Did you know that before independence, India’s financial system was almost entirely controlled by foreign banks?
In fact, until the 1970s, Indian firms had little say in major investment banking decisions!
For decades, foreign banks dominated merchant banking activities, shaping the country’s financial ecosystem long before Indian firms entered the scene.
Today, investment banking plays a crucial role in capital markets, corporate financing, and economic growth.
But how did it all begin, and how has it impacted modern finance in India?
In this blog, you’ll discover:
- What is investment banking?
- History of investment banking
- How it has influenced and transformed modern finance
Whether you’re an aspiring investment banker or just curious about how India’s financial sector evolved, this guide will walk you through its fascinating journey.
Let’s dive in!
What is Investment Banking?
Imagine you’re an entrepreneur with a brilliant business idea, but you don’t have enough money to bring it to life.
On the other hand, there are investors with money but no business to invest in.
This is where investment bankers step in.
They’re the matchmakers of the financial world, connecting businesses needing capital with investors looking for profitable opportunities.
What do Investment bankers do?
Think of investment bankers as agents whose job is to:
- Close deals
- Sell financial products (that they didn’t create), and
- Advise companies on raising capital and structuring investments
They act as intermediaries between:
- Investors with money to invest
- Corporations that need funds to expand and operate
Investment banks primarily assist in:
- Underwriting (Raising capital): Helping companies issue stocks or bonds to generate funds
- Mergers & Acquisitions (M&A): Advising on business takeovers, sales, and mergers
- Financial advisory: Providing insights on valuations, market conditions, and corporate strategies
For example, when a company decides to go public through an Initial Public Offering (IPO), investment bankers help them determine:
- How much money to raise
- How many shares to sell
- At what price
Investment bankers earn through commissions, typically taking a percentage of the IPO size or deal value.
Let’s understand this better with an example:
Assume Zomato wants to go public.
They approach an investment bank like Goldman Sachs.
The bank analyzes:
- Market demand
- Sets the right IPO price
- Finds potential investors
- Ensures the process runs smoothly.
In return, they take a cut from the total amount raised—millions or even billions of dollars.
That’s investment banking in action!
History of Investment Banking
The roots of investment banking in India can be traced back to the 19th century when European merchant banks first set up trading houses in the region.
Let’s understand the history of investment banking by breaking it down into 4 eras:
- British Era
- Post-Independence era
- Economic reforms era
- Modern Era
Let’s get going.
1. The Beginning: British-Era (1800s – Early 1900s)
Investment banking in India started when European merchant banks arrived in the 19th century.
These banks were not Indian, they were run by British and other foreign businessmen who set up trading houses to finance businesses.
For example, if a British company wanted to set up a railway in India, these banks would arrange funds for them.
Indian businesses had little to no control over investment banking at this time.
2. Post-Independence: The rise of Indian banks (1947 – 1970s)
After India gained independence in 1947, the country started developing its own financial system.
However, foreign banks still dominated investment banking.
Indian businesses depended on them for:
- Raising capital
- Mergers
- Acquisitions.
In the 1970s, the Indian government took steps to reduce foreign control and encouraged Indian banks to enter investment banking.
This was when banks like ICICI (Industrial Credit and Investment Corporation of India) and SBI Capital Markets started offering investment banking services.
3. Economic reforms and growth (1991 – 2000s)
In 1991, India opened up its economy through liberalization.
This changed everything!
The government allowed more private companies and foreign banks to operate in India, increasing competition.
Investment banking became more structured, and many Indian banks like:
- HDFC
- Axis Bank
- Kotak Mahindra
Started expanding their investment banking divisions.
Foreign investment banks like Goldman Sachs, JPMorgan, and Morgan Stanley also entered India, working alongside Indian firms.
4. The Modern Era (2000s – Today)
Today, investment banking in India is booming.
Indian investment banks now compete globally, and sectors like technology, startups, and infrastructure are attracting billions in investments.
For example, when Zomato launched its IPO in 2021, investment banks played a major role in:
- Setting the price
- Finding investors
- Making the launch successful.
In simple terms:
- Before Independence, foreign banks controlled investment banking.
- After Independence, Indian banks slowly entered the scene.
- During the 1991 Reforms, Indian and foreign banks expanded, making investment banking competitive.
- Today, India has a strong investment banking sector, helping startups, big businesses, and the economy grow.
Investment banking in India has come a long way from being foreign-dominated to becoming a key player in the global financial market.
How has it shaped modern finance?
Investment banking has played a huge role in shaping India’s financial system.
It’s not just about fancy suits and big deals, it has changed:
- How businesses grow
- How money flows
- How investments work.
Here’s how:
1. Made raising money easier for businesses:
Earlier, if a company needed funds to expand, it had to rely on:
- Personal savings
- Wealthy families
- Informal money lenders.
But now, thanks to investment banks, companies can raise money quickly and efficiently through:
- IPOs: Selling shares to the public
- Debt financing: Borrowing money from investors
- Mergers & Acquisitions: Partnering with or acquiring other companies
For example, companies like Zomato and Paytm used investment banks to launch their IPOs and raise millions.
Without investment banking, such growth would take years or might not happen at all!
2. Brought in foreign investment:
Investment banks act as a bridge between global investors and Indian businesses.
Foreign investors now see India as a great place to invest, leading to huge capital inflows.
This has helped sectors like:
- Infrastructure: Funding for roads, railways, and airports
- Technology & Startups: Growth of companies like Flipkart, Ola, and Byju’s
- Banking & Finance: Development of private banks and NBFCs
Without investment banking, India wouldn’t have attracted the massive global investments it has today.
3. Created more structured and professional finance:
Earlier, finance in India was largely unstructured and informal—businesses depended on:
- Family wealth
- Local lenders
- Government loans.
Investment banks changed that by introducing:
- Proper financial models & risk analysis
- Regulated capital markets
- Sophisticated deal-making & negotiations
Now, India’s financial system operates like a global market, making it easier for businesses to plan and expand.
4. Increased job opportunities and economic growth:
The rise of investment banking has opened up high-paying career opportunities in finance, making it one of the most lucrative industries.
If you are skilled in these areas:
- Financial analysis
- Mergers & acquisitions
- Risk management
- Corporate finance
You will undoubtedly be picked up by firms like Edelweiss or Avendus Capital to work for them.
This growth in the financial sector has boosted India’s economy, making it more competitive on the global stage.
Conclusion
The history of investment banking goes back to the 19th century, a time when the world was evolving rapidly.
Over the years, it has become one of the most prestigious and high-paying industries in India.
At its core, investment banking is just a sophisticated version of sales.
Instead of selling everyday products in a market, investment bankers sell financial deals to:
- High-net-worth individuals
- Companies
- Governments—but with more strategy, higher stakes, and a lot more zeros on the paycheck.
In short, investment banking has transformed India’s financial operations, making it easier for companies to:
- Raise capital
- Attract global investors
- Create a structured financial system.
It’s the invisible force driving modern finance in India.
What do you think? Has investment banking made finance more powerful or more complex?
Let us know your thoughts!
