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SEC halts margin loans against 28 securities

Sarwar A Chowdhury
The stock market regulator has directed merchant banks, brokers and dealers to suspend margin loans against the shares of 28 well-performing companies, as investment by borrowing in these securities is becoming too risky.
Although the companies pay dividends and -- mostly with positive earnings, reserves and surplus — the prices of those shares have soared so high that investment in those securities has turned into a high-stakes game.
Market analysts say rumours and high speculation have fed soaring prices.
Apart from measures to cool down the market, the Securities and Exchange Commission (SEC) has curbed margin loans as a warning to investors about risky investment, which may lead to losses.
The abnormal price rise has led the PE (price-earning) ratio of the 28 companies to go over 100. In one case at least, the PE ratio soared to more than 4,000.
A PE ratio is a company's current share price compared to its earnings per share. In general, a high PE ratio reflects that investors expect higher earnings in future or a strong chance that they will be able to make a capital gain. In other words, share value will increase and the investor is free to sell at a rate higher than he paid for it.
A 100 PE of a firm means if an investor buys a share at the current market price it will take 100 years before the company earns enough profits to equal the value of his investment.
“The stock prices are already overpriced and any margin loan facilities will heat them up further,” Anwarul Kabir Bhuiyan, executive director of SEC, toldThe Daily Star yesterday.
Bhuiyan pointed to the high risk in any investment with loans in such over-valued securities.
Generally, many retail investors follow the market trend and buy soaring shares with margin loan.
“The commission took the decision to suspend margin loans for the 28 securities to protect retail investors from incurring losses and maintain a market stability,” the
SEC executive director said.
He also advised investors to put their money on the companies whose fundamentals are strong and return on investment is ensured.
Of the 28 companies, 15 belong to A-category, whose fundamentals are strong and pay dividends at 10 percent or above to shareholders.
Eleven securities are trading under B-category, which includes companies that pay dividends at rates ranging from 5 percent to below 10 percent.
One company is under N-category, where newly listed companies are traded, and another is under Z-category, a group of the worst performing that do not pay dividend.
Earlier on October 1, the SEC decided that shares with weak fundamentals and also shares of the companies failing to submit their annual reports within the stipulated time will no longer be considered marginable securities.
Marginable security means a stock that can be purchased on margin loan provided by brokerage houses and merchant banks.
sarwar@thedailystar.net