Draft margin loan policy sparks investor concerns over category, P/E rules

General investors have raised objections to several provisions in the proposed new margin loan policy in the capital market, particularly regarding company category changes and the Price-to-Earnings (P/E) ratio criteria.

They claim that if these clauses are implemented without revisions, the market could experience a major downturn and a severe liquidity crisis. Investors have called for a rational reform of the margin loan rules.

On Monday afternoon, at a press conference held at the Capital Market Journalist Forum (CMJF) office in Dhaka, Bangladesh Capital Market Investors Association (BCMIA) President SM Iqbal Hossain presented a written statement on behalf of the organisation.

He said that under the proposed draft, securities with a P/E ratio above 30 would be ineligible for margin loans. However, if the sector's P/E ratio is below 30, the sector's limit would apply for margin loan eligibility.

According to him, the P/E limit has already been reduced from 40 to 30, which has helped control risk. But due to loss-making or irregular companies, sector P/E ratios often become distorted, making the limit unfair for fundamentally strong large-cap shares. 

For example, in sectors like banking, which have very low P/E ratios, the rule becomes excessively strict. Similarly, for high-growth, fundamentally strong companies that outperform their sectors, this restriction leads to wrong investment decisions, he said.

The draft policy also states that if an A or N category share in a margin account is later downgraded to a B or Z category, it must be sold (forced sell) within five working days or the account must be converted into a cash account. 

Regarding this proposal, Iqbal Hossain said that forcing sales within such a short time could create excessive selling pressure in the market. If multiple investors start selling simultaneously, it could even trigger trading halts. To avoid such disruptions, he proposed a minimum adjustment period of three months.

He further said that according to the draft rules, if the combined current market capitalisation of listed companies is seven times or more than their paid-up capital, the maximum loan-to-equity ratio would be set at 1:0.5. If implemented, this could keep the market index confined within a limited range and create a liquidity shortage. However, market intermediaries already follow internal risk-based margin policies, which are effective in controlling abnormal price movements of individual stocks.

The draft also proposes that no market intermediary can extend loans exceeding three times their own net assets or core capital. But most intermediaries are in a weak position due to losses, provisioning requirements, and negative equity. Limiting loans based on current net capital would further reduce the overall margin lending capacity in the market.

Other investor demands

Investors have proposed several measures to protect their interests, including ensuring that no company is delisted without safeguarding investors, reviving non-operational companies to create jobs, and holding mutual fund asset managers legally accountable for losses caused by corruption or irregularities. 

They also called for a rule ensuring investors receive their money within three months if a mutual fund is liquidated.

Investors urged that companies publishing misleading financial data be subjected to forensic audits. They also recommended abolishing the Tk30 lakh investment requirement in the SME market, providing equal trading facilities as in the main market, and offering loan facilities for eligible investors.