Term Paper on

Basic Terms and Concepts of Investment Banking

&
Problems and Prospects of Capital Markets in Bangladesh
Course: EB-622 (Merchant Banking & Investment Banking)

Submitted to
MD. Tanvir Hamim
Assistant Professor, Department of Banking and Insurance,
University of Dhaka

Submitted by
Syed Maruful Islam
ID # 518 40 061
Batch: 40
 Basic Terms & Concepts of Investment Banking

Investment Banking
Investment banking is a special segment of banking operation that helps individuals or organizations raise
capital and provide financial consultancy services to them. They act as intermediaries between security
issuers and investors and help new firms to go public. They either buy all the available shares at a price
estimated by their experts and resell them to public or sell shares on behalf of the issuer and take
commission on each share.
Investment banks
An investment bank is a financial services company that acts as an intermediary in large and complex
financial transactions. An investment bank is usually involved when a startup company prepares for its
launch of an initial public offering (IPO) and when a corporation merges with a competitor. It also has a
role as a broker or financial adviser for large institutional clients such as pension funds.
Global investment banks include JPMorgan Chase, Goldman Sachs, Morgan Stanley, Citigroup, Bank of
America, Credit Suisse, and Deutsche Bank. Many of these names also offer storefront community
banking and have divisions that cater to the investment needs of high-net-worth individuals.
Issue manager
Any financial institution / intermediary which can carry out the activities connected with issue
management is registered with SEBI and follow its regulations and guidelines is capable of venturing into
issue management. Issue management is an important activity for merchant bankers.
underwriter,
Underwriters are responsible for deciding whether or not to accept applications for insurance cover – this
is known as ‘risk’. Determining risk is a complex process and the job relies on sensible judgement and
meticulous attention to detail. The underwriter must ensure that accurate quotes are produced that are
competitive to the customer, yet profitable for the company. Underwriters may work in many areas but
the work generally falls into the categories of life assurance, commercial insurance, general insurance and
reinsurance.
Issue register
The Issue Register captures and keeps track of all formal issues. It is regularly monitored by the Project
Manager throughout the project. Just imagine a spreadsheet where each line is an issue and there are
columns for Issue ID, Issue Type, Date Raised, Raised by, Description, Current Status, and Close Date.
So, we can that the purpose of the Issue Register is to capture and maintain information on all the formal
issues. Informal issues are normally placed in the Daily Log by the Project Manager as these can easily be
taken care of the Project Manager, and they do not need help from others; e.g., Meeting room is
unavailable, or project printer needs new ink.

Primary market,
The primary market is where securities are created. It's in this market that firms sell (float) new stocks and
bonds to the public for the first time. An initial public offering, or IPO, is an example of a primary
market. These trades provide an opportunity for investors to buy securities from the bank that did the
initial underwriting for a particular stock. An IPO occurs when a private company issues stock to the
public for the first time.

secondary market
The secondary market is where investors buy and sell securities they already own. It is what most people
typically think of as the "stock market," though stocks are also sold on the primary market when they are
first issued. The national exchanges, such as the New York Stock Exchange (NYSE) and the NASDAQ,
are secondary markets.

Broker
A broker is an individual or firm that acts as an intermediary between an investor and a securities
exchange. Because securities exchanges only accept orders from individuals or firms who are members of
that exchange, individual traders and investors need the services of exchange members. Brokers provide
that service and are compensated in various ways, either through commissions, fees or through being paid
by the exchange itself.
Dealer
Dealers are people or firms who buy and sell securities for their own account, whether through a broker or
otherwise. A dealer acts as a principal in trading for its own account, as opposed to a broker who acts as
an agent who executes orders on behalf of its clients. Dealers are important figures in the market. They
make markets in securities, underwrite securities, and provide investment services to investors. That
means dealers are the market makers who provide the bid and ask quotes you see when you look up the
price of a security in the over-the-counter market. They also help create liquidity in the markets and boost
long-term growth.

Green shoe provision

A green shoe option is an over-allotment option. In the context of an initial public offering (IPO), it is a
provision in an underwriting agreement that grants the underwriter the right to sell investors more shares
than initially planned by the issuer if the demand for a security issue proves higher than expected.

Reverse green shoe provision,

A reverse green shoe option, also known as an overallotment option, is a provision used by underwriters
in the initial public offering (IPO) process. It is intended to provide increased price stability for the
newly-listed security. Reverse green shoe options are similar to regular green shoe options except that
they are structured as put options rather than call options. In both cases, however, their objective is to
promote price stability following the IPO.
Red hearing prospectus
A red herring is a preliminary prospectus filed by a company with the Securities and Exchange
Commission (SEC), usually in connection with the company's initial public offering (IPO). A red herring
prospectus contains most of the information pertaining to the company's operations and prospects but
does not include key details of the security issue, such as its price and the number of shares offered.
Road show
A roadshow is a series of presentations made in various locations leading up to an initial public offering
(IPO). The roadshow is a sales pitch or promotion made by the underwriting firm and a company's
management team to potential investors before going public. Roadshows generally take place in major
cities and are meant to drum up interest in the upcoming offer. Potential investors are introduced to the
company, its history, and its key personnel.
Indicative price
An indicative quote is a reasonable estimate of a currency's current market price that is provided by a
market maker to an investor upon request. However, this rate is not able to be dealt on, hence the word
indicative. In other words, when a market maker provides an indicative quote to a trader, the market
maker is not obligated to honor the price stated in that quote if the counterparty chooses to transact in that
currency pair.
Cut off price
In a book-building issue, the issuer is required to indicate either the price band or a floor price in the red
herring prospectus. The actual discovered issue price can be any price in the price band or any price
above the floor price This issue price is called “cut off price”
Final price
Even in the era of 24-hour trading, there is a closing price for any stock or other security, and it is the
final price at which it trades during regular market hours on any given day. The closing price is
considered the most accurate valuation of a stock or other security until trading resumes on the next
trading day. Most stocks and other financial instruments are traded after-hours, although in far smaller
volumes. Therefore, the closing price of any security is often different from its after-hours price.

Problems and Prospects of Capital Markets in Bangladesh

The Bangladeshi Stock experts, investors and some other Technical Analyst are trying to find the possible
monsters. The TA experts have found some reasons of this share market fall down. Syndicates are
working behind this recent plunge. These syndicates have a huge investment in Stock Market and they
take control of the price of the shares. They are united and buy a share simultaneously so a want is created
in the whole market. So, the prices of share become higher and general investors suffer with it. Most of
investors in share market is either newbie or have no analysis power. They are just trading on the basis of
seeing what other peoples are trading. So, without seeing a company’s saturation point; the invest money
and lose money. And our Government has changed lots of rules of local stock market and applied lots of
limited on Debt and other facilities. And this is another reason of this recent Bangladeshi share market
plunge. like this many other reasons behind for present alarming condition Bangladesh share market.

The capital market is the engine of growth for an economy, and performs a critical role in acting as an
intermediary between savers and companies seeking additional financing for business expansion. Vibrant
capital is likely to support a robust economy. While lending by commercial banks provides valuable
initial support for corporate growth, a developed stock market is an important pre-requisite for moving
into a more mature growth phase with more sophisticated conglomerates. Today, with a $318 billion
economy and per capita income of roughly $2000, Bangladesh should really focus on improving
governance and developing advanced market products.

Why our stock market is under developed?

Access to high quality and credible corporate information remains a major problem in the market. While a
handful of institutional investors may enjoy certain benefits since, they have an investment unit manned
with qualified officers, nothing exists for retail investors. And, in the absence of independent research
houses, retail investors primarily focus on advice given by their brokers, which often consists of market
rumors. This is not acceptable, and it often leads to enormous losses for small investors who are vital for a
low-income and emerging market like Bangladesh. Filtering of information among different types of
investors may leave scope for manipulation; this assumption had been proved right in the 1996 market
meltdown at the cost of many individuals and households. The market does not have an adequate number
of fundamentally sound scrip.

The Recent Surge in the stock Market

Stock market index jumped by over 100 points today within two hours of the day's trading. With the
surge, the index touched one and a half years' high points today. DSEX, the benchmark index of the
Dhaka Stock Exchange, surged by 102 points, or 1.97 percent, to stand at 5,321.29 at 12:00pm which is
highest since July 7 last year. The turnover during the two hours of the bourse's trading stood at Tk 841
crore. Participation from the institutional investors has been rising in the market in the last few days
which fueled the stock market to rise, a stock broker wishing not to be named said. Investors hoped that
the world economy along with local economy will rebound soon so their participation has been rising, he
added. Among 360 companies that are being traded, 235 advanced, 56 declined and 69 remained
unchanged.

Market capitalization of Dhaka Stock Exchange (DSE) stood at an all-time high at Tk 441,828 crore
yesterday thanks to increased investor participation. The value of listed securities with the country's
premier bourse rose Tk 51,849 crore, or 13 per cent, over the past month, when investors started
pouring their money into the market. Investors started coming back to the stock market in the last few
months since many stocks have become lucrative amid the pandemic driven index fall, said a portfolio
manager of a top asset management company. Many well performing companies' stocks plunged to low
levels in March but they have the potential to grow despite the ongoing crisis, he said. On March 18, the
DSEX, the benchmark index of the DSE, plummeted to 3,603 points, which was the lowest point of the
index since its inception in January 2013, shows the DSE data.

On the other hand, a Covid-19 vaccine is coming so the economy will be revived, said the stock market
analyst.
The listing of well performing companies in the stock market also contributed to the increase in market
capitalization, he added. Robi Axiata got listed with the stock market on Thursday and raised a fund of Tk
523 crore. Its market capitalization is Tk 11,785 crore. Similarly, Walton Hi-Tech Industries raised Tk
100 crore and the market value of the company's shares is Tk 31,495 crore, shows the DSE data.
Meanwhile, the DSE approved a resumption in trading shares of Rahima Food Corporation at the main
board of the DSE, which will begin today under A category, the DSE informed through its website
yesterday. The company was delisted in 2018 due to a shutdown of its operations in 2013. The company
later resumed its operations and applied to get re-listed. The reference floor price will be the floor price of
the company that traded at the Chattogram Stock Exchange, which is Tk 175.4, said the DSE. The DSEX
rose 15.73 points, or 0.29 per cent, to 5,344 yesterday. It was the highest level of the index after July 7,
2019. Turnover, an important indicator of the market, dropped 11.96 per cent to Tk 1,346 crore yesterday.
BD Finance topped the gainers' list with a 10 per cent increase followed by Eastern Cables, BD Lamps,
Robi Axiata and Golden Harvest. Beximco was the most traded stock with Tk 130 crore worth of shares
changing hands followed by IFIC Bank, Beximco Pharmaceuticals, LankaBangla Finance and Square
Pharmaceuticals. Of the total 361 traded companies, 157 advanced, 143 declined and 61 remained
unchanged. Mozaffar Hossain Spinning Mills shed the most, losing 6.79 per cent yesterday, followed by
GQ Ball Pen, Pragati Insurance, Aramit Cement and Bangladesh Industrial Finance Company. The port
city bourse also rose yesterday. The benchmark index of the Chittagong Stock Exchange, the CSCX, rose
29.5 points, or 0.31 per cent, to stand at 9,292. Of the 292 traded stocks, 132 rose, 117 fell and 43
remained unchanged.

Problems in the Stock market

Liquidity Crisis
Liquidity crisis is the main reason for the fall in share prices. The stock market has been fund-hungry
since its collapse in December 2010. Liquidity crisis is the reason for rising call money rate. This
liquidity crisis is also an evident from the recent scramble for luring depositors by some banks by hiking
interest rates on deposit. Most of the money is now invested in government bonds. If Bangladesh Bank
wants to overcome the liquidity crisis it will have to go for an expansionary monetary policy.

Aggressive Profit Taking in Selective Stock

Most banks that had made hefty profits from the stock market between 2007 and 2010 do not have
enough funds to invest in stocks. The market would have got a real boost had all the banks injected fresh
funds worth Tk. 3.0 billion to Tk. 4.0 billion each. But under the given circumstances, a good number of
banks would find it hard to do that. Moreover, since a major turnaround of the market could take several
years many banks right at the moment cannot afford investment in stocks

Frequent Changes in Policy and Directives

The 'fruitless’ measures taken in the name of market stabilization have ultimately created price distortion
in the market without containing the flagging trend. The SEC also created price distortion in the market
by issuing the directive of individually holding minimum two per cent shares by sponsor-directors of the
listed companies. The securities regulator did not think of the aftermath of the directive. The SEC thought
that a demand will be created in the market following mandatory purchase of shares by sponsor-directors.
The market was regularly affected due to hearing of the writ petitions, filed challenging the SEC's
directive. The market never got back its power of natural movement due to disturbances, created by
different stakeholders or the securities regulator itself. The condition limiting bank's exposure to the
capital market and reduction of margin loan ratio may have also affected the investors' sentiment.

Lack of Knowledge & Confidence among Small Investor

The intern places highest importance on this issue as a cause of market plight. Most of the investors of
our capital market are small investors. And it has been seen that, many of them have lack of proper
knowledge about the market. They just bought a share to get profit after 3 days when the shares got
matured. But how and why they were supposed to get a profit they didn’t knows well. So, when market
went decline the investors were supposed to wait and not to sell in loss. But they got panicked and sold
off their share in loss even. So, this attitude prolonged the market to go in bearish situation. Investors'
prevailing lack of confidence, risk-aversion and encashment attitude, and reluctance to make fresh
exposure have caused the market to fall. Following poor half-yearly earnings by a number of financial
institutions have shaken their confidence further. Though the liquidity situation remains favorable, due to
valuation concerns the investors are a bit worried to step up their investments.
Rumors, Speculation and Manipulation
A market rumor is an unreliable report that has the potential of affecting the stock market. Bad rumors
can lead to a loss of confidence in our markets. Such loss of confidence can lead to panic selling which
may be further exacerbated by "naked" short selling. As a result, the prices of securities may artificially
and unnecessarily decline well below the price level that would have resulted from the normal price
discovery process. Media, broker houses, the corrupted members of SEC and various gamblers spreads
these rumors for their immoral purpose. There was wrongly made speculation and manipulation too.
Let’s assume, Eastern Housing Co. (EHL) had a price of Tk. 600 in the last month. After one month it is
now Tk.1000 and there was strong speculation that it would go to Tk.2000 easily. So, the investors who
bought at 600-700-taka level didn’t sell EHL. They believed that speculation. But ultimately that didn’t
happen. There was example of manipulation too. A share had a price of Tk. 40 only. In a year this price
rose up to Tk. 2000 which means that individual share gave maximum 4900% gain in a single year. It has
been observed that the share values of some profitable companies have been increased fictitiously some
times in such a way that hampers the market stability

Weak Corporate Governance

Corporate governance of international standard is still lacking. Multinational corporations and
institutions operating in Bangladesh often adhere to a very high international standard compliance regime.
Parent companies of most of these corporations and institutions have their scraps listed in developed
markets. Unless the local market adheres to, and effectively enforces, a standard corporate governance
system, there will not be a level-playing ground for international business houses via local operators.
There is very poor corporate governance in the Stock Indices that is an important reason of recent
debacle.

Lack of Coordination among Different Financial Markets

Lack of coordination among different financial markets including debt market, equity market and bond
market is considered as a major weakness for sustainable growth of the capital market. Various decisions
(or indecisions) of different market regulatory bodies have often contributed towards significant
fluctuation in the market. Overall, lack of proper coordination between two leading regulatory bodies of
the financial sector, namely the Bangladesh Bank and SEC is considered to have contributed to the
irregular behavior of the capital market.

Major Future Prospects of Capital Market

Within 3 to 6 months 8 large profitable government enterprises are going to be listed under Direct
Listing Method adding value worth another 1 billion Dollar.

 The Telecom Giants in Bangladesh are finalizing their offers for IPO in the market.

 Power and energy sectors demand for capital

al is 5 to 10 billion dollars within short time to meet the immediate needs of 5000 MW power
demand.
 A deep-sea port requiring 1 billion dollars is going to start with a policy decision that it will also
be listed.

 The Pharmaceutical sector and API enjoying WTO benefit is growing sharply.

 Textile sector as backward linkage to thriving export-oriented garments industries is booming.

 Export oriented food processing industry needs huge capital and technical capacity to meet the
growing standards in global market for marine food, fruits and poultry.

 IT sector with our talented developers, yet to demonstrate the massive potentials of software
industry of the country