The securities regulator has extended the deadline for provisioning against negative equity in margin accounts and unrealised losses in dealer accounts to December this year but there is a condition to be met to get the extra time.
The Bangladesh Securities and Exchange Commission (BSEC) asked merchant banks and brokerage firms to submit their plans by June, approved by their boards, on how to meet the provision requirements.
The regulatory decision came at an urgent meeting at the BSEC office on Thursday against the backdrop of continuous fall of the market, which sparked protests the day before.
The DSEX, the broad index of the Dhaka bourse, fell below 5,000 points by the end of the week.
Due to the dire strait of the market, stockbrokers and merchant banks are unable to make enough profits to cover operating expenses.
On the other hand, they feel increasing pressure to keep provisions against mounting losses as the market has kept falling.
The DSEX lost 0.47 per cent or 233 points in the last nine sessions to 4,972 points though Thursday.
On Tuesday, representatives from top 20 brokers had a meeting with the commission, when they sought further time extension for provisioning.
The latest deadline for keeping provisions against negative equity in margin accounts expired in December last year while the deadline for provisioning against unrealized losses in dealer accounts ended in February this year.
Md. Abul Kalam, a BSEC spokesperson, said the regulator extended the deadline, considering the plea of merchant banks and brokerage firms.
The reason for imposing the condition was that the regulator wants a "permanent solution" to the problem of negative equity.
"Merchant banks and brokerage firms will dwell on the issue but won't solve it unless they are forced to do so," Mr Kalam said. Market operators would have a pledge to fulfill if they submit plans approved by their boards, he added.
The outstanding negative equity against margin loans amounted to Tk 78.24 billion as of October last year.
Before the 2010-11 stock market debacle, lenders had disbursed margin loans aggressively boosting liquidity in the market.
The BSEC at the time allowed lenders to lend at a ratio of 1:1 and then raised the ratio to 1:1.5, meaning a borrower could get Tk 150 in credit against an investment of Tk 100 in a marginable stock.
Many lenders had disbursed loans even at a ratio of 1:2 or 1:3 or above. They also provided margin loans to pull specific stocks on the bourses.
As per the stipulated rules, there was no scope of negative equity as lenders were supposed to sell the assets in margin accounts before their market value dropped below the money lent.
But after the market collapsed, the regulator verbally instructed lenders not to conduct sales in the margin accounts, assuring them of market rebound, but that did not happen.
Eventually, wrong regulatory decisions and unregulated disbursement of margin loans led to an escalation of negative equity.
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