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Types and functions

Investment banking companies in Bangladesh are of two types: open-ended and closed-ended.
The open-ended ones, generally referred to as mutual funds, repurchase shares in any quantity as
and when holders offer them for sales. Thus, the amount of shares of the open-ended investment
companies in market changes continually in response to public demand. Closed-ended
investment companies sell only a specific number of ownership shares. An investor wanting to
acquire shares of a closed-ended investment company must find another investor who wishes to
sell. Investment companies do not take part in the transaction. In addition to selling equity
shares, closed-ended companies issue a variety of debt and equity securities including preferred
stock, regular and convertible bonds, and stock warrants for raising funds.

Investment banks act as intermediaries between issuers and investors. The issuer sells securities
to investment bankers who in turn sell the securities to investors. The investment banks own the
securities until they are resold. For firms seeking to raise long-term funds, investment banks
provide assistance through a number of functions including underwriting, marketing of
securities, corporate finance, sale and brokerage, asset management and research. In
underwriting, investment banks can protect themselves by forming a syndicate, which allows
them to diversify the risk. One investment bank acts as the managing underwriter that oversees
the underwriting activities of all members of the syndicate.

In the process of marketing, securities are typically sold through a selling group consisting of the
sales division of the underwriting syndicate and selected retail brokerage houses. Another
significant development in investment banking is the 'unsyndicated stock offering', in
which, the corporation distributes the entire stock issue directly to institutional investors rather
than syndicating them through a retail distribution network to individual investors.

Corporate finance is the core activity in investment banking. Through this


function, investment banks assist clients in developing projects, dealing with

regulatory authorities, performing mergers and acquisitions, and capital

structuring.
The main function of investment banks in sales and brokerage is to provide full-service
brokerage to retail and institutional investors, both foreign and local, in the secondary
market.

The asset management function of investment banks is a process of managing money. In


the process, they analyse the objectives, risk tolerance, and legal restrictions of
each client, and design a customised portfolio. The process continues with an
ongoing measurement and evaluation of performance relative to benchmarks.

Some investment banks in Bangladesh have research department to provide


independent and objective investment advice in relation to primary and secondary
securities to retail and institutional investors. Union Capital Limited is one such
company, which publishes Union Bangladesh Index in major English and Bengali
newspapers. The index shows performance of selected blue-chip stocks of the Dhaka Stock
Exchange.

One of the major investment banks in Bangladesh, the Investment Corporation of


Bangladesh (ICB), plays a leading role in developing the capital market in the country. Major
functions of ICB include merchandising operations and operations of unit funds and mutual
funds. It has an Investors' Account Scheme, which provides small investors with credit
facilities for buying and selling shares listed with the Dhaka and Chittagong stock
exchanges. It also helps investors achieve reasonable returns on investment in sound
shares and provides institutional support to small investors for purchase and sale of shares.
Under the scheme, small investors are to hold accounts with ICB for loans for purchase of
securities. The interest charged is 13.5% per annum.

The maximum amount of loan sanctioned in an account is Tk 200,000. On behalf of account


holders, ICB purchases and sells securities and maintains the profit and loss accounts. An
investor has the option of taking or not taking the loan. If no loan is taken, the investor can
withdraw funds from the account to the extent in excess of the margin requirement. When an
investor takes a loan, he/she can withdraw the amount appearing in the account as
unutilised balance. Also, an investor can withdraw securities when his/her account is
closed after clearing dues outstanding in the account.
Under the scheme, ICB gives the custodian service in safekeeping securities of the account
holders, and also collects allotment letters, share certificate, and dividends. ICB launched its Unit
Fund Scheme on 10 April 1981. This is an open-end mutual fund, through which small and
medium savers get an opportunity to invest their savings at any time of the year. The fund is
divided into units known generally as ICB units, each of which bears a certain value in the assets
of the fund. These units are sold to the public. ICB units can also be purchased by
Bangladeshi citizens living abroad and foreigners residing in the country. Unit holders are the
owners of the fund, while ICB takes the responsibility of managing the fund and loading and
unloading securities in their interest. ICB floated its first mutual fund in 1980 and the number of
its mutual funds increased to 8 by 2000.The total paid up capital of the mutual funds is Tk 175
million. In 2001, the corporation disclosed its decision to issue the 9th mutual fund of Tk 100

million.

In addition to ICB, a number of commercial banks also carry out investment banking functions
in Bangladesh. The Securities and Exchange Commission (SEC) issues certificate of
registration to institutes intending to operate as issue manager provided that they have a capital
of at least Tk 2.5 million. The minimum capital requirement for an institution to become
eligible for the certificate for operating as underwriter or portfolio manager is Tk 10
million.

The SEC has a code of conduct for issue managers, underwriters and portfolio managers
and is empowered to suspend or cancel the certificate of registration for its violation.

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