To

Dr. H. M. Mosarof Hossain

School of Business,

North South University, Dhaka.

Subject: Submission of the project paper

Dear Sir,

We are pleased to submit the team project paper: “A Scenario of Invest Banking Operation of

Bangladesh” that we were supposed to prepare for the partial fulfillment of the course FIN-642

(Financial Markets and Institutions). This report has enabled us to better understand the

condition of overall investment banking system of Bangladesh.

We hope this project paper will be accepted by you.

We greatly value the opportunity you gave us.

Sincerely,

Md. Mahmudul Hasan ID # 1310698660

Minhaj Mahmud ID # 1231239060

Khurshid Anwar ID # 1321822060

Sifat Ahmed ID # 1231235060

Md. Jafran Chowdhury ID # 1231045060

Group # 05 FIN 642

Spring’ 2014, MBA Program

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Acknowledgement

This project would not have been possible without the kind, equal support and help of the team

members. We would like to extend our sincere thanks to all of them.

We are highly grateful to our faculty of FIN - 642 Financial Markets and Institutions of MBA

program Dr. H. M. Mosarof Hossain, North South University, for concerned guidance and

supervision. We would like to express gratitude towards our fellow students who helped by the

cooperation and encouraged us for the completion of this project.

2

EXECUTIVE SUMMARY:

Investment banking is a particular form of banking which finances capital requirements of

enterprises. Investment banking assists as it performs IPO’s, private placement and bond

offerings, acts as broker and carries through mergers and acquisitions. Importance of banking

system in a country is increasing day by day. It is quite impossible for any country to develop in

industrial and commercial sector without sound banking system in modern economic era.

Investment banking performance is one of the significant functions of the bank. It plays a vital

role in overall economy of the country. Bank collects information from numerous sources

relating to cost and revenue from Investment Banking operation. Globalization of national

economies has given a boost to international trade. The seller and the buyer in an international

trading transaction must agree for price enters into a sales contract. The impact on trade

transactions currency policies of the investment banking countries and risks associated with

them.

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. Corporate finance is

the core activity in investment banking. Through this function, investment banks assist clients in

developing projects, dealing with regulatory authorities, performing mergers and acquisitions,

and capital structuring. The main function of investment banks in sales and brokerage is to

provide full-service brokerage to retail and institutional investors, both foreign and local, in the

secondary market. The asset management function of investment banks is a process of managing

money. In the process, they analyze the objectives, risk tolerance, and legal restrictions of each

client, and design a customized portfolio. The process continues with an ongoing measurement

and evaluation of performance relative to benchmarks. Some investment banks in Bangladesh

have research department to provide independent and objective investment advice in relation to

primary and secondary securities to retail and institutional investors. In this project paper we

have tried to provide the information about the condition of investment banking system,

regulations and operations of Bangladesh.

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INTRODUCTION:

Investment Bank 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.

Banks earlier confined most of their operations to deposit mobilization and credit dispensation.

But now in Bangladesh, they have diversified their activities in line with their counterparts in

developed countries, and gone into merchant banking also. This innovative banking has helped

many young entrepreneurs who lacked sufficient experience and had a little capital to invest to

enter into the field of industrial enterprise.

Investment banks assist as it performs IPO’s, private placement and bond offerings, acts as

broker and carries through mergers and acquisitions. In addition to acting as agents or

underwriters for companies in the process of issuing securities, investment banks also advise

companies on matters related to the issue and placement of stock. Investment bankers are

primarily merchants of securities; they perform three basic economic functions: (1) provide

capital for corporations and local governments by underwriting and distributing new issues of

securities; (2) maintain markets in securities by trading and executing orders in secondary market

transactions; and (3) provide advice on the issuance, purchase, and sale of securities, and on

other financial matters. In contrast to commercial banks, whose chief functions are to accept

deposits and grant short-term loans to businesses and consumers, investment bankers engage

primarily in long-term financing.

According to Investors world, Investment banking services are performed by Investment banks.

An Investment bank can be defined as an individual or institution which acts as an underwriter or

agent for corporations and municipalities issuing securities. Most also maintain broker/dealer

operations, maintain markets for previously issued securities, and offer advisory services to

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investors. Investment banks also have a large role in facilitating mergers and acquisitions, private

equity placements and corporate restructuring. Unlike traditional banks, investment banks do not

accept deposits from and provide loans to individuals also called investment banker. Financial

intermediaries who perform a variety of services, including aiding in the sale of securities,

facilitating mergers and other corporate reorganizations, acting as brokers to both individual and

institutional clients, and trading for their own accounts. Investment banks are often treated as

synonyms of merchant banks. But there is a difference in the services they perform. Merchant

banks and investment banks in their purest forms are different kinds of financial institutions that

perform different services. In practice, the fine lines that separate the functions of merchant

banks and investment banks tend to blur. Traditional merchant banks often expand into the field

of securities underwriting, while many investment banks participate in trade financing activities

Pure investment banks raise funds for businesses and some governments by registering and

issuing debt or equity and selling it on a market. The current offerings of investment banks &

merchant banks vary by the institution offering the services, but there are a few characteristics

that most companies that offer both investment & merchant banking share.

Brief History of Capital Market:

Concepts started in USA at Wall Street in 1653

It came to South Asia in 1890

The origin of Stock Market in Bangladesh goes back to 28th April 1954 named East

Pakistan Stock Exchange association at Narayangonj. Later it was s renamed East

Pakistan Stock Exchange Ltd and Trading was started in 1956.

History of Bangladesh Capital Market:

East Pakistan Stock Exchange transferred in Dhaka in 1958

In 1964 it was renamed as Dhaka Stock Exchange Ltd.

In 1976 Dhaka Stock Exchange Ltd started its operation with a bit different version

Securities & Exchange Commission (SEC) was established in 1994 to enhance the

efficiency of country’s capital market

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A big wing of Bangladesh capital market, Chittagong Stock Exchange (CSE)

incorporated in 1995.

Capital Market Players in Bangladesh:

Investors

Private Limited Company

Stock Exchange (DSE & CSE)

Brokers & Dealers

Merchant Banks

Securities and Exchange Commission (SEC)

Central Depository Bangladesh Limited (CDBL)

OBJECTIVES OF THE STUDY:

To study the level of operations of Investment Banking in Bangladesh

To study the Liquidity position of Investment Bankers

To study the Profitability position of Investment Bankers

METHODOLOGY:

Certain methods and techniques were utilized to collect data for this report. Both primary and

secondary sources were chosen as effective means of collecting data relevant for this report.

Personal observation

Online Records:

Bangladesh Bank guideline

Website of Merchant banking

Library Sources:

Annual Report of Merchant Banks

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Journal, magazines on Foreign Exchange Business

Printing materials of banks.

INVESTMENT BANKING HISTORY OF BANGLADESH:

The concept of investment 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 4

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 Regulations,

along with SEC (Mutual Funds) Regulations, 1996. Now there were no legal obligations of the

issuer companies to engage an issue manager at the time security issue. In 1997, some bank and

non-banking organization give proposal to get the permission of operate investment 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 investment banker. It

is the first licensed full-fledged investment banker in the country. Another 10 full-fledged

investment banker introduces in this. In 1999, another 5 non-banking organization started as full-

fledge investment banker. Prime Finance and Investment Limited started their full-fledge

investment banking operation from this year. In 2000, only one non-banking organization

introduced as a full-fledge investment banker. In 2001, Prime Bank and Arab Bangladesh Bank

started their operation as an investment banker, another 2 non-banking organization started their

investment banking operation. From 2002 to 2009, another 10 investment banker are introduced

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and most of them are private commercial banking organization. The number of full-fledged

investment banker is now 29. Another two companies is also registered as investment banker but

currently deals with issue management and portfolio management only.

TYPES OF INVESTMENT BANKING COMPANIES:

Investment banking companies in Bangladesh are of two types:

1) Open-ended and

2) Closed-ended.

The open-ended ones, generally referred to as mutual funds, repurchase shares in any quantity as

and when holders offer them for sales. Thus, the amount of shares of the open-ended investment

companies in market changes continually in response to public demand. Closed-ended

investment companies sell only a specific number of ownership shares. An investor wanting to

acquire shares of a closed-ended investment company must find another investor who wishes to

sell. Investment companies do not take part in the transaction. In addition to selling equity

shares, closed-ended companies issue a variety of debt and equity securities including preferred

stock, regular and convertible bonds, and stock warrants for raising funds.

To register as an investment banker, SEC asks some requirements as below:

1. Issue Manager: At least 1 (one) proposal for public issue be submitted to the Commission in

each calendar year

2. Portfolio Manager: In addition to own portfolio, at least 5(five) new portfolio accounts be

opened in each calendar year

3. Investment Banker: 1 (one) issue management, 2 (two) underwriting, 5(five) new portfolio

accounts be opened in each calendar year

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Besides these, investment bankers need a pre-condition of capital of TK 100 million for the

registration of full-fledged investment banker. Tk 10 million of capital is needed of a company is

registered for issue management and underwriting or portfolio management only. For issue

management, it is needed 2.5 million only.

INVESTMENT BANKING REGULATIONS IN BANGLADESH:

The SEC granted authority to 17 non-bank financial institutions in 1997 to conduct

investment banking business in Bangladesh under the Securities and Exchange Regulations

1995,

The Securities and Exchange Commission (SEC), invited letters of intent from14 institutions

for the registration of investment banks based on SRO No. 59 of 24 April1996, and a

decision taken by it on 17 August1997. Prior to this decision, seven (7) institutions submitted

such letters of intent and SEC gave registration to a total of 19.

Under the SEC investment banker licensing rules, a investment bank working only as issue

manager has to submit at least a documented proposal for an initial public offer of a

company, while an investment bank licensed to act only as portfolio manager has to form at

least five new portfolios of its clients besides its own, and a investment bank working as a

full-fledged investment bank has to manage one IPO, to be under writer of two issues and

form five new portfolios of its clients besides its own in a calendar year. A full-fledged

investment bank has to perform at least two operations among the three including managing

portfolio in a calendar year.

INVESTMENT BANKING OPERATIONS IN BANGLADESH:

Investment 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. So far, a total of 31 companies received investment banking licenses from

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the Securities and Exchange Commission. The registered investment banks are: Janata Bank

Limited, BRAC Bank Limited, City Bank Limited, Premier Bank Limited, Mutual Trust Bank

Limited, Industrial Development Leasing Company of Bangladesh Ltd, Uttara Finance and

Investment Limited, Banco Trans World (Bangladesh) Limited, Fidelity Assets and Securities

Company Ltd., N DB Capital Ltd., Bay Leasing and Investment Limited, Alliance Financial

Services Ltd., Business and Management Co. Ltd., Swadesh Investment Management Limited,

Lanka Bangla Finance Limited, Grameen Capital Management Limited, South Asia Capital Ltd.,

Prime Finance &Investment Ltd., EC Securities Ltd., Mercantile Securities Limited, GSP

Finance Company (Bangladesh) Ltd., Bangladesh Mutual Securities Ltd., BRAC EPL

Investment Ltd, Prime Bank Limited, Arab Bangladesh Bank Ltd., ICB Capital Management

Ltd., Export Import Bank of Bangladesh Ltd.(EXIM Bank), Union Capital Limited , AAA

Consultants and Financial Advisers, Citigroup Global Markets Bangladesh Private Limited,

Trust Bank Ltd, Southeast Bank Ltd, Standard Bank Ltd, Sonali Bank Limited and Agrani Bank

Limited.

Of them, a total of 33 companies received investment banking licenses from the commission

between January 1998 and April 2002. The Citigroup Global Markets Bangladesh Private

obtained the licence in the year of 2007 and the Trust Bank in the year of 2008. Six more FIs are

going to be approved by the SEC.

The SEC on September 7, 2008 cancelled the investment banking license of the Equity Valuation

Research and Distribution Ltd. The Securities and Exchange Commission on October, 2008

cancelled investment banking licenses of the First Securities Services Ltd and the Raspit

Securities and Management Limited with immediate effect since they remained inactive for years

together. The First Securities Services was given license to act as issue manager while the Raspit

Securities and Management as full-fledged investment bank, which was allowed to perform as

issue and portfolio manager as well as underwriter for clients.

In the year of 2009, of the then 28 investment banks, 23 had full-fledged investment banking

license, while four had only issue management license and one had only portfolio management

license.

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The central bank of Bangladesh asked the commercial banks to run their investment banking

business through separately formed subsidiary companies, officials and bankers. Under those

new regulations, the banks had to convert their existing investment banking wing or department

into a separate subsidiary company by January31, 2010.It helped to ensure transparency of the

investment banking business.

Recently, securities regulators gave its go-ahead to six more financial institutions (FIs) to operate

investment banking. Because, analysts questioned their expertise and financial base. The

Securities and Exchange Commission (SEC) also approved rights offer of Bay Leasing and

Investment Ltd.

The six financial institutions are Jamuna Bank, Mutual Trust Bank Ltd, The City Bank, Summit

Group's Cosmopolitan Traders Private Ltd, Green Delta Insurance and Alpha Capital

Management Ltd, a unit of Progressive Life Insurance.

According to the SEC officials, the approval will bring the total number of investment banking at

37. By giving nod to the six FIs to operate as investment banks, the SEC has increased maximum

limit of the investment banking operation in the stock market to 50 from 35. But, although 31

investment banks are operating, only a few (only some) are active while the performance of the

rest is "far from being satisfactory."

Although in the U.S., investment banks offer a wide range of activities, including portfolio

management, credit syndication, acceptance credit, counsel on mergers and acquisitions,

insurance, etc., in case of our country, these services may differ. In Bangladesh, an investment

bank can perform multiple operations including underwriting, issue management, portfolio

management, merger & acquisition etc. The investment banking activities were largely fostered

by two distinct developments: Merger &acquisition activities and increased demand for venture

capital.

Underwriting:

Underwriting operation is one of the important functions of a investment banker by which it can

increases the supply of stock/shares and debentures in the market. It is an arrangement whereby

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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 funds from the public.

One or more investment banking firms may underwrite public offerings. The underwriters have

the responsibility of pricing new shares and selling them to investors. The company pays the

underwriters a fee. Underwriter also provides advice to a company issuing securities or to an

issue manager. Before granting authority to 17 non-bank financial institutions in 1997 to conduct

investment banking business in Bangladesh under the Securities and Exchange (Investment

Bankers and Portfolio Manager) Regulations 1995, specialized financial institutions, and the

nationalized commercial banks and insurance companies were the key underwriters in the

country's securities market.

Issue Management:

One major activity of investment banks is Issue Management. Issue Management means

providing required services to bring new IPOs (Initial Public Offering) to the market.

Organizations performing these types of activities are known as ‘Issue manager’. Investment

bank plays a very important role for bringing up new IPOs to the capital market as a subsidiary

organization. Firstly, they test the techno-economic feasibility. It includes testing the genuinely

of the project, verifying the activities of the authenticity of the management and study of the

audit report; on the other hand, submitting the required information in the Security and Exchange

Commission (SEC) and supplying other necessary documents to them. Another important

activity of investment bank is to organize the lottery if there is any case of over subscription of

IPOs and then issuing certificates accordingly. Other necessary responsibilities to bring any new

project to the market like, collecting underwriters, fixing the appropriate time of issuing IPO, the

size of the issue, the amount of market lot, are also performed by the investment banks. Other

than that the issue manager has to perform some other additional duties. Issue manager provides

the all-important ‘Due Diligence’ certificate after completing the primary scrutiny and

assessment. This indicates that the information on the prospectus about the new issue is correct.

Thus the issue manager is responsible for in case of any false information or other mistakes and

shortcomings. According to this certificate, the issue manager is responsible for either providing

any wrong information intentionally or unintentionally. Security and Exchange Commission can

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take necessary steps as either suspending or canceling the license of the investment bank if there

is any case of forgery or supply of wrong information.

Portfolio Investment Management Services:

Portfolio means a collection of investments owned by an investor, an institution or a mutual fund

and portfolio manager means the entity responsible for investing a mutual fund's assets, mapping

out its investment strategy and managing day-to-day securities trading. Portfolio management is

the process of building, managing and accessing an inventory of company products and projects.

One of the most important functions of investment banking is to provide Portfolio Management

service to the customer. Portfolio Management Services program has four different wings to

provide portfolio investment management services.

Basically portfolio management in securities market is to provide necessary information to the

probable investors about the securities, which are going to be proven harmful or bad investment,

on the other hand investing in those securities that may be profitable for them. Investment bank

provides the services to their client about portfolio management are as below –

They let the investors know about the probable risk underlying the investment.

They inspire in investing in the specific companies through fundamental analysis.

Through strategic analysis they explain the risks of losing the capital as well as earning

more profit.

They provide the information and advisory knowledge of incurring less loses and

Profitable investments, through diversified portfolio.

They provide information about the nature and ways of capital market through the

sensitivity analysis.

The SEC allowed banks to launch investment banking operation through opening of separate

wing mainly to deal in portfolio investment on behalf of clients' account in order to channel pool

of investors' fund into the stock market in an organized manner.

Merger and Acquisition:

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The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate

strategy, corporate finance and management dealing with the buying, selling and combining of

different companies that can aid, finance, or help a growing company in a given industry grow

rapidly without having to create another businessentity.´7 Investment banking helps to negotiate

companies in this case.

LIMITATION OF THE STUDY:

On the way of this study, we have faced the following problems that may be terms as the

limitations / shortcoming of the study:

Budgeted times for the study:

The first obstruct is time itself. Due to the time limitation, the scope and dimension of the project

has been curtailed. As the time limit was assigned for submitting the project was very short, it

was not possible to spend sufficient time for the study.

Data Insufficiency:

It was very difficult to collect data, which is very essential for interpretation, because Bank is very much restricted for provide sufficient data for the study.

RECOMMENDATIONS:

Competitions and Product diversifications:

Investment banks in Bangladesh are operating in a highly competitive environment. The

competition for them is even more challenging as they have to compete with banks. Given the

changes in the business environment, the need for product diversification is very important. The

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remaining part concentrates mainly on term financing and housing finance. Investment banks

should venture into diversified use of their funds such as investment banking, venture capital

financing, factoring, etc. for a healthy growth of the capital market.

Enhancing capital market activities:

Investment banks around the world carry out a significant role in the development of the capital

market. Strong institutional support is necessary for a vibrant capital market which is the core of

economic development in any market based economic system. Active participation of investment

banks is essential to accelerate the capital market activities which can expedite the economic

growth of the country. The success of investment banking operations is largely linked to the

development of the security market.

Offering better services:

In addition to portfolio management, which is the core services offered by the investment banks

in our country, there are other valuable services that they can offer to attract a larger customer

and to reduce the risk of losing out customers to the competitors. If we consider the level of

grasp of the knowledge of our population, then it will become quite apparent that why instigating

programs to educate our clients can give our investment banks competitive edge over others, if

not prove out to be a major differentiating factor. Not only can that, educating the clients also

open up new dimensions to do business with the clients by creating demands in them. Though

merger and acquisition yet not proved to be so affordable and also profitable move in our

country’s perspective, but ignoring this sector will not be wise enough if our investment banks

are aiming at long term customer hold. So, the quicker investment banks address this issue, the

better it may prove out for them.

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CONCLUSION:

The investment banker plays a vital role in channelizing the financial surplus of the society into

productive investment avenues. Hence before selecting a investment banker, one must decide,

the services for which he is being approached. Selecting the right intermediary who has the

necessary skills to meet the requirements of the client will ensure success. It can be said that this

project helped me to understand every details about Investment Banking and in future how it’s

going to get emerged in the Bangladesh economy. Hence, Investment Banking can be considered

as essential financial body in Bangladeshi financial system. Market development is predicted on

a sound, fair and transparent regulatory framework. To sustain the growth of the market and

crystallize the growing awareness and interest into a committed, discerning and growing

awareness and interest into an essential to remove the trading malpractice and structural

inadequacies prevailing in the market, and provide the investors an organized, well regulated

market in Bangladesh.

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