Some comments on VAT, Brokers etc

Rajesh Sharma

My comments posted on Nepalese Investors' Bandstand, a Facebook Forum

June 30, 2017

1. If the brokers do not wish to damage the relation with the investors, they have to apologies and should open the market Sunday unconditionally. They could approach the tax office/Finance Ministry for negotiation and settlement. Or, they have to approach the court for dispute resolution and settlement.

July 02, 2017

1. The regulators should ask the brokers the legal ground for not operating in the market yesterday and should take stern action. Also, SEBON should start expanding the number of brokers by opening licence for new brokers and by providing licence to banks.

Finance Ministry should strictly prohibit unionism of brokers in the larger interests of the investors and national economy.

 Investors should start/continue mass actions/agitations /representations/filling case in the court etc, if regulators and brokers continue to harm the interest of the investors.

Overcoming fear is too difficult. Market is under the grip of fear now. By that time, when many small investors get rid of fear, they would have already lost millions together.

2. The brokers played rowdy Thursday. They may do again and again as their leadership seems a bunch of headless chickens. Neither they have professionalism, nor cool head, nor empathy. Hence, the strategic remedy is to expand the broker base by providing licence to new brokers and merchant banks.

Also, this is the right time to establish another stock exchange. This will bring competition resulting to better performance and will help expanding the capital market.

Let's lobby for:

a. Second stock exchange,
b, Broker licence to banks, and
c. Increasing the number of brokers by providing licence to new applicants.

3. Share Market and VAT (my limited understanding and perspective.)

3.1. In the market, there are a few people who believe that 13% VAT is applicable in the amount of entire transaction. This group is composed of lay persons and greedy share grabbers. Strange but it is happening here.

3.2. Some argue that VAT is applicable in the commission amount the brokers get but are confused who has to pay -brokers or investors.

3.3. Others are divided on the issue of nature of share business. Is this financial service as that of banks or is this value adding business like that of consultants. If this is financial service, no VAT is applicable and if it is value adding business, then VAT is applicable. The ambiguity in the law is a problem and that should be clarified first. This is an issue that affects the entire capital market community. Hence, all of us - SEBON, NEPSE, Brokers and Investors should plead with Finance ministry that Share Market transaction activities be classified as Financial Services. This will solve the problem of entire capital market community.

3.4. In case if VAT is applicable, by its nature and application, the end beneficiary of the value adding goods or services have to pay the VAT. And, sooner or later it will be collected from us - the investors. But, this is a very small amount which is 13% of the commission amount we pay to the brokers. This reality we have to acknowledge from today itself.

Hence, collective, by being all together, let's lobby for classifying the services in share market as financial services like that of banks. The brokers did foolish things last time, let's not do like that, but let's do something together for our collective good.

Comments/posts from a Facebook group Nepalese Investors' Bandstand (Feb 01 to March 23, 2017)

Rajesh Sharma

(Number 22 is from Feb 01 and 1 is from March 22 and other in that reverse order.)

1.    Market has started to gallop. In such period, we should off load dead woods and should change them into milking cows. It is difficult, but by experience and by going through financial facts and credibility about the companies, some of us could do the differentiation.

Alert 1: MFIs are too risky and they could be too rewarding. We should see the size of our neck before swallowing MFIs. Insurance sector is also risky. We should see the size of the bone before swallowing. And, banking sector is less risky but too lousy not only for aggressive risk takers but also for rational risk takers sometimes. We all should diagnose our risk taking capacity, both financial and psychological.

Alert 2: A galloping market demands self discipline. By mistake if we ride a tiger, too difficult to get down. Cooling down and taking informed decisions without any pressure of heavy profit is the need of the hour.

2.    Manipulators are trying their best to get prime meat by slaughtering a BIG HE GOAT called SCB. Their eyes are focused on SCB's 100% bonus shares. They wish to terrorise and grab before book close at nominal price. After that they will start placing roses around SCB. But, now such petty tricks are not so effective.

Context: SCB's Jhur Pradarsan, SCB's weak pradarshan etc headlines. About 30 Arab without banks' participation is neither Jhur nor weak.

3.    Both the strength and weakness of Nepali share market is the domination of traders. They keep market vibrant, which is good. Also, they keep market in pendulum mode, which is too bad.

Hence, Nepali share market has been suffering from a disease-like condition and needs a long, complicated and risky procedure to have its remedy. The remedy is increased retention rate of shares. It is possible when long term investors invest in the market in big numbers and scale. Once again, this could happen when there is political stability in the country and economy starts growing and expanding fast.

Till then, we have to adjust with generally a vibrant-pendulum called trader-shaped market movement.

4.    Everybody who knows basics of share market in Nepal knows already that by going through potential applicants, SCB may have much less demand of FPO shares than NLIC. It is due to restriction in cross holding. No BFIs are allowed to apply. However, making this provision silent and using selective information as an instrument of rumor is interesting.

The media outlets including online portals and many analysts are working overtime to discourage applicants so as to help their sponsors to grab shares in wholesale. Those who are opposing FPO as an issue of principle are the exceptions and I do not blame them at all.

5.    Great effort by online portals/media outlets/ bloggers /analysts/ commentators to discourage investors to apply for SCB FPO. Unprecedented invasion of selective information/disinformation. But, people are far smarter than the players. Overactive RUMOR MILL! A déjà vu scenario of politics in capital market.

6.    I have received quite some questions in my inbox asking about SCB FPO. Rather finding it difficult to reply individually, I thought to write here.

Notwithstanding any other reasons and just confining to profit and loss, my opinion is that if you are a small investor and if you have your own money, then apply and if you have to go for loan, please stay away. Extraordinary risk taking people may travel to any distance.

My definition of small investors includes people of two category - 1. who apply with less than 50,000 (this is in line with the official practice in allotment of shares), and 2. who apply with less than 500,000 ( this is more acceptable range to call someone a small investor).

7.    I have three assumptions - 1. local elections will be held and will accelerate the process of political stability, 2. Increased government spending and prudent behaviours from banks will improve liquid situation for loans, and 3. Better regulation and technology will bring investor confidence back at higher level. (This paragraph is copied from my reply to a friend in messenger.)

With such assumptions, I think the market will be moving up slowly but steadily with some speed breakers in between. In coming August/September, we may see time for minting money.

Note: Satutary warning - Please park your money at your own risk.

8.    Investment in capital market is a profession. In a profession, one has to understand the basics preferably better to have advance knowledge, should have minimum skill and resources, need to have or acquire risk taking attitude, determination and perseverance. In underdeveloped markets like ours, he or she should wear skin of rhinoceros to protect ownself against rumors.

9.    The market is passing through rough weather. It is something like crossing large and deep air vaccums for a light aircraft. Staying on the course with minimum nervousness and plenty of courage is what the pilot does. The same applies to us. We should keep ourselves on the course with minimum injuries. There would be plenty of time in future not only to heal but also to win in a marathon. A lamp post may not have light now, still it reminds us that there was light in the past and that could be in future. Optimists may see defeat in battles but if they stay on the course, they could win the wars.

10.  Professional excellence is what we need. However, we investors in share market forums are at least talking different.

Some of us are ultra nationalist, some are astrologers, some more are sadists, some are casual comedians, a few are wolfs and too many are novice in market complexities.

Hence, there may not be surprises, when market moves in opposite directions.

11.  People without any exposure to economics/finaces through academic background or self studies may be in great difficulty to survive in the secondary market.

There could be two exceptions. 1. You are among a few persons who could enjoy the privillage of insideer trading. 2. You have extraordinary common sense.

Others could earn if they limit their endeavour to IPOs.

12.  Looking at the monkey on the tree, a lion waits down. Monkey falls down at close to lion's mouth. Without making great effort, the lion starts killing and eating the monkey tastefully.

Note: Some friends have asked about the context. It is about selling shares even today at bargain price, much less than the price overall market sentiment could have provided the bench mark.

13.  IPO: Book Building

Book building is a systematic process of generating, capturing, and recording investor demand for shares during an initial public offering (IPO), or other securities during their issuance process, in order to support efficient price discovery.
Book building - Wikipedia
https://en.wikipedia.org/wiki/Book_building

Book Building Definition | Investopedia
www.investopedia.com/terms/b/bookbuilding.asp

14.  Politically motivated messengers/propagandists of boom and doom are among a few major problems in Nepali capital market.

15.  There is the growing tendency among the market participants that the small investors are headless chickens and they need extra protection. In this process, people are asking for intervention from the regulators and government even in petty operational issues. More intervention will invite a situation where free market could not exist. The market should be allowed to function within its legal operational boundaries as a free entity.

The activities that are considered good today may be bad for tomorrow. Let's not welcome a lion tasting human blood. If it happens once, it may repeat the same practice again and again. We should have a vision of a free market and our policies and implementation strategies should support the vision to realize.

16.  Those who did negative publicity of any company and tried to influence market are paying heavy price if they are traders/investors. The fall in Nepse right now could be primarily influenced by irresponsible activities of the bankers, but the negative campainagers disguised as advocates of investors did no small harm in shaping the mind by inserting fear and anger among the investors. In this big fall, only big to medium size investors could survive. Too bad days for small investors and disaster for the traders. This is too big to save from this avalanche being in normal state.

However, there are always exceptions and there are people with exceptional qualities. We should face the situation with strong heart and tranquil mind. During the devastating earthquake, people lost many things - near and dear once, property, and so many, but they are reassembling lives with boldness and hope. Let's not loose hope and courage and let's not be emotionally paralyzed. Let's see the happenings, try to act according to our need and leave the rest for future.

17.  Darkness motivates people to discover ways and means of light. Night gives hope of seeing the dawn - bright and beautiful.

Long ago, Darwin through his Theory of Natural Selection taught us to be fittest to survive.

Hence, in these painful days of devastating floods in Nepalese capital market, those who remain motivated and hopeful and explore strategies to be fittest would survive and flourish in near future that may have a span of couple of months or years. And, for others it would be wise to listen Vishnu Sharma, the great teacher in Hitopadesh, who advised "Rajdware, smasanecha ardha tyajati pundit" meaning who sacrifices half (of that under his/her possession) in a palace and grave yard (in disastrous circumastances) is a wise person.

Let's listen to Darwin or Vishnu Sharma and buy peace of mind. We are travelling through rugged terrain and bumpy roads. Either we train ourselves mentally, emotionally and physically or abandon the journey and search for another route suited to our physical state and temperament. Crying could provide solace but that will not give us solution.

18.  Nirmal Pradhan was overwhelmingly an investor before losing tremendous amount of money during the deep as well as prolonged bear phase when Nepse nose dived from 1175 to 292. He effectively turned himself to trader. He took trading as skilfully as possible. Even some people blamed him for manipulation through his investment fund - Rajdhani. We never knew the reality. However, he traded smartly and made money from NCCB, NBL, NHPC, EBL etc. He recovered his loss and even made more money.

Hence, changing from investor to trader or trader to investor could be a normal practice. No profession is good or bad in itself. Those who have to earn more by maximising transactions with small amount could do so by being traders or those who afford to put sizable amount of money and could wait to earn handsomely may do so as investors. But, both need to keep an eye open to watch the market and respond accordingly.

19.  Those who are fighting battles taking opposite sides of market down to 1200 or even less and market up to 2000 or even more are really capable and qualified to predict the future of the market? Are they really investors? Are they genuine traders? I have doubts.

20.  Posts in social networking sites:

- Tommorow, A is going to sell company x. 
- B will hold company y.
- C will buy company z tommorow or sooner.

Hence, the following messages will be there:

A will write, x is a wonderful company. I am planning to buy. Anybody is there to sell 500 kitta?

B will write, y is the most valuable company in the market. Buy as much as possible. You will be malamal within a year.

C will write, z is a kabadi company. I made great mistake by buying it's shares. I am going to sell even at very low price. If anybody is interested to buy, please contact me

Keys: Sell is buy, buy is sell and valuable is I am holding.

It is entertaining to read but injurious to listen.

21.  In regard to share market, liquidity situation is one of many impacting factors. It is not the single most important factor particularly in Nepali share market where savings/surplus mobilization plays important role. Among small shareholders, still loan from formal banking system has not become culture of investment.

IPOs/FPOs are being oversubscribed by several times and in secondary market also the transaction has generally been around 50 corer recently. This tells a different story.

Here, it is psychology that makes big difference. When investors see opportunity they manage money be it grandmother's lifetime saving, selling salable items under their command, arranging loan from friends and relatives, and many other innovative ways. If it is just 20% from small investors in the FPO of NLIC, still they mobilized 10 Arab and, I think, a large part of it is not loan from the banking system.

Hence, investor sentiment makes a big difference in our market. Now, in a volatile and bearish market, fear factor has been in command. Most recently, courage also has come out of the cage and has started influencing the market. The first destination is stabilization in a given range. However, it is behaving strangely, both ways up and down. The economic ggrowth rate has been projected above 5%.

Our market is vibrant because the traders are many and supper active. It is dominated by traders. Now, traders are fighting for their very survival. They are injured, they are in hurry and they are also highly confused. Their state of mind has been revolving around bewilderment.

Many investors including Mutual Funds and Investment Companies are still in watch and wait mood.

Therefore, we may continue to see for some time the same volatility in the market till investor sentiment including trading behavior does not improve and investor confidence will not change. This could be best attained by policy responses by the government and regulators. They are active in policy responses and investor friendly operational improvement. Hence, I am hopeful that market will enter into relative stability soon and investor sentiment would move to positive territory. At micro level, the performance of the companies is largely better. At macro level, the politics is moving towards stability though with several sand bags in between.

For me, this is buying time in several small installments and also by being highly selective.

Note: Any free advice could be injurious to our financial health. Hence, we should assess our situation objectively and should decide on the merit of own analysis. So, I request the readers to make any investment decisions on the basis of your own judgement.

22.  The problems in the social networking sites, financial portals/TV programs and financial journals/newspapers in Nepal are three types of people.

1. Those who have no idea about the market, litter the sites by writting anything and many thing. A few among them have occupied the position of a hero, strangely.

2. Many among those who know about the basics of the market are governed by their own interests and write/talk accordingly.

3. Those who do not know about basics of the market and are cow animal type ask innocent questions and get misled by people of two types as mentioned above.

Hence, due to disinformation, it is too difficult to get benefit from the media including electronic and print media and social networking sites.

Therefore, getting ourselves educated or hiring services of fund management companies are the better options.

Comments/posts from a Facebook group Nepalese Investors' Bandstand (January 30-31, 2017)

Rajesh Sharma

(I had thought to add here the posts/comments from November 24, 2016 to January 31. 2017. But it was too difficult to retrieve the older posts from the Facebook Group I menetioned above. In future, if I will have time to go through time consuming process, I may update by posting here.)

1.    Chiranjibi Chapagain spent 18 years working in NRB, recently as a director heading its Pokhara branch. With an MBA (Masters degree in commerce from TU was named as MBA then) educational background and so many years of experience as regulator, he failed miserably as Head of Insurance Regulator in being sensitive to market. He unnecessarily brought the issue of non inclusion of paid up capital in insurance bill. That could be done without any fanfare simply ommiting that clause and inserting that that would be addressed through regulation/directives.

I am not sure he did it with other ill-motive or tried to be transparent or to show him as boss of insurance, but altimately he harmed the interest of investors in insurance sector immensely. He is the primary culprit for today's biggest fall in insurance sector.

May be, Minister Mahara hired him to do things like this as they need to amass insurance shares before they increase the paid up capital. Policy corruption is a major tool of insider trading.

2.        Just before the start of previous major bear and extraordinary fall, I had bought SCB shares at 7900 Rupees each. The very next day it had jumped to 9000. Then the fall started and when I realized that the fall is unprecidented, SCB's price was 5400. Giving serious jolt to my logical person inside, I decided to sell. But the price was already down to 4800. I sold part of SCB shares with heavy heart promising with myself that "Death is ok, surrender is not." After buying and selling other company shares still with loss, I again bought SCB shares at 3600 and added more till it came down to 1500.
       
      It finally settled around 1300. My average price per share after collecting bonus shares of a few years was around 1600. Then the market started moving up. My loss was nil in 2012 and then came the phase of good harvest. After the major fall yesterday, I calculated my profit and loss in SCB. It gave me reasonably good return of above 24% annually. I have not included the cash dividend it gave in-between.

     This way, I survived during the dreadful bear phase last time.

Market fall: An Investor's Perspective

Rajesh Sharma

I had a long conversation yesterday with a friend of mine who is also an investor - not so big, but not so small either. The following text is direct quote from him. Yes, the text I have written but being as true to his words as possible. This may represent the reality, I am not sure, but after getting his permission, I have put his perspectives below.

"It started with "hunting down SCB" strategy of a few investors , when SCB made it public that it will issue FPO and will capitalize the funds generated through FPO to meet its capital requirement. This was one of the most attractive proposal for investors. So, this "hunting down" strategy was crafted to grab SCB shares. Hence, confusion was created by magnifying the ambiguity due to the * used in clarification in its notice.

It worked well and new comrades joined the chorus raising the 'nationalist' slogan against a foreign companies' loot through FPO. There were others who raised the banner of anti-FPO. Hence, the "hunting down brigade" became successful attaining a level of SCB price beyond their target of below 3500.

I also had sold already SCB at around 3700. When it came around 3500, I bought using my all resources thinking that the target of "hunting down" team has been achieved and the price, now, will stabilize or will increase. The "hunting down" team also purchased but I am not sure in what scale they did.

In between, a few big investors seen in panic guessing that after 1000 and 500 Rupees notes demonetized by India, Nepal may do some investigation on money invested in the market where it is not that possible to show the source. The SEBON initiated investigation was already a terror to some. They started to sell in a big way.

When EBL made its dividend public, the fearful big shots got a good opportunity to offload EBL shares in big scale. Market started to go down and down when the fear across investors, traders whether they were big or small run as a tempest.

Mutual Funds were apprehensive already. They manage small savings and it is natural if they become defensive. They are not market makers. They stopped buying shares. This fact contributed to already running negative sentiment to accelerate.

Hence, market moved beyond the expectations of the people who initiated "hunting down SCB" in a small way. Many traders are already out of market, may be they may not return for long. Personally, I am also in a big loss. But for me, there is hope as the market may rebound within a few months. At least, it will reach the same level during next dividend season. I hope you will also hold your shares."

Market Fall and Experience

Rajesh Sharma

For them who have seen market down and down and down from 1175 to 292, this fall is digestible. We saw darkness, and afterward we saw light. After that heavy Earthquake in the market, we have reconstructed our emotional state of being with light Japanese construction materials.

Market and forum participants

Rajesh Sharma

Many friends have been seen desperately trying to pass their opinion in the form of news or message that due to some this or that reasons market has been down and it will bounce back.

Other set of friends are passing their message that market will go further down.

There is a third set of people who are predicting doomsday in Nepalese share market.

I think, this is basically a free market and everybody will do what they like to do. When demand dominates, price increases and when supply dominates, price decreases. The market over rules all other factors.

The optimists including myself will hold, enthusiastic optimists will buy. Fearful people will sell though with heavy heart and reluctantly. They are compelled to sell due to their need of funds, fear of further down of the market, strategy to buy when the market decreases more etc.

Let's accept the reality that we have no power to control the flow of supply or increase in demand. Rather than blaming the sellers for decrease in Nepse, let"s firmly take our positions be it buy, or sell or hold.

Yes, I agree that the third set of people are vagabonds or paid agents or sadists. They are irritating and allergic. Hence, I also blocked a few reluctantly. I agree with the great French philosopher Voltaire, when he says, " I Disapprove of What You Say, But I Will Defend to the Death Your Right to Say It," But, allowing barking street dogs at the middle of the night was too much and I were not Voltaire. I am only a tiny follower of his.

Market Turmoil and We Investors

Rajesh Sharma

Market fall down sharply. Today, it closed in nominal green zone.

I was surprised seeing market down for several days. I tried to understand the reasons. People discovered many reasons but for me, there are no convincing reasons. Yes, there are many peripheral reasons, and some speculative reasons.

Hence, I have come to the conclusion that the market movement was due to demand and supply factors contributed by several peripheral reasons including India's demonetization of 1000 and 500 Rupees notes, which triggered on speculation about probable investigation on black money injected into Nepali share market. The fear among a few big investors expanded and spread like wild fire that engulfed even small investors. Moreover, this was not a single reason and other many small-impact news, greed, hurry, crowd mentality, intrigues, rumors all played small or big role. Hence, we all were in confused state of mind. In this cloudy state, some of us sold, some bought and many hold.

Now, the dust seems starting to gradually settling down. What we did during the days of turbulence was right given the situation. Profit and loss are part and parcels of any business. So, happened that way. We might have accumulated profit or we might have incurred loss; that all is past now. We can not change the past, nor we could guarantee the future course. Hence, the most important responsibility for us for now is making peace with ourselves.

Still, the turmoil in the market has not been over, nor that would be over infinitely. Hence, we should sell or buy or hold according to our situation and choice. However, in any case we should not forget our roots and we should not loose hope. Beyond investment also there is a beautiful life.

Disclosure: I hold all my shares during the days of recent market turbulence. I had loss in paper of about 9% in the last two months.