Revised margin rules curb speculative stock rallies

The revised margin rules have diminished the dominance of speculative stocks in the secondary market as they lost the status as marginable securities.

The Bangladesh Securities and Exchange Commission (Margin) Rules 2025 came into effect on November 6. Before that, market manipulators could create an artificial demand for such securities with margin loans, driving abnormal rallies on the bourses.

There is little scope for that now.

The stocks of Orion Infusion, Khan Brothers PP Woven Bag Industries Ltd. (KBPPWBIL), Anwar Galvanizing, Simtex Industries, and Taufika Foods and Lovello Ice-cream have been experiencing corrections.

On October 27, Orion Infusion topped the chart of turnover leaders, with a transaction value of Tk 302.3 million. It alone grabbed 7.7 per cent of the day's market turnover worth Tk 3.94 billion posted by the Dhaka Stock Exchange (DSE).

On the same day, the Khan Brotherswas the second turnover leader, having witnessed sell-buy of shares worth Tk 176.2 million. It accounted for 4.5 per cent of the day's market turnover.

With the new rules becoming effective, the Khan Brothers plunged 25.36 per cent or by Tk 19.2 per share between November 5 and November 16. Similarly, Orion Infusion fell 13.64 per cent during the same period.

"It is not possible for a junk stock likeKhan Brothers to feature a high turnover in comparison to the total market turnover -- without the support of margin loans," said Md. Ashequr Rahman, managing director of Midway Securities.

"Margin loans had been misused then to influence the rally of speculative stocks," he added.

The revised margin rules allow credit facility for investments in 'A' category stocks. 'B' category stockswould also be considered marginable if the companies that they represent have disbursed at least 5 per cent annual cash dividends.

As per the DSE's latest list, there are 140 marginable stocks under 'A' category and six under 'B' category.

Earlier, the Khan Brothers was a marginable security as the company disbursed 1 per cent cash dividends for FY24 but now the stock, with an abnormally high P/E (price-to-earnings) ratio of 92.65 (based on Tuesday's stock price and latest earnings per share), is not.

Under the new rules, both the P/E ratio of a company and its sectoral P/E ratio are taken into account for the disbursement of margin loans. The equity's P/E ratio should be within 30 or double the median of sectoral P/E ratio, whichever is lower, to be marginable.

Md Abul Kalam, spokesperson of the securities regulator, said an investor should not get margin loans based on a company's P/E ratio calculated based on its latest quarterly results.

"But the trailing P/E ratio [company's market price relative to its latest annual earnings] will reflect a company's historical performance."

Orion Infusion's P/E was very high -- 153.82 on Tuesday.

Both the Khan Brothersand Orion Infusionpreviously exhibited unabated price hikes in the stock market.

For example, the Khan Brothersjumped 236 per cent in the three months to February 18 2024 to Tk 231.7 per share on the Dhaka bourse. The company reported losses ranging from

Tk 6.35 million to Tk 18 million between FY20 and FY23. It, however, made a nominal profit of Tk 0.86 million in FY24.

The stock of Taufika Foods and Lovello Ice-cream experienced 18 per cent erosion while Anwar Galvanizing declined 24 per cent since the day the revised margin rules became effective.

Many speculative stocks had begun sliding on the bourses even b`efore that as investors were aware of the regulatory move to change the margin rules.

Meanwhile, market operators expressed optimism, saying the revised margin rules will help contain abnormal rallies of speculative stocks.

"But market monitoring to ensure lenders' compliance is a must. Otherwise, there is a possibility of margin loan facility being misused to encourage rally of junk stocks," said Mr Rahman, the chief of Midway Securities.

mufazzal.fe@gmail.com