National 5 (Spotlight Weekly)

Sharing The Pain

The capital market, particularly the secondary one, takes a heavy beating amid the overall economic slowdown

By SANJAYA DHAKAL

At the end of fiscal year 2000/2001, the index of Nepal Stock Exchange (NEPSE) stood at 348.43. However, at the end of the following fiscal year, it took a plunge of a whopping 120† points to reach 227.54 points. In the days after that, too, the index has been gradually slipping down, currently rallying around 220 points.

During fiscal year 2001-2002, the annual transaction at the NEPSE was only around Rs.1.55 billion. Compared to the previous year, the market capitalization value of the listed stocks at the NEPSE came down by staggering 25.13 percent to reach merely Rs.34.39 billion during this period.

NEPSE trading floor : Activities are down

When every other sector of economy is affected by the political tensions in the country, no one can imagine that the stock and securities market would do well. "Definitely, the securities market is in a big slowdown. But what is significant is that still this market is sustaining itself despite all these hardships," said Dambar Prasad Dhungel, chairman of the Securities Board.

According to him, the figures of fiscal year 2001/2002 show a mixed trend. "While the primary market shown an encouraging trend, the secondary is in dismal state," he said. Mukunda Nath Dhungel, acting general manager of NEPSE, also says that the secondary market will remain stagnant at best until and unless the economy picks up. "The government itself has said that its economic growth rate for this year has reduced to 0.8 percent. In such a dismal situation, the decline in secondary market is to be expected," he said.

The NEPSE boss, however, says trading is quite satisfactory in the given circumstances. "We traded more than we expected during fiscal year 2001-2002 and even made profit of Rs.4.1 million." But the point is not lost. The secondary market had to face such a drubbing this year that the stock prices of banks that used to fetch Rs.3,300 only two years ago have come down to less than Rs.2,000. The share prices of almost all major banks and financial institutions have plummeted.

Contrary to what is happening in the secondary market, the primary market is still upbeat. According to Dambar Prasad Dhungel, the primary market grew by 123 percent during fiscal year 2001-2002. "In the whole of the Ninth Plan period, the total resource mobilization from the primary capital market stood at Rs.3.3 billion - out of which Rs.1.44 billion was mobilized in the fiscal year 2001-2002."

But the astounding growth in the primary market is not surprising given the fact that it happened at the time when many commercial banks and financial institutions were forced to issue new capital instruments to achieve the capital adequacy figure as fixed by the Nepal Rastra Bank (NRB).

According to Dambar Prasad Dhungel, the reason for such good results was because at that time in order to stick to the prudential norms announced by the central bank, there was a flurry of issues of new shares, rights shares, debentures, which shot up the market. "In order to meet the capital adequacy under the central bank's prudential norms, the commercial banks issued different instruments and many other financial companies too came into public flotation," said the board chairman. More important than that was the positive and encouraging response from the public, he said.

"The immense response and interest shown by the public is a proof of the fact that they still have confidence in the capital market and the ongoing reforms in this sector. This proves that we need to speed up further reforms in this sector," said Dambar Prasad Dhungel.

Agrees Mukunda Nath Dhungel. "The encouraging trend in the primary market is a testimony to the fact that capital market still enjoys public confidence. At a time when bank are lowering their interests, the public find investment on capital market is good in the long term."

But the huge difference in the state of primary and secondary markets shows that the latter is still to be reformed. "At present, the public is largely unaware about the functioning of the secondary market. There is a need to increase transparency in the working of this market," said the chairman of the board. At present, the transactions at the NEPSE are carried out by 27 recognized stock brokers. "Among these 27 brokers the lion's share of transactions is carried out by half a dozen ones. Therefore, there is a need to address this mismatch as well," he said.

Anyway, although the capital markets seem to be sustaining in these troubled times, one may not expect them to improve until the overall economic atmosphere of the country improves.