Fiscal Nepal
First Business News Portal in English from Nepal
KATHMANDU: The Securities Board of Nepal (SEBON) has prepared a draft directive that will significantly expand the capacity of stockbrokers to lend against securities. Under the proposed “Margin Trading Facility Directive, 2082,” brokerage firms will be permitted to offer margin trading facilities up to five times their certified net worth.
The move aims to inject liquidity into the market by regulating and expanding the scope of margin lending provided by intermediaries.
Client Limits and DiversificationWhile the total lending capacity has been expanded, the regulator has imposed strict single-obligor limits to manage risk. According to the preliminary draft:
A broker cannot provide margin facilities exceeding 20% of their net worth to any single client or their immediate family members.
Brokers are mandated to ensure investment diversification while granting these facilities, preventing over-concentration in specific stocks.
Eligibility CriteriaThe directive sets stringent standards for both the brokers offering the service and the companies (stocks) eligible for margin trading.
For Stockbrokers: To be eligible to offer margin trading, a broker must have:
A minimum paid-up capital of NPR 200 million (20 Crore).
Active membership with the clearing house and central depository.
Compliance with all other provisions set by the securities market.
For Listed Companies (Eligible Stocks): Margin loans cannot be issued against all shares. Eligible companies must meet the following benchmarks:
At least 5 million (50 lakh) shares listed for the general public.
Net worth equal to or greater than the paid-up capital.
Dividend distribution in at least two of the last three fiscal years.
Completion of at least two years of listing following their Initial Public Offering (IPO).
Operational Framework and ValuationBrokers intending to offer this service must submit an application to the stock market operator (NEPSE) accompanied by their audited financial statements. While brokers who have already received approval do not need to re-apply, they must submit documents proving they meet the new eligibility qualifications.
Valuation and Margins:
Initial Margin: Brokers must collect an initial margin from investors based on the lower of the 180-day average price or the current market price.
Mark-to-Market (MTM): The valuation of shares (both collateral and purchased) must be done daily on a Mark-to-Market basis.
Restriction: Brokers are prohibited from providing additional facilities based solely on the unrealized rise in share prices.
Risk Management and Margin CallsThe draft gives brokers the authority to demand higher margins based on client risk assessments and market volatility.
The directive explicitly outlines the Margin Call protocol:
Maintenance Margin: Brokers must ensure clients maintain a minimum amount (Maintenance Margin) throughout the facility period.
The Call: If a market dip causes the portfolio value to fall below the maintenance level, the broker must issue a margin call to the investor.
Liquidation: If the investor fails to replenish the margin or cannot be contacted after the call, the broker is authorized to sell the shares to recover the funds.
Brokers are required to clearly outline their margin call and liquidation procedures in their internal working procedures. Following any forced sale, the broker must settle the account with the client and inform the securities market.
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