Nepse can reflect real picture of economy only after real sector firms are listed

To diversify the dominance of financial institutions in the secondary market, Securities Board of Nepal recently issued the amended Securities Registration and Issue Regulation after it was endorsed by Ministry of Finance. The regulation is expected to attract privately owned real sector companies to float shares to public to be listed in stock market as public limited company. On the other hand, stock market modernisation has also been given top priority to lure foreign investment in capital market. Pushpa Raj Acharya of The Himalayan Times spoke to Rewat Bahadur Karki, Chairman, SEBON, on what the securities market regulator has been doing to expand and strengthen the country’s sole stock market. Excerpts:

Securities Board of Nepal (SEBON) is preparing to issue directives to enforce recently amended Securities Registration and Issue Regulation, which is expected to attract real sector companies in stock market. How optimistic are you about this move?

We are all aware there is dominating presence of financial institutions in country’s stock market. Out of the total listed companies, roughly 80 per cent comprises of financial institutions and we need to diversify that. The country’s stock market can reflect real picture of economy only when real sector companies are listed in stock market. We have envisioned mandatory and incentive approach to attract real sector firms. While drafting amended regulation we included mandatory provision for firms that have paid-up capital of over Rs 500 million to issue shares to public. However, that provision was removed by Ministry of Finance before regulation was endorsed. It is really a tough task to convince privately run businesses to go public as they have to be more transparent when they go public. Transparency is one major issue, however I do not mean that privately run businesses are not transparent. Another major fundamental aspect is privately run businesses are worried about representation of public shareholders in board after issuing shares to public. I think recently amended regulation has addressed concerns of private sector as it has provisioned that real sector firms can become public after issuing 10 per cent shares to the public (except those that utilise natural resources like hydropower). It also allows firms to issue shares at premium price and paved way for international financial institutions to issue local currency bonds. We have to focus on incentives through fiscal and monetary policy to attract real sector firms.

What type of incentives can encourage real sector firms to be listed as public companies?

We have already initiated some incentives. For example, fiscal budget 2016-17 has provisioned 15 per cent income tax exemption for firms that issue shares to public. As there is no direct regulator for real sector firms like Nepal Rastra Bank for banks and financial institutions and Insurance Board for insurance firms, we have to encourage them through incentives instead of regulatory measures. As fiscal policy has provisioned income tax exemption, monetary policy also should ensure subsidised credit and other incentives for such firms so that there is an ‘incentive package’ for them to issue shares to public. On the other hand, governance of the company will improve when they issue shares to public because there will be pressure from public shareholders to maintain transparency. Real sector firms do not have to worry about representation of public shareholders in the board as they can be listed as public limited company by issuing just 10 per cent shares as against earlier provision of 30 per cent. So, there will be only one director from among public shareholders. There are many advantages for real sector firms to issue shares to public. They will be able to raise funds from public through issuance of initial public offering (IPO) and debentures. Fiscal budget has also provisioned that banks and financial institutions need to cross check the financial statements with tax offices before issuing loans to companies, which means privately run businesses will not be able to keep different accounts for different purposes as is the trend now. So it would be better for private limited firms to go public and reap the advantages of the various incentive packages launched by the government.

Currently issued regulation has provision of premium pricing/free pricing for IPO as against the current fixed priced mechanism. It means there will not be any regulatory intervention in pricing of shares?

There will not be any regulatory intervention in pricing of IPO and price will be determined based on demand from investors and how much they desire to pay per unit share. Fixed price for IPO was set with a purpose to develop capital market in initial few years of the establishment of secondary market, which continued for long. Recently issued regulation has paved way for open pricing of IPO. Henceforth, IPO pricing will be determined under Book Building principle, which means price quoted by largest number of applicants demanding a large chunk of IPO will be the IPO price. Once the application period closes, the underwriter will analyse the information to determine price of IPO.

From when will international financial institutions be able to issue local currency bond?

International financial institutions will be able to issue local currency bond very soon as the regulation is already in place. Asian Development Bank and International Finance Corporation have proposed to float local currency bond worth $500 million each. As Nepali investors can purchase bond in Nepali rupees, there will not be any risk of depreciation of local currency vis-à-vis US dollar. This will help mobilise domestic resources and expand capital market as bond will be listed in secondary market.

Nepse has been running in a traditional way and has not replaced trading software. It has alleged that SEBON has been interrupting in its reform initiative. What do you have to say?

SEBON has held interactions with Nepse to modernise stock market to develop a compatible system for cross-border trading/listing, as we are talking about bringing investment from foreign institutional investors (FIIs) and non-resident Nepalis (NRNs) and some initiatives like dematerialisation of stocks was expedited since last year to develop a fully automated system at Nepse. Full automation covers trading automation, and clearing and settlement automation. We were informed by Nepse that it is in the process to procure software from a local vendor to develop online trading. After this, we urged Nepse to install an internationally compatible and tested system through global bidding because existing trading system was procured through global bidding in 2007. And as we have envisioned to attract FIIs and NRNs how can we assume they will trust a local software. On the basis of this rationale, we had written to Nepse to adopt global bidding. But it had already extended letter of intent to local vendor to supply the software to develop online trading system and vendor has already received a verdict in its favour from Patan High Court to supply software. We have not intervened in Nepse’s procurement process. As a regulator we have suggested Nepse on what would be better. Now the ball is in Nepse’s court on whether to purchase software from local vendor or through global bidding.