IMAGE VIA SHUTTERSTOCK
ON FEBRUARY 13TH Nepal’s securities regulator did something unusual for a watchdog: it gave investors a licence to borrow. A new regulation from the Nepal Securities Board governing margin trading—buying shares with a broker’s money—came into effect. The move formalises a practice that has existed in the shadows, but on terms designed to keep the country’s bubbling bourse from boiling over.
The architecture of the rules is careful, even conservative. To buy shares on credit, an investor must first stump up at least 30% of the value. After purchase, their equity in the position cannot fall below a fifth. Falling share prices thus trigger a margin call, forcing the borrower to put up more cash or collateral. If they cannot, the broker sells the shares, settles the account and reports the whole messy episode to the exchange.
Brokers, too, face constraints. Only those with a paid-up capital (the money raised from shareholders) of at least Rs200m ($1.5m) and a clearing membership may offer the facility. Their total margin lending is capped at five times their certified net worth. And no single client—or their extended family—can soak up more than 10% of that portfolio. The idea is to prevent a concentrated blow-up from taking down a broker, or worse.
The regulation also picks winners. Shares are eligible for margin trading only if their issuer has at least 2.5m public shares listed; a net worth equal to or greater than its paid-up capital; and profits in two of the past three years. An IPO must have been listed at least two years ago. That screen knocks out speculative floats and poorly traded stocks. The regulator is effectively saying: you may borrow but only to buy firms with some heft.
Where will brokers find the money to lend? Their own capital, bank loans and even unsecured loans from shareholders or directors, provided company law is respected. But total borrowing cannot exceed 4.5 times net worth. A broker cannot, crucially, recycle one client’s cash or shares to fund another. That firewall is meant to prevent the kind of co-mingling that has toppled market-makers elsewhere.
Risk management is baked into the daily routine. Shares are marked to market every day, and gains in price cannot be used to justify more borrowing. That stops a rising market from creating its own leverage. Brokers must maintain separate records for margin cash, shares bought on credit and client data. They must also conduct a formal risk assessment before signing anyone up, covering credit checks and know-your-client rules. A written agreement must spell out everything from interest rates to the terms of the power of attorney.
For its part the exchange must publish daily margin-trading data on its website. Brokers must file their own reports the next working day, with monthly submissions to the board. An annual audit of the margin book is required within three months of the fiscal year-end. Transparency is the stated goal, though the volume of paperwork also serves as a check on enthusiasm.
Nepal’s stockmarket has seen speculative surges before, followed by sharp corrections. The new directive does eliminate risk. Borrowing against shares amplifies both gains and losses. A wave of margin calls during a downturn could force selling that deepens the fall. But by capping leverage, diversifying exposure and demanding constant disclosure, the regulator has built guardrails. Investors can now gear up—but only within a framework designed to ensure they do crash.
What remains to be seen is take-up. Brokers must apply for approval, submitting audited financials to the exchange. Existing ones already in the game have a month to file updated qualifications. The machinery is in place. Punters pile in will depend on the market’s direction. In a rising market, margin debt can look like free money. In a falling one, it is a trapdoor. Nepal’s new rules make that trade-off explicit, which is precisely the point. ■
