New government's economic policy

Rajesh Sharma

UML's economic policy is not much different from the policy the previous governments in the recent past followed. A mixed economy with strong emphasis on private sector will continue. However, there are specific issues that may create some road blocks. These are small issues but are important at micro level. Among such small issues, one example could be that of increase of paid up capital of banks. Now, finance ministry going to UML and some bankers from UML background trying to make changes in NRB directive may create tussle between finance ministry, if it will listen to some UML law makers and the NRB. If NRB resists, finance ministry could be unhelpful or obstructive in this issue. If NRB buckles down, investors will suffer. This type of issues may crop up. Otherwise, I think, there would be no big difference in policy.

EBL and 30% bonus

Rajesh Sharma

I read some reactions about EBL's proposed 30% bonus shares. For years, EBL and CHCL were darlings of traders. Hence, their retention rate was very low. (Please read my post of 2012 onhttps://sharenepalcomments.wordpress.com/2012/09/19/111/.) These scrips were sold more times than others.

After Ghising episode, CHCL has lost the charm for the traders. EBL has attraction still. 30% bonus share is not a small return, but people are not happy. There is big gap between expectation and reality. The expectation from EBL was sky high.

For the healthy growth of a company, it is always better to grow in a sustainable way in three major areas - good governance by following best practices, costumer satisfaction through excellence in performance and good return to investors. If the growth affects one among the three areas, the company starts to invite trouble.

All small investors both long term and short term should understand the bitter fact that the board made out of promoters primarily will serve the interest of promoters and I believe that is normal. We retail investors should accept the limitation that we may not have any significant influence on promoters' decisions. They will not give us a single penny more than what matches their interest. This is not only applicable to EBL. We should have leveled our expectation that has this factor considered.

Now, coming to 30% bonus, it is very good return indeed. How they will reach to 4, 6 and 8 Arabs, certainly they might have plan. This 30% is from last year profit, and they may capitalize their independent reserve some time this year by issuing additional bonus shares and get that 4 Arab, or they may go for acquisition and/or merger and reach to that level. There are plenty of options. As a retail investor myself that of EBL, I am not unhappy with their proposal. We are different and our expectations are different. So, some of us could be unhappy and that is perfectly understandable.

Do not add salt to injuries

Rajesh Sharma

A builder had constructed a housing colony.and had handed over the residential units few years back transferring the ownership to buyers. By the earthquake of last April, there were cracks in several units. The residents staged protest in front of the office of the builder. Surprised by the behavior of the residents, the builder asked the protesters why they were busy bringing bad name to their property? He told them that the builder has already transferred the land title and ownership of the house and by contractual agreement he has no further responsibility. So, he will not be doing anything in response to their agitation. He advised the agitators to go home, do some repair, and stay as usual there or rent it out or even sell. If they will continue such protest, nobody will rent the houses or they will not be able to sell if they wish so. On humanitarian ground, he said that he will donate small amount of money to support the repair as donation to earthquake affected family.

Initially, the residents were divided but finally they realized that the agitation will harm their interest and called off the agitation. They silently got their units repaired and even said to outsiders that they were lucky as their units were spared by the earthquake. Only some plaster had cracked that too in a few units. Strangely, their paradigm shifted.

But, this story may not be that much applicable in share market. The share holders are not that naive. Mostly the people who pass extreme negative remarks are the buyers in waiting. If anybody who is inflicting injury and cursing the company the shares he or she holds of, should learn from the above story.

Some Notes

Rajesh Sharma

1. Though, it is not in the interest of traders, for long term sustainable growth of a company and maintaining or improving its profitability, controlling the flood of bonus/rights shares is a healthy strategy.

2. The companies may not stick 100% to the plan they have submitted to NRB. That is a broad framework of growth plan not a law that they have to abide by. That is simply a guideline and expression of their intention how they like to proceed ahead to meeting their paid up capital requirement.

3. As traders, we should look at the trend in the market and that is natural. But for investors fundamentals of a company and the change or possible change in operating environment - political and economic both are most critical factors to look into. If increase of paid up capital affects company's performance in the interim, we should plan for long term or should change the sector such as from BFIs and insurance to hydro, manufacturing, etc.

4. I have received some good number of queries about the future of SCBN. I tried to get some inside perspective and it was too difficult but there is ease at all levels. No panic, no insecurity among executives and other personnel. Hence, now I believe that SCBN will go for continuing its business in Nepal for long. If they will not be ready for injecting new money, they could sell SCB's 24% as FPO (SCB has 75% share in SCBN including that of Grindlays bank) and put that money together with some independent reserve and some bonus shares, SCBN could meet the capital requirement easily. Hence, I believe, it will stay here.

I welcome other friends perspective on issues mentioned above.