A Study of Securities Market in Bangladesh:
Prime Finance Securities Ltd
1.0 executive summary
Analyzing the Security market in Bangladesh appears to be relevant in view of on-going structured adjustment, financial liberalization and economic deregulation policy adopted by the government of Bangladesh. These reforms aim at macro economic stabilization in a free market economy, where stock market reform and development can play a vital role. In order to support the stock market activity towards growing liberal policy for investment and as a vehicle for effective privatization, understanding prevailing stock price behavior and the requirements of marketing securities market effective ones in terms of liquidity and competitiveness is a must. This paper is a modest attempt towards these ends. This paper eventually throws some light on the perceived dominant problems faced by Bangladesh Securities Market (BSM), issues to be addressed for restoring investor’s confidence and potentiality of growing BSM as an emerging market. In doing so, the paper draws attention of the research findings on securities market and is based on logical arguments put forward an observations being made by the author and interviews with diverse groups of market participants.
The securities market of a country is not a thing apart from its economy. Rather typically, a weak economy trudges the stage along with the vicious burdens of a frail and sickly capital market. Conversely, robust securities market serves as a strong part to a country’s forward economy. The Bangladesh stock markets and said to have enormous potential for luxuriant growth. This report focus threadbare analysis of the prevailing situations in the country’s securities markets, probes deep into their great potentialities for growth to substantially back his optimism, and identifies sources that can feed our present climax of security market back to health and prosperity.
Objectives of the Report:
The objective of the report is to make us known the practical situation of Securities market in Bangladesh and prepare me to face the complex situation in any organization in this country. The objectives are also represents here chronologically:
· To make the ratios as a measure of important financial issues that is considered as important aspect of a firm.
· To survive with the current market situation.
· To monitor the practice of modern technology of security market.
· To know the various strategy of securities market.
· To develop our proficiency on capital market.
· To assess strengths and weaknesses of a company.
· To know the strategy of making financial control.
· To examine and evaluate financial statement and identify major field needs to improve.
Overview Of a Security Market
2.0 A brief Description of Security Market
Security market is a place or places where securities are bought and sold, the facilities and people engaged in such transactions, the demand for and availability of securities to be traded, and the willingness of buyers and sellers to reach agreement on sales. Securities markets include over-the-counter markets. The developing economics are looking forward to their capital markets as the engine for future growth as its presence insures mobilization of funds from surplus units to the ones suffering from deficits. Business firms (deficit units) need money to pay to their factors of production, i.e. land, labor, capital and entrepreneurship. Households (surplus unit) have residual earnings, i.e. savings after there consumption but usually in fewer quanta compared to the business firm needs. It is the financial intermediary that usually pools the money from a wide number of people and channels it to the ultimate borrowers.
Two stock markets in Bangladesh, one is named Dhaka Stock Exchange (DSE) in Dhaka and another one is called Chittagong Stock Exchange (CSE) in Chittagong. A central regulatory agency which is the Securities and Exchange Commission (SEC) overseeing the activities of the entire capital market including issue of capital, monitoring the issue of stocks, and operation of the stock markets. The number of listed companies in DSE are 378 of which are shares, 11 debentures, and 9 mutual funds.
A liquid stock market induces individual investors and institutional to keep their savings in shares market to make investment less risky and more attractive in profit taking because they allow savers to acquire the capital gains and to sell it as quickly at the least cost in a situation they need to access to their savings or want to alter portfolios. Alternatively, the stock market also provides companies a permanent access to capital raised through equity issues so that companies can expand its infrastructure in services or products to block the market share competitively and allows to be multinational companies, linked up with international companies and financial institutions. More attractively, institutional investors can invest in infrastructure projects in anticipation of long-term revenue and capital gains on shares of market leaders companies. The studies show based on collected data on 47 countries from 1976 to 1993, banking and the stock market liquidity, size, volatility, and integration with world capital market accelerate the current and futures rates of economic growth, capital accumulation, productivity growth, and private savings and they are robustly correlated to real per capita gross domestic product growth.
Financial intermediaries include banks (the central bank, commercial banks, investment banks etc), Security and Exchange commission (SEC), specialized financial institutions, development financial institutions and institutional investors (i.e. Investment Corporation of Bangladesh). The market can be classified into a number of ways, but from the duration point of view, it is classified into two-money market and capital market. The money market is the market where financial securities maturing in less than one year are transacted while in capital market financial assets maturing within more than a year change hands.
Capital Market is the market, or realistically, the group of interrelated markets, in which capital in financial form is lent or borrowed for medium and long term and, in cases such as equities unspecified periods.The capital markets, in distinction from other parts of the financial market, i.e., the money market are those, for long-term government’s securities, corporate bonds, and stocks, municipals bonds issued by stay and logical government units, and mortgages. Industry and commerce as well as government and local authorities raise capital from the capital market, which perform several important functions in the process of economic development. Most important among them are the promotion of saving and investment and efficient allocation of funds among the competing uses. Participants in the capital market are many. They include the commercial banks, saving and loan associations, credit unions, mutual saving banks, finance houses, finances companies, merchant bankers, discount houses, venture capital companies, leasing companies, investment banks, investment companies, investment clubs, pension funds, stock exchange, securities companies, under writers, portfolio- managers, and insurance companies.
Capital market instruments are broadly the securities- debt and equity instruments. Both money and capital market undeveloped in Bangladesh. A number of reasons may explain why this is happening. First of all, Bangladesh Bank (BB) only holds 91-day bills but the buyers have been limited into commercial banks. In case of capital market, debentures issued by both autonomous bodies and corporation (housing and petroleum) are primarily held by BB and Nationalized Commercial Banks (WB, 1994).
3.0 Historical Background of Stock Exchange
It first incorporated as East Pakistan Stock Exchange Association Ltd in 28 April 1954 and started formal trading in 1956. It was renamed as East Pakistan Stock Exchange Ltd in 23 June 1962. Again renamed as Dacca Stock Exchange Ltd in 13 May 1964. After the liberation war in 1971 the trading was discontinued for five years. In 1976 trading restarted in Bangladesh. In 16 September 1986 DSE all Share Price Index was started. The formula for calculating DSE all share price index was changed according to IFC in 1 November 1993. The automated trading was initiated in 10 August 1998. In 1 January 2001 DSE 20 Index was started. Central Depository System was initiated in 24 January 2004. As of November 15 2007, the benchmark index of the Dhaka Stock Exchange (DSE) crossed 3000 points for the first time, setting another new high at 3013 points.
Stock Exchange organized market for trading of stocks and bonds. In early 1952, five years after the independence of Pakistan, the Calcutta Stock Exchange prohibited transactions in Pakistani stocks. This necessitated the formation of a stock exchange in East Pakistan and the East Pakistan Stock Exchange Association Ltd. was incorporated on 28 April 1954. It changed its name to East Pakistan Stock Exchange Ltd on 23 June 1962 and finally to Dhaka Stock Exchange (DSE) on 14 May 1964. Although incorporated in 1954, formal trading started in 1956 in Narayanganj. In 1958, the stock exchange was shifted to Narayanganj Chamber Building. DSE purchased its own land, and moved to its own premises at 9/F Motijheel C/A in 1959. Prior to independence in 1971, the number of listed companies in DSE was 196 with a total paid up capital of Tk 4 billion. The daily average transaction during that period was about 20,000 shares.
After the Independence, the government of Bangladesh took charge of the abandoned industrial units and pursued a policy, under which large industrial units were nationalized. The trading activities of DSE remained suspended till 1975 and following change in the economic policy of the government, DSE resumed its activities in 1976 with only 9 listed companies, having a total paid up capital of Tk 137.52 million. The actual growth of the stock exchange in Bangladesh (the DSE) started since 1983, when the market capitalization was Tk 812 million. The year 1987 experienced a relatively steep rise in the market with 92 listed companies. With the liberalization of policies in the 1990’s the stock market gradually started to prosper. On 30 June 2001, the number of securities listed in the DSE was 244, the number of listed companies 224, number of listed debentures 10, number of shares of all listed companies 666,553 and that of all mutual funds 72,250 and the market capitalization Tk 72,168 million ($1226 million).
A stock exchange, securities exchange or (in Europe) bourse is a corporation or mutual organization which provides “trading” facilities for stock brokers and traders, to trade stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities as well as other financial instruments and capital events including the payment of income and dividends. The securities traded on a stock exchange include: shares issued by companies, unit trusts and other pooled investment products and bonds. To be able to trade a security on a certain stock exchange, it has to be listed there. Usually there is a central location at least for recordkeeping, but trade is less and less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of speed and cost of transactions. Trade on an exchange is by members only. The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market. A stock exchange is often the most important component of a stock market. Supply and demand in stock markets are driven by various factors which, as in all free markets, affect the price of stocks.
There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter. This is the usual way that bonds are traded. Increasingly, stock exchanges are part of a global market for securities.
3.1 Formation
Dhaka Stock Exchange (DSE) is a public limited company. It is formed and managed under Company Act 1994, Security and Exchange Commission Act 1993, Security and Exchange Commission Regulation 1994, and Security Exchange (Inside Trading) regulation 1994. The issued capital of this company is Tk. 500,000 which is divided up to 250 shares each pricing Tk. 2000. No individual or firm can buy more than one share. According to stock market rule only members can participate in the floor and can buy shares for himself or his clients. At present it has 230 members. Market capitalization of the Dhaka Stock Exchange reached nearly $9 billion in September 2007 and $15 billion a year later.
Management
The management and operation of Dhaka Stock Exchange is entrusted on a 25 members Board of Director. Among them 12 are elected from DSE members, another 12 are selected from different trade bodies and relevant organizations. The CEO is the 25th ex-officio member of the board. The following organizations were holding positions in DSE Board:
· ICB
· President of Institute of Chartered Accountants of Bangladesh
· President of Federation of Bangladesh Chambers of Commerce and Industries
· President of Metropolitan Chambers of Commerce and Industries
· Professor of Finance Department of Dhaka University
· President of DCCI (Dhaka Chamber of Commerce and Industry)
3.2 Corporate profile of a security market
Introduction:
With roots of professional involvement in the financial sector, “Prime Finance Securities Limited” has been established to earn a reputation in the investment community for providing high quality service and advice to corporate in the country. The company has refined its business model constantly maintain a cutting-edge approach in the areas which it operate.
Clients can take advantage of the range of services required to succeed in today’s capital markets. Market support is provided by the experienced institutional teams that work hand-in-hand with PFISL’s growing market-making departments, and they are aided in this by in-house researchers. In short, PFISL’s team can provide a complete service for the corporate clients.
PFI Securities Limited, an associated company of Prime Finance and Investment Ltd. is a stock brokerage company having membership of both the Dhaka Stock Exchange and the Chittagong Stock Exchange. Prime Finance owns 50% shares in PFI Securities Ltd. (PFISL) holding 25% voting right in the board of directors meetings. Out of 12 Directors of PFISL, 3 Directors have been nominated by Prime Finance to represent it in the Board of PFISL. In shareholders meeting, Prime Finance enjoys 50% voting right. As per BAS 28: Accounting for Investment in Associates, investment in PFI securities Ltd. is treated as investment in associate company
PFI Securities Limited is the only associate company of Prime Finance. Particulars of the investment in PFI Securities Limited are given below:
Nature
Activity
Description
of shares held
% of
Shareholding
Face value
of shares
Book value
per share
Brokerage
House
Share trading in
DSE and CSE
Ordinary
50
100
165.67
| Name of the associate |
| PFI Securities Limited |
The book value per share of associated company is calculated based on un-audited financial statements and the management believes that audited result will not differ materially.
Unrealized gain on investment in listed securities
At 31 December 2006, there was Tk. 20.00 million of gross unrealized gain on investment in listed security. .
3.3 Corporate Mission:
To be a specialist in wealth creation by applying a unique breadth and width of innovative expertise to the benefit of clients, shareholders and staff.
PFISL believe in building strong relationships with clients, in maximizing value of clients’ investment portfolios and in continuous innovation and improvement in services offered. It believe that it prosper only if its clients do.
Company Profile:
Ø Prime Finance is one of the leading financial institutions operating in Bangladesh. Our core competencies cover lease finance, term finance, real estate finance, SME finance, public issue of shares, portfolio management, margin loan, share trading etc.
Ø The client is the focal point of all our activities. The company is committed to providing clients with excellent, innovative and fast solutions across all business segments. They want to be the preferred financial institutions for our clients as they enjoy distinct service culture.
Ø Prime Finance holds a leading position in the capital market operations. It is the undisputed number one in providing comprehensive and integrated capital market services.
Ø Prime Finance boasts up a broadly diversified business profile. This enables us to offer our clients the full range of services, they expect from a leading financial institution.
Ø Prime Finance seeks to constantly increase its return on equity for its shareholders, building on a systematic program of value-based management.
3.4 Prime Finance Investment Securities Limited:
PFI Securities Limited (PFISL) is one of the leading brokerage house has been set up to cater to the needs of the capital market in Bangladesh was incorporated on 6 August 1997 as a Private limited Company. It is a 50% owned associated company of Prime Finance and Investment Limited and rest 50% owned by the individual who are also sponsors of Prime bank Limited and Prime Finance and Investment Limited. Having membership in both Dhaka and Chittagong Stock Exchange Limited, inevitably PFISL became a trusted brokerage house to the clients investing in Bangladesh. It also got the license of Stock dealer including Stockbroker license from Securities and Exchange Commission. PFISL is the opening member of Central Depository Bangladesh Limited (CDBL). It has two branch offices in Bangladesh.
PFISL located at the same premises of Prime Finance and Investment Limited: 63, Dilkusha C/A, Dhaka-1000. As a securities broker, the Company act as an agent in the purchase and sale of listed securities. PFISL charges commission to their clients on transactions, in accordance with the established commission schedule, the Company earned Tk. 37.6 million as net profit after tax (2006: Tk. 5.61 million). And earnings per share were Tk. 253.21 (2006: Tk.37.79).
3.5 Features of PFISL:
v International standard corporate brokerage house.
v Corporate member of both Dhaka Stock Exchange Limited (DSE) and Chittagong Stock Exchange Limited (CSE).
v Full service Depository Participant (DP) of Central Depository Bangladesh Limited (CDBL).
v Provides CDBL related services including dematerialization/rematerialization of scripts, freeze/release of requests and suspension, pledge/unpledge and confiscation, BO link setup and securities transmission/transfer, ownership change etc.
v Facilities to open trading account for buying and selling of securities for individuals.
v Facilities to open trading account for institutional buy and sale of securities.
v Facilities to deal the block market trade for Sponsor and Institution.
v Facilities to open BO account for both resident and non-resident Bangladeshi.
v Modern IT infrastructures for efficient data processing and to provide services to the clients.
v Provide margin loan to the clients in line with Margin Rules, 1999 at a competitive rate.
v Proper arrangement for safe keeping of all paper scripts and other instruments in the vault.
v Strict adherence to compliance of regulatory requirements and PFISL rules.
3.6 The aims and objects for which the Company is established:
(As per Memorandum of Association under the Companies Act’1994)
1) To act as consultants, professional advisers, Managers and equity analyst and to provide professional expertise and to act as investment counselors to individual person/persons, firms/ firms, trusts, companies or corporations, local and Govt. authorities and to receive fees therefore.
2) To act as financial consultants for issue of shares of and/or debentures or other types of transferable instruments and for public offer soliciting subscription thereof and to act as managers of such issues and to receive fees therefore.
3) To promote formation of and manage funds, trusts, undertakings for collective investment in transferable securities and portfolios of shares, stocks, debentures and securities and of financial assets in general and to render management services to any individual firm, trust, corporation or association whatsoever in Bangladesh or outside Bangladesh and generally to manage, supervise such funds or investments portfolios.
4) To carry on the business of stock-brokers, investment brokers, insurance brokers, security brokers, property brokers, ship brokers whatsoever for or on behalf of any individual or firm, trust or association, companies or corporations, local or Govt. authorities and receive brokerage thereof.
5) To buy, sell and deal in shares, stock, debentures, bonds and other securities.
6) To become member of Stock Exchanges in Bangladesh and or elsewhere and undertake all the functions of a Stock Exchange member.
7) To act as a stock-broker, CDS-broker, Stock-dealer, underwriter, portfolio manager, fund manager, equity analyst, investment adviser, management consultant, share transfer agent, manager to issue, register to issue, trustee to trust deed and such other intermediary as required in the capital and securities market.
8) To establish, maintain, carry on, transact and undertake all kinds of business other than banking business.
9) To advance or deposit money, securities and properties to or with such persons or bodies, corporate or unincorporated, and on such terms as may seem expedient, and also to discount, buy, sell and deal in bills, notes, coupons and other negotiable or transferable securities or documents.
10) To borrow or raise or secure the payment of money by issue or sale of shares, bonds, debentures, other securities and obligations, either perpetual or terminable and redeemable or otherwise, and to change or secure the same by trust deed or otherwise on the undertaking of the company including its uncalled capital or upon any specific property and rights, present and future of the company.
11) To negotiate all kinds of loans and advances, aid or assistance from any source, local or foreign and to take all such steps as may be required to complete and effectuate such dealings.
12) To pay all expenses incidental to the formation or promotion of this or any other company, organization, body and to conduct its business and to remunerate any person, company, or bodies for services rendered in placing or assisting to place or guaranteeing in the placing of any of the shares or debentures or other securities of the company or in or about the promotion, formation of business of the company or any other company promoted wholly or in part by this company.
13) To purchase or otherwise acquire and undertake, the whole or any part of or any interest in the business, goodwill, property, contracts, agreement, rights, privileges, assets and liabilities of any other company, corporation, partnership, body, person or persons and carrying on any, for the time being business which the company is authorized to carry on, or possessing property suitable for the purpose of the company and upon such terms and subject to such stipulations and consideration, if any, in money, shares, money’s worth or otherwise as may be deemed advisable.
14) To pay for any property or rights acquired by the company either in cash or fully or partly paid shares or by issue of securities or partly on one mode and partly in another and generally on such terms as may be determined.
15) To invest the capital and other moneys of the company not immediately required in the purchase, exchange, or upon the security of shares, stocks, debentures, debenture stocks bonds, mortgages, obligation and securities of any kind issued or guaranteed by any company. Corporation, government, municipal authority or body or undertaking of whatever nature and whatsoever constituted or carrying on business or to invest in any manner as may determined by the company.
16) To establish and open offices, branch offices to carry on all or any of the above businesses abroad and within Bangladesh.
17) To draw, make, accept, endorse, discount, execute and issue cheque, promissory notes, and bills of exchange, bills of lading, debentures and other negotiable or transferable instruments.
18) To form, manage or subscribe to any syndicate, consortium, or any company or trust or individuals abroad or within Bangladesh and to carry on the business of underwriters of any issue.
19) To conduct and carry out any kind of research work calculated to advance any business or activity which the company is authorized to carry on, or in any way related to or connected with.
20) To publish magazines, journals, periodicals, documents and papers whatsoever the company may deem expedient and in this connection the company may purchase or otherwise acquire printing press and do all sorts of printing and publishing business and to do all other works incidental thereto.
21) To enter into any arrangement or agreement with any person or firm, institution, corporation, company or with any government or Autonomous bodies for the purpose of introducing, encouraging any of the aforesaid objects.
22) To distribute any of the properties of the company whether upon distribution of assets or division of profits among members in specie or otherwise.
23) To buy, underwrite, invest in, acquire and hold, pledge, sell or otherwise dispose of shares, debentures, debenture stocks, bonds obligation and securities issued or guaranteed by any company or body corporate or association, and to exercise and enforce all rights and powers conferred by or incidental to the ownership thereof,
24) To form, promote, organize and assist or aid in forming, promoting, organizing companies, syndicate or institutions including subsidiaries in Bangladesh or abroad or enterprises or acquire any interests therein.
25) To act as agent, correspondent and representative of any bank, financing institution, corporation, company, firm, body, authority or individual whatsoever, whether foreign, local or otherwise, for the purpose of any business of the company.
26) To act as trustees, nominees or agents in the matter of issues, purchase and sale of debentures, bonds, stocks of any nature and description including improvements, development and management of any real estates and property or any other purpose in Bangladesh and abroad.
27) To enter into any arrangement with any Government or other authorities supreme, municipal, local, statutory or other bodies and to obtain from any such Govt. or authority all rights concessions and privileges that may seem conducive to any object of the Company.
28) To assist in merger, amalgamation and takeover of firms/enterprise/companies etc.
29) Generally to do all such other acts and things as are incidental or conducive to the attainment of the above objects.
And it is hereby declared that the objects specified in each paragraph above, except where otherwise expressed in such paragraph, shall be separate and independent objects of the company, and shall in no way be limited or restricted by reference to or inference from the terms of any other paragraph or the name of the company.
3.7 Total Solution- Capital Market:
PFISL is one of the very few business houses, which have got the total range of product offering in the capital market. Its sister concern and major shareholder Prime Finance is the leading merchant bank of the country. In addition to that PFI is one of the fasted growing multi product financial institutions.
Stock Broking Service:
PFISL provides stock broking services to corporate investors. Rigorous attention to each client’s needs ensure a professional yet personal service. Portfolio allocation and asset management are driven purely by the client’s investment goals.
These goals differ from client to client; therefore PFISL offers a spectrum of services that can be tuned to suit diverse wishes and needs:
Brokerage Service
· Buy & Sale of Security: Executed the order for sale and purchase of share with the guideline.
· Receipt & Delivery of Securities: To collect and delivery of shares from and to the DSE, CSE and clients.
Custodian Service
· Safe Custody: It ensures the safety of security of share.
· Transfer of share: Except for unusual situation it will transfer all shares of the clients in their name.
· Physical verification of securities to prevent forgeries.
· Collection of shares and dividend from issuers.
Advisory Service:
PFISL has years of experience advising clients on portfolio strategies. As well as being tuned in to market, your broker can draw on internal research technical analysis to help you maximize returns on your investments. Whether you need an option on a specific company or just compare notes with a market professional, PFISL can guide you. A client will benefit form:
· Professionalized broker who understands your investment objectives
· Monthly in house research report on trading
· Online account viewing.
· Company research, Economy research, Industry research
· Analysis and news on new IPOs
· Personally tailored portfolio advice
· Regular updates and recommendations
· Portfolio holding valuations
3.8 Types of Brokerage Trading Account:
PFISL offers two broad types of accounts:
· Cash Account
· Margin Account
Cash Account:
Under this type of account the customers deposits cash account with PFISL and operates the trading activities under standard operating procedure detailed in the account opening agreement. An accountholder may open and transaction this account without any prior deposit.
Margin Account: A Diversified Product Offering from PFISL
Realizing the market situation and the potential of margin trading facilities, the management of PFISL has structured and introduced this type of its valued clients.
Definition of Margin: Margin means the aggregate amount of cash and market value of securities deposited by a client into his margin account, excluding securities, bought in the margin account.
Nature ant Objective of Margin Account: To give financial support to the clients for investment in the secondary market against the margin deposit of the client within the limit set by the management from time to time and Margin Rules & Regulations, 1999.
Deed of Agreement: An agreement must be executed between the margin account holder and PFISL all the terms & conditions stipulated in the agreement will be binding on both the parties.
Margin Deposit / Equity: Margin shall be deposited before the first transaction either in the form of
· Cash (cheque, PO, DD)
· Listed securities valued at last traded price or
· Both
Investment Limit: Investment limit in market value up to 300% of margin deposit.
Authorization for Mortgage, Pledge etc: Client shall authorize the PFISL to mortgage, pledge or hypothecate the securities for a sum not exceeding the loan in the margin account.
Financial charge on loan: Interest @15.5% per month to be charged at the end of every month.
3.9 Portfolio Management Service:
PFISL is one among the few privileged brokers in Bangladesh who has got strong association with sister concern financial institutions licensed to offer the entire spectrum of services for investment activity management in capital markets. Its major shareholder and sister concern Prime Finance & Investment is registered Merchant Bank and Portfolio Manager under SEC Regulation to offer this portfolio management service.
PFISL’s portfolio management schemes are a way of providing solutions to your various problems. PFISL will try to fulfill your hopes, dreams and aspirations. Its investment planning will consider specific individual needs and preferences to the possible extent.
These schemes are backed by its experienced, professionally qualified, dedicated teamwork. Getting a team of professionals to manage your money will improve your chances of beating the markets.
Its investment professionals will regularly track your investments. This way one could spend more quality time with his/her core business activities, instead of poring over investment papers.
Under the portfolio management schemes PFISL offer two different services:
(A) Portfolio Management Service (Discretionary Service);
(B) Portfolio Advisory Service (Non-discretionary service).
Portfolio Management Service (Discretionary Service):
This money management service where it will accept ones funds and would manage his/her portfolio at its complete discretion, for a minimum term and fixed fees, meaning it would act as clients’ agent and invest on his/her behalf in various asset classes such as mutual funds, debt instruments, primary and secondary equity markets. The main features of this service are follows:
Investment Decision– As ones portfolio managers, it will manage clients’ portfolio at its complete discretion and in line with ones policy statement and SEC guidelines.
Size of Portfolio- It will need to develop a minimum portfolio of Tk. 0.50 million either by way of cash or securities.
Bank and Depository Accounts– Funds and Shares of all the clients will be placed in a separate Bank account and Depository account. Shares will be bought/sold in the firm’s name. Similarly the funds will be transferred to the firm’s PMS bank account. It will constantly track clients’ portfolio and keep them informed through its management information systems.
Investment Horizon- A minimum investment span of 1 year is recommended.
Investment Process- After the account opening formalities in completed it will prepare a policy statement. This statement will constitute ones investment objectives, liquidity needs, time horizon, and other needs and preferences. Understanding ones objectives and constrains will help its investment team to allocate there funds to various asset classes.
(A) Portfolio Advisory Service (Non-Discretionary Service)
In this service it will provide you a comprehensive advisory package designed to help your investment decisions. Here you will handle your funds and take your own investment decisions based on its research reports and proposals. Such research reports will provide independent recommendations, corporate details and reasons to invest in equity, debt and mutual funds.
Moreover our investment professionals will help to restructure your portfolio as per your investment objectives. The following are the characteristics of these schemes:
Investment Decision- It will have total discretion to handle own portfolio.
Size of Portfolio- It will need to develop a minimum portfolio of Tk. 0.50 million.
Research Reports- Reports will be sent on a fortnightly basis.
Fees & Charges:
Financial Charge on Loan– Interest @ 15.5% per month to be charge at the end of every month.
Brokerage Commission- 0.35% on transaction value.
Documentation Charge– Tk. 10,000 (Ten thousand) on amount opening/commencement of year (for margin account).
Margin Fee- 1% per annum on investment to be charged.
3.10 PFI Securities Limited
Income Statement
For the year ended 31 December 2007
2007
2006
Notes
| Figure in (BDT) |
50,287,505
3,131,765
3,562,086
56,981,356
5,907,211
1,949,831
2,129,385
9,986,427
16
17
18
7,337,437
6,312,061
13,649,498
680,199
2,241,052
2,921,251
19
20
43,331,858
5,730,112
37,601,746
7,065,176
1,453,450
5,611,726
253.21
37.79
21
|
Operating Income:
Commission on securities trading Interest on margin loan Other operating income Total Operating Income: |
||
|
Operating Expenses:
Laga & Howla charges Management expenses Total Operating Expenses: |
Profit before income tax:
Provision for income tax: Net profit after income tax: |
Basic earning per Share (EPS): |
The annexed notes 1 to 32 form an integral part of these financial statements. The Broad of Directors approved these financial statements on 30 March 2008.
Balance Sheet of PFI Securities Limited
As at 31 December 2007
2007
2006
Notes
| Figure in BDT |
Sources of Fund:
14,850,000
35,046,000
8,170,115
58,066,115
14,850,000
4,455,000
5,614,369
24,919,369
3
|
Shareholders’ Equity:
Share capital Proposed cash dividend Proposed stock dividend Retained earnings Total |
Applications of Fund:
12,612,500
5,050,000
17,662,500
12,612,500
50,000
12,662,500
4
5
287,502
99,311,287
170,894,256
6,102,710
5,188,714
281,784,469
128,800
40,314,721
31,213,159
762,234
12,054,462
84,473,376
6
7
8
9
10
3,039,200
25,000,000
205,039,287
9,072,967
242,151,454
2,540,200
29,854,986
36,735,335
3,342,855
72,473,376
11
12
13
14
39,633,015
770,600
12,000,000
256,869
15
58,066,115
24,919,369
|
Investment:
Membership of stock exchanges Fixed deposit with banks Total Investment: |
|||
|
Current Assets:
Advance, deposits & prepayments Margin loan to clients Accounts receivables Advance corporate tax Cash & cash equivalents Total Current Assets: |
Current Liabilities:
Margin deposit from clients Short term borrowing Accounts payables Provision for current tax Total Current Liabilities: |
Net Current Assets:
Property, plant & equipments: |
Total Assets & Investments |
The annexed notes 1 to 32 form an integral part of these financial statements. The Broad of Directors approved these financial statements on 30 March 2008.
3.11 PFI Securities Limited Cash Flow Statement
For the year ended 31 December 2007
2007
2006
| Figure in BDT |
Operating Activities:
43,331,858
337,916
43,669,774
7,065,176
208,363
7,273,539
(158,702)
(139,681,097)
(58,996,566)
168,303,952
499,000
(30,033,413)
(3800)
(19,884,677)
8,255,531
20,992,015
1,597,758
10,956,827
13,636,361
(5,340,476)
18,230,366
(368,878)
8,295,885
17,861,488
|
Net profit before tax
Depreciation on fixed assets
Net profit before change in working capital components |
||
|
Change in working capital component:
(Inc)/dec. in advance, deposit & prepayments (Inc)/dec. in accounts receivables (Inc)/dec. in margin loan to clients Inc./(dec) in accounts payable Inc./(dec) in margin deposit from clients
|
Cash generation from operatingIncome tax paid |
A. Net cash flows from operating activities
|
Investing Activities:
(851,647)
(5,000,000)
(98,050)
(9,309,986)
(98,050)
|
Acquisition of property, plant & equipments
Fixed deposit with bank |
| B. Net cash flows from investing activities |
Financing Activities:
(4,445,000)
(4,854,986)
(2,025,000)
(6,111,622)
(9,309,986)
(8,136,622)
(6,865,748)
12,054,462
96,26,816
2,427,646
5,188,714
12,054,462
|
Payment of dividend
Inc/(dec) in short term borrowing |
||
| C. Net cash flows from financing activities |
Net change in cash & cash equivalents (A+B+C)
Add. Cash & cash equivalents at the beginning of the year |
Cash & cash equivalents at the end of the year |
The annexed notes 1 to 32 form an integral part of these financial statements. The Broad of Directors approved these financial statements on 30 March 2008.
3.12 Financial and Capital Market Scenario
Financial Market scenario:
Financial institutions represent one of the most important segments of financial system and play very important role in mobilizing and channeling resources in Bangladesh. The financial institution numbering as of December 2007 are regulated by the financial institution Act, 1993 and the regulations made there under. In view of their increased role in financial industry, trade and commerce, transport, information technology, housing etc. the minimum capital requirement of the FIs was raised to tk. 205 million vide FID circular 2 dated 29th June 2003.
Most of the FIs have risen their require capital. All FIs were asked to raise their capital through IPO (Initial public offer) within 2007. The amount of paid up capital and reserve of FIs thus increase up to Tk. 17.85 billion as of 2007. The financing modes of FIs are long term in nature. Total investment by the FIs up to june 2007 was Tk. 91.97 billion, which was 25.75 percent higher than that of the previous year (73.14 billion as of June 2006). The rate of the financial institution is quite low.
Credit growth in commercial banks decreased by 8.01 percent points in the first 10 months of the FY 2007 compared with the corresponding period 2006 despite having over BDT 140 billion surplus liquidity in banks. Deposits in the banks also declined by 4.19 percent point during the period. Decrease in disbursement of the bid loans last year is the reason for the declining credit growth.
Capital Market Scenario:
2007 was a turbulent year for the country’s stock market since the 1996 ‘bubble burst”. On the onset of the year, the market witnessed a bullish trend on easing political uncertainty. But ‘fear fobia’ gripped enthusiastic investors following government’s anti-corruption drive, leading the market trend to a bearish one.
The market also witnessed a slum upon imposition of some restrictions by SEC on merchant bank lending, the much talked about issue throughout the year. The market however bounced back when SEC withdrew its restriction on banning the margin loan disbursement.
However the market at one stage whooped with many new records in term of turnover and indices because of government’s positive attitude towards stock investors. Both the primary and secondary markets were vibrant in 2007. The investor also had confidence in IPOs. There were 14 IPOs with 4.63 billion in 2007 against 7 with Tk. 1.43 billion of 2006. All the IPOs oversubscribed which was a proof of investor strong faith in the market.
The over all price earning ratio reached around 23 which was below 15 in the previous year. Trading took place in 237 days on DSE and total of 282.27 crore shares worth Tk. 32286.77 crore were translated. The highest transaction in term of value in a single day was Tk. 316.83 crore on august 21, while the lowest transaction was Tk. 23.37 crore on January 7, 2007. The daily average turnover was tk. 136.23 crore.
With remarkable 139 percent rise at the end of the year, market capitalization stood at the Tk. 74219.59 crore, which is around 16 percent of GDP. The total market capitalization on the DSE closed at Tk. 742.2 billion on December 30 opening with Tk. 310.66 billion on January 3 of 2007. At the end of 2006 the DSE market capitalization to GDP ratio stood at 7.59 percent. The ratio is still lower compared to the neighboring countries India and Pakistan. At the end of 2007, the ratio of market capitalization of Mumbai Stock Exchange to GDP for India stood at around 130 percent with a total market capitalization of US$ 1.61 trillion. Market capitalization of the National Stock Exchange of India stood at $ 1.48 trillion at the end of 2007. Presently such ratio to GDP for Pakistan is around 75 percent.
We expect the 2009 capital market will remain stable with new support of quality shares from telecommunications, gas, oil and energy sector. We are also expecting introduction of a modern pricing method such as book-building to encourage the private sector entrepreneurs to list their companies on the bourses.
3.13 Operation of the Company:
All the divisions of Prime Finance contributed to the company’s year on year increase of operating profitability in 2007. These results are practically positive, given the fact that during the year a major divisional process was successfully implemented to enhance their future profitability.
Investment Division: Increase of 7.52 percent despite economic slowdown and low industrial investment.
Capital market division: fantastic growth of almost 7 times due to robust capital market.
Business activities: Prime Finance offers diversified products and services which include lease finance, term finance, real state finance, SME finance, short term finance, margin loan, portfolio management, issue management, underwriting etc.
Diversification:
Prime finance has a well balanced diversified portfolio in major sectors which ensure sustained and stable revenue growth. Highest allocation was to dyeing, finishing and accessories sector at 13.46 percent followed by service and entertainment 13.41 percent, construction and engineering 12.08 percent, transport 11.99 percent and spinning, weaving, and knitting 10.81 percent.
Financial activities:
Considering the socio-economic condition in leading operations, our approach to new leading remained extremely cautious in 2007. The quality of finance and maintain high credit requirements for clients and pricing has been systematically linked to risk profile of the transaction.
Leasing:
Leasing finance is the principal fund based activity of Prime Finance. Until now the company concentrated only on full payout financial lease transaction for financing a wide range of capital machinery, equipment and vehicles. Customer represents different segments of local markets. They provide services to developing companies, SMEs and market-leading concerns.
In 2007, Prime Finance was able to maintain consistent growth in lease finance. Despite stagnation in the financial market, innovative offerings, such as option of structured payments, make its easier to draw up concepts for customize solutions whilst using standardized procedures. The ongoing assessment procedures of investment proposals help measuring credit risks entitled in the lease proposals.
3.14 Corporate and Financial Reporting Framework
The directors in accordance with SEC notification No. SEC/CMRRCD/2006-158/Admin/02-08 dated 20 February 2006, confirm compliance with the financial reporting for the following:
a) The financial statements prepare by the management of Prime Finance, present fairly its state of affairs, the results of its operations, cash flows and changes in equity.
b) Proper books accounts of the company have been maintained;
c) Appropriate accounting policies consistently applied, expect for the changes disclose in the financial statements in preparation of financial statement and accounting estimates are based on reasonable and prudent judgments.
d) International Accounting Standards, as applicable in Bangladesh, have been followed in preparation of financial statements and any departure there from has been adequately disclose.
e) The system of internal control is sound in design and has been effectively implemented and monitored.
f) There exist no significant doubts as to the company’s ability to continue as a going concern.
Activities of a Broker House Company
4.1 Introduction:
The capital market leads the growth of economic development, industrialization, employment generation and thus the national growth of a country. It plays a pivotal role for financing industrialization and national growth in developed and developing countries. The capital market of Bangladesh is mainly operated by Dhaka Stock Exchange (DSE), Chittagong Stock Exchange (CSE), Central Depository Bangladesh Limited (CDBL) and Broker House Companies, which are regulated by Security Exchange Commission (SEC) of Bangladesh.
DSE, CSE and CDBL provide three different software for the Broker House Companies. Through the DSE and CSE the broker house companies buy or sell shares and through the CDBL software receive or deliver electronic shares to CDBL.
The capital market of Bangladesh is growing rapidly which increases fraud in the market. At present the total numbers of members of DSE is 230 of which 173 members are registered by the Commission for securities trading.
To understand the operational procedures of a broker house company we have to have clear idea of all the works of a company. This chapter is dedicated to describe the detailed schedule of the whole tasks assigned to a broker house company
4.2 Tasks of a Broker House Company:
A broker house company can acts as a Stock Dealer or a Stock Broker or both. As a Stock Broker, a broker house company can buy or sale shares against the investors. But a stock dealer can buy or sale shares against its own portfolio. The rules and directives of Securities Exchange Commission, DSE, CSE and CDBL regulate all the tasks of the broker house companies. The basic tasks are as under:
|
To open customer account at DSE, CSE & CDBL software.
|
|
Buy or sale shares through DSE or CSE software on every working day.
|
|
Collect pay in forms from customers against sale
|
| Pay in shares from customers’ BO account to CDBL through CDBL software |
|
Receive shares from DSE or
CSE and preserve in the vault according to customer. If |
If Physical
Electronic
|
if Physical If Electronic
Fig: 1.1 Tasks of a broker house company
The main income source of a broker house company is the commission against the total buy and sale amount. A broker house collects money from customer against buy with commission and pays money against sale after deducting commission.
4.3 Trading System through Dhaka Stock Exchange:
Dhaka Stock Exchange purchased an automated trading system named TESA (The Electronic Securities Architecture) from Scandent Solutions Corporation Limited.
Dhaka Stock Exchange provides the software at every broker house company.
The trading is now in continuous session from 10:30 am to 2:00 pm. The session is divided in 5 parts: pre-opening session, opening session, continuous or regular trading session, closing session, and post-closing session. All transactions of brokers are settled and cleared through the 3rd and 5th working day respectively, calculated from the date of contract (hawla) and the procedure followed is presented in chart II.
Chart I I
The clearing house operates manually. Working hours of the clearing house are from 9:00am to 5:00pm. The Stock exchange remains open from Saturday to Thursday and remains closed on Friday.
The management of DSE is vested on a 24-member council having a chairman, one senior vice chairman and one vice chairman. Among the 24 council members, 12 are elected and nominated by DSE members. The other members are representatives from the Bangladesh Bank, finance ministry, law ministry and ministry of industries, presidents of the CA institute, FBCCI, MCCI, DCCI, Supreme Court Bar Association and bankers/insurance corporations associations and the chairman of the Department of Finance and Banking/Economics of the University of Dhaka. The operational management of the DSE is headed by a CEO, who works as an independent entity under the general policy framework set by the council.
Principal Function of TESA
Market Information: Supplying all market information needed to formulate the buy and sale decisions.
Order Management: Accept, validate and store orders and quotes from broker workstations and/or systems.
Order Execution: Automatically executes orders when buy and sell prices match.
Trade Reporting: Trade execution reports are provided to each trade participant, to the settlement system and/or the depository and to the market.
Index Calculation: Calculates and publishes market indices (DSE General Index & Weighted Average Index).
Market Access: Provide exchange members with efficient affordable GUI-based tools for accessing the market.
Trading Sessions: TESA conducts trading in-5-phases.
(1) Enquiry: In this session broker can log on 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.
(2) Opening: The opening is a pure, single-price action. All buy and all sell orders are compared and calculate the open-adjust price. No trades will be executed in this session.
(3) Continuous Trading: During the 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.
(4) Closing: Closing prices are calculated and disseminated to market participants.
(5) Enquiry: Market will be closed in this session and other facilities like the previous enquiry session.
Market Control: The Market Control Workstation allows the exchange administrative staff to control the operation of the market, e.g.
(1) Session Control: Opening and closing the market via interactive control or by preset timers.
(2) Validation Parameters: Setting and viewing parameters that control the trading engine validation e.g. tick size, circuit breaker, circuit filter, market lot, price protection percentage.
(3) Messaging: Allows the dissemination of company announcement data and general market administrative messages.
Market Information: Market Information is a real-time market data system. It collects, manages, generates and stores information relating to trade instruments and issuing companies. Market Information is responsible for,
(1) Collecting Real-Time Market Information: Bids, offers, last trade, book and other data are gathered via the trading engine. It supports TESA’s automated and manual trading modules and can process the trades of external and off-market systems.
(2) Collecting Company Information: All information supplied by the listed companies is maintained in the TESA database.
(3) Generating Market Statistics: TESA generates market indices on a real time basis. It generates other statistical information such as price.
5.1 Business Procedures & Existing Problems
Share Categories
There are five categories of companies’ shares in the Bangladesh capital Market, which are listed in both the Stock Exchanges (DSE & CSE). The basic definition of these share categories is as under:
A-Category Share: Companies, which are regular in holding the current annual general meetings and have declared dividend at the rate of ten percent or more in the last English calendar year.
B- Category Share: Companies, which are regular in holding the annual general meetings but have failed to declare dividend at least at the rate of ten percent in the last English calendar year.
G- Category Share: Companies, which is new but not start operation yet. G categories companies are also called Greenfield companies.
N- Category Share: All newly listed companies except Greenfield companies will be placed in this category.
Z- Category Share: Companies, which have failed to hold the current annual general meetings or are failed to declare any dividend or which are not in operation continuously for more than six months or whose accumulated loss after adjustm