Analysis of Capital Market of Bangladesh Focus-Private Equity

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The internship program as a
part of my BBA degree was a very useful and valuable experience. It helped me
relate the various learning’s of the diverse courses of the BBA program of with
the real world practices and also gain professionalism through a practical work
orientation. I have completed my internship with the Corporate Finance team of
HSBC Bangladesh. This team has provided me with a very challenging and wide
area of study i.e. Private Equity Business of Bangladesh. Private Equity is a
new concept in Bangladesh. Although this has been in existence in the world
market since 1970s, this ia an entirely new industry in Bangladesh. There are
only two to three companies opening up as Private Equity firms. There is also
no specific regulations to regulate this industry. The industry is just
blooming with immense potentials. Therefore, this has been very challenging for
me to conduct study on such an industry which is physically non-existent.
Therefore, I have modified the research design and conducted a study on the
capital market of Bangladesh with a special focus on the Private Equity.
Basically, the study aims at finding out the Capital Market scenario of
Bangladesh and how Private Equity will fit into the picture in future. In order
to analyze that, my studies roved around various dimensions of the capital
market of Bangladesh and the future trends. The global vogue of Private equity
is also included to show the global picture. Along with this a brief comparison
of Bangladesh economy with a few counterparts were also brought in to show the
possibility of Private Equity in Bangladesh Market. Finally, a base case
analysis shows how Private Equity business can be executed provided the
relevant framework set in Bangladesh.

Field of
The field of study for
this particular project is the participants of the capital market of
Bangladesh. The capital market includes Stock Exchange, issuers of public and
private instruments, investors, Regulatory Authorities and the Financial

The study focuses in
depth specifically on the capital market & emergence of Private Equity in
our country. However, this needs to be mentioned that, the study has excluded
Chittagong Stock Exchange from its content and studied only of the Dhaka Stock
Exchange as the Equity Capital Market.

The study is on a
hypothetical industry. However, the physical dimension included only Dhaka and
a few companies participating in the capital market  of Bangladesh. 

In this report, I have
directed myself towards the fulfillment of the following objectives:

  • Observe and describe the capital market scenario
    of Bangladesh along with a comparison (where relevant) with a few close
    competitor countries.
  • Forecast the future trend in the capital market.
  • Provide an overview of the upcoming Private
    Equity market and the reasons behind its emergence.
  • Show that how the capital market scenario is
    going to change after Private Equity is placed in.
  • Lastly, providing a case study to show the
    Private Equity business in a micro perspective.

report is heavily based on the secondary research. The primary tools used for
secondary research was web browsing and published reports and magazines on the
subject matter. For incorporating the Bangladesh perspective in this report,
however, a few interviews were arranged with the officials of the Private
Equity firms of Bangladesh. The researcher has thereby interviewed officials of
Terra Partners, The Frontier Fund and Asian Tiger Capital Partners. The sample
size was only three as there are only three companies commenced operation in
Bangladesh market.

conducting the study, I have encountered some limitations that might have
hindered my progress and prevented me from making the assignment as proximate
to perfection as I wished to. But with constant effort, I have tried my best to
ensure to turn these limitations into reasons for conducting a better study.
Some of the limitations faced are:


The Industry I have worked
on (Private Equity) has no virtual existence. It is not yet placed properly.
This is just in a pre-operating phase. Therefore, conducting studies ion it and
commenting based on that study was a very challenging task for me. I might have
lacked broad knowledge about the field of study and the process of study. This
constraint might have hindered the progress of the work as I needed to develop
my theoretical bases first and then proceed with the study to analyze some of
the findings more thoroughly.


I faced some problem in
getting right information about the companies as they are all at pre-operating
phase. Therefore, I had to face a very stringent confidentiality in sharing
even basic information about the companies in this upcoming industry. This has
resulted in lack of proper information about the industry.

Lack of

This is a problem that
troubled me the most. First of all the chosen topic was quite new to me. I had
to gather a lot of information within a very short time as this is an on the
job internship. Therefore, the report could not include much essential
information and analyze them in a more appropriate fashion. 

The Financial Market all
over the world has several facets and is segregated into Capital and Money
markets. Product based classification gives rise to segmentation of market into
equity, debt, foreign exchange and futures. The Capital market is usually
defined as a market for long-term instruments which deals primarily with debt
and equity.

Debt is represented by
bonds whereas stocks represent equity. This is the important distinction
between the two securities. By purchasing equity (stock) an investor becomes an
owner in a corporation. Ownership comes with voting rights and the right to
share in any future profits. By purchasing debt (bonds) an investor becomes a
creditor to the corporation (or government). The primary advantage of being a
creditor is a higher claim on assets than that of shareholders. That is, in the
case of bankruptcy a bondholder will get paid before a shareholder does. The
bondholder, however, does not share in the profits if a company does well–he
or she is entitled only to the principal plus interest. To sum it up, there is
generally less risk in owning bonds compared to owning stocks, but this comes
at the cost of a lower return.

The instruments most popular
in the global vogue are various kinds of bonds. In many countries, debt market
(both sovereign and corporate) is larger than equity markets.  In fact, in matured economies debt market is
three times the size of the equity market. 
Investment in equity being riskier, certain class of investors chooses
to invest in debt, based on their risk appetite and liquidity requirements.

1The types and characteristics of bonds are mentioned
in appendix1

An important element of a
domestic bond market is the government bond market.  Development of a government bond market
provides a number of important benefits if the pre-requisites to a sound
development are in place.  At the macroeconomic
policy level, a government securities market provides an avenue for domestic
funding of budget deficits and avoids a build-up of foreign
currency-denominated debt. 

The Equity market, on the other hand, is
interlinked with the debt market and together these two brings harmony and
balance in the equity market. Although in the developed economy, capital
markets are overly dominated by bonds, equity securities are more prevalent in
the developing economies. However, these two act like two sides of a balance in
a. The demand for fund is met by either one of them. Therefore, although these
two are not directly inversely correlated, there is an offsetting relationship
between these two. So is true for any other participant in the capital market
as capital markets are essentially about matching the needs of investors with those
that need capital for development.

Capital markets in most
countries are built on the same basic elements: 
a number of issuers with long-term financing needs, investors with a
need to place savings or other liquid funds in interest-bearing securities,
intermediaries that bring together investors and issuers, and an infrastructure
that provides a conducive environment for securities transactions, ensures
legal title to securities and settlement of transactions, and provides price
discovery information.  The regulatory
regime provides the basic framework for bond markets and, indeed, for capital
markets in general.  Efficient capital
markets are characterized by a competitive market structure, low transaction
costs, low levels of fragmentation, a robust and safe market infrastructure,
and a high level of heterogeneity among market participants.

A very popular phenomenon
having a significant impact on the capital market now-a-days is the Private
Equity (PE). This business has been having a major impact on the capital market
of the developed markets. The context of India will well establish the fact.
India has been the fastest rises in Private Equity business in the last year.
The Private Equity business in there has increased the capital market activities
manifold. The Mumbai Stock Exchange as a result now accounts for 166% of the
total GDP of India. Another good example is Europe. Pension funds raised 25% of
private equity assets in Europe last year, overtaking banks for the first time,
with the lion’s share going to those funds demonstrating the best performance.

With the global shift in
the capital market brought about the PE, it is only a matter of time when
Bangladesh will also be facing such a transition. Now-a-days, there is an
existence of only a promising equity market in Bangladesh. With the almost
non-existent bond market, bulk of the financial needs of the institutions is
met by the banks and financial institutions. However, this scenario awaits to
be changed with the emergence of PE business in Bangladesh. The whole report
aims to analyze that trend with a closer inquisition.

Private equity
involves activities of equity investments by professionally managed
partnerships that involve investments along with a transformational,
value-added, active management strategy.
It deals with the
equity capital that is not quoted on a public exchange. It consists of
investors and funds that make investments directly into private companies or
conduct buyouts of public companies that result in a delisting of public
equity. Capital for private equity is raised from retail and institutional
investors, and can be used to fund new technologies, expand working capital
within an owned company, make acquisitions, or to strengthen a balance
In the global
market, the majority of private equity consists of institutional investors and
accredited investors who can commit large sums of money for long periods of
time. Private equity investments often demand long holding periods to allow for
a turnaround of a distressed company or a liquidity event such as an IPO or
sale to a public company. 
Private equity
firms generally receive a return on their investments through one of three
ways: an
a sale or
of the company they control, or a
recapitalization. Unlisted securities may
be sold directly to investors by the company (called a private offering) or to
a private equity fund, which pools contributions from smaller investors to
create a capital pool.
Rather than just
being a source of funding, Private Equity provides intellectual and strategic
capital to new entrepreneurs and established sector corporate as a greater
source of achieving exceptional returns.
Private equity
investments can be divided into the following categories:
  • pVenture capital: A broad
    subcategory of private equity that refers to equity investments made,
    typically in less mature companies, for the launch, early development, or
    expansion of a business. an investment to create a new company, or expand
    a smaller company that has undeveloped or developing revenues;
  • Buy-out: It means the acquisition of another
    company. When that is done using a significant amount of borrowed money
    (bonds or loans) to meet the cost of acquisition, it is called Leveraged
    Buyout (LBO). The strategy is to make equity investments as part of a
    transaction in which a company, business unit or business assets is
    acquired from the current shareholders typically with the use of financial
    leverage. This is profitable in case of a more mature company. The
    acquisition normally entails a change of ownership. Often, the assets of
    the company being acquired are used as collateral for the loans in
    addition to the assets of the acquiring company. The purpose of leveraged
    buyouts is to allow companies to make large acquisitions without having to
    commit a lot of capital. 
  • Merchant banking: negotiated
    private equity investment by financial institutions in the unregistered
    securities of either privately or publicly held companies.
  • Special situation: investments
    in a distressed company, or a company where value can be unlocked as a
    result of a one-time opportunity (Changing industry trends, government
    regulations etc.);
  • Mezzanine Financing A hybrid of
    debt and equity financing that is typically used to finance the expansion
    of existing companies. Mezzanine financing is basically debt capital that
    gives the lender the rights to convert to an ownership or equity interest
    in the company if the loan is not paid back in time and in full. It is
    generally subordinated to debt provided by senior lenders such as banks
    and venture capital companies. Since mezzanine financing is usually
    provided to the borrower very quickly with little due diligence on the
    part of the lender and little or no collateral on the part of the
    borrower, this type of financing is aggressively priced with the lender
    seeking a return in the 20-30% range. Mezzanine financing is advantageous
    because it is treated like equity on a company’s balance sheet and may make
    it easier to obtain standard bank financing. To attract mezzanine
    financing, a company usually must demonstrate a track record in the
    industry with an established reputation and product, a history of
    profitability and a viable expansion plan for the business (e.g.
    expansions, acquisitions, IPO). 
Private Equity investment process starts with the
sourcing of deals.  In most of the cases
the investments are soured through reputable corporate houses, venture capitalists,
or any other financial institutions. The investment decision is quite often
based on the sector or the company situation. A detail analysis of the industry
benchmarking will show it more explicitly
(Appendix 6).  The investment will require delisting in case
of a public company and buyout of a private company. Critical to achieving the
returns is a rigorous and disciplined decision-making process prior to making
an investment. The primary focus of the due diligence process is to perform
commercial, financial, legal and regulatory due diligence to confirm the
reliability of investment and assess any risks that may come in place. The
final stage of the investment process (i.e. Post Investment Involvement) is the
most important phase as this serves the basic purpose of private equity-The
value creation. This sort of firms create value in the portfolio companies by
taking strategic, operational and financial initiatives aimed at strengthening
their competitive position vis-à-vis competitors and industry benchmarks. A
proper private equity firm provides management and technical capital into the
firm to strengthen the financial situation and leverage the balance sheet to
have a good price in the end.  At the
final stage, the PE firm seeks to exit the deal. Such exit strategies can be
any of the following:
•Initial Public Offering on the DSE or overseas exchanges
•Disposal to strategic investors either locally or overseas
•Secondary disposals to other private equity or venture capital

Private Company Scenario:

Management Restructuring


Public Company Scenario: 



Asset Base




Strategic Changes


Post Investment


Private Sell down


Regulatory relief


The global PE market has grown steadily since the
1970s. The deal size also went up overwhelmingly. There were several private
equity purchases in excess of $30 billion during 2006 and 2007. There were
2,700 Private Equity funds representing the world Private Equity market in
2007. The most significant portion was held by LBO Leveraged buyouts.



The regional breakdown of
private equity activity shows that in 2007, North America accounted for around
60% of global private equity investments (down from 67% in 2000) and 47% of
funds raised (down from 69%). Between 2000 and 2007, Europe increased its share
of investments (from 21% to 24%) and funds raised (from 21% to 44%). This was
largely a result of strong buyout market activity in Europe. In recent years,
there has been a rise in the importance of Asia-Pacific and emerging markets as
investment destinations, particularly China, Singapore, South Korea and India.
Asia-Pacific’s share of investments increased from 6% to 14% during this period
while its share of funds raised remained unchanged at around 8%

The biggest fund
type in terms of commitments garnered was buyout, with 188 funds raising an
aggregate $212 billion. So-called mega buyout funds contributed a significant
proportion of this amount, with the ten largest funds of 2006 raising $101
billion alone—23% of the global total for 2007. Other strong performers
included real estate funds, which grew 30% from already strong 2006 levels,
raising an aggregate $63 billion globally. The only fund type to not perform so
well was venture, which saw a drop of 10% from 2006 levels.

In terms of the regional split of fundraising, the majority of funds
raised in 2007 were focusing on the American market, with 62% of capital raised
in 2007 focusing on the US. European focused funds account for 26% of the
global total, whilst funds focusing on Asia and the Rest of World account for
the remaining 11%.

The PE performance
however has changed significantly during the first quarter of this year. As the
graph below shows that the value of private equity activity fell by more than
80% from its peak value of $540bn in Q2 2007 to $88bn in Q1 2008. As a percentage
of total M&A value it fell to 21% from a Q2 2007 peak of 41%

According to an updated 2008 ranking created by
industry magazine Private Equity International
(published by the PEI
50), the largest private equity firm in the world today is The Carlyle Group,
based on the amount of private equity direct-investment capital raised over a
five-year window. The largest 10 private equity firms in the world are:

Asia is a rapidly developing market for PE. This region is still subject
to a high degree of fragmentation and regional variation. The macro-economic
factors at play (above all, sustained growth in Asia as the already vast
markets of China and India continue to integrate into the world economy) which
would compel the financial investors to have an “Asia strategy”. This “pull”
has been accentuated by a “push” as the credit crunch has hit deal execution in
the more established markets of Europe and the US. The combination of a pull
and push into Asia has resulted in financial sponsors, and the advisers who
work with them, gearing up their presence in Asia. The Private equity fund pool
(Cumulative) has increased from USD122 Billion to USD195 Billion from 2006 to
3 (Figure beside shows the trend). 





Asia has seen a robust increase in investment fund in the year 2007. This
is primarily due to the two emerging markets i.e. India and China (Figure
beside shows that the investment has grown by around 90% in India and almost
15% in China). Around 691 deals were known to have been completed in 2007, an
increase of 17.3% from 2006. 292 limited partners (‘LPs’) were known to have
made allocations to 140 Asian private equity funds during 2007, with corporate investors
being the most active. The average fund size has also increased by 20.6% to
US$246.7 million, from US$204.6 million for 2006. US$36.8 billion of fresh
capital has come into the market in 2007, representing an increase of 28.3%
compared to the same period in the last year.

Deal types

PE market
in Asia is very active
with levels of activity for the year to date being similar to or greater than
2007 (although precise levels vary depending on how data is reported, the broad
trend is clear). The Financial Times has measured Asian M&A at around $189
billion in the year to date, with China and India being by far the biggest
markets. This represents an increase of 10% on previous levels, contrasting
with a drop in the US and Europe of around one-third to one-half. The Buyouts
dominated, accounting for 41.1% of 2007’s capital pool. Venture
capital funds
, at US$7.1 billion, enjoyed the highest growth compared
to US$4.3 billion in 2006. 3 Apart from these popular deals, Growth
capital deals, whether pre-IPO financings, private investments in public entities
(PIPEs) or minority equity stakes also continue to be far more prevalent in
Asia than elsewhere. Private equity players entertain these deals as they allow
the deployment of capital whilst avoiding control issues and they do not need
to be leveraged (at least onshore). These deals are often structured as
equity-linked instruments.  


divestment processes were known to have been initiated, a 77% increase compared
to 215 for 2006. Initial public offerings (‘IPOs’) commanded the lion’s share
of exit movements, accounting 77.6%. A total of US$17.05 billion has been
returned to investors for an original invested capital of US$5.80 billion. Realised
capital through IPOs accounted for US$7.24 billion or 42.5% of the returned or
realised capital.

Rectangular Callout: HSBC Today: (Till 31 Dec, 2007)
Assets US$2,354 billion (£1,172 billion HK$18,359 billion) 
Profit before tax US$24,212 million (£12,106 million HK$188,878 million) 
Capital strength Tier 1 capital ratio: 9.3% Total capital ratio: 13.6% 
International reach Around 10,000 offices in 83 countries and territories.
Staff 330,000 employees worldwide.
Customers About 128 million worldwide, with a total of 46 million customers registered for internet banking.

Hongkong and Shanghai Banking Corporation (HSBC) Limited, had initially emerged
in 1865 to finance growing trade between Europe, India and China.

The inspiration behind
the founding of the bank was Thomas Sutherland, a Scot who was then working as
the Hong Kong Superintendent of the Peninsular and Oriental Steam Navigation
Company. He realized that there was considerable demand for local banking
facilities both in Hong Kong and along the China coast and he helped to
establish the bank in March 1865. Then, as now, the bank’s headquarters were at
1 Queen’s Road Central in Hong Kong and a branch was opened one month later in

Throughout the late
nineteenth and the early twentieth centuries, the bank established a network of
agencies and branches based mainly in China and South East Asia but also with
representation in the Indian sub-continent, Japan, Europe and North America. In
many of its branches the bank was the pioneer of modern banking practices. From
the outset, trade finance was a strong feature of the bank’s business with
bullion, exchange and merchant banking also playing an important part.
Additionally, the bank issued notes in many countries throughout the Far East
at that time. During the Second World War the bank was forced to close many
branches and its head office was temporarily moved to London. However, after
the war the bank played a key role in the reconstruction of the Hong Kong economy
and began to further diversify the geographical spread of the bank.

The post-war political
and economic changes in the world forced the bank to analyze its strategy for
continued growth in the 1950s. The bank diversified both its business and its geographical
spread through acquisitions and alliances. This strategy culminated in 1992
with one of the largest bank acquisitions in history when HSBC Holdings
acquired the UK’s Midland Bank plc (now called HSBC Bank plc). However, it
remained committed to its historical markets and played an important part in
the reconstruction of Hong Kong where its branch network continued to expand.

Today, HSBC is ranked
among the top business houses in the world. Recently, it has turned out to be the
most profitable business Organization (Forbes’ Survey 2007) in the world with a
Profit Before tax of around 24 Billion USD in 2008.

2 The
Development of HSBC through different stages are shown in the appendix2

The HSBC Group’s
international network comprises of some 9,500 offices in 76 countries and
territories. To ensure that the key resources (management time, capital, human
resources and information technology) are correctly allocated and that the
exchange of best practice is accelerated between entities, the group has
classified the countries where it operates into 3 categories: the large, the
major and the international.

These classifications
are a function of sustainable, attributable earnings, the number of retail
clients, balance sheet and size of operation. A brief presentation of this
classification is shown in the next page:



  • HSBC Bangladesh
    falls under the HSBC Asia Pacific (HBAP) network.

Principal Investments (PI) was formed in October 2006 as a way of bringing
together all of HSBC’s core principal investing activities. The business has a
global footprint encompassing businesses in multiple jurisdictions.

has two primary business units i.e. Private Equity and real estate

Private Equity

most prominent business unit of Principal Investments is Private Equity. The
business has a global footprint encompassing businesses in multiple
jurisdictions. Its first private equity platform was set up in the UK in 1968
and in the following years we progressively built out its captive businesses in
Asia, North America and the Middle East.

Private Equity (Asia)

Established in 1989 and operates across Asia and will continue to focus in the
mid-market expansion capital segment. In addition, we have a small but
successful venture capital capability in Asia

Private Equity Middle East
established a dedicated Private Equity business in 2001. The team has
successfully deployed its first fund and will look to complete its follow up
fund raising this year

Capital (North America)
– Based
in the US and Canada, HSBC Capital targets mezzanine, direct private equity and
select real estate opportunities in the smaller end of the middle market

Private Equity (UK)
– Established
in 2007. Dedicated to supporting buyout, replacement and expansion capital
opportunities requiring investment of GBP10-50m 10

Private Equity Funds

Private Equity Funds invest across a range of industries in established,
profitable companies with experienced management teams. The principal
geographic markets for investment are China, the Hong Kong SAR, South Korea,
Taiwan, South East Asia and India. Principal sectors for investment include
consumer goods and services, industrial and manufacturing, and electronics and

funds raised by HPEA include:

a) Venture Funds

raised its first Venture Fund in 2001. The Venture Funds advised by HPEA are:
The HSBC Technology Fund Limited (HTF) and The HSBC Asian Ventures Fund 2
Limited (HAV2). HTF closed in 2001 with USD53 million in capital and is in the
process of realizing its remaining investments. HAV2 is a USD120 million fund
which closed in March 2006. 11 HAV2 targets investment opportunities in
growth-oriented, technology driven businesses in Asia. HAV2’s geographic
focus is on China, the Hong Kong SAR, South Korea, Taiwan, India, Japan
and certain countries in South East Asia. There are two funds in this category:

b) The HSBC Technology Fund Limited (HTF)

technology fund raised by HPEA is called HTF. It had its final closing in
January 2001 at USD53 million. HTF is currently in the process of realising its
remaining investments. 11

c) The HSBC Asian Ventures Fund 2 Limited (HAV2)

is the second Asian Venture Fund advised by HPEA. HAV2 was formed to achieve
long-term capital appreciation by making investments in the range of
approximately USD3 million to USD10 million involving mid-sized,
growth-oriented technology companies with significant interests in Asia. HAV2
had its final closing in March 2006 at USD120 million with funding provided by
the HSBC Group and other global institutional and private investors. 11

Private Equity Deals


China: An expansion
capital investment in a company which is a market leader in branded apparel
in China. 


Singapore: A buyout of
a company engaged in the provision of electronics manufacturing services
primarily in the telecommunications and instrumentation, and medical and
bioscience industries.


South Korea: An
expansion capital investment in a company which is a leading provider of
engineering, procurement, construction and maintenance services in South
Korea and the Middle East.


Singapore: A buyout of
a company engaged in the provision of outsourced supply chain services such
as product packaging and kitting, print media production and product order
fulfillment to the IT hardware, software, consumer electronics and wireless


South Korea: An
expansion capital investment in a company which is a leading mid-sized life
insurance company.


East Asia:
A buyout of a group of
companies located in Thailand, Indonesia and Singapore whose core business is
the collection, transportation, treatment and final disposal of industrial
and commercial, hazardous and non-hazardous waste.


Taiwan: An expansion
capital investment in a company which is a leading manufacturer of handheld
garden and power tools. 


China: An expansion
capital investment in a company which provides advertising operations for
newspapers and magazines in Shanghai. 


South Korea: An
expansion capital investment in a company which is one of the leading
multiple system programme providers in the Korean cable television


South Korea: An
expansion capital investment in a company in the ship building industry
specialising in the manufacture of Handysize, Handymax and Panamax product

Following are the remarkable venture funds provided in
different regions of Asia Pacific:


Taiwan: An expansion
capital investment in a company engaged in the design and manufacture of
moulds and hinges for LCD monitors, TVs and other consumer electronic


China: An expansion
capital investment in a company engaged in the design and development of
online games for Chinese and international online game publishers.


Taiwan: An expansion
capital investment in a company engaged in the manufacture and sale of
photovoltaic cells that generate electricity from solar energy.


China: An expansion
capital investment in a company which is one of the leading solar module
manufacturers in China.


India: An expansion
capital investment in a company which provides independent testing and skill
assessment services primarily to corporations in the IT and BPO sectors in
India for recruitment purposes.


China: An expansion
capital investment in a company which is engaged in the design and sale of
controller integrated circuits for portable media devices in the consumer
electronics market. 


China: An expansion
capital investment in a company which develops semiconductor IP libraries and
provides integrated circuit design services to domestic and overseas
semiconductor companies and foundries as an independent contractor.


However, in spite of the Group’s long lasting presence in the
Private equity business even in the Asia pacific region, HSBC Bangladesh is not
into the Private Equity business in its region.

In Bangladesh, the HSBC Group’s history dates back to 1996
when The Hongkong and Shanghai Banking Corporation (HSBC) Ltd opened its first
branch in December. Today, the HSBC Group offers a comprehensive range of
financial services in Bangladesh through a strong Network of 9 offices: 8
branches, 1 sub-branch and an offshore banking unit. HSBC now accommodates 695
employees as of 24 July 2007.


In line with the global functional structure, The Key
business areas in Bangladesh are:

1. Personal Financial Services

2. Commercial banking
3. Payments and cash management
4. Treasury and capital markets

Personal Banking: HSBC
offers a full range of personal banking and related financial services
including current and savings accounts, personal loans, time deposits,
travellers cheques and inward and outward remittances.

Payments and cash management: HSBC is one of the leading providers of
payments and related services to financial institutions, corporate and personal
customers in Bangladesh. Underpinned by the Group’s extensive network of
offices state-of-the-art systems and capabilities, payments and cash management
assists companies in efficient cash management through the provision of
payments, collections, liquidity and account services. In Bangladesh, HSBC
Payments and Cash management has an extensive network of correspondent banks
covering 61 major districts with nearly 200 outlets.

Treasury and capital markets: HSBC’s treasury and capital markets business ranks
among the largest in the world and serves the requirements of supranational,
central banks, international and local corporations, institutional investors,
and financial institutions as well as other market participants.

Commercial banking (CMB): Commercial
banking is a traditional strengths of the HSBC Group .In Bangladesh, HSBC is a
popular choice for customers because of the Group’s international reach and a
wide range of financial services and products HSBC has an offshore banking unit
(OBU) licence and can therefore also provide foreign currency financing to
qualifying customers. The Commercial Banking is, so far, the most prominent business
segment covering a wide range of services. HSBC has turned out to be the
largest commercial bank in terms of business volume in 2007. This department
consists of the following sub-segments:

  • Corporate Credit:

Corporate and Commercial Banking
Corporate and Commercial banking
provides dedicated relationship management services to HSBC’s clients in major
corporate and financial institutions. The Bank’s focus is on fostering
long-term relationship based on its international connections and extensive
knowledge of Asia and Asian business.

o Corporate Finance (CFU): This unit
works under the periphery of the Group’s Global markets and Structured Finance
Team. This unit maintains relationship with the big Corporate Clients and also
NBFIs. It operates to provide financial solutions beyond the regular frame of
services offered by the Corporate Banking. Given the market situation of
Bangladesh, it can offer a relatively smaller array of solutions. The service
offered therefore are somewhat confined around syndicated deals. The remarkable
syndication deals so far include City Sugar, Tanveer Oil, PRAN Foods Limited
and Eskayef and so on. Apart from this, the unit is actively involved in market
observation and the strategy implementation accordingly. This unit also
provides advisory services to the clients on an ad-hoc basis.

o Institutional Banking (IB): This is a
very efficient but small unit of operation. This division brings together the
advisory, financing, asset management, equity securities, private banking,
trustee, and inter-bank correspondence for business growth.

  • Business Banking Business Banking from
    HSBC offers the flexibility of solutions specifically catered to growing
    business needs and management of SME business. With Business Banking
    clients have access to a range of products, which target their business
    growth. HSBC offers an unmatched efficient banking structure along with a
    whole range of products and services to suit all business needs. That is
    why HSBC have designed their extensive range of products and services to
    give clients maximum value with the minimum of paperwork and effort
    through Business Banking.

Trade Services: Trade finance
and related services are a long-standing core business of HSBC. HSBC has
automated trade processing systems and extensive geographic reach. HSBC handled
an estimated 7% of Bangladesh imports and an estimated 9.5% of Bangladesh
exports in 2007.

HSBC is a leader in custody and clearing in the
Asia-Pacific region and the Middle East. The network uses an advanced
securities clearing system, which was developed in-house and provides
round-the-clock online real-time access to clients’ securities portfolios. In
Bangladesh, HSBC is a local custodian for global custodians and investment
banks, which benefit from its significant expertise and understanding of the
securities clearing business.

Amanah: HSBC Amanah is the global Islamic financial services
division of the HSBC Group, responsible for the development of Islamic
financial products for distribution to customers of the HSBC Group. It was
established in 1998 and is now based in Dubai, UAE with regional offices in the
UK, the US, Saudi Arabia, Malaysia, Indonesia, Bangladesh, Singapore and
Brunei. HSBC Bangladesh currently offers Amanah Current Account and Amanah
Import Finance.

market dynamics consists of participants of the capital market like
instruments, issuers, investors, and intermediaries.

Available in the Capital Market of Bangladesh: The capital market in the last year has seen a
significant rise in the equity securities. On the other hand, the debt capital
market has only seen a few Government securities in the debt market and that
too, a market where government was borrowing at pre-announced coupon rates from
basically a captive group of investors, such as banks. Thus there existed a
passive internal debt management policy. This, coupled with automatic
monetization of fiscal deficit prevented a deep and vibrant government
securities market. (The figure below
summarizes the instruments available in the Capital Market in 2007)

As of December31, 2007



Volume (Billion BDT)

Public Placement

Corporate Debentures in DSE


Market Capitalisation


Aramit Cement

Market Capitalisation


BD Welding Electronics

Market Capitalisation


BEXIMCO Fisheries

Market Capitalisation



Market Capitalisation



5 Year

10 Year


15 Year


20 Year


Mudaraba Perpetual Bond by Islami Bank

Market Capitalisation


Equity (issued value)

New IPOs in 2007



Zero Coupon Bond

Issued by IDLC


Zero Coupon Bond

Proposed by Citi NA, HSBC, SCB, IDLC, IIDFC

(Approx) 10

Sources: Bangladesh Bank, National Savings
Bureau, Dhaka Stock Exchange.
Although there seems to be a presence of corporate debentures in the
Stock market in the last year, most of the debentures are non-performing as the
graph of trade for the last year in most cases would seem like the graph
Text Box: one
corporate bond (Mudaraba Perpetual Bond) floated in the market in the last year
with a face value of 3 Bln which has a market capitalization of 2.9Bln as of
now. The Zero Coupon Bond was proposed by a few financial institutions and
corporate houses for its unique advantage of tax evasion. However, till date only
IDLC and ULC has the SEC permission to float Zero Coupon Bond in the market.

On the contrary, the
equity market grew upto 138% in the last year. With the 14 new IPOs worth 4.96
Billion BDT in the Dhaka Stock Exchange, the market capitalization went up from
311 Billion to 742 Billion in 2007.

Issuers: The number of issuers in the equity capital market has been low in the
past years. The main reason was regulatory relaxation. However, the scenario is
changing with the regulatory reform process. The equity market has witnessed a
massive surge in 2007. 14 New companies floated shares through IPO worth 4.96
Bln. The Market capitalization increased from 311 Bln to 742 Billion in one
year. The volume is expected to grow even larger in future. The regulatory reform will hopefully bring many big
corporate houses to turn into public entities.

although Bangladesh has a debenture market, to date only a small number of
well-known issuers have used the market like BEXIMCO. The liquidity in those
debentures at the stock exchange is insignificant because of the small number
of investors, their buy-and-hold mentality, the practice of non-disclosure of
information and above all the inconsistency of market reputation. However, a
few number of financial houses have issued zero coupon bonds in recent years
which was subject to tax exemption.

Investors: The
investment capacity is increasing with the increase in GDP. The per capital GDP
is now USD482 per year up from USD420 in 2006. This enhances the investing capability
of the investors. This enabled the public subscription in DSE to rise from
BDT15 Billion to BDT37Billion. The inward remittance has grown threefold
from2001 to 2006. This all substantiate the presence of a more matured capital
market in case of both equity and deb capital market in Bangladesh.

Intermediaries: Intermediaries in Bangladesh lack many of the skills
needed to foster an active local corporate bond market. As mentioned earlier, a
few financial institutions have capabilities beyond single limit bilateral
financing and short term and long term deposit and lending as per Bangladesh
Bank rule. SEC has issued licenses to 27 financial institutions to operate in
the capital market of which 19 are merchant banks and portfolio manager, 7 issue
manager and 1 issue manager and underwriter. However, very few financial
institutions have the capability to provide efficient merchant banking,
structured finance, securitization, corporate advisory and trust services
altogether. The commercial banks dominate the financial sector and not enough
intermediaries are skilled in securities. Hence the market is illiquid, with
large spreads. At the same time, the fee structure and pricing are high enough
to allow intermediaries to make money, but because transactions are so limited,
the intermediaries seldom make money. Even if they are able to participate,
intermediaries are reluctant to take any risk in dealing.

Despite all this worrying
facts, it is only expected that the financial intermediary services will also
expand with the opening up of new opportunities made by the regulatory
environment, investors and issuers. This will also give scope to utilize the
capabilities of many financial institutions like Citi NA, IDLC, HSBC to expand
their operations.

ii) Regulatory Environment: The Securities and Exchange Commission exercises
powers under the Securities and Exchange Commission Act 1993 (See Appendix 3 for SEC regulations).
It regulates institutions engaged in capital market activities. Bangladesh Bank
exercises powers under the Financial Institutions Act 1993 and regulates
institutions engaged in financing activities including leasing companies and
venture capital companies. Companies’ Act also comes into play in case of
issuers. The capital market oversees rise and fall with an effect to reform and
modification of the rules and guidelines circulated by theses regulatory
bodies. For example, the withdrawal of netting facility and restriction on loan
disbursement of merchant banks by SEC has resulted in the slowdown of the loan
market in mid 2007. 

The share market witnessed
a robust growth during FY07 aimed at a strong economic prospect and outlook. As
there was demand of securities having good fundamentals in the capital market,
at the time of rise in demand, the prices of securities listed on exchanges
showed an unusual upward trend that turned the capital market somewhat
volatile. On the other hand, major economic indicators showed a positive trend
to support the gradual development of the market. As a result, all the
indicators of the capital market increased in FY07 as compared to FY06. Along
with this, the capital market was very active during FY07 because of
significant improvements made in protecting investors’ interests and boosting confidence
of investors in capital market, introducing automated trading through
electronic registration and transfer of securities, simplifying rules and
regulations and notifying guidelines on corporate governance on comply or
explain basis. These measures have created investment friendly atmosphere in
the capital market and positive impact has been noticed in both primary and
secondary market.

Now, the major challenge
for 2008 is to bring more quality companies to list in the stock exchange in
order for the momentum to continue. At the same time, the long abandoned bond
market should also be improvised to bring a balance in the economy by
supporting the growth of the equity market. In 2007, market capitalization
went up by 265% and the average daily turnover increased by 1000%.

However, considering the growth of equity market, this is an adversity that the
bond market is nearly dead. Only one bond was publicly traded (Mudaraba
Perpetual Bond by Islami Bank Bangladesh Ltd) with an insignificant amount of 3
Billion BDT . If the proper infrastructure is not built, a sustainable growth
can not be attained. Therefore, seeing the unprecedented bullish run in the
stock market, the murmur gets stronger with the time that the stock market boom
is only a bubble waiting to be burst, reminiscent of the spiral of 1996.

The regulatory authority is
making a financial policy to increase participation of the large corporate
houses in the equity market. Therefore, Bangladesh Bank is on its way to
circulate a new regulation for limiting the single borrower cap from a single
bank by fixing the maximum debt-equity ratios. While this will come into
effect, the many large corporate relationships even in the most efficient banks
are nearing or have already exceeded any standard debt to Equity ratio accepted
in any standard system. Therefore the loan market will be squeezed and the
equity market will get the share if not more from it. The main driver behind
this would be to enforce the big corporate houses to go public.

SEC has already passed a
rule which will force all companies with over BDT 400 Million Paid Up Capital
to be listed. This scenario forecasts a prospective big number of IPOs in the
coming years.

A direct Listing mechanism
is already in place which foresees a number of IPOs with attractive premium in
the market.

The Government has showed
interesr towards fostering new private investments in the infrastructure sector
with a view to enhance the infrastructure facility as a prime target of this
fiscal year. Therefore, both domestic and foreign investments will be sought in
the coming years by the Government, which will increase the market for both
debt and equity capital.

Basel II standards will be
implemented from early 2009. Implementation of these regulations will help
strengthen the financial system and will help bring greater discipline in the
activities of the banks and financial institutions.

The Government of
Bangladesh (GOB) has liberalized the public enterprises and many State Owned
Enterprises (SOE) are now in the process of being corporatized. A few regions
under BPDB (West Zone, North West Zone), Biman Bangladesh and Sonali Bank are a
few examples of this reform process. This reform will in due course result into
listing as the need for financing would be huge in a close future and the debt
market with the current regulatory framework will fail to meet the need. 

In Bangladesh, although the
capital market is a narrow-based one, the reverse has been true. The equity
market has risen significantly during the past few years and the bond market
has been virtually non-existent.4 Therefore, i
n the face of a
relatively growing credit demand by private sector has increased debt financing
through . Total banking system assets are approximately USD
30bn, whereas stock market capitalization is USD 12bn. Sustained economic
growth of 5%-6% and high growth of trade and remittance in the last 12 years
has helped grow the banking sector. The asset base is approximately 42% of GDP5.
However, There still remains significant scope for further growth. The Bank
loans disbursed in 2007 was about 1651 Bln which was almost 14% more than the
year before. The industrial Term loan outstanding as of June 2007 was about
124 Bln. 6

However, the overview of
the Debt and Equity Capital Market of Bangladesh is given below:

The debt market in
Bangladesh comprises broadly two segments, viz., Government Securities Market
and Corporate Debt Market. The market for government securities is the oldest
and has the most outstanding securities, trading volume and number of
Marketability of bonds issued excluding
government bonds, in the country is very limited. The bulk of these bonds is
held by a few financial institutions.

Over the years, there have
been very few new products introduced like zero coupon bonds, Mudaraba
Perpetual Bond (Islami Bank). The trading is done through auction at the
trading platform of Securities and Exchange Commission (SEC) and Dhaka Stock
Exchange (DSE).

The corporate bond market,
in the sense of private corporate sector raising debt through both Private
placement and public issuance in capital market, is only an insignificant part
of the Debt Market. The issuance of Debt instruments in the form of
securitization through Private placement was a more common practice by the
financial institutions in the non-Government debt market

The microstructure of the
Debt Market of Bangladesh can be explained under two broad sub sections:

a) Primary Corporate Debt Market

The Bangladesh Debt Market,
unlike the developed economies, is not properly developed. It does not have
many bond issuers in place. Only a few sectors (The table above summarizes the
issuers of debentures) have issued public debentures. Because of the regulatory
constraints, lack of quality issuers and limited number of investors, the
spectrum of debt market appears to be a closed ended one.

provides names of some of the
instruments that have been issued. Till recently, Bangladesh debt market had
only observed the existence of a few non-performing bonds issued by BEXIMCO and
a few other companies. These bonds however, became non-functional eventually
due to loss of corporate reputation. Over a period of time, only a handful of
other instruments have been attempted on. They include zero coupon bonds (ZCBs)
and Mudaraba perpetual Bond.

ii) Coupon
The coupon rates mostly
depend on tenure, credit rating and the yield rates on the bonds. However,
these may not be strictly correlated in all cases. The maturities of corporate
bonds generally vary between one year to five years
. The maturity period by and large
depends on outlook on interest rates. In expectation of falling interest rates
environment, corporate, it is observed, mostly go to shorter term instruments
while the opposite is true in case of possible hike in interest rates.

There are two most common
ways of debt instrument issuance in Bangladesh following the most popular vogue
in the world Debt Capital market. They are public issue and private placement
routes. In a mature and developed market where large number of institutional
investor /sophisticated investors are available and a highly developed mutual
fund industry is in operation, the private placement route may be acceptable to
issuers, investors and regulators. In a less developed market / small market
like Bangladesh, it is a perfect dilemma as private placement is not suitable
because this market do not have adequate number of informed investors and the
public issue route may create regulatory arbitrage, higher compliance costs
resulting sometimes in migration of markets.

Two classes of
intermediaries required for the proper development of debt market are broker
and investment banker/ merchant banker. In Bangladesh 27 financial institutions
have merchant banking license among which seven are issue managers and one
issue manager and underwriter.

v) Investors The most important structural weakness in Bangladesh is lack of large
and diverse institutional investors. The regulatory constraints also restricts
the corporate bond market to a large extent. Therefore the investors are not
yet exposed to the bond market although the derivatives market is flourishing
with increased number of investors (both individual and institutional) in the debt

b) Secondary Corporate Debt Market

Appropriate ‘micro-structure’ of secondary market is
vital for trading, clearing and settlement. The present infrastructure does not
accommodate any such formal micro-structure. However, the mechanism somehow
works like the below:

i) Trading Platform In Bangladesh, Corporate debt instruments are traded
either as bilateral agreements between two counterparties or on Dhaka Stock
Exchange through brokers.

Like debt
market, equity market is also divided into two parts. The Securities and
Exchange Commission is the regulatory authority od the Equity market of
Bangladesh. It has two Stock Exchanges over namely Dhaka Stock Exchange and
Chittagong Stock Exchange for stock trading. The primary stocks are floated
into the market usually through IPOs.

a) Primary Equity market:

The equity
market saw an enormous rise in the past few years. The equity growth was
primarily driven by privatization and the liberalization of foreign investment.
There were 108 public sector enterprises (out of a total of 128) initially
marked for privatization through public offering, outright auctions, and strategic
sales to investors in 1994. By 1996, the number of enterprises to be privatized
increased to 118. The injection of substantial public sector listings to the
stock market has greatly transformed the sector distribution. The market
changed from being textile-dominated (22 % of market capitalization in June
1992) to one that revolves around three to ten large-The Table beside
summarizes the number of IPOs and their size in order to bring the volume of
new stocks floated through IPOs. The number of IPOs was 14 last year with a
total value of BDT4.5 Billion up from only BDT1.4Billion in 2006. This is going
to increase at least ten times if not more within one year or two after the SEC
law regarding IPO requirement is passed (See Future trends). The go public trend
in the telecom sector is expected to raise the market by a significant volume.
Along with this a few more big corporate names are also going to go public.
This would optimistically increase the market manifold notwithstanding the
murmur that this can be just another bubble waiting to be burst (like the stock
market crash in 1996).

Dhaka Stock Exchange




Initial Public Offcring(IPO)

NO. of Public Issues




Size of Public Offer Tk mn


~Tk. mn




-US$ mn




% of Annual Growth




Size of Pre IPO Placement

-Tk. mn




-US$ mn




% of Annual Growth




b) Secondary Corporate Equity market

Equity Market has increased by volume to a great extent in the last year. DSE
market capitalization by the end of October has crossed the $10 billion mark
for the first time. The market capitalization to GDP ratio also increased to
14% from a meager 6% in early 2006. Growth was led mainly by banking, power,
and pharmaceutical shares. The return of Stock market was very high in 2007
marking the best performance globally in the second quarter 2007.(Appendix5
shows the graph
) But the surge in capitalization was mostly demand-driven,
which runs the risk of collapse unless backed by quality shares with strong
economic fundamentals.






Listed Issues

No. of Securities




% of Annual Growth




No. of Securities in mn




% of Annual Growth




-Tk. mn




% of Annual Growth




Market Capitalisation

-Tk. mn




% of Annual Growth




Turnover of Listed Securities

Total Turnover

Volume in mn




Value (Tk. mn)




Value (US$ mn)




% of Annual Growth




Public Subscription

-Tk. mn




-US$ mn




% of Annual Growth




-Value (Tk. mn)




% of Annual Growth




This has been a very common
question to answer now-a-days that why is Bangladesh the destination next for
the Private Equity business. Bangladesh has come into the focus in the world’s
economic discussion from last year. The salient reason lies in the consistent
economic performance throughout the last few years. A few comments made about
Bangladesh by the world renowned research houses are being excerpted below:

Bangladesh’s geographic position gives it every opportunity to
participate in the “Asian Century”. We believe it is this potential that
will increase the focus, interest and opportunities for global investors. Goldman
Sachs Global Economics Group. (2007).


“It is the demographics of Bangladesh
that justifies its inclusion in the JPMorgan Frontier Five. The country
ranks fourth in growth in economically active population. Five-year
economic growth is strong at 6.1% (CAGR). Progress has been made over the
last few years to reduce poverty, increasing literacy levels and moderating
population growth to a more sustainable level. An assertive judiciary, active
civil society and a relatively free media have increased public
accountability.” (“Ho Chi Minh trail to Mexico”, JP
Morgan Research, 04 April


Bangladesh could reach Middle Income Country (MIC) status
(defined as USD per capita of USD 875) by 2016 if it grows 7.5% per year.
There are three key mutually re-inforcing longterm transitions as being
integral to achieving this outturn including:

A shift
from agriculture to industry and services

integration with global markets

emergence of diverse dynamic urban centers (The World Bank)


Private Equity although a new concept in Bangladesh, has been
prevalent in many countries in the Asia Pacific region. Optimistically, many
countries in this region with somewhat similar private equity environment has
been successfully accommodating this business and taking full advantage of
market growth through this. The economic development and the comparative
position of Bangladesh can be portrayed through the following graph:

Bangladesh has demonstrated a pretty consistent growth rate
in the four major economic indicators mentioned above with some other
counterparts in the Asia Pacific region. The pace GDP growth has brought
Bangladesh into the focus many times during the past few years. This is indeed
one of the highest among the countries in this region and higher than many
countries of its category. The CPI index, although high, is maintaining a
consistent level. The industry is also growing at a consistent rate with others.
The Dhaka stock market index, however, rallied by approximately 91%. On an
average the two stock markets return was about 50% in the year 2007. This
definitely attracts more investors in the market. The Gross investment inflow
in shares and securities by the NRBs stood at BDT8.4Bln in the last year,
almost 250% higher from BDT2.4Bln in FY06. Overall, the Bangladesh is on its
way to attain a consistent economic growth to support new projects by
attracting new investments. This will, in course, create satisfactory
environment for the Private Equity business.  The major economic parameters are discussed in
details in the following section which would further substantiate this comment.

The following paragraphs will illustrate the key performance indicators of Bangladesh
as an investment destination:

GDP Growth Rate:Text Box: Source: Bangladesh BankThe GDP Growth rate has been one of the highest in its category (Third
World) during the past few years. This is even compatible with some developed
countries in this region like Singapore and Malaysia. The growth rate also observed
a robust growth within very short period. In the Financial Year ending June
2007, the GDP growth rate stood at 6.5% rising from 5.3% in 2003. The following
graph would show the progressive trend more explicitly.

Inflation and Exchange Rates

consumer price index (CPI) inflation, covering food and nonfood indices was
high in the latest Financial Year (FY 07), this is easing now-a-days. In
September 2007, on a point-to-point basis, inflation fell to 9.6% from 10.1% in
July 2007. The rise in international commodity prices (oil and non-oil),
domestic food grain shortfall, reduction in underinvoicing, and the drive
against corruption and hoarding amplified price pressures. Food grain prices in
domestic and international markets rose sharply. Higher demand for food items
in the month of Ramadan also added to inflationary pressures.

The nominal exchange rateText Box: Source: Bangladesh BankThe exchange rate (taka/dollar) remained stable
between Tk68.5–Tk69.8:$1 during July–June FY2008, illustrating the healthy
buildup of foreign exchange reserves. The central bank started interventions in
the interbank market by increasing the supply of dollars at the end of October 2007.
The taka marginally appreciated against the dollar to Tk68.6:$1 on 18 November.
Given the comfortable foreign exchange reserves, taka appreciation could dampen
inflationary pressures partly by cutting import costs. Excess liquidity in the
banking system will be absorbed and the credit boom risk will be reduced as
business confidence returns.

Ease of Doing Business:

The following table shows
that although Bangladesh has shown a poor performance in this regard, the
scenario is improving. The table summarizes the performance of various
variables under ease of doing business:
World Bank: Business Environment-2008

a) Financing depth:

The Stock Market Capitalization is quite
competitive compared to many countries in this region. More importantly, the
growth rate was as high as 132% in the last year. The regulatory framework also
encourages a higher participation in the stock market through recent regulatory
reformation (details discussed in the regulatory trend). There has been a few
attempts undertaken by Private Equity company. All these efforts will hopefully
increase the market capitalization manifold in the coming years. If this
sustains, the stock market will soon catch up the global standard and also
constitute a significant share in the country’s GDP.

Name of the


Market Cap


% of

Capital Markets


in US$ mn 2007

in US$ mn 2007


Colombo Stock Exchange





Dhaka Stock Exchange










Bombay Stock Exchange




















Stock Exchange of Thailand










b) Restriction on Quality and Stability of
Regulatory System:

There is no specific guideline in the
market regarding private equity investment. Therefore, FDI investment related guidance
is relevant in case of fund inflow from oversees. Foreign investors are free to
make investment through remit in foreign currency. The only restriction is
remittance must be made through proper banking channels and reported to the
central bank. The reporting responsibilities lie with the remitted bank. If the
custodian of the securities is the remitted bank, then it’s the bank
responsibility to report this to Central Bank.c) Long Term Bond Yield:

Although the bond
market is not developed in a proper fashion yet, the yield structure of the long
term bond yield is quite high in Bangladesh to attract the retail investors.
Therefore the interest rate is also quite high in Bangladesh. Text Box: Demand for IPO: The demand for IPO is on rise. This is mainly because of the regulatory
reform which would make many large companies go public. Again, with the
industrial growth rate, more and more new companies are expected to start
operation. Therefore, more economic activities would make environment for
increasing number of IPOs.

  • High GDP growth
  • Young population
  • Progressive equity market
  • Well functioning banking system
  • Access for both domestic and nonresident
    borrowers to the local capital market
  • Government’s favorable
  • Cheap Labor pool
  • The thrust of government policy is towards
    economic openness (i.e. low state intervention in the economy)
  • No restrictions on institutional investors
    investing in private equity
  • Liberalization of the tax regime (tax holiday for
    potential industry)
  • fast-growing consumer market,
  • Massive gas resources and potential oil and coal
  • Unwieldy bureaucracy
  • A large domestic market, natural resource wealth
    and a
  • Lack of transparency
  • Lack of highly skilled labor market and topnotch management
  • Poor quality of the infrastructure
  • Faint debt market

Name :

Ding Dong Cotton Spinning
Mills Limited

Ownership type:

Private Limited Company

Factory Address:

Ding Dong Centre, Jamirdia,
Masterbari, Valuka, Mymensingh

Head Office:

25-26 Dilkusha C/A, Dhaka

Installed Capacity:

1200 Spindles

Annual Production:

25M Kgs

Main Product:


Yarn Production: (2006-07)

229K Kg

Raw Material Requirement:

32000 Bales







of mills













































































































Text Box: Draw Frame

In 000BDT



e) Availability of Long term Loans: The
availability of long term loans is restricted by a few factors. First of all,
the gross deposit is quite low in Bangladesh. The single borrower exposure is
also limited to 15% of the total Capital Fund (Paid up Capital + Reserve and
surplus+ Statutory Reserve + retained Earnings) as the funded limit. Most of
the banks’ fund is below 400 crore in Bangladesh. Therefore, a single borrower
can expose to only about 40-50Crore in regular cases only. The industrial Term
loan outstanding as of June 2007 was about 124 Bln. There are only a handful of
financial institutions that have offshore lending capability (not more than
10). Therefore, the offshore financing is further restricted. Thus, the
availability of long term loans is limited in Bangladesh. However, the bank
industry is on high growth. This will continue to expand in future. Therefore,
this capacity is expected to increase is near future. 

The regulatory system is
yet to incorporate Private Equity rules as this is an upcoming industry here.
However, the relevant issues regarding PE, will be executed by FDI a few
regulatory authorities at different phases. BOI (Board of Investment)
administers the permission and limit issues of the inward remittances which will
be applicable for fund inflow for Private Equity investment. The FDI inflow
will be administered by Bangladesh Bank, which is quite explicit and relaxed.
The delisting, listing, and IPO related issues are taken care of by the Stock
and Exchange Commission. There has been a stable and organized set of rules in
place. However, the stability and quality of the regulatory system can not be
judged as there is no set of specific schemes and regulations for Private
Equity business in Bangladesh.

The policy framework has
long been bureaucratic and volatile. Corruption has been the most telling
indicator of this poor governance. Off-the-record payments by firms result in
an annual loss of 2%–3% of GDP. The country scores poorly in Transparency
International’s corruption perceptions index.

However, the present
caretaker Government’s reform initiatives have started to improve
administrative efficiency in some areas. The Government has directly addressed
the culture of impunity that has existed in Bangladesh by taking a tough line
on corruption. It has declared, and showed political willingness, to fight
corruption and to institute needed systemic reforms. The tough line on
corruption centers on reforms being carried out by the Anticorruption
Commission (ACC).

Planned ACC reforms by the
new leadership focus on (i) a stronger decentralized network and structure of
ACC operations to better manage the handling of cases, (ii) a planned
performance management scheme to provide incentives to ACC staff based on
demonstrated performance, (iii) a separate prosecution unit to lower reliance
on government prosecutors to take up cases, (iv) consideration of the
outsourcing of non-core commission functions, and (v) more aggressively
partnering with civil society to address corruption at the local level. The
Government has underlined the need for an institutional framework on governance
and anticorruption backed by a long-term vision, strategy, and achievement of
anticorruption outcomes across sectors, institutions, and government.

The substantive basis of
this vision is the Government’s ratification of the United Nations Convention
against Corruption (UNCAC). The public expectation increasingly is that the
Government will not only sanction corrupt officials but will also put in place
a mechanism to deter the massive corruption that has been the hallmark of
public life.Public services such as law enforcement agencies, power generation
and distribution, ports, and customs have turned around markedly. With the
current reforms taking effect and business confidence restored, the corruption
perceptions score is expected to improve in the coming years.

The major performance
indicators have already shown that there is a huge market opportunity for this
business. Apart from the above mentioned factors, this section includes a few
more factors to show the market opportunities of PE business in Bangladesh.
Bangladesh has three key attractions for global investors and multinationals: a
large base of (Age: 15-64, 95mn) young population, Enhanced performance of the
capital market, and a huge potential business interface with nearly 3bn people
in the Asian region that it has market access to.

The young
base has given
Bangladesh distinguishable comparative advantage over many countries in the
world. Where the developed world is facing a threat from aging population and
reduction in population, Bangladesh is enjoying a great pool of potential labor
force. With a proper utilization of this young and population base, Bangladesh
can attract huge investor pool to set up new ventures. Assuming FDI of USD
700mn in 2008, Bangladesh should realistically aim for FDI of USD 7bn by 2015.(Appendix
4 shows the FDI trend in Bangladesh)
Therefore, the prospects for
Bangladesh to accelerate its growth rate to 7%+ on a consistent basis over the
next 10 years which should take it towards a goal of becoming an Middle Income
Country (MIC). A more focused education strategy can leverage its favorable
demographics in terms of a young and rapidly growing labor force enhance the
professional resource base in Bangladesh to increase business operation..

The capital
of Bangladesh has seen a
steep rise as has already been mentioned.

Stock market has experienced a boastable improvement in terms of return. In the
second quarter of 2007, the stock market return of DSE was more than . The
Dhaka Stock Exchange (DSE) trended up during the first 4 months of FY2008. The
DSE general index climbed 33% to 2,850.81 points at the end of October from the
end of June 2007, buoyed by strong institutional buying. The upward trend in
prices was temporarily interrupted in early August 2007 as the mortgage market
crisis coupled with global financial turbulence buffeted many stock markets.
But prices quickly recovered and went to new highs. The stock market return of
DSE has increased upto 90% in the year preceding. The graph above here shows
the risk return situation of DSE and a comparison with the other markets.
Among the emerging markets,
Bangladesh return- risk trade off is very attractive. With less than 20%
volatility, the DSE’s return in 2007 of 81.5% clearly exceed that of India,
Pakistan and Hong Kong

Text Box: Source: Deutsche Bank report

Business Interface:
has a favorable geographic position for being in the middle of Asia. Due to its
favorable position between India and China, Bangladesh can take the full
advantage of the upcoming Asian Century. A huge market of outsourcing is going
to open up for Bangladesh, when the business volume of India and China will
increase rising the cost. Therefore, due to wave effect, Bangladesh will be
able play a role in the global outsourcing industry and capture a huge market
with which the financial activities will hopefully increase manifold. In that
circumstance, the PE business will have a very favorable environment diversify
and enhance operation. However, this, in turn depends on a lot of issues.

Although the Private Equity
culture has not yet blossomed, the market is more attractive to foreign
investors. The Strengths and weakness of Bangladesh in the perspective of PE
business is listed below:



Although the concept of
Private equity at its genuine form has been absent in the Bangladesh market so
far, equity investments have been taking place for quite a few years. A few foreign
development agencies like ADB, FMO, IFC, DEG, and two Financial Institutions
like SABINCO and IPDC were involved in this business. However, unlike a proper
Private equity deal, these equity investments were ad-hoc and unstructured in
nature. These were more of an institutional equity investment. Usually the
mechanism was that the Financial Institution would acquire equity stake in
exchange of equity funding. This kind of funding used to take place at the
start-up phase. These deals usually did not have any specific time frame. The
investors used to keep the fund as long as it was profitable. After a certain
period, they used to sell the stakes back or hold it back for better
negotiation. The deal size was also pretty small. The individual deal sizes
were in most cases below 5 Million BDT. The market size was also quite insignificant
at only 500 to 600 Crores (According to an industry insider).

Private Equity with its
full implication is still at its infant stage. This concept has been brought
about by two NRBs from UK. Mr. Ifty Islam, the ex CEO of Citi Bank NA, London
and Mr. Sayeed Khan are the founders of a private equity firm- Asian Tiger
Capital Partners. This firm aims to operate in full range of private equity
products. There are two other firms in the same business- Terra Partners and
The Frontier Fund (Brummer & Partners). JP Morgan, Goldman Sachs and Morgan
Stanley have also expressed interest to come into the market within a few
years. Thus, Private Equity industry in Bangladesh eyes a bright potential in
this sector and a huge expansion of market in the coming future. The market
size of about USD150 to USD250 Million is forecasted within one year. This
volume is expected to be shared by three private equity companies committed to
this business so far.

Asian Tiger Capital Partners
(‘AT Capital’), is the premier initiative in this industry undertaken by two
Non Resident Bangladeshis (NRBs). It has started in-house operation since the
last quarter of 2007. It plans to launch two funds i.e. Strategic Opportunities
Fund and Capital Market Opportunities Fund in 2008. In the following
year, AT Capital will go for launching Bangladesh Infrastructure and Real
Estate funds. Following is an overview of the funds that AT Capital aims to
raise in the short run:

Strategic Opportunities Fund – The Strategic Opportunities Fund will invest in
non-publicly listed companies This will invest in Private Equity/Venture
Capital with the objective to make $ 0.5mn-$ 10mn investments in non-listed
companies where the fund will aim to establish a controlling stake where
possible, either by itself or in syndicate with other private equity investors.
Investments will be made in businesses where there are opportunities for
significant growth with strong management teams and reputable corporates. The
exit strategy via an IPO or disposal will be based on a 3-5 year investment
horizon. The Fund will also invest $0.3mn-$1.0mn in startup companies in
strategically compelling sectors where the investment horizon will be 5-7

The Market Opportunities
Fund will invest in equities listed on the Dhaka and Chittagong Stock
Exchanges. AT Capital will make investments in the Dhaka Stock Exchange. The
market capitalization of the stock exchange currently stands at $11.3bn,
representing approximately 18% of 2006 GDP. In 2007 the stock exchange
experienced growth of 87%, making it amongst the top performing stock markets
globally. The stock market is expected to increase in size in 2008 by over $5bn
with key Telecoms companies and State Owned companies expected to enter the market.
AT Capital believe there are opportunities to make significant returns from
trading on the secondary market and from IPOs. AT Capital will follow a
systematic investment strategy using both a top down and bottom up investment
strategy, as well as investing opportunistically where significant returns can
be made.

Tiger also opts for providing an opportunity of direct investment to the
investors whereby AT Capital will give them advisory services and partner in
the investment.

Apart from the above three,
dedicated mutual fund products will be developed to allow Non-Resident
Bangladeshi retail investors to gain exposure to Private Equity, Stockmarket,
Infrastructure and Real Estate Investments in Bangladesh.

Brummer and Partners, a
global Private Equity investor also has a fund for Bangladesh which will run under
the name of The Frontier Fund. This company will start commercial operation
from August 2008. It has an objective to invest into both listed and non-listed
companies. It opts for investing 100-200Million USD in this business within the
next one year. Due to confidentiality and pre-operating status of this company,
the investment policy and strategy could not be revealed. However, I has an intention
to indulge into Private Equity business to the fullest with all possible
varieties of equity market (i.e. LBO, Venture Capital, Asset management and so

Like Brummer and Partners, Terra
Partners is also a globally managed Fund. It has a fund of around 40Million USD
for Bangladesh. This firm is especially interested in the stock market deals
with a balanced financial position and high capital investment. This firm has
already started operation and the first deal awaits signing off within this

The Private Equity is a very
delicate business, which requires a complete balance of careful decision and
efficient operation. This is a high risk and high return game. The various dimensions
of the spectrum need to be analyzed very closely to be successful in this

illustrate this scenario more explicitly, this section aims at analyzing a
hypothetical company with a few certain characteristics. In order to view a
private equity deal at a closer perspective, the PE flow will be analyzed in a
case with all the pre and post intervention of PE. However, there is no real
company in existence with the similar financial standing whatsoever; the case
is made with some assumptions and conditions. The real objective of this case
is to show, how in micro perspective a deal can function provided the
regulatory, market and other relevant industry scenario in Bangladesh.

is a hypothetical company description for a base case analysis of Private
Equity intervention:

Based on the company information
mentioned above, below is a pre and post evaluation of PE deal from financial
and non-financial aspects:

is mentioned above, this company operates in the spinning industry. Therefore,
there should be an analysis of spinning industry, the potential market of this
company, financial outcome from the deal and off course the legal procedures
and regulations applicable in implementing this deal.

these relevant aspects are evaluated below sequentially:

industries according to their stage of growth is extremely useful for the
purposes of finding companies that match your investment objectives. Here is a
graph outlining the stages discussed above:

a very young company with no revenue and no earnings is
highly risky from a funding point of view. This sort of business usually can’t
afford to borrow, so capital must be obtained from friends and family, or
individual “angel
“. As a company matures and becomes profitable,
however, its risk profile diminishes. By the time a company is well
established, it can usually fund operations inexpensively with a mix of debt
and equity securities. Private equity comes into play at different points along
the risk continuum. Private investors can include institutions (pension funds,
university endowments, insurance companies, etc) or individuals (high net worth
families, friends and relatives). Private equity also refers to leveraged buyouts
(LBOs), mezzanine
, private
loans, distressed
and funds of
.These types of financing solutions come in various shapes and
sizes; however, most are structured as limited

PE at emerging stage:

a company is just being launched and has little more than a great new idea,
loans from friends and family or sometimes government grants are the typical
funding sources available. Venture capital only enters the picture when the
company has finally created its product or service, and is ready to bring it to
market. Venture capitalists are sophisticated investors who are always on the
look-out for the next “big thing”, or the newest product that will be
all the rage for consumers. Some of the largest and most successful companies –
such as Dell Corp., Intel Corp., Apple Computer Corp. and many others – began
as venture-funded operations.

as private partnerships and usually with institutional money, venture
capitalists generally provide all equity financing, with a minority stake in a
start-up or early expansion company. Sometimes a venture capitalist will take a
seat on the board of directors for its portfolio companies, ensuring an active
role in guiding the company along. Venture capitalists look to hit big early
on, and exit investments within five to seven years. The majority of
venture-backed investments will fail; however, the few shining stars will
return 10-50 times or more of the value of the original investment.

Rapid Growth Industries

is less risky to invest in such industry. The increased earnings all the while
and, most importantly, maintaining its expectations for continued future
growth, makes it possible to apply all possible fund solutions of PE. The high
growth segment of the market is lucrative for all sorts of PE funds specially
Buyout, venture capital funds and hedge funds.

Mature Industry Financing

private equity strategies like LBOs or mezzanine financings are usually tapped
when a company is more mature. These financings usually involve some mix of
debt and equity, and deals may be backed by the cash flows and assets of the
portfolio company itself, or those of the company being acquired
in a transaction. Unlike venture capital, other private equity strategies
usually involve taking a majority shareholder position. Because target companies
are more established and have achieved profitability, the risk involved is far
lower. Consequently, fewer of these investments fail.)

Declining Industry Financing

industries tend to be poor places to seek investment opportunities, although
individual companies within these industries may still have investment merit.
Even in the industries where prospects look bleakest, there are always
companies that are able to buck the trend and generate growing revenues and
profits while those around them falter. Private Equity for special situation
and distressed buyouts are some options that PE firms may opt for in these

the discussion above, this is evident that, venture capital is the only form of
private equity funding that’s available to companies at various stages of their
life cycles. Moreover, private equity and public equity take turns in cycles
over time as the key engine driving capital market valuations higher. Investors
should be able to recognize these cycles and understand the impact on their

investors who are looking for a bit of stability in the equity portion of their portfolios
will first want to check out mature industries, where there is the best
selection of blue-chip
that are widely traded, having extreme trading liquidity.
Investors with a taste for risk may want to take advantage of the higher
potential for return that growth industries can provide. And investors who like
to live their lives on the razor edge between success and failure may consider
investments in emerging industries, even though such investments tend to be
geared toward private companies. The only constant when it comes to considering
investments in various industries is that it may be best to avoid industries in

Context-Spinning Industry in Bangladesh:

industry is the first stage of backward linkage industry in Bangladesh. The complementarily
between spinning and RMG has spawned a new set of linkage industry and
propelled the RMG sector reach new height. With the enhancement of RMG
business, the spinning industry also marked a remarkable progress in the past
decade. The table below would show the growth pattern of the spinning industry
since 2001:

Source: BTMA Annual Report 2007

is vividly evident that this industry is a high growth industry in Bangladesh.
The capacity has been increasing 10% on an average in the past 2-3 years. The
production has also attained a commendable growth rate of around 13-15% YoY.
This growth is however, a wave effect of the growth in the RMG industry. As
spinning is a support industry for the woven and knitwear industry of
Bangladesh, this industry will continue to grow till the RMG industry will be
propelling. In spite of growing with such a high rate, the industry still falls
behind in meeting the demand of RMG industry. The graph below would show the growth
pattern of Knit and Woven industry in context:

Source: BGMEA

graph shows the growth trend of Knit and Woven wears. The Knitwear has seen a
sharp rise of around 25-30% on an average in the past few years. The Woven
sector is also growing at a consistent rate of about 20%. The spinning
capacity, is supplying only about 80-85% of the knit industry demand and 50-55%
of the woven industry demand.

the above mentioned growth rate and immense potential as a significant part of
PTS industry, spinning clearly qualifies as a rapid growth industry.  

RMG manufacturers demand for domestically produced yarn is primarily due to
availing preferential trading arrangement, which requires domestically acquired
backward linkage for the preferential advantage. This coupled with the growth
in export of apparels with he phasing out of MFA has resulted in an increase in
the number of spinning mills to 310 units. Since 2001 there has been a boost in
investment in Spinning which resulted in significant expansion in production
capacity. To meet the continuous demand of fabric specially the knit fabrics,
new spinning mills are being increasingly set up. As a result, the private
sector spinning mills are now able to meet 100% demand for the domestic textile
production and 85% of the export oriented production9. The Woven and
Knit industry is foreseeing a robust growth in investment as many foreign investors
are becoming increasing interested in setting up RMG production units. This is
increasingly leaving enough space for the backward linkage industry (i.e.
Spinning, Textile). The growth of the apparel sector is shown in the table

Source: BGMEA

the increase in RMG export, it is required that the country attains the same
level of growth, if mot more in the PTS sector. As these two are the parts of
the same industry, without one the existence of the other will be in serious
crisis. A very good example of this can be the knitwear industry in Bangladesh.
Over the past few years knit wear industry has attained a growth rate of around
100% (from 91Mln Dozen in 2004 to 199Mln in 2008). This is all because of the
strengths of the backward linkage. The spinning sector accounts for around 85%
of the local demand. The relationship between the backward linkage industry’s
strength and the knitwear sector growth is thus well establishes.

following table shows a comparative growth pattern of spindle and overall RMG

Text Box: Source: BTMA Annual Report

graph above shows that the correlation between local inputs and increase in RMG
exports always proved to be positive. This shows that whenever PTS achieved a
substantial growth pattern apparel exports also tended to be high. This trend
has also been supplemented by a preferential trade scheme (i.e. GSP) wherein
use of domestically produced inputs in apparel qualifies for duty free market

Woven Sector Spinning:

are 400 SMEs along with 1000specialized power loom units producing grey fabrics
in Bangladesh. During 20-07, the total demand for domestic fabric was around
2.46 Billion and export units were 6.02Bln meters. However, the local
industrial units provided only 4.91Billion Meters to export oriented units and
1.23Billion meters were imported. This demand is expected to rise to
12.03Billion meters by the year 2012. The major reason behind this lack of
strong backward linkage especially in the woven sector has been the high cost
associated with it. Therefore, spinning and weaving sector in knit ware has
flourished far rapidly than weaving sector. Moreover, importing quality fabrics
from china, India and East Asian countries has been cost effective and has
ensured quality finished product. Therefore, revolutionary change in backward
linkage for woven industry in upcoming years is less than expected although
some of the big players have been working on building composite factories.. 

Knitwear Sector Spinning:

knitting industry in the last two decades has achieved a significant
improvement. In 2000-2001 the export of knitwear items was 1.4 Billion US
Dollars, now it is 4.5 Billion US Dollars in 2006-07. To meet the demand of
yarn and fabrics, significant number of textile spinning and knit fabric
production units has been set up. At present, the local units can meet the
demand up to 85-90%. The present demand of yarn in the export oriented knit
industry has been 598 Million KGs, against which the local mills supplied 490
Million Kgs. With this trend in consideration, the export oriented knit manufacturing
units would require around 964 million Kgs. To meet this extended demand, new
mills are required to be set up with significant rise in the production

Following is the Financial
Statements of the company:


No escalation
factor on the cost or sales price was assumed

The price machinery
price assumed here does not have any solid source. However, they are taken from
various reliable sources

This is assumed
that the company has passed its tax holiday period.

The beta could
not be calculated due to unavailability of market information and the private
ownership structure of the company 

he Exchange rate
was considered to be 70BDT:1USD

g is assumed to
be 5% conservatively

There was not
exceptional regulatory requirement. Therefore, the deal went through a normal
procedure of acquisition of Private Limited Company and had an exit through IPO
(Appendix 3 shows the legal procedure). The cost is considered in estimation.

The Deal was found to be profitable financially. But
this financial profitability came along with a few careful steps taken to
develop the company condition. Those are in brief below:

Creating Operating and Financial Synergy:

Synergy is probably the most widely used and misused
rationale for mergers and acquisitions.


Operating synergies are
those synergies that allow firms to increase their operating income, increase
growth or both. In this case, we created an operating synergy through the

1. Economies of scale: The company had 1200 spindles in place. Its annual production capacity estimated
was around .25Million per year resulting in the production of 217 kg of yarn per spindle.
However, after analyzing the industry trend we have found out that the
utilization rate can be as high as 280kg per spindle in the same category.
However, this has given the us an insight to llok for ways to improve spindle’s
production capacity. With a production capacity of 259kg per spindle, the Ding Dong Company will be able
to produce 700 spindles per day equivalent to .30 Million Kgs of yarn per year.
With this increase in production, the company will be able to enjoy economies
of scale. This coupled with a meager increase in the sales price through a
better burgaining power would result in an increase of 14% in the company’s
revenue in the very first year. With this cost-efficiency and industry
average growth rate (10%) in consideration, the revenue is assumed to grow at
the rate of 14% for the five years thereafter.

2. Greater pricing power As mentioned earlier, with an
increased production through better utilization and subsequently with the
expansion of capacity, the company will be able to have a higher market share,
which would position it at a better bargaining position would result in higher
margins and operating income. With the strengths of experienced human resource
deployment, it was assumes that the price per kg will be 5Taka higher than the
current selling price of yarn.

3. Combination
of different functional strengths
, The PE firm will put a stronger
marketing panel in place which was a major lacking in this company. This would
help the firm acquire good customers with large demands.


With financial synergies,
the payoff can take the form of either higher cash flows or

a lower cost of capital
(discount rate).

Increase in Debt
The Debt capacity was increased, the earnings and cash

flows became more stable
and predictable after buyout. This, along with the reputation of the PE firm in
the market, allowed them to borrow more than Ding Dong Company could
have as individual entities, which created a tax benefit for the combined firm.
This tax benefit can either be shown through the higher cash flows.

Tax benefits arose from the leveraged position that
the firm taken up after buyout. Clearly, this was a potential for synergy in
many mergers. The more important issues are

whether that synergy can be
valued and, if so, how to value it.

The Private Equity
business has an immense potential in Bangladesh as shown throughout the report.
This emerging business has a potential to change the perview of the capital
market of Bangladesh. Now, the question is whether the infrastructure of the  capital market is strong enough to support
this transition. There is nor clear cut answer to this. However, there are
several factors on which the success will depend on.

First of all the Private
Equity environment. As was discussed in an above section Bangladesh has  the favorable environment compared to some
other developed countries for which the world renowned PE companies are now
interest to commence operation in Bangladesh.

However, unless the
financing depth is found to be stable, the massive surge  in the equity capital market is being
considered by the conservatives as another bubble to be burst shortly.
Notwithstanding this comment, the GDP growth rate, regulatory sustainability
and improved law and order would optimistically support the emergence of
Private Equity in Bangladesh.

When PE will turn out to
be successful in Bangladesh, the capital market will face some changes. For
example, the monopoly of the banking sector will reduce. The Equity market be
further strengthened and finalyy, the debt market may see some opportunities to
evolve. Thus, this business is nothing but a win-win deal for Bangladesh.