Why prices of junk shares surge, BSEC seeks to know role of margin loan

Amid a bull run of the bourse, the regulator moves to check what lies behind abnormal share-price surge of many listed companies with poor fundamentals, so no bubble does occur.

The Bangladesh Securities and Exchange Commission (BSEC) Wednesday asked the premier bourse to find out the causes behind such soaring prices of listed securities with poor price-earning (P/E) ratio.

Dhaka Stock Exchange (DSE) has been given a 15-day timeframe to find whether margin loans were disbursed against the securities having P/E ratio above 40.

The DSE management will have to submit a report in this regard within a fortnight (15 days).

Spokesperson for the BSEC Mohammad Rezaul Karim told the FE that the recent price spirals of companies having poor fundamentals have prompted the regulator to go for a crosscheck.

"The stock exchange has been asked to find whether margin loans were disbursed against the securities having P/E ratio above 40," said Mr Karim, adding that the DSE will find out whether any facility contradicts the directive issued setting the highest P/E ratio for availing credit facilities.

As per the existing provision, lenders are allowed to provide margin loans to their clients for purchasing securities having P/E ratio up to 40. This provision was included in a directive issued on June 15, 2010.

P/E ratio is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS). The price-to-earnings ratio is also sometimes known as price multiple or earnings multiple.

The premier bourse has also been asked to find whether any loan facilities on those securities having P/E ratio above 40 contradict the BSEC directive previously issued on June 15, 2010.

Before the 2010-11 stock-market debacle in a directive issued on June 15, 2010 the securities regulator had directed merchant bankers, including portfolio managers, not to provide or disburse margin loans or credit facilities to their clients to purchase equity securities with P/E ratio above 40 until further order.

The then directive was issued against the backdrop of the then frenzied rally of the stock market.

As per the revised directive, stockbrokers presently are allowed to disburse margin loan at a ratio of 1:0.8 until DSEX, the broad index of the premier bourse, remaining below 8,000 points.

According to previous directive issued on April 4, 2021 investors were allowed to avail margin-loan facilities at a ratio of 1:0.8 until the DSEX remaining below 7000 points. And the lower loan ratio was 1:0.5 if the DSEX crosses 7001-point mark or rises above.

Of 390 securities listed with the bourses, the P/E ratios of 221 are below 40, while the ratios of 98 securities are above 40 based on the latest interim financials and the market prices of the securities observed on Wednesday.

Some 15 listed companies are also being traded with P/E ratios ranging between 350 and 4692 due to appreciation observed in share prices despite witnessing no significant rise in EPS.

Of those companies, the P/E ratio of Rahima Food Corporation was 4692 on Wednesday. The P/E ratio also indicates the possible growth of a company.

Peter Lynch, an American mutual-fund manager says, "If the P/E ratio of Coca-Cola is 15, you would expect the company to be growing at around 15 per cent a year."

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