The Securities Board of Nepal (Sebon) has allowed brokerage companies to provide margin loans of up to 50 percent of the value of the shares to investors wishing to buy stock in the secondary market.

Margin trading allows investors to buy shares by borrowing money against stock as collateral. To trade on margin, investors need to have a margin account with a brokerage firm.

A potential investor has to deposit up to 50 percent of the value of the stock to be purchased while the rest of the money is put up stockbrokers. The broker charges interest on the loan.

According to Sebon, it issued the directive related to margin trading on Monday as per the Securities Act 2006. The provision could help stock brokers expand their work areas besides ensuring greater liquidity in the stock market, it said.

Niranjaya Ghimire, deputy spokesperson for Sebon, said the provision would facilitate stock investments by easing access to capital. “It is expected to enhance the volume of trading in the secondary market.”

Ghimire added that the concerned stockbrokers would have to devise a separate working guideline to provide the service. “The regulator will also prepare a guideline to minimise possible risks to brokers,” he added.

As per the Sebon’s new directive, stockbrokers with a net asset of Rs50 million can offer margin trading service to investors. “Stockbrokers can issue margin loans amounting up to 50 percent of the value of the shares based on the 180-day average price or the prevailing market price, whichever is lower,” Sebon said.

Investors can obtain margin loans to buy shares of companies that have at least 10,000 general shareholders and have issued at least 10 percent dividends for the last two fiscal years. In case of highly fluctuating share prices, brokers can charge an additional 40 percent of the price of the stock as maintenance margin.

Stockbrokers can provide margin loans from the cash they hold or through banks. The maximum amount they can lend is double their net worth.

While issuing margin loans, stockbrokers have to clearly mention the initial margin amount, maintenance margin rate, margin call, service charge and details of the shares their clients wish to buy.

They are required to report to the secondary market operator the details of the transaction and the investors who have obtained margin loans.