Fin 504 Report

Merchant Banks as Security Market Institutions 1
The Roles and Challenges of Prime Bank Investment Ltd.
A report on
Merchant Banks as Securities Market Institutions:
Abstract
Prime Bank Investment Limited has been operating in the capital market since
1996- at first as a division of Prime Bank Limited(PBL) and now as a subsidiary
of PBL. After the debacle in 1996, the bank has been in the consolidation phase
for sometimes. Then in 2001 the bank was accorded the merchant banking
license from SEC. It once again started active participation in the market from
2006. It became a subsidiary of Prime Bank Limited in 2010 with a paid up
capital of Tk. 300 crore. In this short period of time it has gained great
momentum and is expanding at a fascinating rate. A number of actions have
been considered by strategists to add depth to the market. Merchant banking,
these days has been showing the path to achieve these goals. Although the
concept is not too old in this country, its potential of meeting diverse
challenges of capital market is high. This report emphasizes on the roles of
Prime Bank Investment Limited as a ‘security market institution’ and
challenges it has been facing and also how effective and efficient it has been in
its working process.
1.0 Securities Market in Bangladesh

Securities market is an economic institute within which take place sale and purchase
transactions of securities between subjects of economy on the base of demand and
supply. Securities market includes Primary Market where new securities are sold and
Secondary Market where existing securities are traded. An efficient capital market can
play the crucial role in mobilizing domestic savings for the purpose of investment.
2.0 Merchant Banking

Merchant banking is an emergent sector in the capital market. According to
Securities and Exchange Commission (Merchant Banker and Portfolio Manager)
Rules, 1996, merchant bankers is defined as “… those who manage portfolio on
behalf of its clients or performs the business of underwriting or are related to
securities as underwriter or advisor or are providing corporate advisory
services on completion of all the activities relating to Issue Management.”
Generally the term merchant banking refers to a negotiated private equity
investment by financial institutions in the unregistered securities of either
privately or publicly held companies. (Craig, 2002)
As per Merchant Banking Regulations, a merchant bank can mainly perform

three activities which are:
i. Issue Management: Issue Management function of merchant Banking

helps capital market to increase the supply of securities. Being a Issue
Manager, the bank provides assistance to the Private Limited Companies
intended to be converted into Public Limited Companies by way of obtaining
necessary permission from the relevant authorities, preparing prospectus for

public issue of shares and debentures, involving itself in the collection of
application money, scrutiny of applications, arranging for lottery relating to
allotment, if required, allotment of shares and debentures, refund of
application money etc.
ii. Underwriting: Underwriting Operation is one of the important

functions of a Merchant Bank by which it can increase the supply of
stock/shares and debentures in the market. It is an arrangement whereby the
underwriter undertakes to subscribe the unsubscribed portion of
shares/debentures offered by any Public Limited Company. This encourages the
prospective issuers to offer shares/debentures to the public for subscription
and they can raise fund from the public for implementation of their industrial
undertakings.
iii. Portfolio Investment Management Services: One of the most

important functions of merchant banking is to provide Portfolio Management
service to the customer.
In addition a merchant banker can also perform the activities of Project

counseling, Pre-Investment Studies, Merger & Acquisitions, Factoring, Asset
Securitization, OTC Market, Capital Re-Structuring etc.
2.1 Merchant banking in Bangladesh:

The concept of merchant banking is in a development phase in our country.
Regulatory bodies and Government is always trying to develop the capital
market focusing the welfare of the investor through building a stable and
secured market. The first ever stock exchange came into existence in
Bangladesh (then East Pakistan) in the name of “East Pakistan Stock Exchange
Association Ltd”. It took two years more to launch its formal operation. 1964,
the name of East Pakistan Stock Exchange Limited was changed to "Dacca
Stock Exchange Ltd." Investment Corporation of Bangladesh (ICB) was the
pioneer in the country that has performing with strong reputation in the
country’s capital market spreading its activities in all the segments of capital
market. In 1987, the Bangladesh Government prepares and presents the
Securities & Exchange Rules. In 1993, DSE took step ahead to update its all
share price index on the basis of the design suggested International Finance
Corporation (IFC). In 1994, Securities & Exchange Commission (SEC) published
rules regarding the activities of dealers and brokers. The title of the rules is set
(Stock-dealers, Stock-brokers and Sub brokers). In 1996, SEC introduces SEC
(Merchant Baker & Portfolio Manager) Regulations, along with SEC (Mutual
Funds) Regulations, 1996. Except the activities of ICB, merchant banking in
Bangladesh had started their activities. Now there were no legal obligations of
the issuer companies to engage an issue manger at the time security issue. In
1997, some bank and non banking organization give proposal to get the
permission of operate merchant banking operation. In 1998, DSE introduced
automated trading; it is a great breakthrough both for the country and stock
exchange. IDLC of Bangladesh got license full-fledged merchant banker. It is
the first licensed full-fledged merchant banker in the country. Currently, there
are 35 registered merchant banks operating in Bangladesh.
To register as a merchant banker, SEC asks some requirements as below:
Issue Manager At least 1 (one) proposal for public issue be

submitted to the Commission in each calendar
year
Portfolio Manager In addition to own portfolio, at least 5(five) new

portfolio accounts be opened in each calendar
year
Merchant Banker 1 (one) issue management, 2 (two) underwriting,

5(five) new portfolio accounts be opened in each
calendar year
2.2 Merchant Banks as Securities Market Institutions:

The primary role of capital market is to raise long term funds for governments,
banks and corporations while providing a platform for the trading of securities.
Activities of a typical merchant bank in Bangladesh include helping companies
issue securities, helping investors purchase securities, manage
financial assets, trade securities and provide financial advice; raise
equity capital (e.g., helping launch an IPO). Underwriting operation is an
important function of investment banker by which it can increase the supply of
stock/shares and debentures in the market. Issue management function of
investment banking helps capital market increase the supply of securities. It
also provides portfolio investment management services; and deals with
the buying, selling and combining of different companies that can aid, finance,
or help a growing company without having to create another business entity.
 Bridging the gap between buyers and sellers: Merchant banks are
often divided into two camps: the buy side and the sell side. The traditionally
termed investment banking services are now called the sell side, and other
financial services are called the buy side. The sell side typically refers to selling
shares of newly issued Initial Public offering IPO, placing new bond issues,
engaging in market making services, or helping clients facilitate transactions.
The buy side, in contrast, works with pension funds, mutual funds, hedge funds,
and the investing public to help maximize their returns through trading or
investing in securities such as stocks and bonds. Many investment banks offer
both buy side and sell side services.
 Helping to raise funds: Investment banks provide a wealth of critical

services to our economy. One important role is to assist public and private
corporations in raising funds in the capital markets. Merchant banks were
allowed to operate with the hope of playing a meaningful role in salvaging the
country's limping stock market, by generating fresh funds, following the 1996
stock market crash. An important task under this system is advising companies
about raising funds, which they do in two main ways. They raise funds via
capital markets or through private placements. For a better understanding of
the role of merchant bank it is important to distinguish between what is known

as the primary and the secondary markets. Secondary markets are defined as
"markets for existing assets that are currently traded between investors".
 Custodians and trustees of the public money: Merchant banks are

social institutions. They are custodians and trustees of the public money. The
primary functions of a merchant bank is buying and selling products --both on
behalf of their clients and also for the bank itself. Banks undertake risk through
proprietary trading, done by a special set of traders who do not interface with
clients.
 Act as an advisor: Investment banks act as an advisor in primary

market in a number of ways. These are: issuers on funding strategy; regulatory
and legislative issues; stock exchange; obtaining credit rating; migration of
best practices systems, and procedures for settlement, clearing, custodial
services and reporting; and development of the swaps and foreign exchange
markets.
 Act as an arranger: Investment banks also act as an arranger in a

number of ways. These are: managing the debt issue to ensure overall success
of the transaction; assist the issuer in producing the information memorandum,
legal documentation, and obtaining regulatory approvals from the capital
market authority and stock exchange; education of investors, marketing and
placement of the bonds; create market in the securities to support the issue;
develop interest rate and cross currency derivative applications.
Investment banks also contribute on secondary market: sales and trading;

trading can be proprietary, market making, client driven or reverse enquiry;
research work on local market, and post deal communication. Another point to
consider as 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.
2.3 Benefits of capital markets through merchant banking

 In-depth expertise in local debt market environment;
 Excellent distribution capabilities (onshore and offshore); and
 Access to research teams offering advices and commentaries on

markets, industries, currencies, and interest rate.
 Make debt investment capital accessible for intermediate and long term;
 Improved secondary market liquidity; and
 Promoting economic stability
3.0 A Case Study on Prime Bank Investment Limited
3.1 Company Background:
Prime Bank Limited has been engaged in capital market since 1996. After the
debacle in 1996, the bank has been in the consolidation phase for sometimes.
Then in 2001 the bank was accorded the merchant banking license from SEC. It
once again started active participation in the market from 2006.
In July 2006, a group of young executives of the bank were assigned to retake
its position in the capital market and certainly, the bank maintaining its
tradition, become one of the leading merchant banks in the market in terms of
market share, efficient services, transparency and compliances.
Within last few years, the bank’s merchant banking unit emerged as one of the
leading market participants having around 3049 customers with portfolio size
of around Tk. 1700 Crore.
The most remarkable achievement of the bank was to build a well structured
independent profit making centre managed by a team combined with
experienced and highly motivated young executives. In 2006, it realized that
the economic paradigm was fully based on money market and driven by
commercial banks. It also observed that the paradigm started shifting from
money market to capital market following the same route of India and Pakistan.
The bank further realized that in our capital market, especially stock market,
the demand side does not have minimum standard compare to other Asian
markets.
On the other hand, after 2007 almost every economic activities of our country
collapsed, more over bank was asked to reduce their lending and deposit rates
to a single digit. These actually forced both surplus and deficit saving unit of
our economy to come to the stock market. This, in fact, gave the merchant
bank an opportunity to revive the long bearish stock market.
Now, after passing of four successful years, achieving its vision, it is now
become an independent subsidiary company of Prime Bank Ltd. It is now
Prime Bank Investment Limited (PBIL).
Since 2007 Bangladesh Capital Market have become more vibrant and passed
several milestones. Today, total market capitalization is around 3,022,371.811
million taka, daily turnover is on an average 1300 crore taka and the numbers
of beneficiary owner (BO) accounts have reached over 2.24 million
approximately.
As such, it is believed that our market will be an emerging market within the
next few years, we will have to compete with the highly qualified professionals,
there will be varieties of new and innovative products, market will become
more and more efficient day by day as well as global expansion will take place
and many more. Finally, to keep our existence in this market, the bank would
have to face challenges in every aspect and surely the profit margin will be
narrowed down and mostly depend on higher professional services.
Where PBIL was:

Back in 2006, PBIL started with 5 officers and just 37 clients with a view to offer
the best financial services in the Capital Market. At the beginning, own
investment was the major focus rather than customer portfolio management.
During the year 2007-08, it emphasized on own investment considering
portfolio management service was at a very initial stage.
After 2008, as per board instruction it diverted the focus more on to portfolio
management service as against own investment. Accordingly, PBIL
implemented client oriented services throughout the organization. However, its
contribution to Prime Bank was excellent in terms of loan advances, customer
services, profit margin and reputation.
Where PBIL is:
Since the inception, it has come a long way from being a division of Prime Bank
Limited to a separate entity with a paid up capital of Tk. 300.00 crore of its own
and an authorized capital of Tk. 1000.00 crore only.
PBIL has established itself as a strong entity in the capital market through a
profound client base providing superior quality service and its operational
excellence playing a vital role to attract new investors every now and then.
PBIL started its journey in 2006 with only 37 clients, now in 2010 the total
number of clients has increased to around 3049 just in three and a half years’
of operation.
Today, the company is operating with three branches and in future the plan is
to expand its wing across other parts of nation.
The capital market of Bangladesh has been growing at a stable rate over the
last few years. The DGEN of Dhaka Stock Exchange has grown at an impressive
CAGR1 of 28.23% from 2005 to 2009.
Parallel to the rapid growth of the capital market, the trade position of PBIL has
also increased significantly over the last three and half years starting from Tk.
3,296.1 crore in 2007 to Tk. 17,773.4 crore in 2009, representing a symmetric
growth.
1
Cumulative Average Growth Rate
Moreover, PBIL has been generating around 12% of total DSE turnover in last
couple of years showing its strong presence in the capital market.
The team of portfolio managers with their long experience in the capital market
can provide clients the best possible service. Clients, as always remain to be
our foremost priority and in the middle of frequent regulatory changes in
capital market we have always strived to provide the best to our clients.
3.2 Vision, Mission and Objectives

Vision Statement
“We would like to go public and globally by using our efficient, innovative
product and services with a view to maximize wealth and stakeholders’ value.”
Mission Statement
“Our aim is to become one of the front liners in the primary and secondary
market operation by being a leading company with a strong capital base to
ensure quality and efficient services by remaining profitable with compliance.”
Objectives
Value and Wealth Maximization
Like any business organizations our focus will also be on generating profit for
the company. However, remaining profitable will not be our main target, but
the real intention would be to increase the wealth and value of the company,
as a whole. In order to increase the wealth we should concentrate on building a
better image of our company to our clients, stakeholders and regulatory bodies
alike.
Action Plan:
1. More engagement in Primary Market operation than secondary market
2. Diversification of Product and Services
3. Expansion of Business
4.0 The roles of Prime Bank Investment Limited:
Portfolio Investment Management Services

One of the most important functions of PBIL is to provide Portfolio Management
service to the customer. This provides all kinds of management services in
relation to diversified Investors’ Portfolio Management products. Basically, the
program has two different wings to provide portfolio investment management
services. These are:
PrimeInvest
Non-Margin Margin
Margin
Self-Directed Managed
Self-Directed
Non- Discretionary Discretionary
At present, basically PBIL provides one type of portfolio management services

i.e. Non Discretionary Account.
Finance & Investment

This unit will primarily be providing all kinds of management services in
relation to managing issues of different companies; offering shares in the
market; underwriting; investment in shares (Pre-IPO) and equity financing. In
addition, the unit will procure corporate clients for cross selling of other
products and services of the Bank. This unit will also be headed by an
experienced executive and will be responsible for carrying out following
services as per approved policy guidelines and will be reporting to the head of
the division.
 Issue Management
When a company (the Issuer) needs to raise capital, they either issue equity
(shares) or debt securities (bonds). Raising capital from the market involve a
complicated process of versatile activities. It starts from advising the issuer to
get all primary regulatory job done, getting approval of the prospectus from the
SEC and to ensuring that the issuer receives the fund raised from the market. A
merchant banker/issue manager does the all these jobs for the issuer company.
 Underwriting
Underwriting is the processes by which merchant bankers raise capital from the
market (investors) on behalf of companies intend to issue securities (both
equity and debt). When an issuer gets approval for issuing IPO or RSO in the
market, it is required to make sure that 50% of the total amount of the issue
has been underwritten by one or more underwriters. Underwrites took the risk
of taking up unsubscribed portion of shares. The deal is made through an
agreement with the issuer company. In return the underwriters get
commission.
 Pre-IPO Private Placement
As per SEC rules companies other than financial institutions intend for going
public can raise their capital fund in two ways on 60:40 basis. They can raise
60% of the capital privately through private placement before issuing public
offering subject to raising rest 40% from public. It is basically equity investment
and carries significant risk.
 Corporate (Pre-Issue) Advisory Services

This is another area of business opportunity for fee-based income. Basically
when a company intends to go for public issue it appoints an issue manager for
issue management activities. But there are several pre-issue secretarial
activities are involved with the managing the issue for offering to the public.
These functions are, among others:
a. Accord consent from existing paid-up capital from SEC;
b. Obtaining return of allotment certificate from Registrar of Joint Stock
Companies & Firms;
c. Obtaining certified copy of schedule X, Form XII, etc.
d. Advising preparation of financial statements in line with the SEC
requirements;
e. Advising arrangement of AGM, EGM where applicable, etc.
 Banker to the Issue

It is basically related to subscription money collection of IPO/RSO through
branches of banking channel. It gives the Bank very short-term benefit against
huge cost free deposits. But there are number of supervisory, monitoring, and
coordinating functions are involved with it which is carried out by the merchant
banking & investment division. Concern branches of the Bank get commission
for providing this service. In 2003, the Bank earned around Tk. 70 lac by
providing this service. But on subsequent years no significant earning was
made from this service because of lack of marketing effort by division as the
nothing was credit to their account for the services they carried out.
 Lead Banker
The main concept is when a company floats IPO/RSO; it has to open a STD A/C
(also a F/C A/C for NRB investors) with any Bank among the Bankers to the
issue. The entire fund collected by all branches of all banks has to deposit the
amount to the account for a period of minimum 32 days. This deposits varied
from minimum 05 crore to 500 crores and above. It not only facilitates the
Bank to enjoy comparatively low cost short-term deposit but also gives interest
benefits.
 Bridge Financing
Bridge financing is a method of financing, used by companies before their
initial public offering, to obtain necessary cash for the maintenance of
operations. These funds are usually supplied by the investment/merchant
banks underwriting the new issue. As payment, the company acquiring the
bridge financing give a number of shares at a discount of the issue price to the
underwriters that equally offsets the loan. This financing is, in essence, a
forwarded payment for the future sales of the new issue.
 Security Custodial Service

It is a very potential and profitable area of business particularly under
depository system. The basic concept is to provide following services (as per
SEC rules) to the customers (individual and institutions):
a. Safe custody of security/shares;
b. Maintain accounts and receives income, profits, claim, and all other benefits
on behalf of customers against shares under custody and report accordingly;
c. Keep record of all relevant information, declaration, statement and report to
the customers accordingly;
d. Maintain account and fund of customers and manage.
e. Specific fee is charged for rendering these services. However, presently, we
are not authorized to act as “Security Custodian”. To act as “Security
Custodian” the Bank has to obtain Registration from SEC under SEC
(Security Custodial Service) regulation, 2003.
Information & Research:

As we mentioned earlier that market information is the most important aspect
for success in the capital market operation. In our country we don’t have any
data warehouse online facilities. Therefore, it is very essential that the
company build its own data warehouse as best as possible.
The internship candidates who will be engaged for the job will be observed very
carefully and only highly potential and qualified candidates may be
recommended for future employment.
Asset Management:
At present, as per existing SEC regulations no merchant bank is not authorized
to be an assets manager. But, we believe that in due course we will be able to
obtain necessary permission to act Assets Management functions from the
regulatory authority on or before completion of our capacity building to provide
full-fledged operational services.
5.0 Challenges of Prime Bank Investment Ltd (PBIL)
Merchant Banking concept is a new concept in Bangladesh. Merchant banks are

facing many challenges, not least the need to become global in scope and
ambition, but local in understanding and whole body of financial system.
Key Challenges that as a Merchant Bank, PBIL has to face:

 Frequent changes in policies:
The share market in Bangladesh unusually went bullish in 2010 and the Bangladesh
Bank (Central Bank) and the Security and Exchange Commission (SEC) intervened by
toying with the margin loan requirements which triggered a free fall of the indexes in a
number of occasions in the last few months. Moral hazard has been reflected in
changes in policy stance by Bangladesh Bank with regard to exposure of banks to
stock markets and frequent changes by SEC in respect of loan margin ratio and the
methods of calculating the ratio. Moral hazard seems to have become entrenched,
especially because regulatory authorities have often relaxed their standards in

response to destructive activities of a limited number of disgruntled investors. The
raising of margin loan ratio triggered liquidity shortage which hurt the stock market.
Among other policy changes: allowing GP share netting facility; extending margin loan
ratio to 1:1.5; allowing mutual funds to margin loan like normal stocks;
withdrawal of extension of the member's margins and many more put our stock
market in an nervous situation. However, none of the directives of the SEC, and
assurance from market experts, leaders of the top bourses, Bangladesh Bank
top officials and even the Finance Minister did not seem to bring any positive
and sustainable improvement in the market. Perhaps, optimum policies and
action are still not in place to restore the confidence to and normalcy of the
market.
 Bringing back the confidence of the investors:

It has been the challenge of the top policymakers concerned to restore the
confidence of the investors and put the derailed market on the right track,
otherwise, our economy will suffer a lot in the long term. In the meantime, the
SEC has applied all the weapons but failed to bring stability to the market.
Bangladesh Bank has due role to play now along with the highest policymakers
of the government. BB can increase the exposure limit of banks to the capital
market or allow the banks to calculate their capital market exposure at lower
market value or cost value. As many merchant banks and dealers borrow from
the call money market to finance the margin loan at the capital market,
stability must be brought to the capital market. Moreover, as institutional
investor must be induced to increase their participation in the capital market,
as they exercise larger influence over the movement of stock prices. Main
brokerage houses can be induced to advice their retail investors for not going
on a panic selling, as when one investor sells all of his/her portfolios, other
neighboring investors usually do the same, thereby aggravating the situation
further. Finally, there must be a system in place in one way or other for
effective coordination among SEC, BB, government, investors and others
concerned to undertake any decisions regarding the capital market.
 Valuation Disparity
Value of scripts is subject to speculative trading rather than sound fundamentals,

resulting in market volatility. Some of the IPOs were oversubscribed many times. With
the high price of any IPO, investors try to come to a conclusion that price of existing
shares in the same sector is undervalued and this perception may mislead them to
buy at higher price. That is how market price of shares increased apart from
manipulations, if any. This oversubscription has been going on because of the fact that
individual investors either are misinformed or are lacking the knowledge of analyzing
the securities market. Education of investors, overall development of capital markets
through time can address this issue.
 Supply side constraints
The market does not have an adequate number of fundamentally sound scripts. Entry
of new companies in the market can help reduce gap between demand and supply and
help bring stability in the market. The authorities should not force major corporations
to come into the market, without creating an enabling environment. The focus should
be on the privatization of state owned enterprises through public offerings in the
bourses. The market has to reach such a stage of development that companies will
take it as a serious alternative to bank financing. Only six IPOs and two direct listings
in 2010 took place.
 Excessive investment by commercial banks in the capital

markets
Commercial banks have been involved heavily in the stock market business for
the last few years. Allowing merchant banking has exaggerated the situation.
Banks became the key player in the stock market in Bangladesh. Perhaps,
Bangladesh Bank was not very much aware about banks' exposure to the stock
market. The situation had worsened when it was made mandatory for all banks
to maintain their investment in the stock market equivalent to 10% of their
total deposit and to comply with it by December, 2010, as in reality the ratio
was much higher than this level. Along with the measure, increasing the Cash
Reserve Ratio (CRR) was doubly debacles for the banks. Naturally, banks, the
big player of the stock market, had to sell a huge amount of shares due to
liquidity constraints, which had caused share prices to decline.
 Influence of political power:
These influential culprits can do and undo many things in our share market. In
Bangladesh we have seen much direct interventions and policies to support
stock price levels. Excessive ad-hoc regulatory interventions in response to
market developments also distort price movements and reduce the incentives
for investors to buy stocks on the basis of fundamentals since unfavorable price
trends might be unduly affected by official interventions. Unwarranted market
intervention is not just a market of moral hazard but runs potential political
risks as well.
 Information asymmetry
Asymmetry of information" in the context of stock markets implies that the

investors know much less about the inherent worth of the companies' shares
which they are buying/selling compared to the managers and sponsors of those
companies. Investors' decisions, therefore, may not be based on rational
considerations. Perhaps even more importantly, the incapacity or unwillingness
to process available information has contributed to large swings. The investors
have not taken into consideration well-known criteria such as net asset value
per share and/or price-earning ratio in their decisions even though information
regarding these criteria is readily available on the websites of stock exchanges.
As a result, all share prices rose or fell more or less in unison, irrespective of
differences in fundamentals.
Also, listed companies accounts in many cases are poorly presented and not
entirely reliable. International Accounting and auditing standards should be
observed in the preparation of financial statement and in their audit. To bring
back investors confidence, the SEC must create an environment by ensuring
proper disclosure in audited financial statement. Such lapses make people
unaware about the companies. Any information about the share of a company must be
made public to all investors. Unfortunately, we do not see this happening usually in
Bangladesh. It is truly a despondent syndrome, but equally it is true that many
investors in Bangladesh want to make profit from inside information of companies that
leaves a huge room for manipulating the whole stock market. As a result, investors
could lose out.
 Lack of proper knowledge of the investors:
In Bangladesh, most investors use a broker to buy and sell stocks. These brokers
simply take an investor's order and execute it for them. These brokers legally cannot
offer any advice to the investors in facing their decision about where to invest. It is
conceivable that the dealings of all such brokers must also be scrutinized to ascertain
whether they have been performing their duties legally. Especially those, who do not
have any knowledge and information on technical and specialized matters, can easily
be influenced by such brokers. This could lead the investors to take some wrong
decisions. And, in the
absence of independent research houses, retail investors primarily focus on advice
given by their
brokers, which often consists of market rumours. This is not acceptable, and it often
leads to
enormous losses for small investors who are vital for a low-income and emerging
market like
Bangladesh. Filtering of information among different types of investors may leave

scope for
manipulation; this assumption had been proved right in the 1996 market meltdown at
the cost of
many individuals and households.
 Manipulating emerging market:
Aggarwal and Wu mention that emerging stock markets can be manipulated. This is an
important issue for both the regulation of trading and the efficiency of the market.
They also note that manipulation can occur in a variety of ways, - insiders' foul-game
by taking actions that influence the stock price (e.g., accounting and earnings
manipulation such as was in the Enron case) or the release of false information or
rumors in internet chat rooms. In different dailies in Bangladesh, reports were
published about rumors that were going on about the stock market. Such reports
made people confused and shattered. It is obviously investors' responsibility to
analyze the market, before putting in their money in stocks. But people here do hardly
get any accurate information. We should not forget that there are a number of
investors in stock market in Bangladesh who do not have proper knowledge about
risky investments.
 Quality Research and Analysis

Development of quality equity research in the country is yet to match the
growth of local capital markets. Quality research increases investor awareness,
reducing speculative trading and market volatility
 Central Co-ordination of Regulators
There must be a system in place in one way or other for effective coordination
among SEC, BB, government, investors and others concerned to undertake any
decisions regarding the capital market.
 Advancement in technological usage
To keep pace with the current trend PBIL will also have to technologically
upgrade to compete with others. PBIL urgently need to have its own Web Portal
so that both customers and potential investors can have easy access to its
company profile and stay mark to market basis information of their accounts.
 Development of products and services
At present, basically PBIL provides one type of portfolio management services

i.e. Non Discretionary Account. Under Non Discretionary account it provides
two kinds of products for both individuals and Corporate:
• Margin Account or MSDA (Margin Self directed non-discretionary
account)
• Non Margin Account or NMSDA (Non margin self directed non-
discretionary account)
But, it perceived that within next 2 years, requirement of margin loan from
merchant banks by customers will be reduced significantly. Rather, investors
will be more focused on services that include advisory on market. Besides, PBIL
also believes that there is a plenty opportunity to bring NRB funds as well as
foreign individual investor’s funds in to our market.
As such, we need to develop more products like Discretionary Account for
Individuals and Corporate and NITA/FC investment account for NRBs and
Foreign individuals.
6.0 Current Situation of Securities market
Bangladesh's stock market performance, measured in terms of the stock price

index, has been one of the best globally for a number of years. Its upward
surge defied global and regional market developments. When almost all
markets across the globe collapsed during the global economic crisis, DGEN
was perhaps one of the very few which defied the global trend and maintained
its upward progression fueled by local developments/conditions.
When it started its upward trend in 2007, the market was certainly
undervalued, and there were fundamental economic reasons for it to go up. At
that time the average Price/Earning (P/E) ratio was in single digit and the
market capitalization was less than 10 per cent of gross domestic product
(GDP). The sustained upward surge, however, went beyond what could be
justified by economic fundamentals by early 2010.
Since mid-2010, as the index crossed the 5000 mark, the market has clearly
been driven by speculative forces. During the last two-month period leading up
to the peak, the index increased by more than 2000 points before crossing the
8900 level on December 5. To put it in proper perspective, the index level was
at about 1500 until this recent surge started in 2007. Daily market turnover
increased 30 fold about Tk. 1.0 billion to Tk. 33 billion over the three-year
period. Clearly, economic fundamentals cannot support this level of valuation
gain and turnover, and the market is bound to correct itself once it runs out of
steam.
The recent drop in the stock market index needs to be evaluated in this
context. Even after a more than 2500 point decline, the index is still well above
its mid-2010 levels. The corrections and volatility in the price index that we
have experienced in recent days is nothing uncommon, and fully in line with
what has been observed in many other important, and much larger stock
markets across the globe. For the market to start consolidating, it needs to
shed itself of speculative elements, and that can only happen once market
valuations come back to their fundamental levels
This situation started to ripe when the central bank issued circulars regarding
restricting the banks to lower their capital market exposure up to 10 per cent
of the total liabilities, and increasing the CRR and SLR by 50 basis points to 6.0
per cent and 19 per cent respectively. However, the increase in CRR was
consistent with the central bank monetary policy objective to contain the
inflation under control (inflation already exceeded 8.0 per cent) and money
growth (which also exceeded the targeted growth) in the economy. Moreover,
the central bank's directive to calculate the stock market exposure of the
banks at market price left many banks over exposed and increased the selling
pressure on part of banks, thereby creating a mismatch between demand for

and supply of stocks. As most of the leading merchants banks are subsidiary of
the banks and NBFIs, and banks themselves are overexposed to capital market,
as a result, supply of funds to these merchant banks are limited that results in
lower margin loan available in the market and less or virtually negative
demand (institutional investors are the net seller) of stocks by the institutional
investors. Moreover, Bangladesh Bank's directive regarding tough treatment
for diversion of industrial loan to capital market further contributed to selling
pressure in the market. Furthermore, some of the big size IPO subscriptions in
the same month are expected to contribute heavy selling pressure in the
secondary market aggravating the situation further. It is also alleged that some
kinds of syndicate exists in the market with the help of top merchant banks,
bourses and a part of regulators who are willingly contributing to such fall of
the market just to pick the stock at lower prices.
7.0 Recommendations
Prime Bank Investment Ltd. has established its image as one of the best
service provider for its potential customers. From above discussions and basic
understandings while working in the organization following recommendations
can be formulated for the organization.
a) Increase in the number of scrips: There has been an explosion of market

capitalisation on the basis of price inflation of existing scrips. There have
not been many new issues of initial public offering (IPO) over the last
couple of years from the private sector, with the notable exception of
Grameen Phone. The promised off-loading of shares of 26 state-owned
enterprises has not materialissed. A large number of shares issued by
companies from different sectors would help bring about better balance
between demand and supply and enable investors to pick and choose on
the basis of fundamentals rather than zooming on a limited number of
existing shares, thus excessively inflating their prices and creating
conditions for eventual downslide. Furthermore, adverse impact of

manipulation by any errant market actor with respect to a few shares
would be minimised.
b) Investor's education: The coverage of existing investor's education

programmes conducted by the stock exchanges and merchant banks is
limited. These programmes need to be expanded. Cooperation of both
print and electronic media should be sought to educate investors about
the considerations that should guide investment decisions. It should also
be made abundantly clear to them that they have to bear the losses of
wrong decisions themselves and should not expect regulators to
undertake salvage operations. They should be made aware that stock
prices can not go on rising till eternity.
c) Strengthening monitoring and surveillance: By adopting the principles

of good governance at all decision making levels, Prime Bank Investment
Ltd. must show that corporate governance is a management
enhancement tool. This is one of the factors that can give confidence to
business partners and facilitates co operation with parties in international
financial centers, which already adopts such principles. It is important to
force the listed companies to publish their annual reports with actual and
proper information that can ensure the interests of investors.
d) Maintain a well-balanced portfolio: In order to increase the profitability

& reduce the risk, Prime Bank Investment Ltd. should maintain a well-
balanced portfolio. The more diversified the portfolio, the lesser the risk
of losses.
e) Ensure fair pricing: There is a also a clear need to stimulate increased

equity issuance in Bangladesh including fairer IPO pricing with the re-
adoption of the book-building method; regulations and tax incentives for
increased free float; the listing of state-owned enterprises; and the
development of a mechanism whereby companies can raise the capital

they need and meet free float requirements.
f) Limit the exposure of banks in capital market: We also recommend the

government and regulators think carefully about commercial banks'
exposure to the capital market (Are the limits at 10 percent of liabilities
or 25 percent of capital too high?).
g) Coordinated role of regulators: Ensure more regular co-ordination

between Bangladesh Bank and SEC on stock market policies, and assess
the impact of the market correction on the real economy. Bangladesh
Bank and SEC should regularly exchange notes and adopt policies with
due regard to interactions between money market and capital market.
Policies, once adopted on the basis of mutual consultations between the
two regulatory authorities as well as between them and other stake
holders, should be implemented rigorously without being subservient to
extraneous influences and should not be changed frequently.
8.0 Conclusion
Merchant banks can contribute greatly for the development of more

authenticated and structured capital market and can also help to form a more
stable economy. It has not been possible to present all the factors along with
problems and prospects within this limited time frame and it needs more
expertise to analyze the real scenario. In spite of these reasons, dedicated
efforts are given to prepare the report, but some mistakes can occur, which are
unintentional due to lack of knowledge on certain areas and also because of
time limitations.
Bibliography
Business Plan of Prime Bank Investment Ltd.
Investment banks in emerging markets.
http://www.thefinancialexpress-bd.com/more.php?
news_id=131479&date=2011-04-05
Capital Market Development in Bangladesh.
http://www.scribd.com/doc/21892091/9-Capital-Market-Development-in-
Bangladesh
4. Recent collapse of stock prices and challenges ahead
http://news.reportlinker.com/n04407070/Recent-collapse-of-stock-prices-
and challenges-ahead.html#ixzz1Hj3tlRZB
The stock market situation: What to do about it?
http://www.thefinancialexpress-bd.com/more.php?news_id=124083

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Merchant Banks as Security Market Institutions 1

The Roles and Challenges of Prime Bank Investment Ltd.

Merchant Banks as Securities Market Institutions:

The Roles and Challenges of Prime Bank Investment Ltd.

1.0 Securities Market in Bangladesh

2.0 Merchant Banking

As per Merchant Banking Regulations, a merchant bank can mainly perform

i. Issue Management: Issue Management function of merchant Banking

necessary permission from the relevant authorities, preparing prospectus for

ii. Underwriting: Underwriting Operation is one of the important

iii. Portfolio Investment Management Services: One of the most

In addition a merchant banker can also perform the activities of Project

2.1 Merchant banking in Bangladesh:

To register as a merchant banker, SEC asks some requirements as below:

Issue Manager At least 1 (one) proposal for public issue be

Portfolio Manager In addition to own portfolio, at least 5(five) new

Merchant Banker 1 (one) issue management, 2 (two) underwriting,

2.2 Merchant Banks as Securities Market Institutions:

 Helping to raise funds: Investment banks provide a wealth of critical

the role of merchant bank it is important to distinguish between what is known

 Custodians and trustees of the public money: Merchant banks are

 Act as an advisor: Investment banks act as an advisor in primary

 Act as an arranger: Investment banks also act as an arranger in a

Investment banks also contribute on secondary market: sales and trading;

2.3 Benefits of capital markets through merchant banking

 Excellent distribution capabilities (onshore and offshore); and

 Access to research teams offering advices and commentaries on

 Improved secondary market liquidity; and

 Promoting economic stability

3.0 A Case Study on Prime Bank Investment Limited

3.1 Company Background:

Where PBIL was:

Where PBIL is:

3.2 Vision, Mission and Objectives

Value and Wealth Maximization

1. More engagement in Primary Market operation than secondary market

2. Diversification of Product and Services

4.0 The roles of Prime Bank Investment Limited:

Portfolio Investment Management Services

Non- Discretionary Discretionary

At present, basically PBIL provides one type of portfolio management services

Finance & Investment

 Corporate (Pre-Issue) Advisory Services

 Banker to the Issue

 Security Custodial Service

Information & Research:

5.0 Challenges of Prime Bank Investment Ltd (PBIL)

Merchant Banking concept is a new concept in Bangladesh. Merchant banks are

Key Challenges that as a Merchant Bank, PBIL has to face:

especially because regulatory authorities have often relaxed their standards in

 Bringing back the confidence of the investors:

Value of scripts is subject to speculative trading rather than sound fundamentals,

 Supply side constraints

 Excessive investment by commercial banks in the capital

Asymmetry of information" in the context of stock markets implies that the

 Lack of proper knowledge of the investors:

Bangladesh. Filtering of information among different types of investors may leave

 Manipulating emerging market:

 Quality Research and Analysis

 Development of products and services

At present, basically PBIL provides one type of portfolio management services

6.0 Current Situation of Securities market

Bangladesh's stock market performance, measured in terms of the stock price