Last Word

The government has just come out with the guidelines relating to Securities Registration and Issues. It is more of a treatise of reactive provisions taking into consideration the advantages a couple of companies have taken while issuing securities. The issues that have been brought forward will make an impact on the way shares issues are going to be made in the future but it does not look at the fundamentals of securities issue and trade.

The Niti relating to the securities issue, management and guidelines are not limited to one act only and has a greater impact as many fundamental problems exists in other Acts too. For instance, an insurance company or a bank has to have public shareholding to a certain percentage. However, if one thinks rationally the companies that just come into existence should not be issuing shares to public before establishing their business. Nepal has witnessed many companies that came to the securities market at start up phase and vanished. A Company with just a liaison office was allowed to issue shares. Most countries where capital markets are developed do not allow a company to issue shares without doing business for three years and also meeting certain milestones relating to the profitability. There are so many conditions precedent that they have to meet to be eligible to enter the securities market. However, in Nepal we have had instances where not only primary issue but subsequent rights issues has been allowed without the company actually starting commercial operations.

There have been many instances where prospectus relating to share issues have been doctored and the concerned agencies have done practically nothing about it. The liability of the people involved should be made more stringent so that the directors concerned, the professionals who have certified the prospectus and the officials who have actually given the approval should be prosecuted in criminal courts. There are many instances where public has lost money while promoters have gained.

It also needs to be borne in mind that the implementation arm of the regulators is very weak and there has been hardly an instance where the regulators have raised a strong voice. Therefore, there may be more guidelines that have been issued but its implementation is critical. Increasing levels of bureaucratic intervention is not a solution to any problem. It is more important to resolve issues that have the wrong intent.

The issue relating to securities in Nepal is not limited to various micro ones but more macro ones. Various legislation relating to businesses have to be examined to look at the overall policy relating to companies, their ownership, control and thereby governance. The various forms of participation in formation of business should be clearly spelt out and options should be provided in terms of voting, profit sharing as well as preferential treatment in case of liquidation. The days of having strict quota for public shareholding is over. In contrary, companies should be encouraged to issue shares rather than been forced by legislation. The issue management has to get professional with credit rating made mandatory to determine the level of trust investors can have. Risk factors should be made more prominent so that ordinary investors are not duped. Finally, the trading of securities has to be more contemporary by switching to paperless trading. The monitoring of companies on the stock exchange and the regulatory role of Securities Board needs to be made more effective.

In summation, the government guidelines that keep on being issues now and then are just patchwork to a rather important problem. The concentration should be on more effective implementation of the provisions that already exist. Of course, a more comprehensive Securities Niti is required urgently.

Securities Niti

Chanakya