Investment banks in emerging markets
Tuesday, 5 April 2011
Md. Toufique Hossain
Investment banks refer to the banking institutions which offer specialised services related to investment. Investment banks, commonly known as merchant banks, provide a wide variety of services like investment management, buying and selling, research, risk diversification, and portfolio management. In the context of Bangladesh, investment banking includes all financial institutions that combine the functions of both development banking and merchant banking. Through investment banking, an institution generates fund in two ways. They may draw on public funds through the capital market by selling stock, and they may also seek out venture capital or private equity in exchange for a stake in their company. An investment bank also does consultancy business. Investment bankers give companies advice on mergers and acquisitions. For example, they track the market in order to give advice on when to make public offerings and how best to manage the business' public assets. Investment banks are often divided into two camps: the buy side and the sell side. The traditionally termed investment banking services are now called the sell side, and other financial services are called the buy side. The sell side typically refers to selling shares of newly issued Initial Public offering IPO, placing new bond issues, engaging in market making services, or helping clients facilitate transactions. The buy side, in contrast, works with pension funds, mutual funds, hedge funds, and the investing public to help maximise their returns through trading or investing in securities such as stocks and bonds. Many investment banks offer both buy side and sell side services. Merchant 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 merchant banking licence from the Securities and Exchange Commission (SEC). Among them are: City Bank Limited, Premier Bank Limited, Uttara Finance and Investment Limited, Lanka-Bangla Finance Limited, Prime Finance and Investment Ltd., EC Securities Ltd, GSP Finance Company (Bangladesh) Ltd., Bangladesh Mutual Securities Ltd., BRAC EPL Investment Ltd, Prime Bank Limit, ICB Capital Management Ltd, and IDLC. The modern concept of "Investment Bank" was created in the Glass-Steagall act (Banking Act of 1933). Glass Steagall separated commercial banks, investment banks, and insurance companies. Originally, the term "investment bank" comes from the United States of America, while some other variations include 'merchant bank' in the United Kingdom and 'securities house' in Japan. In Bangladesh it is known as investment bank or merchant bank or even stock brokerage. An important task under this system is advising companies about raising funds, which they do in two main ways. They raise funds via capital markets or through private placements. Activities of a typical investment bank include helping companies issue securities, helping investors purchase securities, manage financial assets, trade securities and provide finical advice; raise equity capital (e.g., helping launch an IPO) and debt capital (e.g., issuing bonds to help raise money for a factory expansion); insure bonds or launching new products. Underwriting operation is an important function of investment banker by which it can increase the supply of stockshares and debentures in the market. Issue management function of investment banking helps capital market increase the supply of securities. It also provides portfolio investment management services; and deals with the buying, selling and combining of different companies that can aid, finance, or help a growing company without having to create another business entity. Investment banks are social institutions. They are custodians and trustees of the public money. The primary functions of an investment bank is buying and selling products --both on behalf of their clients and also for the bank itself. Banks undertake risk through proprietary trading, done by a special set of traders who do not interface with clients. Investment banks provide a wealth of critical services to our economy. One important role is to assist public and private corporations in raising funds in the capital markets. Another noteworthy service offered by them is providing strategic advisory services for mergers, acquisitions and other types of financial transactions. For a better understanding of the role of investment bank it is important to distinguish between what is known as the primary and the secondary markets. Secondary markets are defined as "markets for existing assets that are currently traded between investors". Investment banks act as an adviser in primary market in a number of ways. These are: issuers on funding strategy; regulatory and legislative issues; stock exchange; obtaining credit rating; migration of best practices systems, and procedures for settlement, clearing, custodial services and reporting; and development of the swaps and foreign exchange markets. Investment banks also act as an arranger in a number of ways. These are: managing the debt issue to ensure overall success of the transaction; assist the issuer in producing the information memorandum, legal documentation, and obtaining regulatory approvals from the capital market authority and stock exchange; education of investors, marketing and placement of the bonds; create market in the securities to support the issue; develop interest rate and cross currency derivative applications. Investment banks also contribute on secondary market: sales and trading; trading can be proprietary, market making, client driven or reverse enquiry; research work on local market, and post deal communication. Another point to consider as 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. Benefits of capital markets through investment banking: in-depth expertise in local debt market environment; excellent distribution capabilities (onshore and offshore); and access to research teams offering advices and commentaries on markets, industries, currencies, and interest rate. Role of investment banks in promoting debt market: make debt investment capital accessible for intermediate and long term; more transparent pricing of credit risk; diversity and disintermediation of commercial banking; wider variety of investment worthy products for institutional investors; improved secondary market liquidity; and promoting economic stability. Investment banks are facing many challenges, not least the need to become global in scope and ambition, but local in understanding and whole body of financial system. They help their clients raise capital through equity execution. These institutions play the role as circulating element in the debts, or other potential deals. The necessity of issuing investment banking license by the Securities and Exchange Commission SEC is also seen by some experts as an option to lessen the alleged dominance of the existing merchant banks in the stock market. This will be helpful for the investors and firms. The writer is a student of BBA of American International University of Bangladesh AIUB, and can be reached at e-mail toufique2010@gmail.com
Investment banks refer to the banking institutions which offer specialised services related to investment. Investment banks, commonly known as merchant banks, provide a wide variety of services like investment management, buying and selling, research, risk diversification, and portfolio management. In the context of Bangladesh, investment banking includes all financial institutions that combine the functions of both development banking and merchant banking. Through investment banking, an institution generates fund in two ways. They may draw on public funds through the capital market by selling stock, and they may also seek out venture capital or private equity in exchange for a stake in their company. An investment bank also does consultancy business. Investment bankers give companies advice on mergers and acquisitions. For example, they track the market in order to give advice on when to make public offerings and how best to manage the business' public assets. Investment banks are often divided into two camps: the buy side and the sell side. The traditionally termed investment banking services are now called the sell side, and other financial services are called the buy side. The sell side typically refers to selling shares of newly issued Initial Public offering IPO, placing new bond issues, engaging in market making services, or helping clients facilitate transactions. The buy side, in contrast, works with pension funds, mutual funds, hedge funds, and the investing public to help maximise their returns through trading or investing in securities such as stocks and bonds. Many investment banks offer both buy side and sell side services. Merchant 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 merchant banking licence from the Securities and Exchange Commission (SEC). Among them are: City Bank Limited, Premier Bank Limited, Uttara Finance and Investment Limited, Lanka-Bangla Finance Limited, Prime Finance and Investment Ltd., EC Securities Ltd, GSP Finance Company (Bangladesh) Ltd., Bangladesh Mutual Securities Ltd., BRAC EPL Investment Ltd, Prime Bank Limit, ICB Capital Management Ltd, and IDLC. The modern concept of "Investment Bank" was created in the Glass-Steagall act (Banking Act of 1933). Glass Steagall separated commercial banks, investment banks, and insurance companies. Originally, the term "investment bank" comes from the United States of America, while some other variations include 'merchant bank' in the United Kingdom and 'securities house' in Japan. In Bangladesh it is known as investment bank or merchant bank or even stock brokerage. An important task under this system is advising companies about raising funds, which they do in two main ways. They raise funds via capital markets or through private placements. Activities of a typical investment bank include helping companies issue securities, helping investors purchase securities, manage financial assets, trade securities and provide finical advice; raise equity capital (e.g., helping launch an IPO) and debt capital (e.g., issuing bonds to help raise money for a factory expansion); insure bonds or launching new products. Underwriting operation is an important function of investment banker by which it can increase the supply of stockshares and debentures in the market. Issue management function of investment banking helps capital market increase the supply of securities. It also provides portfolio investment management services; and deals with the buying, selling and combining of different companies that can aid, finance, or help a growing company without having to create another business entity. Investment banks are social institutions. They are custodians and trustees of the public money. The primary functions of an investment bank is buying and selling products --both on behalf of their clients and also for the bank itself. Banks undertake risk through proprietary trading, done by a special set of traders who do not interface with clients. Investment banks provide a wealth of critical services to our economy. One important role is to assist public and private corporations in raising funds in the capital markets. Another noteworthy service offered by them is providing strategic advisory services for mergers, acquisitions and other types of financial transactions. For a better understanding of the role of investment bank it is important to distinguish between what is known as the primary and the secondary markets. Secondary markets are defined as "markets for existing assets that are currently traded between investors". Investment banks act as an adviser in primary market in a number of ways. These are: issuers on funding strategy; regulatory and legislative issues; stock exchange; obtaining credit rating; migration of best practices systems, and procedures for settlement, clearing, custodial services and reporting; and development of the swaps and foreign exchange markets. Investment banks also act as an arranger in a number of ways. These are: managing the debt issue to ensure overall success of the transaction; assist the issuer in producing the information memorandum, legal documentation, and obtaining regulatory approvals from the capital market authority and stock exchange; education of investors, marketing and placement of the bonds; create market in the securities to support the issue; develop interest rate and cross currency derivative applications. Investment banks also contribute on secondary market: sales and trading; trading can be proprietary, market making, client driven or reverse enquiry; research work on local market, and post deal communication. Another point to consider as 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. Benefits of capital markets through investment banking: in-depth expertise in local debt market environment; excellent distribution capabilities (onshore and offshore); and access to research teams offering advices and commentaries on markets, industries, currencies, and interest rate. Role of investment banks in promoting debt market: make debt investment capital accessible for intermediate and long term; more transparent pricing of credit risk; diversity and disintermediation of commercial banking; wider variety of investment worthy products for institutional investors; improved secondary market liquidity; and promoting economic stability. Investment banks are facing many challenges, not least the need to become global in scope and ambition, but local in understanding and whole body of financial system. They help their clients raise capital through equity execution. These institutions play the role as circulating element in the debts, or other potential deals. The necessity of issuing investment banking license by the Securities and Exchange Commission SEC is also seen by some experts as an option to lessen the alleged dominance of the existing merchant banks in the stock market. This will be helpful for the investors and firms. The writer is a student of BBA of American International University of Bangladesh AIUB, and can be reached at e-mail toufique2010@gmail.com