To allow contrarian investors to buy more shares at falling prices, and also help the market avoid the forced sale of securities from leveraged investment accounts, the securities regulator raised the margin lending cap to 100% from 80%.
Leverage, technically called margin lending, allows investors to buy more securities with money borrowed from their brokers or merchant banks.
The Bangladesh Securities Commission (BSEC) said on Sunday that brokers and merchant bankers can lend their clients up to 100% of their shares, as long as the price-to-earnings (PE) ratio of a share particular does not exceed 40.
The easing of leverage came in response to the sharp decline in the stock market, with the DSEX dropping 1.84% to 6,142 – the lowest since June 30, 2021.
Amid macroeconomic headwinds that caused exchange rate turbulence, rising inflation and deteriorating corporate earnings outlook, the Dhaka Stock Exchange (DSE) general index fell 7.7 % in May alone and the last eight consecutive bearish sessions have caused more than Tk 33,000 crore capital erosion on the country’s top stock exchange.
Experts told The Business Standard, in reaction to the relaxation of margin rules, that leverage is good when investments generate a positive return.
On the other hand, leverage has the toxic power to ruin an investor if prices fall sharply, because the lender never owns the portfolio losses.
However, the immediate help of the easing would be that some stressed investor accounts might avoid forced liquidation.
Under margin rules, in a declining market when an investor’s capital erodes and the remaining asset belongs only to the margin lending provider, the broker or merchant bank may sell forcibly titles to recover the money lent.
Over the past two or three trading sessions, many brokers have had to trigger such forced selling in many client accounts to save their ass, market officials said, adding that they feared a further decline in the market does not aggravate forced sales.
In addition, investors who find that good stocks are undervalued in the falling market are also offered to use more borrowed funds to place more buy orders.
However, nowadays the market does not encourage leverage like it did during the bull market of 2009-2010 because the verbal ban on hard selling from client accounts has ruined both the investors and their broker-dealer banks.
Sitting tightly with leveraged investments in a declining market, thousands of investors found themselves with negative equity, instead of zero equity, while no practical way to recover loans broke some middlemen from the market as their balance sheets are full of toxic multi-thousand crore taka loan portfolios.
In addition, market intermediaries today are much more conservative when it comes to margin lending. The majority of brokers do not grant margin loans up to the maximum authorized limit of 80%.
However, the easing of leverage has allowed risk-takers to pour more funds into stocks and it’s now up to them to decide whether or not to do so, a senior executive at IFC said. a brokerage firm.