Rastra Bank directives to the BFIs: how it can impact the stock market?

ShareSansar, Aug 21:

Amid heavy downfall of the Nepse benchmark index in recent days with no particular reasons, the Nepal Rastra Bank (NRB) issued circular yesterday to the licensed banks and financial institutions (BFIs) in regards to the bonus share distribution and their exposure in the shares of other companies.

The latest directive of the central regulatory bank to the BFIs, which constitutes almost two-third of the listed companies in the Nepse, could make a significant impact in the secondary market.

The NRB’s instruction to the BFIs calls for the priority on offering the bonus shares to its shareholders over cash dividend.
This might encourage the investors of the secondary market to pour their money in the BFIs scrips.

Since the banking groups is the heavyweight of the secondary market, the surge in the sub-index will help in pushing up the overall benchmark index.

Dr Gopal Prasad Bhatta, capital market expert, dubs the central regulatory bank’s directive as a move of an umpire. “It would neither help the stock market to go up staggeringly nor will it help on remarkable retreat,” Dr Bhatta told ShareSansar.

The directive, Dr Bhatta said, is a reminder to the BFIs that their primary duty is to pay attention in the credit flow rather than in other investments. “ The NRB’s latest directive discourages short-selling tricks of the investors mainly the BFIs. One thing I can say for sure is that the directive will be beneficial for the long-term investors who take rational decision,” he added.

Narendra Sijapati, president of Stock Brokers Association (SBAN), echoed Bhatta.

“While you carefully read the directives, the policy helps the market in the long run. Profit goes the way of unruffled investors, who do not make hasty decisions. Those who make investment calmly rather than depending on rumors, they are not going to regret their decision,” said Sijapati, asserting that the time was good to make investment in the shares of the BFIs.  

Through its circular yesterday, NRB has said that the capital adjustment fund of the BFIs could be utilized for the distribution of the bonus shares. It said that the money left in the redemption reserve after repaying the liabilities of the debentures should be transferred in the capital adjustment fund. The fund is used to issue the bonus shares to the investors.

“The new provision will obviously lured the investors towards the shares of the BFIs particularly which have low capital base in the expectation of the bonus shares,” Sijapati added.

However, the diktat of the NRB to bring down the ´held for trading´ investment to the one percent of the total core capital may impact the insurance and hydropower companies’ scrips. ‘Held-for-trading’ means the debt and equity investments that are purchased with the intent of selling them within a short period of time (usually less than one year).

After the BFIs were barred from the buying the shares of other BFIs, they have started making investment in the scrips of the insurance and hydropower companies against the backdrop of liquidity surplus and growing share market.

“The one percent investment cap is to discourage the BFIs from making short term investment. The initiative to discourage the short-term profit booking sentiments for the long-term stability of the market should be appreciated,” said Sijapati.