KATHMANDU: The Securities Board of Nepal (SEBON) has enforced the ‘Margin Trading Facility Directive’ to make margin trading services provided through stock brokers more systematic and transparent.
Issuing the directive under Section 118 of the Securities Act, 2006, the Board has introduced comprehensive provisions governing margin trading in the secondary market.
According to the directive, only companies meeting specific eligibility criteria will qualify for margin trading. A company must have at least 2.5 million units of publicly listed shares. Its net worth must not be less than its paid-up capital, and it must have earned net profits in at least two of the last three fiscal years. Additionally, the company’s shares must have been listed on the stock exchange for a minimum of two years.
The directive also sets strict requirements for brokers seeking to provide margin trading facilities. A securities broker must have a minimum paid-up capital of Rs 200 million. The broker must be a clearing member and also operate as a depository participant. Furthermore, brokers are required to obtain prior approval from the stock exchange before offering margin trading services.
Under the new framework, investors must deposit at least 30 percent of the market value of shares as an “initial margin” before initiating margin trading. After the transaction, a minimum “maintenance margin” of 20 percent must be maintained.
If the share price falls and the maintenance margin cannot be sustained, the broker will issue a “margin call” to the investor. Should the investor fail to deposit the required amount after receiving the margin call, the broker has the authority to sell the shares purchased under the margin facility to recover dues.
However, investors are allowed to maintain the maintenance margin not only in cash but also by pledging listed ‘A’, ‘B’ and ‘G’ class shares as collateral. Such shares will be valued at 60 percent of their prevailing market price for margin purposes.
The directive permits brokers to provide margin trading facilities up to five times their net worth. Brokers may use their own resources, loans obtained from banks and financial institutions, or unsecured loans from directors to finance margin trading.
To mitigate concentration risk, the directive stipulates that no single client or related family members may be extended margin facilities exceeding 10 percent of the broker’s total margin limit. The maximum tenure of the facility will be one year, with provisions for renewal.
Investors seeking to engage in margin trading must open a separate margin trading account and a margin trading beneficiary account through their broker.
Brokers are authorized to obtain consent letters from investors to operate these accounts. Such authorization can only be used for selling shares or settlement purposes in cases where the investor fails to meet margin requirements.
To ensure transparency, brokers must submit daily reports of margin trading transactions to the stock exchange, which in turn will publish the details on its website. The directive also mandates annual audits of margin trading activities, with brokers required to submit audit reports to both the Board and the stock exchange.
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