Stock brokering companies can now offer credit facility to investors, with the Securities Board of Nepal (Sebon) enforcing the working guideline on margin trading on Thursday. The provision is expected to help stockbrokers expand their business besides ensuring greater liquidity in the stock 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 invested by stockbrokers. The broker charges interest on the loan.

As of now, stock brokerage firms are only allowed to execute trading orders placed by their clients in the secondary market.

Under the new rule, stockbrokers with a net asset of Rs50 million can offer margin trading service to investors. Stockbrokers can issue margin loans 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.

However, stockbrokers cannot issue loan of over 10 percent of their net worth for investing in stocks of a single company. Similarly, stockbrokers have to maintain this limit if they provide margin loans to more than one investor from the same family.

Sebon’s Deputy Spokesperson Niranjaya Ghimire said the Sebon board on Thursday endorsed the working guideline in compliance to the directive related to margin trading. “The full-fledged implementation of margin trading could also facilitate more investment in the secondary market,” Ghimire said.

The sector’s regulator issued the directive seven months ago. By issuing the directive, Sebon had asked Nepal Stock Exchange (Nepse) to form related guideline. Nepse submitted the draft of the working guideline to Sebon two weeks ago.

According to Sebon, it issued the directive related to margin trading as per the Securities Act 2006. As per the provisions outlined in the regulation, investors can avail the credit facility from the brokers only for those companies with more than 10,000 shareholders, which has positive net worth and has been providing minimum 10 percent bonus for the last two consecutive years.

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

Brokerage firms are free to set service charge, or interest rates, for margin trading. 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, in the contract with the client, according to the guidelines. 

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

Nepse Spokesperson Murahari Parajuli said Nepse was ready to implement the system as soon as they received official letter from Sebon. “As the existing system supports implementing the provision, we will permit stockbrokers to implement the margin trading system based on the applications from the interested stockbrokers,” Parajuli said.

Guidelines

Investors need to have a margin account with a brokerage firm

Only stockbrokers with a net asset of Rs50 million can offer margin trading service to investors

Stockbrokers can issue margin loans 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

Brokerage firms are free to set service charge, or interest rates