BSEC plans case-to-case dealings to get rid of negative equity by 2023

Aiming to get rid of the over decade-long burden of negative equity by end-2023, the Bangladesh Securities and Exchange Commission (BSEC) has chalked out a plan to deal with the matter on a case-to-case basis through discussions with brokerage firms.

According to data available with the commission, negative equity in the stock market portfolios stood at Tk4,659 crore at the end of June 2022.

Nearly 26,612 investment accounts – known as beneficiary owner (BO) accounts – are still in negative equity territory, which means account holders owe money to their brokers or merchant banks.

At the end of March 2022, negative equity was Tk6,156 crore but market intermediaries have been able to minimise their negative equity by Tk1,496 crore in the April-June quarter.

And 18 of the firms have made 6,161 BO accounts free of negative equity.

Stockbrokers and merchant banks had earlier been asked to prepare their action plans on how they can minimise negative equity.

Seeking anonymity, a BSEC official said the regulator wants both Dhaka and Chittagong bourses to guide their member brokerage firms on how they would minimise their portion in toxic assets.

According to the regulatory compilation seen by The Business Standard, 98 intermediary firms had lent margin loans to their clients to buy additional securities.

A margin loan is what investors borrow from their brokers or merchant bankers to buy more securities to maximise their gains, which is technically called leverage.

At the end of June, Dhaka Stock Exchange (DSE) member firms' exposure in insolvent investment accounts stood at over Tk2,679 crore, while clients of their peers at the Chittagong Stock Exchange (CSE) owed Tk24 crore.

And merchant bankers' funds of more than Tk1,955 crore are stuck in investment accounts as their clients' equity in the respective portfolios is in the negative territory.

Sayadur Rahman, president of the Bangladesh Merchant Bankers Association, said, "Negative equity needs to be ended as soon as possible for the real development of the capital market."

Asked about ways of resolving the decade-long problem, he said, "It should be adjusted on a case-to-case basis through discussions."

Another alternative could be realising the losses in the accounts of the merchant banks concerned, he suggested.

Richard D' Rozario, president of the DSE Brokers Association of Bangladesh, said the brokerage firms do not also want to carry on the decade-long problem.

But they have to be given time to resolve it as investors do not want to adjust the issue, he added.

BSEC Executive Director Mohammad Rezaul Karim said, "As negative equity is not acceptable in the capital market, it has to be eliminated gradually."  

He added that the regulator is working continuously to do away with the problem.   

When the market was showing an upward trend until the end of 2010, a large number of stock investors were in love with leverage.

However, as soon as the market's decade-long downturn began in December 2010, the leverage turned to be a shark and multiplied borrowers' capital erosion rate.

As soon as the erosion surpasses investors' own capital, only lenders' assets remain in the investment portfolio.

Ideally, at such a point, the lender calls the client to deposit fresh funds into the account or face a forced liquidation of the investment portfolio so that the lender can get its money back with interest.

As part of a political preference to save small investors during the market crash a decade ago, the government and the capital market regulator verbally ordered lenders not to liquidate any investment account forcibly. That was the beginning of the crisis, which still persists.