SEC to announce uniform margin loan policy soon

Express (August 04, 2011)

The Securities and Exchange Commission (SEC) has decided to announce a uniform margin loan policy for the capital market within a short time.

"We'll shortly announce a uniform margin loan policy to ensure discipline in providing loans in the stock market by the brokerage houses and merchant banks," an SEC official told the UNB.

Currently, brokerage houses and merchant banks give margin loans to the investors. But the ratio of the margin loans is not uniform in all brokerage houses. Even some brokerage houses and merchant banks provide loans to different investors at different ratios.

There is no uniform policy for such loans.

A merchant bank is allowed to lend at the ratio of 1:1.5 that means an investor is entitled to borrow Tk 150 against his investment of Tk 100. The SEC, which regulates this ratio, made changes on more than 20 occasions in the last one year alone.

The capital market regulator allowed the merchant banks and brokerage house to fix the margin loan limits for their clients.

The issue of margin loan came to the limelight when the share prices went abnormally up.

But the scenario changed abruptly when the share prices lost more than a thousand points within a short period. At that time, the brokerage houses resorted to forced sale of the shares of the investors which were bought through loans.

As a result, a huge number of investors, particularly small investors, lost their capital in the market as the prices of the shares fell rapidly.

At one stage, the government directed the merchant banks not to go for forced sale of the shares. About the allegation of 'forced sale' against the merchant banks, Finance Minister AMA Muhith had said that he personally thought such sale was immoral.

The merchant banks' association were told to prepare a guideline by February 10 this year and get it approved by the SEC, the capital market regulator.

The loan providers are allowed to change the margin loan limit twice a year - first working day of January and July.

The decision is seen as a victory for the merchant banks and their thousands of clients who have earlier accused the SEC of creating volatility in the capital market by frequently changing the margin limits.

SEC officials said that in preparing the guideline, the merchant bankers will take into account the evaluation method of securities stored in clients' accounts, highest limit of loans, rules of margin call, trigger sale and the existing securities laws.

Experts welcomed the regulator's decision but they stressed a clear guideline to avoid irregularities in extending margin loans to investors.

SEC sources said the regulator had asked the stakeholders to send their recommendations on margin loan, but it is yet to receive any reply from the stakeholders.

"We've decided not to wait any more. We'll prepare the guideline within a short time for the welfare of the investors, particularly the small investors in the market," an SEC official said.