SEC redesigns margin loan criteria

Investors will not get credit against equity securities having PE (price-earnings) ratio over 75, in line with modified margin loans criteria.

With the latest modification, 33 equity securities, as of yesterday's PE ratio, will not be considered marginable securities.

A marginable security means a stock that can be purchased on margin loans provided by brokerage houses and merchant banks.

The margin loan criteria were modified yesterday at a meeting of the Securities and Exchange Commission, chaired by the commission's Chairman Ziaul Haque Khondker.

The commission generalised the margin loan facilities instead of fixing the criteria for selected securities, said a senior SEC official.

On October 21, the SEC directed merchant banks, brokers and dealers to suspend margin loans against shares of 28 companies, whose PE ratio had gone over 100. From now, these 28 companies will be governed by the new criteria.

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.

Restrictions on margin loans against investment securities or mutual funds, equity securities being traded under Z category and paper shares will remain in force as before.

On October 26, the SEC further ordered the merchant banks, portfolio managers, brokers and dealers to stop margin loans against mutual funds until further notice.

In the same month, the market watchdog said Z category shares and companies, which will fail to submit their annual reports within the stipulated time, would no longer be considered marginable securities.