Term paper

On
Investment Banking
EB-612

Submitted to:

Md Tanvir Hamim
Assistant Professor
Department of Banking and Insurance
University of Dhaka

Submitted by:

Mehnazz sadekin
Id: 51942018
Batch: 42nd
EMBA Program
University of Dhaka

Date of submission: January 3, 2021

1. Basic Terms and Concepts of Investment Banking.

Investment banking is a specific division of banking which is related for capital formation of the
companies, governments, financial & non financial industry and other entities.
Investment banks underwrite new debt and equity securities for all types of corporations, for
selling the securities, and help to facilitate mergers and acquisitions, reorganizations, and broker
trades for both institutions and private investors. Investment banks also provide guidance to
issuers regarding the issue and placement of stock.
Investment banking is a way of controlling the flow of money. The goal of investment banking is
providing cash from investors looking for returns into the hands of entrepreneurs and business
builders who have business ideas but capital shortage. Investment bankers increase money from
investors, by selling securities, and then transfer that money to people who need cash to start
businesses, build buildings, run cities, or bring other costly projects to reality.
A bank providing financial services for governments, companies or very wealthy individuals, as
compared to commercial banks, which provide loans and savings accounts to the general public.

Analyst: person who studies an industry sector and makes BUY, HOLD and SELL
recommendations. Also, a different term referring to entry-level career position in many
investment banks.

Asset: an item with economic value that is owned or controlled by an individual, business or
government. Asset is something that has the potential to earn money for an individual. It is
something one can own that can reasonably be expected to produce something for
himself/herself. Assets include stocks, bonds, commodities, real estate, and other investments.
Bear market: This is a market that is falling. in bear market sells are encouraging. A bear market
has a downward trend, and someone who believes the market is headed for a drop is often
referred to as a “bear”. Bear markets can last for a few weeks or years. Here shares are falling
down.
Bid price: This is the highest price a buyer is willing to pay when buying an investment. Today,
electronic trading makes it possible to ask and bid to be matched up automatically and almost
instantly.

Bonds: When government or company wanted to raise their capital they issues bond. From the
bonds bondholders receive interest and the capital is repaid at maturity. The difference between
bonds and loans is that bonds can be traded between investor. Broker: intermediary between a
buyer and a seller, receiving commission on the trade.

Brokerage: brokerage is from the payment for the client to the broker. This is the entity that
buys and sells investments on behalf of the client. Usually, client pay a fee for this service. In the
case of an online discount broker, client often pay a flat commission per trade. Other brokers,
especially if they also manage client’s assets as a whole, just charge a percentage of client’s
assets each year.

Bull: investor who buys believing prices will rise. A bull market is the condition of a financial
market in which prices are rising or are expected to rise. The term "bull market" is most often
used to refer to the stock market but can be applied to anything that is traded, such as bonds, real
estate, currencies and commodities. Because prices of securities rise and fall essentially
continuously during trading, the term "bull market" is typically reserved for extended periods in
which a large portion of security prices are rising. Bull markets tend to last for months or even
years.

Capital markets: capital market is the market for long-term funding, bonds and equity. A
capital market is a financial market in which long-term debt (over a year) or equity-backed
securities are bought and sold. Capital markets channel the wealth of savers to those who can put
it to long-term productive use, such as companies or governments making long-term
investments.

Clearing: the mechanism for making transactions happen: matching the buyer and seller,
making sure the buyer has the cash and the seller has the securities.
Commodities: goods such as oil, petrol, metal or grain. For investors, commodities can be an
important way to diversify their portfolio beyond traditional securities. Because the prices of
commodities tend to move in opposition to stocks, some investors also rely on commodities
during periods of market volatility. In the past, commodities trading required significant amounts
of time, money, and expertise, and was primarily limited to professional traders. Today, there are
more options for participating in the commodity markets.

Debt capital markets (DCM): investment bank division responsible for issuance and pricing of
debt securities. Debt Capital Markets groups are responsible for providing advice directly to
corporate issuers on the raising of debt for acquisitions. With a stock sale, the buyer is assuming
ownership of both assets and liabilities – including potential liabilities from past actions of the
business.

Derivatives: the group term for financial contracts between buyers and sellers of commodities or
securities. Includes futures, options or swaps. Derivatives allow profit from the rise (or fall) of a
commodity or security, without actually buying the underlying well.

Equity: otherwise referred to as shares. Shareholders own a percentage of the company, and
have a share in profits, as well as control via voting rights.

Equity capital markets (ECM): investment bank division responsible for structuring and
pricing the issuance of equities, such as at IPO (Initial Public Offering – flotation of the company
on the stock exchange).

Interest rates: lenders demand interest on loans. The rate is dependent on future inflation
expectations, as well as the ‘real interest rate’ – the rental cost of money. Borrowers might pay
extra on top in order to compensate lenders for the credit risk.

Investment management: the buying and selling of securities (see securities) and assets (see
asset) within a portfolio to achieve investment objectives.
Investment trust: similar to unit trusts – collective investment but with a different structure.
Investment trusts’ value fluctuates with demand for shares on the stock market. The price of an
investment trust does not necessarily equal the price of its underlying assets.

Leveraging: using debt to supplement investment. An institution that has borrowed heavily in
addition to its funds or equity to finance growth is said to be highly leveraged.

Liquidity: ability of an asset to be traded quickly without changing the market price.
Market maker: bank that is obliged to offer to trade securities in which it is registered throughout
the trading day.

Money market: the market for short-term funding such as certificates of deposit and treasury
bills. Money market securities typically have a maturity of less than one year.

Portfolio: collection of securities held by an investor. Also known as a ‘fund’. A portfolio is a

collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents,
including closed-end funds and exchange traded funds (ETFs). People generally believe that
stocks, bonds, and cash comprise the core of a portfolio. Though this is often the case, it does not
need to be the rule. A portfolio may contain a wide range of assets including real estate, art, and
private investments.

Pure risk: a type of risk where the only consideration is the possibility of loss. Speculative risk
in contrast offers the possibility of loss or gain.

Risk management: management of the pure risks to which a company might be subject. It
involves analyzing all possible risks and determining how to handle this exposure through
trading out, or transferring the risk with derivatives.

Secondary market: the trading of securities. The ‘primary market’ means the launching
(issuing) of bonds and equities for the first time.
Securities: securities are generic term for bonds, gilts and equities. The term "security" refers to
a fungible, negotiable financial instrument that holds some type of monetary value. It represents
an ownership position in a publicly-traded corporation via stock; a creditor relationship with a
governmental body or a corporation represented by owning that entity's bond; or rights to
ownership as represented by an option.

Settlement: once a deal has been made and clearing taken place, stock and cash transfer between
seller and buyer.

Yield: the total return on a security expressed as a proportion of its price. Yield refers to the
earnings generated and realized on an investment over a particular period of time. It's expressed
as a percentage based on the invested amount, current market value, or face value of the security.
It includes the interest earned or dividends received from holding a particular security.
Depending on the valuation (fixed vs. fluctuating) of the security, yields may be classified as
known or anticipated.

These are some terms used in investment banking

2. Problems and Prospects of Capital Markets in Bangladesh.

Capital markets are venues where savings and investments are channeled between the suppliers
who have capital and those who are in need of capital. The entities that have capital include retail
and institutional investors while those who seek capital are businesses, governments, and people.
Capital markets are composed of primary and secondary markets. The most common capital
markets are the stock market and the bond market. Capital markets seek to improve transactional
efficiencies. These markets bring those who hold capital and those seeking capital together and
provide a place where entities can exchange securities.

The Securities and Exchange Commission (SEC) was established on 8th June, 1993
under the Securities and Exchange Commission Act, 1993. The Chairman and Members of the
Commission are appointed by the government and have overall responsibility to
administer securities legislation. The Commission is a statutory body and attached to the
Ministry of Finance.

The Dhaka Stock Exchange (DSE) & Chittagong Stock Exchange (CSE) is the capital market of
Bangladesh. DSE is the main stock exchange of Bangladesh. It is located in Motijheel at the
heart of the Dhaka city. It was incorporated in 1954. Dhaka stock exchange is the first
stock exchange of the country. As of 31 December 2007, the Dhaka Stock Exchange had
350 listed companies with a combined Market capitalization of $26.1 billion .

The Chittagong Stock Exchange (CSE) began its journey in 10th October of 1995 from
Chittagong City through the cry-out trading system with the promise to create a state-of-the art
bourse in the country. Founder members of the proposed Chittagong Stock Exchange
approached the Bangladesh Government in January 1995 and obtained the permission of
the Securities and Exchange Commission on February 12, 1995 for establishing the
country's second stock exchange. The Exchange comprised of twelve Board members,
presided by Mr. Amir Khosru Mahmud Chowdhury (MP) and run by an independent
secretariat from the very first day of its inception. Market capitalization of $26.1 billion.
There are some problems in DSE & CSE, & these are the barriers to development & growth of
country’s prime house. The major problems of DSE & CSE are:

Gaps in legal & supervisory framework & week implementation capacity: governance
structures are deficient & market regulations have ineffective enforcement & week
implementation capacity. The SEC was established & given the mandate to oversee the operation
of the capital market; however recurring violations of securities laws & regulations have been
reported. Many cases of filed by the SEC against companies & brokers for violation of SEC
rules. Even though there is a separate bench at the high court to deal with the company-related
matters, most of the cases remain unresolved.

Inadequate systems & surveillance: the trading surveillance systems & standards are
inadequate. Good governance depends on having sound technical infrastructure in place, but
neither the SEC nor the exchange has effective automated systems of surveillance to help them
detect market abuse. One of the systems modules-the surveillance module was not designed to
provide online market surveillance. Consequently the systems is no longer adequate for the
market surveillance function it now needs to perform. Surveillance at the exchanges concerns the
issues obligation of disclosure & monitoring of the trading portfolio of brokers, market
manipulation, & insider trading. The SEC does not have an independent system for monitoring
the DSE.

Shortage of fundamental securities: the limited number of listed securities has constrained
increases in the liquidity & the market Capitalization of the stock exchanges. In addition
investors have restricted investment choices because of the lack of fundamental equity issues,
investment grade equities and the debt instrument in the market.

Lack of professional standards for licensing: the categories of market participants requiring

• a license from the SEC include

• Brokers who provide trading services to the clients
• Dealers who are permitted to trade for their own account
• Merchant bankers who provide underwriting, issue management, and portfolio
investment services.
Price Manipulation: In stock market whoever has the better information can manipulate the
price in favor of him. This price manipulation significantly affects the normal growth of the
share market. Syndicates of share market related person are responsible for this manipulation
taking the advantages of their better situation.

Delays in Settlement: Financing procedures and delivery of securities sometimes take an

unusual long time for which the money is blocked from nothing.

Irregulations in Dividends: Some companies do not hold Annual General Meeting (AGM) and
eventually declare dividends that confused the shareholders about the financial positions of the
company.

Selection of Membership: Some members being the directors of listed companies of DSE, CSE
look for their own interest using their internal information of share market. Capital Market of
Bangladesh

Improper financial statement: Many companies do not focus real position of the company as
some audit firms involve in corruption while preparing financial statements. As a result the
shareholders as well as investors do not have any idea about position of that company.
Prospects of Capital Markets in Bangladesh:

• To regularly review primary & secondary market regulations

• To Integrate the DSE & CSE with the international financial system
• To Strong surveillance department
• To listing fundamentally sound, well reputed companies
• To provide fiscal incentives
• To Maintaining professional standard for licensing
• To Developing bond market
• To Demutualization of stock exchange
• To Strong monitoring system
• To Introduction of book building method for price discovery
• To Establish a centralized settlement system
• To Mount an intensive education & promotion campaign
• To Central co-ordination of regulators
• To Floatation of mutual funds
• To Proper measure to reduce insider trading
• To Institutionalization of the market
• To introduce automated monitoring system that may control price
manipulation, malpractices and inside trading.
• To introduce full computerized system for settlement of transactions.
• To force the listed companies to publish their annual reports with actual and
proper information that can ensure the interests of investors.
• To control and abolish kern market form premises of stock market.
• To take remedial action against the issues of fake certificates.
• The composite Quotation system (CQS) should be introduced and implemented
that available the exchange specialist bid-ask quotes to the subscribers.
• To make arrangement to set-up merchant banks, investment banks and floatation of more
mutual funds particularly in the private sectors. Banks, insurance companies and other
financial institution should be encouraged deal in share business directly.
 • The brokers should not be allowed to deal in the Scripps on their own accounts.
• The management of DSE and CSE should be vested with professionals and should not in
any way be linked with the ownership of stock exchange and other firms.

Conclusion: The Bangladesh capital market still has a long way to go. The recent measures
taken by the transitional government have already begun to positively impact the markets.
If more investor-friendly policy reforms were to be implemented, the capital market will
undoubtedly play a critical role in leading Bangladesh towards being the next Asian
country.