Stock Market

If all goes as planned, Nepal’s stock market will shortly have the Central Depository System (CDS), the most modern way of securities transaction. Authorities have been seriously considering about it and are optimistic to have the system introduced in the country by the end of next fiscal year.

"The proposal for the introduction of CDS is under consideration", says Dambar P. Dhungel, Chairman of Securities Board of Nepal, the institution designated as the capital market developer and regulator of the country.

"In the present context, the CDS is a must. Our community has been demanding it because it speeds up the process of share transfer and reduces paper work", says Nabaraj Pokhrel, President of Nepal Stock Brokers’ Association.

Establishment of CDS is one of the components of the Asian Development Bank ADB loan approved recently. It may be recalled, a study on capital market was conducted couple of months back with assistance from ADB. One of the suggestions made by the study team was for establishing the CDS.

Some of the benefits of CDS are easy transfer of share ownership, upgrading the system, paperless system, transparency, and attraction to big investors as it is reliable and process is simplified.

However, establishing CDS is not an easy task. "Some legal provisions need to be made before introducing CDS in Nepal," says Chairman Dhungel.

Existing laws do not match with CDS. So, Company Act and Securities Exchange Act too need to be amended. However, positive developments towards this are underway, it is learnt. According to a reliable source in Company Registrar’s Office, provision for CDS has been included in the proposed amendment in the Company Act. Similarly, a draft law on Security Exchange has also incorporated the provisions needed for CDS.

Beside legal provisions, suitable system for CDS has to be developed. Hardware and software need to be procured. Creating awareness among investors is another tough challenge. Stock agents should be prepared to bear the cost of CDS operation. And the organisational set up is to be revamped. To address the last challenge, two separate ideas have been floated – the first one is to set up a sister organisation of Nepal Stock Exchange Ltd., and the second one is to open a department within Nepal Stock Exchange Ltd. itself.

However, still many people in Nepal do not know what is CDS. Even in SAARC region, it is a new thing. According to an official in Nepal Stock Exchange Ltd., India introduced the CDS only last year.

"CDS is a scriptless system. It is like a bank of shares. A separate organisation or department needs to be established for CDS. Share brokers and shareholders will have their accounts of shares with CDS operating body. If a share is purchased, it is credited on the purchaser’s account and debited on the sellers account, or vice versa," says Pramod Bhattarai, senior officer in Nepal Stock Exchange Ltd. According to Bhattarai, who was in India last year to study the CDS, says the system is little big complicated to begin with but becomes easy when it comes into operation.

The history of securities market in Nepal is more than six decades old. Biratnagar Jute Mills and Nepal Bank Ltd. are pioneer companies in floating shares in the market. However, it was only on January 13, 1993 that Nepal adopted a system for stock trading called ‘Open Out Cry System’. It means transactions of securities are conducted on the open auction principle on the trading floor. Since then, Nepali stock market has witnessed many ups and downs. However, during the short span of time, the size of stock market has expanded. Number of shareholders and the volume of market capitalisation have both increased.

In 1993/94, when the open cry system was introduced, total turnover in the Nepali stock market was Rs. 431.34 million during the six months between January and July, a period for which the system remained in operation that year. It went up to Rs. 1,054.26 million in the fiscal year 1994/95. And the increase was because of high speculation, the experts have declared. As a result, in the following fiscal year 1995/96, the transaction volume dramatically declined and to Rs. 215.61 million only the share market nearly crashed.

In 1994/95, according to Nepal Stock Exchange Ltd., total number of securities listed was 58,247,000, which touched 118,338,463 in mid-October 2000. During the same period, market capitalisation increased from Rs. 12963 million to Rs. 53087 million, and total paid up value of the listed companies from Rs. 2962 million to Rs. 7595 million.

Milestones in Nepalis Stock Market

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