The Nepal Stock Exchange (Nepse) is preparing to allow margin trading through stock brokering firms as Nepal Rastra Bank (NRB) has given the green signal. Investors will now be able to buy shares by borrowing money from their brokers using stock as collateral.

NRB spokesperson Narayan Prasad Paudel said the central bank had agreed in principle to Nepse’s plan to permit margin trading. “Based on the working guideline passed by Nepse, we have permitted stockbrokers to issue loans to buy stock,” Paudel said.

Two months ago, the Securities Board of Nepal issued a separate guideline allowing investors to buy on margin. The provision is expected to help stockbrokers expand their business besides injecting greater liquidity in the stock market.

Only the central bank is authorised to permit loan transactions in the domestic financial market, and stockbrokers wishing to issue loans need to obtain its approval. “Brokering firms need to take final permission from the central bank after being scrutinised by Nepse,” Paudel said. “NRB itself is formulating a separate working guideline in this regard.”

Currently, brokerage firms are only allowed to execute trading orders placed by their clients in the secondary market. As per the Nepse guideline, stockbrokers with a net asset of Rs50 million can offer margin trading services to investors. Stockbrokers can issue margin loans of up to 50 percent of the value of the shares based on the 180-day average price or the prevailing market price, whichever is lower.

Nine months ago, Sebon issued a directive related to margin trading as per the Securities Act 2006. As per the provisions outlined in the regulation, investors can borrow money from brokers to buy shares of companies with more than 10,000 shareholders and which have a positive net worth and have been providing minimum 10 percent bonus for the last two consecutive years.

Stockbrokers can provide margin loans from the cash they hold or through banks. The maximum amount they can lend is double their net worth.

Investors wishing to buy on margin need to open a margin account with a brokerage firm. The investor has to deposit up to 50 percent of the value of the stock to be purchased while the rest of the money is invested by the stockbroker. The broker charges interest on the loan.

However, stockbrokers cannot issue loans of over 10 percent of their net worth for investing in stocks of a single company. Similarly, stockbrokers have to maintain this limit if they provide margin loans to more than one investor from the same family.

Nepse is the sole authority to monitor margin lending. “As the central bank has given the go-ahead, Nepse’s next board meeting will decide when it will be launched,” Nepse spokesperson Murahari Parajuli said.