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The Roles and Challenges of Prime Bank Investment Ltd.
A report on Merchant Banks as Securities Market Institutions: The Roles and Challenges of Prime Bank Investment Ltd.
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.
Merchant Banks as Security Market Institutions 2
The Roles and Challenges of Prime Bank Investment Ltd.
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
involving itself in the collection of application money.Merchant Banks as Security Market Institutions 3 The Roles and Challenges of Prime Bank Investment Ltd. Capital Re-Structuring etc. preparing prospectus for public issue of shares and debentures. if required. the name of East Pakistan Stock Exchange Limited was changed to "Dacca Stock Exchange Ltd. refund of application money etc. Asset Securitization. scrutiny of applications. ii.1 Merchant banking in Bangladesh: The concept of merchant banking is in a development phase in our country. arranging for lottery relating to allotment. Portfolio Investment Management Services: One of the most important functions of merchant banking is to provide Portfolio Management service to the customer. 1964. 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. allotment of shares and debentures. It is an arrangement whereby the underwriter undertakes to subscribe the unsubscribed portion of shares/debentures offered by any Public Limited Company. 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. Pre-Investment Studies. 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. Factoring. Merger & Acquisitions. iii. necessary permission from the relevant authorities." Investment Corporation of Bangladesh (ICB) was the pioneer in the country that has performing with strong reputation in the . 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. In addition a merchant banker can also perform the activities of Project counseling. OTC Market. 2.
Except the activities of ICB. at least 5(five) new portfolio accounts be opened in each calendar year Merchant Banker 1 (one) issue management. Securities & Exchange Commission (SEC) published rules regarding the activities of dealers and brokers. In 1998. country’s capital market spreading its activities in all the segments of capital market. In 1996. it is a great breakthrough both for the country and stock exchange. DSE introduced automated trading. SEC introduces SEC (Merchant Baker & Portfolio Manager) Regulations. In 1997. 1996. In 1987. The title of the rules is set (Stock-dealers. merchant banking in Bangladesh had started their activities. In 1994. Currently. To register as a merchant banker. Now there were no legal obligations of the issuer companies to engage an issue manger at the time security issue. along with SEC (Mutual Funds) Regulations. It is the first licensed full-fledged merchant banker in the country. Stock-brokers and Sub brokers). the Bangladesh Government prepares and presents the Securities & Exchange Rules.2 Merchant Banks as Securities Market Institutions: . 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. 2 (two) underwriting. DSE took step ahead to update its all share price index on the basis of the design suggested International Finance Corporation (IFC). In 1993.Merchant Banks as Security Market Institutions 4 The Roles and Challenges of Prime Bank Investment Ltd. 5(five) new portfolio accounts be opened in each calendar year 2. IDLC of Bangladesh got license full-fledged merchant banker. some bank and non banking organization give proposal to get the permission of operate merchant banking operation. there are 35 registered merchant banks operating in Bangladesh.
They raise funds via capital markets or through private placements. banks and corporations while providing a platform for the trading of securities. raise equity capital (e. The sell side typically refers to selling shares of newly issued Initial Public offering IPO. The buy side. following the 1996 stock market crash. placing new bond issues. works with pension funds. helping investors purchase securities. It also provides portfolio investment management services. trade securities and provide financial advice. Underwriting operation is an important function of investment banker by which it can increase the supply of stock/shares and debentures in the market. For a better understanding of . Merchant banks were allowed to operate with the hope of playing a meaningful role in salvaging the country's limping stock market. or help a growing company without having to create another business entity. Issue management function of investment banking helps capital market increase the supply of securities. manage financial assets. and other financial services are called the buy side.Merchant Banks as Security Market Institutions 5 The Roles and Challenges of Prime Bank Investment Ltd. engaging in market making services. The traditionally termed investment banking services are now called the sell side. by generating fresh funds. An important task under this system is advising companies about raising funds. which they do in two main ways. Bridging the gap between buyers and sellers: Merchant banks are often divided into two camps: the buy side and the sell side. in contrast.g. helping launch an IPO). mutual funds. finance. and the investing public to help maximize their returns through trading or investing in securities such as stocks and bonds. selling and combining of different companies that can aid. hedge funds.. and deals with the buying. The primary role of capital market is to raise long term funds for governments. or helping clients facilitate transactions. One important role is to assist public and private corporations in raising funds in the capital markets. Activities of a typical merchant bank in Bangladesh include helping companies issue securities. Helping to raise funds: Investment banks provide a wealth of critical services to our economy. Many investment banks offer both buy side and sell side services.
clearing. legal documentation. and procedures for settlement. Banks undertake risk through proprietary trading. Custodians and trustees of the public money: Merchant banks are social institutions. Act as an arranger: Investment banks also act as an arranger in a number of ways. . research work on local market. These are: issuers on funding strategy. education of investors. regulatory and legislative issues. the role of merchant bank it is important to distinguish between what is known as the primary and the secondary markets. assist the issuer in producing the information memorandum. migration of best practices systems. done by a special set of traders who do not interface with clients. and obtaining regulatory approvals from the capital market authority and stock exchange. create market in the securities to support the issue. develop interest rate and cross currency derivative applications. 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. stock exchange. client driven or reverse enquiry.Merchant Banks as Security Market Institutions 6 The Roles and Challenges of Prime Bank Investment Ltd. market making. These are: managing the debt issue to ensure overall success of the transaction. Act as an advisor: Investment banks act as an advisor in primary market in a number of ways. Secondary markets are defined as "markets for existing assets that are currently traded between investors". marketing and placement of the bonds. The primary functions of a merchant bank is buying and selling products --both on behalf of their clients and also for the bank itself. trading can be proprietary. Investment banks also contribute on secondary market: sales and trading. custodial services and reporting. in the secondary market. They are custodians and trustees of the public money. and post deal communication. both foreign and local. obtaining credit rating. and development of the swaps and foreign exchange markets.
the bank has been in the consolidation phase for sometimes. currencies. become one of the leading merchant banks in the market in terms of market share.0 A Case Study on Prime Bank Investment Limited 3. It once again started active participation in the market from 2006.1 Company Background: Prime Bank Limited has been engaged in capital market since 1996. it realized that the economic paradigm was fully based on money market and driven by . Improved secondary market liquidity. In July 2006. and interest rate. a group of young executives of the bank were assigned to retake its position in the capital market and certainly. industries. 2. the bank’s merchant banking unit emerged as one of the leading market participants having around 3049 customers with portfolio size of around Tk. efficient services. Make debt investment capital accessible for intermediate and long term. 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. and Promoting economic stability 3. In 2006. and Access to research teams offering advices and commentaries on markets. Within last few years. transparency and compliances. Then in 2001 the bank was accorded the merchant banking license from SEC.Merchant Banks as Security Market Institutions 7 The Roles and Challenges of Prime Bank Investment Ltd.3 Benefits of capital markets through merchant banking In-depth expertise in local debt market environment. Excellent distribution capabilities (onshore and offshore). the bank maintaining its tradition. 1700 Crore. After the debacle in 1996.
achieving its vision. after 2007 almost every economic activities of our country collapsed. gave the merchant bank an opportunity to revive the long bearish stock market. Now. there will be varieties of new and innovative products. It is now Prime Bank Investment Limited (PBIL). These actually forced both surplus and deficit saving unit of our economy to come to the stock market.Merchant Banks as Security Market Institutions 8 The Roles and Challenges of Prime Bank Investment Ltd. This. it is believed that our market will be an emerging market within the next few years.811 million taka. 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. Since 2007 Bangladesh Capital Market have become more vibrant and passed several milestones. total market capitalization is around 3. especially stock market. daily turnover is on an average 1300 crore taka and the numbers of beneficiary owner (BO) accounts have reached over 2.022. the demand side does not have minimum standard compare to other Asian markets. Finally. The bank further realized that in our capital market. after passing of four successful years. in fact.371. As such. Today.24 million approximately. market will become more and more efficient day by day as well as global expansion will take place and many more. commercial banks. it is now become an independent subsidiary company of Prime Bank Ltd. to keep our existence in this market. On the other hand. more over bank was asked to reduce their lending and deposit rates to a single digit. we will have to compete with the highly qualified professionals. It also observed that the paradigm started shifting from money market to capital market following the same route of India and Pakistan. Where PBIL was: .
it emphasized on own investment considering portfolio management service was at a very initial stage. as per board instruction it diverted the focus more on to portfolio management service as against own investment. . 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. During the year 2007-08. Where PBIL is: Since the inception. At the beginning. its contribution to Prime Bank was excellent in terms of loan advances. profit margin and reputation. After 2008. own investment was the major focus rather than customer portfolio management. However. Back in 2006. Accordingly. PBIL implemented client oriented services throughout the organization.00 crore of its own and an authorized capital of Tk.00 crore only.Merchant Banks as Security Market Institutions 9 The Roles and Challenges of Prime Bank Investment Ltd. PBIL started with 5 officers and just 37 clients with a view to offer the best financial services in the Capital Market. now in 2010 the total number of clients has increased to around 3049 just in three and a half years’ of operation. 1000. 300. PBIL started its journey in 2006 with only 37 clients. 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. customer services.
773.1 crore in 2007 to Tk. Parallel to the rapid growth of the capital market. 3. the trade position of PBIL has also increased significantly over the last three and half years starting from Tk. The DGEN of Dhaka Stock Exchange has grown at an impressive CAGR1 of 28. Today. representing a symmetric growth.296. 17. 1 Cumulative Average Growth Rate . The capital market of Bangladesh has been growing at a stable rate over the last few years.23% from 2005 to 2009. the company is operating with three branches and in future the plan is to expand its wing across other parts of nation.Merchant Banks as Security Market Institutions 10 The Roles and Challenges of Prime Bank Investment Ltd.4 crore in 2009.
Merchant Banks as Security Market Institutions 11 The Roles and Challenges of Prime Bank Investment Ltd. Moreover. 3. The team of portfolio managers with their long experience in the capital market can provide clients the best possible service. Mission and Objectives . PBIL has been generating around 12% of total DSE turnover in last couple of years showing its strong presence in the capital market. 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.2 Vision. Clients.
innovative product and services with a view to maximize wealth and stakeholders’ value.Merchant Banks as Security Market Institutions 12 The Roles and Challenges of Prime Bank Investment Ltd. Vision Statement “We would like to go public and globally by using our efficient. However. remaining profitable will not be our main target. but the real intention would be to increase the wealth and value of the company.” 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. In order to increase the wealth we should concentrate on building a . as a whole.
Discretionary Discretionary At present.e. Action Plan: 1. These are: PrimeInvest Non-Margin Margin Self-Directed Self-Directed Managed Margin Non. More engagement in Primary Market operation than secondary market 2.0 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. Expansion of Business 4. Basically. stakeholders and regulatory bodies alike. Non Discretionary Account. . better image of our company to our clients. This provides all kinds of management services in relation to diversified Investors’ Portfolio Management products. the program has two different wings to provide portfolio investment management services. Diversification of Product and Services 3.Merchant Banks as Security Market Institutions 13 The Roles and Challenges of Prime Bank Investment Ltd. basically PBIL provides one type of portfolio management services i.
Underwrites took the risk of taking up unsubscribed portion of shares. with 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). they either issue equity (shares) or debt securities (bonds). underwriting. It is basically equity investment and carries significant risk. In addition.Merchant Banks as Security Market Institutions 14 The Roles and Challenges of Prime Bank Investment Ltd. When an issuer gets approval for issuing IPO or RSO in the market. The deal is made through an agreement commission. Finance & Investment This unit will primarily be providing all kinds of management services in relation to managing issues of different companies. it is required to make sure that 50% of the total amount of the issue has been underwritten by one or more underwriters. In return the underwriters get . It starts from advising the issuer to get all primary regulatory job done. 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. offering shares in the market. They can raise 60% of the capital privately through private placement before issuing public offering subject to raising rest 40% from public. Issue Management When a company (the Issuer) needs to raise capital. getting approval of the prospectus from the SEC and to ensuring that the issuer receives the fund raised from the market. 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. A merchant banker/issue manager does the all these jobs for the issuer company. the unit will procure corporate clients for cross selling of other products and services of the Bank. investment in shares (Pre-IPO) and equity financing. Raising capital from the market involve a complicated process of versatile activities.
It not only facilitates the . Obtaining return of allotment certificate from Registrar of Joint Stock Companies & Firms. d. These functions are. among others: a. c. e. 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. monitoring. b. etc.Merchant Banks as Security Market Institutions 15 The Roles and Challenges of Prime Bank Investment Ltd. Obtaining certified copy of schedule X. 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. 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. Concern branches of the Bank get commission for providing this service. It gives the Bank very short-term benefit against huge cost free deposits. and coordinating functions are involved with it which is carried out by the merchant banking & investment division. Advising arrangement of AGM. This deposits varied from minimum 05 crore to 500 crores and above. Advising preparation of financial statements in line with the SEC requirements. 70 lac by providing this service. Basically when a company intends to go for public issue it appoints an issue manager for issue management activities. EGM where applicable. Banker to the Issue It is basically related to subscription money collection of IPO/RSO through branches of banking channel. etc. In 2003. But there are several pre-issue secretarial activities are involved with the managing the issue for offering to the public. Accord consent from existing paid-up capital from SEC. Corporate (Pre-Issue) Advisory Services This is another area of business opportunity for fee-based income. But there are number of supervisory. Form XII. the Bank earned around Tk.
e. Maintain account and fund of customers and manage. . Maintain accounts and receives income. b. claim. profits.Merchant Banks as Security Market Institutions 16 The Roles and Challenges of Prime Bank Investment Ltd. c. Specific fee is charged for rendering these services. These funds are usually supplied by the investment/merchant banks underwriting the new issue. To act as “Security Custodian” the Bank has to obtain Registration from SEC under SEC (Security Custodial Service) regulation. 2003. Keep record of all relevant information. However. Safe custody of security/shares. a forwarded payment for the future sales of the new issue. in essence. Bank to enjoy comparatively low cost short-term deposit but also gives interest benefits. This financing is. to obtain necessary cash for the maintenance of operations. presently. 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. statement and report to the customers accordingly. we are not authorized to act as “Security Custodian”. declaration. Bridge Financing Bridge financing is a method of financing. and all other benefits on behalf of customers against shares under custody and report accordingly. d. 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. used by companies before their initial public offering. As payment.
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. it is very essential that the company build its own data warehouse as best as possible. In our country we don’t have any data warehouse online facilities. Merchant banks are facing many challenges. 5. 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. 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. Therefore. as per existing SEC regulations no merchant bank is not authorized to be an assets manager. Information & Research: As we mentioned earlier that market information is the most important aspect for success in the capital market operation. Asset Management: At present. Moral hazard seems to have become entrenched. But. but local in understanding and whole body of financial system.Merchant Banks as Security Market Institutions 17 The Roles and Challenges of Prime Bank Investment Ltd.0 Challenges of Prime Bank Investment Ltd (PBIL) Merchant Banking concept is a new concept in Bangladesh. Key Challenges that as a Merchant Bank. not least the need to become global in scope and ambition. . 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.
Perhaps. Among other policy changes: allowing GP share netting facility. and assurance from market experts. especially because regulatory authorities have often relaxed their standards in response to destructive activities of a limited number of disgruntled investors. leaders of the top bourses. In the meantime. optimum policies and action are still not in place to restore the confidence to and normalcy of the market. otherwise. The raising of margin loan ratio triggered liquidity shortage which hurt the stock market. none of the directives of the SEC. 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. 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.Merchant Banks as Security Market Institutions 18 The Roles and Challenges of Prime Bank Investment Ltd. However. As many merchant banks and dealers borrow from . 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.5. Bangladesh Bank top officials and even the Finance Minister did not seem to bring any positive and sustainable improvement in the market. extending margin loan ratio to 1:1. Bangladesh Bank has due role to play now along with the highest policymakers of the government. the SEC has applied all the weapons but failed to bring stability to the market. our economy will suffer a lot in the long term.
BB. overall development of capital markets through time can address this issue. The market has to reach such a stage of development that companies will take it as a serious alternative to bank financing. resulting in market volatility. 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. as they exercise larger influence over the movement of stock prices. 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. the call money market to finance the margin loan at the capital market. Main brokerage houses can be induced to advice their retail investors for not going on a panic selling. thereby aggravating the situation further. as institutional investor must be induced to increase their participation in the capital market. government. Only six IPOs and two direct listings in 2010 took place. Education of investors. Valuation Disparity Value of scripts is subject to speculative trading rather than sound fundamentals. as when one investor sells all of his/her portfolios. other neighboring investors usually do the same. Some of the IPOs were oversubscribed many times. 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. stability must be brought to the capital market. Finally. . if any. investors and others concerned to undertake any decisions regarding the capital market. without creating an enabling environment. The authorities should not force major corporations to come into the market. Moreover. With the high price of any IPO.Merchant Banks as Security Market Institutions 19 The Roles and Challenges of Prime Bank Investment Ltd. That is how market price of shares increased apart from manipulations. The focus should be on the privatization of state owned enterprises through public offerings in the bourses. there must be a system in place in one way or other for effective coordination among SEC.
Naturally. 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. had to sell a huge amount of shares due to liquidity constraints. Investors' decisions. Excessive markets investment by commercial banks in the capital Commercial banks have been involved heavily in the stock market business for the last few years. may not be based on rational considerations. Perhaps even more importantly. banks.Merchant Banks as Security Market Institutions 20 The Roles and Challenges of Prime Bank Investment Ltd. Perhaps. 2010. which had caused share prices to decline. the incapacity or unwillingness to process available information has contributed to large swings. as in reality the ratio was much higher than this level. 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. The investors . the big player of the stock market. increasing the Cash Reserve Ratio (CRR) was doubly debacles for the banks. Unwarranted market intervention is not just a market of moral hazard but runs potential political risks as well. therefore. Along with the measure. Banks became the key player in the stock market in Bangladesh. Influence of political power: These influential culprits can do and undo many things in our share market. Bangladesh Bank was not very much aware about banks' exposure to the stock market. In Bangladesh we have seen much direct interventions and policies to support stock price levels. Allowing merchant banking has exaggerated the situation. 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.
by in the their to like absence of independent research houses. retail investors primarily focus on advice brokers. who do not have any knowledge and information on technical and specialized matters. Also. Lack of proper knowledge of the investors: In Bangladesh. 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. International Accounting and auditing standards should be observed in the preparation of financial statement and in their audit. listed companies accounts in many cases are poorly presented and not entirely reliable. can easily be influenced by such brokers. most investors use a broker to buy and sell stocks. given leads market And. irrespective of differences in fundamentals. To bring back investors confidence. These brokers legally cannot offer any advice to the investors in facing their decision about where to invest. investors could lose out. which often consists of market rumours. This is not acceptable. 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. all share prices rose or fell more or less in unison. As a result. This could lead the investors to take some wrong decisions. It is conceivable that the dealings of all such brokers must also be scrutinized to ascertain whether they have been performing their duties legally. the SEC must create an environment by ensuring proper disclosure in audited financial statement. These brokers simply take an investor's order and execute it for them. Unfortunately. Such lapses make people unaware about the companies.Merchant Banks as Security Market Institutions 21 The Roles and Challenges of Prime Bank Investment Ltd. we do not see this happening usually in Bangladesh. Especially those. and it often enormous losses for small investors who are vital for a low-income and emerging . As a result. Any information about the share of a company must be made public to all investors. It is truly a despondent syndrome.
Advancement in technological usage To keep pace with the current trend PBIL will also have to technologically upgrade to compete with others. this assumption had been proved right in the 1996 market meltdown at Aggarwal and Wu mention that emerging stock markets can be manipulated. before putting in their money in stocks. Manipulating emerging market: cost for of manipulation. Quality research increases investor awareness. government.insiders' foul-game by taking actions that influence the stock price (e. accounting and earnings manipulation such as was in the Enron case) or the release of false information or rumors in internet chat rooms. 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. .g. Quality Research and Analysis Development of quality equity research in the country is yet to match the growth of local capital markets. 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. 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. Filtering of information among different types of investors may leave scope the many individuals and households. It is obviously investors' responsibility to analyze the market. They also note that manipulation can occur in a variety of ways. But people here do hardly get any accurate information. Bangladesh. Such reports made people confused and shattered. . This is an important issue for both the regulation of trading and the efficiency of the market. In different dailies in Bangladesh. investors and others concerned to undertake any decisions regarding the capital market. reports were published about rumors that were going on about the stock market.Merchant Banks as Security Market Institutions 22 The Roles and Challenges of Prime Bank Investment Ltd.. BB.
requirement of margin loan from merchant banks by customers will be reduced significantly. When it started its upward trend in 2007.0 Current Situation of Securities market Bangladesh's stock market performance. 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. and there were fundamental economic reasons for it to go up. 6. measured in terms of the stock price index. When almost all markets across the globe collapsed during the global economic crisis. it perceived that within next 2 years. DGEN was perhaps one of the very few which defied the global trend and maintained its upward progression fueled by local developments/conditions. the market was certainly undervalued. Besides. Rather. 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 nondiscretionary account) But. investors will be more focused on services that include advisory on market. Development of products and services At present.e. basically PBIL provides one type of portfolio management services i. has been one of the best globally for a number of years. Its upward surge defied global and regional market developments.Merchant Banks as Security Market Institutions 23 The Roles and Challenges of Prime Bank Investment Ltd. we need to develop more products like Discretionary Account for Individuals and Corporate and NITA/FC investment account for NRBs and Foreign individuals. 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 . As such.
went beyond what could be justified by economic fundamentals by early 2010. The recent drop in the stock market index needs to be evaluated in this context. Clearly. Daily market turnover increased 30 fold about Tk. the market has clearly been driven by speculative forces. To put it in proper perspective. 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 .0 billion to Tk. 1.Merchant Banks as Security Market Institutions 24 The Roles and Challenges of Prime Bank Investment Ltd. the index increased by more than 2000 points before crossing the 8900 level on December 5. and the market is bound to correct itself once it runs out of steam. Since mid-2010. it needs to shed itself of speculative elements. economic fundamentals cannot support this level of valuation gain and turnover. The corrections and volatility in the price index that we have experienced in recent days is nothing uncommon. Moreover. and much larger stock markets across the globe. However. the increase in CRR was consistent with the central bank monetary policy objective to contain the inflation under control (inflation already exceeded 8. however. Even after a more than 2500 point decline. 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 fully in line with what has been observed in many other important. the index level was at about 1500 until this recent surge started in 2007. the index is still well above its mid-2010 levels. The sustained upward surge.0 per cent and 19 per cent respectively. and increasing the CRR and SLR by 50 basis points to 6. 33 billion over the three-year period. During the last two-month period leading up to the peak.0 per cent) and money growth (which also exceeded the targeted growth) in the economy. (GDP). For the market to start consolidating. as the index crossed the 5000 mark.
As most of the leading merchants banks are subsidiary of the banks and NBFIs. thereby creating a mismatch between demand for and supply of stocks. 7. 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. as a result. It is also alleged that some kinds of syndicate exists in the market with the help of top merchant banks. thus excessively inflating their prices and creating . has established its image as one of the best service provider for its potential customers. Moreover. 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. Bangladesh Bank's directive regarding tough treatment for diversion of industrial loan to capital market further contributed to selling pressure in the market. with the notable exception of Grameen Phone. From above discussions and basic understandings while working in the organization following recommendations can be formulated for the organization.0 Recommendations Prime Bank Investment Ltd. There have not been many new issues of initial public offering (IPO) over the last couple of years from the private sector. Furthermore. 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. and banks themselves are overexposed to capital market. pressure on part of banks. a) Increase in the number of scrips: There has been an explosion of market capitalisation on the basis of price inflation of existing scrips.Merchant Banks as Security Market Institutions 25 The Roles and Challenges of Prime Bank Investment Ltd. The promised off-loading of shares of 26 state-owned enterprises has not materialissed. bourses and a part of regulators who are willingly contributing to such fall of the market just to pick the stock at lower prices.
which already adopts such principles. conditions for eventual downslide. The more diversified the portfolio. regulations and tax incentives for increased free float. Prime Bank Investment Ltd. the listing of state-owned enterprises. Prime Bank Investment Ltd. should maintain a wellbalanced portfolio. 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. This is one of the factors that can give confidence to business partners and facilitates co operation with parties in international financial centers. Furthermore. and the . Cooperation of both print and electronic media should be sought to educate investors about the considerations that should guide investment decisions. the lesser the risk of losses. 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. e) Ensure fair pricing: There is a also a clear need to stimulate increased equity issuance in Bangladesh including fairer IPO pricing with the readoption of the book-building method. d) Maintain a well-balanced portfolio: In order to increase the profitability & reduce the risk. must show that corporate governance is a management enhancement tool. b) Investor's education: The coverage of existing investor's education programmes conducted by the stock exchanges and merchant banks is limited.Merchant Banks as Security Market Institutions 26 The Roles and Challenges of Prime Bank Investment Ltd. c) Strengthening monitoring and surveillance: By adopting the principles of good governance at all decision making levels. They should be made aware that stock prices can not go on rising till eternity. These programmes need to be expanded. adverse impact of manipulation by any errant market actor with respect to a few shares would be minimised.
but some mistakes can occur. should be implemented rigorously without being subservient to extraneous influences and should not be changed frequently. dedicated efforts are given to prepare the report. . development of a mechanism whereby companies can raise the capital they need and meet free float requirements. Bangladesh Bank and SEC should regularly exchange notes and adopt policies with due regard to interactions between money market and capital market. Policies. 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?). 8. g) Coordinated role of regulators: Ensure more regular co-ordination between Bangladesh Bank and SEC on stock market policies. 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.Merchant Banks as Security Market Institutions 27 The Roles and Challenges of Prime Bank Investment Ltd. once adopted on the basis of mutual consultations between the two regulatory authorities as well as between them and other stake holders. and assess the impact of the market correction on the real economy. which are unintentional due to lack of knowledge on certain areas and also because of time limitations.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. In spite of these reasons.
com/more.reportlinker.php? news_id=131479&date=2011-04-05 Capital Market Development in Bangladesh.com/more.html#ixzz1Hj3tlRZB The stock market situation: What to do about it? http://www.com/doc/21892091/9-Capital-Market-Development-inBangladesh 4. http://www. http://www.com/n04407070/Recent-collapse-of-stock-pricesand challenges-ahead. Investment banks in emerging markets. Bibliography Business Plan of Prime Bank Investment Ltd. Recent collapse of stock prices and challenges ahead http://news.thefinancialexpress-bd.scribd.thefinancialexpress-bd.Merchant Banks as Security Market Institutions 28 The Roles and Challenges of Prime Bank Investment Ltd.php?news_id=124083 .
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