The Role of Investment Banks in Facilitating the IPO
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Transcript of The Role of Investment Banks in Facilitating the IPO
The Role of Investment Banks in Facilitating the IPO
Prepared for
Mohammed Sohail Mustafa
Lecturer, School of Business
Prepared By
Khan Asif Imran
Farnaz Karim
Nashid Iftekhar
Shahjadi Rabeya Bosrin
FIN 435 (Section # 4)
North South University
August 1, 2010
EXECUTIVE SUMMARY
As part of our course FIN 435 Investment Theory we are obligated to perform a practical project
work on the topic “Role of Investments Banks in Facilitating the IPO” where we focused on the
performing investing banks in Bangladesh who conduct the activity of off loading of shares of
joint stock companies by the process of IPO (Initial Public Offering). Indeed it is the Invest
Corporation of Bangladesh (ICB) along with three of its subsidiaries ICML – ICB Capital
Management Ltd, IAMCL – ICB Asset Management Company Ltd, ISTCL – ICB Securities
Trading Company Ltd, who mainly work in this arena as the main Investment Bank to the Issue
by forming syndicate with various commercial banks who act as the issue managers under the
investment bank. We dealt with data throughout the period from 2005 till 2010 for our analysis
where we tried to project the nature and trend of year wise aggregate IPO off loading amount.
Despite of limitations to the scope of accessing appropriate information, we conducted the
analysis based on both primary source (Mr. Prometheus Siddiqui, Executive of NDB Capital) and
secondary sources (relevant national and international websites).
Table of Contents
1.0 What is an Investment Bank? 01
2.0 Investment Banks in Bangladesh 02
3.0 About Investment Corporation of Bangladesh (ICB) 05
4.0 IPO off loading Analysis for the period 2005-2010 16
Reference
Appendix
1.0 What is an Investment Bank?
Investment Banking an American synonym of merchant banking. Investment banks provide
advice on mergers and acquisitions and are involved in financing industrial corporations
through buying shares and selling them in relatively small lots to investors.
In the Bangladesh context, merchant banking includes all institutions that combine the
functions of both development banking and investment banking. The Securities and Exchange
Commission, based on SRO No. 59 of 24 April 1996, and a decision taken by it on 17 August
1997, invited letters of intent from 14 institutions for registration of merchant banks. Prior to
this decision, 7 institutions submitted such letters of intent and SEC gave registration to a total
of 19.
01
2.0 Investment Banks In Bangladesh
3.0
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.
02
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 analyze the objectives, risk tolerance, and legal restrictions of each
client, and design a customized 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
03
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.
04
3.0 About Investment Corporation of Bangladesh
4.0
Investment Corporation of Bangladesh (ICB) established on 1 October 1976 under the
Investment Corporation of Bangladesh Ordinance 1976. It is an investment bank established to
accelerate the pace of industrialization and develop a sound securities market in Bangladesh.
Initially, the activities of ICB were limited to underwriting public issue of shares, bridge
financing, debenture financing and opening/maintaining investors' accounts (Investors'
Scheme). ICB had largely expanded its areas and scope of activities and now provides various
types of investment and banking services. Added activities include providing debenture loans to
companies and loans to investors on margin trading basis, providing advances against ICB unit
certificates, leasing of industrial equipment, managing unit fund and mutual funds, and
participating in stock exchange for trading securities.
Initially, the authorized and paid up capital of the corporation was Tk 200 million divided into 2
million shares of Tk 100 each, subscribed by the government of Bangladesh (27%), Bangladesh
Bank (12%), Bangladesh Shilpa Bank (6%), Bangladesh Shilpa Rin Sangstha (6%), Nationalised
Commercial Banks (15%), Sadharan Bima Corporation (9%) and the general public (25%). The
authorised and paid up capital of ICB was increased in 1999-2000 to Tk 1,000 million and Tk 466
million respectively. ICB is a listed company in both Dhaka and Chittagong Stock Exchanges. The
reserve fund of the corporation was Tk 425.08 million on 30 June 2000 and the types of
reserves were general reserves, building reserves and dividend equalisation reserves.
Total fund of ICB during the year 1999-2000 was Tk 6,784.84 million which comprised
shareholders' equity i.e., share capital, reserves and retained profits (Tk 894.97 million), long-
term debts Tk 1,153.81 million, deferred interest (Tk 292.72 million), deferred liabilities (Tk
18.81 million), lease deposits (Tk 0.66 million), and other liabilities (Tk 4,423.83 million).
On 30 June 2000, the total value of assets of ICB were valued at Tk 6,784.84 million comprising
marketable securities (Tk 2,391.52 million), secured margin loans (Tk 1,503.40 million), unit
05
advance account (Tk 19.60 million), bridging loan (Tk 339.44 million), debenture loans (Tk 4.40
million), leased equipment (Tk 7.95 million), and cash in hand and at banks, interest receivables
and the premises and equipment under its own use.
Since its inception up to 30 June 2000, ICB committed to provide a total of Tk 2,496.8 million in
loans to 353 projects and it disbursed Tk 1,141.2 million to 307 of them. It acted as the trustee
to the debenture issue for 12 companies and as manager to the issue for 39 companies.
Advances Against Unit Certificate Scheme (introduced 1998) were Tk 43 million, cumulative
amount of lease financing amounted to Tk 73.9 million involving 14 companies, and total net
underwriting cum bridging loan commitment was Tk 1,164.80 million to 306 companies. ICB
committed to provide net assistance in the form of direct underwriting of shares of Tk 702.6
million of 37 projects and debentures of Tk 120 million of 5 projects.
As on 30 June 2000, the total gross outstanding loans of ICB stood at Tk 4,775.1 million and it
recovered Tk 1,315.70 million. Up to the date, ICB floated 8 closed-end Mutual Funds with total
paid up capital of Tk 175 million. The dates of issue of these Mutual Funds were 25 April 1980,
17 June 1984, 19 May 1985, 6 June 1986, 8 June 1987, 16 May 1988, 30 June 1995, and 23 July
1996. As on 30 June 2000, the cumulative net sale of units amounted to Tk 5,280.8 million for
42,985,690 units. The ICB unit certificates earned a net income of Tk 528 million during the year
1999-2000. The total number of unit holders on 30 June 2000 was 43,433 of which 58% were
salaried employees of government and private organisations.
The corporation introduced its Investors' Scheme in 1977. Under the scheme, it received a total
deposit of Tk 22,177.5 million up to June 2000, while loans sanctioned and investments made
amounted to Tk 3,715.2 million and Tk 4,410.6 million respectively. During the year 1999-2000,
the corporation invested Tk 978.9 million in securities and on 30 June 2000, the market value of
its portfolio stood at Tk 1,945.9 million. During the fiscal year 1999-2000, the corporation
earned a net profit of Tk 59.4 million.
06
Besides its head office and the local office in Dhaka, ICB has 6 branch offices, one each at
Chittagong, Rajshahi, Khulna, Barisal, Sylhet and Bogra. The head office has 4 broad
divisions/wings and 31 departments under them. In 2001, ICB had 394 employees including 242
officers and 152 other staff. The managing director is the chief executive officer of the
corporation and an 11-member board of directors is its top policy making body.
With the enactment of the Investment Corporation of Bangladesh (Amendment) Act, 2000, ICB
became empowered to create and operate subsidiaries. ICB has a plan to form three separate
subsidiary companies - ICB Capital Management Ltd, ICB Securities Trading Company, and ICB
Asset Management Company Ltd. ICB is represented in the governing board of the South Asian
Development Fund established in June, 1996 through the Dhaka Declaration of a meeting of the
SAARC member countries. ICB is also associated with South Asian Regional Fund (SARF).
Objectives
To encourage and broaden the base of investment.
To develop the capital market.
To provide for matters ancillary thereto.
To mobilize savings.
To promote and establish subsidiaries for business development.
Basic Functions
Underwriting of initial public offering of shares and debentures
Underwriting of right issue of shares
Direct purchase of shares and debentures including Pre-IPO placement and equity
participation
07
Managing investors’ account
Managing Open End and Closed End Mutual Funds
Operating on the Stock Exchanges
Providing investment counsel to issuers and investors
Participating in Government divestment Program
Participating in and financing of, joint-venture projects
Dealing in other matters related to capital market operations
Trusty, Custodian, Bank Guarantee
Consumer Credit
Business Policy
To act on commercial consideration with due regard to the interest of industry,
commerce, depositors, investors and to the public in general.
To provide financial assistance to projects subject to their economic and commercial
viability.
To arrange consortium of financial institutions including merchant banks to provide
equity support to projects and thereby spread the risk of underwriting.
To develop and encourage entrepreneurs.
To diversify investments.
To induce small and medium savers for investment in securities.
To create employment.
08
To encourage Investment in IT sector.
To encourage Investment in joint venture capital/project.
Continued Operations of ICB
Private Placement
Custodian and Banker to the Issues (IPO)
Mergers and Acquisitions
Corporate Financial Advice
Lease Finance
Portfolio Investment
Advance Against Unit Certificate Schemes
Advance Against Mutual Fund Certificate Schemes
Consumer Credit Scheme
Bank Guarantee
Training Program
Trustee to the Debentures and Securities Assets
ICB’s Subsidiary Companies
ICML – ICB Capital Management Ltd
IAMCL – ICB Asset Management Company Ltd
ISTCL – ICB Securities Trading Company Ltd
09
ICML – ICB Capital Management Ltd
Underwriting
In order to raise long term debt and equity from the primary market, the Government bodies,
enterprises corporation or companies may seek intermediary assistance from ICML in the form
of underwriting.
Issue Management
To act as the manager to the issue of shares and debentures, ICML provides professional
services in respect of syndicate underwriters and bankers to the issue. Besides, it also helps in
preparing prospectus, getting their approval from SEC and arranges publication of the same.
Placement of Shares
ICML acts as a placement agent.
Investment Counseling
ICML provides investment counsel to the issuers and investors' including financial engineering
and corporate advisory services.
Managing Investment Accounts
ICML, at its discretion, may grant loan at a ratio of 1:1 against the assets of an account subject
to a maximum limit of Tk.25.0 lac. An accountholder may use the combined balance of his/her
equities and loan to buy shares/securities. To help the investors to develop diversified and
balanced portfolio to minimize risk and earn a reasonable return. ICML provides professional
advice and other support services.
10
IAMCL – ICB Asset Management Company Ltd
Background
ICB Asset Management Company Ltd. was established as part of the restructuring programme
of ICB under Capital Market Development Programme (CMDP) initiated by the Government of
Bangladesh and the Asian Development Bank. The Company was incorporated as a public
limited company with an authorized capital of Tk. 100 crore and a nominal paid up capital of Tk.
2.00 lac, which was subsequently increased to Tk. 12.00 crore, under the Companies Act, 1994
with the Registrar of Joint Stock Companies and Firms on December 05, 2000. The Company
obtained license on October 14, 2001 from the Securities and Exchange Commission (SEC)
under Securities and Exchange Commission (Mutual Fund) Act 2010 to carry out the mutual
fund activities. The company started its operation from July 01, 2002 upon issuance of Govt.
gazette notification.
Business
The company is engaged in investment management; more specifically floating and managing
both open-end and closed end mutual funds. The company is dedicated towards development
of mutual fund industry as well as the capital market of Bangladesh.
MUTUAL FUNDS
ICB Asset Management Company Ltd. has so far floated eleven closed-end mutual funds and
two open-end Mutual Funds through which the small and medium savers get opportunities to
invest their savings in a balanced and relatively low risk portfolio. The aggregate size of these
funds is around Tk. 815.00 crore.
11
Conventional Mutual Funds:
Sl.No. Name of the Funds Date of
Launching
Nature of
the Fund
Size of the
Fund (TK.
in crore)
1. ICB AMCL First Mutual Fund 16/06/2003 Close-end 10.00
2. Prime Finance First Mutual Fund 04/01/2009 Close-end 20.00
3. ICB AMCL Second Mutual Fund 09/08/2009 Close-end 50.00
4. ICB Employees Provident Mutual Fund
One: Scheme One 22/11/2009 Close-end 75.00
5. Prime Bank 1st Mutual Fund 06/12/2009 Close-end 100.00
6. Phoenix Finance 1st Mutual Fund 07/03/2010 Close-end 60.00
7. ICB AMCl Unit Fund 21/06/2003 Open-end 150.00
12
Non-Conventional Mutual Funds:
Sl # Name of the Funds Launching Date Nature Size
1. ICB AMCl Islamic Mutual Fund 12/10/2004 Close-end 10.00 crores
2. ICB AMCL First NRB Mutual Fund 28/01/2007 Close-end 10.00 crores
3. ICB AMCL Second NRB Mutual Fund 15/05/2008 Close-end 100.00 crores
4. ICB AMCL Third NRB Mutual Fund 28/03/2010 Close-end 100.00 crores
5. ICB AMCL Pension Holders' Unit Fund 18/10/2004 Open-end 30.00 crores
6. IFIL Islamic Mutual Fund-1 26/09/2010 Close-end 100.00 crores
These funds received spectacular response from the investors. The business of the Islamic
mutual funds should be inconsistence with the Sharia Law. With a view to tapping the savings
of Non-Resident Bangladeshis (NRBs) for investment in the country's capital market, ICB Asset
Management Company Ltd. lunched ICB AMCL First NRB Mutual Fund, ICB AMCL Second NRB
Mutual Fund and ICB AMCL Second NRB Mutual Fund. Investors have shown overwhelming
interest in all the mutual funds. ICB AMCL Unit Certificates and ICB AMCL Pension Holders’ Unit
Certificates are sold and repurchased on the counters of ICB AMCL Head Office and the branch
offices of ICB. ICB AMCL Pension Holders’ Unit Certificates are sold exclusively to the retired
pension holders. ICB along with some other banks and financial institutions extend loan facility
against lien of units. The company plans to launch some other conventional mutual funds
named First Agrani Bank Mutual Fund, Sonali Bank Limited 1st Mutual Fund and specialized
open-end mutual fund for NRBs named ICB AMCL NRB Unit Fund.
13
ISTCL – ICB Securities Trading Company Ltd
Background
ICB Securities Trading Company Limited (ISTCL) is a subsidiary of Investment Corporation of
Bangladesh (ICB) under the provisions contained in Section-2 of the Companies Act, 1994. It
was formed as a part of the restructuring programme of ICB under Capital Market Development
Programme (CMDP) initiated by the Govt. of Bangladesh (GOB) and the Asian Development
Bank (ADB) and in terms of power conferred in the ICB Ordinance. The company was
incorporated with the Registrar of Joint Stock Companies and Firms under the Companies Act
1994 on 05 December 2000. The company obtained license from the Securities and Exchange
Commission on 12 August 2002 to carry on the stock brokerage business. The company started
its operation on 13 August 2002 upon the issuance of gazette notifications by the Government.
The company is being operated pursuant to its own Memorandum and Articles of Associations,
SEC's Rules and regulation and other applicable laws. It has independent Board of Directors and
separate management.
Corporate Service
Provides online trading facilities for buying and selling securities listed with the bourses;
Works as a full service Depository participant in the Central Depository System;
Performs other brokerage services;
Trades Securities for its own portfolio as Authorized Dealer of DSE;
Acts as selling agent under "Direct Listing Regulations 2006".
14
Financial Indicators of ISTCL:
Particulars 2008-2009 2009-2010
Capital Structure
Authorized Capital TK. 50.00 crore TK. 50.00 crore
Paid up Capital TK. 3.75 crore TK. 7.50 crore
Reserve TK. 26.55 crore TK. 39.55 crore
Retained Earnings TK. 5.76 crore TK. 31.47 crore
Financial Performance
Revenue Income TK. 38.79 crore TK. 89.74 crore
Income before Tax TK. 21.76 crore TK. 43.98 crore
Income after Tax TK. 18.79 crore TK. 38.70 crore
Financial Ratios
Net Profit to Total Income(%) 48.44 43.12
Return on Equity(%) 47.20 49.29
Earning Per Share(Tk.) 501.15 516.00
Dividend Per Share 1:1B 1:2B
Dividend Payout Ratio(%) 19.96 38.76
Current Ratios (Times) 1.32:1 1.29:1
Net Asset Value(NAV) per Share(Tk.) 1061.64 1046.87
15
4.0 IPO off loading Analysis for the period 2005 - 2010
Year wise IPO off loading Amount:
2010
Total Amount 8412.35 million
No. of Companies 9
Average 934.71 million
2009
Total Amount 12492 million
No. of Companies 17
Average 734.82 million
2008
Total Amount 3043.41 million
No. of Companies 12
Average 253.62 million
2007
Total Amount 3463.96 million
No. of Companies 13
Average 266.46 million
2006
Total Amount 1243.7595 million
No. of Companies 11
Average 113.07 million
2005
Total Amount 1233.24 million
No. of Companies 15
Average 82. 22 million
16
No of Companies
0
2
4
6
8
10
12
14
16
18
Year
2005
Year
2006
Year
2007
Year
2008
Year
2009
Year
2010
No of Companies
Year Aggregate IPO Amount Growth
2005 1,233,240,000
2006 1,243,759,500 0.9%
2007 3,463,960,000 178.5%
2008 3,043,410,000 -12.1%
2009 12,492,000,000 310.5%
2010 8,412,350,000 -32.7%
If we look into the trend of IPO size we can see that the yearly aggregate IPO floating amount in
the year 2005 and 2006 was around 1200 million BDT. In 2007 the amount grew by 178.5% as
that of 2006 and totaled to around 3464 million BDT. In 2008 there was a decline in the amount
by 12.1% than the previous year, which totaled to 3043.41 million. Then it is the year 2009,
during which the size of yearly aggregate IPO off loaded amount, as well as year-wise growth,
both shows the peak level our analysis through the years 2005 till 2010, which was 12492
million, with a growth of above 310.5%. Lastly in 2010 it again fell down by 4079.65 million
17
No of Companies off loaded share by IPO
Year 2005,
82.22
Year 2006,
113.07
Year 2007,
266.46
Year 2008,
253.62
Year 2009,
734.82
Year 2010,
934.71
Year 2005
Year 2006
Year 2007
Year 2008
Year 2009
Year 2010
than 2009, totaling to 8412.35 million, almost 1/3 decline. So finally we can conclude on our
analysis that the trend of yearly IPO off loading amount is of a kind of mixed nature, there is not
a steady trend of either increase or decrease. An appropriate explanation is the nature of semi
form of efficiency of our capital market. At the same time there are bureaucratic complicacy
and inefficiency of our capital market’s regulatory bodies that makes the process IPO off
loading prolonging. Also the stock market down turn in the capital that was seen in the second
half of 2010, along with corruptions and manipulations incurred in the process of private
placement process added as a determining factor to the most recent decline in growth that
happened in 2010.
The average authorized capital base (size) for each of the companies that off loaded its shares
through IPO to the capital market during each of the years from 2005 till 2010 had a
significantly increasing trend as in 2005 it was 82.22 million, whereas, in 2010 it was 934.71
million.
18
References
Primary Source:
Mr. Prometheus Siddiqui, Executive, NDB Capital, Gulshan – 2, Dhaka.
Secondary Source:
1. www.icb.gov.bd
2. www.wikipedia.com
3. www.banglapedia.com
4. www.investopedia.com
APPENDIX