Capital market reform: Taskforce recommends ban on margin loan-based directorship

The Capital Market Reform Taskforce has proposed banning individuals from becoming company directors by acquiring shares through margin loans, citing risks to lenders' ability to recover principal and interest.

The taskforce submitted two draft proposals to the Bangladesh Securities and Exchange Commission (BSEC) today, outlining reforms for margin loan regulations and mutual funds.

As part of the proposed amendments, the taskforce recommended incorporating the restriction into the margin loan regulations, which are set to be reformed as the Equity Margin Rules 2025, according to the BSEC.

A taskforce member stated that there have been several instances where groups acquired directorships by purchasing shares using margin loans, creating a harmful practice in the capital market. 

These loans often became unrecoverable as the shares remained blocked due to their use in securing directorship positions, the member added.

The proposed regulations will impose stricter conditions on margin loans, preventing all investors from borrowing from their brokers or merchant banks to purchase additional shares.

According to the proposal, investors will only be eligible for margin loans if they have at least six months of experience in secondary market investments and a minimum capital of Tk10 lakh. 

Additionally, individuals without a regular income must have a disclosed wealth of at least Tk2 crore to qualify for margin loans.

Currently, a stock remains eligible for margin loans unless its price exceeds 40 times its annual earnings per share and it does not fall under the "Z category" in stock exchanges. For companies that have consistently paid at least 10% dividends over the past three years, the threshold is set at 50. 

The taskforce plans to lower this limit to 30 and restrict margin loans to only "A category" shares. For banks and non-bank financial institutions, the price-to-earnings (PE) ratio threshold will be reduced to 20.

According to the taskforce, if a client's account value falls below 125% of the amount they owe (the debit balance), the institution has the right to liquidate assets from the account without prior notice to the client in order to restore the account's value to at least 150% of the debit balance.

However, a margin lender can choose to set a higher trigger point for selling, as long as it is specified in the contract.

If the lender fails to act and sell assets when necessary, they will be responsible for covering the loss to the client, ensuring the account reaches a 25% equity-to-debt ratio, it added.

Additionally, the taskforce has proposed allowing investors to maintain both cash and margin accounts under the same depository participant (DP). However, margin accounts will be restricted from participating in IPO subscriptions, which will only be allowed through cash accounts.

Ashequr Rahman, a focus group member and managing director of Midway Securities, told The Business Standard, "Our aim was to make sure past mistakes and mismanagements are avoided going forward.

"We want to empower the stock exchanges by providing data on marginable securities with robust due diligence (which includes more than just the P/E of a stock) and ensure institutions providing margin loans will have more control in managing the lender-borrower relationship."

Earlier, on 7 October last year, the BSEC formed the taskforce to get recommendations for the needed reforms in the capital market.

The taskforce was given 17 terms of reference (TOR) initially, according to the BSEC.

The primary objective of the TORs was to identify the reasons behind the poor size of the capital market compared to the GDP and make policy proposals for the financial sector for improvement.

The list included making recommendations for ensuring BSEC representation during the government's financial policy formulation and making policy decisions so that bank dependency for long-term financing decreases and the capital market can play a bigger role.