Insider trading paralyzing Nepali capital market; Are we supposed to just watch our investments glide while regulators do nothing?

Wed, May 15, 2019 5:06 PM on Exclusive, Stock Market,

Insider trading happens when someone buys or sells shares of a publicly traded company based on some information that is not public yet. For example, if someone buys huge number of a company's shares because s/he found out from informal means that the company will soon be announcing huge dividends, then s/he will buy at low and once the news comes out the price will go up and that person will take advantage by selling it at a higher price.

The Chapter 9 of Securities Board Regulation, 2064 states that, "If any person deals in securities or causes any other person to deal in securities on the basis of any insider information or notice that are unpublished or communicates any information or notice known to such a person in the course of the discharge of his or her duties in manner likely to affect the price of securities such a person shall be deemed to have been committed an insider trading in securities." It also mentions, "A person who commits an insider trading as referred to in Section 91 shall, upon being convicted of the offense of insider trading, be liable to the punishment with a fine equal to the amount in controversy or with imprisonment for a term not exceeding one year or with both punishments."

Despite having regulations in place, we can detect hints of insider trading in many occasions. Recently, there are three accounts where insider trading might have happened.

Bhargav Bikas Bank

Today Nepal Stock Exchange (NEPSE) published a notice regarding the merger and acquisition (M&A) of Shine Resunga Development Bank (SHINE) and Bhargav Bikas Bank (BHBL). Since the banks signed the agreement, the trading of BHBL has been halted from today.

M&A notice

This has been a public notice just today morning, but the price of BHBL rose by 6.98% and 8.15% on Baisakh 30th and 31st respectively with huge volume of 43 thousand 652 units.

*Picture taken for SSPro

In the graph given above, the bars shows the volume of transactions and as you can clearly see, the volume is drastically high for the last two days. Insider trading or sheer investor instinct?

Prime Commercial Bank

Today Prime Commercial Bank (PCBL) announced its date of 11th AGM on Jestha 26, 2076 along with book closure date on Jestha 09, 2076. The Bank has proposed 16% bonus long ago but due to its M&A complications with Om Development Bank, the AGM had not happened yet. The merger had reached its final stages when they pulled out and for that reason NRB is going to punish the banks.

The nature of punishment isn't known yet and that had dimmed the hopes of dividend for PCBL shareholders. However, the announcement of AGM has refueled that hope.

PCBL's AGM notice

NRB planning to punish PCBL and ODBL

This notice was also a published by NEPSE today, however the price of PCBL increased by 4.79% and 2.42% respectively on Baisakh 30th and 31st respectively with a volume of 2.98 lakh in total.

*Picture taken for SSPro

The candlestick and the volume graph shows how abnormal the movement has been for the past two days, where the price has started to rise suddenly and the volume has gone up with it. Again, insider trading or sheer investor instinct?

Sagarmatha Insurance Company

Sagarmatha Insurance Company (SIC) held its 271st Board meeting on Baisakh 26, 2076 and proposed 86% Bonus shares worth Rs 46 crore 29 lakh 31 thousand 034 on Baisakh 27, 2076. Although the endorsement is subject to approval from Beema Samiti and AGM, it’s a huge opportunity to let go of.

Bonus proposal notice

But the question is, who takes the advantage of this opportunity? The proposition was made public on Baisakh 27th, 2076 however, SIC price rose by 8.5% on Baisakh 26th, 2076 with a volume of 21,699 units.

*Picture taken for SSPro

All these accounts are clear indication of insider trading and yet we hear nothing about investigation or prosecution. Despite having clear regulations against insider trading, the implementation hasn't seen the light of day yet.

The argument that SEBON or NEPSE is not aware of such insider trading can't be true. Either they are overlooking such issues, or if they truly don't know about it then they are in more darkness than the layman investor. If the authorities are so ignorant, how can anybody be sure that they aren't being manipulated by the larger whales in the market?

The market can be efficient only when the information dissemination is effective i.e if all investors have access to information at the same time. The time lag between those who get prior information benefit because of it at the expense of other non-informed investors.

The Nepali capital market is struggling to gather larger investor pool and such insider trading instances rips the new investors' faith. If they can't make their investment decisions with full information, then their investment is at risk and so are all the other small investors.

The examples given above represent just the tip of the iceberg, and if authorities don't take any action soon then we might as well just surrender our investments and pull out from the market.