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Some Reflections on Share
Market in Nepal
Rajesh Sharma
- Biratnagar Jute Mills and Nepal Bank Ltd were the first companies, which floated shares in 1937. In 1964, the Company Act came into existence. This Act, first time in Nepal, provided legal framework for the companies. The same year, the Government Bond was issued. The Securities Exchange Center was established in 1976. The Securities Exchange Act was promulgated in 1983. The Securities Board of Nepal (SEBON) and Nepal Stock Exchange (NEPSE) were established in 1993 by splitting Securities Exchange Center and making them two different entities one as a regulator and the other as a stock exchange.
Securities Board
of Nepal (SEBON) functions as capital market regulator as per the provisions in
the Securities ACT 2006.[i]
Nepal Stock
Exchange (NEPSE) works as stock exchange and it has 388 listed companies and 50
brokers.[ii]
Now, under
NEPSE, CDS and Clearing Ltd has been established and that does clearing and
settlement business.[iii] CDS stands for Central Depository System that
stores share ownership data electronically and transfers ownership as well.
The legal and
organizational initiatives as briefly mentioned above provided the foundation
for the development of capital market in Nepal.[iv]
2
Nepali share market, though, more than 76 years
old, is still in its childhood. It works under the load of papers. The
investors and traders could not place order electronically, nor is the clearing
and settlement process computerized yet. Though, there is fully ready-to-function
CDS Company in place but several hurdles are compelling it to sit in waiting
for the last two years. The recent
clearing and settlement mess has discouraged many investors. Even brokers are
facing difficulties to comply with the provisions of settlement in relation to
cash and papers. As soon as CDS becomes fully operational, that would certainly
streamline the process of settlement and would help to increase the trading
volume and also will attract more investors and traders to its fold.
- Nepali share market has been dominated by traders for a long time. As a result, most of the time companies go down without any understandable cause and also sometime jump wildly, again, without any understandable reason. Hence, wild speculation and sudden flow of resources targeting in a single or a few companies by the BIG speculators makes the market vulnerable. The Nepali share market, thus, makes movement either side amazingly and ruthlessly.
- Rumor plays here vital role. It takes the routs of sponsored news items in major economic and financial dailies or web portals. To support such sponsored reporting or news items, the discussion forums also are extensively used. Foot solders spread rumors as wild fires when a BIG speculator wishes to do so. People take such news cautiously but seldom get control over their own greed. Hence, rumor functions here as part of a well thought out strategy. Any investor or trader, if thinks himself/herself as a horse of a long race, should understand this rumor phenomenon.
- Many investors and traders are the darlings of bonus shares, right shares and merger among and between companies. These words are like the music coming out of Krishna's flute for the worshipers of Krishna, the Hindu God. Many investors/traders have not much knowledge about the dynamics that the market operates with. Therefore, they are after understandable bench marks. In this context, the phrases as motioned above work for them. Due to this phenomenon, the market index moved up between 2006 and 2008. It reached to all time high of 1175 (August 31, 2008). This happened as there were wild expectations of right and bonus shares. Suddenly the index started to reverse and the same fall down to 292 (June 15, 2011). Notwithstanding how much we are educated in market mechanism and how good strategist we are, if we fail to understand the environment we operate, we may not be successful. Therefore, till the market gets maturity and education and strategy start playing their roles, there are compelling reasons to take into consideration the 'prime movers' of the market like bonus shares, right shares and mergers in Nepali market now. These 'prime movers' may change. This logic may not go well with many enlightened friends, but this is the ground reality as of now. Most of the time no fundamental analysis, no technical analysis and no good performance of a company work. May be, this phenomenon has shorter life, but it is still here very much present - healthy and smiling.
- The above analysis may put the market in darker context, but that is not the whole of a single object. Though until now in minority, the other side is also very much present – rational investors/traders. They not only could differentiate between facts and fictions, they could devise strategy to utilize rumors for their benefit. Interestingly, they do not spread rumor. This is due to some ethics and some professionalism. Like a Buddhist, they do not kill the animals, but if somebody has already killed an animal and if that person gives to Buddhist monks or Buddhist persons, they do not mind to eat. Utilizing this provision in Buddhism, the meat-loving Chinese brought several Muslims in several villages to kill animals. They made the meat ready for the Buddhists. This way, the Buddhists were not involved in the business of killing. Test and temperament go together. Great Chinese intelligence!
Really, many
well informed new investors with critical understanding of the market are
entering into the market and also are thriving. For example, there are quite a good
number of final year/or just graduated MBA students in the market. They sound
happy with their own performance. Many share dons of today succeeded learning
by doing; this new breed has academic and professional insights too.
- More recently, the regulators, particularly, SEBON have become active. In the past SEBON was functioning like a clerk who factions within the limit of procedures. However, more recently, it has started to show its teeth. That was seen in the case between Nirmal Pradhan and Laxmi Bahadur Shrestha. SEBON made strong moves, though after it felt tremendous pressure from the investors and brokers, and finally made Nirmal Pradhan complying with its order in share transactions related to Nepal Bangladesh Bank. (For details, please Google the incidence). NEPSE also has become more assertive. That has been seen in its action about suspension of brokers for a day or two, if they fail to comply with settlement of papers or cash. The central bank – Nepal Rastra Bank has taken control of the management of a few banks or development banks or finance companies. And, the insurance board also has become more vigilant. These are good signs that in future the market could function smoothly and investors as well as traders could feel much assured.
- In conclusion, I summarize that the market is still in its childhood with large number of investors/traders unaware of market dynamics, the papers are still nurturing situations, where human energy and potentials are draining unnecessarily, rumor works as part of an investment strategy and most of the time regulators are sleeping or their staff members are making money for them by buying and selling shares and in-between influencing the policies for their own personal benefits. However, this is just one side of the coin. On the other side, the new market entrants are intelligent, educated and risk taking brighter brains, technology, particularly computerization of the whole process including CDS coming soon, some new energy seen in the acts and actions of the regulators and somehow super active anti-corruption agency called Commission for the Investigation of Abuse of Authority are all heralding to a new possibility, new period of time – a bright and signing tomorrow.
[i]
http://www.sebon.gov.np/
[ii]
http://www.nepalstock.com/
[iii]
http://www.cdscnp.com/
[iv]
JB Gurung has studied Nepali Capital market. His well researched 92-pages book/extensive
article is available at: www.nepjol.info/index.php/JNBS/article/download/43/125
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