A government-formed taskforce for capital market reforms has proposed a host of amendments to margin loan rules, including new eligibility criteria.

An investor must have a minimum equity of Tk 10 lakh alongside six months' experience in secondary market trading to be able to purchase stocks with money borrowed from brokers against securities as collateral.

Moreover, to ensure responsible lending, institutions providing margin loans must conduct mandatory risk profiling before approving financing.

Investors without stable earnings—such as students, homemakers, and retirees—will not be eligible unless classified as high-net-worth individuals.

These, alongside stricter regulations, have been proposed for a major overhaul of the Margin Rules, 1999, through the introduction of a new framework under the Equity Margin Rules, 2025.

The recommendations, formulated through consultations with stakeholders, were handed over to the Bangladesh Securities and Exchange Commission (BSEC) on Sunday.

Mismanagement of margin loans has harmed many institutions and investors since the market crashed in 2010 and 2011.

On one hand, margin loans have fuelled market liquidity; on the other, when lenders were not allowed to go for forced sales of assets to adjust loan balances, a huge amount of negative equity piled up.

Negative equity refers to an asset whose value has fallen below its outstanding debt.

This ultimately harmed many brokerage houses and merchant banks.

Negative equity against margin loans in the country's capital market amounted to Tk 9,700 crore at the end of November 2024, which was significantly higher than just a decade earlier.

Against this backdrop, the taskforce has proposed introducing stricter eligibility criteria, improved risk management, and greater transparency to stabilise the capital market and protect investors.

A key component of the reform is the restructuring of eligible collateral. The proposed framework allows margin financing against cash, listed A-category stocks, corporate bonds with a minimum BBB+ rating, and government securities.

However, securities under legal restrictions or going through lock-up periods after initial public offerings (IPO), illiquid stocks or those that cannot be readily sold without a substantial loss in value, shares mired in rumours, and companies nearing insolvency will be excluded.

Additionally, power plants with limited life cycles will not qualify for margin financing in the last two years before expiry.

Another major change is a shift to a market-driven interest rate structure. Previously, interest rates on margin loans were regulated, but under the new rules, lenders will have the flexibility to set rates based on market conditions.

However, the lenders must notify clients at least 15 days in advance before implementing any rate changes. In a major relief for investors, no interest will be charged on negative equity accounts.

To eliminate inconsistencies, all lenders must follow a standardised margin loan agreement. Online agreements will also be facilitated, making the process more transparent and accessible.

Additionally, margin loan contracts must have a fixed expiry period, ranging from six months to one year, with renewals subject to compliance with rules.

A stricter risk management system is also being recommended. The collateral must be deposited before any transaction, replacing the current practice that allows a seven-day window.

Investors will be required to maintain an equity level of at least 150 percent of the summation of the initial equity and margin loan availed afterwards.

If the equity falls below this threshold, the deficit must be met through the deposit of funds within three working days.

Lenders will have full discretion to liquidate holdings if the equity drops below 125 percent. However, if lenders fail to act immediately, they will be held liable for any financial losses suffered by clients.

To further mitigate risks, the maximum margin loan ratio will be capped at 1:1, meaning an investor cannot borrow more than their own equity contribution.

To curb overexposure, the taskforce has proposed new limits on margin financing. No single client will be allowed to exceed 10 percent of a lender's capital, with a maximum exposure of 15 percent for related group or family accounts.

Similarly, single-sector exposure will be limited to 30 percent, while single-stock exposure will be capped at 25 percent of a lender's total exposure.

Stock exchanges will publish a daily list of marginable securities based on earnings, liquidity, and volatility factors, ensuring that only fundamentally strong stocks qualify.

To enhance regulatory oversight, the proposal includes segregating cash and margin accounts. Clients will be required to maintain separate accounts to prevent the misuse of investor funds.

Deposits and financing will be routed through dedicated accounts, and margin accounts will no longer be accepted for IPO applications.

Dividends from margin-held securities must be credited directly to the lending institution, and the renunciation of rights shares to third parties will not be permitted.

A major addition to the framework is the introduction of record-keeping focusing on how stocks react to market-wide stress.

Stock exchanges will be responsible for recording the patterns to assess the resilience of the margin lending system under extreme market conditions.

Additionally, margin lenders must submit a monthly report of their total margin exposure to stock exchanges.

These measures are expected to improve market stability by preventing excessive leverage and ensuring that lenders remain accountable.

Market analysts believe these rules will bring much-needed discipline and transparency to margin trading.

Some investors have raised concerns over the new margin loan eligibility criteria and loan recall provisions, arguing that those could limit market participation.

However, analysts opine that these long-overdue reforms are necessary, as the stock market should not be a place for investments made with borrowed money.

A reduced margin loan facility is beneficial for the market, and these reforms aim to ensure just that.

All eyes are now on the BSEC as it prepares to finalise the new margin rules, which could reshape Bangladesh's stock market for years to come.