Brokers wary about margin finance
KATHMANDU, June 25:
Stock brokers are waiting for a functional directive from the regulator before jumping into guaranteeing margin finance for investors.
Both Securities Board of Nepal (Sebon) and Nepal Rastra Bank (NRB) have opened up margin finance for investors based on a guarantee by brokers but their provision is still mum about the role and liabilities of the brokers on the matter.
“Nothing has been mentioned about the mechanisms that need to be followed and the responsibilities of brokers, so if we start guaranteeing margin loans now based on half-baked notions then there will be complications in the future,” pointed out president of Stock Brokers’ Association of Nepal (SBAN) Anjan Raj Paudyal.
On June 1, the Finance Ministry had made an agreement with three investor associations to start margin financing through brokers’ guarantee to enhance stock market trading. In the following week, the capital market regulator –– Sebon –– told brokers to make necessary provisions for margin lending while the regulator for financial institutions –– NRB –– issued a directive asking financial institutions to float loans against the share purchase receipt and brokers’ guarantee.
Financial institutions can provide loans for a maximum of one year fixing a margin if the investor can provide proof of purchase of the stocks along with brokers’ guarantee regarding the purchase. “It is no big deal for brokers to submit the purchase slip on behalf of the investors but the term guarantee has to be well defined by the regulator,” said Paudyal.
Under margin lending, brokers provide partial loans to clients in order to cover a larger investment than one’s capital could directly cover. But here, the authorities have asked brokers to guarantee that share purchase has been made by the investor who can later acquire a loan from financial institutions.
Earlier, banks provided loans only if the investor was able to furnish a share certificate making loan purchase possible only if the investor had made full payment for the share and had got it transferred. Excited investors began approaching share brokers to guarantee their purchase immediately after the announcement.
“Likewise, if an investor defaults on a margin loan floated by a financial institution, then the liability of the broker that guarantees the loan has to be clearly spelt out now so that brokers can take account of the risk involved before backing up investors,” he said.
SBAN has corresponded with Sebon regarding the complications. “Sebon is preparing guidelines for margin financing and will issue it as soon as it is ready and approved,” said chairman of Sebon Babu Ram Shrestha.
Moreover, brokers also need to be legally permitted to guarantee or start margin financing as Securities Act 2066 forbids brokers to undertake any other service except order placement.
Source: THT
