FE Report
Stakeholders urge the securities regulator to find a 'quick solution' to the problems arising out of negative equity, blaming forced sales in margin accounts for the sharp decline of the index this week.
Representatives of the bourses, merchant banks, and asset management companies sat with the Bangladesh Securities and Exchange Commission (BSEC) on Monday and shed light on issues surrounding negative equity.
Lenders had disbursed margin loans to clients from money borrowed from their parent companies or other institutions. They are legally entitled to carry out forced sales in margin accounts with negative equities.
However, previous commissions on several occasions prevented lenders from doing so on the pretext of protecting investors' interests. Even the court imposed a bar on the sales of securities in margin accounts.
Over time, negative equity ballooned and the restrictions proved to be nothing but futile attempts to protect lenders and clients. Meanwhile, the hope that margin accounts would recover the loss eventually has been diminished.
Forced selling happens when the market shows an upward trend as lenders seek to make adjustments in the margin accounts.
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 an 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 goes below Tk 125, the lender should liquidate the assets without notifying the client to avoid negative equity.
Market operators say the negative equity is not letting the market flourish.
Negative equity fell more than 18 per cent to Tk 66.3 billion between December 2020 and September 2023. It has recently increased due to the persistent fall of the market, sources said.
Terming the problem as 'cancer' of the market, stakeholders on Monday requested the regulator to solve it immediately.
The BSEC is set to issue guidelines in this regard.
Mazeda Khatun, managing director of ICB Capital Management, said participants of Monday's meeting spoke about different ways to solve the problem of negative equity.
"They said the negative equities could be written off or a bail-out programme could be initiated to support portfolios.
"If the problem is solved, the market will not face trigger sales and the provisioning requirement of the lenders [against the loss] will not be there."
Ms Mazeda also said lenders such as merchant banks and brokerage firms would follow the guidelines once the regulator formulated them.
Emergence of negative equity
Before the 2010-11 stock market debacle, lenders disbursed margin loans aggressively boosting liquidity in the market.
The regulator 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.
Insider said some 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.
Stock brokers and merchant banks provide margin loans from funds received from parent companies, most of which are banks.
The market shot up in 2010, owing to margin loans, and then it burst, rendering massive erosion of assets' value. That led to negative equity piling up.
As per the stipulated rules, there was no scope of negative equity as the lenders were supposed to sell the assets in margin accounts before their worth went below the amount of 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 led to a culmination of negative equity to more than Tk 81 billion by December 2020.
The regulator's pressure on lenders drove down negative equity until the end of 2022, but then it went up again in 2023 when the market was mostly illiquid with good stocks languishing on the floor.
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