The Bangladesh Bank has allowed non-bank financial institutions (NBFIs) to calculate their capital market exposure based on the cost of investment, instead of the market price of their held securities.
Therefore, from now on, NBFIs will not need to sell shares to stay within their exposure limit after capital appreciation.
The central bank responded to repeated requests from the securities regulator and the investment industry as they believe the measure would help stabilise the capital market.
Following the finance ministry's directives, the Bangladesh Bank issued circulars for banks on 8 August and for NBFIs on Sunday, allowing them to calculate their capital market exposure on a cost basis.
A top official of an NBFI told The Business Standard on condition of anonymity that the policy will enable banks to increase their capacity to invest in the stock market.
"Increasing share prices will no longer be a problem for banks. And since it is the cost price instead of the market price, investment calculations will be easier," he added.
Previously, exposure limits of banks and NBFIs would be calculated on the market price instead of the cost price. As a result, if the stock market index or share prices increased, the exposure limit of banks would be exceeded. Consequently financial institutions often had to sell shares to stay within the limit, resulting in the index declining due to such sales in an otherwise bullish market.
As financial institutions are the major institutional investors in the bourses of Dhaka and Chattogram, their selling impacts market rallies adversely every now and then.
Earlier, in coordination meetings among regulatory bodies, the Bangladesh Securities and Exchange Commission requested the central bank to calculate exposure on the basis of cost price.
Banks and NBFIs can invest in listed securities up to 25% of their paid-up capital and reserves on a solo basis, and 50% on a consolidated basis, according to the central bank.
Stock market stakeholders said that the investment exposure of many NBFIs is currently below the limit. However, if it is calculated based on cost price, the exposure limit of a few will increase from the current level. So even if there is some selling off pressure at the beginning, it will be good for the stock market in the long run.