Merchant Banking in Bangladesh

An article on
Merchant Banking in Bangladesh:
A Case Study on Prime Finance & Investment Ltd
Abstract
Prime Finance & Investment Limited has been running its merchant
banking operations for about fourteen years. In this short period of
time it has gained great momentum and expanding at a fascinating
rate. However, the growth can be best evaluated by considering the
financial factors as well as its operations. Capital market of
Bangladesh is yet to play its potential role as a vehicle for financing
long term investment. However, the hangover of an unpalatable
historical past which saw a dramatic upsurge in the second half of
1996 only to be followed by a drastic and prolonged downswing has
been successfully overcome. Discernible signs of renewed vitality
have emerged. 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 operations of Merchant Banking Division of Prime Finance &
Investment Limited. It is aimed to achieve an overview on the
operations of this division and measure how effective and efficient it
has been in its working process.
Keyword
Prime Finance & Investment Limited, Merchant Banking, CDBL, DSE,
SEC, TESA
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:
1. Issue Management: Issue Management function of merchant
Banking helps capital market to increase the supply of securities.
Being a Issue Manager we provides assistance to the Private Limited
Companies intended to be converted into Public Limited Companies
by way of obtaining necessary permission from the relevant
authorities, preparing prospectus for public issue of shares and
debentures, involving itself in the collection of application money,
scrutiny of applications, arranging for lottery relating to allotment, if
required, allotment of shares and debentures, refund of application
money etc.
2. Underwriting: Underwriting Operation is one of the important
functions of a Merchant Banker by which it can increase the supply
of stock/shares and debentures in the market. 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.
3. Portfolio Investment Management Services: One of the most
important functions of merchant banking is to provide Portfolio
Management service to the customer. Basically, Portfolio
Management Services program has four different wings to provide
portfolio investment management services.
In addition a merchant banker can also perform the activities of
Project counseling, Pre-Investment Studies, Merger & Acquisitions,
Factoring, Asset Securitization, OTC Market, Capital Re-Structuring

etc.
Origin of merchant banking:
Merchant banks first arose in the Italian states in the Middle Ages,
when Italian merchant houses—generally small, family-owned
import-export and commodity trading businesses—began to use
their excess capital to finance foreign trade in return for a share of
the profits. This trade generally consisted of lengthy sea voyages. In
late 17th and early 18th century Europe, the largest companies of
the world were merchant adventurers. The colonies of other
European countries were started in the same manner. For example,
the Dutch merchant adventurers were active in what are now
Indonesia; the French and Portuguese acted similarly in their
respective colonies. The American colonies also represent the
product of merchant banking, as evidenced by the activities of the
famous Hudson Bay Company. Later, the center for merchant
banking shifted from the Italian states to Amsterdam and then, in
the eighteenth century, to London, where immigrants from Prussia,
France, Ireland, Russia, and the Italian states formed the core of
early British merchant banking. As the nineteenth century opened,
virtually no mercantile houses remained focused on both trade and
finance.
During the 20th century, however, European merchant banks
expanded their services. They became increasingly involved in the
actual running of the business for who the transaction was
conducted. Today, merchant banks actually own and run businesses
for their own account, and that of others.
Merchant banking in Bangladesh:
The concept of merchant 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 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 (Merchant Baker & Portfolio Manager) Regulations,
along with SEC (Mutual Funds) Regulations, 1996. Except the
activities of ICB, merchant banking in Bangladesh had started their
activities. Now there were no legal obligations of the issuer
companies to engage an issue manger at the time security issue. In
1997, some bank and non banking organization give proposal to get
the permission of operate merchant 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 fullfledged merchant banker. It is the first licensed full-fledged
merchant banker in the country. Another 10 full-fledged merchant
banker introduces in this. In 1999, another 5 non banking
organization started as full-fledge merchant banker. Prime Finance
and Investment Limited started their full-fledge merchant banking
operation from this year. In 2000, only one non banking organization
introduced as a full-fledge merchant baker. In 2001, Prime Bank and
Arab Bangladesh Bank started their operation as a merchant banker,
another 2 non-banking organization started their merchant banking
operation. From 2002 to 2009, another 10 merchant banker are
introduced and most of them are private commercial banking
organization. The number of full-fledged merchant banker is now 29.
Another two companies is also registered as merchant banker but
currently deals with issue management and portfolio management
only.

To register as a merchant banker, 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, at least 5(five) new
portfolio accounts be opened in each calendar year |
Merchant Banker | 1 (one) issue management, 2 (two) underwriting,
5(five) new portfolio accounts be opened in each calendar year |
Besides these, merchant bankers need a pre-condition of capital of
TK 100 million for the registration of full-fledged merchant 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.
Prime Finance & Investment Ltd as a merchant banker:
Merchant Banking department of Prime Finance & Investment Ltd is
a very progressive department. Prime Finance operates as a fullfledged merchant bank since 1996. Merchant bank operates four
types of operation. The activities are given belowIssue Management:
It is a mandatory activity for any merchant bank working in
Bangladesh. Issue management means managing new issues of
equities, bonds and debenture. The functions of issue management
include provide assistance in transform of Private Limited
Companies to Public Limited Companies where necessary. It helps
preparing prospectus, pricing issue of Shares, getting approval from
the appropriate authorities, arranging underwriters, bankers to the
issue, stock exchanges, advertising agencies receiving share
applications, arranging distribution of allotment letters and refund
money send all other activities related to public issues. Thus, issuing
new IPO is the focus point for any merchant bank under separate
issue management department. (Merchant Banking and it’s
Progression in Bangladesh: The Multidimensional Factors, 2005,
p.7).Mangers may select out of SEC approved Issue Managers. The

normal commission for Issue Manager is 1% of issue amount.
The activities are divided by issue management into two stages: Preissue Stage and Post-issue Stage. Different steps are followed in
these stages.
Step A: Before filing the prospectus to SEC for approval some
documents are required to provide by issue company to issue
manager.
Step B: General Requirement for filing application to SEC for consent
to an issue (In line with Public Issue Rules, 2006)
Step C: Basis on getting consent letter on dated ………………from
the Securities and Exchange Commission the company will publish
the prospectus on different newspapers, websites and for NRB they
send EMS. The issue manager shall carefully examine and compare
the published abridged version of prospectus on the date of
publication with the copy vetted by SEC.
Step D: After subscription of Resume, the issuer and the issue
manager shall jointly provide the Commission and the stock
exchanges with the list of valid and invalid applicants (i.e. final
status of subscription) to the Commission within 3 (three) weeks
after the closure of the subscription along with bank statement
(original), branch-wise subscription statement, NRB application
forms (photocopy attested by the CEOs of the issuer company and
the issue manager). The list of valid and invalid applicants shall be
finalized after examination with the CDBL in respect of BO accounts
and particulars thereof.
Step E: Application forms, pay orders collection & checking, data
entry and other related works up to the status ready for lottery
arrangement.
Step F: Distribution of allotment letters and refund warrants.
Step G: The Issue Manager, In addition to the issuer company, shall
ensure due compliance of the conditions and submit compliance
report thereon to the Commission.
As an issue company, Prime Finance worked for 25 companies so far.
Underwriting:

A merchant bank uses some portion of their own assets as
guarantee to help an entity find
investors, this process in known
as underwriting. It is one of the major functions of a merchant bank.
Underwriting is one of intermediary function whereby underwriters,
agrees to take up the unsold position of an issue that is being
offered by the company directly to the investor. In other words it is a
guarantee of subscription of shares or debentures by the public
against some specific commission. In our country as per the SEC
rules every public company has to do 50 % of their new issues must
have to underwrite.
The underwriting procedure can be outlined with the flow chart:
Manage underwriting
Finalize underwriting of shares
Prepare underwriting agreements
Steps done by Prime Finance as an underwriter:
Step a) Agreement Signed
Step b) Declaration of Current Underwriting
Step c) Contact Person Details
Step d) Due Diligence Signed
Step e) Management Approval
Step f) Board Approval
Step g) Note for Payment
Step h) Forwarding Letter
No. of Underwriting by PFI:
Total amount of issues held for Underwriting are 60.
Portfolio Management:
Another Important emerging area in merchant banking activity is
investment management or portfolio management. The demand for
this service, from individual investors as well as from institutional
investors is increasing. Prudent merchant banker provides expert
guidance for making right investment in write time. Portfolio
manager mainly give support to the investors to invest in secondary
share market.
Activities Done by PFI as a Portfolio Manager:

The portfolio management department of PFI maintains two
portfoliosOrganization’s own portfolio, which is an omnibus BO account.
Investors’ portfolio, which are operated against each individual’s
account.
The major activities of organization’s own portfolio are1. To prepare all kind of paper and formalities for IPO/Rights Shares
applications, transfer and
registration
2. To collect dividend warrant, interest warrant, bonus shares and
right shares from the company
3. To prepare Transfer instruments and get signature verification of
others.
4. To update daily market trend statement of PFIL portfolio.
5. To prepare monthly purchase and sales statement and monthly
gain loss statement for board meeting purpose.
The major activities of investors’ portfolio are:
1. To do necessary jobs relating to opening of investors account.
2. To receive, record and maintain orders for purchase or sales of
securities on behalf of the portfolio accounts holder.
3. To execute buy and sale order on behalf of investors.
4. To maintain investors wise information in the ledger.
5. Maintain updated fund position and share position of each
investors.
6. To give support at the time of requisition of withdrawal by
investors.
7. To report SEC as per their instruction or requirements.
8. To prepare tax certificate for the requirement of the investors.
9. To report to the different companies for different activities (right
share application, dividend declaration, bonus share declaration,
Pre-IPO offer, IPO offer) on behalf of investors.
10. To do other ancillary jobs at the instruction of superiors.
No. of Portfolio Account PFI:
Portfolio department of PFI has 955 individual and institutional nondiscretionary accounts as on dated 31 July, 2010.

Corporate Counseling:
Corporate counseling service is administered within a limited frame
not only PFI but also all the merchant banks in the country. Prime
Finance provides selected counseling service for its potential
customers to aware and to educate them about various issues of
capital market for preserving their investment in a structured way.
Process of doing everyday business functions:
Every merchant bank has to do their business as per the SEC
instruction. If they break any of its instruction SEC may cancel the
license of merchant bank. PFI maintain some system to precede its
business.
Non-Discretionary accounts:
Generally non discretionary accounts are operated by PFI. That
means it will give only the monetary support (margin loan) and
necessary support to do the share business. But it will not take any
kind of risk of giving advisory risk at the time doing the share
business by the investors. Portfolio department of PFI merchant
banking mainly two accounts, one is called individual account (a/c
no 102) and another is own portfolio account (a/c no. 101). Own
portfolio account is the company’s own account.
Relation with Brokers:
PFI is related with three broker houses, by which it operates its
secondary share business. Investors are doing their daily buy and
sale by these broker houses. 35 paisa commission is taken against
per 100 TK transactions from the investors. And the broker houses
get the 20 paisa and the merchant bank gets the 15 paisa
commission. The broker houses are- Prime Finance and Securities
Ltd., Vision Capital Management Ltd., Chowdhury Securities Ltd. and
Sharp Securities Ltd.
Taxation:
Under the Income Tax Ordinance1984, Prime Finance & Investment

Ltd. is subject to tax on income derived from share transaction
amount of its trading activities. Provision for income tax has been
calculated on the other income of the country. The company’s
trading income is subject to deduction of tax at source on brokerage
commission as final settlement.
Trading in accordance with the applicable laws and regulations:
Buy/Sale order books: according to Securities Exchange Rule, 1987,
4(1),
a) A buy/sell order form is to be maintained through which all
clients shall place their transactions order. This form is to be signed
by the clients. No order shall be entered in the Brokers workstations
without written order form. [This clause is extremely important as
the main risk of a brokerage house is involved with it and any
misunderstanding regarding the order shall be verified with this
document.
b) All these orders should be chronologically recorded in a register
mentioning the name and address of the client, the name and
number of the securities to be bought or sold, the nature of
transaction and the limitation, if any, as to the price of securities.
c) No sell order to shares shall be entered without holding the
shares by the Broker or having the shares in the Broker clearing
account (in case of CDBL traded issues). CDBL regulations require
the shares intended to be sold out be transferred from the BO
account of the client to the clearing account of the Broker.
d) No buy order shall be entered without having positive balance
(Credit balance) with the broker excepting a margin Agreement for
credit facility. [In case the accumulated purchase amount exceeds
the credit balance of a particular client, excess amount should
be deposited with the broker on the same day]
Prime Finance & Investment Ltd. maintains Buy/Sale order books in
accordance with the rules mentioned above.
Telephone/Email/Fax Order:
Order of Purchase or Sale of shares through telephone/fax or email
is also accepted in Prime Finance & Investment Ltd. according to the

Securities Exchange Rule, 1987, 4(1). In the rule,
A telephonic order of buy or sell given by a customer may also be
accepted if
a. The customer has an established account with the member.
b. The order is properly recorded and signed by the member or his
Authorized representative.
c. Written order of confirmation is obtained by the member within 24
hours.
For placing such orders, the account holder has to tell his account
number; i.e. A1111 and must make sure he is completely aware of
the position of his account value and available shares.
Settlement Process:
The settlement date is the day on which either the payment to cover
purchases or the securities to cover sales must be in the company’s
account. When the clients purchase/buys a security, payment must
reach IDLC Securities Limited account before execution of trade.
When the client sells a security, the share certificates must be
delivered to IDLC Securities Limited before trade execution.
Clearing & Settlement:
1. Shares and money are settled with the clearing & settlement
department of the exchange according to the category of the
company. For ‘A’ category shares, money and shares are to be
settled on T+1 (Transaction Date + One Days) and cleared on T+3
(Transaction date + Three Days). For ‘B’ and ‘G’ same rule applies.
2. In case of shares in ‘Z’ category shares and money shall be
deposited on T+4 and cleared on T+7.
3. CDBL traded issues are settled on within T+2. only ‘A’ category
share are eligible to become as demat form.
Trading Procedures:
Screen Based Trading:
It is an advanced trading system over the “Cry out Market”. Now
Bangladesh has started this type of trading system. In this system
the shares are dematerialized that means we do not have any paper
share certificate. Now every share is reserve in the central
depository. Central depository is a system where every share is

record as digital and they are also traded digitally. The way bank
record all the transaction of its client depository also record his
client’s every transaction electronically. And the owner ship also
transacted digitally. The depository maintains an account of the
share investor which is called the BO account.
CDBL:
Central Depository Bangladesh Limited (CDBL), a joint venture
company setup by banks, stock exchange, Asian Development Bank
and other institutions operates the Central Depository System (CDS)
in Bangladesh. CDBL, by converting physical certificates into
electronic form, will eliminate the risks of damaged, lost, forged and
duplicate share certificates. The Dhaka Stock Exchange has become
a full depository Participant (DP) of CDBL to facilitate the trading of
its non-DP members. CDBL is regulated by the Securities and
Exchange Commission (SEC).
TESA: trading software
DSE trading function is operating by the help of TESA (The
Electronic Securities Architecture).It is a trading software which is
based on HP proprietary O/S & DBMS. TESA software is built for the
global securities markets. It uses fault tolerant computers,
intelligent workstations and client / server design techniques. This
provides co-operative processing, high message integrity,
continuous operation and fully automatic recovery. This co-operative
mechanism enables very high speed processing which is essential
for today’s electronic markets, especially for DSE. TESA has two
parts: MSA (Member’s Server Application) & TWS (Trader
workstation).MSA is the “Gateway” between the traders and the
Stock Exchange, which manages all the transactions and database
operations between the traders and the Trading Engine. TWS is the
Front-end Application closer to investors, where they can submit
Buy/Sell orders for their desired securities.
Dhaka stock exchange utilizes the blending trading system where
both the pure auction market and the dealer market work
collectively. Actually the pure auction market dominate the dealer
market as public basically prefer and feel comfortable dealing with

the pure auction market in first hand in trading system. However,
people go for dealer market when, trading in dealer market is much
more comfortable to utilize the trading system compared to only
exercise pure auction market. Nevertheless, note that, when pure
auction market and dealer market is in same cost to trade, then
people definitely go for the pure auction market as its more
comfortable toward public.
TESA conducts trading in-5-phases:
a) Enquiry: In this session Brokers can logon to the system. No
order will be submitted in this session. No trade will be executed.
Only previous orders can be withdrawn in this session.
b) Opening: The Opening is a pure, single-price auction. All buy and
all sell orders are compared and calculate the open-adjust price. No
trades will be executed in this session
c) Continuous Trading: During this phase, participants enter orders
and immediate execution or for inclusion in the book. Automatic
matching and execution takes place based on best price/ first in,
first out trading rules.
d) Closing: Closing prices are calculated and disseminated to
market participants
e) Enquiry: Market will be closed in this session & other facilities
like the previous enquiry session.
Orders may be grouped or categorized based on the following,
namely - (a) Price; (b) Volume; and (c) Validity.
Based on price, orders may be of the following categories - (a) Limit
order and (b) Market order
Based on volume, orders may be of the following categories, namely
:(a) Partial fill which signifies that as much possible of the order
quantity shall be executed as soon as the order is submitted to the
trading engine.
(b) Partial fill and kill signifies that as much as possible of the order
quantity shall be executed as soon as the order is submitted and the
remaining order quantity shall be returned to the trader who entered
the order.

(c) Full fill or kill signifies that either all of the orders quantity shall
be executed as soon as the order is submitted to the trading engine
or the entire order shall be rejected and returned to the trader.
Based on validity, orders may be of the following categories, namely
:(a) Good till day - By default, all orders shall be valid till the end of
the current trading day.
(b) Good till date- The trader can specify the date till which the order
should remain active in the market. The order validity date can be a
date which is up to a maximum of thirty days from the current
trading day.
Payment Policies:
Prime Finance & Investment Ltd. prefer that the client makes
payment before the execution of a buy order or delivers share
certificates before the execution of a sell order. Account payee
Cheques for payments on purchase of a securities must be made
payable to Prime Finance & Investment Ltd. Only clients’ personal
cheques, bank draft, pay order, corporate cheques are accepted in
Prime Finance & Investment Ltd. Any kind of cash or money order is
unaccepted for the payment of the transaction.
Performance of Prime Finance & Investment Ltd.:
The performance of Prime Finance & Investment Limited is showing
an upward trend here. The reason behind their consistent
performance can be attributed to keeping operating expense down.
The profit growth was lowered in 2009, but growing reserve can
justify the situation.
Contemporary challenges of merchant banking in Bangladesh:
Merchant Banking concept is a new concept in Bangladesh. This
market is not that much establish. There are many problems in this
area. Some major problems are given belowHigh Flotation cost
-For high flotation cost small entities cannot enter the market.

Information Asymmetry
-Access to credible information is restricted.
-Retail investors lack dedicated investment process infrastructure.
-Forced to look to brokers for advice that may consist of market
rumors.
-Syndicate of large investors manipulates the market through price
inflation, pump and dump strategies. (Rashid, n.d.).
Supply Side Constraints
-Lack of fundamentally sound scripts as companies prefer traditional
bank finance to capital markets.
-Need to encourage listing of good scripts in the market.
-Reducing supply side constraints generates liquidity, reducing
scope for price manipulation. (Rashid, n.d.).
Lack of Professional Portfolio Management
-Ratio of institutional-to-retail investors remains low
-Institutional investors bring stability through non speculative long
term investments
-Listing of more mutual funds can be a starting point to increasing
institutional activity (Rashid, n.d.).
Valuation Disparity
-Value of scripts is subject to speculative trading rather than sound
fundamentals, resulting in market volatility. Education of investors,
overall development of capital markets through time can address
this issue. (Rashid, n.d.).
Lack of a Formal Debt Market
-Bangladesh does not have established secondary debt market.
-Markets are unable to provide short term financing solutions to
corporations, i.e., commercial paper.
-Listing of debt instruments from quality issuers and institutional
trading can increase activity.
-Introduction of BASEL II guidelines by Bangladesh Bank likely to
encourage banks to raise capital through debt instruments in 2010.

(Rashid, n.d.).
Quality Research and Analysis
Development of quality equity research in the country is yet to
match the growth of local capital markets. Quality research
increases investor awareness, reducing speculative trading and
market volatility (Rashid, n.d.).
Central Co-ordination of Regulators
-Top down co-ordination between Bangladesh Bank, SEC and related
bodies would:
-Streamline regulatory processes
-Reduce time required for quality issuers and new capital markets
products to reach market
(Rashid, n.d.).
Relatively short history
The issuance of debt securities by corporate bodies is a relatively
recent phenomenon in Bangladesh and the experience of the
investors’ has not been quite pleasant. The first public issue of listed
corporate debenture in independent Bangladesh happened only in
1987, followed by about another dozen in the following years
(Sayeed, n.d.).
High government borrowing at high interest rates
The government has traditionally been the major borrower through
the various ‘national savings schemes’ and that too at the highest
interest rate bracket and in unlimited (not predetermined) amounts.
The government instruments were crowding out corporate
borrowers and bank deposits in comparable tenures. Thankfully, the
scenario is shifting lately as the government has discontinued some
high interest paying instruments and restricted investments on
others, accompanied with rate cuts. This has been attributed to the
recent surge in stock prices (Sayeed, n.d.).
Lack of transparency in public sector borrowing

Public sector borrowing has been riddled with lack of transparency
that failed to eventually proffer any reliable demand-supply scenario
in which an efficient debt market can function. Because of the
frequent shifts and ad hoc culture and volatility of demand, many of
the debt instruments could not be designed to be publicly traded
that could fuel a vibrant market. Efforts are now on to issue tradable
instruments and bring fiscal discipline (Sayeed, n.d.).
Entrenched buy & hold culture
Since the first love of fixed income investors were the nontransferable high yield government saving certificates, an
entrenched ‘buy & hold’ culture developed over the years. Even
premature encashment over the counter at the issuing offices were
not a common practice. This culture spilled over to the nascent
listed corporate debenture market, testified by the historically low
trading volume at the exchanges, which retarded the natural growth
of a secondary debt market (Sayeed, n.d.).
Low long-term borrowing requirement
Owing to a bitter colonial past and lack of resources, historically
there was a weaker base for industrialization and related formalized
commercial activities. This has kept the demand for long-term
capital and credit requirement at the formal market at a lower level
(Sayeed, n.d.).
High bank deposit rates
As deposit interest rates of the commercial banks were also quite
high until recently in competition with government securities,
corporate issues had to offer unsustainable higher rates (14%-18.5%
per with semi-annual rest). High bank interest rates deterred public
borrowing by the corporate bodies, thwarting the expected
development of a debt market (Sayeed, n.d.).
Banks feeding project finance appetite
Though retail banks necessarily should not be in a position to

provide adequate long-term project finance owing to a deposit and
credit tenure mismatch, traditionally the commercial banks were
(and still) providing such funds largely through annual rollovers,
distorting the long-term credit market. Borrowers prefer less
disclosure requirement and prudential obligations in bank borrowing
to a public issue (Sayeed, n.d.).
Absence of policy support
Until recently there had been no government initiative, policy
support or expressed political will to develop the financial and
infrastructural base where a debt market could grow. Only recently
the government has taken some measures that hint policy shift and
discipline, including intended listing of two new sovereign bonds at
the bourses for the first time. Outcrowding effect from bad loan
situation and fiscal deficit of the government as well as dominance
of NCBs also played a damper on viable debt securities market
development (Sayeed, n.d.).
High tax incidence & issue cost
Until a couple of years back debenture trust had to pay one-off 2.5%
registration fees (now a fixed token amount of Tk2,500) and 2%
stamp duty on the total amount raised. With firm commitment
underwriting requirement necessitating 2.5% fees, the public issue
cost averaged about 8%, topping with a recurring annual 1% trustee
fee and related listing fees. In a prevailing high interest regime, a
high establishment and issue cost base rendered most public issue
of corporate debentures unviable
(Sayeed, n.d.).
Lack of regulations and infrastructure
Absence of a dedicated set of regulations and necessary
infrastructure that could help a debt market of consequence
remained an impediment. However, despite absence of an umbrella
law, there could have been notable market activities had there been
strong policy support. The historical inheritance of the English

Common Law, including the Companies Act 1913, Contract Act
1862, Trust Act 1882 etc. along with the various securities
regulations including the SEC Public Issue Rules, all provided a
framework which could have a facilitating role had their been
application of imagination. The SEC has now framed a guideline for
issuance of debt securities (Sayeed, n.d.).
Lack of expertise & innovation
General lack of expertise and innovation and absence of institutions
in bringing variations in debt products have kept the market
uninteresting. Lawyers, financial advisors and other service
providers have not been competent in identifying the rights and
obligations of the parties involved in debt securities. Expertise and
institutional base for issuing various forms of debt is yet to visibly
evolve. There is also absence of pertinent financial research
institutions. The Bangladesh Bank have now issued Primary Dealer
licenses to selected banks and NBFIs and the SEC have also initiated
the process of appointing eligible stock brokers for trading of
government securities at the bourses (Sayeed, n.d.).
Unaccountable trustees
Owing to the absence of a clear regulatory regime, the system failed
to hold the Trustees of debenture responsible for failure to defend
the rights of the debenture-holders in many cases when issuing
companies declined to honor obligations. Regulators could not take
the Trustees to task those, though received their fees, could or did
not take any timely action against recalcitrant issuers. The
trusteeship of debentures has in effect become an unaccountable
and defunct institution (Sayeed, n.d.).
Absence of institutional investors
In Bangladesh the institutional investor community like investment
& merchant banks, mutual funds, pension & provident funds, life
insurers etc. has unfortunately not developed due to multifarious
impediments. The market is essentially retail based and prone to

high risk. The newly licensed merchant banks are yet to make any
tangible mark, the government pension funds are essentially nonfunded and non-accounted-for liabilities, provident and insurance
funds restrained under age old qualitative and quantitative
restrictions and growth of private mutual fund retarded under
stringent regulatory frame-work and an uneven playing field. None
of these ground realities has been conducive to growth of a healthy
and vibrant capital market (Sayeed, n.d.).
Cold capital market
The capital market is yet to emerge as an effective investment
avenue to most of the small savers on one hand and attractive
avenue for the corporate bodies in raising fund on the other,
especially since the boom and burst of 1996. The negative spillover
effect of the grim capital market performance dampened potential
public issue of debt securities. However, with recent resurgence of
the market the appetite for investment grade securities has again
been pronounced that could unleash fresh demand for listed debt
securities (Sayeed, n.d.).
Recommendation for Prime Finance & Investment Ltd.:
Prime Finance & Investment Ltd. has established its image as one of
the best service provider for its potential customers. From above
discussions and basic understandings while working in the
organization following recommendations can be formulated for the
organization.
a) By adopting the principles of good governance at all decision
making levels, Prime Finance & Investment Ltd. must show that
corporate governance is a management enhancement tool. This is
one of the factors that can give confidence to business partners and
facilitates co operation with parties in international financial centers,
which already adopts such principles.
b) Prime Finance & Investment Ltd. should more clearly define
respective responsibilities of staffs, managers, board of directors
and shareholders in the attainment of goals and establish a
procedure of sanctions attached to these responsibilities.

c) It should improve more on management control systems comply
religiously with corporate governance principles and the
international financial standards especially aspects that impact on
assessment &management of risks, transparency & viability.
d) Intensify consultation within the profession in order to become a
real source of idea for the development of brokerage house system
within the region.
e) Demand is shifting continuously, and these shifts have so much
to do with today and the future as with the past.
f) In order to increase the profitability & reduce the risk, Prime
Finance & Investment Ltd. should maintain a well-balanced portfolio.
The more diversified the portfolio, the lesser the risk of losses.
g) It is to be keeping with mind that competitors can copy product
but cannot copy the understandings & expertise.
h) Many consumer segments still demand braches & use them
while the other seek the reassurance of the branch if they do not
use them, so branch should be based on proper demand
identification.
i) Prime Finance & Investment Ltd. should continuously redefine
new demand for financial, brokerage services & ensure that this
understanding is unique & actionable.
j) Establish priorities for capabilities for new product investment as
well as better ways to minimize gaps in strategic management.
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. The report has been focused to
present the important issues of merchant banking sector of
Bangladesh within the boundary of three merchant bankers. 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. It may not showcase the proper
scenario of total merchant banking conditions. The findings may get
biased by the interviewer information compared to the real scenario
of market. It was very difficult to give recommendations depending

on three merchant banks. In spite of these reasons, dedicated
efforts are given to prepare the report, but some mistakes can
occur, which are unintentional due to lack of knowledge on certain
areas and also because of time limitations.

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