Institutional Investors play a crucial role in facilitating the corporate governance of the overall capital market in the developed and developing countries. They are the major players who can influence the market trend and bring dynamism to the overall capital market with their large fund size and sophistication.

Institutional investors possess the capability to control the overall trend of the capital market as retail or individual investors tend to follow them in terms of investment decision making because it is assumed that institutional investors possess required knowledge and they make investment decisions backed by proper research and expertise. For this reason, institutional investors are a crucial part of the capital market and their active participation has a significant influence on the corporate governance structure of the overall capital market. The capital market of Bangladesh is mainly retail-investor oriented. However, before 2010, an active participation of institutional investors was noticed in the market that has drastically fallen after the collapse took place in December 2010. The effect of this collapse was so adverse that the market is still paying for it. Moreover, in order to retrieve the investors' confidence, proper measures must be taken in no time for the sake of the corporate governance structure of the overall capital market. This study has been conducted to point out that area which needs special consideration and suggests the probable ways of improving the overall condition of capital market of Bangladesh. “Companies use a broad set of tools to attract more investors to their stocks in the hope that greater investor base raises share price and increases firm value” ^[1]. Two distinct categories of investors, the institutional investors, and retail investors dictate not only the size of the trades they make but also the types of companies and financial instruments in which they invest their money. The term “retail investors” is identical with “individual investors.” Institutional investors are just what the name implies: large institutions, such as banks, insurance companies, pension funds, mutual funds, and exchange-traded funds (ETFs) that buy and sell securities for their investment portfolios. In contrast to retail investors, institutional investors usually engage in block trades, which is an arrangement made by a broker to make the buyers and sellers meet and trade in large volume without placing any order on the market.

The institutional investors often determine the price of the security that are being bought or sold. They are one of the major forces of any capital market as they are well-informed entities and they usually do not invest depending on the rumors prevailing in the market. Most of the time retail investors tend to follow institutional investors because it is assumed that institutional investors are more knowledgeable and better able to protect themselves. In Bangladesh, the participation of institutional investors in the capital market is not up to the mark. Especially after 2010 capital market crash, institutional investors have lost their confidence to invest in the market and this phenomenon is still going on. Nevertheless, in order to reform the corporate governance structure of the overall capital market, a large participation of institutional investors is much required. This study intends to shed light on those factors that are preventing institutional investors from participating in the capital market in full swing and how they can overcome these hindrances for the sake of the corporate governance of the overall capital market of Bangladesh. The study attempts to get a broader overview of Institutional Investors and their roles in the capital market to identify the major institutional investors of Dhaka Stock Exchange (DSE) of Bangladesh. With that, it offers a theoretical overview of Dhaka Stock Exchange (DSE) since its inception and gathers information on the present condition of Institutional Investors in the capital market. Further, the study outlines the major problems facing by Institutional Investors after 2010 capital market crash. It compares and analyzes the contribution of Major Institutional Investors in the capital market to be familiar with the contribution of institutional investors in the corporate governance of the overall capital market of Bangladesh.

METHODS:

This study mainly covers the major institutional investors of Dhaka Stock Exchange (DSE) and they include- private commercial banks, insurance companies, NBFIs, asset management companies, state-owned companies, mutual funds and other manufacturing companies. Private commercial banks include thirty PCBs listed on the Dhaka Stock Exchange (DSE), Mutual funds include forty-one mutual funds listed on DSE. The sample population considered for the study has a noteworthy illustration of companies representing the major institutional investors of Dhaka Stock Exchange (DSE). It is exclusively a descriptive research and thus it is purely based on the information from secondary data sources. The data collected for the purpose of the study involve the examination of annual reports for the year 2013 of thirty Private, Commercial Banks (PCBs) listed on the Dhaka Stock Exchange (DSE). The other information has collected from Dhaka Stock Exchange Websites and Dhaka Stock Exchange Libraries. And there is also an interview of a personnel working in one of the leading asset management companies in the country has taken to have more in-depth insights about the banks as institutional investors in the capital market. However, deficiencies in the data required for the study due to both confidentiality and unavailability and the deficiencies in up to date information are two major limitations of the study.

LITERATURE REVIEW:

Institutional investors have the ability to apply the power in the marketplace by buying or selling securities. Furthermore, they can influence the corporations by other means such as pressure campaigns targeted to specific issues and direct attempts to control the internal decision process, perhaps via member hip on the firms' board of directors. Shareholders' activisms include negotiation with firms' management, proxy contests, and public targeting of poorly performing firms. Florence (1961) felt the need for a shareholders' coalition to control on their organization ^[2]. He showed that a low dividend policy (high plowed back) was associated with a low concentration of shareholders' power. He viewed that the positive relationship between low dividend payment and low shareholders power could be due to managers' self-interest for survival through their firms' growth. Shleifer and Vishny (1986) developed a normative model and showed that the presence of a large shareholder was a necessary condition for value increasing takeovers ^[3]. Brickley and James (1987) studied 891 banks of the US (502 banks in the states where an acquisition is allowed and 389 banks in the states where the acquisition is prohibited) ^[4]. Through regression, they showed that concentration of ownership and outside-dominated board (2/3 of the board members are outsiders) were negative and significantly (p=0.05, one-tailed) associated with managerial consumption of perquisites in the non-acquisition States and there was no significant relation between the variables in the acquisition States. However, predicting the power of the independent variables in the States is closely similar (R2 of 0.94 and 0.95). They conclude that concentration of ownership and outside directors can be influential devices for control, although not perfect substitutes for the market for takeovers, Agarwal and Mandelker (1990) studied 372 NYSE and AMEX firms that proposed anti-takeover amendments during the period 1979-85 ^[5]. They found a positive relationship between the wealth of shareholders (cumulative abnormal returns) around the announcement of anti-takeover charter amendments and the proportion of equity owned by the institutional shareholders. In this study, over the interval (-40days, +1day) around the announcement dale, the shareholders of the one-third of the sample firms with the lowest institutional holding suffer a statistically significant (p=0.10, two-tailed) loss of 6.4percent of their wealth, while the wealth of the shareholders of the remaining firms did not change significantly.

Tosi and Gomez-Mejia (1989) performed a questionnaire survey of the level of monitoring by major shareholders, Board of Directors, and the compensation committee on CEO pays in 175 manufacturing companies of the US ^[6]. Through Likert-type scaling of the data, they found that the mean level of monitoring of the institutional shareholders was significantly higher for owner-controlled firms than management-controlled firms, they also found that CEO pay risk (pay variability) was higher in owner-controlled firms compared to management-controlled firms. Winfrey (1990) ^[7]and Chowdhury (1993)^[8]found that concentration of institutional ownership was negatively associated with pecuniary executive remuneration. There is, however, a debate on the size of the block holding which is needed for attaining control, controlling block-holdings range from 25 percent down to 4 percent with 10 percent and 5 percent respectively as the most popular ^[9].Cubbin and Leech (1983) [9] have developed a model, which takes account of the existing dispersion of shares in the company to predict on certain assumptions, the particular critical percentage of shares required for control of that company. Applying their model, Cosh and Hughes (1987) find that the model is not markedly different from the simple 5 percent rule ^[10]. However, there is some evidence that ownership concentration is not enough rather the exercise of voting rights is more important for effective monitoring of managers.

Barclay and Holderness (1991) find that block traders are associated with the average abnormal share price increases of 16.5 percent, but they conclude that specific skills and expertise of block holders and not just the concentration of ownership are important determinants of firm value ^[11]. Similarly, Pound (1988) argues that institutional investors, for example, insurance companies may hold a significant portion of corporations' shares and concurrently act as their primary insurers ^[12]. Voting against corporations' management may significantly affect their insurance business. Holmstrom and Kaplan (2001) reveal that it is difficult to measure the extent and effects of shareholder activity because much of it is communicated verbally and not reported ^[13]. In the UK context, the Institutional Shareholders' Committee (ISC), the Association British Insurers, the Cadbury Report 1992 and the PRO NED (an organization for the promotion of non-executive directors) all have their guidelines for effective corporate governance and monitoring in UK public corporations. Similarly, in USA CalPERS (California Public Employees Retirement System) and Council of Institutional Investors, in Japan, Keidanren, in Europe Brusse-based Deminor, and international organizations, such as the OECD and World Bank have their separate corporate governance guidelines ^[14]. Common guidelines for the above-interested parties are: (i) institutional shareholders should exercise their voting rights regularly, (ii) the Board, the nominating committee, the remuneration committee, and the audit committee should have the majority of independent directors, and (iii) adequate disclosure of accounting information.

Foreign institutional owners are more active in corporate governance than domestic institutions that have business relations with local firms who feel compelled to be loyal to management. Fidelity Investments was more aggressive in governance issues in Europe but relatively acquiescent in the US where it manages several corporate pension accounts^[15]. Aggarwal et al., (2011) studied portfolio investment of holdings of institutions in 2000 non-US and 5000 US companies in 23 countries during 2003-2008^[15]. They also classified institutional owners into two classes: Independent institutions such as mutual fund managers and investment advisers who have fewer potential business relations in firms where they invest. These institutions are called "pressure-resistant". Another class is gray institutions such as banks, insurance companies who have current and prospective business relations with companies where they invest. These institutions are supposed to be more loyal to corporate management and not react to management actions that do not align with the interests of shareholders. These institutions can be called "pressure-sensitive". Their results show that independent institutional ownership has a significant influence on corporate governance, but gray institutional ownership is insignificant when these two classes of ownership are put in the same regression equation.

None of these studies examined the effect of corporate governance on institutional ownership. Dahlquist et al. (2003) ^[16], Giannetti and Simonov (2006) ^[17], Ferreira and Matos (2008) [18], Leuz, Lins, and Warnock (2009) [19] analyze the effect of ownership structure on institutional investors’ stock selection decisions. Dahlquist et al. (2003) [16] find no relation between the ratio of control to cash flow rights and the holding of foreign investors. Giannetti and Simonov (2006) [17] show that both foreign and domestic financial institutions are reluctant to hold shares of companies that have high control to cash flow right ratios of principal shareholders. Ferreira and Matos (2008)^[18] show that institutions hold fewer shares of companies that have more closely-held ownership structure. Leuz, Lins, and Warnock (2009)^[19] find that U.S. institutions invest less in foreign firms with large insider block ownership. Li, Ortiz-Molina, and Zhao (2008) ^[20]show that institutions avoid investing in companies with dual-class shares. Because these studies focus on only one dimension of corporate governance (i.e., ownership structure), however, they offer limited insight on the relation between corporate governance and institutional ownership. Bushee, Carter, and Gerakos (2008) ^[21] analyze whether institutional investors tilt their portfolios toward firms with preferred governance mechanisms. The authors conclude that although institutional investors have incentives to tilt their portfolios toward firms with better governance mechanisms, there is no significant relation between institutional ownership and corporate governance.

Major Institutional Investors of Dhaka Stock Exchange of Bangladesh:

Institutional investors play a major role in all of the developed and developing country’s capital markets to make it more vibrant^[22]. They are typically called the ‘smart money’ meaning they are the better-informed investors, they make investments backed by proper research, and due diligence and the retail investors follow them in order to generate a superior return^[22]. However, in Bangladesh, our capital market is mostly retail investors driven and institutional investors are the laggard in this case mostly because of the lack of skills needed to invest in the volatile market and due to some regulatory changes ^[23]. The major institutional investors in Bangladesh are banks, non-banking financial institutions, insurance companies, mutual funds, state-owned companies, merchant banks and brokerage houses etc. Among these, banks are the major players. They have their own portfolio known as the proprietary portfolio. Some of the banks also have merchant banking portfolios and brokerage operations. Other institutional investors have an investment as well, but those are not large as banks. Major Institutional Investors of Dhaka Stock Exchange (DSE) are as follows ^[24]:

(a) Private Commercial Banks (PCBs),

(b) Non-Banking Financial Institutions (NBFIs)

(d)Merchant Banks and Brokerage Houses

(e) State-owned Companies

(f) Mutual Funds

(g) Other Manufacturing Companies

(a) Private Commercial Banks (PCBs):

Private commercial banks are the largest contributor in Bangladesh’s equity market in terms of institutional investors. Since there are 56 scheduled banks in Bangladesh and this sector is one of the most important pillars of our economy, they play a crucial role as far as institutional investment is concerned. Nevertheless, due to lack of confidence in the aftermath of the 2010 stock market debacle, their confidence has gone down significantly^[23]. In addition, Bangladesh Bank has capped their investment in the capital market to make the banking sector a more regulated one. However, PCBs make capital market investments through own portfolios, through merchant banks (own portfolio and margin loans), through brokerage houses and through loans provided by the parent company to its capital market-related subsidiaries. The Bangladesh Bank (BB) issued the circulars on September 16, 2013 (solo basis) and on 25th February 2014 (consolidation basis) regarding capital market investment-related policy. The circular restricted the equity market investment by banks to 25 percent of total capital on a standalone or solo basis and 50 percent of total capital on a consolidated basis (Bangladesh Bank DOS Circular Letter No. 7, February 25 2014 and Bangladesh Bank DOS Circular Letter No. 2, September 16 2013)^[25]. The total capital includes paid-up capital, reserves, share premium and retained earnings. The main points of the circular are described below:

Bring down overall capital market investment within 25 percent (solo basis) and 50 percent (consolidation basis) of total capital by July 21, 2016. BB defined total capital comprises of four components - paid up capital, balance in share premium account, statutory reserve, and retained earnings, as stated in the latest audited financial statements (Bangladesh Bank DOS Circular Letter No. 7, February 25 2014 and Bangladesh Bank DOS Circular Letter No. 2, September 16 2013)^[25]. For Solo Basis, the banks' total investment (in market value) in capital market includes; (1) all types of shares, debentures, corporate bonds, mutual fund units and other securities, (2) Equity Investment in Subsidiaries related to capital market, (3) Loan to own subsidiary/subsidiaries related capital market, (4) Loan to others for merchant banking and brokerage activities, (5) Loan to Stock Dealer, (6) Placement/others. For Consolidation Basis, the bank’s and its subsidiaries’ total investment (in market value) in capital market includes (1) all types of shares, debentures, corporate bonds, mutual fund units and other securities, (2) Equity Investment in Subsidiaries related to capital market, (3) Margin loan, (4) Loan to others for merchant banking and brokerage activities, (5) Loan to Stock Dealer, (6) Placement/others, (7) bridge loans provided to companies by the subsidiary or subsidiaries of the bank against expected equity flows/issues, (8) subscription by the subsidiary or subsidiaries of the bank to any fund intended to invest in the capital market ^{[26, 27]}.

While across the banking sector, capital market exposures have come down closer to the new regulator levels, as detailed above, some PCBs are still well in excess of regulatory limits (regulatory limit is 25 percent). This primarily is through their proprietary exposure (own portfolio) and margin loan overhang (defaulted margin loans) through loans they have provided to capital market (i.e. Stock brokerage, the merchant bank, asset management companies) subsidiaries and third party capital market operators. Banks like AB Bank, National Bank have the higher capital market exposure than that of the others ^[28]. Due to this over exposure, after the circular introduced by Bangladesh Bank, many banks were compelled to bring down their capital market exposure to the regulatory limit level and thus creating increased selling pressure and panic in the market. As at June 2016, except for only a few banks, the majority of the banks has brought down their capital market exposure to the allowable limit with Bangladesh Bank relaxing subsidiary equity related rules as not being considered as capital market exposure and further fundraising on the part of the banks.

(b) Non-Banking Financial Institutions (NBFIs):

Non-Banking Financial Institutions are other major players in our capital market after banks. With currently 23 listed NBFIs in the Dhaka Stock Exchange and with a couple of other non-listed ones, the investments on their part varies largely. NBFIs by nature are the tough business to handle, especially when our economy is built on the single basic pillar of Banks ^[28]. With too many banks around, NBFIs not only have to compete with each other but also compete with banks. Banks are allowed to collect demand deposits while the NBFIs are not. The NBFI's cost of deposits is usually higher than banks and thus they are restricted to disbursing long term loans at a much higher rate and thus exposed to interest rate risk. Although the capital adequacy of banks is more stringent than that of NBFIs, NBFIs face some inherent pressure within the industry while running the operations smoothly. These things usually compel the NBFIs to go for speculative investments. Before the 2010 stock market debacle, many NBFIs went for huge speculative exposure in the capital market. However, they had to take the brunt of the stock market collapse. Since then, as our market is going through the lack of confidence, NBFIs along with banks have also become sidelined in their investment in capital market. Bangladesh Bank has also restricted their capital market exposure just like banks. However, amid all these, Lankabangla Finance is one of the vital institutional investors from our NBFI sectors, especially with their own portfolio amounting BDT 251 Crore in 2013 and with most of their revenue earnings coming from its brokerage operations ^[29]. They also have the highest market share in handling foreign investments and they are the market maker of quite a few numbers of stocks. Its merchant banking side is also doing good with some recent IPO and right issue management and managing discretionary portfolios.

IDLC Finance is another major player in the capital market area after Lanka Bangla Finance with their own portfolio amounting BDT 78.7 Crore in 2013 ^[29]. The rest of the NBFIs make very small to insignificant contribution as institutional investors of our capital market. But one of the major constraints of NBFIs currently is the huge underwater margin loan and its required provisioning. A newspaper reported the underwater margin loan is currently about BDT 15,000 Crore ^[29]. Moreover, the provisioning of the margin loan has been deferred up to December 31, 2014. In addition, the interest on these margin loans has been waived to give the merchant banks some breathing room and they will get the tax benefit out this waived interest.

(c) Insurance Companies:

Insurance companies are relatively small players in the capital market for the insurance sector in our country is in the moribund condition and it lacks a certain level of sophistication. The regulatory body of insurance sector Insurance Development Regulatory Authority (IDRA) has emerged only a few years back and it is still in its premature stage. With 46 listed insurance companies 34 of which is general insurance and 12 is life insurance companies and a couple of other non-listed insurance companies, the sector has become overcrowded. Furthermore, the government has given license to 9 other insurance companies last year (2013) on the political backing. According to the website of IDRA, Bangladesh has 45 non-life insurance companies, 30 life insurance companies and 2 public sector insurance companies one of which is life and the other is general.

Lack of disclosure, business malpractice, corruption, lack of skilled human resources, lack of good corporate governance practice, lack of proper enforcement of rules and as such are the problems that are at the forefront of the insurance companies and can be treated as the major hindrances to the development of the sector. The majority of the insurance companies are struggling even to manage their paid up capital ^{[30, 31]}. According to Insurance companies act of Bangladesh, Life insurance companies have to have a minimum paid-up capital of BDT 30 crore and the general insurance companies have to have a paid up capital of BDT 40 crore to run their operations. However, because of the lack of disclosures on the part of the insurance companies, the actual investments in the capital market by these companies cannot be known. Nevertheless, they do have small investment portfolios, especially the large insurance companies.

(d) Merchant Banks and Brokerage Houses:

There are 55 merchant banks and over 250 brokerage houses running their capital market operations in Bangladesh. Merchant banks are mainly involved in issue management and corporate advisory services. However, the merchant banks those are subsidiaries of Banks or NBFIs can manage the discretionary portfolio of capital market investments. They can also have their own investments in the capital market. On the other hand, the core revenue of brokerage houses in Bangladesh is the commission for trade execution. Again, brokerage houses mainly those who are the subsidiaries of banks and NBFIs may have their own small investments from their surplus cash in the capital market.

Merchant banks also provide margin loans to both their retail and institutional investors’ clients to make capital market investments. In 2011, the margin loan ratio used to be 1:2 meaning for every 1-taka equity investment of the client, the merchant banks were willing to provide BDT 2 as a loan. Yet, after the stock market collapse, BSEC has managed to bring it down to 1:0.5 starting from June 2014 in three gradual steps. There are also some stringent conditions to get the margin as if one cannot invest in companies with a price to earnings ratio of more than 40 with the margin loan amount, etc. After the stock market collapse, huge margin loan amount has been piled up underwater that amounts to about BDT 15,000 Crore as at 2013-14. To recover these underwater margin loans and to give the merchant banks some breathing spaces, a couple of provisions have been introduced over time. For instance, interest on margin loans has been waived and for the waived interest, the merchant banks are supposed to get tax benefits.

(e) State Owned Companies:

The most prominent and arguably the largest state-owned company involved with the capital market is the Investment Corporation of Bangladesh (ICB). ICB with its asset management wing manages quite a few numbers of open-end and closed-end mutual funds. Moreover, in the time of distress, governments, as well as the investors, seek for the ICB’s support to inject fresh funds and thus create demand for stocks in the process. Again, a BDT 900 Crore re-financing fund has been introduced by BSEC to compensate the affected small investors in 2010 stock market collapse, the disbursement of which has been made by ICB in three separate installments of BDT 300 Crore at 6 percent interest rate to the brokerage house and merchant banks and they will offer the funds to the investors at 9 percent interest rates (The Financial Express, June 19 2013). Until now, the first installment of BDT 300 Crore has already been disbursed and the BSEC has sought for the second installment from the government. The application process for this fund has got a very meager response so far. In the budgetary allocation, the government is willing to provide up to BDT 1500 Crore funds for the revival of the moribund capital market. Other than ICB, state-owned banks are also involved in investments in capital markets to some extent.

(f) Mutual Funds:

Mutual fund investments allow access to diversified portfolios regardless of the sophistication level of the investors. In 2013, there were 43 closed-end mutual funds, whereas at present (June 2016) number of the closed-end mutual fund has been reduced to 36 because of 7 funds' tenure fulfillment. The price of a unit in a closed-end fund is determined entirely by market force, so units can either trade below their net asset value ("at a discount") or above it ("at a premium"). ICB, RACE, and AIMS are the oldest player in the mutual fund industry as they have the highest number of listed closed-end mutual funds. Relatively new asset managers are LR Global, VIPB etc. Apart from these closed-end funds, there are approximately 6 open-ended mutual funds which are operated in dealer-based market meaning designated dealers transact in those funds and those are not listed. Mutual fund (MF) is a very useful investment mechanism in a capital market. A developed capital market consists of varieties of investment instruments and MF is one of them ^[32]. However, the share of mutual funds in Bangladesh's capital market is very low. The only risky instrument available for mutual funds is equity and there is no effective risk management tool. That is why a rapid development has not happened in the MF sector at all. But MF can be a good investment alternative in this undiversified market. Bangladesh has a very small market for mutual funds. As of 2012, there were 41 MFs in the country's capital market. For them, the Bangladesh Securities and Exchange Commission (BSEC) framed MF rules. Under the rules, a fund consists of one sponsor/entrepreneur, one trustee and obviously a fund manager. It is required for every such company to get the permission of the BSEC before proceeding with its fund allocation process. Most of the funds have a June year end. One of the most important metrics in the mutual fund industry is Price to NAV ratio. This actually determines whether a particular mutual fund is trading at a premium or discount or at par to its NAV. Since at the redemption, meaning at the end of the fund’s tenure, an investor is only to get the NAV of the fund as redemption value, price to NAV gives the investors a sense of whether the fund is undervalued or overvalued and what is the current performance level of the fund relative to the market. Most of the mutual funds are not performing up to the mark as most of the mutual funds are trading at deep discounts to its NAV.

The concept of MFs appears to be critical and difficult to understand by the majority of the people ^[33]. For instance, many people keep focusing on the offer price or face value of MFs instead of their net asset value (NAV) while they get listed through an Initial Public Offering (IPO), treating the mutual funds similar to the public offering of a company. This lack of financial literacy definitely creates distortion in the market more than anything as such. Asset managers of MFs offer units to the public in order to pool money in the form of IPO. Units are similar to shares in case of a company, but the mutual fund’s Net Asset Value (NAV) backs the units. This means the appreciation or depreciation of NAV of the mutual funds depends on the fund managers' performance over time. In the case of redemption, the unit holders (investors of MFs) will receive the Net Asset Value (NAV) of the fund. Overall market sluggishness has been perceived as the key reason for the poor performance of MFs. But in recent times, it can be observed that even though DSEX rallied up to 11.4 percent in one month (January 2014), MFs still fail to attract investors' attention on a decent scale. There is simply no demand and as a result, a significant number of MFs are still at a discount to their respective NAVs that means their Price to NAV ratio is less than 1. The majority of the people view this market as a place for short-term money-making ^[34]. On invests, one gets the return within a couple of weeks and then one exit. However, that is not how it works. It is firmly believed that one needs to have the patience to generate more return than the market. Say if a mutual fund is 30 percent discounted to its NAV, theoretically, it should be a good long-term pick given that the fund managers are skilled. Since investing in MFs requires a longer horizon, i.e. a long-term approach (say 5 years), the myopic investors are less interested. This is reflected in the low trading volume of MFs. Another source of loopholes is the lack of transparency. MFs are not mandated to make disclosures of their holdings and their underlying financial health. Our fund management industry just reports, NAV at cost (book value) and the market price on a weekly basis and their portfolio status on a quarterly basis. But more frequent disclosures on their portfolio status would help investors to make prudent investment decisions. Another reason for our underdeveloped mutual fund industry and probably the most crucial reason is that there is simply no incentive to manage a fund with the best effort. A firm receives a certain percentage of the assets under management as a management fee. Regardless of the status of the fund, the fund manager will receive this fee.

In other countries, in addition to the management fee, an incentive fee is also involved if the fund's performance exceeds a certain predetermined benchmark performance. This actually motivates a fund manager to perform better and to take part in active management. Since there is no such arrangement in our fund management industry, fund managers don't feel the urge to exercise their expertise to the best possible use and take 'necessary' risks. Mutual fund sector of Bangladesh is very small compared to that in developing markets in the neighborhood and those developed across the globe. It is representative of only around 3-4 percent of the total market ^[28]. As far as the growth prospect of the fund management industry is concerned, it does not look that bright unless some effective authoritative steps are taken. Where the existing MFs are well discounted to their NAVs, new funds will simply bleed from under- subscription and thus inadequate funds. In comparison to other South Asian countries, our mutual fund industry is very insignificant when calculated in terms of total asset under management as a percentage of total market capitalization. While the mutual fund industry in Bangladesh accounts for only 3-4 percent of total market capitalization (1.3 percent closed end fund and 0.8 percent open-ended funds), in India and Pakistan the mutual fund industry accounts for 11 percent and 7 percent of their total market capitalization respectively (Dhaka Stock Exchange and Mutual Fund Association of India and Pakistan) ^[35,
36].

(f) Other Manufacturing Companies:

Different listed and non-listed manufacturing companies are also involved in small-scale capital market investments with their surplus and set aside funds from the profits. However, proper risk management is a major concern for these companies since Bangladesh does not have too many investment vehicles to invest.

CONCLUSION AND RECOMMENDATIONS:

In most of the developed as well as emerging markets, institutional investors play the most crucial roles ^[22]. Since the equity market has an inherent tendency of depicting herding behavior by the investors, institutional investors usually play the role of the ‘smart money’ i.e. informed investors and thus they go for taking positions, create a market and drive much retail investors’ attention in the process ^[22]. However, in Bangladesh, the scenario is a bit different. Our market is mostly retail investors driven. Before the 2010 stock market debacle, institutional investors were actively involved led by banks and at some point they became overexposed. Since banks run with the depositors’ money, this overexposure to risky equity market was very much questionable ^[23]. Then when the Bangladesh Bank increased the cash reserve ratio to 6.5 percent from 6 percent back in 2010 and set out the guidelines to make the banks underexposed to volatile capital market investments, the increased sell pressure dragged the market down and the much unfortunate stock market debacle took place. However, asset bubble and bursts are the very well known phenomenon in each market throughout the world. Since then, even after a couple of short terms, medium-term, and long-term reforms have taken place, the major institutional investors remained inactive in participating in the market. Furthermore, the recently imposed caps on commercial banks by Bangladesh bank to restrict their investments within 50 percent of their total capital (Paid-up Capital + Share Premium + Reserves + Retained Earnings) on a consolidated basis and 25 percent on a standalone basis further restricted the banks to participate in the capital market even if there is a willingness among the bankers. In the current scenario, only state-owned companies like Investment Corporation of Bangladesh (ICB) and Lankabangla Finance from the private sector are the most active ones and even the 19 asset management companies are in a crisis too after the stock market collapse. Our mutual fund industry has been suffering from lack of demand as well as due to different set problems like lack of disclosures, preference in fixed income securities, lack of skill on the asset manager’s part etc. Most of the mutual funds are trading at deep discounts to their respective Net Asset Values (NAV). Also in the developed market, the mutual fund industry usually accounts for more than 50 percent of total market capitalization where the situation in Bangladesh is poor as the mutual fund industry accounts for only about 3-4 percent of the total market capitalization. This is true that banks are the largest institutional investors of Dhaka Stock Exchange in Bangladesh but still the participation of other institutional investors in the capital market is equally important for the corporate governance system of the overall capital market of Bangladesh. After identifying each of their stances in capital market and analyzing their contribution, few of the salient findings of this study are pointed out. While in developed and developing capital markets, Institutional Investors are playing a crucial role, the participation of Institutional Investors is very poor in the capital market of Bangladesh. Especially after 2010 capital market collapse, they have become inactive in participating in the equity market. From an investor's perspective, there are a few investment options available in Bangladesh and it mainly includes- Bank deposits and Capital market investment. Lack of profitable investment opportunities is one of the hindrances in the overall economic development of Bangladesh. There is a common forum for investors in USA and UK where they issue various guidelines about corporate governance, but in Bangladesh, there is no such common forum of investors^[8]. We lack skilled investment professionals who possess significant influence in the effective investment decision making. And as Corporate Governance is defined as the widest control mechanism used for efficient utilization of corporate resources ^[8], proper knowledge and expertise are required to facilitate the concept of Corporate Governance. Regulatory bodies such as Bangladesh Securities and Exchange Commission (BSEC) and Bangladesh Bank, lack coordination among them in terms of issuing guidelines for the sake of the Corporate Governance structure of the overall capital market. Mutual funds have been suffering from lack of sufficient disclosure requirements, which are preventing investors from investing their money in the mutual funds.

The argument is clear that institutional investors are one of the major forces in the corporate governance of the overall capital market of Bangladesh. As the participation of institutional investors in the capital market of Bangladesh is not satisfactory, following several factors has been identified in order to boost up the involvement of institutional investors in the capital market. Institutional Investors should come forward to participate in our equity market with proper risk management tools i.e. Derivatives. More investment vehicles such as derivatives, commodities, bond markets and so on should be introduced backed by proper regulatory reforms in the capital market of our country so that investors become interested in invest in the capital market. More educated investment professionals should be created so those investment decisions can be made based on proper research and for the development of capital market, financial literacy is the dire requirement for the time being. The disclosure quality of mutual funds should be improved so that the demand of mutual funds increase and investors can attain confidence about their investment in the mutual funds. Corporate governance and transparency of all listed companies should be ensured at all levels in order to retain the investors' confidence that has badly hampered after the 2010 capital market collapse. The regulatory bodies should be more technologically enhanced and they should go for all electronic measures in regulating their activities. The flow of equities or Initial Public Offering (IPO) should be increased in number given that the companies applying for IPO possess good business and maintain good corporate governance within their organizations. As initial Public Offering (IPO) is the determinant of the offer price, the valuation of IPO must be based on more sophisticated and realistic valuation models used by the regulators. As banks are the major player in our capital market, their each move has a sheer impact on the overall capital market. Therefore, banks should invest with more prudence by complying with the circulars issued by Bangladesh Bank. In order to encourage Institutional Investors, different fiscal incentives, for example- tax benefits can be introduced. The culture of going for speculative investment based on prevailing rumors in the market, (investment in junk stocks) should be discouraged with proper regulatory measures. As expertise, merit, knowledge, and independence are yet to be utilized in our governance system ^[8], the involvement of Non-executive Directors (NXDs), who are the external experts, to a broader extent should be encouraged to facilitate the corporate governance system of the overall capital market.

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Received on 02.07.2016 Modified on 27.07.2016

Asian J. Management. 2016; 7(4): 263-271.

DOI: 10.5958/2321-5763.2016.00040.8