'Last chance' for merchant banks, brokerage cos

Merchant banks and brokerage firms have been offered 'last chance' to come out of the problem of negative equity calculated in margin accounts within timeframe extended till December, 2018.

The officials of the Bangladesh Securities and Exchange Commission (BSEC) Sunday said the lenders who will fail to adjust negative equity setting individual plan will not be allowed to avail facilities including credit from refinancing scheme.

Following the plea of merchant bankers and stock brokers, the regulator allowed transactions in margin accounts having negative equity till December, 2018 by extending existing timeframe that will end on August 18, 2017.

"The lenders either will have to turn negative equity into positive one or will have to write off their loans provided to clients within timeframe," said a most senior official of the securities regulator.

He said the regulator issued an order in last week to submit quarter-wise plan to come out of problems of negative equity.

"After December, 2018 the merchant banks and brokerage firms will have to remove negative equity from their balance sheets if they fail to adjust loans through internal management or writing off loans," the BSEC official said. 

The negative equity is mentioned as 'asset' in balance sheets of merchant bankers and brokerage firms. The amounts of such assets are increased because of interest. 

According to BSEC officials, the aggregate amount of negative equity has stood at around Tk 70 billion in margin accounts maintained by merchant banks and stock brokerage firms.

Negative equity is when the value of an asset falls below the outstanding balance on the loan used to purchase that asset.

According to BSEC officials, the regulator is set to issue a separate order soon regarding adjustment of negative equity within timeframe extended by merchant bankers.

"The margin accounts maintained by merchant bankers are maintained as per contact between lenders and clients. Nevertheless, the regulator will issue a separate order on adjustment of negative by merchant bankers," the BSEC official said.

To allow transactions in accounts having negative equity, the regulator extended the suspension period of effectiveness of sub-rule (5) of rule 3 of Margin Rules, 1999 until December 31, 2018 from August 18, 2017.

 As per sub-rule (5) of Rule 3 of Margin Rules, 1999, the members shall not permit any new transaction in the margin accounts unless the resulting equity in the account would be not less than 150 per cent of debit balance.

The volume of outstanding margin loans advanced by merchant banks and brokerage firms of both the stock exchanges rose to Tk 225.29 billion, inclusive of interest, according to DSE's information sent to the BSEC in August 2015.

At the time, the outstanding amount of such margin loans was Tk 0.87 million to Tk 9.61 billion provided by lenders.

 The greater part of margin loans was provided to clients before 2010-11 stock market following the continuous rising trend of the capital market.

Mohammad Saifur Rahman, a BSEC executive director, the regulator will remain strict to execute the order issued for adjustment of negative equity as per respective plans of merchant banks and brokerage firms.

"Finally we have got the exact figure of negative equity calculated in margin accounts. Now it is their own job of adjusting the negative equity following BSEC's order," Rahman said. 

     mufazzal.fe@gmail.com