NEPSE

Bulls And Bears

After a week of mayhem, the share market stabilizes

By A CORRESPONDENT

It was a case of undefined frenzy. Just as it was unclear what exactly caused the free fall in the share market – whether it was the latest monetary policy provisions by the central bank or trading in collusion by vested interests; it was equally amazing manner in which the whole thing more or less recovered.

Last week, the country’s only secondary share market Nepal Stock Exchange (Nepse) suffered a historic jolt as it went through continuous fall in share prices of what were earlier considered as ‘blue chips.’ In a matter of one week, the Nepse index lost 31 points and over Rs 8 billion in share values with shareholders up in arms over the changes in monetary policy, which was largely blamed for the decline. Big names in Nepse like Standard Chartered, and almost all other banks, lost their share values.

Interestingly enough, after the week-long mayhem, the Nepse made a remarkable recovery on Monday (August 7) when the shares prices of most of the commercial banks increased substantially. On Monday, the Nepse index surged by 19.58 points. The improvement followed after the central bank made some changes in its monetary policy.

“The sudden increase and decrease in the Nepse showed the volatility of the share market. In fact, many of the share values were artificially high and they had to come down,” said a share market broker.

Even though the central bank had, at first, rejected the charges that its policy was to blame for the fall in share prices, on Sunday (August 6), its board decided to amend the capital adjustment provision. The central bank decided to bring down the requirement of paid up capital to Rs 800 million for the commercial banks.

In its monetary policy unveiled a few weeks ago, the Nepal Rastra Bank (NRB) had introduced a provision that made it mandatory for the banks to increase their paid up capital to Rs 1 billion by mid-July 2009 and decided that the banks can allocate necessary amount from their profit to capital adjustment fund to raise the paid-up capital. The provisions also stated that the banks were not obliged to obliged to distribute dividend or issue bonus shares from the profit they earned. This point, many say, triggered the decline in share prices as investors sensed that the banks would no more issue rights shares or bonus shares or dividends.

In order to ‘correct’ the misconception, the central bank later on decided to amend the paid up capital requirement provision allowing the banks to issue bonus shares and distribute dividends.

The NRB’s decision to amend the monetary policy provision somewhat reversed the decline in Nepse and helped it recover from one of the worst period for share investors. The Nepse index, which had opened with 386.5 points on the opening day of the last week, tumbled down to 355.6 points on the closing day that week. The shares of commercial banks, which occupy 74.14 percent of total transactions at Nepse, took a deep plunge triggering the collapse of Nepse.

The index lost over Rs eight billion in share values due to the fall. The share traders then started complaining that the latest provision in the monetary policy of the central bank was responsible for the fall. They claimed that the new policy allowed the banks to decide on their own whether to issue rights shares and/or bonus shares in the coming days. In the past, the central bank had instructed them to issue such shares to increase their capital base.

A senior economist Dr. Raghab Dhoj Pant accused the central bank of committing gross mistake in introducing a provision in monetary policy that ‘caused’ shockwaves at the share market. “The Nepal Rastra Bank has committed a mistake by announcing such policies without considering their consequences,” Dr. Pant, who is the executive director of Institute for Development Studies (IfDS) said.

On its part, the Nepal Rastra Bank (NRB), had initially rejected charges that its new monetary policy was somehow responsible for unnaturally rapid decline in Nepse index. The bank officials even claimed that the decline is ‘mysterious.’ Deputy governor of the central bank Krishna Bahadur Manandhar told media that the policy did not affect the capabilities of the commercial banks to provide bonus, earn incomes or increase their net worth. Even as the stock exchange and share brokers accused the policy for being responsible, the bank officials claimed that the system of transactions within Nepse itself was to blame.

In order to check the rapid decline, the Nepse also interfered in the share transactions. Last week, it even temporarily halted trading in shares of Laxmi Bank and Standard Chartered Bank as their per unit share price had fallen by over 10 percent in a single day. It introduced a new provision called circuit breaker on Wednesday (August 2) to temporarily halt the share trading of the companies whose share prices dropped by over 10 percent in a single day.

On August 2 alone, Nepse index had declined by 8.48 points and closed at 358.25 points.

This was preceded by the loss of 12 points in a single day on August 1 - this loss amounted to Rs 3 billion in share values.

For the time being, the Nepse index seems to have stabilized. But its weaknesses have come to the limelight during the tumultuous week that has just passed. There are many share trading analysts who have been raising doubts over the ability of Nepse to provide ‘true picture’ so far as financial health of banks and businesses are concerned. They complain that more than true net worth, the share prices are fluctuated by intangible considerations and speculations. Charges of trading in collusion and insider trading have also been leveled often.

Share markets are considered as barometers of economy of any country. However, Nepse has not been able to act as true barometer. It is, therefore, necessary that the Finance Ministry, Central Bank and Nepse authorities conduct a thorough research on the functioning of the bank so as to introduce measures for reforming the weaknesses. That only will make the Nepse attractive to wider Nepalese public – a very few minority of whom are currently attracted to invest in shares.

Maoists To Adopt One Window Policy To Raise “Donation”

Maoist leader Dr. Baburam Bhattarai has said that his party would be adopting ‘one window’ policy to raise ‘donations’ from central level to manage its People’s Liberation Army (PLA).

Addressing the program organized by the FNCCI to mark its 40 th anniversary, Dr. Bhattarai said his party was forced to raise ‘donation’ since the state did not provide it with resources to maintain its PLA. He said that once the centralized one window policy is put in place, the bitterness with business community would end.

He claimed that ten percent of the resources that the state gives to its armed forces would be adequate for PLA. He said that the current budget has allocated Rs 20 billion for state’s armed forces whereas PLA would need only Rs 2 billion. Dr. Bhattarai claimed it was natural for the Maoists to raise ‘tax’ since they had both people’s army and the people’s government.

Speaking at the same program, Dr. Bhattarai claimed his party was concerned with the growing problems between workers and management in various businesses. He proposed forming a joint task force with the business community to resolve the problems. At the program, Dr. Bhattarai said his party favored modernization of agriculture, revolutionary land reforms, and promotion of domestic capital, resources and labor. He added that the Maoists would allow an individual to keep up to 10 bigha of land if he/she is involved in farming. “We oppose the feudal attitude of amassing huge land,” he said.

He claimed that the economy had collapsed due to policy failures rather than people’s war. He urged business community to invest in Rolpa, Rukum and other base areas of the Maoists. He said that foreign investment in areas where domestic production is adequate to meet the demand would be banned. However, he added, foreign investment that create jobs and transfer technologies, would be welcome. He said his party was not negative about Indian or other foreign investment in the country.