Over the last decades, many countries have implemented significant reforms to foster domestic capital market development. Governments in developing countries are giving increased attention to stock market development as a way of improving domestic resource mobilization, enhancing the supply of long-term capital and encouraging the efficient use of existing assets. Sound development of stock market in any country plays an important role in economic development of that country. Nepal is one of the countries, which has initiated number of financial reform programs to foster faster economic growth of the country. Stock market development is one of the prime reform activities of the government, which was expected to provide a market where investors can easily put their saving for higher and secured return at the same time providing an avenue for growing companies to raise capital at lower cost. Stock market provides an efficient savings vehicle for retail and institutional investors, helping to diversify their financial holdings.

Well-developed stock markets can support long-run economic growth as they are expected to accelerate economic growth by providing a boost to domestic savings and increasing the quantity and the quality of investment. Efficient stock markets enable savings to be allocated to investment projects with higher returns, the rate of return to savers increases, making savings more attractive. As a result, more savings are channeled to the corporate sector. Due to their liquidity, stock markets enable firms acquire much needed capital quickly, hence facilitating capital allocation, investment and growth. Stock markets also help to reduce investment risk due to the ease with which equities are traded.

The stock market in Nepal has introduced automated system for trading, initiated process to induct new

brokers and is in the

process of establishing

automated clearing and

settlement system. Despite the intense reform efforts, the performance of the stock market in Nepal is

not very encouraging.

Regular disruptions in the trading and controversies surrounding the market have resulted in the poor performance and hence poor returns for the investors. The impact of such a performance is severe for small investors rather than large and institutional investors. Poor regulatory and supervisory role of the government and supportive role of concerned institutions has also worsened the situation. In the last two years or so, Nepse has plummeted quite sharply, and a number of investors have lost their investment.

For sound development of the stock market, policymakers should consider reducing impediments to stock market development. The following suggestions can be useful in revitalizing the Nepalese stock market considering its importance for the economic development of the country.

Policy consistency and continuity is essential for the development of any stock market. Therefore, it is essential that either securities board or the government should spell out the long term vision, goal and guidelines, which will be the guiding principle of the stock market for another 10 to 20 years.

Domestic investment is an important determinant of stock market development. To encourage domestic investment, the government should adopt an appropriate policy, which will motivate investors to invest in the stock market. There have been debates on the conversion of the promoter shares and loans against shares. These kinds of issues should be discussed in appropriate forums to come up with policies which are acceptable to all or at least to most. The cost of transaction should be minimum to attract investors in the

market. For this purpose, securities board should consider mostly automated systems and look for ways to reduce the cost of doing transaction.

Markets need to maintain the confidence of the investing public by ensuring there is open and fair price formation. Standards of investor protection and the full, prompt, and reliable disclosure and dissemination of information are vitally important. Nepalese stock market lacks transparency and disclosure of the information, which might encourage insider trading.

Regular disclosure, transparency and enforcement form an integral part of regulation and supervision. Important disclosure requirements include relevant information with regards to transactions, accounting and the identity of ultimate beneficial owners. They must be nonetheless simple and supportive of the legal and accounting framework. Enforcement essentially requires compliance and the ability to prosecute. The presence of a securities regulator is important in this regard to ensure enforcement. The presence of strong corporate governance mechanisms also helps boost investor confidence in regulatory issues.

Strict ethical and conduct of business rules could be developed for members of the stock exchanges. Rules must follow international best practices but at the same time reflect local structures and needs.

Gurung is Chief Tax

Administrator, Inland

Revenue Office, Kathmandu Area No. 3.