If NEPSE fails to update itself within a year we might bring in another exchange  

The Securities Board of Nepal (SEBON) has been introducing various measures and reforms for the development and regulation of the capital market in the country. It has recently introduced credit rating and CDS systems and plans to upgrade Nepal Stock Exchange for fully automated trading.  Despite all this, many stakeholders say they are a bit concerned about the pace of reform. They have also been urging the regulator to bring in the real sector as the market for the BFI, which largely dominate the only stock market, has saturated. Then there are also issues concerning debt market and the regulation of commodity market. ShareSansar caught up with Mr. Niraj Giri, the Spokesperson of the SEBON, so that you get to know the regulator’s perspective.

Excerpt:

What is the SEBON doing to promote the general awareness among the general investors as well as to develop capital market?

We have been launching investor education program under our lead role since the last couple of years in collaboration with the Federation of Nepalese Chambers of Commerce and Industry (FNCCI). The trainers include SEBON’s resource persons and market participants such as Nepal Stock Exchange officials, brokers, and mutual fund managers. From this year onward, we will also include CDS and Credit Rating agencies in the program. We have also been asking NEPSE and CDSL to take initiative to educate the investors so that there is a collective effort in this regard. We are also ready to help investor groups to conduct the training by providing them with resource persons and other assistance.

The basic idea is that the more the investors get educated the more it is easy for the SEBON.  Not only here in Nepal, everywhere around the world, the focus is on investor education.  Besides the FNCCI and other stakeholders, we are also mulling over tying up with colleges to educate the investors about the capital market.

Is the capital market operating as per the existing act, regulations and by-laws? Some companies do not seem to follow them properly. What is the SEBON doing to make them accountable?

The market is operation under the prevailing Securities Related Act and the regulations thereof. There will always be some companies that fall short in complying to the provisions of the acts and different rules. In that case SEBON has been taking the necessary actions as per the provisions of the rules and regulations. Hence if you look at our annual report you will see that the case of non- compliance has dropped significantly.

If you are talking about the companies that would issue the IPOs but would not list the shares for trading or list them very late, such a problem hardly exists now. Yes, there was a time in the past when we faced that problem, but I don’t think that is of much concern now as there is tremendous pressure from the share investors themselves, which forces the companies to duly list the IPO.

But the real concerns of the investors, as they tell us, relate to two basic things:  when will the operation of full-fledged automated trading system and CDS take place? Therefore, SEBON is currently focusing on these two things.

As we cannot directly introduce both the systems, we will keep on pressing NEPSE and CDSC to act faster. So far as CDS is concerned, now that the brokers have started to join the process as clearing agents, SEBON believes that it should come into operation very soon.  As more than a dozen DPs have also joined, most probably CDS would come into partial operation from the next month.

As for the NEPSE’s up-gradation, the stock exchange is doing the necessary homework to install the system. From what we have heard, it is also contacting international agencies for the purpose. They have formed a team to study the requirements for the purpose. As soon as they submit the report, we will act accordingly. But, the process is going to take some time unlike CDS, which we expect to come into partial operation from next month.

Many stakeholders believe that these processes are not moving at a desired pace because the concerned agencies, including the SEBON as the regulator, is not taking a holistic approach to these things. What do you say?

It’s not about not having a holistic approach. We think that is it better to implement the CDS in phase-wise manner than to go into full-fledged operation. This way we can test the new system and we still need to educate the stakeholders. Moreover, CDSC does not have enough staff to implement it in a full scale at this point. If all 230 companies were to come into the process immediately it will be very difficult to tackle them. The demat process takes time. If we go into full fledged operation of CDS at this point, it could be chaotic.

Much was expected from the mutual funds introduced for the maturity of the stock market. But there are only two schemes in the market and there is not much charm among the investors. Why are not mutual funds fairing as desired? Is it due to lack of adequate awareness, or is it due to the problem with the existing regulations, or it has more to do with investors’ awareness?

I think it is about investors’ awareness. The problem is that many investors still think that a mutual fund is similar to equity shares which entail bonus shares and dividends. Hence, investor education is needed to address this problem. The other reason the mutual funds not received the true value in the market is that they have just been introduced to the market. Many investors also treat mutual fund as an institutional investor, which is not true. It is more like a portfolio manager than an institutional investor. We are constantly in touch with the mutual fund operators to tackle this issue. We have also included mutual fund awareness in our training programs. Besides NEPSE’s upgradation and CDS operation, mutual fund is another area of our focus.

Some investors complain that the mutual funds are destroying the market by offloading the IPOs on the first day. They say that there should be a locking period for the mutual fund, too likes staff share. What do you say?

We don’t think that the mutual funds are destroying the market.  This is a misconception. We see two problems here. One is that the concept of margin lending is not fully developed and that we are yet to adopt a free pricing concept. We can see that any IPO shares are sold for more than Rs 150 immediately after they get listed for trading. This means that the IPOs are under priced, and that the company is suffering loss.  Had we allowed them to offer the IPO at a free price then we would have got the real picture.  But what is happening now is that the investors want to buy the IPO by hook or crook for immediate impressive returns. This is also promoting over the counter trading of IPO allotment slips.

We also don’t see any problem with the mutual funds offloading some of the IPO shares on the opening days of trading. After all, a mutual fund is about collective investment of small investors. If a mutual fund was about an individual investor then we had to intervene immediately.

Nevertheless, we do not want the mutual funds to offload all of the 5 percent of IPO shares allotted to them immediately after they are listed for trading. If they do that then that is wrong. We did not bring the mutual funds for that purpose. Mutual funds were introduced to help stabilize and mature the market. We have been monitoring the market to check that the mutual funds do not offload all or the bulk of the IPO in the initial days.  We see that they have been offloading 10 to 20 percent of such shares, which is not significant.

Anyway it will become a non-issue in near future. There is much hullabaloo this in the market because we only have two mutual funds now. But we have already received three more applications for mutual funds. Once they enter the market, five percent of the IPO shares will be divided among them.

As you have also noted good companies suffer due to the lack of free pricing. But the contradictions among the rules set by Nepal Rastra Bank and the SEBON have affected good companies which want to issue premium shares? How are you planning to address this matter?

Yes, we need to review our provision regarding issuance of premium shares. We have already started the process of reviewing the Securities Registration and Issue Regulations. The present regulations takes into account only net worth, which is about the past performance of a company. But a company also has future prospects.  

We don’t think the central bank wants to restrict the BFIs to issue premium shares if they merge and strengthen their position.  For instance, RMDC has just issued premium shares. Hence, the aim of the central bank, and the state for that matter, is to promote merger between them so that they could sustain themselves.

We need to review the regulation also to bring in the real sector. BFIs have already been saturated in the market.

You say that the SEBON is reviewing the existing regulations to bring in the real sector to the stock market. When can we expect the real sector to enter the market?

As I mentioned before, we are reviewing the provision pertaining to issuing shares in premium price which now is tied up to the net worth of the company. The government also needs to make some provisions. If we look at the international practices, if a company’s net worth exceeds its certain value then such a company is transformed into a public company. Government needs to think about this practice. There are good companies in Nepal, too. Many of such companies are hesitating to go public due to the issues related to taxation. From what we have read in the newspaper government recently has formed a panel to review the tax system of the country. Since the government needs to review its policies, it will take some time before the real sector could be brought into the stock market.

Information is key to investment. However, it seems that only big investors have access to information related to the stock trading. Why is information disclosure not as transparent as it should have been?

In the initial eight to ten years, the market was in a grip of big investors. Now the times have changed.  There are at least five to six thousand very active investors in the capital market. Likewise, the capital of the listed companies has also risen drastically. Hence, the big investors cannot corner the market now. Though we cannot rule out the possibility of the big investors having an access to insider information, even that should not be easy for them. There are 50 brokers in the market. If any of them start buying shares of a certain company then the others would become alert and disseminate the information immediately. Likewise, many investors are investing in the shares by taking loan from the BFIs. For them any information pertaining to the share trading is very valuable. Hence, the information disclosure scenario has improved significantly.

Nonetheless, we still need to work more to ensure that the listed companies issue relevant information on a timely basis. A lot of companies do not make public their quarterly, half yearly and annual reports on time. Though only around 30 percent of the companies would disclose information on time in the past, but some 70 to 80 percent of them disclose information now. It has to 100 percent, and we have been pushing them for that. Then there is an issue of the SEBON’s institutional capacity. We must admit that we need to strengthen it. Now there around 237 listed companies, 50 brokers and around the same number of DPs, and there is also the CDSC, which means that the number of entities that the SEBON has to regulate has reached almost 500.  On the other hand, we have not been able to increase our staff strength, which stands at less than 40. We also need to invest more much in our other resources.


So, what are the initiatives the SEBON is taking to strengthen its institutional capacity?

We have already completed an O &M study for the purpose.  We will table the report on our upcoming board meeting. It will chart our roadmap for the next five years, including how much manpower we need to function more efficiently.  Once the board approved of it, we will forward it to the Ministry of Finance for endorsement. The good thing is that the ministry has already realized that the institutional capacity of the SEBON must be improved, as it is already overstretched.

The role of SEBON is to develop and regulate the capital market. So far, we have focused largely on the development of the capital market, now it is high time we focus more on regulating the market. The market has already come a long way. Initially the market stood only on two pillars one regulator and the stock market. Now it firmly stands on four pillars with the addition of central securities depository and the introduction of credit rating. Hence, we are now in a position to focus on regulating the market. Most probably, we will start recruiting additional manpower and other resources shortly after the Constituent Assembly election takes place.

The number of brokers was increased with an aim to increase the access of small investors to the stock market. But again big investors seem to be benefiting the most out of this. How is the SEBON tackling this issue?

We have been constantly monitoring the brokers. Only just ahead of the Dashain festival we visited offices of all the brokers and issued clear directives to each of them to address the shortcoming identified during our inspection. We will on follow up on them within a month or two and will take action against them if they have not complied with our directives.  We have decided to increase inspection on the brokers as part of our plan to focus more on market regulation.

Another facet of this issue is that the investors should take the initiative to inform  SEBON if they find that any of the brokers are resorting to wrong practices. But investors hardly come to us. Probably they are apprehensive that the brokers will not cooperate with them if they lodged complaints against them. The fear factor cannot be ruled out. Initially when there were a very few brokers in the market, even we hesitated to take action against them, as it could have directly affected the market. But the times have changed. Now that there are 50 brokers in the market, I don’t see why the investor should hesitate to complain against the brokers who are doing wrong things. Moreover,  SEBON is always there to protect their interest, so they should come forward. We have been trying to pass this message to the investors, especially the smaller ones. We need to raise the awareness of the investors. Here I would like to add that the SEBON also wants to educate and encourage investors to go for mutual funds.

At the same time, we are also mindful of the fact that some brokers are having hard time to manage huge share transaction through only one system.  This problem is related to system upgradation.

Talking about the impediments to the growth of brokers, what else do you think are affecting them?

Another factor that is hindering the growth of brokers is the fixed commission we have set for them.  I think we need to let them take up to 1 percent commission on each transaction. This will prove as an extra incentive to the brokers and will also start a healthy competition between them. Besides we should also look into other areas where brokers could work like investment advisory, margin lending etc.

The plan to decentralize the brokers for the benefit of small investors has apparently failed to yield desired result. What is the SEBON doing to make sure that the brokers can make enough profit by working outside the capital?

The problem is that everything is centralized in Kathmandu. We have to come to Kathmandu for clearing and settlement. Trading itself is largely based in Kathmandu. Once the CDS become fully functional, they will definitely work outside the capital. The trading system should not be a major hassle because they can directly trade shares using a telephone through the brokers they know as they have been doing now.

Debt market is yet to develop. What is the SEBON doing in this regard?

There are two challenges. One is related to the general awareness about debt instrument. Only some of companies from the financial sector have issued it to meet the regulatory requirement.  Another is tax rate. We need to review the tax rate.

The government of Nepal with technical assistance of the Asian Development Bank (ADB) is running a project for the development of debt market development. Its main focus is to establish a debt management office at the Ministry of Finance or some other appropriate venue.  The other objective is to issue the state’s debt instrument on a regular calendar. It will develop the yield curve. This will help other financial institutes to determine their yield, the interest rates. This will stimulate them. However, the real sector companies also have to join the market for this as the financial sector alone cannot sustain it.

There was plan to privatize NEPSE, and also to bring in private stock exchanges? What is happening in that front?

Though we have received from proposals for private stock exchanges, but our study has shown that given the size of our economy and the technology one exchange is sufficient for the country. At the same time, the same study conducted by the SEBON has concluded that we may need another exchange to grow the market if the NEPSE does not quickly reform itself and fails to upgrade the system soon. We have already told the authorities that we will wait for some time  for  NEPSE to upgrade itself, but if it fails do that then we might have to look into the option of bringing in another exchange.

SEBON is also supposed to regulate the commodity market. At a time when it is not being able to properly regulate the capital market, what are its plans to regulate the commodity market, too?

We have explored the possibility of regulating the commodity market through our regulations. We prepared a rule to regulate the commodity market but could not base the rule on any of the existing Acts. The government has directed the SEBON to draft an act for the purpose, and we are working on it. It will take around two months to prepare a draft of the act as we also need to take inputs from the stakeholders.

Is the Nepse index overpriced or underpriced at the moment?

Going by the performance of the listed company, we think the index is neither overpriced nor underpriced. It is just fine. After all, it all boils down to how the listed companies perform, irrespective of what kind of system we introduce for the trading. Even if we introduce a state-of-the-art system, the market will now grow if the companies do not perform well.  Looking at the quarterly reports and other indicators, the listed companies are indeed doing good, and it has made the investors more confident.

Likewise, the market also looks stable and is growing gradually, which is good.  We think the market will further grow after the CA election. But in the longer run, the market will react according to the policies of the new government to be formed after the election.