New margin rules on merchant banks’ loans to be effective by month-end

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FE Report
The Securities and Exchange Commission (SEC) expects to bring discipline in the country's merchant banking operation by the end of this month through new margin rules.
"We have just sent the newly approved rules to the government press and the rules will come into effect through a gazette notification by the end of this month (October)", an SEC source told the FE Thursday.
Earlier, the SEC at a 'commission meeting' Tuesday last approved the margin rules that bar merchant banks from giving loans to their board members and employees and their relatives.
Under the rules, merchant banks will also have to follow the ratio set by the SEC in giving loans to their clients, said SEC member Mansur Alam.
The ratio depicts the value of the collateral in relation to the loan. If the ratio, for example, is 1 to 2, then the clients will get loans that are twice the value of the collaterals, and if the ratio is 1 to 5 then they will get loans that are five times the collaterals' value.
Although the rules entitle merchant banks to set margin call period on their own, 'the SEC holds the authority to set the margin call period, if necessary,' said the SEC executive.
Margin call is the call from the merchant banks to the borrowing clients to replenish the margin to the desired level either by adding new funds or new securities or by ordering sale of shares in their portfolios. Merchant banks make the call when the lower limit of margin is almost touched.
Previously, there was no SEC guideline on offering margin loans and the merchant banks used to follow their codes of conduct to approve loans to investors.
He said under the rules, the SEC would from time to time set the ratio in which merchant banks would offer loans to their clients.
Merchant banks, under the rules, will be allowed to offer loans against shares, debentures, mutual funds, and government securities and against other items the SEC approves, Mansur said.
The securities which will be considered as 'marginable securities' while disbursing the margin loans for listed issues, listed corporate bonds and debentures, mutual funds and government savings instruments.
The closing price of the securities plus their net asset value divided by two will be the method of evaluating a share, he added.
Merchant banks will have to inform their clients of the amount of fees and charges prior to giving loans, the SEC member said. 'The clients will also have to be notified of any change in the fees and charges.'
The merchant banks have to consider investment security, fundamentals and liquidity of securities, reasonable income, capital appreciation, risk factors and influence of tax imposition ahead of disbursing margin loans against marginable security.