Bank’s Operation in Capital Market- Bangladesh Perspective

1.     Introduction

The capital market of Bangladesh is considered to be one of the emerging markets in the context of the global financial system. The market has immense potentials for country’s industrialization, development of infrastructure in particular and economic growth in general. The extent of volatility in the capital market is more pronounced in Bangladesh than elsewhere in the world. The government and Bangladesh Securities and Exchange Commission (BSEC) have undertaken a good number of initiatives to meet financing requirements of Bangladesh with a particular focus on developing long term infrastructure financing and strengthening financial stability through promotion of Capital Market. Dhaka Stock Exchange (DSE) , Chittagong Stock Exchange (CSE) and Bangladesh Securities and Exchange Commission (BSEC) implements rules and regulations, monitors their implications to operate and develop the Capital Market. In this paper, some basic understanding on Bank’s Operation in Capital Market is illustrated.

 2.     Present Turmoil Condition of the  Capital Market

Bangladesh is passing its transitional periods in the areas of several developments issues. After facing serious fiasco in 1996, the capital market nose up its performance indexes from 2007 which ultimately raised theirs intolerable limit in 2010. These upward indexes created new record in the history of capital market. Millions of small investors lured by this return and invested their last or most residuals in this market. Different regulators exerted their efforts to tame the bull but those efforts showed functional inefficiencies which finally resulted bubble burst in 2011. Investors lost their investment and also created huge distress in the society and economy and financial sector.

Commercial Banking sector were also affected by this fierce downturn, they incurred huge loss in their own portfolios as well as in their subsidiaries which ultimately eroded capital base in consolidated position. Beside this turmoil condition the major indexes are showing slight upward tendency from the year 2012 and continue it in 2013. Many commercial Banks have taken these opportunities by trading some specific securities.

 3.     Bank’s Operation in Capital Market.

There are two ways for participating in the capital market. One is the direct participation (Investment) and another one is indirect participation (Investment).

A.     Direct Investment

 Under this system Bank directly participates in the market by trading shares from secondary market and underwriting IPO and Rights Share Issue. The process comprises two phases.

·        Own Portfolio Management:  Bank undertakes regular trading of shares and other issues from capital market. The Bank may get benefits in the following ways.

? Capital gain from trading

? Dividend Income

? Nominate director in the board of listed companies.

? Liquidate the investment within a very short period of time when required.

? Control over investment.

? Take significant low tax rate on capital gain comparing with other sources of income.

For capital market operation the Bank has to cope with the Bangladesh Bank’s rules and regulation and   BASEL III Accord. This result the following risks.

? It may distract core Banking business so that long run growth of the Bank will be jeopardize.

? The dealing officials of capital market operation may involve in scam so that goodwill and reputation of the Bank may be hampered.

? Drastically fall of major indexes may incur huge loss to the Bank so that Bank’s performance may drastically fall in the respective year.

? It may create financial risk for the Bank.

 ·        Underwriting: Bank will get underwriting commission and take off Commission for giving firm commitment in order to take off unsubscribed shares of IPO & Rights Issue. The Bank will be benefited as follows

 ?  Generate commission income without any cash involvement.

?  Free publicity & Enhance reputation of the Bank.

?  Enable to find new opportunities for Bank such as new clientele base, new investment opportunities etc.

?  Purchase huge shares at comparative low rate in case of under subscription of shares.

In this activity the Bank has to provide due diligence certificate to the issue which creates huge responsibilities. The following risks are associated with underwriting.

? Penalties for regulatory non compliance with BSEC rules and ordinance.

? May have the chance to bring low graded issue in the market.

? Huge involvement of fund for subscribing (taking off) un allotted shares.

 B.     Indirect Investment

 In case of Indirect Investment Bank will not participate directly in the capital market rather than it creates a subsidiary and provides capital and loan/investment for Capital Market Operation. The Bank’s suffer consolidation effect. It has two phases.

§ Merchant Banking Operation

§ Brokerage House Operation.

Merchant Banking Operation: According to the Securities and Exchange Commission (Merchant Banker and Portfolio Manager) Rules, 1996 se (2) (1) :- Merchant Banker means any person (Organization) who performs all activities related with Fund Management , Portfolio Management, Issue Management , Underwriting and Advisory services on behalf of clients. Merchant Bank acts as a media among small investors and companies. It establishes connection between surplus unit and shortage unit of economy. Bangladesh Securities and Exchange Commission issues license for merchant Banking operation.

In our country, Merchant Banks mainly provide the following three services:

 1.      Issue Management Services.

2.      Underwriting Services.

3.      Portfolio Management Services

 Issue Management Services: Issue management includes preparing prospectus, correspondence with SEC regarding the IPO, collecting IPO applications, performing allotment through lottery or other measures, managing placements, listing the Company with DSE/CSE and distributing refund. It also includes arranging Banker to the Issue, arranging / managing of Underwriter(s). It enables Issue Management commission for maximum amount of Tk. 20.00 lac per issue.

Underwriting Services: In case of new issue or right issue, Merchant Banks assures that if the issue is under-subscribed, Merchant Bank will purchase the unsubscribed shares at a predetermined price. This service is known as underwriting service. It enables underwriting commission.

 Portfolio Management Services: This is the major service area of Merchant Bank in Bangladesh. A portfolio is usually a combination of investment in the Capital Market. The Portfolio Manager acts as the custodian of shares of the clients, provides them information and helps them constricting a portfolio that minimizes risk and maximizes return. Besides these, Merchant Bank provides its clients financing facility against their investment, which is popularly known as margin loan, (margin investment in case of Shariah based Merchant Bank). It enables margin on investment and trade commission and portfolio management fees from the clients. The following accounts are provided

 § Bank Discretionary A/C : Bank’s Discretionary Investment account is under the direct supervision and operation of portfolio managers. The client only provides fund and shares profit and loss with the portfolio managers.

 § Investors Discretionary A/C : The investors manage his/her funds/portfolio and instruments. Portfolio managers do not manage or involve with this account. It has two shapes one in Margin Account enjoying investment facilities provided by the merchant Banker and another one is Non Margin Account sometimes referred as Cash Code involving only own fund of the client.

Brokerage House Operation: To operate Brokerage House business Bank has to purchase brokerage license of Dhaka Stock Exchange (DSE) or Chittagong Stock Exchange (CSE) or both and becomes a member of the Stock Exchange in the absence of demutualization of stock exchanges by creating a subsidiary company. Brokerage house operates the business activities by following ways.

§ Brokerage Service

§ Dealer Service. (Stock Dealer)

Brokerage Service: The Company trade shares on behalf of clients in exchange of trade commission as set by BSEC. It has two kinds such as

§ Non Margin Account :  investment facility (Loan Facility) is not provided for trading shares.

§ Margin Account : Investors are allowed investment facility ( loan facility) for trading shares

Dealer Service (Stock Dealer): The Company trade shares for its own portfolio so that it may earn capital gain and dividend.

   Future of Bangladesh Capital Market :

The future of Bangladesh capital market is shining uniquely. Presently we have around 2.5 lac registered companies of which only a little portion is listed with Stock Exchanges. Most of the companies are accessing their fund from Banks and financial institutions or own finance. As for this large conglomerate companies could not be emerged due to fund crises which could easily be financed by the Capital Market. Several strategic partners like USA, Japan, Uk have already expressed their keen interest to make investment into our capital market. Condition of the Capital market is the indicator of economic strength