Our leaders have to understand that a country’s development is not possible without developing and expanding the capital market.  

Dr Rewat Bahadur Karki, former CEO of Nepal Stock Exchange and currently an expert director with SEBON, in an interview with ShareSansar, spoke about the overall scenarios affecting NEPSE.   

Have SEBON and NEPSE done enough to promote and develop the share market of Nepal?

As the main regulator of the capital market, SEBON is responsible for developing, promoting, monitoring as well as managing the stock market. NEPSE, on the other hand, is seen as the frontline regulator, and is also responsible for managing lots of things related to stock market.

SEBON lacks clear cut vision and sometimes misunderstanding between SEBON and NEPSE hinders capital market’s development.  Due to its weak institutional capacity, SEBON could not play dynamic role for the market development.  

Similarly, NEPSE is not enough to play a dynamic role in modernizing and promoting the stock market. For example, after the trading was automated, it should have shown the readiness to develop to fully automated system in the market. Partly, the government is also responsible as it has yet to come up with clear policies relating to capital market. Shortage of qualified manpower, political appointments of nonprofessionals and interference are other things that hinder any effort to expand the share market.

Thus, both SEBON and NEPSE should strengthen their institutional capacity and then they can play more effective role to develop the market.

Isn’t everything related to capital market tried and tested worldwide? We already know how it works, then why have we failed to just follow what is practiced all over the world?

Frankly, we still do not have adequate infrastructure. In South Asia, Nepal is the only country where an agency like CDSC has not come into operation. Though it was established in 2010, it hasn’t been able to operate automated clearing system and also demat system (CDS). There has been conflict since the very beginning. Initially, it was setup with the participation of NEPSE as well as listed companies. But later on it was made full subsidiary of NEPSE, a government undertaking.  Due to this, its performance slackened. In addition to this, it lacks strong legal backing.  

Then there is the issue of political will to develop the capital market. Statements like ‘stock market is a gambling house’ coming from those in the responsible position scare people away from the share market.

Maoist party says that they have embraced capitalism, but that has still to reflect clearly in their policies. For example, though China is a communist country, when it comes to its economic policy, it has fully adopted liberal policies. Our leaders have yet to understand the simple fact that a country’s development is not possible today without developing and expanding the capital market.

On the one hand, there is political instability in our country, and on the other, our parties do not unite around a common economic agenda.  Thus, the development of capital market is still in infant stage without having sufficient infrastructural development.

Therefore, we cannot compare the situation of our capital market with those of other countries. India adopted liberal policy one year later then we did. They progressed because they have maintained consistency in their policies and we fell behind because we failed to maintain the consistency.

Why is NEPSE not privatized yet?

It is strange that NEPSE was established as not for profit organization. With the aim of privatizing NEPSE, it was made profit making company in 2065 BS and some other formalities were also made in this connection.

So ultimately privatization of NEPSE is a must. But since ours is a small market, it is necessary to ensure that stock market does not fall in the hands of individuals who can easily influence the market.  So NEPSE should be privatized with corporation model, that is, owned and run by A-class listed companies.

During my tenure in 2064/65, I had prepared a model for corporatized privatization model and presented a concept paper to the board. The concept paper had envisioned privatization of stock market in three phases. In the first phase, NRB’s ownership will be sold, in second phase the government will sell its major stake and in the third phase, the government would keep some stake and let A-class companies manage the stock market.

But as the government at the time did not want to listen anything to do with privatization, the process could not move ahead.

But the process should not be delayed now. We have been hearing about the inefficiency of NEPSE and other problems. If we implement the concept of privatization with corporatization, this will lead to faster development of the market.

Letting A-class companies like Standard Chartered, NABIL and other such companies run the stock market would bring positive changes. Also, to an extent, even foreign investment must be invited. It would help in further modernization of stock market.      


So when will the privatization of NEPSE happen?

Given the political situation, it is hard to say anything. If the election happens and power falls in the hands of a stable government that is dedicated to lead the capital market forward, then it will happen sooner. Otherwise, it might take longer.

How immune NEPSE is to manipulation by big investors?

While such things happen more in manual trading, after automation chances of such thing occurring is significantly reduced. Under automated system, there is a provision of circuit breaker to inform the investors about drastic movements. In the first phase, it is imposed on a particular company, and if that still continues, the whole trading can be stopped.

But even within automated system there might be some room to maneuver. But NEPSE and SEBON should be alert on this matter and they should strengthen their supervisory capacity to minimize such issues.

What is the prospect of mutual fund in Nepal?

It is very important in a country like ours where we have many small investors who are looking for proper investments. If the scheme is technically sound and run by qualified professionals it is very good for such small investors. It will contribute greatly in capital mobilization and also expanding the market.

In India, mutual fund is around IRs 8100 crore industry; that is 7/8 times Nepal’s GDP. There is a separate act that governs mutual fund industry and it has been given many facilities. Here it has been brought through a bylaw (niyamawali), so it is not that strong. If something is brought through an act, it comes with strong validation and nothing else can undermine that. But even though it has come through a bylaw, it is a good step and things will certainly improve in future.

Who is responsible to increase awareness about the capital market among people?

Of course, the main responsibility lies to SEBON and the government, but that is something which takes a lot of time. Everybody must contribute in the effort toward increasing awareness. Even people and general investors must come forward and show interest. There is a lack of financial literacy because of which people invest based on rumors. Even the educated people follow rumors when in fact they should invest relying on technical as well as fundamental analysis.

When you talk about awareness, a lot of factors come into play: overall literacy rate, people’s willingness to know, condition of the capital market, among others.

What are the changes you wish to see in NEPSE?

First thing is institutional change. Privatization with corporatization, in line with the model followed by National Stock Exchange of India, is a prerequisite because under the government, NEPSE will always remain vulnerable to political interference. Its institutional capacity has to be developed to operate modern and competitive secondary market.
Significant steps have to be taken to operate online trading. But even the little steps taken toward automation would prove helpful for all stakeholders.

Infrastructure-wise, NEPSE has not been able to keep up with time and with its own development over time. There are so many things that need to be changed and you can understand that by the fact that we lag behind all other stock exchanges in this region.