Margin loans not for retired persons, housewives, students: Taskforce

Margin loans should be available only for those who have a regular flow of income from sources beyond the equity market so that they can pay interest and honour margin calls.

The taskforce of the capital market made this recommendation in its final report submitted to the securities regulator on receipt of public opinions on the draft report on credit facilities for equity market investors.

Clients will have to provide documents in proof of regular income, such as copies of tax return, salary statements, and bank statements, said taskforce members at a press briefing at the office of the Bangladesh Securities and Exchange Commission (BSEC) on Monday.

However, the DSE Brokers Association (DBA) gave its opinion in favour of margin loans for retired individuals, students, and housewives.

The taskforce said margin loan is a risky product for investments in risky equity-based instruments and so clients must have income to mitigate the risk involved. Because of the disbursement of such loans to clients having no repayment capacity, both lenders and borrowers fall in trouble when assets purchased with credits suffer price erosion, it said.

Many clients disappear from the scene when there are margin calls asking them to deposit fresh funds in margin accounts so that assets' worth does not fall below the amount of credit.

Apart from the condition of regular income flow, a client must have investment experience for at least six months to avail of the credit facility.

It also suggested that companies should not get margin loans against their accounts for such loans may be used for stock price manipulations.

For example, a listed company has received margin loans, putting its shares on lien. That company may purchase its own shares with margin loans to create an artificial demand for the stock in the market.

Such malpractices have been committed by several companies.

According to another recommendation, power plants should be excluded from marginable securities since they are short-term projects.

Furthermore, the taskforce proposed keeping the margin loan ratio unchanged at 1:1 but said only 'A' category stocks should be considered marginable securities.

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