A larger number of the merchant bank without professionalism would create unhealthy competition in the stock market making investment a very risky venture, experts say.
They also view that more merchant banks would not mean greater liquidity as they cannot mobilize resources without having to tap the banking system. The experts’ view came in response to the recent government decision to allow more merchant banks to operate in the stock market in an effort to increase liquidity in the market.
“A larger number of banks would have much less business to do,” said Mirza Azizul Islam, ex-finance adviser to the caretaker government. “The merchant banks only mobilise resources from the banking system and depositors’ money. So the strategy for boosting liquidity by issuing more merchant bank licences is wrong,” he said. Finance minister Abul Maal Abdul Muhith recently told Parliament that the government is contemplating raising the number of merchant banks to stabilize the capital market and increase its liquidity. Currently, 35 merchant banks are operating in the stock market and the market capitalization of the Dhaka Stock Exchange is around $40 billion.
The Securities and Exchange Commission (SEC) has raised the ceiling on the maximum number of licences to be issued to merchant banks, from 35 to 50.
Merchant banking in Bangladesh is growing along with the capital market signalling a growing competition.
“Competition as well as a minimum scale of economy is required for smooth functioning of a bank,” said Islam, also ex-chairman of the SEC. “Depending the market size, some 34 to 35 professional and financially strong merchant banks is fairly good,” he said.
Instead of raising the number, the regulator should look at how the merchant bankers are supposed to play their role, he said and pointed out that these banks are functioning as stock brokers, which bodes ill for the market, he added.
According to the merchant banking regulation 1996, the activities of merchant banking are limited to issue management, underwriting, lending to stock investors, portfolio investment and management services.
Salahuddin Ahmed Khan, professor of finance at Dhaka University, said: “Operations of the merchant banks should be widened to allow them to have a broader range of functions including corporate financing and corporate restructuring and takeovers to bring variability in the market.”
“Loan-based merchant banking now dominates the market, increasing financing risks in the stock market,” he said adding that merchant bankers should be encouraged to manage their own portfolios to help stabilize the market. Merchant banks should be able to conduct their business in a professional manner in the greater interest of the market as millions are investing money in the capital market every day, he said.
While a merchant bank working only as issue manager has to submit at least a documented proposal for an initial public offering of a company in a year, a merchant bank licensed to act only as portfolio manager has to form at least five new portfolios of its clients besides its own. A merchant bank working as a full-fledged merchant bank has to manage one IPO, to be underwriter of two issues and form five new portfolios of its clients besides its own in a calendar year.
So far, the SEC has cancelled licences of six merchant banks because of violation of securities rules or their inactiveness after obtaining licence.

News: the independent/Bangladesh/ Apr-03-2011