The DSEX rose by 0.16 per cent to settle at 6206.80 points at the end of last Thursday’s trading.
Removal of floor price will lead to price erosion of securities in margin accounts, he said, adding that small investors would then fall victim to margin calls.
In an exclusive interview with the FE, BSEC Chairman Shibli Rubayat Ul Islam said big and institutional investors would take advantage of the price erosion in absence of the floor price while retail investors would endure losses.
“They will face forced selling [of stocks] by lenders,” he added.
Margin accounts have assets purchased with funds belonging to both investors and brokerage firms. So, an investor’s equity is the total value of the securities in the margin account minus the money borrowed from brokerage houses.
As per the rules, a lender shall request his client to provide additional capital or securities if his margin account falls below 150 per cent of the debit balance. The lender shall not permit any new transactions unless the equity is equivalent to at least 150 per cent of the debit balance.
If a margin account falls below 125 per cent of the debit balance, the lender without informing its client can sell assets to meet the margin call.
The index may come down to settle at 6,000 points if the floor price is withdrawn after it reaches 6,500 points, said Mr Islam. “The index is now at 6,200 points. It will fall to 5,500 points if the floor price is withdrawn at this moment.”
The BSEC chairman pointed the finger at institutional investors for the sorry state of the market.
He said that instead of supporting the market now, institutions were waiting to grab the holdings of small investors at lower prices after the removal of floor price.
Mr Islam said investments made by banks have declined to 15 per cent or even lower. For example, Dutch-Bangla Bank now has market exposure at around 4 per cent, he said.
Banks can invest in listed securities up to 25 per cent of their equity on a solo basis and 50 per cent on a consolidated basis, according to the Bank Companies Act. In August 2022, the central bank allowed the banks to calculate their exposure at the purchase price instead of the market price following pleas from a section of stakeholders.
Responding to a query, the BSEC chief said the amount borrowed by small investors in the form of margin loans was greater than that of big investors.
The securities regulator imposed the floor price for the first time in March 2020 to protect the market from going into free fall against the backdrop of the pandemic.
It was then lifted in phases from April 2021.
Later, the price restriction was re-imposed in July 2022 for economic uncertainties ushered in by the Russia-Ukraine war. The restriction was partially removed from 169 stocks in December last year.
On March 1, the regulator reinstated floor price for the 169 securities.
“I am willing to lift floor price at a stage when investors will not be distressed by margin calls,” said the BSEC chief.
The issues surrounding the price restriction will be solved if inactive investors become active, he said, referring to high net-worth and institutional investors. “The floor price will be ineffective if the stock prices go up” due to participation of investors with high investment capacity.
Investors, who can inject fresh funds, should not consider the floor price as a barrier, said the BSEC chairman.
He, however, ruled out that the regulator was fixated on the rise and fall of the index. “But safety of investors is our concern.”
“The Ordinance [Securities and Exchange Ordinance 1969] has mandated us to ensure safety of investors. In no way we can bypass the Ordinance.”
Source: The Finencial Express