Industry Overview of Merchant Bank Operation in Bangladesh

Merchant banking has been a very lucrative and risky endeavor, currently 61 merchant banks have engaged in the business under existing law. Recent legislation has expanded the merchant-banking activities into different segments of debt and equity financing. Merchant banking activities are permissible to commercial banks and they are influential player of the industry. Merchant Banks negotiate and co-operate with different regulators through Bangladesh Merchant Bankers Association (BMBA). BMBA started its journey sometime in 1997.

 Merchant banks of Bangladesh is working with several lucrative products such as Underwriting IPOs, Managing new issues,  Right issue, Corporate advisory , Structured finance , Portfolio management, Bond Issuance, Alternative Financing, Mergers and Acquisitions etc.  As we consider issue management is the front line product of a merchant bank let’s see a little statistic in this regards. After introducing Electronic Subscription System (ESS) by DSE from May, 2017 to November 2018, 19 companies raised their capital through IPO under Book Building Method and Fixed Price Method; BDT 939.25 crore has been raised during the period. Regulator like BSEC, DSE and CSE fasten their IPO approval process for fund raising.

According to BSEC information during 6 (six) months period from January 01, 2014 to June 30, 2014 58 private companies raised BDT 1310.68 core equity capital and 49 public companies raised BDT 3964.80 crore equity capital. In recent year’s financial activity become more complex above mentioned numbers are per better now. Entrepreneurs are more aware about their financing activity. For established sustainable business venture companies need long term financing and entrepreneurs are now move from debt base financing to equity base long term financing.

In refer to industry insider portfolio management, corporate advisory and strategic investment are more profitable now-a-days. Performance of capital market is a major contributor of the profitability of the merchant bank. During 2017 we have seen very good performance of capital market of Bangladesh but in 2018 the market performs poorly. In this situation we can be hopeful for the capital market and in subsequent merchant bank activity will go levels high which lead profit more than we may expect.

Merchant Banking (MB) refers to company/ industries' development. Merchant Bankers can play a pivotal role in serving the nation by generating/ increasing production, employment, and earning foreign currency as well as improving the foundation of capital market through equity investment/ equity participation. It is evident that Merchant Banker (MB) can develop and make quick progress to strengthen our national economy by developing the overall industrial sector. The core business of merchant banking comprises of issue management services, portfolio management services and underwriting services.

In Bangladesh, new entrepreneurs are facing acute shortage of capital. There is not a single investment bank in the country which could provide direct equity funds to the entrepreneurs. It is here that merchant banks can play the role of investment banks. Merchant banks play major roles in listing securities with stock exchanges. Entrepreneurs are the life blood of the economy. They are the major sponsors of a company. Merchant bank integrates fund for entrepreneurs in many ways like Initial Public Offering (IPO), Repeat Public Offering (RPO), Rights Share Offer, and Direct Listing for selling of existing paid-up capital, issue of preference share convertible or non-convertible in shares. Besides listing, a merchant banker can create benefits for the company through issuing directives on merger, acquisition and takeover and change of management for listed sick industries and EEF (Equity and Entrepreneurship Fund) of the Bangladesh Bank.

Every company aspiring to be listed with stock exchanges has to get undertaking on firm commitment basis. MB provides all kinds of underwriting services like Underwriting of Initial Public Offering (IPO), Underwriting of Rights Share Offer, Underwriting of Repeat Public Offering (RPO) and participation in the book building system as investment banker.

Sound merchant banking calls for effective merchant banker's policy guidelines which may include merchant banker's policy for operation, information memorandum, appraisal reports and agreements etc. A typical merchant bank has several departments. Some of them are Marketing Department, Documentation Department, Audit/Inspection Department, Investment and Analysis Department, Legal & Compliance (Tax & VAT) Department, Human Resources Department, Accounts Department.

Conventional banks, Islami banks and financial institutions can widely participate in equity investments for the development of the industrial sector, strengthen the economy of the country and also do brisk businesses with the assistance of merchant bankers. Merchant bankers are more specialized in dealing with equity securities.

The concept of merchant banking is not much familiar among mass people like commercial banking. But in developed countries, merchant banks are prime mover of economic development. Every year many potential companies are funded and discovered by merchant banks. Their specialized investment techniques help many potential companies turn into business conglomerate within a decade from small sole proprietorship.