Frequent revisions of the decisions on margin loans by the capital market regulator may create more volatility instead of stabilising the stockmarket, experts fear.
In a span of just two months, the Securities and Exchange Commission, as they pointed out, changed its stance four times in an effort to "cool down the overheated market".
On February 3, the SEC squeezed the ratio of brokerage houses' margin loans to 1:1, down from the 1:1.5 ratio -- a change that came after a short gap. The modification means that the SEC allowed a higher ratio for margin loans first and then backtracked on it.
Reacting to the latest move, the market plunged by more than 100 points on February 3, but bounced back with a gain of more than 35 points a day later.
The rising trend continued yesterday too. The DSE General Index (DGEN) reached its highest at 5,552.85 points.
In a decision on December 9, the SEC allowed investors to get credit for securities with higher PE (price-earnings) ratio, but reduced the ratio -- from 75 to 50 -- in a quick change of mind on February 1.
The step missed the mark. The market jumped some points.
On December 9, the DGEN closed at 4,415.27 points, which rose to 4,437.72 points a day later. The market closed at 5,503.37 points on February 2, up from 5,451.15 points of the previous day.
The regulator's intervention only in margin loans created confusion among investors, market analysts say.
AB Mirza Azizul Islam, former caretaker government adviser, said margin loan is a tool for the regulator to control an overheated market, but the ratio should not be changed frequently.
“Instead of fixing the PE at 75 first and then at 50, it would have been better to fix it at 25 or 30 first through which the market could get a clear instruction about the SEC's position,” he said.
This time, the SEC has been far from what it earlier practised. Without any prior warning or talks with stakeholders such as bourses, merchant banks and brokers, it has recently made directives to brokerage houses about the margin loan ratio.
Previously, it was observed that the SEC did not impose any decision at initial stage. It first held meetings with stakeholders and warned them of irrational market behaviour.
Mirza Azizul Islam, who had also served as SEC chairman, said the commission could discuss with the market stakeholders before taking decisions.
The SEC should also approve the pending IPO proposals to increase the supply side, he suggested, pointing his finger at the low supply side as a major reason for the overheated market.
Salahuddin Ahmed Khan, professor of Finance at Dhaka University, also thinks the SEC measures inappropriate.
“By restricting the loan ratio the market can be calmed for a day or two, but never for a long period of time,” said Khan, also the former chief executive officer of Dhaka Stock Exchange.
Merchant bankers echoed these views.
“The frequent changes in decisions have created confusion in the market system,” said M Fazlur Rahman, president of Bangladesh Merchant Bankers Association.
Rather, he suggested, the SEC should have a conservative attitude in taking decisions from the very first stage.
Source: thedaillystar.net
