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COVER STORY |
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COVER STORY |
STOCK MARKET In the decade since Nepal
opened organized trading through a stock exchange, as part of the government's wider
economic liberalization program, the indices have gone on a feverish roller-coaster ride.
With the national economy in a mess, the stock market naturally reflects the slowdown. The
last two years have seen share prices fall consistently, as the indices have doggedly come
down. The physical infrastructure of the capital market has not been upgraded. Besides,
the stock market has still not been able to attract the manufacturing sector. Amid all
this, the government is planning to introduce reforms to induce further growth in the
sector in the days ahead By SANJAYA DHAKAL The stock market, it is said, is the
barometer of the national economy. If so, it is natural to expect the finance minister of
the country to keep regular tabs on market behavior. Going by the claims made by stock
brokers, however, the government does not seem too concerned about the market. "It has been six months since we
dispatched letters asking to meet the finance minister. I, myself, went to the ministry a
couple of times. But every time we were told that the minister was too busy. We would have
been satisfied by the answer if it was not for regular news of the minister cutting
ribbons to inaugurate shops. While he has time to engage in such trifle jobs, he feels too
busy to meet us," claimed Bishnu Prasad Chapagain, the president of Stock Brokers'
Association of Nepal (SBAN). Chapagain said a delegation of brokers had
wanted to meet the minister to voice their opinion amid reports that the government was
planning to introduce a new Securities Act through ordinance. "Before he became
finance minister, Dr. Badri Prasad Shrestha used to visit the trading floor often. But he
has not come since," he said. "This is indicative of the utter neglect in which
the stock market is performing."
Economists argue that the stock
market in Nepal has received the prominence it deserves. "Take, for instance, the way
the international media handle the fluctuations in the capital market," said one
economist. "During the beginning of the Iraq war, top media outlets like BBC and CNN
extensively reported on the performance of stock-market indices like the Dow Jones, giving
them top priority next only to the actual war." Fluctuations In Stock Market With the beginning of fresh initiatives for
peace, the capital market, particularly the secondary one, is showing signs of recovery.
The first positive reflection of the cease-fire announced by the government and Maoist
rebels three months ago was probably witnessed in the way the stock index took a U-turn
from its persisting downward spiral. In recent weeks, however, the index has fallen
slightly. In less than a week after the cease-fire
announcement, the Nepal Stock Exchange (NEPSE) index showed strong signs of recovery.
According to recent reports by the Securities Board, Nepal (SEBON), the NEPSE index, which
stood at 227.54 at the beginning of the current fiscal year in mid-July 2002, plunged to
200.80 six months later in mid-January, 2003. However, following the cease-fire and hopes
for permanent peace in the country, the market reacted positively. "From a low point
of 190 six months ago, it has ended at 209 this week (April 25)," said Chapagain. Dambar Prasad Dhungel, chairman of SEBON,
cautions that although fluctuations are regular in the stock indices, it would be wrong to
assume a trend just by looking at short-term figures. "But positive developments like
hopes for peace will definitely go a long way in helping the market to recover." The stock market in the country has taken a
serious beating over the last couple of years thanks to political turmoil and economic
recession. At the end of the previous fiscal year 2057/58 (2000/2001) the NEPSE index
stood at 348.43. However, at the end of the next fiscal year 2058/59 (2001/2002), it took
a plunge of a whopping 120 points to reach 227.54 points. In the days after that as well,
the index has been gradually slipping down and was rallying around 200 points. During fiscal year 2058/59, the annual
transaction at 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.
When every other sector of the
economy is affected by the political tensions in the country, no one can imagine that the
stock and securities market would do well. 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.200. The share prices of almost all major banks
and financial institutions had plummeted. "Definitely, the securities market is
in a big slowdown. But what is significant is that this market is sustaining itself
despite all these hardships," said Dambar Prasad Dhungel. According to him, even the figures of the
last six months of the current fiscal year 2059/60 (2002/2003) show a mixed trend.
"There has been a significant growth in the primary capital market, whereas severe
contraction was noted in the secondary market like stock exchange," he said. "Due to continuation of reform
processes, the primary market witnessed growth. The issue approval in the period grew by
65 percent compared to the same period in the previous fiscal year. This was primarily due
to two reasons; one, the banks and financial companies began to comply with the terms of
their licenses and, two, they came into public flotation to meet the minimum capital
adequacy requirement as determined by the central bank," said Dambar Prasad Dhungel. In the period, SEBON approved 10 public
limited companies to issue different capital instruments worth Rs.504.2 million to the
public. He said that since the capital market had
not witnessed erosion in its fundamentals during the last couple of years, which were
dismal from an economic point of view, they will not lose time to recover once concrete
peace takes shape. At present, there are 103 companies listed
at the NEPSE. Recently, it de-listed 25 companies after they failed to adhere to the
prescribed financial norms. "The market capitalization value at the stock exchange as
of April 23, 2003 has reached Rs.34.84 billion," said Mukunda Nath Dhungel, acting
general manger at NEPSE. Likewise, the stock exchange has carried out transactions worth
Rs.430 million till now in the fiscal year 2059/60 (2002/2003).
Against that backdrop, the sudden
initiatives for dialogue and growing yearning for peace among all sections of society have
injected fresh confidence in the investors. Market analysts say news of important
companies like Chilime Hydroelectricity Project planning to enter the share market, too,
could bolster recovery. 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 2058/59. "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 fiscal year
2058/59." 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 fixed by the Nepal Rastra bank (NRB). According to Dambar Prasad Dhungel, such
good results were achieved 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 was the positive and encouraging response from the public, he
said. "The immense response and interest
shown by the public is 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
reforms in this sector," said Dambar Prasad Dhungel. Agrees Mukunda Nath Dhungel. "The
encouraging trend in the primary market is testimony to the fact that the capital market
still enjoys public confidence. At a time when banks are lowering their interest rates,
the public find investment in the capital market good in the long term." Banks, financial institutions and insurance
companies heavily dominate the capital market, covering over 70 percent of total
transactions. The companies that were authorized to go for public flotation include banks
(46 percent), finance companies (18 percent), insurance companies (4 percent), industrial
and manufacturing companies (20 percent), hotels (7 percent) and others. Almost 50 percent of the issuance approval
were given for ordinary shares, 33 percent for rights share, 10 percent for debentures and
so on. Reform Measures But the huge difference in the state of
primary and secondary market shows that the latter is still to be reformed. "At
present, the public is largely unaware about the functioning of 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 NEPSE are carried out by 27 recognized stock
brokers. "Among them, the lion's share of transactions is carried out by half a
dozen. Therefore, there is a need to address this mismatch as well," he said. SEBON claims that it is working hard to
introduce reforms in the sector. "We are shortly going to train the market
intermediaries to build their capacities," said Dambar Prasad Dhungel. "The
Asian Development Bank is also helping us in the reform measures. They are helping us in
the Corporate Financial Governance project.' According to him, one of the most pressing
reforms needed is the establishment of Central Depository System (CDS). "The setting
up of CDS would expedite the ownership transfer of shares and make the procedures more
convenient." At present, the procedures of share
transactions are cumbersome, said Chapagain. "It takes at least 10 days to complete
transactions as many days are lost in clerical and paper works. The CDS could resolve that
problem," he concurs. Likewise, there is an urgent need to
introduce on-line trading. "It does not take more than a few million rupees to
install this system. Once installed, the government can expect to increase its revenues by
many folds. All of us brokers are ready for that system," said Chapagain. According
to him, there is Open Cry system in place at present where one has to shout hard to make
himself/herself heard. "Unless you shout and yell hard, your transactions may not be
registered." Moreover, changes in many laws like company
laws, securities act are desirable, say market analysts. "We are in the process of
introducing new Securities Act. The cabinet is considering it. Once it is introduced, we
can expect to see further development of capital market as the new act has provisions for
new ventures like mutual funds, portfolio management etc," said Dambar Prasad
Dhungel. Even in its initial stage, the capital
market in the country had to go through several bumpy phases like the hijack of Indian
Airlines plane in 1999, Maoist insurgency, royal palace massacre, emergency and
inconsistent policies. But it has survived. Its survival and growth can be assured only if
the national economy takes positive turn in the months and years to come. 'Share Market Is Doing As Good As The Economy' — MUKUNDA NATH DHUNGEL Mukunda Nath Dhungel is the
acting general manager of Nepal Stock Exchange (NEPSE). He spoke to SANJAYA DHAKAL on
critical issues facing the share market. Excerpts: What is the situation of the
capital market at present? It is a common fact that the capital market
or share market reflects the economy. When the economy itself is not faring well, there is
no question of the share market doing well. It is as good as the national economy. Why do banks and financial
companies dominate the capital market here? What does this indicate? At present, there are 103 companies listed
at the NEPSE. Banks and financial companies cover over 70 percent of total transactions
carried out by the NEPSE. This is because of public confidence of good return from these
institutions. We have found that majority of the manufacturing sectors have shown negative
growth and hence become less attractive to investors. But this is only in the secondary
market. Why couldn't the secondary market
be attractive to the manufacturing sector, then? People invest in secondary market only
after getting convinced of good return. If the growth of these real sectors become
impressive and they start giving returns to investors, there is no reason why people would
not be attracted to them. Apparently, there is skewed
representation in the NEPSE, as it is heavily dominated by banks and financial
institutions with very less participation by manufacturing sector. How broad-based is its
indication of the health of national economy in such a situation? Stock indices are regarded as barometers of
economic development everywhere. But there has been a trend among the investors in our
country from the very beginning to invest in the banking and financial sectors. But
gradually, companies representing sectors like tourism, hydropower and so on are also
being listed with the NEPSE. How do you see the future of the
stock market, then? It is tied up with the national economy. If
the economy grows, then there are many possibilities of growth in this sector as well. Are there any new major companies
that are coming into public flotation soon? There are reports that Chilime
Hydroelectricity company and some banks are coming into public flotation soon. If that
happens, it would further boost our capital market. |
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editor: spotligh@mos.com.np |
