Merchants and Banks Are Currently Engaged in a Wide-ranging Struggle

8/14/2019 Merchants and Banks Are Currently Engaged in a Wide-ranging Struggle

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Abstract:

Merchants and banks are currently engaged in a wide-ranging struggle for

control over payment systems. The conflict is playing itself out in business

practices, in banking regulation, in corporate governance, in corporate

restructuring, in securities offerings, and in the biggest antitrust litigation

since AT&T. Yet, it is possible that the extraordinary energy being spent in

this fight is for naught, as the growth of national bank brands, technological

developments, and innovative business models are likely to result in aradical reshaping of the payments world. This article reviews the factors

behind the struggle between merchants and banks and the strategies adopted

by each, and questions what impact changes in the payment card industry's

structure and the emergence of new payments technologies and business

models will have on the merchant-bank contest.


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Chapter 1

Introduction:

The Progress of any economy mainly depends on the efficient financial system of the

country. Bangladesh economy is no exception of this. This importance of the financial

sector reforms affirms an effective means for solving the problems of economic, financialand social in Bangladesh and elsewhere in the developing nations of the world. The

progress of the securities Industry of any country depends mainly on the flow of funds.

Infact, Capital generation is the lifeblood of the capital market without which the healthand soundness of the financial system cannot be geared up and for which well-developed

capital market as well as money market is essential.

Merchant Bank

Investment Dictionary: Merchant Bank

A bank that deals mostly in (but is not limited to) international finance, long-term loans

for companies and underwriting. Merchant banks do not provide regular banking services

to the general public.

In banking, a merchant bank is a financial institution primarily engaged in offering

financial services and advice to corporations and to wealthy individuals. The term can

also be used to describe the private equity activities of banking. The chief distinctionbetween an investment bankand a merchant bank is that a merchant bank invests its owncapital in a client company whereas an investment bank purely distributes (and trades)

the securities of that company in its capital raising role. Both merchant banks and

investment banks provide fee based corporate advisory services including in relation tomergers and acquisitions.

Banking Dictionary: Merchant Banking

Form of banking where the bank arranges credit financing, but does not hold the loans in

its investment portfolio to maturity. A merchant bank invests its own capital in leveraged

buyouts, corporate acquisitions, and other structured finance transactions. Merchant

banking is a fee based business, where the bank assumes market risk but no long-term

credit risk. A common form of banking in Europe, merchant banking is gaining

acceptance in the United States, as more banks originate commercial loans and then sell

them to investors rather than hold the loans as portfolio investments. A banque d'affaire isa French merchant bank, which has more powers than its British counterpart. The
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Gramm-Leach-Bliley Act allows financial holding companies, a type of Bank Holding

Company created by the act, to engage in merchant banking activities.

Financial institutionthat specializes inservicessuch as acceptance ofbills ofexchange,hire purchaseorinstallment buying, international tradefinancing, long-termloans, and

managementofinvestment portfolios.Merchant banks also advise on (and investownfunds in) acquisitions,mergers, and takeovers. In the US, a merchant account provideris

sometimes called a merchant bank.(Business Dictionary)

History

Merchant banks, now so called, are in fact the original "banks". These were invented inthe Middle Ages by Italian grain merchants. As the Lombardy merchants and bankers

grew in stature based on the strength of the Lombard plains cereal crops, many displaced

Jews fleeing Spanish persecution were attracted to the trade. They brought with themancient practices from the middle and far east silk routes. Originally intended for the

finance of long trading journeys, these methods were now utilized to finance the

production of grain.

The Jews could not hold land in Italy, so they entered the great trading piazzas and hallsof Lombardy, alongside the local traders, and set up their benches to trade in crops. They

had one great advantage over the locals. Christians were strictly forbidden the sin ofusury. The Jewish newcomers, on the other hand, could lend to farmers against crops inthe field, a high-risk loan at what would have been considered usurious rates by the

Church, but did not bind the Jews. In this way they could secure the grain sale rights

against the eventual harvest. They then began to advance against the delivery of grain

shipped to distant ports. In both cases they made their profit from the present discountagainst the future price. This two-handed trade was time consuming and soon there arose

a class of merchants, who were trading grain debt instead of grain.

What is the difference between Merchant bank and commercial bank?

The world of banking and finance is one of many intricacies. Many types of financialinstitutions exist, including commercial banking and merchant banking. The difference

between commercial banking and merchant banking lies mainly in the services they

provide, and to whom they are provided. Commercial banking is generally accessible to
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anyone for basic banking needs, whereas merchant banks serve mainly large companies

and very wealthy individuals.

this case, banking provided to individuals is referred to as retail banking to differentiate itfrom the second definition of commercial banking. Commercial banking and merchant

banking both involve the provision of financial services and advice. Merchant banking,however, often focuses on investing a depositor's assets in a finance portfolio and

managing these investments. Merchant banks are commonly called investment banks inthe United States. Apart from investing and managing the assets of wealthy clients,

merchant banks also offer counsel and advice to large corporations. This advice is

particularly useful when a corporation is considering getting involved in a merger with,or acquisition of, another corporation.

Both commercial banking and merchant banking have roots that go back hundreds of

years, if not more. Merchant banks were actually the original banks, and were invented in

the Middle Ages by Italian grain merchants. These merchants, as well as Jewish traders

fleeing persecution in Spain, used merchant banking to finance long trading journeysCommercial banks are what people typically refer to as "banks." A commercial bank can

provide loans to individuals and small businesses. It raises funds by collecting depositsfrom these same groups of people, as well as from interest charged on loans. It also

purchases bonds from governments and corporate entities.

The banks described above are the most common definition of commercial banks.

Commercial banking is also sometimes defined as the provision of banking services such

as checking and loans to large businesses, as distinguished from individual citizens. In aswell as the production of grain.

The use of commercial banks by the average citizen is a relatively new phenomenon,

historically speaking, but moneylenders have engaged in basic banking practices sincethe time of ancient Roman Empire. Primitive banking, though, mainly consisted of

changing foreign currency to that of the Empire, rather than investment as we see today.

Today's commercial banks are so common that more people work in the commercialbanking sector than in any other part of the financial services industry.

Modern practices

The definition of merchant banking has changed greatly since the days of the

Rothschilds. The great merchant banking families dealt in everything from underwriting

bonds to originating foreign loans. Bullion trading and bond issuing were some of the


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specialties of the Rothschild family. The modern merchant banks, however, tend to

advise corporations and wealthy individuals on how to use their money. The advice

varies from counsel on M&A to recommendation on the type of credit needed. The job ofgenerating loans and initiating other complex financial transactions has been taken over

by investment banks and private equity firms.

Chapter - 2

Introduction:

The Progress of any economy mainly depends on the efficient financial system of the

country. Bangladeshi economy is no exception of this. This importance of the financialsector reforms affirms an effective means for solving the problems of economic, financial

and social in Bangladesh and elsewhere in the developing nations of the world. The

progress of the securities Industry of any country depends mainly on the flow of funds.Infact , Capital generation is the lifeblood of the capital market without which the health

and soundness of the financial system cannot be geared up and for which well-developedcapital market as well as money market is essential.

Capital market

A capital market is a market forsecurities (debt orequity), where business enterprises

(companies) and governments can raise long-term funds. It is defined as a market in

which money is provided for periods longer than a year, as the raising of short-term funds

takes place on other markets (e.g., themoney market). The capital market includes thestock market (equity securities) and thebond market(debt). Financial regulators, such as

the Securities and Exchange Commission(SEC), oversee the capital markets in their

designated jurisdictions to ensure that investors are protected against fraud, among otherduties.

Capital markets may be classified asprimary markets and secondary markets. In primarymarkets, new stock or bond issues are sold to investors via a mechanism known as
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underwriting. In the secondary markets, existing securities are sold and bought among

investors or traders, usually on a securities exchange,over-the-counter, or elsewhere

capital market

The market for long-term funds where securities such as common stock, preferred stock,and bonds are traded. Both the primary market for new issues and the secondary market

for existing securities are part of the capital market.

The Capital market is a market ,which deals in longterm loans . It supplies industry

with fixed and working capital and finances medium-term borrowing of the central , state

and local governments. The capital market deals in ordinary stocks, shares and

debentures of corporations and bonds and securities of governments.

In Fact, the Capital markets is related to the supply of and demand for new capital and

stock exchange facilitates such transactions.

Capital market Institutions: Investment Banks , commercial Banks , Specialized Banks, Money lenders ,

Brokers, Non-bank Financial Institution , Issuing house , stock exchange.

Capital Market instruments:Term loans of the banks and financial institutions, shares ,Bonds, Securities, Debentures

etc., Common Stocks/Equity, mortgages Corporate Notes, Securitized Assets, StrippedSecurities ,etc.

The difference between capital markets and money markets

In order to understand what the differences between things are you first need to

understand what each of the items is. In this case before you can understand thedifference between capital markets and money markets you are going to need to

understand what capital markets are and what money markets are. Once you understand

the two items are it will be easier to see what the difference or differences are between

the two markets.

What is capital market?

Basically the capital market is a type of financial market, it includes the stocks and bonds

market as well. But in general the capital market is the market for securities where eithercompanies or the government can raise long term funds. One way that the companies or

the government raise these long term funds is through issuing bonds, which is where a
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person buys the bond for a set price and allows the government or company to borrow

their money for a certain time period but they are promised a higher return for allowing

them to borrow the money, the higher return is paid through interest that accrues on themoney that the government or company borrows.

Another way that the companies or government can raise maney in the capital market

is though the stock market, most of the time you don't see the government as a part ofthe stock market, but it can actually happen so we need to include them. But how thestock market works is that the companies decide to sell shares of their stock, which is

basically ownership in the company, to ordinary people and other companies, as a way to

raise money. The people who buy the stock are usually given dividends each year, if thecompany has agreed to pay out dividends, so that is another possible return on their

investment.

The capital market actually consists of two markets. The first market is the primary

market and it is where new issues are distributed to investors, and the secondary marketwhere existing securities are traded. Both of these markets are regulated so that fraud

does not occur and in the United States the U.S. Securities and Exchange Commission is

in charge of regulating the capital market.

What is the money market?

Basically the money market is the global financial market for short-term borrowing and

lending and provides short term liquid funding for the global financial system. The

average amount of time that companies borrow money in a money market is aboutthirteen months or lower. Some of the more common types of things used in the money

market are certificates of deposits, bankers' acceptance, repurchase agreements and

commercial paper to name a few.Basically what the money market consists of is banks that borrow and lend to each other,but other types of finance companies are involved in the money market. What usually

happens is the finance companies fund themselves by issuing large amounts of asset

backed commercial paper that is secured by the promise of eligible assets into an assetbacked commercial paper conduit. Your most common examples of these are auto loans,

mortgage loans, and credit card receivables.

Capital market

Long-term funds are bought and sold:

o Shareso Debentures

o Long-term loans, often with a mortgage bond as security

o Reserve funds

o Euro Bonds


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Money market

Financial institutions can use short-term savings to lend out in the form of short-

term loans:

o Credit on open account

o Bank overdrafto Short-term loans

o Bills of exchange

o Factoring of debtors

What is the difference?

Basically the difference between the capital markets and money markets is that capitalmarkets are for long term investments, companies are selling stocks and bonds in order to

borrow money from their investors to improve their company or to purchase assets.Whereas money markets are more of a short term borrowing or lending market wherebanks borrow and lend between each other, as well as finance companies and everything

that is borrowed is usually paid back within thirteen months.

Another difference between the two markets is what is being used to do the borrowing or

lending. In the capital markets the most common thing used is stocks and bonds, whereaswith the money markets the most common things used are commercial paper and

certificates of deposits.

Importance of Capital Market :

1. Help in Capital formation and economic growth of the country.

2. Diverts resources from wasteful and unproductive cannels such as Gold,

Jewellery , Real Estate conspicuous consumptions etc. to productive investments .

3. Give qualitative and quantitative direction to the funds and brings rationale

allocation of resources by converting financial assets into productive physical

benefits .

4. Makes bridge between savers and investors offering alternative benefits.


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The recent growth of capital market (CM) of Bangladesh was behind time. We have

witnessed the money market (MM) grow stable in this country over the last decade; our

economy was starving for a matured and stable capital market. The stability camethrough a variety of sources namely, educated retail investors, institutional investors and

last but not least the capital market regulators.

As it is a market that involves both the sponsors and investors, the need for a healthy andstable market became necessary. Through various forms of reforms and automation the

capital market of Bangladesh won the confidence of investors from all walks of life. It is

a fact that capital market outperformed money market by far in the last couple of years

but that was only possible due to the uniform and state of the are technology that hasbeen used as the platform of our capital market. In addition to that, the government

facilitated our capital market by structuring its monetary and fiscal policies in a pro-

capital market manner.

The central bank (CB) played a thoughtful part in developing our capital market. It

brought transparency to the banking sector, which actually welcomed the retail investorsto join the capital market with high confidence. The performance and healthy return of

the banking sector worked as a crucial component to bring in institutions and foreign

investors. Power and pharmaceutical sector also outperformed the expectations of generalinvestors; resulting fresh fund injection into our capital market.

Our emerging economy mostly invited the funds from all over the globe. Market capital

has shown amazing growth. Although current market price earning ratio is higher thanthat of the neighbouring country but it is my belief that considering the demand for lack

of avenue to invest, the capital market of our country has a bright and attractive futureand untapped sector.

Addressing the issue regarding our capital market, 'liquidity' and lack of "instrument"

would top the list of challenges that we have right now. The major reason for theexistence of the stock market is to provide liquidity of shares and diversified instruments

which helps increase market capitalisation. It also helps investors to gain more

confidence and positively impact Gross Domestic Product (GDP) of our country.

Neighbouring countries such as India and Pakistan have market capitalisation of morethan 75% of their GDP. Comparatively, the Bangladesh capital market accounts for a far

lesser share of its GDP indicating ample scope for future intensification in this sector.

Hence, we should address the above to issues with utmost seriousness and with a futurevision.

As we know, our economy is an emerging one; there is ample scope of growth of ourcapital market. Our market cap, accounts for a lower share of our GDP in a comparative

regional perspective. With the help of upcoming issues (IPO) we are very optimistic that

the market capitalisation is reach a higher level within a short span of time. Automationand introduction of Central Depository helped our capital market to grow considerably.

e prospects, possibilities and challenges of Bangladesh capital market
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The regulatory body, namely Securities and Exchange Commission, is continuously

facilitating our capital market with its international standard surveillance and monitoring.

The continuous endeavour of the SEC has resulted in our capital market to be free fromfraudulent and manipulative activities. Thus presence of the SEC has impacted

significantly in the development of the market. However, considering our market size, the

SEC should employ more professionals from private sector. Would bring more dynamismto the market.

The major drawbacks of our capital market are lack of instruments and liquidity. We canaddress these two issues by attracting more companies to the market. In order to make the

market more attractive, the corporate tax bracket can be lowered in order to encourage

sponsors to list their companies in the exchanges. We can also introduce Future and

Option Market and help our already existing bond market to be more vibrant leaving theinvestors with more instruments. Although we have some mutual funds (MF) currently

trading in the secondary market, yet we believe there is higher demand for such products,

since MF provides the clients the opportunity to reduce investment risk. With the help of

the bourse, we should welcome hedge funds from different parts of world to invest in ourcapital market. Cash management can also play a significant role in overcoming the

drawbacks of our capital market. With the help of efficient and online cash managementour cumbersome settlement procedure could be stream lined. There are other numerous

ways we can reduce the drawbacks of our capital market. Last but not least, international

auditing standard has to be adopted, resulting in more transparency in the financial

activities and reporting. This would draw the attention of general investors and gain thenconfidence to invest in every sector. More importantly, in the context of online central

depository system, guaranteed clearing agent for settlement is obvious for market

development.

Absence of capital gain tax is the most attractive reason for foreign investors (FI) to

invest in Bangladesh capital market, which is not very common in emerging economiessuch as Bangladesh. In addition to high return and significant dividend yield, FIs should

be attracted to our capital market because of the easy and hassle free repatriation of

funds.

From the present point of time the future seems bright, not only because of our vibrant

capital market but also of our room for new products. With the introduction of direct

listing and possible book building method, our primary market is improving in line withthe secondary market. The market cap will grow significantly within next few years and

turnover shall reach an international level. Moreover, institutional clients, namely banks

are entering the market with their huge liquid fund causing the capital market to growvery rapidly. Domestic and international banks have started not only to invest in the

capital market but also to operate brokerage and merchant banking wing. Cross border

trading and index trading are ideas we might adopt in future, which will result in liquidityand new avenues for investment and minimise our cash market risk.

The Bangladeshi and foreign investors are experiencing the scarcity of diversified

products in Bangladesh. The platform of this market is supply and demand. Due to the


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absence of diversified products, the liquidity of market is declining.

Introducing option and future market to our capital market can be a solution to the aboveissue. Turnover and market capital of India grew substantially after introducing the

option and future market. However, the investors have to be educated properly to reduce

speculation. Derivatives and option market is unavailable only due to our lack ofprofessionals and technical weakness and also there are no specific regulations relating to

these products. However, in a very short span of time capital market intermediaries are

bringing in infrastructure changes such as book building, derivative and option market toour market. Introduction of these products will further broaden investment horizon and

bring enhanced depth and liquidity to our market and attract global customers.

Although we have a bond market but compared to other countries it is very weak. Wehave to attract private and public sector companies to issue more bonds and thus increase

liquidity in our bond market.

The need for cooperation among the stock exchanges in this region has to be emphasisedher in order reap tremendous benefits. At present, the level of such cooperations remains

at a very low level. The experience we have had in our respective markets can bevaluable to each other and ought to be exchanged, even though the sizes and

specifications of our markets may vary. Regionwise, we are bound by commonalities in

culture, environment, tradition. The same Socio-political factors affect us rather similarly.

Hence, the knowledge gathered in our respective countries can be valuable to us, whobelong to the same region. Through a friendly dissemination of knowledge and

experience, we can revitalise and energise our economies. Shared knowledge can fuel the

growth of a stronger and more vibrant capital market.


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Chapter- 3

List of Registered Merchant Banks In Bangladesh

1.Industrial Development Leasing Company of Bangladesh Ltd.

2.Uttara Finance and Investment Limited,

3.Banco Trans World (Bangladesh) Limited,

4. Fidelity Assets and Securities Company

5.Raspit Securities and Management Limited,

6. Capital Market Services Limited,

7. Bay Leasing and Investment Limited,

8. Swadesh Investment Management Limited

9.LankaBangla Finance Ltd (formarly VANIK Bangladesh Limited),

10. Grameen Capital Management Limited

11. South Asia Capital Ltd.,

12.Saudi-Bangladesh Industrial&Agricultural Investment Company

Limited,

13. Prime Finance & Investment Ltd

14. EC Securities Ltd.,

15. Mercantile Securities Ltd.,

16. GSP Finance Company (Bangladesh) Ltd.,

17. Bangladesh Mutual Securities Ltd.,

18. Equity Partners Limited

19. Prime Bank Limited

20.Arab Bangladesh Bank Ltd.,


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21. ICB Capital Management Ltd.,

22. Export Import Bank of Bangladesh Ltd. (EXIM Bank)

23. Union Capital Limited

24. AAA Consultants and Financial Advisers

25. Pangaea Partners (BD) Ltd.

26. Equity Valuation Research & Distribution Ltd

27. Prime Securities & Financial Services Ltd

28. MFH Financial Services Ltd

29. First Securities Services Ltd

30. Business and Management Co. Ltd.

FUNCTIONS OF MERCHANT BANK:-

1. Portfolio management

2. Issue management

3. Project finance4. Leasing

5. Loan syndication

6. underwriting

1. Portfolio management

Portfolio Management may refer to:

i. Portfolio manager, in investment management

ii. ii. IT portfolio managementiii. iii. Project management

i. Portfolio manager
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A portfolio manager is a person who makes investment decisions using money other

people have placed under his or her control. In other words, it is afinancialcareer

involved in investment management. They work with a team of analysts and researchers,and are ultimately responsible for establishing an investment strategy, selecting

appropriate investments and allocating each investment properly for a fund- or asset-

management vehicle.

Portfolio managers are presented with investment ideas from internal buy-side analystsand sell-side analysts from investment banks. It is their job to sift through the relevant

information and use their judgment to buy and sellsecurities. Throughout each day, they

read reports, talk to company managers and monitorindustry and economic trendslooking for the right company and time to invest theportfolio'scapital.

Portfolio managers make decisions about investment mix and policy, matching

investments to objectives, asset allocation for individuals and institutions, and balancing

risk against. performance.

Portfolio management is about strengths, weaknesses, opportunities and threats in the

choice of debt vs. equity, domestic vs. international, growth vs. safety, and other

tradeoffs encountered in the attempt to maximize return at a given appetite for risk.

Investment management

Investment management is the professional management of various securities (shares,bonds and other securities) and assets(e.g., real estate), to meet specified investment

goals for the benefit of the investors. Investors may be institutions (insurance companies,

pension funds, corporations etc.) or private investors (both directly via investment

contracts and more commonly via collective investment schemese.g.mutual funds orexchange-traded funds) .

The term asset management is often used to refer to the investment management of

collective investments, (not necessarily) whilst the more generic fund management mayrefer to all forms of institutional investment as well as investment management for

private investors. Investment managers who specialize in advisory ordiscretionary

management on behalf of (normally wealthy) private investors may often refer to theirservices as wealth management or portfolio management often within the context of so-

called "private banking".

The provision of 'investment management services' includes elements offinancialstatement analysis, asset selection, stock selection, plan implementation and ongoingmonitoring of investments. Investment management is a large and important global

industry in its own right responsible for caretaking oftrillionsof dollars, euro, pounds

and yen. Coming under the remit offinancial servicesmany of the world's largestcompanies are at least in part investment managers and employ millions of staff and

create billions in revenue.
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Fund manager (orinvestment adviserin the United States) refers to both a firm that

provides investment management services and an individual who directs fund

management decisions.

ii. IT portfolio management

IT portfolio management is the application of systematic management to large classes of

items managed by enterprise Information Technology (IT) capabilities. Examples of IT portfolios would be planned initiatives, projects, and ongoing IT services (such as

application support). The promise of IT portfolio management is the quantification of

previously mysterious IT efforts, enabling measurement and objective evaluation ofinvestment scenarios.

iii. Project management

Project management is the discipline ofplanning, organizing, and managing resourcesto bring about the successful completion of specific project goals and objectives. It isoften closely related to and sometimes conflated withprogram management.

Aproject is a temporary endeavor, having a defined beginning and end (usually

constrained by date, but can be by funding or deliverables[2]), undertaken to meet

particular goals and objectives[3], usually to bring about beneficial change or added value.The temporary nature of projects stands in contrast to business as usual (or operations)[4],

which are repetitive, permanent or semi-permanent functional work to produce products

or services. In practice, the management of these two systems is often found to be quite

different, and as such requires the development of distinct technical skills and the

adoption of separate management.

The primary challenge of project management is to achieve all of the project goals[5] and

objectives while honoring the preconceived project constraints.[6] Typical constraints arescope,time, andbudget. The secondary and more ambitious challenge is to optimize the

allocation and integration of inputs necessary to meet pre-defined objectives.

2.Issue management

Inbusiness, Issue Management refers to the discipline and process of managing

business issues and usually implies using technology to electronically automate the

process. Electronic issue management has gathered steam as a business and technologymovement in recent years as mid-sized and large businesses have realized the advantage

of implementing systems to manage, document, and track work.

Early examples of issue management systems appeared in the late 1980s with customerticketing systems. Businesses that implemented these systems were often addressing

customer complaints and needed a method to document, track, and manage complaints to

successful resolution. These systems evolved with the widespread introduction of
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Information Technology departments, leading to wider deployment of issue management

systems in the form of 'help desk' systems.

Today, help desk and ticketing remain the most prevalent roles for issue managementsystems, though common enterprise-wide systems have emerged to consolidate and

increase visibility of issues across an organization.

Purpose:

The purpose of Issues Management is to insure that any concernsrecognized during a project are addressed in a timely manner and donot go unresolved until they become major problems.

3.Project finance

Project finance is the long term financing ofinfrastructure and industrial projects based

upon the projected cash flows of the project rather than the balance sheets of the projectsponsors. Usually, a project financing structure involves a number ofequity investors,

known as sponsors, as well as a syndicate ofbanks that provide loans to the operation.The loans are most commonly non-recourse loans, which are secured by the project

assets and paid entirely from project cash flow, rather than from the general assets or

creditworthiness of the project sponsors, a decision in part supported by financialmodeling. The financing is typically secured by all of the project assets, including the

revenue-producing contracts. Project lenders are given a lien on all of these assets, and

are able to assume control of a project if the project company has difficulties complying

with the loan terms.

Risk identification and allocation is a key component of project finance. A project may

be subject to a number of technical, environmental, economic and political risks,

particularly in developing countries and emerging markets. Financial institutions and

project sponsors may conclude that the risks inherent in project development andoperation are unacceptable (unfinanceable). To cope with these risks, project sponsors in

these industries (such as power plants or railway lines) are generally completed by a

number of specialist companies operating in a contractual network with each other thatallocates risk in a way that allows financing to take place.[2] The various patterns of

implementation are sometimes referred to as "project delivery methods." The financing of

these projects must also be distributed among multiple parties, so as to distribute the risk

associated with the project while simultaneously ensuringprofits for each party involved.

A riskier or more expensive project may require limited recourse financing secured by a

surety from sponsors. A complex project finance structure may incorporate corporate

finance,securitization, options,insuranceprovisions or other types of collateralenhancement to mitigate unallocated risk.
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4.Leasing

Leasing is a process by which a firm can obtain the use of a certain fixed assets for which

it must pay a series of contractual, periodic, tax deductible payments. The lessee is thereceiver of the services or the assets under the lease contract and the lessor is the owner

of the assets. The relationship between the tenant and the landlord is called a tenancy,and can be for a fixed or an indefinite period of time (called the term of the lease). The

consideration for the lease is called rent. A gross lease is when the tenant pays a flatrental amount and the landlord pays for all property charges regularly incurred by the

ownership

A lease is a contract conferring a right on one person (called atenantorlessee) topossess propertybelonging to another person (called a landlord orlessor) to the

exclusion of the owner landlord, and all others except with the invitation of the tenant. It

is a rental agreement between landlord and tenant. The relationship between the tenant

and the landlord is called a tenancy, and the right to possession by the tenant is

sometimes called a leasehold interest. A lease can be for a fixed period of time (calledthe termof the lease) but (depending on the terms of the lease) may be terminated

sooner. The consideration for the lease is calledrent orthe rental.

A lease should be contrasted to a license, which may entitle a person (called a licensee)to use property, but which is subject to termination at the will of the owner of the

property (called the licensor). An example of a license is the relationship between a

parking lot owner and a person who parks a vehicle in the parking lot.

Term of a lease

The term of the lease may be fixed, periodic or of indefinite duration.

If it is for a specified period of time, the term ends automatically when the period expires,

and no notice needs to be given, in the absence of legal requirements.

The term's duration may be conditional, in which case it lasts until some specified eventoccurs, such as the death of a specified individual.

A periodic tenancy is one which is renewed automatically, usually on a monthly or

weekly basis.

A tenancy at will lasts only as long as the parties wish it to, and be terminated withoutpenalty by either party.
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5.Loan Syndication

The process of involving several different lenders in providing various portions of aloan.

Mainly used in extremely large loan situations, syndication allows any one lender toprovide a large loan while maintaining a more prudent and manageable credit exposure

because the lender isn't the only creditor

A loan offered by a group of lenders (called a syndicate) who work together to provide

funds for a single borrower. The borrower could be a corporation, a large project, or

a sovereignty (such as a government). The loan may involve fixed amounts, a credit line,or a combination of the two. Interest rates can be fixed for the term of the loan or floating

based on a benchmark rate

Goal of loan syndication :

The main goal of syndicated lending is to spread the risk of a borrower default across

multiple lenders (such as banks) or institutional investors like pensions funds and hedgefunds. Because syndicated loans tend to be much larger than standard bank loans, the risk

of even one borrower defaulting could cripple a single lender. Syndicated loans are also

used in the leveraged buyout community to fund large corporate takeovers with primarilydebt funding.

Syndicated loans can be made on a "best efforts" basis, which means that if enoughinvestors can't be found, the amount the borrower receives will be lower than originallyanticipated. These loans can also be split into dual tranches for banks (who fund standard

revolvers or lines of credit) and institutional investors (who fund fixed-rate term loans).

6.Underwriting

Underwriting refers to the process that a large financial service provider (bank, insurer,investment house) uses to assess the eligibility of a customer to receive their products

(equity capital, insurance, mortgage or credit). The name derives from the Lloyd's ofLondon insurance market. Financial bankers, who would accept some of the risk on agiven venture (historically a sea voyage with associated risks of shipwreck) in exchange

for apremium, would literally write their names under the risk information that was

written on a Lloyd's slip created for this purpose.
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Investment Dictionary: Underwriting

1. The process by which investment bankers raise investment capital from investors on

behalf of corporations and governments that are issuing securities (both equity and debt).

2. The process of issuing insurance policies.

Banking Dictionary: Underwriting

Banking:

1. Detailed credit analysis preceding the granting of a loan, based on credit informationfurnished by the borrower, such as employment history, salary, and financial statements;

publicly available information, such as the borrower's credit history, which is detailed in

a Credit Report and the lender's evaluation of the borrower's credit needs and Ability toPay.

2. Purchase of corporate bonds, commercial paper, U.S. Treasury securities, municipal

general obligation bonds by a commercial bank or dealer bank for its own account, or for

resale to investors. Bank underwriting of corporate securities is carried out throughseparate holding company affiliates, called Securities Affiliates or Section 20 affiliates

(taken from the section in the Glass-Steagall Act allowing banking companies to

purchase limited amounts of corporate bonds, mortgage-backed securities, and asset-backed securities for resale to investors).

There are three types of underwriting :

1. Bank underwriting

2. Securities underwriting

3. Insurance underwriting

Other forms of underwriting:

Forensic underwriting

Real estate underwriting

Sponsorship underwriting

Risk, exclusivity, and reward

Once the underwriting agreement is struck, the underwriter bears the risk of being able to

sell the underlying securities, and the cost of holding them on its books until such time in

the future that they may be favorably sold.
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If the instrument is desirable, the underwriter and the securities issuer may choose to

enter into an exclusivity agreement. In exchange for a higher price paid upfront to the

issuer, or other favorable terms, the issuer may agree to make the underwriter theexclusive agent for the initial sale of the securities instrument. That is, even though third-

party buyers might approach the issuer directly to buy, the issuer agrees to sell

exclusively through the underwriter.

In summary, the securities issuer gets cash up front, access to the contacts and saleschannels of the underwriter, and is insulated from the market risk of being unable to sell

the securities at a good price. The underwriter gets a nice profit from the markup, plus

possibly an exclusive sales agreement.

Until recently commercial banks have been involved in the capital markets mainlythrough ownership of brokerage businesses. Seventeen banks operate brokerage

businesses as members of the Dhaka Stock Exchange (DSE). Historically revenue from

securities business was low compared to a bank's core business of deposit-taking andterm-lending. With a rising share market, contribution to revenue from the brokerage

businesses has risen significantly. This has provided a much needed respite to many

banks in the midst of reduced lending and trading activities. Most banks generated thisextra revenue by lending to Beneficial Ownership (BO) accounts of investors against

their stock portfolios at high interest rates (margin loans).

Because of a perception of easy profits, commercial banks are preparing to enter into the

securities market on a larger scale. Many banks have either received or applied formerchant banking licenses, which would allow them to manage issues, underwrite public

offerings, and offer wealth management services. Currently, banks hold 10, out of a total31 merchant banking licenses. While diversification of revenue is desirable for banks, it

is also important to note that the business of securities is different from that of banking,

and presents different risks. The foray of commercial banks into the securities marketraises some concerns, both from risk management and competitiveness perspectives.

Risk perspective: As new issues are few and far between, margin lending and tradingremain the focus for merchant banking operations. Merchant banks are allowed to

provide as much as 150% of the portfolio value in margin loans. Margin lending

increased significantly in the last year. According to a report published in an Englishdaily in its issue on July 14, 2009, two commercial banks increased their brokerage profitduring first half of 2009 by 20% and 300% respectively, compared to last year.

Supposing margin interest rate and borrowing costs remained fairly same, it could beassumed that most commercial banks increased their margin-lending volume in similar

degrees. During that period, market capitalisation of the Dhaka Stock Exchange (DSE)

increased 21%, from Tk. 776.4 billion in June, 2008 to Tk. 938.0 billion in July 2009.

Commercial banks' participation in merchant banking
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New issues (a total of 16) accounted for only Tk. 4.1 billion of this increase. It can be

safely assumed that margin lending played a role in this significant advance; excess

liquidity drove up the share prices in a market that experienced limited security supply.

Margin lending is attractive to banks for two reasons; first, it earns interest income and

second, it generates trading revenue. This is also true for independent merchant banks notaffiliated with a commercial bank. However, banks can bring to bear enormous amounts

of funds from their deposit base at a low cost. Consequently, they also have the ability to

render a much larger impact on the market. In contrast, independent merchant banks havehigher costs of capital and hence are more selective in margin lending. In a rising market,

margin lending encourages speculative trading and creates significant risk for investors,

for banks and for the market.

Risk to investors: A portfolio created out of borrowed funds magnifies the risk of losses.

A 10% market correction causes as much as 25% loss to an investor who is leveraged

150%. An investor not only absorbs losses incurred on his own money, but also on the

money borrowed, as the lender does not assume any market risk. If significantlyleveraged, an investor may lose a large part of his savings during a big market correction.

Risk to banks: Although margin loans are secured by shares purchased, banks take on

significant risk through such lending. A 40% correction in the market would wipe off the

entire equity of the investor and expose the margin lender to losses. This risk is reflectedin the new banking supervision rules; under Basel II framework, investment in equity

should be risk weighted at 100%. In other words, no matter the quality of share, the

margin loan disbursed against such security would have to be fully risk-weighted.

Risk to the market: Margin lending exacerbates market volatility. A rising market lowers

margin ratio allows further borrowing and encourages more buying. This in turn drivesup the share prices. In a falling market, brokers call for more collateral to cover margin,

often forces investors to sell, which pushes prices down, and creates further selling

pressure. Such increase in volatility is detrimental to market stability.

Competition perspective: Merchant or investment banks serve an important role in a

capitalist economy. It ensures efficient capital allocation to profitable businesses,

improves market liquidity, facilitates price discovery through vigorous trading andreduces cost of capital by innovative structuring. In such a skill-driven business,

intellectual capital is much more important than financial capital. Such intellectual capital

is developed through incessant focus on the market by capital market professionals. Thesame quality may not develop in a large organisation engaged in a multitude of

businesses.

Banks are important players in capital market, but their unrestrained expansion would

deter the growth of independent merchant banks. If size and easy access to capital

become the only criteria in awarding merchant banking mandates, we will never see a

rise of independent merchant banks that lead their respective markets in innovation and


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service quality.

Case for limiting bank participation in the capital markets: Regulators in many countries

favour separation of banking and securities businesses. An early example of thisapproach is the Glass Steagall Act of the US Congress of 1933. This Act separated

investment and commercial banking activities, preventing overzealous commercial bank

involvement in stock market. It was deemed that such involvement caused the bankingcrisis of 1929 when commercial banks took on too much risk with depositors' money.

The core banking practices of deposit taking, term lending and risk management took a

backseat. In many cases, banks would issue unsound loans to companies in which it hadinvested. Clients would also be encouraged to invest in those same stocks. Separation of

banking and securities businesses removed such practices.

The Act was repealed in 1999 under pressure from the financial services industry whoargued that by preventing diversification, the Act made banks riskier. Overnight,

commercial banks, merchant banks and insurance companies merged under the same

umbrella, creating financial behemoths. The most famous example was Citigroup, created

through the merger of Citibank and the Travellers Group. The subsequent misfortune ofCitigroup and other financial omnibuses highlights the relevance of the separation of

banks and securities business. China, the new financial powerhouse, still maintains aseparation between the two businesses.

As we are still developing our financial markets, we need to take a prudent approach to

this issue. Banks should still be allowed to participate in merchant banking, but thepractice of banks' margin lending should be limited with a keen eye on regulatory capital

requirement. This would stop certain institutions from cornering the market by putting in

huge capital in select securities or pulling out; a practice that creates huge volatility.

Also, in order to ensure the growth of independent merchant banks, it must be ensured

that mandates such as issue management and underwriting offerings are equitablyawarded to these institutions. The government can take a proactive role by selecting

independent firms for management of government issues. Currently, Investment

Corporation of Bangladesh (ICB) seems to have the sole mandate of such issues, which isnot conducive to a competitive market. We need to develop various counter and

competitive forces in order to ensure a competitive and efficient market.

Importance of Merchant Banking :

In today's diverse and unpredictable economy, the need for a sustained profit plan and

long term growth strategy has become essential for both individuals and corporations.

Merchant banking principally involves providing financial services and advice for


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individuals and corporations. Merchant banking operations consists of providing clients

with a Variety of financing options to sustain long term growth.

Merchant banks tend to have operations in a variety of countries throughout the world

allowing them to offer an extensive network distribution to help their clients explore

opportunities with alternative finance options.

In banking, a merchant bank is a financial institution that primarily invests its own capital

in a client's company. Merchant banks provide fee based corporate advisory services for

mergers and acquisitions, as well as other financial services. Merchant banking

operations focus on commercial international finance, stock underwriting, and long-term

company loans. These banks work with financial institutions with their primary function

being stock underwriting. They also work in the area of private equity where the

securities of a company are not available for public trading.

The most common private equity investment strategies include venture capital, leveraged

buyouts, distressed investments, growth capital, and mezzanine capital. Leveraged

buyout generally means that they acquire majority control over existing or maturecorporations. Growth capital and venture gains means they invest in newer or rising

corporations without acquiring majority control.

Today, merchant banks are involved in a number of tasks such as credit syndication,

portfolio management, mergers and acquisitions counseling, and acceptance of credit, etc.

Their investments include private equity, structured equity, and bridge debt. They

generally invest in private or public companies to finance growth, acquisitions, and

management/leveraged buyouts and recapitalizations. In some cases, they provide an

invested company with short-term financing for a particular project, or provide short-term

liquidity.

Merchant Banking operations can focus on a particular country or they can expand their

operations in other countries. They can assist sustainable companies undergoing a

financial restructuring requiring short-term liquidity. These banks provide their partners

with financial analysis, capital structuring and strong industry relationships. They provide

the corporate lending, leveraged finance, and investment banking and industry expertise.

Merchant Banking operations provide all types of domestic and foreign banking

transactions, corporate finance services, product knowledge, and management services.

Global merchant banking operations provide individual and corporate investors with the

opportunity to participate globally for access to international investment opportunities,providing global companies access to a particular market, and opportunities for co-

investment.

When searching to partner with a Merchant Banking Service Company in order to

enhance your business operations, you should find a well established, full-service

merchant financial services company. You want a large, credible firm that can

demonstrate a good track record. Ask the merchant banks how long they have been in


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business and who some of their customers are, particularly from your market, so they can

demonstrate their experience and understanding of your needs.

Merchant banking operations provide the support, knowledge, and resources to

effectively assist clients and corporations with improving, expanding, and sustaining their

business and business investments.


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Chapter 4

Few Merchant Bank's Activities in Bangladesh


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AB Bank Limited

Services Provided by Merchant Banking Wing (MBW)

MBW provides diversified services for the Capital Market to investors and sponsors group. Ever since itsinception, MBW has consolidated its presence as a market leader in the DSEs total turnover. The offered

services are:

Portfolio Management Service

Non-Resident Bangladeshi Investors' Discretionary Account

Issue Management Service

Private Placement

Corporate Advisory Underwriting

Bankers to the Issue

Research Notes on Listed Companies

Portfolio Management Service

Since inception, we have achieved an unparalleled reputation as a leading Merchant Banker throughproviding portfolio management services by maintaining a high level of professional expertise and integrity

in client relationships. Keeping customer preferences as an investor in mind, AB Bank has designed

Investors Discretionary Account (IDA) and Bank's Discretionary Account (BDA). In these accounts the

customers may enjoy loan facilities at a ratio 1:1 for investments in private placement, IPO, and secondary

market operations.

Types of Accounts:

Investors Discretionary Account (IDA): This leveraged account is managed by the account holder through

us. By this the investor bears the risk of investment and also its gain or loss.

Banks Discretionary Account (BDA): With this account the Bank, on behalf of the account holder, uses its

discretion in managing the account. The investor lays down his/her investment objectives and the Bankdesigns a portfolio aligning the investors' risk-return profile.

Operational Procedure:

Opening of the Account: Any two Bangladeshi nationals and NRB of sound mind having a minimum age of

18 years may open three IDA/BDAs-one each in their single name and the other in their joint names.

Building of Portfolio: A diversified portfolio through investment in IPO, Private Placement and Secondary

Market.

Appointment of an Operator: Account holder may appoint any existing account holder of MBW as an

operator of his/her Account.

Services:

Application, Transfer and Collection of Shares and/ or Dividends: Arranged by AB Bank on behalf of

the clients.

Safe Custody of Securities: Securities are kept in the AB Bank vault.

IPO and Private Placement: AB Bank furnishes the account holders, information about forthcoming IPOs

and Private Placement through FAX, e-mail and letters upon request.
http://www.abbank.com.bd/mbw-services-portfolio-management.htmlhttp://www.abbank.com.bd/mbw-services-nrb-investors-discretionary-account.htmlhttp://www.abbank.com.bd/mbw-services-issue-management.htmlhttp://www.abbank.com.bd/mbw-services-private-placement.htmlhttp://www.abbank.com.bd/mbw-services-corporate-advisory.htmlhttp://www.abbank.com.bd/mbw-services-underwriting.htmlhttp://www.abbank.com.bd/mbw-services-bankers-to-the-issue.htmlhttp://www.abbank.com.bd/mbw-services-research-notes-on-listed-companies.htmlhttp://www.abbank.com.bd/mbw-services-portfolio-management.htmlhttp://www.abbank.com.bd/mbw-services-nrb-investors-discretionary-account.htmlhttp://www.abbank.com.bd/mbw-services-issue-management.htmlhttp://www.abbank.com.bd/mbw-services-private-placement.htmlhttp://www.abbank.com.bd/mbw-services-corporate-advisory.htmlhttp://www.abbank.com.bd/mbw-services-underwriting.htmlhttp://www.abbank.com.bd/mbw-services-bankers-to-the-issue.htmlhttp://www.abbank.com.bd/mbw-services-research-notes-on-listed-companies.html

Documents

Merchants and Banks Are Currently Engaged in a Wide-ranging Struggle