (2005). ]

United States From the start of the nineteenth century on, a range of intermediariesmerchants, industrial firms, incorporated commercial banks, private bankers, trust companies, lotteries, auctioneers, and brokersprovided some form of investment banking services. Indeed, one of the countrys first banks, The Bank of the Manhattan Company, began in 1799 as an adjunct to the parent companys main business of water supply in lower Manhattan. The bank underwrote bonds to finance the Erie Canal in the 1820s. Similar financial institutions emerged from manufacturing and commercial enterprises in the early 19th century, notably Manufacturers Hanover Trust Company (cotton processing equipment manufacturer) and Chemical Bank (manufacturer of dyes, medicines, and paints).[footnoteRef:39] [39: http://www.jpmorganchase.com/corporate/AboutJPMC/document/shorthistory.pdf ]

Specialized investment banks came to the fore in the 1850s and, responding to an immense demand for borrowing by the federal government, multiplied with the Civil War. The most prominent of the war financiers, Jay Cooke and Company of Philadelphia, started out in 1861 with Union war bonds and afterwards moved into railroad finance. The firm failed in the panic of 1873, but the founders son-in-law Charles D. Barney reorganized the firm under his own name and took on his brother-inlaw, Jay Cooke, Jr. as partner.[footnoteRef:40] Many similar firms appeared over the late nineteenth century, but the most famous American investment banker is undoubtedly John Pierpont Morgan. J. P. Morgan, son of ex-pat London banker Junius Morgan, co-founded his first bank in 1860 and worked with a variety of partners over subsequent decades.[footnoteRef:41] [40: http://www.jpmorganchase.com/corporate/AboutJPMC/document/shorthistory.pdf ] [41: Carosso, V. (1970) Investment Banking in America: A History. Cambridge: Harvard University Press.]

United States law separated banking and commerce activities with the passage of the National Banking Act of 1864, under which nationally chartered commercial banks were technically prohibited from direct participation in investment banking activities. By the late nineteenth century, investment banking largely took place within specialized institutions in the United States, mostly private partnerships, though they worked with and often took stakes in commercial banks. However much the US law worked against the creation of straightforwardly universal banks, entrepreneurial individuals continued to form a variety of institutions that replicated universal banking in its primary services and effects. The investment bankers themselves formed close ties with commercial banks; often owning stock in them or sitting on their boards, in order to insure their access to short-term loans to cover operations during a flotation of securities. In this sense, J.P. Morgan and Co. stands out as the preeminent example of American quasi-universal banking in the pre WWI era, perhaps acting even more like the stylized view of a German universal banker than the Germans ever did: providing abundant capital to firms with which it had close relationships and monitoring the management of the same.[footnoteRef:42] Morgan operated in cooperation with the First National Bank of New York, [42: Hawkins, R. (2007), American Boomers and the Flotation of Shares in the City of London in the Late Nineteenth Century, Business History 49, pp. 802-22.]

Moreover, quasi-universal banks formed through the integration of investment subsidiaries into commercial banks. These banks typically sold shares to their affiliated companies by attaching them to their own shares, which then allowed the bank to engage in a wide range of non-banking activities, including but not limited to securities underwriting, brokerage and investment.[footnoteRef:43] The commercial banks really launched into investment banking most significantly after World War I, and a relatively small number of commercial banks created security affiliates (10) or bond departments (62).[footnoteRef:44] Still, the largest bankers in the principle commercial centers did engage in investment banking. [43: See Carosso, V. (1970) Investment Banking in America: A History. Cambridge: Harvard University Press.] [44: See White (1986), based on national banks at least. Also complicating the overall picture of an increasingly universal system, by some accounts (see Lamoreaux, 1991) the earliest participants in quasiuniversal banking, the New England Banks, transitioned towards more specialized commercial banking at the same time. ]

As in the early 19th century, corporate firms continued to own controlling stakes in commercial banks, and private investment banking firms collaborated with commercial banks. In one notable example, the Rockefellers took a substantial stake in National City Bank. After James Stillmans sister married William Rockefeller, the brother of John D. Rockefeller and co-founder of Standard Oil and Amalgamated Copper, he became president of the bank. City Bank grew rapidly into a Wall Street force, the largest bank in the city as of 1893, and a lead underwriter of the Union Pacific reorganization in 1895. Stillman held seats on over 50 corporate boards in the early 1900s, including major rail lines of the Harriman system, and the bank functioned as the main bank of Standard Oilearning it the title Oil Bank.[footnoteRef:45] When Stillman resigned from the directorate and executive committee of Harrimans Union and Southern Pacific lines in January 1908, Stillman appointed his vice chairman at City, Frank Vanderlip, to succeed him.[footnoteRef:46] At the same time, City Bank collaborated regularly with the investment house Kuhn Loebtying the banking interests via stakes in many underwriting syndicates and corporate stock pools. [45: See the obituary of James Stillman in the New York Times (March 16, 1918), http://query.nytimes.com/mem/archive-free/pdf?res=9403E0DF103BEE3ABC4E52DFB5668383609EDE, retrieved from nytimes.com.] [46: Los Angeles Herald, January 26, 1908, Stillman Resigns from Harrimans Directorate. ]

Non-bank financial services companies, such as insurance companies and trust companies, also invested heavily in corporate firms and participated in underwriting syndicates. The latter group became the most actively universal of all the various institutions, as they operated free from the regulations that hamstrung chartered banks.[footnoteRef:47] Trust companies provided depository and trust accounts, commercial banking services, and investment advisory to wealthy clients. In this capacity as fiduciaries and savings banks for wealthy clientele, they entered into higher-risk, higher-return investments than did the typical savings bank of the time: holding portfolios of industrial securities and lending on collateral of stocks and bonds. Trust companies also moved into investment banking activities, such as securities issues and placement, and mergers and acquisitions.[footnoteRef:48] As trust companies expanded their mix of services, they eroded the market share and profitability of commercial banks in the same markets. The lax regulation on trust companies, however, encouraged many new institutions to take on that form instead of chartered bank. The competition from trusts, pushed commercial banks to seek new avenues for profits and spurred their move into investment banking services. [47: White, E. (1986). "Before the Glass-Steagall Act: An analysis of the Investment Banking Activities of National Banks," Explorations in Economic History, vol. 23(1), pages 33-55.] [48: Carosso, V. (1970) Investment Banking in America: A History. Cambridge: Harvard University Press.]

Thus, when considering the range of institutions engaged in investment banking activities, along with the interconnectedness of private investment banking firms with commercial banks, it appears that by World War I, most US corporations financed through universal-type (or quasi-universal) institutions. The Investment scenario in indiaWith India becoming one of the important investment destinations for both corporates and investors, and Indian companies' increasing focus on the global markets, particularly in the automotive and healthcare industries, the potential for cross border transactions has increased manifold. Last century has witnessed, researchers from around the Globe have worked upon postulating models and theories facilitating firms to add to their efficiency in terms of competitive corporate financial practices. Financial sector reforms were initiated as part of overall economic reforms in India too and wide ranging reforms covering industry, trade, taxation, external sector, banking and financial markets have been carried out since mid- 1991. The most significant achievement of the financial sector reforms has been the marked improvement in the financial health of commercial banks in terms of capital adequacy, profitability and asset quality as also greater attention to risk management. Further, deregulation has opened up new opportunities for banks to increase revenues by diversifying into investment banking, insurance, credit cards, depository services, mortgage financing, securitization, etc.[footnoteRef:49] The financial services sector contributes about 5% to the nations GDP. This is in line with ratios in most of the developed and developing countries and reflects the ability of sector to create employment. Work suggests that financial services sector will create 7.4 million direct jobs by 2020.[footnoteRef:50] [49: A.K Purwar, Banking Sector, [Online] Available: www.bseindia.com/downloads/BankingSector.pdf] [50: McKinsey & Company, Indian Banking: Towards Global Best Practices, [Online] Available: http://www.mckinsey. com/locations/india/mckinseyonindia/pdf/India_Banking_Overview.pdf, November 2007]

Higher demand deposit to total deposit ratio necessitates maintenance of higher liquidity in the bank and vice versa. Therefore, interpretation of other ratios vis--vis liquidity of a bank depends largely on this ratio, in other words, the ratio is synonymous to liquidity needs of any banking organization. Average Industry ratio has moved between 0.11 and 0.12 through 1999-2008, depicting very less variation in last one decade. However, movement of individual banks has been low or fast paced. The industry average for the liquid asset to demand deposit ratio for the period under study is 1.345. Liquid Assets as a percent of total assets show the percentage of liquid assets in the asset structure of the bank. Higher the proportion of Liquid Assets in the total assets, higher is the liquidity of the bank. The liquid asset includes cash in hand, balance with the RBI, balance with other banks and money at call and short notice. The ratio has increased substantially from 1999 to 2008; it was 0.401 in 1998-99 and increased to 0.583 in 2007-08. It can be considered as good sign as far as liquidity is concerned but profitability of these banks might suffer due to less deployment of funds in loans. Most of the banks have increased this ratio in recent years.[footnoteRef:51] [51: Rimpi Kaur & Pallavi Manik, A Comparative Study on Investment Pattern of Indian Banking in the Global Era, Opinion Vol. 2, No. 1, June 2012]

While large corporations with comparatively advanced product needs continue to be the largest CIB customer segment at $326 billion in post-risk revenues, faster growth is found among mid-size corporationsdefined as companies with revenues between $50 million and $125 million. McKinseys research indicates that by 2015 revenues from Asias mid-corporate segment will nearly double to $308 billion, driven by the economic expansion of India and China and the growing importance of those two countries medium-size companies. Even more promising, this growth is not merely in the number of potential clients. The segments need for more sophisticated (and higher-margin) transaction-banking and tradefinance solutions is also likely to surge in response to increasing trade, especially within Asia and with other developing countries in the Middle East, Africa and Latin America. Industry participants agree that the opportunity is exceptional: in a recent McKinsey poll of over 45 top CIB executives in Asia, respondents listed the mid-corporate sector as the biggest growth opportunity for their institutions over the next three years. At the same time, most participants said they found the mid-corporate segment a particularly tough business. Building a mid-corporate franchise that is profitable throughout the economic cycle has proven difficult, with only a few successes in Asia to date. For example, a review of Indias mid-corporate segment showed return on assets (ROA) varying by as much as 450 basis points between low and high performers (Exhibit 3). This significant variance is due primarily to two factors: risk costs, given the vulnerability of these companies in an economic crisis, and the ability to cross-sell other products based on primary bank relationships.Investment Pattern of Indian Banking Industry (Rs. Crore) Years PSBs OPSBs NPSBsFBs SCBS In IndiaOut ofIndiaIn IndiaOut ofIndiaIn IndiaOutsideIndiaIn IndiaOutsideIndiaIn IndiaOutsideIndia 2001-024283633390 289593196419957761777902331012002-03315328395844468703080305329763238 4290892003-04507451278035203846095303267206362672877 2004-055643453250347197662313383404306806413363 2005-0693635408806879893957 0134516129374535819782006-0701247463025622007507333723 5439533421351052007-088285109202415558 643430541842133015189202008-09099997011587145730 84159756355362301635932009-1013585348521 1000015835660819018020916511749202010-11014486249033 10744118103646030197649929111960Average641001.304582.5041037.6039.80109745.60156.8063022.800.10860308.204939.00 SD252564.032221.4614324.9942.0462515.39289.6436567.740.32350377.702237.85 CV39.4048.4834.91105.6356.96184.7258.02316.2340.7345.31 Growth (%)271.01312.58223.71-100.001011.702344.74380.31-100.00238.18166.46 :Report on Trend and Progress of Banking in India (2001 to 2011)Average Investment Pattern of Indian Banks

The global financial stability report, 2011 has cautioned that for the 1st time since 2008, the risk to global financial stability has increased which means global economy is under crisis where the banking system of advanced countries is continued to be on uncertain grounds on account of increasing credit strains and uncertainty of investments. The critical issue for financial economists studying conflicts of interest in financial institutions is the balance between the value added of an institution and the potential harm arising from conflicts of interest. A conflict of interest is defined as a situation in which a party to the transaction can gain at the expense of another party. Its occurrence does not necessarily mean that, in equilibrium, it results in an economic loss. The issue has gained in importance in light of the ongoing restructuring of the global investment banking industry as new regulations take hold and impact investment banking relationships with corporate clients in the wake of the financial crisis of 2007-2009. During 2008, three major financial firms with investment banking operations either failed (Lehman Brothers) or had to be taken over (Bear Stearns, Merrill Lynch).[footnoteRef:52] [52: http://www.slideshare.net/businessdesign2011/investment-banking-14036143?related=1]

India has a robust, transparent and stable financial market, which has gradually transformed from being a highly controlled system to a liberalized one. There are three leading areas of corporate financial practices that consistently require the academic concentration of scholars in corporate finance theory. These include corporate financial practices relating to investing, financing and finally the practices concerning distribution. However, in modern finance, the investing practices have been further classified into two categories, that is, long term financing and short term financing. The long term financing refers to capital budgeting practices and short term refers to working capital practices.Under the premise that the severity of the investment banking relationship distortion is directly related to the nature of the financial crisis, it is reasonable to assume that our documented treatment effect is more pronounced for the clients of Lehman Brothers - the only one of the three troubled investment banks that actually filed for bankruptcy. To investigate this hypothesis, we differentiate treated firms according to the nature of their underwriters collapse and divide our treatment group into two subsamples. We then repeat our analysis. The first subsample contains only clients that were affiliated with Lehman Brothers, the second subsample contains only clients affiliated with Bear Stearns and Merrill Lynch.Not surprisingly, the regional focus will naturally shift from developed Asia to China and India. While Southeast Asias CMIB pool is dramatically smaller, it will deepen as well and potentially present more attractive margins.The two giants will likely become major revenue pools, together contributing 40 percent of Asias total by 2015. By the end of the period, China will be generating about $53 billion in revenues and India about a quarter of that amount (despite faster growth). Each of these markets, however, is evolving along a different path from the regions more developed markets. Chinas regulatory controls mean that important capital market components, including a secondary market for corporate bonds and asset-backed securities, have barely caught on, leaving primarily equities and plain vanilla fixed-income products. Although most bankers and CFOs interviewed agree that growth will be explosive once the market takes off, the timing of such an occurrence remains highly uncertain. Meanwhile, despite similarities to China in fundamental economic growth, India is already seeing rapid advances in both product sophistication (for example, the dominance of listed derivatives) and accessibility of revenue pools. In equities, global players share of the Indian market is nearly 75 percent, in marked contrast to China where they hold less than 1 percent. In both countries it is the regulators who will play the most critical role in the pace of market development. Latent demand continues to be high, but regulatory barriers are still in place.[footnoteRef:53] [53: http://cec.shfc.edu.cn/download/ff9afd43-a63a-4c1e-b8f3-9566c0c62053.pdf]

ConclusionThe face of banking is changing rapidly. Competition is going to be tough and with financial liberalization under the WTO, banks in India will have to benchmark themselves against the best in the world. For a strong and resilient banking and financial system, therefore, banks need to go beyond peripheral issues and tackle significant issues like improvements in profitability, efficiency and technology, while achieving economies of scale through consolidation and exploring available cost-effective solutions. A large number of global banks have stepped up their focus on India, keen to participate in the sectors growth. As the pressure for better financial performance has been mounting largely because of increasing competition in the present globally competitive era, the researchers in finance have been left with no option but to explore a number of factors and techniques that could help to device suitably fitted financial practices in compliance with central philosophy of modern finance theory. These are some of the issues that need to be addressed if banks are to succeed, not just survive, in the changing milieu.[footnoteRef:54] [54: Prakash Vir Gupta & Ashok Purohit, A Study of Corporate Investment Practices of Banking Industry in India, IJMBS Vol. 1, Issue 4, Oct-Dec 2011 as available on http://www.ijmbs.com/14/praksah.pdf]

Finally, banks should consider two administrative levers. Businesses can make a point of preferring counterparties with strong collateral and netting agreements for derivatives already in place. Direct impact will vary widely across businesses. Some products implicated in the financial crisis, such as securitizations and re-securitizations, OTC derivatives, and sub-prime products, are the subject of specific regulation. Thus, businesses that deal in these products will be most affected.The recent financial crisis has had a lasting effect on investment banks trading activities. Most major global investment banks restructured their businesses as a result of their large losses during the crisis in 2008 alone, aggregate trading losses in the UK banking system were over 30 billion and regulatory measures taken after the crisis to make them less risky. By far the most significant shift has been in their trading operations. Interconnectedness in the financial system, for example through interbank lending, can create a channel for the transmission of losses between financial institutions, including investment banks. The most direct channel of contagion is counterparty credit risk , the risk that insolvent institutions cannot repay their debts and thus impose losses on other institutions to whom they have outstanding obligations. Investment banking activities such as derivative trading and securities financing transactions can create large intra-financial exposures. For example, in June 2014, over 80% of investment banks global derivative exposures were to other financial institutions, including 40% to other investment banks. These exposures are typically collateralised, however, and this significantly reduces the risk of a direct loss from the failure of a counterparty. But problems can nonetheless arise through other channels of contagion, such as market liquidity effects. 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