Margin loans created massive turmoil in the stock market during the previous Awami League government. Over the years, millions of investors have suffered losses due to these loans. Syndicates engaged in market manipulation used multiple accounts – both legitimate and anonymous – to trap investors. Millions of investors have been stripped of their assets. Now, authorities are taking action against these syndicates.
To curb irregularities in margin loans, the Bangladesh Securities and Exchange Commission (BSEC) has initiated major reforms. Additionally, steps will be taken to revitalise the mutual fund market.
Regulatory reforms underway
According to sources, measures are being implemented based on recommendations from the government-formed taskforce for capital market reforms. In this regard, BSEC stated that margin loan reforms and mutual fund-related recommendations will be fast-tracked for immediate implementation. The goal is to make mutual funds more accessible across the country, allowing customers to purchase them through banks, online marketplaces, and mobile operators.
BSEC sources also revealed that margin loan reforms are being undertaken as they were one of the key contributors to past market turmoil. For years, market manipulation syndicates have used multiple anonymous beneficiary owner (BO) accounts to carry out transactions, artificially inflating the prices of specific shares.
These manipulators spread rumours to attract retail investors into buying these inflated shares. Once retail investors purchase them, the prices collapse. This brings substantial losses for the investors.
Stricter regulations on margin loans
As part of the reforms, the commission has recommended banning margin loans for investors without a regular income, such as homemakers, students, and retirees. This move aims to prevent anonymous BO accounts from being used for fraudulent margin loan activities.
Only companies listed on the capital market and investments in mutual funds with a BBB+ rating can be used as collateral against these loans. Lenders will not be allowed to accept any other type of investment as collateral, except cash deposits.
Stock exchanges will set specific rules regarding which companies' shares can be used for margin loans. Additionally, a lending institution cannot provide more than 25 per cent of its capital as margin loans to a single investor.
Overhauling the Mutual Fund sector
BSEC has also announced plans to revive mutual funds, as most listed funds are currently trading below their face value, with some being traded at as low as Tk 3 to Tk 4 per unit. Consequently, mutual funds are being failed to stabilise the stock market.
To address this issue, BSEC is refraining asset managers of mutual funds from becoming board directors in companies they invest in. Currently, many mutual fund managers hold directorial positions in banks and financial institutions. Additionally, defaulters will be declared ineligible to operate mutual funds.
Banks, digital banks, mobile financial services (MFS), post offices, stock exchanges, financial institutions, insurance companies, merchant bankers, stockbrokers, mobile telecom operators, and technology-based service providers (such as online marketplaces and third-party digital distribution platforms) will be allowed to sell mutual fund units.
Ensuring investor protection
When asked about these reforms, BSEC Executive Director Rezaul Karim told Bangladesh Pratidin that steps are being taken to reduce the risks associated with margin loans. “Market manipulators often spread false information, leading investors to take margin loans and buy shares unknowingly. Later, companies force-sell these shares, causing investors to suffer losses,” he said.
He assured that the new reforms will mitigate such risks. Additionally, they will curb the dangers associated with small-scale investments using margin loans, which often lead to financial ruin for inexperienced investors.
Karim highlighted that a more dynamic mutual fund sector will bring stability to the stock market. Measures are being taken to ensure customers can easily buy mutual fund units. BSEC will fast-track the regulatory reforms and implement them as quickly as possible, he remarked.
Translated & edited by Fariha Nowshin Chinika
