BSEC extends deadline for adjusting negative equity to Dec 2023

The stock market regulator has extended the time period for adjusting the negative capacity of brokerage firms and merchant banks – which was supposed to end in December 2022 – by one year.

The authorities took the decision considering the current market situation, said the Bangladesh Securities and Exchange Commission (BSEC) in a directive issued in this regard yesterday.

Earlier, aiming to get rid of the decade-long burden of negative equity by end-2023, the commission chalked out a plan to deal with the matter on a case-to-case basis through discussions with brokerage firms.

According to data available with the commission, negative equity in the stock market portfolios stood at Tk4,659 crore at the end of June 2022.

According to the regulatory compilation seen by The Business Standard, 98 intermediary firms had lent margin loans to their clients to buy additional securities.

A margin loan is what investors borrow from their brokers or merchant bankers to buy more securities to maximise their gains, which is technically called leverage.

When the market was showing an upward trend until the end of 2010, a large number of stock investors were in love with leverage.

However, as soon as the market's decade-long downturn began in December 2010, the leverage turned to be a shark and multiplied borrowers' capital erosion rate.

As soon as the erosion surpasses investors' own capital, only lenders' assets remain in the investment portfolio.

Ideally, at such a point, the lender calls the client to deposit fresh funds into the account or face a forced liquidation of the investment portfolio so that the lender can get its money back with interest.

As part of a political preference to save small investors during the market crash a decade ago, the government and the capital market regulator verbally ordered lenders not to liquidate any investment account forcibly. That was the beginning of the crisis, which still persists.