Nepali stock market has come of age, indicating its latent potential and ever increasing role in Nepali economy. However, the recent month-long restriction on lending against shares by Nepal Rastra Bank has spoiled this game of bull and bear. The trial and error formula of bank referee has been dominating the activities at the NEPSE floor for the last few months. With piecemeal directives every month, the cost borne by both investors and market is high. With uncertainty increasing, investor spirit has dampened and the much-needed growth of capital market hindered.

Stock market is the barometer of any economy and the enthusiasm of Nepali investors hints at a positive outlook. Stock market is the platform for future value creation and wealth maximisation. The fallacy being propagated on linkage of net worth and scrip value is shortsighted. Does a bank with negative net worth has no enterprise value? While valuing companies, an investment banker would assign values to the future earnings/cash flows and inherent strength of the enterprise. The current value is irrelevant for valuing or investing decisions. What is important is the future outlook which will yield returns for the investment made today.

Stock markets are known to be wealth creators the world over. Price Earning (PE) multiple measures the number of times an investor is ready to pay for every one rupee earned (profit) by a company. Even in small economies like Nepal with established Stock market, PE for high performing companies would be more than 30-40 times. In India, PE ratio of Indian Telecom operator Videsh Sanchar Nigam Limited, Nepal Telecom’s counterpart, is 900 times. So what if Nepal Telecom starts trading at Rs. 5,000 per share? It is the real value of NT. Any intervention which stalls the rally would be uncalled for and detrimental for growth of capital market.

The recent success of Agriculture Development Bank’s allocation of 12 million shares for existing farmer shareholders is yet another indicator of the real potential of Nepal’s capital market. It is not the so-called stock gamblers or crooks who have created the euphoria. It is the common man who has even sold his cattle or borrowed from the local money lender to create the wealth. The common investor has confidence in his bank and is willing to take calculable risks. He is not aware of the PE multiple or the circuit breakers at the NEPSE, but he is aware that risk is the price for a great chance to earn profit.

A unique characteristic of Nepali stock market is its demand and supply chain. With more than a million investors, the investment per investor is going down and more and more retail investors are venturing into wealth creation. NEPSE is no longer controlled by a group of gamblers but by strong retail investors. The supply of tradable shares, by comparison, is small. This distortion needs to be addressed for a free play of supply and demand. Restriction on demand side may not yield effective results and would be punitive rather than corrective. Rather than normal return through profits, an entrepreneur also looks for capital appreciation, which is delivered by the capital market. A free capital market driven by market forces fosters entrepreneurship and breeds new ideas and vision. An element of speculation is inherent in any stock market. When the going is good, the stock rallies and when the sentiment is low the bearish trend can lead to bloodbath. These are cyclical fluctuations inherent in market. Intervention without proper understanding would disturb the cycle.

Furthermore, scrip prices are also driven along with future earnings. Sensitive information has a bearing on the scrip price in the short term. Vested interests with access to sensitive information have also led to distortion in the market. Investors are risk takers. On the contrary, depositors want to play safe. The tradeoff between investor and depositor aspirations and expectations is critical.

It is high time structural reforms in capital market are introduced. The investor needs a smart and aggressive custodian. SEBON has to live up to its expectation. Though large numbers of regulations have been introduced in the recent past with ever increasing interest of investors and aggressive market growth, the pace of reforms has to be in tandem. The investor’s custodian should have the teeth to cut across its issues rather than being hogged by the depositor’s custodian.

The paradox of NRB calling the shots in the arena of investors indicates the need for SEBON to be more effective and strong. Market expansions, private sector’s role, automation of operation, investor’s education, and corporate governance issues are paramount. Nepali stock market is currently subject to pitfalls of partial adoption by NRB. We need to address the macro-level issues rather than fixing micro-level problems piecemeal and fuelling uncertainty.

Dr. Chalise, Dr. Paudel and Garg are Rastriya Banijya Bank chairman, director, and head of Corporate Banking, respectively