Introduction
Recently, the Nepalese share market has witnessed a significant increase in the number of investors, and it has expanded from the capital to various remote areas. However, with growth come distortions and challenges, and the participation of multiple fields is affected. The paper discusses the market’s distortions and proposes solutions to address them.
The latest data shows that 5.2 million people have opened Demat accounts, representing 17.5% of the country’s population. The number of applicants in IPOs has also surged from lakhs to crores, with 4.3 million people having Mero Share accounts.
The Nepalese stock market is expanding rapidly, but it also faces challenges that must be addressed. By providing education and support to market traders, promoting transparency and fair trading, and reducing taxes on share transactions, the market can continue to grow and contribute to Nepal’s overall development.
To address the current distortions, there should be more education and awareness raising among traders. The government and Nepal Rastra Bank should support market traders by reducing taxes on share transactions and providing low-cost loans. This will encourage more people to invest in the market and promote its growth.
The government should also promote transparency and fair trading by enforcing regulations that protect investors. This will ensure that the market operates stably and efficiently.
Details of Listed Securities in NEPSE
The Nepal Stock Exchange (NEPSE) currently has 229 listed companies, as reported by Nepal Rastra Bank’s latest data based on the nine months of the fiscal year 2078/79. Of the listed companies, 145 are banks and financial institutions, 47 are insurance companies, 19 belong to the production and processing industry, 6 are investment companies, 4 are commercial enterprises, and 3 belong to other groups. Additionally, 11 new companies issued primary shares (IPOs) in the nine months.
Banks, financial institutions, and insurance companies have the largest market capitalization among the listed companies, with commercial enterprises having the minimum market capitalization. The market capitalization share of insurance companies, banks, and financial institutions is 37.6 percent, followed by hydropower companies at 10.2 percent, other companies at 9.1 percent, investment companies at 7.1 percent, listed companies in the production and processing industry at 4 percent, hotels, and tourism groups at 1.6 percent, and commercial enterprises at 0.4 percent.
Development of Market During Pandemic
The Nepalese stock market has experienced slow development at the beginning of the coronavirus outbreak, which originated in Wuhan, China. Unlike other countries, the Nepalese stock market remained closed due to the pandemic. However, the market closure led to pressure from investors, brokers, merchants, and other stakeholders to reopen the market. As a result, the stock market has recovered since its closure due to the coronavirus.
The regulatory authorities’ decision to reopen the stock market after an extended closure has benefited the Nepalese stock market’s development and expansion. The coronavirus pandemic caused most industries and commercial establishments to shut down in Nepal. When the lockdown started, various sectors, such as tourism, hotels, education, transportation, and real estate, as well as different industries and businesses, were adversely affected. The closure of most business and industry sectors in the country allowed the stock market to function more efficiently, leading to faster development.
During the lockdown period, people invested in various companies in the stock market, which resulted in a rapid rise in stock prices. This allowed the Nepalese stock market to gain momentum. Due to the closure of other business sectors, more people invested in the stock market, leading to further market growth.
Increasing Irregularities in the Nepalese Stock Market
The Nepalese stock market is experiencing a rise in irregularities, such as insider trading, spreading rumors on social media, and investment companies operating without permission from the regulators. These irregularities pose challenges for regulatory bodies and brokers, so they must identify appropriate solutions to ensure market development and expansion.
Social media usage in Nepal is also increasing, with many groups spreading rumors that can destabilize the market. Live streaming on platforms like Clubhouse and Facebook can also impact fluctuations in the market. This poses a particular problem as many active investors in the Nepalese stock market are new to investing and base their investment strategies on market rumors.
Regulatory bodies must take appropriate steps to regulate distortions in social media to ensure the market remains stable. It is essential for all stakeholders, including market investors, regulatory bodies, brokers, and merchants, to work together to identify and solve problems in the market. As American businessman Henry Ford said, “The number of small problems is significant, but they are not considered significant.” Therefore, every issue in the Nepalese stock market must be addressed with collaborations between stakeholders to ensure its long-term stability and growth. Some of the prominent problems in the current Nepalese stock market include;
Illegal Investment Companies:
There are dozens of investment companies established in Nepal that promise good returns in the future. Investors are tempted to invest more as the Nepse index continues to rise. However, some individuals have used collected funds for personal purposes. Some companies have also been established to provide reasonable returns, and investors and company executives have collected funds and started accumulating wealth. Many have even used investment funds for personal purposes. Some companies have raised millions of rupees by collecting funds from investors and have been listed on the stock market. Furthermore, companies that have raised billions of rupees by issuing bonds have also been listed on the stock exchange. The Securities Board of Nepal(SEBON), with the assistance of regulatory bodies such as the CIB and CIAA, has been studying and researching this issue for some time. The Board has taken appropriate measures to regulate companies under the Securities Act. It is essential for SEBON to periodically inform ordinary investors about such companies.
Investors’ Grievances about the Services of Stockbrokers:
There are currently more than 50 securities firms operating in Nepal. However, most investors are dissatisfied with the brokers’ services and practices, such as their services and behaviors towards clients, not settling trades on time, etc. As a result, investors have demanded that banks issue broker licenses to financial institutions such as Banks and increase the number of brokers. In addition, regulatory bodies have recognized the need for further study and research on the condition of existing brokers. Even most employees working in broker offices are dissatisfied, as brokers’ company directors fail to pay salaries on time, provide bonuses, contribute to social security funds, bear insurance, and transportation expenses, and exploit employees’ labor. Consequently, employees have filed complaints against brokers with the Securities Board of Nepal, NEPSE, CDSC and Clearing Ltd., and the Labor Court to demand their rights. Therefore, it is necessary to ensure the consistency of inspection activities carried out in broker offices by the SEBON.
Increasing Number of Analysts in the Market:
There are numerous declared analysts in Nepal, and these analysts position themselves as experts in the market and predict the market based on their own personal interests. Most of these analysts invest in the market themselves, so their analysis tends to be biased towards their gains, which can mislead and lure new investors. Most analysts buy shares of a company first and then conduct research and marketing of the same company in the name of analysis. Investors who fall into the trap of these analysts invest in the market without adequately studying the company’s fundamentals, technical analysis, and market conditions, resulting in a loss of their investment. Additionally, declared analysts are also charging fees, including various “Share Training” packages to new investors. Regulatory authorities should regulate the activities of such declared analysts in the market who claim to be the experts in the industry.
Solutions
Problems exist not only in the Nepalese capital market but also in other countries’ capital markets. However, the question of how to solve the existing issues is of utmost importance. In a speech at an event, author Pierre Filion said, “Every problem has a solution, but the main problem is finding the solution to the problems.” Like elsewhere, the Nepalese capital market has practical solutions to the existing problems and distortions. However, identifying and implementing the most effective solutions poses a challenge for regulators and the government. The following options can be pursued to address the distortions that exist in the Nepalese capital market;
Expansion of Regulatory Capacity of the Board
The Securities and Exchange Board of India (SEBI), the regulatory body for India’s capital market, has undertaken various activities to develop and expand the Indian securities market. These activities include regulating insider trading, scam prevention, mutual funds, institutional investor development, and broker capacity expansion. The activities undertaken by SEBI for developing and expanding the Indian securities market are studied and researched by regulatory bodies of other countries. They also adopt SEBI’s practices, as per their requirements. SEBI has been listed among the world’s most powerful regulatory bodies. In 2019, SEBI’s former chairman, Ajay Tyagi, was ranked seventh in the “Top Ten Regulators” list worldwide. Tyagi’s success has led to SEBI’s current chairpersons being placed high on the list of successful regulatory leaders.
In Nepal, it is also necessary to develop the capacity of the regulator of the capital market, the Securities Board of Nepal (SEBON). The situation is such that due to various political alignments, the necessary activities for market development and
expansion has not been able to take place at the Board itself. Therefore, the government must revise the essential laws and make SEBON a potent regulator like India’s SEBI. SEBON also needs to ensure the continuity of its work for capital market development and expansion and regulate the distortions in the market.
Accreditation of Analysts
The increasing number of analysts who analyze the market based on their personal interests and benefits is one of the challenges in the market. Therefore, regulatory bodies such as the Securities Board and other regulators must determine the necessary standards and distribute licenses for the accreditation of analysts who analyze the stock market. In the United States, technical experts need to get permits from financial industry regulators such as FINRA, and similar provisions must also be implemented here. It is seen that most of the problems in the market are solved when regulatory bodies only regulate the analysts in the Nepalese market. Therefore, regulatory bodies must create necessary laws and regulations, bring analysts under their jurisdiction, and accredit them.
Expansion of Broker’s Capability
Currently, 50 securities brokers in Nepal buy and sell securities. Brokers also demand additional services such as portfolio management and advisory services. Therefore, regulatory bodies must study and research the demands raised by brokers and address them appropriately. Investors and stakeholders have also expressed dissatisfaction with the unprofessional conduct of brokers currently operating in Nepal. Therefore, the regulatory authorities need to study the need for more brokers, issuing broker licenses, and increasing the number of brokers. Along with this, it is also necessary for regulatory authorities to define criteria to expand the working capacity of brokers and to transform them into more professional entities.
Impact of Financial Literacy
Warren Buffett once said, “Risk comes from not knowing what you’re doing.” This statement holds true for most Nepalese investors who lack financial literacy. They invest their money without clearly understanding what they are investing in, why they support it, and the risks.
In the past two years, there has been a surge in the number of Nepalese investors in the stock market. The collective investment of these investors is significant. However, most do not have adequate knowledge about the companies they are investing in or the reasons behind their investments. Investing without understanding the fundamentals of the company and market risks is a recipe for disaster.
Therefore, it is essential to understand the basics before investing, such as what the company does, its competitive advantage, its revenue sources, and the risks associated with investing in the company. Without having these fundamental answers, investing blindly in the market is a considerable risk.
Furthermore, it is imperative to be aware of myths surrounding the stock market, such as the idea that the market always goes up. This is not true, and one must be prepared to lose money when investing.
Nepal’s financial regulatory bodies, merchants, brokers, and investment associations must promote financial literacy through programs and initiatives to ensure that investors are well-informed. Additionally, continuous awareness campaigns and financial literacy programs via online platforms are necessary to keep up with the fast-changing market trends.
There is an urgent need for regulatory bodies to enforce the need for financial literacy programs for investors. However, these programs must be adequate, understandable, and well-promoted so investors can take advantage of them. Financial literacy will help Nepalese investors make better-informed investment decisions and reduce the risk of significant losses.
Conclusion
At present, the Nepalese stock market is in the process of maturing. In recent years, there have been significant improvements in the number of investors, online methods, regulatory capacity, etc. Most of the country’s citizens are connected to the stock market, making the Nepalese stock market a stable force. As the market’s scope and number of participants increase, regulatory agencies face additional challenges in managing the stock market and its stakeholders. Because the stock market is unstable, strategies are necessary to deal with such challenges. Therefore, the relevant agencies must be informed and engage in extensive discussions with market stakeholders to address these challenges effectively.
References
https://cdsc.com.np/
https://cbs.gov.np/population/
https://sebon.gov.np/acts
https://www.nepalstock.com.np/
https://www.nrb.org.np/contents/uploads/2022/05/Current-Macroeconomicand Financial-Situation-Nepali-Based-on-Nine-Months-data-of-2078.79.pdf
https://www.business-standard.com/article/markets/sebi-chief-ajay-tyaginamed among-world-s-top-10-regulators-117092501161_1.html
https://www.investopedia.com/articles/financialcareers/07/securities_licenses. asp
*The author is a Financial Journalist at Bizshala.com.
The article above was published on the 30th anniversary of the Securities Board of Nepal (SEBON) and is the translated version of the original article. Link to the book, which contains the original version of the article:
M9HFPEUGZh37HjRBEdlsyQ6US30Lvjs5uWigHECW.pdf (sebon.gov.np)
