FNB 308: Merchant and Investment banking

Farjana Hossain Dhara (ID#1348)

Swadesh Investment Management Limited

Investment Bank / Merchant Bank

Evolution of Investment Bank/Merchant Bank & What does it mean?

Merchant banks first arose in the Italian states in the middle Ages, when Italian merchant
houses-generally small, family-owned import-export and commodity trading businesses-began
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. That time the investments were very high risk: war,
bad weather, and piracy were constant threats, and by their nature the voyages were long-term
and illiquid.

In the eighteenth century the merchant banking center shifted from the Italian states to
Amsterdam and then to London, where immigrants from Prussia, France, Ireland, Russia, and
the Italian states formed the core of early British Merchant Banking. Before the Italian and
Dutch houses British houses were generally small, family-owned partnerships, and most of
them continued to trade for their own businesses and to finance the trading by others. At the end
of the eighteenth century, however, the British merchant houses had increased in size and
sophistication and began specializing in trade, marketing, or finance. In the nineteenth century
this sector has been spread out virtually no mercantile houses remained focused on both trade
and finance.

The most widely accepted definition of a merchant bank/investment bank is - an individual or

institution which acts as an underwriter or agent for corporations issuing securities is known as
investment bank/merchant bank. However, most of these banks also maintain broker/dealer
operations, maintain markets for previously issued securities, and offer advisory services to
investors. Investment banks/Merchant banks also play a vital role like mergers and acquisitions,
private equity placements and corporate restructuring.

Investment banks/Merchant banks function as intermediaries in financial transactions. They

provide four primary types of services: raising capital, advising in mergers and acquisitions,
executing securities sales and trading, and performing general advisory services.

1
In this prospective we can say an investment bank/merchant bank can assist a firm to raise
funds for achieving a variety of objectives, such as to acquire another company, reduce its debt
load, expand existing operations, or for specific project financing. Capital can include some
combination of debt, common equity, preferred equity, and hybrid securities such as convertible
debt or debt with warrants. Although so many people are associating to raise capital by public
stock offerings, a great deal of capital is actually raised through private placements with
institutions, specialized investment funds, and private individuals. The investment bank work
for the client to organize the transaction, in this way to meet the specific objectives.

Investment banks/Merchant banks represent firms in mergers, acquisitions, and divestitures.

Example projects include the acquisition of a specific firm, the sale of a company or a
subsidiary of the company, and assistance in identifying, structuring, and executing a merger or
joint venture. In each case, the investment bank/merchant bank should provide a thorough
analysis of the entity bought or sold, as well as a valuation range and recommended structure.

Investment Banks/Merchant Banks also provide sales and trading services which are primarily
relevant to publicly traded firms, or firms which plan to go for public in the nearer future.
Specific functions include making a market in a stock, placing new offerings, and publishing
research reports.

Prominently, investment banks/merchant banks carry out advisory services which include
assignments such as strategic planning, business valuations, assisting in financial restructurings,
and provide an opinion with a fairness of a proposal transaction. They also track the market in
order to advice, by offerings and insure to the investors, how the superior services are given by
them for the public assets. Some of the consultative activities investment banking firms are
engaged in overlap with those of a private brokerage, as they will often give buy-and-sell advice
to the companies they represent.

Unlike traditional banks, investment banks do not accept deposits from and provide loans to
individuals; which happened to be the biggest difference between commercial banks and them.
This line between investment banking/merchant banking and other forms of banking has blurred
in recent years, as deregulation allows banking institutions to take on more and more sectors.
Traditionally, banks either engaged in commercial banking or investment banking.

Brief History of Capital Market:

 Concepts started in USA at Wall Street in 1653.

2
  It came to South Asia in 1890
 The origin of Stock Market in Bangladesh goes back to 28th April 1954 named East
Pakistan Stock Exchange association at Narayangonj. Later it was s renamed East
Pakistan Stock Exchange Ltd and Trading was started in 1956.

History of Bangladesh Capital Market

 East Pakistan Stock Exchange transferred in Dhaka in 1958.

 In 1964 it was renamed as Dhaka Stock Exchange Ltd.
 In 1976 Dhaka Stock Exchange Ltd started its operation with a bit different version.
 Securities & Exchange Commission (SEC) was established in 1994 to enhance the
efficiency of country’s capital market.
 A big wing of Bangladesh capital market, Chittagong Stock Exchange (CSE)
incorporated in 1995.

Our Capital Market Products

 Shares
 Debentures
 Mutual Funds
 Bonds
 Derivates
 Future & Options

Capital Market Players

 Investors
 Private Limited Company
 Stock Exchange (DSE & CSE)
 Brokers & Dealers
 Merchant Banks
 Securities and Exchange Commission (SEC)
 Central Depository Bangladesh Limited (CDBL)

3
Bangladesh Capital Market

Capital market is the market for securities, where companies and governments can raise long
term funds. It is a market where money is lent for periods longer than a year. Capital market
includes the stock market & the bond market. Our main regulator is Securities and Exchange
Commissions (SEC) oversees the capital markets in their designated countries to ensure that
investors are protected against fraud.

Capital markets consist of the primary market and the secondary market. The primary markets
are where new stocks and bonds are issued and sold (underwriting) to investors. And the
Secondary markets are where existing securities are sold and bought from one investor or
speculator to another, usually on exchange.

At present Bangladesh have two stock exchanges:

1. Dhaka Stock Exchange.(Number of Registered Trading Members/Brokers is 195)

2. Chittagong Stock Exchange.(Number of Registered Trading Members/Brokers is 124)

Bangladesh capital market is growing day by day, now there are two exchanges with 276
companies, 17 mutual funds, 8 debentures and 112 bonds. The market capitalization of Dhaka
Stock Exchanges is BDT 104700 million and the market Capitalization of Chittagong Stock
Exchange is BDT 800000 million. The average turnover of both exchanges is now around BDT
5000 million per day.

Services of Swadesh:
 bond issue
 fund raising
 underwriting
 bridge finance
 local placement
 debenture issue
 loan syndication
 foreign placement
 issue management
 corporate advisory
 merger & acquisition
 portfolio management
 post issue management