The Nepal Securities Board is preparing to overhaul the share trading system, ending credit-based purchases and requiring investors to either pay in full cash or utilize margin trading services.
Nepal Securities Board Chairman, Dr. Gopal Prasad Bhatta, has indicated that the country’s share trading system is about to change significantly. He hinted at a shift towards either 100% cash-based share transactions or the adoption of margin trading. Speaking at a program organized by the Stock Broker Association of Nepal in Kathmandu, Chairman Bhatta suggested that the current T+2 system, which allows investors to purchase shares by depositing only 25% of the value upfront and paying the rest on the second working day, may soon be revised.
Under the present arrangement, investors must deposit 25% of the share purchase amount into their broker’s account before buying. They can then acquire shares within the limit provided by their broker. The remaining payment for these shares is then due within two working days. However, it now appears that investors will soon be required to either pay the full 100% amount for their share purchases or utilize the margin trading facility as per new regulatory provisions.
Brokers Moving Towards Margin Trading
Nepal currently has 92 stock brokers. According to Nepal Stock Exchange (NEPSE) spokesperson Murahari Parajuli, 49 brokers has already received final approval for margin trading, with an additional 12 brokers in the final stages of obtaining their approval.
The concept of margin trading is not new to Nepal. The Securities Board first introduced guidelines for it in B.S. 2074. Nasa Securities (Broker Number 58) was the first to offer margin loans in B.S. 2079. However, the high interest rates, often exceeding 20% at the time, and a lack of sufficient funds with brokers, prevented margin trading from expanding significantly.
Nevertheless, following the Securities Board’s release of new margin trading guidelines in B.S. 2082, brokers have become more active in expanding this service. Many brokers have begun announcing that they will offer margin trading facilities to their clients.
19 Brokers Secured 25 Arba 55 Crore Loans from Banks
To support the expansion of margin trading, brokers are now sourcing funds from banks and other financial institutions. Reportedly, 19 brokers have collectively borrowed 25 arba 55 crore rupees from banks. These loans are not directly categorized as “margin trading” loans but fall under “Working Capital and Receivable Financing.”
By combining these borrowed funds with their own resources, brokers are able to provide margin loans to investors. Currently, most brokers are offering margin loans at annual interest rates ranging from 7.5% to 8%. However, interest rates and service charges may vary depending on the individual broker.
Margin Trading Could Reshape Investor Choices
The expansion of margin trading could also lead to a change in investor preferences within Nepal’s share market. Recently, there has been a trend of investing in ‘low-cap’ companies with fewer tradable shares, primarily due to the expectation of rapid price increases, often without much regard for the company’s financial health or profitability. Such companies tend to attract investors because even a small increase in demand can lead to significant price fluctuations due to their limited tradable shares.
However, with the expansion of margin trading, this trend might change. Not all companies are eligible for margin trading. For a company to be eligible, it must meet specified financial and other criteria. Typically, only companies that have made a net profit in at least two of the last three fiscal years and whose net worth is equal to or greater than their paid-up capital can qualify.
If investors can access loan facilities from brokers for purchasing shares of eligible companies, but are required to pay 100% upfront for companies not on the eligible list, it could significantly influence their investment decisions. This could encourage a trend of investing based on a company’s financial health, profit, and business capabilities, rather than just hoping for price appreciation simply because a company have few tradable shares.
AI Disclaimer: This article was originally published on https://bajarkochirfar.com. It has been translated with the help of AI. For the best understanding and accurate facts, we recommend reading the original Nepali version.
