Stockbrokers who have long been pressurising the Nepal Stock Exchange to allow margin trading seem to have lost their enthusiasm just as the bourse is preparing to legalise it as the market is in the midst of a downturn. Margin trading enables investors to borrow money from their broker to buy shares.

Only seven out of the 50 brokerage firms in the country have applied for permission to provide this service more one week after the Nepal Stock Exchange called for applications.

Stockbrokers have been making margin trading one of the main items on the agenda during every meeting with the Nepal Stock Exchange. Bowing to their demands, the Finance Ministry formed a panel two months ago which asked the Securities Board of Nepal to make immediate arrangements to permit margin trading.

To trade on margin, investors need to have a margin account with a brokerage firm while the stockbrokers can fix the interest rate on such loans. The Nepal Stock Exchange will act as an oversight agency and monitor the operations of brokerage firms.

The plan to permit margin trading got stuck for over two years on the issue of fixing the interest rate.

The Securities Board of Nepal recently permitted Nepal Stock Exchange to launch margin trading after the central bank decided to let brokerage firms fix the interest rate.

Nepal Stock Exchange spokesperson Murahari Parajuli said very few stockbrokers had applied to conduct margin trading. According to him, around half of the applicants do not meet the net worth requirement, one of the main conditions for brokerage firms to be eligible to provide the service.

As per the securities board’s directive, stockbrokers with a net asset of Rs50 million can offer margin trading service 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.  

Similarly, stockbrokers can provide margin lending service to purchase shares of only those listed companies which have issued a minimum 10 percent dividend in the last two successive years. These companies should also have more than 10,000 shareholders.  

Nepal Stock Exchange officials attributed the lack of enthusiasm for margin trading among stockbrokers to the bearish trend in the stock market. “The NEPSE index has fallen to a four-month low, and stockbrokers probably see a lot of risk in lending their money to investors,” said an official.

Stockbrokers said they wanted the board to amend a few clauses in its regulations before starting margin trading. “Brokerage firms are keen to offer the service to their clients, and they will start the process to obtain licences soon,” said Bharat Ranabhat, president of the Stockbrokers’ Association of Nepal.