Margin Trading Directive 2082 to come into effect from Falgun 1, experts raise concern over implementation

The Securities Board of Nepal (SEBON) has approved the “Margin Landing Directive, 2082” under the Securities Act, 2007. The Directive, which comes into effect from February 13, has replaced the Margin Trading Directive 2074.

According to the Directive, brokerage companies willing to provide margin trading services must have a minimum paid-up capital of Rs. 20 crore and must hold clearing membership, depository membership and others approvals mandated by the stock exchange.

Margin loans provisions

On margin loan facility, brokers may provide margin loans from their own funds, bank borrowings, or unsecured loans from shareholders or directors. However, total borrowings and unsecured loans cannot go beyond 4.5 times the broker’s net worth. Brokers are also barred from using one client’s funds or securities to finance another client’s margin trades.

Margin landing limits

Brokers can extend margin facilities up to five times their certified net worth. A single client and related parties are subject to avail only 10% of the total margin facility.

Eligible stocks for margin trading

Only selected listed companies will be qualified for margin trading. Eligible shares must have at least 2.5 million units of public shares (excluding locked-in shares) listed, and maintain a net worth equal to or above paid-up capital.

Similarly, they have posted net profits in at least two of the last three fiscal years, and completed at least two years since listing following an IPO.

Under the provision, brokerage firms must collect a minimum initial margin of 30% of the market value of shares purchased under margin trading. Additionally, investors must maintain a minimum maintenance margin of 20%.

Margin requirements and calls

The inability to maintain the required margin due to price fluctuations, brokers are required to issue a margin call.

Market reactions

Experienced investor Shiva Chandra expressed optimism that investors and traders availing the margin loan facility from brokers with the enforcement of the Directive.

“It is a matter of satisfaction that investors and traders can access services from a single entity. Since certain standards have been set for listed companies to qualify for margin trading, companies with strong fundamentals will also get a recognition, helping build a strong foundation for NEPSE to reach new heights in the future,” he wrote on social media.

Bhakti Ram Ghimire, General Secretary of the Stock Brokers’ Association of Nepal hailed the Directive as a positive move for the development of the overall stock market. Small investors and traders lacking adequate access to bank loans would particularly benefit from the provision.

 “It will also help boost liquidity in the market,” he said, adding that listed companies with strong fundamentals would be prioritised as certain criteria has been set for margin loans.

He however expressed concern about the effective implementation of the Directive, citing past failure to effectively enforce such provisions. He suggested a strong coordination between the SEBON and the Nepal Rastra Bank for its successful implementation.