The Margin Trading Directive, 2082, issued by the Securities Board of Nepal (SEBON), provides the legal and operational structure for margin trading in the country’s capital market. Formulated under the authority of Section 118 of the Securities Act, 2063, this directive systematises how securities brokers provide credit facilities to investors for purchasing shares.
1. Core Definitions and Legal Basis
Margin Trading is defined as the act of providing trading facilities to an investor by a securities broker after collecting a specified margin. The framework identifies three critical margin-related terms:
- Initial Margin: The amount an investor must deposit with the broker before commencing margin trading.
- Maintenance Margin: The minimum percentage of margin an investor must maintain after the trade is executed.
- Margin Call: The formal notification issued by a broker to an investor when the maintenance margin falls below the required level.
2. Eligibility Standards for Securities
To manage market risk, the directive mandates that only shares of “eligible” listed companies can be traded on margin. A company’s shares are eligible only if they meet the following criteria:
- Public Float: At least 2.5 million units of public shares must be listed (excluding locked-in shares).
- Financial Health: The company’s net worth must be at least equal to its paid-up capital.
- Profitability: The company must have recorded a net profit in at least two of the last three fiscal years.
- Listing History: The shares must have been listed for at least two years following an Initial Public Offering (IPO).
3. Requirements for Securities Brokers
Brokers must obtain specific permission from SEBON and meet rigorous financial and operational standards to offer these services. These include:
- Capital Base: A minimum paid-up capital of 200 million NPR.
- Memberships: The broker must be a clearing member and either be a Depository Participant (DP) or have a parent/subsidiary company that is a DP.
- Exchange Consent: Brokers must submit audited financial statements to the Stock Exchange to receive prior consent before providing facilities to investors.
4. Margin Ratios and Valuation Dynamics
The framework sets strict minimums, though brokers are permitted to demand higher margins based on risk assessments.
- Minimum Thresholds: The Initial Margin must be at least 30% of the market value, and the Maintenance Margin must be at least 20%.
- Daily Valuation: All shares purchased under this facility must be valued daily on a mark-to-market basis.
- Restrictions on Value Increases: If the market value of the shares increases, brokers are prohibited from providing additional facilities based on that unrealised gain.
5. Margin Calls and Collateral Management
When market fluctuations cause an investor’s margin to drop, the broker is responsible for ensuring the maintenance margin is restored.
- Liquidation Rights: If an investor fails to meet a Margin Call, the broker has the legal right to sell the shares to recover the outstanding balance.
- Secondary Collateral: Investors may provide shares of companies listed in “A”, “B”, and “G” classes as additional security. However, for the purpose of margin calculation, these shares are valued at only 60% of their market price.
6. Operational Limits and Financial Sourcing
To ensure the stability of the brokerage firm, the directive imposes several “ceiling” limits:
- Funding Sources: Brokers can fund margin trading using their own resources, bank loans, or unsecured loans from shareholders/directors (provided they follow the Company Act).
- Leverage Limit: Total borrowing for margin trading (from banks and shareholders) cannot exceed 4.5 times the broker’s net worth.
- Total Lending Limit: A broker can provide total margin facilities up to 5 times its certified net worth.
- Concentration Risk: No single client (including their immediate family or associated entities) can receive more than 10% of the broker’s total margin facility.
7. Documentation, Accounts, and Oversight
The directive emphasizes transparency through specific account structures and reporting mandates:
- Dedicated Accounts: Investors must open a separate Margin Trading Account and a Margin Trading Demat Account.
- Power of Attorney (PoA): Brokers may take a PoA from the investor to manage these accounts, specifically for the purpose of liquidating shares if the investor defaults on their obligations.
- Agreement Details: Formal agreements between brokers and clients must specify the initial and maintenance margins, service fees, interest rates, and the list of shares to be purchased.
- Duration: Facilities are granted for a maximum of one year, after which they may be renewed.
- Reporting: Brokers must provide daily trade reports to the Stock Exchange and monthly reports to SEBON. Furthermore, an annual audit of margin trading accounts must be submitted within three months of the fiscal year-end.
This framework effectively replaces the previous Margin Trading Directive, 2074, and all actions taken under the old directive are now governed by these updated 2082 regulations.
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