Money to be invested in only 'A' stocks by credit-worthy investors

Taskforce meant to suggest reforms to the capital market recommended that investors having less than Tk 1 million in equity investment do not get margin loans and only 'A' category companies be considered as marginable stocks.

The changes to the margin rules are aimed at lowering risks of loans turning sour or increasing the burden of negative equity.

The taskforce submitted a draft report, with its recommendations, to the Bangladesh Securities and Exchange Commission (BSEC) on Monday. The report was published on the BSEC website Tuesday night.

"The taskforce has made the recommendations, keeping in mind the impact of (margin) loans on the market," said Ashequr Rahman, managing director of Midway Securities.

The taskforce in its report said lenders must conduct risk profiling of their clients before the disbursement of margin loans.

Many investors had no financial ability to mitigate the risks of margin loans but still received loans to invest in equities and eventually their investments have

been wiped out and replaced, in extreme cases, with negative equity.

A retired person may have a capital of Tk 5 million. This client will be at high risk if he/she injects the whole fund, with margin loans, into stocks.

To be eligible for credit facility, clients, as recommended, must have the minimum prescribed equity investment for at least six months prior to receiving a loan.

The taskforce recommended that the loan ratio remain unchanged at 1:1 but attached a condition that no loan would be provided against unrealised profits.

For an instance, a client has received a loan of Tk 1 million against his own investment worth Tk 1 million. At one stage, the value of the assets bought with the fund, Tk 2 million, may rise to Tk 3 million but the lender in this case should not be allowed to lend more money to the

client against the unrealised gain of Tk 1 million.

The recommendation limiting loan disbursement to 'A' category stocks is meant to avoid the trickery of companies that keep their status as marginable stocks by providing nominal dividends to shareholders.

A company with weak fundamentals may be listed under 'B' category at present, having distributed only a 0.1 per cent cash dividend.

The taskforce also suggested empowering stock exchanges to decide marginable securities.

No changes have been advised to the existing maximum P/E (price-earnings) ratio of 40 for marginable stocks but the exchanges will see whether any security exhibits frequent volatility.

A company showing frequent volatility will be excluded from the list of marginable securities, said the taskforce in the report. Moreover, stocks having good liquidity will be prioritized in the disbursement of margin loans.

The malpractice that has played a big role behind negative equity is the disbursement of margin loans against locked-in shares as collateral.

For example, shares of sponsor-directors of listed companies are not sellable. But many sponsors received loans having a lien on their shares. Eventually, such loans became irrecoverable.

The taskforce recommended that no credit be given, putting a lien on locked-in shares.

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