Margin loan rules relaxed for more fund flow in healthy, stable stocks

The securities regulator, to give a hand to the depressed shares of fundamentally good companies with a decent paid-up capital, has eased the margin regulations.

From now on, the maximum price to earnings (PE) ratio to be treated a marginable stock will be 50, up from 40, for the company shares that have been in A category for three consecutive fiscal years, and have a minimum paid-up capital of Tk50 crore, said the Bangladesh Securities and Exchange Commission (BSEC).

Investors can borrow up to 100% against their equity from the respective broker or merchant bank to buy more listed securities, and this leverage is what margin loan is.

The regulations, however, do not allow investors to buy overvalued or weak company shares with the borrowed money.

For instance, companies which are not regular in holding their annual general meetings or in paying dividends end up in Z category in the stock exchanges. Providing any loan against them is prohibited.

Also, at present, the stocks which are trading above the PE multiple of 40 are not marginable. That means, the shares will neither be bought with margin loans, nor they would be considered as the investor's equity against which margin loans can be given.

Besides, to restrict the use of margin loans in speculative trading, the BSEC prohibited margin loans against newly listed stocks over their first 30 trading sessions. Stocks changing their category remain non-marginable for the first seven trading days.

"The margin rules will pretty much remain the same, except for the PE limit for the stable mid and large-cap companies," said BSEC spokesperson and executive director Rezaul Karim.

The BSEC relaxed the margin regulations to facilitate and encourage more trading of fundamentally sound stocks in the secondary market, according to Karim.

A regulatory weapon to dictate the stock market course

However, using margin regulations as a weapon to dictate the course of the stock market has long been frowned upon.

For instance, in September 2020, the BSEC tagged the Dhaka bourse's broad-index DSEX with the amount of margin loans that can be disbursed against investors' own portfolio assets.

It said if the index goes below 4,000 points, up to 100% of the investor's equity can be lent as margin loans. And, when the index crosses 6,000-mark, the loan ratio would decline to 25%.

Later in April 2021, the BSEC said the ratio would be 80% if the DSEX remained below 7,000 points and 50% above the threshold by wish.

Again in May 2022, to pull the market up after the breaking of the Ukraine war, the index pegging was repealed and the margin loan ratio was raised to 100%.

So many changes in a short span of time interrupted many investors' decision making, and of course, the market behaviour as well.

Earlier in the peak of the 2007-10 bull market, and also after the crash, margin loan ratio had been changed several times.

However, Bangladesh Merchant Bankers Association (BMBA) President Sayadur Rahman believes the regulator made the right move this time as many large-cap, mid-cap stocks of fairly stable companies have corrected to lucrative price levels. Allowing more fund flow there would help market vibrancy.

"Investing in well performing companies during market depression helps maximise wealth," he said.

He also supported the idea of raising the PE threshold for the mid and large cap companies only, as the small cap stocks' prices are prone to speculation and manipulation that increases market volatility.

Beneficiaries right now

The DSE has a total 400 listed companies, closed-end mutual funds, and corporate bonds.

Of them, 260 are in A category, that means they pay at least 10% dividends, maybe including bonus shares.

Neither all of them have been in A category for three straight years, nor all of them have at least Tk50 crore in paid-up capital.

For instance, Apex Footwear has been in the A category, but its paid-up capital is only Tk13 crore. So, its shares would be non-marginable at above 40 PE.

An instant screening of a brokerage firm suggested on Tuesday that Doreen Power, Aman Feeds, Aman Cotton, and Meghna Cement were the non-marginable stocks to become marginable immediately because of the relaxation.

However, the relaxation created headroom for a large number of stocks to rally more, of course if the broker or merchant banks agree to lend as they have discretionary power not to lend against any marginable stock.