When the market saw a meltdown in 2010, merchant banks were supposed to opt for forced selling of stocks of their clients who had taken out loans from them to buy shares before they touched the cost price.
But they did not, or rather could not, do that because of pressures from the regulatory authorities who thought such selling would lead to a market crash.
Nonetheless, the market crash could not be avoided, and the merchant banks and brokers are still burdened with the losses they incurred during that time.
As of June this year, the accumulated loss – also termed as negative equity – of 28 merchant banks and 100 brokers stood at Tk12,700 crore.
But this mere figure does not fully reflect the market situation. The amount of losses has actually ballooned into the current size because of accumulating interest on the Tk2,000 crore loans that the merchant banks and brokers distributed among their clients.
The investors could not repay the credits over the last ten years. However, the losses have dropped slightly recently, as price indices gained moderately over the last two months.
As there is no exit route from loss in the margin loan provision, brokers are still bearing the negative equity that has squeezed their capacity in trading and portfolio investment.
Stockbrokers and merchant banks needed to maintain provision against this loss, but they could not do it due to a lack of capacity.
According to the Bangladesh Securities and Exchange Commission (BSEC) guidelines, merchant banks can invest in the portfolio not more than five times their paid-up capital and reserve.
But, many merchant banks owed more than their paid-up capital due to substantial negative equity.
For instance, the amount of negative equity of Prime Bank Investment stood at Tk740 crore as of June this year, more than double its paid-up capital of Tk300 crore.
Meanwhile, ICB Capital owed Tk680 crore against its paid-up capital of Tk329.65 crore.
In December 2016, the BSEC relaxed the provisioning rule for brokers against their loss in the margin loan account, helping them gradually come out from negative equity. In spite of that, brokers could not recover the losses due to a prolonged depression in the price index.
The relaxed provisioning facility will expire in December 2022.
Charging accounts for an indefinite time is not any accounting norms, said a senior executive of the Bangladesh Bank.
In the case of banks, there is an ending of charging interest, which gives borrowers an exit, but, in the case of margin loans, there is no exit policy and no ending of charging interests. This weakens brokerage firms' financial capacity
In the case of banks, there is an ending of charging interest, which gives borrowers an exit, he said, adding when a loan turns into a bad one, the bank concerned stops charging interest and goes for legal action.
But, in the case of margin loans, there is no exit policy and no ending of charging interests. This weakens brokerage firms' financial capacity, he added.
Shibli Rubayat-Ul-Islam, chairman of the BSEC, said the regulatory authority has started to work on an exit plan to bring out the brokers from negative equity.
When contacted, Md Sayadur Rahman, president of Bangladesh Merchant Bankers Association (BMBA), said they have continued to charge interest on negative equity accounts as brokers have been paying the interest to lenders.
"Intermediaries do not have their own fund for giving margin loans. They borrow money from banks or non-bank financial institutions and lend it to the investors. Brokers have been bearing the loss taking provisional forbearance from the authorities as they do not have the capacity to make such huge provision," he explained.
He argued that brokers cannot stop charging interests on negative equity accounts until the main lenders give them a waiver from loans.
"Even though there is no possibility of loss in the margin loan rules, verbal instructions from the authorities during the massive price fall in 2010 triggered this problem that has now turned into cancer for the market," he observed.
Sharif Anwar Hossain, president of DSE Brokers Association (DBA) said the only way out of this crisis is to make profits. This is because, he said, the price level of shares will never go to the previous level.
Market stabilisation is needed for increasing brokers' earnings, he added.
In the margin loan rule, there is no provision of loss because investors will be given margin calls later when the value of an investor's margin account falls below the broker's required amount.
If the investor cannot adjust the loss by depositing a fresh fund, the broker will call forced sell to save its investment.
A margin call refers specifically to a broker's demand that an investor deposits additional money or securities into their account so that it is brought up to the minimum value, known as the maintenance margin.
When price indices in Dhaka and Chittagong stock exchanges started to fall massively in 2010, the regulatory authority verbally instructed brokers to suspend force selling to reassure the panicked investors.
However, the effort could not stop a price disaster and, subsequently, all brokers and individual investors fell into negative equity.