Sebon okays bank guarantee for brokerage firms

KATHMANDU, AUG 21 -

Stock brokerage houses applying for a licence for clearing members can now produce a bank guarantee for Rs 1 million instead of making a cash deposit. The Securities Board of Nepal (Sebon) has allowed CDS and Clearing (CDSC) to implement the bank guarantee system paving the way for brokerage houses to begin operations.

About a month ago, CDSC had applied to Sebon to permit applicants to submit a bank guarantee instead of cash. CDSC, a subsidiary of the Nepal Stock Exchange (Nepse), asked Sebon to relax the requirement after brokerage houses showed no interest in engaging in clearing stock transactions due to the cash deposit rule.

They have been demanding that the rule be scrapped as they were unable to make a cash deposit of Rs 1 million due to their small paid-up capital. Only two out of the 50 stock brokers, Divya Securities & Stock House and Nepal Investment & Securities Trading, have obtained a license for clearing members so far.

Sebon’s spokesperson Niraj Giri said the regulator approved the proposal on Friday. He added that the new provision would help CDSC to conduct full-fledged functions. CDSC said they had not received an official letter from Sebon regarding the approval.

CDSC’s Chief Executive Officer Subodh Sharma Sigdel said they wanted to implement the provision to attract more stock brokers to engage in clearing members. According to Giri, if clearing agents fail to settle transactions within three days from the date they are conducted, CDSC could recover the amount from the bank guarantee submitted by the brokerage firm.

CDSC started digital clearing and settlement of securities transactions in mid-April. The paperless system allows processing to be done in an easier and faster way compared to the manual system which normally takes at least three days to transfer ownership of shares after a sale. The

system has also aimed to compel brokers to be members of CDSC to act on behalf of their clients.

Although the autonomous government body has initiated the move, the reluctance of stock brokers to obtain a clearing licence has impeded the pace of digitization of the clearing system. Despite the rule allowing submission of a bank guarantee instead of a cash deposit, CDSC does not expect a large number of brokerage houses to apply for permits.

Sharma said that brokers were still firm regarding their demand that they be allowed to operate as Depository Participants (DPs) as well. The regulation requires a company to have a net worth of Rs 10 million to obtain a DP licence. “However, most brokering houses have a net worth much lower than the requirement,” said Sigdel.

Anjan Raj Poudel, a stock broker, considers the implementation of the bank guarantee system as a positive move, but he said that it was not sufficient to attract brokering houses. “Unless the government replaces capital gains tax by transaction tax, there is a small chance of brokers beginning operations as clearing agents,” he added. “In addition, the government should reduce the net worth threshold for brokers to encourage them to join the online clearing system fully.”

So far, 15 companies have made agreements with CDSC for dematerializing stocks. CDSC has issued licences to 10 companies to operate as DPs while it has registered 6,561 share certificates for dematerialization.

Source: The Kathmandu Post