Stocks sink as political tension, new rules rattle investors

The country's stock market is witnessing one of its worst periods in recent times, falling sharply yesterday amid prevailing political tension and regulatory moves, including changes to borrowing rules for share trading.

The DSEX, the benchmark index of the Dhaka Stock Exchange (DSE), dropped 122 points, or 2.5 percent, marking the steepest single-day fall in six months. The last major slide was on May 7, when the index lost 149 points, or 3 percent.

Earlier, EBL Securities, in its latest monthly report, stated that the DSE was the world's worst-performing market in October, with its key index tumbling 5.42 percent — in stark contrast to the positive momentum seen across most major global and regional markets.

CHANGES TO MARGIN LOAN RULES

One of the major moves that spooked investors was the Bangladesh Securities and Exchange Commission's (BSEC) amendment to the margin loan rules, which allow investors to borrow money from stockbrokers to buy shares, with the purchased shares acting as collateral.

The Margin Loan Rules, 2025, gazetted earlier this month and effective from October 30, have made it harder for investors to borrow in this way, reducing their buying power and, according to analysts, making the market less liquid.

EBL Securities, in its latest monthly report, stated that the DSE was the world's worst-performing market in October, with its key index tumbling 5.42 percent

The amendments state that investors must maintain an average annual investment of at least Tk 5 lakh to be eligible for margin loans. Students, homemakers, and retired individuals — who typically do not have a steady income — will not qualify for margin financing due to the associated financial risks.

Furthermore, margin loans can now only be used to purchase shares. Cash withdrawals or fund transfers have been prohibited. Investors with portfolios valued between Tk 5 lakh and Tk 10 lakh will receive margin at a 1:0.5 ratio, while portfolios exceeding Tk 10 lakh will qualify for a 1:1 ratio. Margin facilities cannot be availed based on unrealised gains.

"The BSEC's amendment in margin rules has made it difficult for investors to buy shares with margin loans, which impacted market confidence," said M Shahriar Azad Bhuiyan, senior research analyst at Unicap Securities.

He stated that this is the first time such an amendment has been made in 25 years. "It is right in the sense that investors should not invest in shares by taking loans."

"As margin loans were misused and investors put money in the stock market by taking huge loans, they incurred huge losses, so the regulator is making the rule tougher," he clarified.

He also noted that the amendment, in essence, has made stock brokers more powerful to execute forced sales, which has caused tension among investors.

The amendment also changes which shares are eligible for margin loans. Now, only A and B category stocks will qualify, and companies must pay at least a 5 percent annual dividend to be eligible.

To clarify, A category stocks are generally considered safer, well-established companies with strong financial performance, regular profits, and a track record of paying dividends. B category stocks are relatively riskier — they may be smaller companies, have less consistent profits, or weaker financial records.

Adding to concerns is the issue of negative equity, which happens when the value of shares bought on margin loans falls below the amount borrowed.

Up until recently, stock brokers and merchant banks were mandated to clear their negative equity within six months, which exacerbated concerns of extra selling pressure in the market if they sold the shares to cover their losses. However, the BSEC yesterday said the order is being temporarily "relaxed" for the major 28 stock brokers and merchant banks, allowing more time to adjust.

POLITICAL TENSION, MERGERS, LIQUIDATIONS

However, despite the BSEC's move, the prevailing political tension, along with other issues across the country, has made institutional and foreign investors cautious, triggering the fall of the index.

"When the amendment has already depleted investor confidence, political uncertainty among major parties and the Awami League's activities fuel their fear," said Bhuiyan. "Once the government announces the election date, people will regain their confidence."

Speaking on condition of anonymity, a senior official of a leading merchant bank said, "Margin rules and a time-bound forced sell of negative equity issues have dampened investors' confidence. Political situations triggered the fall of the market."

Meanwhile, DSE Brokers Association President Saiful Islam noted that the slump also reflects deeper issues in the financial sector.

"The recent fall of the stock market index is a consequential effect of 15 years of embezzlement in the financial sector," he said.

"Investors in at least five banks are losing heavily. Some other banks are also at risk. Eight listed non-bank financial institutions are going into liquidation, and others are under threat. The insurance sector is also likely to face similar challenges.

"All of these factors have impacted the index," he added.