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April, 2003 |
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Stock
Taking |
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Lack
of Compliance by Dhruba Timilsina Share
trading scandal formed the headline of major dailies of Nepal a few days
ago. The news was that some of the staffs of Nepal Merchant Banking and
Finance Ltd. (NMB), the share registrar of Standard Chartered Bank Nepal
Ltd., were involved in unauthorized sale of the shares of investors not
present in the country. They were also alleged of cheating such
shareholders of their dividend. As a share registrar, the company’s
duties were to update the shareholders’ information, distribute the
benefits provided by the client company to the latter’s shareholders
and to verify the signature of the shareholder at the time of ownership
transfer of shares. But the staff forged the signatures of the
company’s shareholders so as to sell their shares without the
knowledge of the shareholders and to claim themselves the dividend
allotted to such shareholders. When this scandal was reported by the
media, NMB blamed one of its staffs and registered a forgery case in the
District Police Office, Kathmandu. The accused is still learnt to be in
the police custody. As stated in the news, though some other staffs also
were involved in this scandal, NMB has registered the case against only
one of its staff. Another of the NMB staff accused in this scandal is
reported to have escaped out of the country. If
such types of scandals, whether they are reported by the media or not,
are repeated frequently and no attempts are made to rectify the flaws in
the system and to punish the guilty, there is no doubt that sooner or
later the capital market will lose the investors. A
close study of this case brings the deficiencies of our market to the
forefront. The major deficiencies are obviously lack of professionalism
among the market participants and lack of interest in compliance. The
issuer company cannot escape from its responsibility simply by blaming
the registrar. It must satisfy those investors whose shares have been
stolen. The share registrars are found to be careless and a question can
be raised on their professionalism and honesty. The stock broker has
also made a mistake by executing the share trading without identifying
the client and thus violating the codes of conduct for stock brokers
issued by Securities Board (SEBO), the regulator of the capital market
in Nepal. As the code clearly states that the brokers must identify
their clients, such scandal could have been avoided had the broker
complied with the code. Also the regulators are equally responsible as
they are not effectively monitoring the activities of securities
businesspersons and taking legal action against their non-compliance
under the prevailing rules and regulation. As
the capital market of Nepal is still in the infant stage, the regulatory
system established to systematize and regularize the securities trading
still has deficiencies. This leaves scope for anyone to take unfair
benefit from the market at the cost of ordinary investors. Not only the
investors but also the service providers are found to be irrational and
concerned with short-term gains. In this scenario, we cannot expect
perfect behaviour from all the market participants. The major problems
seen in the system are duality and ambiguities in the regulations,
inadequate legal provision to control the market, lack of adequate
market infrastructure, lack of clear demarcation of duties of the
regulators, poor corporate culture, lack of professionalism of the
market participants, poor compliance and lack of clear legal provision
for taking action to address the non-compliance cases. In
its Annual Report for the fiscal year 2001/02, SEBO states that it has
made some attempts to address the issues through issuance of guidelines,
directives and disclosure formats to the market participants, codes of
conduct for the stock brokers etc. It has also prepared a draft for the
new securities exchange act which was presented to the Ministry of
Finance in 1998 to initiate the necessary legislative process. However,
it is still to be enacted by the parliament. Even though SEBO has made
attempts to solve the problems, they are still there. It cannot escape
of its duty to explain the present state of the market and deficiencies
existing in the system. Taking necessary support from the government it
should take the required steps to better coordinate the market
participants to develop a healthy capital market in the country.
Moreover it is important to discipline the market participants and
educate them of their moral duty to comply and make others comply with
the prevailing rules and regulation. Only this can create the atmosphere
where scandals like this one are not repeated. (Timilsina is associated with SEBO. But the ideas expressed in this article are his personal) |
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