One-third merchant banks fail to comply with license conditions

One-third of merchant banks have failed to comply with regulatory obligations imposed during their license approval by the Bangladesh Securities and Exchange Commission (BSEC).

Over the last three years, 21 out of 62 merchant banks did not submit any proposal to list a company in the stock market, or helped any company gather more capital.

As per Securities and Exchange Commission (Merchant Banker and Portfolio Manager) Rules, 1996, each merchant bank must submit at least one IPO (Initial Public Offering) issue proposal to the regulator every two calendar years.

Companies that failed to comply

The BSEC has recently issued a letter to 21 companies seeking their explanation on the issue. Those companies are Asian Tiger Capital Partners Investments Ltd, Bangal Investment, BetaOne Investments, Cosmopolitan Finance, EC Securities, Exim Islami Investment, FAS Capital Management, First Security Islami Capital & Investment, Grameen Capital Management, Green Delta Capital, Hal/sigma Capital, IL Capital, Jamuna Bank Capital Management, Janata Capital and Investment, MIDAS Investment, PLFS Investments, Race Portfolio & Issue Management, Riverstone Capital, Sonali Investment, Trust Bank Investment and Uttara Finance Capital Management Ltd.

What does BSEC say? 

Sources from the BSEC said that a number of merchant bankers think that underwriting and portfolio managing is easier than issue managing. Because the issue managing process is lengthy and requires a lot of compliance with the regulation, some merchant bankers avoid it.

BSEC's Executive Director and spokesperson Saifur Rahman said, "Some merchant bankers have failed to submit the IPO issue in the last couple of years. For this reason, the commission has issued a letter seeking explanation from these merchant bankers.

"After receiving their explanation, the commission will take action against these companies."

Function of merchant banks

The main function of a full-phased merchant bank is Issue Management, Underwriting, Portfolio Management and Corporate Counselling, along with Project Counselling, Capital Restructuring Services, Loan/Credit Syndication, Arranging Working Capital Finance, Bill Discounting and Acceptance Credit, Lease Finance, Venture Capital, Public Deposits and Specialized Services.

Some companies are not complying with the rules despite getting a license as a merchant bank.

The BSEC started enforcing the law requiring merchant banks to submit at least one issue in every two calendar years from January 2010.

Cause for failure

Some merchant bankers are not interested in the function of issue management, instead they want to carry out other functions such as Underwriting, Portfolio Management and Corporate Counselling.

According to sources concerned, the BSEC approved only 26 IPOs for trading in the capital market in the last three years, which is low, because there are 62 merchant banks in the country. 

Several merchant banks are very good at issue management. However, some of the other banks do not even have a policy for the issue management function, resulting in them failing to meet the regulatory obligation.

The BSEC gave the letter of consent for IPOs to six companies in 2017, 13 in 2018 and eight in 2019.

Merchant bankers' view

Md Abdul Muktadir, chief executive officer of the PLFS Investment Ltd, said that his company is yet to receive the letter sent by the BSEC. 

"Actually, issuer companies look for the best and reliable merchant banks for its IPO. An issuer company's management thinks that a prominent and experienced issue manager will ease the process of approval from the securities regulator," he added.

He further said, "Besides, we have yet to take any effective policy regarding issue management. If the BSEC pushes the merchant bankers to comply with this condition, we will make an action plan regarding the matter."

Dina Ahsan, Chief Executive of Janata Capital and Investment ltd, said: "We already received the letter from the BSEC. But, we recently submitted two issues for IPO. We are continuing our promotional work to bring a good company to the capital market.

Khairul Bashar Abu Taher Mohammed, chief executive officer of MTB Capital Ltd, said, "The main reason behind many merchant bank's failure to comply with the regulation is the lack of proper policy.

"There is little investment in the issue management department of some merchant banks. That is why these companies could not get any issues. An issuer company always wants to enter in the capital market through a competent merchant bank."