National 4 (Spotlight Weekly)

'There Is A Mixed Trend In The Capital Market'

— DAMBAR PRASAD DHUNGEL

Dambar Prasad Dhungel is the chairman of Securities Board of Nepal. The board is the regulatory authority of the securities market. He spoke to SANJAYA DHAKAL about capital-market trends and prospects. Excerpts:

How do you find the present situation of the capital market?

There is a mixed trend in the capital market. The secondary market is not doing as good as the primary market. But, the growth has been noteworthy. Last year, market capitalization was just over Rs.32 billion. This year, it is around Rs.35 billion. The share index, too, has gone from an average of 216 last year to 214 this year. On the whole, the market is stable.

How do you view the decade since capital market transactions began in Nepal?

It has been one decade since we started open competitive capital market transactions. It is not a short duration. But since this is a very technical field, there has to be certain degree of maturity among corporate sector, investors as well as market intermediaries. The board has been active in creating awareness, building capacity of different players and increasing effectiveness of its monitoring system in this period.

How do you evaluate the status of capital market transactions? Has it been broad-based?

Well, the market is evolving. However, it is still dominated by banks and financial institutions. Last year, two dozens companies were de-listed from the Nepal Stock Exchange for their failure to meet prescribed norms. Now, there are just above 100 companies listed. Among them, there are only 15-20 companies whose shares are actively traded. And they are all banks or financial institutions. The manufacturing and industrial sectors have not shown an inclination to list themselves as public companies.

How extensive could the indication of our stock indices be considered if they do not cover the manufacturing sector?

That is true. Since, it is dominated by banks and financial institutions, it is more focused toward the health of these institutions. However, manufacturing industries, which operate as private companies, too, seek loans from banks and pay interest. Banks will grow only if they earn interests on them. To that extent, the performance of banks could be linked with that of manufacturing sector. There are a few companies representing the tourism sector listed at the stock exchange. Their performance is indicative of the decline in tourism sector.

Why have the manufacturing and industrial sectors not been attracted to the stock market?

The growth in the industrial and manufacturing sectors has not been that impressive. Besides, most reputable manufacturing companies prefer to operate as private companies for various reasons. Moreover, since public have shown interest mostly to buy shares of banks, financial institutions and insurance companies, they have dominated the stock exchange transactions.

How do you find the public response to the capital market?

They have shown tremendous response over the last couple of years. They have prudently treated companies with good fundamentals. Due to their confidence, we are in a position to mobilize resources over one billion rupees from the market at a given time. Due to growing public awareness, the companies also have started to introduce different instruments like rights shares, preferential shares, debentures etc.

How do instability and bandh affect the capital market?

It affects us very much. The crux of any market is the confidence of investors. Such instability and bandhs hit the confidence of investors, preventing them from making new investment decisions. It leads to a vicious cycle whereupon employment is not generated and national economy is also hit.

What kind of reforms are you undertaking at present?

We are undertaking a number of reform measures. We are improving the capacity of supervision and monitoring. We are planning to train market intermediaries like brokers. Currently, we have a system of T plus 5 meaning the payment will be settled only 5 days after the transactions. We are planning to introduce T plus 2/3 system soon. We are working with the Asian Development Bank, which is helping us on Corporate Finance Governance. The cabinet is considering a new securities bill. This bill, if enacted, could address a number of problems we are currently facing. There is a plan to privatize the stock exchange. And we are preparing to introduce the system of Central Depository System. This will expedite the ownership transfer in share transactions.

'Our Situation Has Not Improved'

— BISHNU PRASAD CHAPAGAIN

Bishnu Prasad Chapagain is the president of Stock Brokers' Association of Nepal. He spoke to SANJAYA DHAKAL on various issues facing the capital market. Excerpts:

What are your observations on the evolution of the capital market here?

In the last one decade since the liberalization of economy, the capital market grew rapidly. However, our situation has not improved in the period. We did manage to improve the volume of transactions. But we are far from institutionalizing this sector. There is no physical development. We still pursue Open Cry system when most of the countries in the world have already opted for on-line trading. There is still no Central Depository System in place. The share transaction procedures are cumbersome. It takes at least ten days for an investor to complete his transaction. This is in total contradiction to the spirit of share market.

How about the shareholders and their confidence?

Well, the number of shareholders increased from 70,000 (in early 1990s) to 600,000-700,000. But these investors have lost their money. Fraudulent companies have taken them for a ride not only at secondary but also primary markets. Take for instance the frauds committed by companies like Nimrod Pharmaceuticals, Agro Limited Company, Harisiddhi, Himigir Textiles etc. Unfortunately, the concerned bodies of the government have not taken proper steps to protect the interest of individual investors. Last year 25 companies were de-listed from the stock exchange. This led to loss millions of rupees worth losses for investors.

How has been the growth in annual transactions?

Before 1992, the average annual transaction in the capital market was around Rs.40 million-50 million. At present, the average annual transaction is well above Rs.500 million, sometimes it crossed even Rs.1 billion. Currently, there is a daily turnover of Rs.2 million to 2.5 million at the stock exchange.

Why do banking and financial institutions dominate the stock exchange so heavily?

Because there is no proper monitoring of the manufacturing and industrial sector. There are industries that show they are incurring losses regularly for the last couple of years. But still their owners seem to be enjoying better lifestyle day by day. There is very little confidence and trust among public regarding these industries. On the other hand, banks give good dividends, are relatively more transparent and generally considered safe investment by the public.

There are charges that brokers corner the market and profit from such manipulations. Do you agree?

It is a baseless charge. Unlike other countries, brokers in Nepal are not even allowed to buy shares for themselves or their close relatives. We are authorized only to carry out transactions as per the order from our clients. We can neither buy/sell shares on our own nor can we manage others' portfolio. There is no possibility of manipulation.

What are the problems facing the capital market?

There are many inconsistencies with the government regulations and directives. The central bank has asked the banks and financial companies to do away with their shares of other companies within 2061 B.S. They were the only institutional buyers in our market. This decision could hurt the market. On the other hand, the central bank has been pressing the banks to raise their capital. The decisions by the Nepal Rastra Bank from time to time have affected the market more than anything else. Rather than issuing one directive after another, the central bank could have made clear-cut instructions asking the banks to go for merger.

What are your recommendations to improve the situation?

The government should formulate progressive policies after consulting with stake-holders like us. They should immediately set up Central Depository System and go for on-line trading. All of us brokers are ready for that. Likewise, there should be two different stock indices - one for A grade or blue chip companies whose shares are actively traded and another for remaining ones. This is the practice all over the world.