Nepal | September 28, 2020

Only a third of public shares are actively traded

Rupak D Sharma
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Kathmandu, January 21

Only a third of shares that are in the hands of the public are actively traded on the stock market every day.

This became evident after the Securities Board of Nepal, the securities market regulator, introduced a measure to bar trading of shares that have not been dematerialised beginning January 15.

Currently, 2.97 billion units of shares are listed at Nepal Stock Exchange (Nepse), the domestic stock market, shows the latest Nepse report.

Many listed companies, whose stocks are actively traded, have allotted 30 per cent of their shares to public, while rest are owned by promoters.

This means around 892.02 million units of shares are currently in the hands of the public, which can be easily traded on the secondary market.

But so far only 308.96 million units of shares have been dematerialised, or converted into electronic form. This means only 308.96 million units of shares — or 34.64 per cent of shares owned by the public — are eligible for trading on Nepse at the moment.

This is an indication that supply of tradable shares has fallen drastically in the secondary market since January 15. Yet, there has been no change in trading volume since the new provision came into effect.

On January 15, for instance, when the benchmark index hit all-time high of 1,212 points, shares worth Rs 548.12 million were traded. A day after that, shares worth Rs 624.04 million exchanged hands. Yesterday, trading amount stood at Rs 427.65 million and today it hovered around Rs 460 million.

These trading amounts are similar to those of the period when provision on trading of dematerialised shares had not come into effect. This is evidence that trading at Nepse revolves around a third of shares allotted to the public — meaning dematerialisation of additional shares in the coming days may not have any impact on stock trading.

“This shows that there is a lot of room for trading volume to expand, which would make the stock market even more vibrant,” Shreejesh Ghimire, CEO of NMB Capital Ltd, told The Himalayan Times. “However, change is not going to happen overnight and it will take some time.”

One of the reasons for trading of tiny fraction of stocks offered to public is practice of holding on to shares bought on the primary market.

These days retail investors jump to buy shares whenever initial public offerings (IPOs) are launched. Once they buy the stocks, they just sit on top of them, without engaging in trading activity.

“Some of the investors who purchase stocks on primary market do not even come to collect share certificates for months,” Ghimire said.

Many retail investors are least bothered about their investment because they do not own considerable number of shares.

People who reach out to the primary market cannot always purchase large number of stocks because most of the IPOs here are heavily oversubscribed. So, allocations are made proportionately among all the applicants. This results in distribution of inconsiderable number of shares.

“But even these small quantities of shares generate yields in the form of, say, bonus shares, which continue to pile up in the accounts of investors for years,” said Ghimire.

Although it is the right of investors to hold on to their shares, trading is essential to make the stock market vibrant.

“Here, focus has to be laid on generating awareness among investors, especially retail investors,” said Ghimire.

A version of this article appears in print on January 22, 2016 of The Himalayan Times.

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