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Origin of merchant banking:
Merchant banks first arose in the Italian states in the Middle Ages,
when Italian merchant housesgenerally small, family-owned
import-export and commodity trading businessesbegan 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
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 companys 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
record as digital and they are also traded digitally. The way bank
record all the transaction of its client depository also record his
clients 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 todays electronic markets, especially for DSE. TESA has two
parts: MSA (Members 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
(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
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.
Bibliography
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http://www.dsebd.org
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