An article onMerchant Banking in Bangladesh:A Case Study on Prime Finance & Investment Ltd

AbstractPrime Finance & Investment Limited has been running its merchant banking operations for about fourteen years. In this short period of time it has gained great momentum and expanding at a fascinating rate. However, the growth can be best evaluated by considering the financial factors as well as its operations. Capital market of Bangladesh is yet to play its potential role as a vehicle for financing long term investment. However, the hangover of an unpalatable historical past which saw a dramatic upsurge in the second half of 1996 only to be followed by a drastic and prolonged downswing has been successfully overcome. Discernible signs of renewed vitality have emerged. A number of actions have been considered by strategists to add depth to the market. Merchant banking, these days has been showing the path to achieve these goals. Although the concept is not too old in this country, its potential of meeting diverse challenges of capital market is high. This report emphasizes on the operations of Merchant Banking Division of Prime Finance & Investment Limited. It is aimed to achieve an overview on the operations of this division and measure how effective and efficient it has been in its working process.

Keyword Prime Finance & Investment Limited, Merchant Banking, CDBL, DSE, SEC, TESA

Merchant BankingMerchant banking is an emergent sector in the capital market. According to Securities and Exchange Commission (Merchant Banker and Portfolio Manager) Rules, 1996, merchant bankers is defined as “… those who manage portfolio on behalf of its clients or performs the business of underwriting or are related to securities as underwriter or advisor or are providing corporate advisory services on completion of all the activities relating to Issue Management.” Generally the term merchant banking refers to a negotiated private equity investment by financial institutions in the unregistered securities of either privately or publicly held companies. (Craig, 2002)

As per Merchant Banking Regulations, a merchant bank can mainly perform three activities which are:1. Issue Management: Issue Management function of merchant Banking helps capital market to increase the supply of securities. Being a Issue Manager we provides assistance to the Private Limited Companies intended to be converted into Public Limited Companies by way of obtaining necessary permission from the relevant authorities, preparing prospectus for public issue of shares and debentures, involving itself in the collection of application money, scrutiny of applications, arranging for lottery relating to allotment, if required, allotment of shares and debentures, refund of application money etc.2. Underwriting: Underwriting Operation is one of the important functions of a Merchant Banker by which it can increase the supply of stock/shares and debentures in the market. It is an arrangement whereby the underwriter undertakes to subscribe the unsubscribed portion of shares/debentures offered by any Public Limited Company. This encourages the prospective issuers to offer shares/debentures to the public for subscription and they can raise fund from the public for implementation of their industrial undertakings.3. Portfolio Investment Management Services: One of the most important functions of merchant banking is to provide Portfolio Management service to the customer. Basically, Portfolio Management Services program has four different wings to provide portfolio investment management services.In addition a merchant banker can also perform the activities of Project counseling, Pre-Investment Studies, Merger & Acquisitions, Factoring, Asset Securitization, OTC Market, Capital Re-Structuring etc.Origin of merchant banking: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. In late 17th and early 18th century Europe, the largest companies of the world were merchant adventurers. The colonies of other European countries were started in the same manner. For example, the Dutch merchant adventurers were active in what are now Indonesia; the French and Portuguese acted similarly in their

respective colonies. The American colonies also represent the product of merchant banking, as evidenced by the activities of the famous Hudson Bay Company. Later, the center for merchant banking shifted from the Italian states to Amsterdam and then, in the eighteenth century, to London, where immigrants from Prussia, France, Ireland, Russia, and the Italian states formed the core of early British merchant banking. As the nineteenth century opened, virtually no mercantile houses remained focused on both trade and finance.During the 20th century, however, European merchant banks expanded their services. They became increasingly involved in the actual running of the business for who the transaction was conducted. Today, merchant banks actually own and run businesses for their own account, and that of others.

Merchant banking in Bangladesh:The concept of merchant banking is in a development phase in our country. Regulatory bodies and Government is always trying to develop the capital market focusing the welfare of the investor through building a stable and secured market. The first ever stock exchange came into existence in Bangladesh (then East Pakistan) in the name of “East Pakistan Stock Exchange Association Ltd”. It took two years more to launch its formal operation. 1964, the name of East Pakistan Stock Exchange Limited was changed to "Dacca Stock Exchange Ltd." Investment Corporation of Bangladesh (ICB) was the pioneer in the country that has performing with strong reputation in the country’s capital market spreading its activities in all the segments of capital market. In 1987, the Bangladesh Government prepares and presents the Securities & Exchange Rules. In 1993, DSE took step ahead to update its all share price index on the basis of the design suggested International Finance Corporation (IFC). In 1994, Securities & Exchange Commission (SEC) published rules regarding the activities of dealers and brokers. The title of the rules is set (Stock-dealers, Stock-brokers and Sub brokers). In 1996, SEC introduces SEC (Merchant Baker & Portfolio Manager) Regulations, along with SEC (Mutual Funds) Regulations, 1996. Except the activities of ICB, merchant banking in Bangladesh had started their activities. Now there were no legal obligations of the issuer companies to engage an issue manger at the time security issue. In 1997, some bank and non banking organization give proposal to get the permission of operate merchant banking operation. In 1998, DSE introduced automated trading; it is a great breakthrough both for the country and

stock exchange. IDLC of Bangladesh got license full-fledged merchant banker. It is the first licensed full-fledged merchant banker in the country. Another 10 full-fledged merchant banker introduces in this. In 1999, another 5 non banking organization started as full-fledge merchant banker. Prime Finance and Investment Limited started their full-fledge merchant banking operation from this year. In 2000, only one non banking organization introduced as a full-fledge merchant baker. In 2001, Prime Bank and Arab Bangladesh Bank started their operation as a merchant banker, another 2 non-banking organization started their merchant banking operation. From 2002 to 2009, another 10 merchant banker are introduced and most of them are private commercial banking organization. The number of full-fledged merchant banker is now 29. Another two companies is also registered as merchant banker but currently deals with issue management and portfolio management only.

To register as a merchant banker, SEC asks some requirements as below:Issue Manager | At least 1 (one) proposal for public issue be submitted to the Commission in each calendar year |Portfolio Manager | In addition to own portfolio, at least 5(five) new portfolio accounts be opened in each calendar year |Merchant Banker | 1 (one) issue management, 2 (two) underwriting, 5(five) new portfolio accounts be opened in each calendar year |Besides these, merchant bankers need a pre-condition of capital of TK 100 million for the registration of full-fledged merchant banker. Tk 10 million of capital is needed of a company is registered for issue management and underwriting or portfolio management only. For issue management, it is needed 2.5 million only.Prime Finance & Investment Ltd as a merchant banker:Merchant Banking department of Prime Finance & Investment Ltd is a very progressive department. Prime Finance operates as a full-fledged merchant bank since 1996. Merchant bank operates four types of operation. The activities are given below-

Issue Management:It is a mandatory activity for any merchant bank working in Bangladesh. Issue management means managing new issues of equities, bonds and debenture. The functions of issue management include provide assistance in transform of Private

Limited Companies to Public Limited Companies where necessary. It helps preparing prospectus, pricing issue of Shares, getting approval from the appropriate authorities, arranging underwriters, bankers to the issue, stock exchanges, advertising agencies receiving share applications, arranging distribution of allotment letters and refund money send all other activities related to public issues. Thus, issuing new IPO is the focus point for any merchant bank under separate issue management department. (Merchant Banking and it’s Progression in Bangladesh: The Multidimensional Factors, 2005, p.7).Mangers may select out of SEC approved Issue Managers. The normal commission for Issue Manager is 1% of issue amount.The activities are divided by issue management into two stages: Pre-issue Stage and Post-issue Stage. Different steps are followed in these stages.Step A: Before filing the prospectus to SEC for approval some documents are required to provide by issue company to issue manager.Step B: General Requirement for filing application to SEC for consent to an issue (In line with Public Issue Rules, 2006)Step C: Basis on getting consent letter on dated ………………from the Securities and Exchange Commission the company will publish the prospectus on different newspapers, websites and for NRB they send EMS. The issue manager shall carefully examine and compare the published abridged version of prospectus on the date of publication with the copy vetted by SEC. Step D: After subscription of Resume, the issuer and the issue manager shall jointly provide the Commission and the stock exchanges with the list of valid and invalid applicants (i.e. final status of subscription) to the Commission within 3 (three) weeks after the closure of the subscription along with bank statement (original), branch-wise subscription statement, NRB application forms (photocopy attested by the CEOs of the issuer company and the issue manager). The list of valid and invalid applicants shall be finalized after examination with the CDBL in respect of BO accounts and particulars thereof.Step E: Application forms, pay orders collection & checking, data entry and other related works up to the status ready for lottery arrangement. Step F: Distribution of allotment letters and refund warrants.Step G: The Issue Manager, In addition to the issuer company, shall ensure due compliance of the conditions and submit compliance report thereon to the Commission.

As an issue company, Prime Finance worked for 25 companies so far.

Underwriting:A merchant bank uses some portion of their own assets as guarantee to help an entity find investors, this process in known as underwriting. It is one of the major functions of a merchant bank. Underwriting is one of intermediary function whereby underwriters, agrees to take up the unsold position of an issue that is being offered by the company directly to the investor. In other words it is a guarantee of subscription of shares or debentures by the public against some specific commission. In our country as per the SEC rules every public company has to do 50 % of their new issues must have to underwrite.The underwriting procedure can be outlined with the flow chart:Manage underwriting Finalize underwriting of shares Prepare underwriting agreementsSteps done by Prime Finance as an underwriter: Step a) Agreement SignedStep b) Declaration of Current UnderwritingStep c) Contact Person DetailsStep d) Due Diligence SignedStep e) Management ApprovalStep f) Board ApprovalStep g) Note for PaymentStep h) Forwarding LetterNo. of Underwriting by PFI:Total amount of issues held for Underwriting are 60.

Portfolio Management:Another Important emerging area in merchant banking activity is investment management or portfolio management. The demand for this service, from individual investors as well as from institutional investors is increasing. Prudent merchant banker provides expert guidance for making right investment in write time. Portfolio manager mainly give support to the investors to invest in secondary share market.

Activities Done by PFI as a Portfolio Manager:

The portfolio management department of PFI maintains two portfolios-Organization’s own portfolio, which is an omnibus BO account.Investors’ portfolio, which are operated against each individual’s account.The major activities of organization’s own portfolio are-1. To prepare all kind of paper and formalities for IPO/Rights Shares applications, transfer and registration2. To collect dividend warrant, interest warrant, bonus shares and right shares from the company3. To prepare Transfer instruments and get signature verification of others.4. To update daily market trend statement of PFIL portfolio.5. To prepare monthly purchase and sales statement and monthly gain loss statement for board meeting purpose.The major activities of investors’ portfolio are:1. To do necessary jobs relating to opening of investors account.2. To receive, record and maintain orders for purchase or sales of securities on behalf of the portfolio accounts holder.3. To execute buy and sale order on behalf of investors.4. To maintain investors wise information in the ledger.5. Maintain updated fund position and share position of each investors.6. To give support at the time of requisition of withdrawal by investors.7. To report SEC as per their instruction or requirements.8. To prepare tax certificate for the requirement of the investors.9. To report to the different companies for different activities (right share application, dividend declaration, bonus share declaration, Pre-IPO offer, IPO offer) on behalf of investors.10. To do other ancillary jobs at the instruction of superiors.No. of Portfolio Account PFI:Portfolio department of PFI has 955 individual and institutional non-discretionary accounts as on dated 31 July, 2010.

Corporate Counseling: Corporate counseling service is administered within a limited frame not only PFI but also all the merchant banks in the country. Prime Finance provides selected counseling service for its potential customers to aware and to educate them about

various issues of capital market for preserving their investment in a structured way.

Process of doing everyday business functions:Every merchant bank has to do their business as per the SEC instruction. If they break any of its instruction SEC may cancel the license of merchant bank. PFI maintain some system to precede its business.

Non-Discretionary accounts:Generally non discretionary accounts are operated by PFI. That means it will give only the monetary support (margin loan) and necessary support to do the share business. But it will not take any kind of risk of giving advisory risk at the time doing the share business by the investors. Portfolio department of PFI merchant banking mainly two accounts, one is called individual account (a/c no 102) and another is own portfolio account (a/c no. 101). Own portfolio account is the company’s own account.

Relation with Brokers:PFI is related with three broker houses, by which it operates its secondary share business. Investors are doing their daily buy and sale by these broker houses. 35 paisa commission is taken against per 100 TK transactions from the investors. And the broker houses get the 20 paisa and the merchant bank gets the 15 paisa commission. The broker houses are- Prime Finance and Securities Ltd., Vision Capital Management Ltd., Chowdhury Securities Ltd. and Sharp Securities Ltd.

Taxation:Under the Income Tax Ordinance1984, Prime Finance & Investment Ltd. is subject to tax on income derived from share transaction amount of its trading activities. Provision for income tax has been calculated on the other income of the country. The company’s trading income is subject to deduction of tax at source on brokerage commission as final settlement.Trading in accordance with the applicable laws and regulations:Buy/Sale order books: according to Securities Exchange Rule, 1987, 4(1), a) A buy/sell order form is to be maintained through which all clients shall place their transactions order. This form is to be signed by the clients. No order shall be

entered in the Brokers workstations without written order form. [This clause is extremely important as the main risk of a brokerage house is involved with it and any misunderstanding regarding the order shall be verified with this document. b) All these orders should be chronologically recorded in a register mentioning the name and address of the client, the name and number of the securities to be bought or sold, the nature of transaction and the limitation, if any, as to the price of securities. c) No sell order to shares shall be entered without holding the shares by the Broker or having the shares in the Broker clearing account (in case of CDBL traded issues). CDBL regulations require the shares intended to be sold out be transferred from the BO account of the client to the clearing account of the Broker. d) No buy order shall be entered without having positive balance (Credit balance) with the broker excepting a margin Agreement for credit facility. [In case the accumulated purchase amount exceeds the credit balance of a particular client, excess amount should be deposited with the broker on the same day]Prime Finance & Investment Ltd. maintains Buy/Sale order books in accordance with the rules mentioned above.

Telephone/Email/Fax Order:Order of Purchase or Sale of shares through telephone/fax or email is also accepted in Prime Finance & Investment Ltd. according to the Securities Exchange Rule, 1987, 4(1). In the rule,A telephonic order of buy or sell given by a customer may also be accepted ifa. The customer has an established account with the member. b. The order is properly recorded and signed by the member or his Authorized representative. c. Written order of confirmation is obtained by the member within 24 hours.For placing such orders, the account holder has to tell his account number; i.e. A1111 and must make sure he is completely aware of the position of his account value and available shares.Settlement Process:The settlement date is the day on which either the payment to cover purchases or the securities to cover sales must be in the company’s account. When the clients purchase/buys a security, payment must reach IDLC Securities Limited account

before execution of trade. When the client sells a security, the share certificates must be delivered to IDLC Securities Limited before trade execution.Clearing & Settlement:1. Shares and money are settled with the clearing & settlement department of the exchange according to the category of the company. For ‘A’ category shares, money and shares are to be settled on T+1 (Transaction Date + One Days) and cleared on T+3 (Transaction date + Three Days). For ‘B’ and ‘G’ same rule applies.2. In case of shares in ‘Z’ category shares and money shall be deposited on T+4 and cleared on T+7.3. CDBL traded issues are settled on within T+2. only ‘A’ category share are eligible to become as demat form. Trading Procedures:Screen Based Trading:It is an advanced trading system over the “Cry out Market”. Now Bangladesh has started this type of trading system. In this system the shares are dematerialized that means we do not have any paper share certificate. Now every share is reserve in the central depository. Central depository is a system where every share is record as digital and they are also traded digitally. The way bank record all the transaction of its client depository also record his client’s every transaction electronically. And the owner ship also transacted digitally. The depository maintains an account of the share investor which is called the BO account. CDBL:Central Depository Bangladesh Limited (CDBL), a joint venture company setup by banks, stock exchange, Asian Development Bank and other institutions operates the Central Depository System (CDS) in Bangladesh. CDBL, by converting physical certificates into electronic form, will eliminate the risks of damaged, lost, forged and duplicate share certificates. The Dhaka Stock Exchange has become a full depository Participant (DP) of CDBL to facilitate the trading of its non-DP members. CDBL is regulated by the Securities and Exchange Commission (SEC).TESA: trading softwareDSE trading function is operating by the help of TESA (The Electronic Securities Architecture).It is a trading software which is based on HP proprietary O/S & DBMS. TESA software is built for the global securities markets. It uses fault tolerant computers, intelligent workstations and client / server design techniques. This

provides co-operative processing, high message integrity, continuous operation and fully automatic recovery. This co-operative mechanism enables very high speed processing which is essential for today’s electronic markets, especially for DSE. TESA has two parts: MSA (Member’s Server Application) & TWS (Trader workstation).MSA is the “Gateway” between the traders and the Stock Exchange, which manages all the transactions and database operations between the traders and the Trading Engine. TWS is the Front-end Application closer to investors, where they can submit Buy/Sell orders for their desired securities.Dhaka stock exchange utilizes the blending trading system where both the pure auction market and the dealer market work collectively. Actually the pure auction market dominate the dealer market as public basically prefer and feel comfortable dealing with the pure auction market in first hand in trading system. However, people go for dealer market when, trading in dealer market is much more comfortable to utilize the trading system compared to only exercise pure auction market. Nevertheless, note that, when pure auction market and dealer market is in same cost to trade, then people definitely go for the pure auction market as its more comfortable toward public.TESA conducts trading in-5-phases: a) Enquiry: In this session Brokers can logon to the system. No order will be submitted in this session. No trade will be executed. Only previous orders can be withdrawn in this session. b) Opening: The Opening is a pure, single-price auction. All buy and all sell orders are compared and calculate the open-adjust price. No trades will be executed in this session c) Continuous Trading: During this phase, participants enter orders and immediate execution or for inclusion in the book. Automatic matching and execution takes place based on best price/ first in, first out trading rules. d) Closing: Closing prices are calculated and disseminated to market participants e) Enquiry: Market will be closed in this session & other facilities like the previous enquiry session.Orders may be grouped or categorized based on the following, namely - (a) Price; (b) Volume; and (c) Validity.Based on price, orders may be of the following categories - (a) Limit order and (b) Market order

Based on volume, orders may be of the following categories, namely :- (a) Partial fill which signifies that as much possible of the order quantity shall be executed as soon as the order is submitted to the trading engine. (b) Partial fill and kill signifies that as much as possible of the order quantity shall be executed as soon as the order is submitted and the remaining order quantity shall be returned to the trader who entered the order.(c) Full fill or kill signifies that either all of the orders quantity shall be executed as soon as the order is submitted to the trading engine or the entire order shall be rejected and returned to the trader. Based on validity, orders may be of the following categories, namely :- (a) Good till day - By default, all orders shall be valid till the end of the current trading day. (b) Good till date- The trader can specify the date till which the order should remain active in the market. The order validity date can be a date which is up to a maximum of thirty days from the current trading day.Payment Policies:Prime Finance & Investment Ltd. prefer that the client makes payment before the execution of a buy order or delivers share certificates before the execution of a sell order. Account payee Cheques for payments on purchase of a securities must be made payable to Prime Finance & Investment Ltd. Only clients’ personal cheques, bank draft, pay order, corporate cheques are accepted in Prime Finance & Investment Ltd. Any kind of cash or money order is unaccepted for the payment of the transaction.

Performance of Prime Finance & Investment Ltd.:

The performance of Prime Finance & Investment Limited is showing an upward trend here. The reason behind their consistent performance can be attributed to keeping operating expense down. The profit growth was lowered in 2009, but growing reserve can justify the situation.

Contemporary challenges of merchant banking in Bangladesh:Merchant Banking concept is a new concept in Bangladesh. This market is not that much establish. There are many problems in this area. Some major problems are

given below-High Flotation cost-For high flotation cost small entities cannot enter the market.Information Asymmetry-Access to credible information is restricted.-Retail investors lack dedicated investment process infrastructure.-Forced to look to brokers for advice that may consist of market rumors.-Syndicate of large investors manipulates the market through price inflation, pump and dump strategies. (Rashid, n.d.).

Supply Side Constraints-Lack of fundamentally sound scripts as companies prefer traditional bank finance to capital markets.-Need to encourage listing of good scripts in the market.-Reducing supply side constraints generates liquidity, reducing scope for price manipulation. (Rashid, n.d.).

Lack of Professional Portfolio Management -Ratio of institutional-to-retail investors remains low-Institutional investors bring stability through non speculative long term investments-Listing of more mutual funds can be a starting point to increasing institutional activity (Rashid, n.d.).

Valuation Disparity-Value of scripts is subject to speculative trading rather than sound fundamentals, resulting in market volatility. Education of investors, overall development of capital markets through time can address this issue. (Rashid, n.d.).Lack of a Formal Debt Market-Bangladesh does not have established secondary debt market. -Markets are unable to provide short term financing solutions to corporations, i.e., commercial paper.-Listing of debt instruments from quality issuers and institutional trading can increase activity.-Introduction of BASEL II guidelines by Bangladesh Bank likely to encourage banks to

raise capital through debt instruments in 2010. (Rashid, n.d.).

Quality Research and AnalysisDevelopment of quality equity research in the country is yet to match the growth of local capital markets. Quality research increases investor awareness, reducing speculative trading and market volatility (Rashid, n.d.).Central Co-ordination of Regulators -Top down co-ordination between Bangladesh Bank, SEC and related bodies would:-Streamline regulatory processes-Reduce time required for quality issuers and new capital markets products to reach market(Rashid, n.d.).

Relatively short history The issuance of debt securities by corporate bodies is a relatively recent phenomenon in Bangladesh and the experience of the investors’ has not been quite pleasant. The first public issue of listed corporate debenture in independent Bangladesh happened only in 1987, followed by about another dozen in the following years (Sayeed, n.d.).

High government borrowing at high interest ratesThe government has traditionally been the major borrower through the various ‘national savings schemes’ and that too at the highest interest rate bracket and in unlimited (not predetermined) amounts. The government instruments were crowding out corporate borrowers and bank deposits in comparable tenures. Thankfully, the scenario is shifting lately as the government has discontinued some high interest paying instruments and restricted investments on others, accompanied with rate cuts. This has been attributed to the recent surge in stock prices (Sayeed, n.d.).

Lack of transparency in public sector borrowingPublic sector borrowing has been riddled with lack of transparency that failed to eventually proffer any reliable demand-supply scenario in which an efficient debt market can function. Because of the frequent shifts and ad hoc culture and volatility

of demand, many of the debt instruments could not be designed to be publicly traded that could fuel a vibrant market. Efforts are now on to issue tradable instruments and bring fiscal discipline (Sayeed, n.d.).

Entrenched buy & hold culture Since the first love of fixed income investors were the non-transferable high yield government saving certificates, an entrenched ‘buy & hold’ culture developed over the years. Even premature encashment over the counter at the issuing offices were not a common practice. This culture spilled over to the nascent listed corporate debenture market, testified by the historically low trading volume at the exchanges, which retarded the natural growth of a secondary debt market (Sayeed, n.d.).

Low long-term borrowing requirement Owing to a bitter colonial past and lack of resources, historically there was a weaker base for industrialization and related formalized commercial activities. This has kept the demand for long-term capital and credit requirement at the formal market at a lower level (Sayeed, n.d.).

High bank deposit rates As deposit interest rates of the commercial banks were also quite high until recently in competition with government securities, corporate issues had to offer unsustainable higher rates (14%-18.5% per with semi-annual rest). High bank interest rates deterred public borrowing by the corporate bodies, thwarting the expected development of a debt market (Sayeed, n.d.).

Banks feeding project finance appetite Though retail banks necessarily should not be in a position to provide adequate long-term project finance owing to a deposit and credit tenure mismatch, traditionally the commercial banks were (and still) providing such funds largely through annual rollovers, distorting the long-term credit market. Borrowers prefer less disclosure requirement and prudential obligations in bank borrowing to a public issue (Sayeed, n.d.).

Absence of policy support

Until recently there had been no government initiative, policy support or expressed political will to develop the financial and infrastructural base where a debt market could grow. Only recently the government has taken some measures that hint policy shift and discipline, including intended listing of two new sovereign bonds at the bourses for the first time. Outcrowding effect from bad loan situation and fiscal deficit of the government as well as dominance of NCBs also played a damper on viable debt securities market development (Sayeed, n.d.).

High tax incidence & issue cost Until a couple of years back debenture trust had to pay one-off 2.5% registration fees (now a fixed token amount of Tk2,500) and 2% stamp duty on the total amount raised. With firm commitment underwriting requirement necessitating 2.5% fees, the public issue cost averaged about 8%, topping with a recurring annual 1% trustee fee and related listing fees. In a prevailing high interest regime, a high establishment and issue cost base rendered most public issue of corporate debentures unviable(Sayeed, n.d.).

Lack of regulations and infrastructure Absence of a dedicated set of regulations and necessary infrastructure that could help a debt market of consequence remained an impediment. However, despite absence of an umbrella law, there could have been notable market activities had there been strong policy support. The historical inheritance of the English Common Law, including the Companies Act 1913, Contract Act 1862, Trust Act 1882 etc. along with the various securities regulations including the SEC Public Issue Rules, all provided a framework which could have a facilitating role had their been application of imagination. The SEC has now framed a guideline for issuance of debt securities (Sayeed, n.d.).

Lack of expertise & innovation General lack of expertise and innovation and absence of institutions in bringing variations in debt products have kept the market uninteresting. Lawyers, financial advisors and other service providers have not been competent in identifying the rights and obligations of the parties involved in debt securities. Expertise and institutional base for issuing various forms of debt is yet to visibly evolve. There is

also absence of pertinent financial research institutions. The Bangladesh Bank have now issued Primary Dealer licenses to selected banks and NBFIs and the SEC have also initiated the process of appointing eligible stock brokers for trading of government securities at the bourses (Sayeed, n.d.).

Unaccountable trustees Owing to the absence of a clear regulatory regime, the system failed to hold the Trustees of debenture responsible for failure to defend the rights of the debenture-holders in many cases when issuing companies declined to honor obligations. Regulators could not take the Trustees to task those, though received their fees, could or did not take any timely action against recalcitrant issuers. The trusteeship of debentures has in effect become an unaccountable and defunct institution (Sayeed, n.d.).

Absence of institutional investorsIn Bangladesh the institutional investor community like investment & merchant banks, mutual funds, pension & provident funds, life insurers etc. has unfortunately not developed due to multifarious impediments. The market is essentially retail based and prone to high risk. The newly licensed merchant banks are yet to make any tangible mark, the government pension funds are essentially non-funded and non-accounted-for liabilities, provident and insurance funds restrained under age old qualitative and quantitative restrictions and growth of private mutual fund retarded under stringent regulatory frame-work and an uneven playing field. None of these ground realities has been conducive to growth of a healthy and vibrant capital market (Sayeed, n.d.).

Cold capital market The capital market is yet to emerge as an effective investment avenue to most of the small savers on one hand and attractive avenue for the corporate bodies in raising fund on the other, especially since the boom and burst of 1996. The negative spillover effect of the grim capital market performance dampened potential public issue of debt securities. However, with recent resurgence of the market the appetite for investment grade securities has again been pronounced that could unleash fresh demand for listed debt securities (Sayeed, n.d.).

Recommendation for Prime Finance & Investment Ltd.:Prime Finance & Investment Ltd. has established its image as one of the best service provider for its potential customers. From above discussions and basic understandings while working in the organization following recommendations can be formulated for the organization. a) By adopting the principles of good governance at all decision making levels, Prime Finance & Investment Ltd. must show that corporate governance is a management enhancement tool. This is one of the factors that can give confidence to business partners and facilitates co operation with parties in international financial centers, which already adopts such principles. b) Prime Finance & Investment Ltd. should more clearly define respective responsibilities of staffs, managers, board of directors and shareholders in the attainment of goals and establish a procedure of sanctions attached to these responsibilities. c) It should improve more on management control systems comply religiously with corporate governance principles and the international financial standards especially aspects that impact on assessment &management of risks, transparency & viability. d) Intensify consultation within the profession in order to become a real source of idea for the development of brokerage house system within the region. e) Demand is shifting continuously, and these shifts have so much to do with today and the future as with the past. f) In order to increase the profitability & reduce the risk, Prime Finance & Investment Ltd. should maintain a well-balanced portfolio. The more diversified the portfolio, the lesser the risk of losses. g) It is to be keeping with mind that competitors can copy product but cannot copy the understandings & expertise. h) Many consumer segments still demand braches & use them while the other seek the reassurance of the branch if they do not use them, so branch should be based on proper demand identification. i) Prime Finance & Investment Ltd. should continuously redefine new demand for financial, brokerage services & ensure that this understanding is unique & actionable. j) Establish priorities for capabilities for new product investment as well as better ways to minimize gaps in strategic management.

ConclusionMerchant banks can contribute greatly for the development of more authenticated and structured capital market and can also help to form a more stable economy. The report has been focused to present the important issues of merchant banking sector of Bangladesh within the boundary of three merchant bankers. It has not been possible to present all the factors along with problems and prospects within this limited time frame and it needs more expertise to analyze the real scenario. It may not showcase the proper scenario of total merchant banking conditions. The findings may get biased by the interviewer information compared to the real scenario of market. It was very difficult to give recommendations depending on three merchant banks. In spite of these reasons, dedicated efforts are given to prepare the report, but some mistakes can occur, which are unintentional due to lack of knowledge on certain areas and also because of time limitations.

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