The Hindu Business Line : Reinventing the investment banker’s role

Not so long ago, investment bankers were the object of envy and investment banking a most sought after profession. The salaries and bonuses that young investment bankers made, the deals they managed to pull off and their jet-setting lifestyles were favourite topics of discussion.

In India, too, the scenario was no different. B-school campuses in India basked in a blaze of publicity when “international” investment banks came to their campuses and recruited their students at mind-boggling starting pay packages, often pushing up the “average” starting salary to absurdly high levels.

That many of these young MBAs were chosen for international postings within these banks, was seen as a signal that the best Indian B-schools were in the same league as the Ivy-league schools. IITs were also in the fray, with I-banks visiting IIT campuses to recruit the best talent from there too — the investment banks could always find uses for the brightest and the best techies from our country, with some extra training of course! Engineering graduates were welcome additions to investment banks for their industry knowledge and numerical abilities.

The dramatic collapse of some of the iconic Wall Street Firms, and the fall from grace of the “stars”, has come as a rude shock to many. Investment bankers have been blamed for all the excesses and errors of omission and commission that brought Wall Street tottering to its knees and made America and the Rest-of-the-World keel over.

Changed scene

There is rage over lost jobs, broken dreams and lost opportunities and the investment banker is the obvious and visible target. Not a day goes by without new jokes about investment bankers making the rounds on the Net. It is a wake-up call for the profession. If investment bankers find no sympathy today, it is because they made hay while the sun shone and forgot the basic tenet of their profession — to provide their clients with top quality advice that would be in the clients’ best interests. Clearly, if investment bankers in India have to regain their credibility and be regarded as key intermediaries in the financial system, they have to re-think their approach. The old-style investment banking was more about relationship building with clients, building enduring trust and deep rapport with them, understanding their business needs and ably assisting them at every stage of their growth.

It was not necessarily about youngsters in flashy suits intimidating clients with techie jargon or complex financial models. Unfortunately, snazzy, American-style investment banking had taken its hold in India too, forcing some of the old-school Indian investment banks to imitate their style.

Forgotten values

Fees became the over-riding criterion and deal-making was considered the ultimate skill of an investment banker and, in the process, good quality advice and the concept of value-for-money service were forgotten.

Keeping the client at the centre of all activity was considered old-fashioned and irrelevant. Relationships with clients became completely transaction-oriented and trust levels suffered as a consequence. American-style reward systems were in vogue. To sustain these high costs and keep the “star deal-makers” happy, the costs structures of the investment banks grew to unsustainable levels and obviously with it, the pressures to do only big-ticket, high-fee yielding deals.

The broking-investment banking nexus became more and more pronounced with the structuring and pricing and marketing of transactions, particularly IPOs, being done with a view to ensuring the participation and interest of the I-banks’ FII clientele.

Examples abound of clients having had to fork out huge fees, for “international quality” advice, whether relating to mergers and acquisitions or any other aspect of investment banking services, for which, in return, they received little or no benefit.

It is my belief that the need for investment banking services has not gone away. Good advice is always in short-supply; companies do not always know how to enhance value for their stakeholders or how to go about raising capital in the most efficient way. Companies would continue to look for opportunities to grow their businesses, often on a global platform. Investment bankers have to once again become trustworthy advisors.

The best blend

Here is where the old-school, home-grown investment banks and those that have been present in this market for a number of years, will have to take centre-stage. Faced with competition from foreign investment banks, Indian firms smartened up considerably, investing in strengthening their resources, both people and systems and becoming more nimble and innovative.

Therefore, today, they are best placed to offer a blend of both approaches, the traditional and the new, to the advantage of their clients. The small- and mid-sized client companies, whose needs had been ignored in the race for large and mega-sized deals, will now perhaps be back in focus.

Innovation in the Indian context, and not imitation, is the need of the hour. For example, instruments such as convertibles, that had been knocked off the IPO scene, may find favour once again with investors who lost heavily by betting on pure equity.

A lot of innovation and revisiting of the IPO process could be effected with the collective wisdom of these Indian investment banks. Within their respective organisations, they would have to re-visit their practices and their reward systems to promote ethical behaviour among their employees. It is going to be a long haul but then there are no shortcuts are there?

(The author is a senior investment banker. blfeedback@thehindu.co.in)