‘Capital market may need another exchange to spark competition’

The evolution of the capital market in Nepal can be traced back to January 1994 when Nepal Stock Exchange opened its trading floor. Since then, market capitalisation of Nepse has surged to Rs 1,306.21 billion, which is around 61.50 per cent of the gross domestic product, and the benchmark index hit an all-time high of 1,212 points on Sunday. There is still room for the market to grow, but delay in modernisation of the capital market has worked as an obstacle. Also, Nepse’s trading floor is dominated by the financial sector,with very little participation of real sector firms. Rupak D Sharma of The Himalayan Times talked to Rewat Bahadur Karki, Chairman of the Securities Board of Nepal, the securities market regulator, on issues hindering the growth of the capital market.

You recently joined Securities Board of Nepal (SEBON) as its chairman. How do you plan to steer it?

As you know I’ve previously served as the head of Nepal Stock Exchange (Nepse). During my tenure there, I automated the trading floor and introduced measures such as the circuit breaker. Automation of stock exchange incorporates three things. First is the automation of the trading floor. Second is the automation of clearing and settlement. Third is the electronic ownership transfer of securities. Although the country’s stock exchange was established 22 years ago, we have not been able to fully automate it. That’s why we are far behind in South Asia in terms of modernisation of the stock exchange. So, my first challenge is to fully modernise the stock exchange. In this regard, SEBON has already directed Nepse and Central Depository System (CDS) and Clearing Ltd to launch fully automated share trading, and securities ownership transfer and clearance services. Besides, I’ll also focus on enhancing regulatory and supervisory capacity of SEBON.

Talks about stock exchange modernisation have been held for long. But so far the country has not been able to issue unique ID numbers to investors. What is causing the delay?

Many investors do not want us to introduce ID numbers because it would compel them to disclose their personal information. But I have tabled a proposal on it in the board. The proposal comprises two options. First is creating an ID number through CDS and Clearing Ltd. Another is using Permanent Account Number (PAN) issued by the tax office as ID numbers.

Delay in introduction of ID numbers is hindering the process of dematerialising shares issued through initial public offerings, isn’t it?

Yes, primary offerings are still conducted manually. As a result, files, comprising records of investors, are piling up in merchant banks. We are planning to modernise this practice as well so that electronic shares can be issued to those who take part in initial public offerings.

Most of the listed companies on the stock market belong to the financial sector. Why aren’t efforts being made to rope in real sector companies as well?

It’s not that we are not making any effort in this regard. In fact, it’s the delay made by the government in introducing effective measures that is hindering the process. Currently, many real sector firms want to fix the public offering price on their own, unlike the current practice under which initial public offering (IPO) price is fixed at Rs 100 per share. We have been pushing the Ministry of Finance to make that amendment in the regulation. But nothing has happened so far. Earlier, companies that got listed on the stock exchange were allowed to enjoy partial income tax holiday for a certain period. That provision has also been scrapped. So, there is no incentive for real sector companies that wish to get listed. If we could introduce that provision and other features, like one percentage point discount on loans for companies that wish to get listed, we could attract real sector firms to the stock exchange. Also, binding provisions on listing for companies whose annual transactions exceed certain amount can increase participation of real sector firms in the stock market.

Nepse also seems to be doing very little to attract real sector companies, isn’t it?

Nepse used to be a state-owned non-profit institution in the beginning. In 2008, I began the process of demutualisation at Nepse by removing two brokers in the board of directors. I replaced them with experts. I also transformed Nepse into

a profit-making company at that time. However, Nepse is still in the grip of the government. This ownership structure

has to change over the time. Otherwise, it would be difficult to introduce reforms at Nepse. In this regard, we can corporatise Nepse by selling at least 51 per cent stake to best listed companies. Or, we can allow another stock exchange to come into operation so that there is competition, which will compel Nepse to cater better services.

Are you implying the country needs another stock exchange?

No, I didn’t mean to say that. Since Nepse is a government entity, decision-making process in the company is very slow. This should change. If not, we should allow another exchange to operate here to spark competition. Although the idea of opening another exchange in the age of unification of stock exchanges may sound weird, we may have to follow this path to make the environment competitive.

Should the new exchange work like formal exchanges or focus more on over-the-counter (OTC) trading which the market lacks?

I had helped formulate a regulation for OTC trading in the past. But it wasn’t implemented. I’m planning to implement it now so that shares of delisted companies and even government and corporate bonds could be traded. The OTC facility will also help listed firms that want to transfer ownership of large quantity of stocks to certain parties. So, I’m positive about introducing OTC trading.

Also, the process of framing a law on derivatives and commodities trading seems to be moving ahead slowly. What is causing the delay?

I’m planning to introduce derivatives trading soon. This will immediately help those who want to renounce rights shares extended by listed companies. This will ultimately help banks and financial institutions that will soon have to raise minimum paid-up capital as per the regulator’s instruction. With regards to commodity trading, the draft of the Bill is about to be forwarded to Parliament for discussion. Once the Bill is converted into law, we will have to frame two or three regulations to begin derivatives and commodities trading. So, we have a lot to do in the coming days. But investors here are too obsessed with stock trading. That’s one of the reasons for snail-paced growth of the capital market.

Isn’t that a result of low level of financial literacy in the country?

Yes, financial literacy rate is low in the country. As a result, people are focusing solely on stocks. And even those who purchase shares make buying decision without referring to ratings extended by credit rating agency. Two basic analyses should be conducted prior to purchasing shares. One is technical and another is fundamental. Here, many conduct technical analysis while purchasing shares. This means investors only look at price movement of shares. Although it is important to ake stock of price movement, fundamental analysis should also be conducted by looking into books of companies. Also, macroeconomic situation of the country and other exogenous factors should be taken into consideration before making purchase decision.

Shouldn’t SEBON be taking initiatives to enhance financial literacy in the country?

Yes, we should. But we have a small team of around 27 employees. I’m planning to add 31 more employees. We need these people to strengthen supervisory capacity of SEBON. In this regard, I have just created a supervisory committee, which will conduct off-site and on-site supervision of brokerage companies and merchant banks. We are also planning to raise minimum paid-up capital of brokerage companies because Rs two million is not enough considering daily transaction of brokerage companies. We are currently seeking suggestions from brokerage companies and Nepse on this matter. It is also essential to raise paid-up capital of brokerage companies to fully implement margin lending system, under which banks can issue loans to stock investors based on request made by brokerage firms. Also, in a liberalised system, the door to conduct business should not be closed. However, to regulate entry of brokerage companies, we have to introduce stringent provisions. One such provision could be higher paid-up capital. Meanwhile, we are also planning to introduce Citizens Investment Trust as an institutional investor. I have already conducted a round of meeting to finalise this matter. Also, I want to bring in a foreign brokerage company.

And what about plans to allow non-resident Nepalis (NRNs) to invest in stocks here?

We can lure NRNs only if we are able to fully modernise the stock exchange. We should also introduce internet-based trading to be able to attract NRNs. Also, we have to fully implement T+3 trading system, under which trading is conducted on the first day; documentation related works are conducted on the second day; and payments are settled and ownership of electronic shares are transferred on the third day.

Lastly, Sebon still has not been able to come up with provisions to allow venture capital and private equity funds to raise money from the market. What is causing the delay?

Initially, we are planning to allow companies to issue shares to the public prior to the launch of IPO. To introduce the provision on pre-IPO, we have made amendments to the Securities Registration and Issue Regulation and forwarded the copy to the Ministry of Finance for approval. But we haven’t heard from them. Through the same regulation, we are also planning to allow foreign financial institutions, such as the Asian Development Bank and the International Finance Corporation, to list local currency bonds on the secondary market. To allow venture capital and private equity

funds to raise funds, we have to introduce another regulation. We are also holding discussions on introducing collective fund here and are working with the Investment Board Nepal on this matter.