SEC lowers P/E loan ceiling for investors
Wednesday, 16 June 2010
FE Report
The Securities and Exchange Commission (SEC) has lowered the price-earning ratio margin again to be eligible for taking out loans by investors in an effort to cool down the sizzling market.
In a directive issued Tuesday, the securities regulator ordered merchant bankers and stock brokers not to provide any credit facilities to their clients, who will snap up equity securities with price-earning (P/E) ratio of above 40.
The decision, which will be valid until further notice, will be effective from June 20.
"We've decided to reduce PE ratio margin to 40 from the current 50 for the interest of investors and the market," said an SEC official. "Companies with above 40 PE ratio will not be qualified for marginable securities," he added.
In the last one month, benchmark index DSE General Index added more than 500 points and on Tuesday it closed at 6324.97, which was the second best high.
A PE ratio is a company's current share price compared to its earnings per share. In general, a high PE ratio reflects that investors expect higher earnings in future or a strong chance that they will be able to make a capital gain.
On December 9 last year, the commission first set PE ratio below 75 as marginable securities. In February, it revised the ceiling, barring investors from getting credit facilities against securities having a PE ratio of 50.
Currently, the Dhaka Stock Exchange has 109 securities having above 40 PE and 115 with below the same PE.
In a span of seven months, the SEC changed PE ratio three times to discourage investors to purchase "over-priced" issues, which could in turn stabilise an otherwise overheating market.
Salahuddin Ahmed Khan, a professor of Finance at Dhaka University, welcomed the move, saying it was taken "at the right time" when most of the issues have become overpriced.
"By restricting the loan ratio the market can be wobbly for a day or two, but it will pay off in the long run," said Mr. Khan, also a former chief executive officer of DSE.
Yawer Sayeed, a leading fund manager, said, "The SEC decision will affect small investors, who rely much on credit facilities."
The Securities and Exchange Commission (SEC) has lowered the price-earning ratio margin again to be eligible for taking out loans by investors in an effort to cool down the sizzling market.
In a directive issued Tuesday, the securities regulator ordered merchant bankers and stock brokers not to provide any credit facilities to their clients, who will snap up equity securities with price-earning (P/E) ratio of above 40.
The decision, which will be valid until further notice, will be effective from June 20.
"We've decided to reduce PE ratio margin to 40 from the current 50 for the interest of investors and the market," said an SEC official. "Companies with above 40 PE ratio will not be qualified for marginable securities," he added.
In the last one month, benchmark index DSE General Index added more than 500 points and on Tuesday it closed at 6324.97, which was the second best high.
A PE ratio is a company's current share price compared to its earnings per share. In general, a high PE ratio reflects that investors expect higher earnings in future or a strong chance that they will be able to make a capital gain.
On December 9 last year, the commission first set PE ratio below 75 as marginable securities. In February, it revised the ceiling, barring investors from getting credit facilities against securities having a PE ratio of 50.
Currently, the Dhaka Stock Exchange has 109 securities having above 40 PE and 115 with below the same PE.
In a span of seven months, the SEC changed PE ratio three times to discourage investors to purchase "over-priced" issues, which could in turn stabilise an otherwise overheating market.
Salahuddin Ahmed Khan, a professor of Finance at Dhaka University, welcomed the move, saying it was taken "at the right time" when most of the issues have become overpriced.
"By restricting the loan ratio the market can be wobbly for a day or two, but it will pay off in the long run," said Mr. Khan, also a former chief executive officer of DSE.
Yawer Sayeed, a leading fund manager, said, "The SEC decision will affect small investors, who rely much on credit facilities."