Stock Taking

One serious weakness facing Nepal's stock market is the low participation of investors in securities transaction. Majority of the investors participating in the exchange are from Kathmandu valley. Since there is only one stock exchange in the country and it is located in the capital, and there is no other alternative available, participation of the investors from outside the valley is very low. In the present trading system (centralized open out cry trading system) all brokers should gather in the trading floor of the Nepal Stock Exchange (NEPSE) to effect the deal. No electronic system has been developed yet that could help the investors to participate in the transaction electronically from different parts of the nation. It is not only a problem of implementation: the existing Acts are silent on the electronic trading system. What is being followed now here is a system borrowed from Sri Lanka. But though electronic trading system and central securities depository system have been already introduced in Sri Lanka, Nepal is still following the same old system.

A ray of hope has been aroused by the Tenth Five-year Plan which targets to increase the investor participation in the securities transaction and to have a minimum of 3% of total population investing in the share capital of the organized sector enterprises. For this the government has brought out the concept of regional exchange. To meet this target, it has a program of expanding the stock exchange facilities in each of the five-development regions.

But it is worth noting that the concept of regional exchange was there also in the Ninth Five-year Plan. As nothing noticeable was done towards this direction during the Ninth Plan period, doubts are raised also at the possibility of implementing the program in the 10th Plan period. 

For investors who want to invest through the primary market, it is not so great a problem even if they are living far away from the stock exchange as they can easily apply for the shares through different financial institutions which have their offices scattered around the country. But in the real sense, this is not enough for the involvement of the people in the securities transaction and investment in share capital of the organized sector enterprises. It is important to facilitate the participation of such people in the secondary market as well. Those who get shares from the primary market must have the opportunity to sell them in the secondary market. Similarly, also those who want to invest through the secondary market must have easy access to the market. But as the only stock exchange of the nation is located in the capital, only those investors living in its surrounding areas have easy access to it. All the investors from outside Kathmandu valley who want to involve in the transactions must come to the capital physically. There is no other way for them to participate in the secondary market.

However, it may be worth noting that some brokers are providing some services to these investors from outside the valley. These brokers have established informal consulting offices in different major cities of the country like Biratnagar, Dharan, Birgunj, Bhairahawa, Pokhara etc. Out of the 27 brokerage firms, about nine (see box) are found providing such services to the out of the valley investors.

But no effort has been made from the side of the government to motivate the investors/brokers. The brokers who are providing such services to the outside the valley investors, say that the existing process is very costly and risky. To sell the securities they need to have the signature of the seller verified from the registrar office. Almost all the listed companies have their head offices located in the capital and investors desiring to sell the securities of these companies need to verify signature through the head office. Therefore, either the investors must visit the capital themselves or deliver the signed order form along with the share certificate to the broker authorizing him/her to complete the process here. But, if the signature could not be verified, the broker will have to put a long distance call and ask the investor to send another form with a new signature. This is repeated till the signature gets verified. In the course of this long process, the investors as well as the brokers incur high transaction cost. Currently, all the transaction costs from the side of brokers (i.e. cost of telephone to the investors, charges of delivering the documents to the investors etc.) are being borne by the brokers themselves, according to the brokers.

Also the buying is equally complicated and risky process under the existing system. Therefore the brokers say that they deal with only highly creditworthy clients as the risk of default will be very high from the outside the valley customers.

Government is not doing anything significant to attract more investors from out of the valley; though it has very ambitious objective and quantitative target about capital market in its tenth five-year plan (see box).

It has not brought out any related program in the budget of F/Y 2003/2004. Presently the capital market is suffering from low investors' participation due to the absence of awareness about the securities market. Even after ten years of the establishment of the stock exchange, the investors of Kathmandu valley itself have not become so much aware about the securities market. Thus number of participation is not as desired. Then it is anybody's guess how the government can achieve the objective of the out-side-the-valley investors participating in the transaction and ownership of the securities of organized sector enterprises. This indicates to the need for launching many investor awareness programs in different parts of the country particularly the rural areas, where the potential small investors live. Therefore, in the course of such awareness campaigns, the services of the brokers should be expanded and this expanded network should be used for more awareness programs. Investors awareness cannot be achieved by merely broadcasting the share prices through Radio Nepal, Nepal Television or other private radios and TVs.

At present, Securities Board  can be found distributing the educational and informative booklets free of cost to the investors visiting the Board office. But this cannot be considered as sufficient. Such educational and informative booklets should be distributed to the investors who live far away from the securities board office and stock exchange.

Expansion of stock exchange facilities, to achieve the objective, to the different development regions is very much appreciable approach of the government because thousands of investors from out valley are suffering due to not having an easy access to secondary market. Expansion of the stock exchange outside Kathmandu will help to increase the trading volume as well as the market capitalization. Moreover the concept of central security depository system also can bring more efficiency in the stock exchange, which is suffering by script based, and long security processing cycle. These two programs, if implemented seriously, can solve two wide problems of the securities market.

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