Investment Banking Process | What are the steps to become an investment banker? | Corporate Finance
Investment Banking Process
Investment banking process involves the step by step activities that is carried out to raise money through initial public offering by the help of investment bankers. The investment banker is a financial intermediary acting between buyer and seller that specializes in selling new security issue and advising to firm with regards to major financial transactions with the purpose of raising capital for the companies.
Selecting the investment banker
When company decides to issue securities for raising funds, they have to choose best suited investment banker who can help them to provide best form of financial service. Size of funds to be raised, riskiness of the security, company strategy and amount of commission are the important factors that should be consider while investment banker is selected.
Discussion with investment banker
Investment banker gives suggestion about process, types of securities, amount to be raised and everything information needed using all the experiences and expertise they have. In this discussion, whether best effort or underwritten issue is used in the process, issuance cost and offering price are determined.
While issuing the securities of large amount of security and individual underwriting may be unable to bear all risk so a syndicate under writing refers to an underwriting where a number of underwrites enter into an agreement among themselves in order to underwrite.
Forming a selling group
The selling group includes all the members of the underwriting syndicate plus additional dealers who handles the distribution of securities to individual investors.
Fulfilling the legal requirement
A firm should fulfill legal requirement from the sell side while issuing security. The investment banker assists the firm in fulfilling necessary legal requirement. Before issuing new security the issuer must obtain the approval of the Security Exchange Commission (SEC) as per Nepal Stock Exchange Act 2040. The firm can no longer sell the security until the Act approves the registration statement. This procedure normally requires two to three weeks. Once the registration statement has been approved, the new security can be offered for sale of the prospectus is already made available to potential buyer during the waiting period between filling the registration and its approval (Paudel, Baral, Gautam, & Rana, 2017).
Pricing the issue
Setting best suited price is crucial because relatively lower price increase the number of shares and that dilutes the earnings and wealth position and relatively higher price may under subscription of the securities.
Distributing the issue
In case of under-subscription, underwriter syndicate purchase shares and sell to the individual investors later as dealer or broker. But in case of over-subscription investment banker distributes the applicants on prorate basis.
Stabilizing the price
When issuing company is well established responsibility of investment banker well be over when all the securities are sold but in case of new firm which is not established in the market is issuing securities investment banker should stabilize price of that issued securities. Investment baker make market for that firm by maintain a position in the securities, quotes a price at which the stock will be purchased (a bid price) and a price at which the stock will be sold (an asked price) and stands ready to buy and sell it at those prices.
Some of the examples of Middle Market Investment Banks include Baird, Jefferies, Piper Jaffray, Harris Williams, etc.