Capital Market
Capital market is known as the heart of an economy. It plays a vital role to develop an economy. Capital market is mainly an intermediary between Savers and companies seeking for money to expand the business. While lending by commercial banks provides valuable initial support for corporate growth, a developed stock market is an important pre-requisite for moving into a more mature growth phase with more sophisticated conglomerates.
The journey of Bangladesh capital market is not too old. Still, it has a long way to go. In order to strengthen the capital market of Bangladesh, the newest initiative of the government and the regulatory bodies has been to promote investment banking. The capital market of Bangladesh has yet to find a solid ground and the investor confidence in the market is not significantly high, especially after the stock market crash in 1996. Observing the poor performance of the market over the years the government has taken initiatives to reform the market. One of such step is to allow banks and non-banking financial institutions offering other financial and banking services to open up their investment banking wing.
Banks and non-banking financial institutions are offering a different type of capital market-related services like issue management, underwriting, portfolio management, loan against securities etc. through their investment banking wing. Generally, an investment bank plays two types of role in the capital market. In primary capital market, it helps new companies to go public and collect funds from the capital market to expand their businesses, on the other hand, it play an important role as a portfolio manager in trading securities in the secondary capital market on behalf of the investors and it also provides loan facilities to the investors for their maximum profit. Investment banks also contribute to keeping the capital market stable as they maintain their own company portfolios with a huge volume of securities.
Investment Bank Activities
Investment banking under a formal legal framework is a relatively new concept in Bangladesh. Securities and Exchange Commission (SEC) formulated a regulation in 1996 on investment banking activities namely “SEC (Investment Banker and Portfolio Manager) Regulations, 1996”. As per regulations, an investment bank is allowed to perform four types of operations –
. Issue Management
. Underwriting
. Portfolio Management
. Corporate Advising
FUNCTION OF INVESTMENT BANK
Investment banks play a very important role in the matchmaking between the issuers of securities and their primary investors. By being managers and underwriters to the new issues, investment banks provide an invaluable service to both on the part of issuers as well as investors of IPOs. As they are the managers of new issues, investment banks prepare all documents relating to the issues for its business clients. By underwriting new issues, investment banks not only guarantee the business that the underwritten amount will be made available to them in time but also send signals to the investors that the underwritten securities are fairly priced. Investment banks advise their clients on their investor lists to buy those primary securities. That way investment banks act as market makers in the primary market.
In terms of Bangladesh economy, it is quite a new concept. Investment banking, in other words, means the bank which takes the responsibility of the securities of other companies and in a case of merging of companies or other required advisory services to them. Many people believe that these investment banks will invest a large amount to the market and in the process, the activities of share market will be reinforced. But practically it doesn’t make any sense because it is not the responsibility of the investment banks to invest as much in strengthening the share market. They just can help as much the process they can. They can provide advisory services to develop the market and its activities.
ü Market making- Investment bank usually play a vital role as the market in the secondary market
ü Research- Investment banks conduct research on securities price regularly.
ü Financial and Corporate Advisory – It includes the activities of fixing the capital structure, advisory services for investment and managing the monetary instruments.
ü Issue management advisory - This includes Underwriting, Public issue management and right issue management.
ü Private placement of investment – The sale of new securities directly to one or a few investors rather than through public offering.
ü Advisory services required for corporate restructuring – Reforming capital and debt structure is the main responsibilities in this regard.
ü Private capital rising – Advises regarding organization’s required capital and afterward
Converting private companies towards offering IPO’s.
ü Offering advisory services to “Merger’s acquisition and joint venture” – It includes acquiring, merging and forming new companies.
ü Intermediary arrangements of project financing – Bridge loan financing are this sort of activity which deals with the arrangement of a large amount of loans.
ü Portfolio Management - Investment banks provide proper guideline and support to investors’ maintaining their portfolios.
There are many other activities that investment banks perform in foreign countries. But in Bangladesh, the activities are limited to basically issue management, underwriting and portfolio management service.
I. 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 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.
II. ISSUE UNDERWRITING
Issue Underwriting is an investment banking function in which securities are purchased from the issuer for resale to the public. Investment bank performs the duty of issue underwriting as an intermediary organization to develop and reinforce the capital market. Mainly selling the issue shares is known as issue underwriting. The organization takes responsibility of selling the shares is called underwriter. This organization helps the issue manager in many ways. Now it is one of the major duties of the investment banks, though stockbrokers also perform these types of responsibility.
Investment banks perform as an underwriter. They buy all of the shares when those are under subscribed. Underwriters also have to buy and hold these securities for some time. Usually, IPO’s are underpriced just because they tried to overcome the risks. They also try to protect themselves against the lawsuits, if there is any. Actually, they play the role of a monopolist in the market as an underwriter. There are different types of underwriting exists in the capital market. Underwriters can organize a syndicate to perform the responsibilities in a way to absorb minimum risks.
III. PORTFOLIO MANAGEMENT
Portfolio management is one the major responsibilities of the investment banks. When investment banks provide proper guideline and support to investors maintaining their portfolios, it is known as Portfolio Management. Although these investments do not indicate only investing in the share market but also in the bond and securities market, but in Bangladesh common practice restricted on only in capital market. So portfolio is the management of any organization’s profitable investment and in the process investing in diversified ways. It is the sum of all the different placement of investment.
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 loss and Profitable investments, through a diversified portfolio.
§ They provide information about the nature and ways of capital market through the sensitivity analysis.
Other than these, another very important criterion for portfolio management is “Margin Trading”. Margin trading is the facilities of providing loan and the scopes to buy more shares for the investors against buying the required shares. Banks now a day are not providing any loan for investing in the capital market because they are suffering from their own capital shortage. Besides, investors are interested as the bank interest rate is very high as well as due to the absence of margin trading. So because of these various allegations investment banks are really in the very good position in the case of portfolio management. In Bangladesh Investment banks perform basically the responsibilities of portfolio management, issue management, and underwriting. Other activities are performed in a limited scope since the market is not yet developed. But it is expecting that very soon investment banks will be allowed to perform other duties as well as the market is growing very rapidly.
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