The securities regulator has extended time for mandatory provisioning against unrealised losses in margin accounts for seven months until January next year in a desperate move to avert further market fall.
According to market insiders, forced selling executed in the margin accounts is mostly responsible for the persistent market correction over the last nearly seven weeks, taking the broad index of the Dhaka Stock Exchange (DSE) to a three-year low on Wednesday.
Forced selling will intensify if the deadline for provisioning is not extended, said Mohammad Rezaul Karim, spokesperson of the Bangladesh Securities and Exchange Commission (BSEC).
"The market would not be able to absorb the selling pressure. There are no sufficient buyers in the market.
"The decision has been taken for the sake of investors and the market. Stakeholders have also made a plea [for more time]," added Mr Karim, referring to an order issued on Thursday extending the time.
A substantial amount of negative equities had resulted from brokers' failure to liquidate assets in margin accounts as they gave in to regulatory pressure time and again or avoided the risk of displeasing clients.
For example, an investor has made an investment of Tk 200, out of which Tk 100 was funded through a margin loan from the stock broker.
As per the rules, the lender will ask the investor to deposit additional margin if the value of the equities purchased by the aggregated fund goes below Tk 150.
If the investor fails to do so and the equity value falls below Tk 125, the lender should liquidate the assets without notifying the client to avoid negative equity.
While forced selling has been dragging the index down, the negative value in margin accounts has gone up, panicking lenders. On one hand, they face the risk of incurring more losses, on the other they will have to keep higher provision against unrealised losses.
That is why many margin loan providers feel an urgency to sell shares in margin accounts.
Meanwhile, a delegation of stock brokers and merchant banks on Thursday met Deputy Governor of the Bangladesh Bank Md. Khurshid Alam to discuss the situation of the capital market.
They sought support from the central bank, and the deputy governor assured them of policy support for the capital market.
After the withdrawal of the floor price in January, the broad index of the DSE exhibited an upward trend and peaked at 6447 points on February 11.
Later, the market started to fall and the DSEX went below 6000 points on March 13. The broad index of the Dhaka bourse lost 685 points as of Wednesday before recovering 15 points to settle at 5778 on Thursday amid thin participation by investors.
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