Stock Market

Nepali Share Market An Investor’s Perspective

By Atma Ram Ghimire

Currently share prices are on the decline. On March 3rd 1999 Nepse index was 178.81 (base Feb. 1994=100), it was the highest on December 2000 at 545.25 and then within five months, on May 17, 2001, it plunged to 334.29. These are not periodic, cyclic movements, but the results of mismanagement of the share market by the authorities and manipulation by big share holders/company promoters and stock brokers.

The major reason behind the movement in the index is the domination of banking sector scrips in Nepali stock exchange’s transactions. The price changes in bank shares have mostly no justification. When they increased, it was after declaration of bonus, dividend or interim dividend or after the receipt of bonus share and dividend and when they decreased, it was before the receipt of bonus share and dividend, i.e. after the confirmation that return is imminent. Therefore, these changes are unnatural and can again lead to the debacle the share market faced in 1994/95.

When we analyze the Nepali share market we find that all the components of this market are lame and weak and perhaps work for vested interest. The Securities Board, the supreme body of this market, gave the permission to Taragaon Regency Hotel to increase the number of shares issued from 8 million to 12 million units after the public oversubscribed the initial offer, despite the advise from experts not to do no. To repeat the same mistake, the Board gave almost similar permission to Hotel Radison and now public investors are again cheated. The board has thus repeatedly supported companies in their activities that lead to cheating the investors.

There have been so called market makers in the stock market but they did not appear when the market was booming with unnatural growth. Neither are they in sight now when the market is crashing. Why cannot the board cancel the license of the recalcitrant market makers and issue new ones? Why in a liberal and market economy is the license/quota system being followed? It should be open for all - brokers, market makers, and stock dealers. Just fix straight and transparent requirements, like 5 million capital, Master’s degree in economics / management/ accountancy and whatever, but not something based on ‘HAKIMKO BIBEKMA’ ( the judicious will of the decision maker).

The other component in the market is Nepal Stock Exchange Ltd. The primary requirement now is to privatize this institution immediately to sustain the interest of the public in capital market and for its healthy growth. Its operation is primitive, like that of a ‘Dhiki’ (village rice dehusker) instead of a cellar mill. Weak practices are seen in its management. It seems to be without any regulatory functions when judged by its dealings towards listed companies. Even the share registrar and market maker (NIDC Capital Market) has not held its AGM for fiscal year 1999/2000. Still, the Board has not been able to take any action. There are no set rules (or they are not implemented) for transaction processing and certificate delivery. It could take months for the certificates to arrive from the companies. These mismanagement practices cannot help the growth of a share market.

The broker organizations are real private, and run a one-man show. Most of them do not have real education and knowledge about the market. They do not have analysts or advisors to make suggestions to the investors. Their primary motto is to make transactions and earn commission. They have not paid a single rupee from the earning they have made from this market for its promotion. They have not even spent on their basic office automation and systematic transaction recording. One of the reason for such aloofness is the security provided by Nepse and Board hakims, denying other qualified institutions a free entry into the market.

The general public has invested recklessly. They just believe what one broker or the investor says about a scrip. They must study (be informed) about the company before making the investment. One of the prime motives for the investment is to earn return on it. Capital market is a long-term concept. The investment on secure and good company does yield good returns in the long run.

Therefore, general investors should be alert and aware to these situations. They must receive the financial information before they make investment and act rationally. This will avoid the typical crashes the market experienced in the past which were largely created by unnatural activities of the institutions and individuals concerned.

 NEPSE

Towards Privatization

By Krishna Shrestha

Nepal Stock Exchange Ltd. (NEPSE) is to see a significant change in its organisational and functional structure in the near future, thanks to Government’s finally starting the process of privatizing the country’s only stock exchange, though after a considerable gap of good eight years from the conception of the idea.

As an initiation of the process, Corporate and Financial Governance (CFG) Project of Ministry of Finance issued a public notice in May 2001 calling interested and qualified firms to submit an Expression of Interest for providing support for institutional strengthening of the Securities Board, privatisation of Nepal Stock Exchange (NEPSE), and establishment of a Central Depository System (CDS), among others.

Concerned authorities and securities brokers seem happy from the initiation of the government. "It is the need of the hour", says Dambar Prasad Dhungel, Chairman of Securities Board, the regulatory body of the country’s securities market. He hopes that the privatisation will enhance the efficiency of NEPSE. "Dependency syndrome will be minimized. Decision making process will be faster. Generating additional capital will be possible. The institution may turn into profit-making organisation. Ownership of NEPSE will be restructured."

Dhungel is right. Being a government owned institution, NEPSE cannot take prompt decisions in many cases. It can neither introduce innovative ideas nor take bold decisions. Since it is a nonprofit making organisation, it cannot distribute dividend to its shareholders.

Presently, NEPSE’s shareholders include His Majesty’s Government, the central bank (Nepal Rastra Bank), Nepal Industrial Development corporation (NIDC) and the licensed members of the stock exchange, with the government holding the majority (52.55 per cent), Nepal Rastra Bank 39.72 per cent, and NIDC 7.04 per cent. The licensed members hold only 0.69 per cent. If NEPSE is privatized, licensed members will have more "say" in its decision-making process as their shares will be increased.

"No government runs securities exchange. And no government-operated securities exchange runs smoothly. So is the case with the NEPSE. Therefore, there is no way other than privatizing it for the development of the stock market. The only concerned issue is the way of privatizing it," says Jagdish Agrawal, a leading stock broker and former president of Nepal Stock Brokers Association (NSBA).

Another stock broker and President of NSBA Navaraj Pokharel says, "Privatizing is not a bad thing. Sooner or later, the government has to do it. Only the important thing it is how it is to be privatized."

Asian Development Bank (ADB), which has been supporting His Majesty’s Government under the Corporate and Financial Governance Project feels that at a time when the Nepali government is withdrawing from direct involvement in production of goods and services, state ownership of the stock exchange is an anomaly. "International experience shows that exchanges work most efficiently when they are in the private sector, and the State limits its role to ensuring that they are properly regulated," says an ADB document.

However, "Scope and Outline Terms of Reference for Consulting Services under Corporate and Financial Governance Loan" shows that no modality has been finalized as yet for NEPSE’s privatization. The consulting team is expected to formulate a strategy and detailed implementation plan in privatizing NEPSE (see box).

It may be recalled here that the government had way back in 1994 itself made its intention clear to privatize NEPSE gradually and complete the process within five years. Accordingly, provision was made for the appointment of two directors in NEPSE Board from among the licensed members. NEPSE Board consists of nine members.

Report of Capital Market Development Project II (1998) prepared with the assistance from ADB also states that with regard to ownership and governance of the stock exchange, it is highly desirable that the stock exchange be privatized at an early stage of market development (see box).

Though stockbrokers are optimistic regarding the government’s move to privatize NEPSE, they have some reservation too. One of the major concerns is about who will be taking over. If NEPSE is handed over to a group having vested interest, the future of capital market as well as the hope for better protection of investors’ interest will be shattered.

"Nobody can guarantee that only healthy conditions will emerge after privatisation," said one of the stockbrokers, who did not wish to be named.

Chairman Dhungel too agrees that there are certain possible demerits of privatisation of NEPSE. "Self disciplinary mechanism, a conducive culture, a strong regulatory system and legal infrastructure are the major factors, which should be considered before going for privatization". For that reason, Dhungel expects the process to take about two years for completion.

Agrawal too agrees that Ministry of Finance, Securities Board and NEPSE should be strong in their own fields. He stresses on stronger role of Ministry of Finance and Securities Board as both are policy-making bodies.

Stockbrokers have pointed out that though privatisation is inevitable, forecasting its impact is not possible right now.

However, the NEPSE itself, which will be the most affected body, is not in a position to make comment on its privatisation process. "We have to watch how it will go, what will be the view of ADB’s group and whether the private sector comes ahead or not. Nothing can be said right now", said Mukunda Dhungel, the Acting General Manager of NEPSE.

Another most important thing that needs to be done before the plan of NEPSE privatisation materializes, is the amendment of existing Securities Act or promulgation of new act. Similarly, existing Company Act too needs to be amended. Luckily, both are in the process of amendment now.

Source: Report of Capital Market Development Project II

Share Price in Nepal Stock Exchange

Movement in Nepse Index

(Base : February 12, 1994=100)

Coming AGM