Opportunities for merchant banking in Bangladesh

Simply speaking, 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 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.
The business world is turning rapidly to more compliance with laws and regulations and ethics.  Corporate governance is the latest phenomenon in the business world. BSEC (Bangladesh Securities and Exchange Commission) has already issued guidelines on corporate governance for listed companies. Merchant banks can play a vital role in regulatory compliance of a company.  It also provides Tax & VAT consulting services, Legal Consultancy Services, Financial Reporting Consultancy Services, etc.
More conscious investors are the major contributors of structured capital market. Merchant banks play a crucial role in this regard. MB holds regular awareness programmes for investors. Small severs are facing difficulties in preserving the purchase power of their money. Continuing downward trend of deposit rate, regulatory complexities, high tax burden etc qualify them to search for alternative mode of investment. Here MB plays a vital role. It arranges several kinds of investment products for investors like Merchant Bankers' Discretionary Account, Investors' Discretionary Account, Own Portfolio Management and Profit/Loss Sharing Portfolio management schemes.

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), participation in the book building system as investment banker.
 Merchant bankers can make direct investment in line with the traditional banks' funding to the companies.  This kind of investment may be spread over the long-, medium- and short-terms. Long-term investment, which lies in two forms such as investment in the form of equity shares in primary market comprising Proprietorship Companies, Private Limited Companies, non-traded Public Limited Companies and investment in the form of equity shares in the secondary market. Medium-term investment comprises equity investment before IPO of the company, investment in sick industries' shares from secondary market, investment in the OTC (over-the-counter) market shares, interest free investment in sick and OTC market companies for generating profit against strong collateral. Short-term investment lies with own investment in the secondary shares in the capital market.
Now the constraint is how a merchant bank can raise fund for itself. MB may raise funds from several sources like funds against various profit-sharing schemes from general investors, foreign funds from general investors against investment in primary market, foreign fund against investment in secondary market, issue of Mutual Fund (open-end/close-end) to the general public, issue of Coupon Bond,  Underwriting Services, Portfolio Management Services, Documentation Fees against Investments as equity in primary market, Sick and OTC market, Corporate Advisory fees arising from Annual Legal fees as legal consultant, annual audit fees as financial reporting consultant, annual Tax & VAT  Fees as Tax Consultant, commission income, income from sale of shares which includes investment as equity shares invested in the form of primary market, i.e. proprietorship, private limited companies, non-traded public limited companies, investment as equity shares which are invested in traded public limited companies, sick companies, investment as equity shares which is invested in OTC shares (sick companies), investment income against sale of equity investment in the secondary market by own portfolio services, income as cost of fund against loan to the companies, sale of un-subscribed shares against underwriting services and dividend income from own investment in the primary and secondary markets.
Sound merchant banking calls for effective merchant banker's policy guidelines which may include merchant banker's policy for operation, information memorandums, 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 specialised in dealing with equity securities.
A sponsor can get the following benefits by capital market finance:
Company benefits:
1. Capital market finance is basically interest-free because it is an equity finance
2. No co-lateral is required
3. No interest burden here
4. Tax burden is lower
5. Auto marketing develop its products/services by trading with stock exchanges
6. Another money requirement by offering rights shares to the market
7. Strong customer base, domestic and internally
8. Strong financial leverage
Sponsors' personal benefits:
9. Opportunity for Investment folds up to 10 to 100 times
10. Production capacities shall increase/fold up
11. Tax burden is lower
12. Sponsors' Liabilities are limited by shares
13. After expiry, the sponsors' family/heirs will represent the company
14. Products are more acceptable by the people
15. Be an internationally known sponsor/person as sponsor of a public limited company
16.  Sponsors can calculate their investment by market value
17. Sponsors can sell their shares to the market for emergency personal           fund requirements
Country's economic benefits:
1. After fulfilling domestic demand, the sponsors can export their products and earn foreign currency
2. Sponsors can generate employment in their companies
3. Companies and its directors will get corporate status world wide
4. Investment opportunity for the investors in the company's shares
CONCLUSION: 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 specialised investment techniques help many potential companies turn into business conglomerate within a decade from small sole proprietorships.
The writer is Manager Operations and Company Secretary of a Merchant Bank.
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