Investment Banking is an American synonym of merchant banking. It is a financial institution that assists individuals, corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities. An investment bank may also assist companies involved in mergers and acquisitions, and provide supplementary services such as market making, trading of derivatives, fixed income instruments, foreign exchange, commodities, and securities. It also provides advisory services on corporate matters to the firms they lend to.
In the Bangladesh context, financial institutions that carry out some distinct activities are being addressed as merchant banks. The core functions of merchant banks in Bangladesh include issue management, underwriting and Portfolio management services. The securities and exchange commission, based on SRO No 59 of 24 April 1996, and a decision taken by it on 17 August 1997, invited letters of intent from 14 institutions for registration of merchant banks. Prior to this decision, 7 institutions submitted such letters of intent and SEC gave registration to a total of 19. Presently, a total of 50 merchant banks are operating in the country, and their aggregate paid-up capital amounts to about Tk 36 billion. Among them 43 are full-fledged merchant banks. Merchant banks in Bangladesh are actively governed by the Securities and Exchange Commission (SEC) and submissively by the Bangladesh Bank.
Investment banks act as intermediaries between issuers and investors. The issuer sells securities to investment bankers who in turn sell the securities to investors. The investment banks own the securities until they are resold. For firms seeking to raise long-term funds, investment banks in Bangladesh provide assistance through a number of functions that involves.
Issue Management function of merchant Banking helps capital market to increase the supply of securities and companies to raise money from the market in order to expand their operations. A Issue Manager provides assistance a Private Limited Company intended to be converted into Public Limited Company by way of obtaining necessary permission from the relevant authorities, preparing prospectus for public issue of shares and debentures, supporting itself in the collection of application money, inspection of applications, arranging for lottery relating to allotment and so forth.
The other important function of Merchant Bank is underwriting operation. 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. Underwriters take on the risk of distributing the securities. If they fail to find enough investors, they will have to hold some securities themselves. Underwriters make their income from the price difference between the price they pay the issuer and what they collect from investors or from broker-dealers who buy portions of the offering.
A prime function of Merchant Banks is providing portfolio management services. Management of a portfolio is the process of selecting asset classes and their weights in the portfolio, maintaining diversification, executing trades, keeping records, researching, borrowing for leveraging return etc. This process is quite dynamic and requires instant adjustments when the market patterns shift to new directions. Most importantly, to complete the process sufficient involvement of people with many different skills (i.e. researching, record keeping etc) must be ensured. There is at least two keys aspects of successful portfolio management: experience of portfolio managers, execution efficiency.
Merchant Banks carry out other important services like Corporate Advisory that refers to the activity of advising organisations, including corporations, institutions and government bodies, on mergers and acquisitions and other transactions that involve a change in ownership of a company or business.
In Bangladesh a Merchant bank is said to be a full-fledged merchant bank that performs all the aforementioned activities covering Issue Management, Underwriting, and Portfolio Management and providing Corporate Advisory Services. BRAC EPL Investments Limited is one of the full-fledged merchant Banks of Bangladesh that delivers a whole range of Investment Banking services including traditional merchant banking activities such as Issue Management, Corporate Advisory, Corporate Finance, Underwriting and Portfolio Management. IDLC Finance is another leading full-fledged merchant Bank of Bangladesh commencing its Merchant Banking operations backs in 1999.
One of the major investment banks in Bangladesh, the Investment Corporation of Bangladesh (ICB), plays a leading role in developing the capital market in the country. Major functions of ICB include Merchant Banking operations and operations of unit funds and mutual funds. It has an Investors' Account Scheme, which provides small investors with credit facilities for buying and selling shares listed with the Dhaka and Chittagong stock exchanges. It also helps investors achieve reasonable returns on investment in sound shares and provides institutional support to small investors for purchase and sale of shares. Under the scheme, small investors are to hold accounts with ICB for loans for purchase of securities. The interest charged is 15.0% per annum. On behalf of account holders, ICB purchases and sells securities and maintains the profit and loss accounts. An investor has the option of taking or not taking the loan. If no loan is taken, the investor can withdraw funds from the account to the extent in excess of the margin requirement. When an investor takes a loan, he/she can withdraw the amount appearing in the account as unutilised balance. Also, an investor can withdraw securities when his/her account is closed after clearing dues outstanding in the account. Under the scheme, ICB gives the custodian service in safekeeping securities of the account holders, and also collects allotment letters, share certificate, and dividends.
ICB launched its Unit Fund Scheme on 10 April 1981. This is an open-end mutual fund, through which small and medium savers get an opportunity to invest their savings at any time of the year. The fund is divided into units known generally as ICB units, each of which bears a certain value in the assets of the fund. These units are sold to the public. Bangladeshi citizens living abroad and foreigners residing in the country can also purchase ICB units. Unit holders are the owners of the fund, while ICB takes the responsibility of managing the fund and loading and unloading securities in their interest. ICB floated its first mutual fund in 1980 and the number of its mutual funds increased to 8 by 2000.The total paid up capital of the mutual funds is Tk 175 million. In 2001, the corporation disclosed its decision to issue the 9th mutual fund of Tk 100 million.
In addition to ICB, a number of commercial banks also carry out investment banking functions in Bangladesh. The Securities and Exchange Commission (SEC) has set the minimum paid-up capital requirement for full-fledged merchant banks to Tk 25 crore. Through the Merchant Bankers and Portfolio Manager Rules 1996, Securities and Exchange Commission specified the minimum paid-up capital requirement for different merchant banking activities. For issue management the minimum paid-up capital would be Tk 2.5 crore, for under-writing issues and portfolio management, the minimum paid-up capital would be Tk 12.50 crore. The SEC has a code of conduct for issue managers, underwriters and portfolio managers and is empowered to suspend or cancel the certificate of registration for its violation. [Jamal Uddin Ahmed]