Functions of Investment Banker
Functions of Investment Banker: An investment banker is defined as firm or a financial intermediary specializing in the sale of new securities to the public investors. For doing so an investment banker performs a wide variety of functions. The typical functions done by an investment banker are, however, summarized below:
An investment banker serves a potential security issuer in an advisory capacity. It helps the issuing firm analyze its financing needs and suggests different ways of raising funds. Being an underwriter, an investment banker may function as an adviser in mergers, acquisitions, and financing operations. The investment banker reaching an agreement with the issuer is called originator or managing underwriter who subsequently coordinates two temporary groups. An number of investment bankers being the members of underwriting syndicate, the first group, pool their money and share the underwriting risk. The second group known as selling group is generally made up of brokerage firms agreed to sell the primary issues to the investors.
The investment banker shares with the issuer the responsibility of conforming to the securities laws involving preparing the registration statement and prospectus. The Securities and Exchange Commission (SEC) requires that most primary issues should be accompanied by a registration statement disclosing information that should allow potential investors to assess the quality of the new issue. The information that must be published in registration statements is set by law. After filing the registration statement with the Securities and Exchange Commission, there is usually only a brief waiting period until the new issue may be offered for sale.
Underwriting refers to the guarantee by investment banker that the issuer of the new securities will receive s certain amount cash for them. The managing underwriter forms an underwriting syndicate the members of which literally buy the securities from the issuing firm on the day of the offering. When the securities are actually sold to the public, they are sold either by members of the underwriting syndicate or by members of the selling group. The members of the selling group are broker-dealer firms buying the securities from the underwriters and in turn resell them to their customers.
Investment bankers distribute the new issues to investors in several ways viz.,
i) Underwriting-by which they buy the issues and then sell them to the public investors. They also bring together issuer and investors as an intermediary.
ii) Private placement- meaning that investment banker finds one buy (typically large institution) for an entire issue and arrange for direct sale from the issuer to this large investor.
iii) Best-efforts basis- where the investment banker may agree to distribute new issues assuming no financial responsibility if all the securities can not be sold. The commission or compensation for the investment banker for best-efforts offerings are typically more than for a direct placement but less than for a fully underwriting public offering.
The investment bankers must stabilize the pricing of a new issue during the distribution period to prevent it from drifting downward. The underwriting manager supports the price by placing orders to buy the newly issued security at a specified price in a secondary market where the new securities are trading.