Journal of Seybold Report ISSN NO: 1533-9211

A Study of Investment Banking and its Impact on Economic 

Development with Special Reference to INDIA. 
Author:- Anoop Deshpande
(Student of BBA, ISB&M College Of Commerce, Pune)

ABSTRACT:

The theory of investment can be considered from the social point of view. The social
point of view which regards the flow of the annual income into investment, the
influence of speculation upon the community, etc., is important in connection with the
control of investment banking, as well as the forecasting of changes in investment
conditions.The interdependence between investment banking and economic growth
has been a subject of some debate. While some economists contend that the
development of the economy is a by-product of gdp. India’s impetus on expanding its
banking reach and recent changes in the way transactions are being done begs the
question whether such changes directly affect the growth trajectory. This paper aims
to examine and understand the relationship between investment banking and
economic growth in India in the last few years. The findings indicate a strong
relationship between the two variables, investment banking and economy.

Keywords​: Investment, Investment Banking, GDP, Economic growth.

INTRODUCTION:

All Non-banking Finance Companies that function as investment banks are regulated
by RBI under RBI Act, 1934. SEBI governs the functional aspects of Investment
banking under the Securities and Exchange Board of India Act, 1992.​An Investment
Bank is a financial intermediary which specializes in the field of selling securities and
underwriting the issuance of new equity shares to raise capital funds. Investment
Banking is a special segment of banking operations that helps individuals or
organisations raise capital in the primary market, where new securities are issued
and occupy a significant role in the secondary market by acting on behalf of their
clients. They act as intermediaries between security issuers and investors and help
new firms to come in the view of the public. Proprietary trading, leveraged finance
which involves lending money to firms to get assets and settle acquisitions, trading
securities, mergers and acquisitions advisory, and restructuring which involves
improving structure of companies to form a business more efficient and make
maximum profit and new issue of shares or IPOs where these banks help new firms
can go public are some kind of work that investment bank does. Investment banks
are split into Front office, Middle office and Back office.

VOLUME 15 ISSUE 9 2020 Page: 2341

Each sector is extremely different yet plays a crucial role in ensuring that the bank
makes money, manages risk and runs smoothly. The organisation structure of
Journal of Seybold Report ISSN NO: 1533-9211
investment banks are described as follows: Front Office: plays a very important role
in the investment banking firm and is also described as the highest revenue
generating department. It is further divided according to its major activities as
Investment banking, Sales and Trading, Research. Middle Office: includes treasury
management which is responsible for its funding, internal controls, compliance with
the rules and regulations formed by the Government. Internal corporate strategy
which tackles the firm’s management and profit strategy and liquidity risk monitoring
to analyze the firm’s capital flows i.e. keeping a watch on the inflows and outflows of
cash so as to have fair idea about the liquidity of the firm. It also includes product
control teams. Back Office: Back office services play an important role in the field of
operations and Technology. They handle trade confirmation, checking dates,
ensuring that right securities are being bought and the complete availability of the
required software and technology. Their services are critical to the functioning and
success of the investment banking firm.

Economic development is a concept which is broader than economic growth.

Development reflects social and economic progress and requires economic
processes . The relationship between economic growth and developments in the
financial sector is one of the vast term where the most of them discuss in economies
and the direction of causality.W hether financial development causes economic
growth or do not cause economic growth.That is by no means a settled issue
Schumpeter (1912), in the effort to analyse the importance of technological
innovation in long-run of economic growth and emphasises the crucial role that the
banking system would play in facilitating investment in the innovation and the
productive investment by the entrepreneur.

The literature on the relationship between economic growth and financial

development has since grown enormously and supporting arguments of any one
view on the direction of causality are as strong as their counterparts.Also its a crucial
policy, whether financial development influences economic growth is not just a
matter of intellectual curiosity. Financial development may be either of the
bank-based or stock market-based type. The type of development should the
government actively promote the relative importance of these two types of financial
structures in economic growth has been debated for over a century is a very
important matter. Arguments that the bank-based proponents are that the banking
development plays a crucial role in economic growth. And banking development can
avoid the shortcomings or the liabilities of the market-based financial systems.

Main variables are economic growth; population, Consumer price index (1990—91),
real GDP (1900-81), population, and total investment used in research Growth rate
of these variables are calculated using log alteration method that wipes out strong
irregularity in distribution. The log alteration smoothed time trend in the data set.
There is volatility in the data to make it more clear Hodrick Prescott filter is used for
data sets. The author applied Granger causality test to measure the linear causation
between investment market and economic growth.

VOLUME 15 ISSUE 9 2020 Page: 2342

LITERATURE REVIEW:
Journal of Seybold Report ISSN NO: 1533-9211

Investment markets tend to service the liquidity needs of investors and provide the
underwriter with up-to-date information to aid in pricing a new issue. In addition to
this, the advisory dimension has emerged throughout the 1980s as one of the most
critical investment banking functions and has created a polarization in the industry
between full service shops and specialist corporate finance houses Consequently,
advice can no longer be categorized as a related service, but as a main activity.

Informed by finance theory, the seminal paper on MPT by Dow and Gorton, (1997)
provided researchers with a set of quantitative tools for prescribing how investors
should combine their financial assets to maximize return for a given risk thus
emphasizing on the nature and mix of investment habits held. Research in this field
received a significant boost in the 1990s following the compilation and availability of
monthly and annual return data for typical assets such as shares in listed
companies, bonds and housing as well as estimates of annual inflation rates A
central aspect of MPT is that the enthusiasts proposed that every investor should
hold an optimal portfolio that is fully diversified. Almost working in parallel, the thrust
of studies by economists in the later half of the 20th Century was an attempt to gain
insight into the life cycle of household economic behaviour, namely income, savings,
consumption and investment habits. These studies examined personal investment
habits accumulation and its determinants on the foundation of saving and
consumption theory. In this line of inquiry, the Life Cycle Hypothesis (LCH) of Kaplan
and Stromberg, (2001) appears to have gained wider acceptance in its proposition
that age is the most important determinant of a person's investment habits and that it
(investment habits) follows a hump-shape to a person's age; rising during the
youthful age, peaking just before retirement and declining thereafter Kaplan and
Stromberg, (2001) expands these works and develops the Life Cycle
The Investment banks help the financial markets and the economy by matching
sellers and investors, and therefore add liquidity to markets.These actions of the
banks make financial development more efficient and promote business growth,
which helps the economy to develop.

Prof. Winston ​has defined economic development as follows​:​"Economic

Development shows the excess of consumption and production of a country as
compared with increase in population. This increase in population is due to better
combination and increase in the productivity of the factors of production".

Shaffer, Deller​, Marcouiller has defined economic development as follows:

“Economic development is sustained, progressive change to attain individual and
group interests (related to the economy).”

According to me, Economic development in India can not be achieved without a

good rate of capital formation. The important way of capital formation for economic
development is through improving investment banking industries in India.

VOLUME 15 ISSUE 9 2020 Page: 2343

Journal of Seybold Report ISSN NO: 1533-9211

OBJECTIVES:

1. To find out how investment banks increase the financial resources in India.
2. To analyse the various functions performed by the investment banks.
3. To analyse the liquidity and the need to understand the role of investment
banks in capital formation and economic growth.

RESEARCH METHODOLOGY:

This section discusses the data collection and data analysis procedures that were
used in this study. It discusses the methodology used to analyze the impact of
investment banking development on economic growth of India.
The research is both quantitative and qualitative in nature This implies that both
descriptive statistics and inferential statistics were used. Once the data is collected, it
was checked for completeness and was ready for analysis. The raw data or the data
bought from the field is first coded according to the themes that were researched
during the study. Analysis was done with aid of the statistical package for social
sciences (SPSS) package. Descriptive statistics generated such as percentages,
mean scores and proportions was presented in tables and figures. Qualitative data
from open questions was sorted and put together accordingly as a paragraph.

DATA COLLECTION:

The data was collected from the secondary source. The data was collected by
Bibliometric approach,i.e. ​application of mathematical and statistical methods from
papers, books and other means of communication is used in the analysis. ​database
which included Gross Domestic Product measured as the real GDP value generated
within a given year. Average commission fee charged, the total number of
investment banks in India, the total value of stocks traded, the trading cycle within
the investment market to measure the structure of investment markets, all within a
year is collected. The data was supplemented with data from various government
publications such as the Reserve Bank of India and Central Bureau of Statistics data
(Economic Surveys).

VOLUME 15 ISSUE 9 2020 Page: 2344

Journal of Seybold Report ISSN NO: 1533-9211

HYPOTHESES:
1. The following hypotheses are formulated on the basis of the above mentioned
objectives.
2. There is a significant variation in income and relation in expenditure
3. The awareness level of the respondents is very high about the Government
schemes and facilities which can support or improve their economic condition.
4. The education level and savings are relatively very low among people of
india.
5. The relation of price rise and its significance on the increasing debt.

TOOLS TO BE USED:
The primary data collected from the respondents have been classified and tabulated
for the purpose of analysis and the data have been scrutinised by appropriate coding
for the drawing of inferences. To elucidate the outcome of the study the researcher
has used tables to indicate the number of investment banks in India during that
period and their investment and is represented in bar diagrams. For the study,
sponsored by the Department of Planning, Government.

SAMPLE SIZE:

The number of investment banks and their investment in India during the 4 years is
collected.The GDP of India in those 4 years is collected.

PRIMARY DATA COLLECTION

The stratified random sampling method is used to choose the number of investment
banks in that particular year. The stratification is according to the division. The
following table shows the number of investment banks in India in four years.

VOLUME 15 ISSUE 9 2020 Page: 2345

Below given is the investment by the banks in India in the following years:
Journal of Seybold Report ISSN NO: 1533-9211
Year 2001-2002 2002-2003 2003-2004 2004-2005

No. of investment 24 24 26 40
banks

Amount raised(​Crores)​ 6423 5732 22145 25526

Source:​Primary Database annual Reports for the period 2001-2005

Below given is the GDP of India in following years:

Year 2001-2002 2002-2003 2003-2004 2004-2005

GDP 4.82% 3.08% 7.86% 7.92%

Source:​capitalmind.in

VOLUME 15 ISSUE 9 2020 Page: 2346

Journal of Seybold Report ISSN NO: 1533-9211

LIMITATIONS OF THE STUDY:

1. Wrong Numbers​: The error in the numbers could lead to wrong results from
the statistical data.
2. Stalling Growth​: An expansion of retail lending can partially compensate for
loss of growth stimulus, that cannot be sustained in the absence of other
stimuli that ensure income growth of a kind that helps service rising debt.
3. Sale Season​: There is a particular period where the growth in sales is more
and also there is a period where the sales rate falls down i.e. the growth rate
is not stable so it would be difficult for a person to predict the growth.

CONCLUSION:

From the above graphs, it is observed that when more investment banks invest and
also the investment is more than the GDP also increases. In India, in 2001-2002 ,
there were 24 investment banks which raised around Rs 6423 cr. and the GDP in
2001-2002 was 4.82% but in 2002-2003 there were same number of investment
banks as in 2001-2002 but the amount raised was less than before i.e Rs 5732 cr.
Hence the GDP of India in 2002-2003 went down to 3.08%. In year 2003-2004, the
investment banks in India were 26 and the amount raised was Rs 22145 cr, so the
GDP was around 7.86%,similarly, during the year 2004-2005, there were 40
investment banks which raised the amount to Rs 25526 cr. and the GDP was around
7.92%. Since the GDP is the indicator of economic growth, the economic growth rate
is proportional to the GDP and hence is proportional to investment of investment
banks in India. Therefore, the more the Investment by investment banks, the more
the GDP and more the economic growth. The major role of investment banks in
economic development is to remove the deficiency of capital by stimulating savings
and investment. Investment Banking helps individuals or organisations to raise
capital and also provide the financial consultancy services to them. Investment
banking is the most complex financial mechanism in the world and India’s banking
and financial sector is expanding rapidly which helps the economic growth. Some
largest investment banks in India are: Bank of America, Deutsche bank, JP Morgan,
Citigroup Investment banking, Barclays capital, Goldman Sachs. Investment banks
influence the rate of economic growth because it is a component of aggregate
demand and more importantly influences the productive capacity of the economy.
From the analysis of the various functions and roles performed by the investment
banks as well as its role on the economic development of India, it clearly proves that
the investment banks have a huge impact on the economic development of the
country with special reference to India.

VOLUME 15 ISSUE 9 2020 Page: 2347

Journal of Seybold Report ISSN NO: 1533-9211
References:

● SEBI (​https://www.sebi.gov.in/acts/act15ac​) (26/08/2020)

● Reserve Bank of India (2001-2005), Report on Currency and finance, Reserve
Bank of India, Mumbai dated (26/08/2020)
(​https://www.rbi.org.in/Scripts/StateStatisticsFinances.aspx​)
● GDP of India (2001-2005) (available at data.worldbank.org) dated 26/08/2020
● GDP of India (2001) (​https://countryeconomy.com/gdp/india?year=2001​)
dated 26/08/2020
● Dr. Ashok Kumar Rath.( 2017) A study on Investment Banking and Practices
in India an opportunity and challenges in the present competitive environment.
International Journal of Business and Management Invention. Vol.06. PP
13-17
● Bandlamudi Kalpana and Taidala V. Rao. (2017) Role of commercial banks in
the economic development of India. International Journal of Management and
Applied Science Vol. 03.
● Role of Development Banks in Promoting Growth and Sustainable
Development in the South (2016) UNCTAD
● Dr. Michael Schroder ( 2011) The Role of Investment Banking for the German
Economy.
● Statistical tables relating to banks in India. Reserve Bank of
India.(​https://dbie.rbi.org.in/DBIE/dbie.rbi?site=statistics​ ) dated 26/08/2020

VOLUME 15 ISSUE 9 2020 Page: 2348