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 SEC steps in to calm market

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Posts : 105
Join date : 2010-05-27

PostSubject: SEC steps in to calm market   Wed Jun 16, 2010 8:54 am

Sarwar A Chowdhury

The regulator has stepped in again by resetting the margin loan criteria to cool down the stockmarket, which is now riding high on a liquidity glut.

In line with the modified criteria, investors will no longer get credit from Sunday against an equity security with a PE (price-earnings) ratio that exceeds 40. The current ratio is set at 50.

"The commission revised the PE ratio down to 40 in an effort to cool down the market as well as control excess liquidity in the market," said Mansur Alam, member of Securities and Exchange Commission.

A low PE ratio means a decline in the liquidity flow to the market, as investors will get less credit to purchase shares, he said.

"We sent a directive to merchant banks, stockbrokers and the exchanges on the latest move, which will come into effect from Sunday," he added.

A PE ratio is a company's current share price compared to its earnings per share. In general, a high PE ratio reflects that investors expect higher earnings in future or a strong chance that they will be able to make a capital gain.

In other words, the share value will increase and the investor is free to sell at a rate higher than what he paid.

A marginable security is a stock that can be purchased on margin loans provided by brokerage houses and merchant banks.

For a few months now, the market is floating on excess liquidity that is being reflected on the daily turnover.

The daily average turnover on Dhaka Stock Exchange was more than Tk 2,100 crore in the last four trading days.

With the liquidity glut, shares prices are also on the rise, as excess liquidity increases demand.

The key indices of the premier bourse are reaching new heights now and then. The benchmark DSE General Index set a new high yesterday by finishing the day at 6,332 points.

On February 1, the SEC reset the PE ratio at 50, down from 75. The regulator first set the PE ratio as margin loan criteria on December 9 and fixed the ratio at 75.

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