Revised margin rules gazetted to broaden credit access, limit risks

Shares of listed companies in the ‘A’ and ‘B’ categories with price-to-earnings (P/E) ratio up to 40 will qualify for margin loans, while the revised rules also eased the thresholds for margin calls and forced sales.

The Bangladesh Securities and Exchange Commission (BSEC) has issued a gazette on the revised margin rules, 2025, allowing intermediaries to expand their lending but with stronger regulatory oversight.

The final rules came after extensive discussions over changes to the earlier framework, particularly on the criteria for determining securities eligible for margin financing.

Market operators said the revised framework would help increase liquidity in the secondary market by widening access to margin financing while maintaining safeguards against excessive risk-taking.

The final rules dropped the proposed price-to-book (P/B) ratio as an eligibility criterion for banks, non-bank financial institutions (NBFIs) and general insurers and instead retained the P/E-based test for deciding eligibility, except for life insurers.

The draft rules had proposed a maximum P/B ratio of 3 for banks and 1 for insurance companies, arguing that asset-based businesses are better assessed through book value as their earnings fluctuate due to provisioning and interest-rate movements.

For life insurers, however, the maximum allowable P/B ratio has been raised to 3 from the proposed 1. The ratio will be calculated using the latest closing price divided by audited net asset value per share.

The final rules raised the P/E ceiling to 40 from the proposed 30 for ‘A’ and ‘B’ category shares. Stocks with a P/E above 40 will therefore not qualify for margin loans. The P/E ratio will be calculated based on EPS reported in the financial statements for the latest four quarters.

Securities under the G (Greenfield), N (Newly Listed) and Z categories, as well as securities traded on the SME board, Alternative Trading Board (ATB) and Over-the-Counter (OTC) platforms, will remain outside the margin-lending facility because of their relatively higher risk and lower liquidity.

Akramul Alam, head of research at Royal Capital, said the revised framework sought to strike a balance between facilitating leveraged investment and containing the risks associated with it.

“Lenders and investors will enjoy greater flexibility as the final rules raised the P/E ratio threshold from 30 to 40,” he said.

The retention of the P/E-based test for most securities, while introducing the P/B test only for life insurers, indicates that the commission ultimately opted for a targeted approach rather than applying the proposed valuation measure broadly across banks, NBFIs and insurance companies, he said.

Margin ratio remains 1:1

The maximum margin financing ratio remains unchanged at 1:1, meaning a merchant bank or stockbroker cannot provide loans exceeding the amount of equity maintained by an investor.

An investor with Tk 1 million in equity, for example, can receive up to Tk 1 million in margin financing.

The one-year margin agreement will be automatically renewed unless either party terminates it.

“The automatic renewal provision will help reduce administrative and other related costs,” said Mr Alam.

Minimum investment cut

The final rules have reduced the minimum investment required to qualify for margin lending to Tk 300,000 from Tk 500,000.

An investor must therefore have at least Tk 300,000 invested in the secondary market to obtain margin financing.

The lower threshold is expected to broaden access to such loans while keeping very small investors outside the leveraged market.

Margin calls eased

The rules have significantly eased the thresholds for margin calls and forced sales. If a client’s equity falls below 50 per cent of the margin financing, compared with the proposed 70 per cent, the lender will ask the client to deposit the required amount.

If the client fails to meet the margin call within three working days, the lender can sell part of the securities to restore the client’s equity to 50 per cent of the margin financing.

The threshold for forced sales has also been reduced to 25 per cent from the proposed 50 per cent. Once the client’s equity falls below this level, the lender can sell the required securities without prior notice to adjust the margin position.

The rules also protect lenders against losses caused by execution delays. A lender will not be held liable for losses if a mandatory sell order is not executed immediately or is delayed after being placed.

Lenders’ exposure capped

A merchant bank or stockbroker can finance up to four times its actual capital, down from the proposed five times. This provision is intended to prevent lenders from taking excessive leverage while providing margin loans.

The rules also cap exposure to a single security at 20 per cent of a financier’s total outstanding margin portfolio, unchanged from the proposed limit. The measures are aimed at preventing excessive leverage by financing institutions and concentration of exposure to individual securities.

Governance tightened

Every margin financier will have to maintain a dedicated bank account exclusively for the financing activities. Existing branch-based or digital booth-based accounts must be closed by February 2027 unless specifically approved by the commission.

Each margin financier must also establish a risk management committee comprising at least two members. The committee will have to meet at least four times a year, with its proceedings submitted to the board of directors.

Source: The Business Standard