Kathmandu, September 23
Brokerage companies in Nepal have started expanding margin lending services, allowing investors to purchase shares by contributing part of the required amount and borrowing the rest from their brokers.
According to the Nepal Stock Exchange (NEPSE), 11 brokerage companies have so far started providing margin trading services.
The companies are NASA Securities (58), Trishakti Securities (48), Imperial Securities (45), Aryatara Investment and Securities (57), Crystal Kanchanjunga Securities (50), Nepal Stock House (14), Dakshinkali Investment and Securities (33), Vision Securities (34), Dipshikha Securities (38), Sunny Securities (42), and Kalash Stock Market (74).
Another 50 brokerage companies have started the process of launching the service, while around a dozen have already obtained approval to conduct margin trading.
Under margin trading, investors contribute a portion of the amount required to purchase shares, while the broker lends the remaining amount.
At present, brokers generally finance up to 70 percent of the purchase value. This means investors can contribute 30 percent of the amount and borrow the remaining 70 percent from the broker.
More investors turning to broker-based lending
Madan Paudel, managing director of NASA Securities, said the company has already extended around Rs 1.25 billion in margin loans.
“Margin trading is increasing. Borrowing directly from brokers is quicker and more convenient, while the fees and interest rates are not very high,” he said.
According to Paudel, the introduction of margin lending has made it easier for investors to access funds for share purchases.
The system also differs from taking a loan from a bank against existing shares.
When shares are pledged as collateral for a bank loan, investors generally have to repay the loan and release the collateral before selling those shares. Under margin trading, however, investors do not have to pledge their existing shares and can sell the shares purchased through the facility when they choose, subject to the applicable margin requirements.
Paudel said margin lending could increase significantly as the stock market expands. Brokers also expect the facility to help reduce the problem of credit transactions within brokerage firms.
The margin lending period has been set at one year.
Brokerage operators say the service could expand further if intraday trading is introduced in Nepal. Intraday trading allows investors to buy and sell securities within the same trading day, seeking to benefit from short-term price movements.
How investors can use margin trading
Investors must first open a separate margin trading account with their brokerage company.
After completing the required procedures, the broker activates margin trading facilities in the investor’s Trading Management System (TMS) account.
When placing an order through TMS, investors using the facility can select the ‘MST’ option before placing a purchase order.
Santosh Paudel, chairman of Sunny Securities, said customers must first visit their brokerage company and complete an agreement form.
“Once the agreement form is completed and the process is finalised, the facility can be used immediately,” he said.
However, margin trading also exposes investors to additional risks.
If the price of shares purchased through margin trading falls by 20 percent or more, the broker can issue a margin call.
Under the Margin Trading Directive, brokers can demand additional margin based on the customer’s risk assessment, market conditions and the risks associated with the shares of listed companies.
The directive requires brokers to maintain a minimum maintenance margin equivalent to 20 percent throughout the margin trading period, taking into account market conditions and the investor’s risk.
For example, if an investor purchases shares worth Rs 1 million by contributing Rs 300,000 and borrowing Rs 700,000 from a broker, a decline in the share value to Rs 800,000 would reduce the investor’s equity to Rs 100,000.
Since the investor must maintain equity equivalent to at least 20 percent of the current value, or Rs 160,000, the investor would have to provide an additional Rs 60,000.
If the investor fails to meet the margin requirement, the broker can sell the shares to recover the amount owed.
Brokers charge 7-10 percent interest
The service fee and interest charged for margin trading vary among brokerage companies.
Most brokers charge a service fee of around 0.25 percent of the amount borrowed. Some brokers, however, do not charge a separate service fee and instead charge only interest.
“We do not charge a service fee. We charge only interest,” said NASA’s Paudel.
Interest rates currently range from around 7 percent to 10 percent annually, depending on the brokerage company.
Sunny Securities, for example, charges an annual interest rate of 7 percent.
Paudel said the interest and service charges levied by brokers are not significantly different from the rates charged by banks.
Brokerage companies can arrange funds for margin lending from their own resources, by borrowing from banks and financial institutions, or through unsecured loans from their shareholders or directors.
Under existing provisions, a broker can borrow up to 4.5 times its net worth for margin trading purposes. A broker cannot provide more than 10 percent of its total margin lending amount to a single individual or household.
With bank interest rates currently relatively low, brokerage operators say some firms have begun using their own funds to provide margin loans to investors.
Which shares qualify for margin trading?
Investors cannot use margin loans to purchase shares of every listed company.
Only securities of companies designated by NEPSE as eligible for margin trading can be purchased using the facility.
Under the Margin Trading Directive, an eligible company must have at least 2.5 million publicly held shares, net worth equal to or greater than its paid-up capital, and must have recorded profits in at least two of the previous three fiscal years. Its shares must also have been listed for at least two years.
Based on these criteria, NEPSE determines which listed companies qualify for margin trading.
Currently, eligible companies include all 19 commercial banks, 11 development banks, 11 finance companies, 28 hydropower companies, 12 life insurance companies, 11 non-life insurance companies and 17 microfinance institutions.
The list also includes six investment companies, three hotel and tourism companies, two manufacturing and processing companies, one trading company and two companies from other sectors.
With more brokers entering the margin lending business, investors now have greater access to borrowed funds for share purchases. However, the facility also exposes investors to margin calls and the risk of forced sales if share prices fall and they fail to meet the required maintenance margin.
