Investment Banking an American synonym of merchant banking. Investment
banks provide advice on mergers and acquisitions and are involved in financing
industrial corporations through buying shares and selling them in relatively small
lots to investors.
In the Bangladesh context, merchant banking includes all institutions that combine
the functions of both development banking and investment banking. The
SECURITIES AND EXCHANGE COMMISSION, based on SRO No. 59 of 24 April 1996,
and a decision taken by it on 17 August 1997, invited letters of intent from 14
institutions for registration of merchant banks. Prior to this decision, 7 institutions
submitted such letters of intent and SEC gave registration to a total of 19.
Investment banking companies in Bangladesh are of two types: open-ended and
closed-ended. The open-ended ones, generally referred to as mutual funds,
repurchase shares in any quantity as and when holders offer them for sales. Thus,
the amount of shares of the open-ended investment companies in market changes
continually in response to public demand. Closed-ended investment companies sell
only a specific number of ownership shares. An investor wanting to acquire shares
of a closed-ended investment company must find another investor who wishes to
sell. Investment companies do not take part in the transaction. In addition to selling
equity shares, closed-ended companies issue a variety of debt and equity securities
including preferred stock, regular and convertible bonds, and stock warrants for
Investment banks act as intermediaries between issuers and investors. The issuer
sells securities to investment bankers who in turn sell the securities to investors.
The investment banks own the securities until they are resold. For firms seeking to
raise long-term funds, investment banks provide assistance through a number of
functions including underwriting, marketing of securities, corporate finance, sale
and brokerage, asset management and research. In underwriting, investment banks
can protect themselves by forming a syndicate, which allows them to diversify the
risk. One investment bank acts as the managing underwriter that oversees the
underwriting activities of all members of the syndicate. In the process of
marketing, securities are typically sold through a selling group consisting of the
sales division of the underwriting syndicate and selected retail brokerage houses.
Another significant development in investment banking is the 'unsyndicated stock
offering', in which, the corporation distributes the entire stock issue directly to
institutional investors rather than syndicating them through a retail distribution
network to individual investors.
Corporate finance is the core activity in investment banking. Through this function,
investment banks assist clients in developing projects, dealing with regulatory
authorities, performing mergers and acquisitions, and capital structuring. The main
function of investment banks in sales and brokerage is to provide full-service
brokerage to retail and institutional investors, both foreign and local, in the
secondary market. The asset management function of investment banks is a
process of managing money. In the process, they analyse the objectives, risk
tolerance, and legal restrictions of each client, and design a customised portfolio.
The process continues with an ongoing measurement and evaluation of
performance relative to benchmarks. Some investment banks in Bangladesh have
research department to provide independent and objective investment advice in
relation to primary and secondary securities to retail and institutional investors.
UNION CAPITAL LIMITED is one such company, which publishes Union Bangladesh
Index in major English and Bengali newspapers. The index shows performance of
selected blue-chip stocks of the Dhaka Stock Exchange.
One of the major investment banks in Bangladesh, the INVESTMENT CORPORATION
OF BANGLADESH (ICB), plays a leading role in developing the CAPITAL MARKET in
the country. Major functions of ICB include merchandising operations and
operations of unit funds and mutual funds. It has an Investors' Account Scheme,
which provides small investors with credit facilities for buying and selling shares
listed with the Dhaka and Chittagong STOCK EXCHANGEs. It also helps investors
achieve reasonable returns on investment in sound shares and provides institutional
support to small investors for purchase and sale of shares. Under the scheme, small
investors are to hold accounts with ICB for loans for purchase of securities. The
interest charged is 13.5% per annum. The maximum amount of loan sanctioned in
an account is Tk 200,000. On behalf of account holders, ICB purchases and sells
securities and maintains the profit and loss accounts. An investor has the option of
taking or not taking the loan. If no loan is taken, the investor can withdraw funds
from the account to the extent in excess of the margin requirement. When an
investor takes a loan, he/she can withdraw the amount appearing in the account as
unutilised balance. Also, an investor can withdraw securities when his/her account
is closed after clearing dues outstanding in the account. Under the scheme, ICB
gives the custodian service in safekeeping securities of the account holders, and
also collects allotment letters, share certificate, and dividends.
ICB launched its Unit Fund Scheme on 10 April 1981. This is an open-end mutual
fund, through which small and medium savers get an opportunity to invest their
savings at any time of the year. The fund is divided into units known generally as
ICB units, each of which bears a certain value in the assets of the fund. These units
are sold to the public. ICB units can also be purchased by Bangladeshi citizens
living abroad and foreigners residing in the country. Unit holders are the owners of
the fund, while ICB takes the responsibility of managing the fund and loading and
unloading securities in their interest. ICB floated its first mutual fund in 1980 and
the number of its mutual funds increased to 8 by 2000.The total paid up capital of
the mutual funds is Tk 175 million. In 2001, the corporation disclosed its decision
to issue the 9th mutual fund of Tk 100 million.
In addition to ICB, a number of commercial banks also carry out investment
banking functions in Bangladesh. The Securities and Exchange Commission (SEC)
issues certificate of registration to institutes intending to operate as issue manager
provided that they have a capital of at least Tk 2.5 million. The minimum capital
requirement for an institution to become eligible for the certificate for operating as
underwriter or portfolio manager is Tk 10 million. The SEC has a code of conduct
for issue managers, underwriters and portfolio managers and is empowered to
suspend or cancel the certificate of registration for its violation.
Collection from The Banglapedia.
Abdur Rab (forhad)
Department of Public Administration.