Negative equity: 60% of brokers and merchant banks yet to submit action plans

Infographics: TBS

Although steps are underway to eliminate long-standing negative equity burdens, about 60% of brokerage firms and merchant banks have yet to submit action plans to the Bangladesh Securities and Exchange Commission (BSEC) for adjustment and provisioning. 

Data show that more than 86 firms – out of 146 brokers and merchant banks with negative equity – have not submitted board-approved plans seeking regulatory relaxation for provisioning. 

Against this backdrop, the commission has reiterated that all such firms must submit their action plans by 31 December, failing which they will be required to maintain full provisioning against negative equity.

To help firms gradually reduce the burden, the BSEC has been granting extensions on a case-by-case basis after reviewing board-approved and implementable plans. 

In some cases, firms have been allowed time until 2032 to fully adjust and provision against their negative equity. So far, 60 firms – comprising 21 merchant banks and 39 brokerage houses – have secured such extensions, according to regulatory officials. 

Within the extended period, the firms are required to gradually build provisions against their negative equity exposure.

As per documents of the commission, seen by The Business Standard, the total negative equity in the sector stood at Tk10,425 crore as of February 2025. This included Tk8,005 crore in principal margin loans and Tk2,420 crore in accrued interest.

The problem dates back to the stock market crash of 2010, when the regulator at the time verbally instructed firms not to trigger forced selling of shares, according to market sources. Since then, negative equity has remained a persistent structural issue.

In total, 146 institutions – 102 brokerage houses of the Dhaka Stock Exchange (DSE), 39 merchant banks, and five brokers of the Chittagong Stock Exchange (CSE) – have been bearing the burden and struggling with negative equity for years.

Muhammad Nazrul Islam, general secretary of the Bangladesh Merchant Bankers Association (BMBA), said most merchant banks had already submitted their plans. "The majority of merchant banks have submitted their plans to the regulator, and some have already secured extensions. I hope the rest will submit their plans within the stipulated timeframe," he told TBS.

Negative equity refers to a deficit in owners' equity, which occurs when the value of assets used to secure margin loans falls below the outstanding loan balance. 

Brokerage firms and merchant banks had extended margin loans to clients for share purchases, but the current market value of those shares is far below their purchase price. 

The problem deepens when firms do not enforce the forced selling of securities bought with borrowed funds from the broker or merchant bank. As a result, loans cannot be adjusted through share sales, allowing negative equity to persist for years.

To ease pressure on lenders, the regulator has repeatedly extended deadlines for adjusting negative equity and maintaining provisions. However, data show that while firms should have provisioned against the full principal amount of margin loans, they have so far maintained only Tk2,946 crore. The resulting net provision shortfall stands at Tk5,058 crore.

Since margin loans have no collateral other than the securities in the account, negative equity turns irrecoverable unless the securities price bounces back significantly.

Broker owns 63% of negative equity 

Data show that 102 DSE brokerage firms account for Tk5,942 crore of negative equity, including Tk5,073 crore in principal margin loans. Of these, just 11 firms together hold more than Tk4,130 crore in negative equity.

PFI Securities and Fareast Stock and Bonds carry the highest exposure, with negative equity of Tk679.66 crore and Tk669.23 crore, respectively as of February 2025. Seven firms – including ICB Securities Trading Company, ICB Capital Management and AVIVA Equity Management – each hold more than Tk400 crore in negative equity.

A top official of a brokerage firm with over Tk300 crore in negative equity said his firm had secured an extension until 2032 to adjust negative equity and keep provision. "If the capital market rebounds after the upcoming election, we will be able to maintain provisioning," he said.

After an earlier deadline expired on 31 January 2025, the BSEC in April allowed brokers and merchant banks until 31 December 2025 to make full provisions, subject to submission of board-approved roadmaps by 30 June. 

Many firms failed to meet those conditions. Since November, the commission has approved extensions in several phases, covering 60 firms to date.

In December last year, stockbrokers proposed a six-year relaxation until 2030 to gradually meet provisioning requirements for negative equity and unrealised losses – issues that continue to weigh heavily on the capital market.