Secondary market does not exist if there are no minor fluctuations

Priya Raj Regmi was recently elected as the new president of Stock Brokers Association of Nepal (SBAN). Sharesansar sat with Regmi, who is also the Managing Director of Crystal Kanchanjangha Securities, to talk about the recent fluctuations in the share market, delay in the implementation of the Central Depository System (CDS), roles of capital market regulator Securities board of Nepal (Sebon), the extra scopes that brokers are currently seeking from the regulators, among other issues. Excerpts:

How do you assess the current market situation?

The market of the country is yet to be grown which is rising in a subtle way. The market has passed its infancy age, but yet to become adult. There are several reasons. First the market is dominated by the banks and financial institutions and insurance companies as well as the reluctance of the real sector companies to join the market. There are also problems at the policy level. The policy makers could not act on time to frame the policies toward that end. There should be the maximum utilization of technology in the market, which we have not been able to do. Though we are doing it, but not at the desired level.

There are talks about the implementation of the CDS for last three years, but it is yet to be implemented. Whom do you see responsible for the delay in the full-fledged implementation of the dematerialized form of shares trading?

They (CDSCL) have already given the reasons about the delay. This is new technology. As people are less open to the new changes, it is difficult process to make fundamental changes in the system. The turnover and number of transactions will go up following the enforcement of the CDS system. One of the reasons for the delay could be the requirement for the load test. The CDSCL has also said that the Securities Board of Nepal (Sebon) has sought assurance from it. We are working on manual system now. However, the CDS is started but it could not withstand the load than it will make negative impact. It would be better to start the system by ensuring high-degree of safety. The process of implementation has moved ahead. More than 22,000 DP accounts have been already opened. Nearly a million of shares have been already dematerialized. Though people want immediate implementation, there might be technical reasons too which is compelling the authority to defer the full-fledged enforcement of the CDS

However, Nepse and the CDSCL should have thought about the possible hurdles for the implementation and plan accordingly. Was CDSCL too ambitious about its plan?

I am not the right person to answer this question. Nepse or CDSCL may give better answer in this regard. We are just the implementing partners and we are ready to execute it anytime. We have been expressing our commitment that we are ready to implement it anytime.

However, brokers are said to be un-cooperative toward the implementation of the dematerialized form of trading?

This is just a baseless accusation. Currently, I am running two systems together due to the delay in the full-fledged implementation of the CDS. I am working one through the paper-less trading system while I am continuing the paper-based trading. I have to involve more manpower and facing problems due to the lost of papers including other. Almost all the brokers have taken the membership of the DP. What else can we do more than this? We are not the one who operates the market. We are always ready to help them (Nepse/CDSCL) for the implementation of the system. Once the CDS comes into the operation, the turnover will go up. The broker will be the biggest beneficiary of this system as their commission will also increase with the rise of the turnover in the market.

What are your plans and priorities as the president of the SBAN?

As SBAN, I don’t think we can make transformational changes. Yet, there are plans and policies related to the brokerage firms which we will formulate and implement following the consultations with our members. Likewise, our priority is also to support for the full-fledged implementation of CDS as soon as possible. We will also help the policy makers by putting forth our views in the policy formulation for the development of the capital market.

The roles of the brokers have so far been just brokering on selling and buying shares. Don’t you think that you should have bigger roles?

We have been demanding the authority to allow us to do more. We have been raising our demands in various ways. We also plan to work-out more deeply and suggest them from our side. We need full-fledged broker. Such full-fledged broker will not only increase our business, it will also contribute the overall capital market. The full-fledged brokers will have various businesses like advisory service, portfolio management and margin trading, among other. Our scope should be expanded with the compatible policy and laws in place so that we will be able to expand our business remaining under the ambit of the law.

What should the government do for the development of the capital market?

There are a lot of things to do from the part of the government. In order to make our capital market a real capital market and to show the direction of the country’s economy from the index of capital market, the sectors in the capital market should be mixed up. Real sector companies have not come to the secondary market. Nepal is already self-reliant on cement while it is semi-reliant on drugs and medicines. Large scale hotels are opening. Foreign direct investment is coming. There are profit-making multinational companies like Ncell. Similarly, there are educational institutions and hospitals. First, these companies should be brought to the stock market for the trading of their shares. Toward bringing them into the market, one of the ways is by penalizing them or another way could be by encouraging them through incentives. In my view, the government can formulate a law whereby it can make mandatory to a company to go to the public if it has a certain amount of annual transactions. This will compel the companies to come to the market. Or, the government can say that if a company’s paid-up capital is of certain amount, it can only be registered as a public company and have to float shares to the public in certain years. The government can put constraint in this way for the company so that they will have to float their shares to the public. Likewise, it can also bring companies that are already in the operation into the stock market by using the measures like incentives or penalization.  A private limited company has to pay 25 percent corporate tax to the government. The government may say that if the company goes into the public it will give a tax subsidy or incentives for certain time. Similarly, if a company don’t want to go to the public and wants to enjoy the profit itself, the government can increase the tax rate. This could drive the companies to the share market either out of choice or compulsion which will ultimately give the real picture of the capital market of the country.

What do you think will help the boost the market size to its potential?

There are two types of investors in the market who makes investment in the shares in the long term. They pour their money into the shares and sell it in the future when they need money. Another type of investors includes those who are involved in daily trading. The current market seems for the latter type of investors. The awareness level of the investment is very low. We are raising awareness from our part which needs to be increased from all stakeholders including Nepse, CDSCL, Sebon and other. In order to make the size of the market more bigger, the government-owned institutions which acts as the market maker, but seem passive currently, should be made active. Similarly, participation as much as possible should be made in the mutual funds which have got the approval and are currently being traded. Similar like tax rebate in the deposit of the Employees Provident Fund, Citizen Investment Trust, and similar incentive should also be offered in the mutual funds. There are 20 lakh government employees in the country. Even if an employee makes at least Rs 50,000 in the mutual fund, billions of rupees will come to the stock market. Such a big amount will give mobility to the market plus 20 lakh people will also know about the stock market while the entrepreneur opening the company will get the capital. Brokers will also get business if the market will become bigger. These all efforts from the part of government will boost the market.

There are always talks about bringing NRN investment in the capital market. However, this has not made any headway. What should be done to bring the NRN investment in the stock market?

Bringing NRN investment should not be limited in the speech only. If we say that the NRN investment should be brought, the initiatives should be started. The government should bring a substantive proposal and form a task force to work in this regard. The task force can work out on the ways and policies on bringing the investment, about taking away the profits, hassle-free or one window investment channel whereby the investor will bring the investment taking the approval from a certain authority like Nepal Rastra Bank or Sebon and on which companies the NRNs will be allowed to make investment, among others. Now it’s already time to form a task force in this regard. Than only there will be some development.

It seems like there is no-presence of the regulators in the market. Sometime the banking regulator and insurance regulator decision makes impact in the market while the capital market regulator become passive. Is it the lack of coordination among the various regulating bodies or Sebon’s passiveness?

You cannot say that our regulator is weak. The history of banking regulator is also long while Sebon was established later. NRB has a very big manpower while Sebon is still reeling under the manpower crunch. Similarly, Sebon is struggling to utilize the technology in its works. It’s not like Sebon is not doing anything. It is doing as much as it can from its existing manpower, capacity and resources. Sometime the policies and directives of the regulatory bodies is interpreted in the market and media in a different way. The coordination among the regulatory bodies is always important which they are doing from various forums.

How do you assess the current understanding level of the investors in the market?

The situation of the market is now completely different than it was four/five years ago. The media are also following the market closely. The focus of all stakeholders in the market is increasing so do the awareness level of the investors. The number of investors investing on the basis of the fundamentals of the company and the economy is also on the rise unlike the past trend when the investors used to run after the whim and rumors in the market. The market dealers and mutual funds are also going up in recent time which is helping the market to operate on balanced approach.

Still, the political development plays dominant role in the stock market.

The current political situation is not a normal or as usual situation as we are on the critical moment. It’s not like that we are making a small policy which will whether make any impact to the market or not. We are drafting a constitution which will show the political and economic direction of the country. The impact in the country on having a new constitution or not having will be seen for a long period of time. The current political situation is not about the change of the government. The market should not respond on the political development resulting from the change of the government. However, the constitution will also determine the future and shape of the market so it holds significant importance to the investors. So, the impact in the share market due to the political development vis-à-vis constitution drafting process cannot be ruled out.

The market has observed massive correction in recent months. The turnover has also gone down significantly. What are the reasons?

We started the works related to the CDS after adopting the new system. The shares of commercials banks that the investors have bought after Ashoj 22 have been sent for the ownership transfer on the dematerialization form. Until Poush, most of the investors sent their shares for the ownership transfer to clinch the dividend of the companies and take part in their AGM. The dematerialized shares have not been eligible for the loans due to a lack of clarity on the working procedure for the banks to issue loans against such share pledges. The business volumes do not increase until the leverage is not created in the investors’ fund. These are the reasons why the turnover and transaction in the market has gone down in recent days. Similarly, the market goes down or remains stagnant if the business volume tumbles. Also, correction of some 100/200 points in the market cannot be considered a serious downfall. The beauty of the secondary market is speculations which should be natural. Who will sell the shares if the investors feel that their shares price is going to increase? Likewise, nobody is going to buy the shares if there is feeling that the share price is going to plunge. The market operates on speculations and the demand and supply theory. The secondary market does not exist if there are no minor fluctuations.

 Most of the brokers are accused of discriminating small investors over big investors while doing works. Is it true?

Earlier we had problems in the system. There were problems like failure on the execution of the orders from the broker, sometime double execution on single order and system used to be hanged frequently, among others. Such problems have come to an end now. Nepse has upgraded the existing system to an extent. There are two log-in accounts in every broker offices. So we have given priority to all investors in equal way rather than any discrimination. If you ask investors now, they will not make such complains anymore.

It is said that the money of the stock market is flowing toward real estate in recent days which has led to the fall in the turnover. Is it the scenario?

I don’t think so. The turnover is decreasing because of the reluctance of the banks don’t issue loans sans collateral. The secondary market is dominated by the banks and financial institutions, especially commercial banks. 70 percent of the daily transactions in the market is of commercial banks. Most of the shares of the commercial banks have been dematerialized following the ownership transfer.  Banks have not issued loans on such shares as it has not worked as the securities lately.

The brokers are mostly centered in the capital. As the capital market is also outside Kathmandu and recent floating of the shares is also of the companies based outside Kathmandu, why brokers fail to go there?

Brokers reach alone doesn’t work. RTs should also follow us. We have already gone to 6/7 cities, but there is a problem of RTs. Sometime later, DPs also have to go. The presence of all stakeholders can only help to grow the market outside Kathmandu valley. Similarly, the technology should also be available in the market where we are supposed to go as we cannot function without technology. The banks should also go there. The internet service provides should also be there. If we fail to make settlement in T+3, Nepse kicks out us from the trading. We don’t need profit immediately for taking business there, but there should be environment there which ensure profit after certain period of time, say two or three years. The combination of all stakeholders and aspects is needed for the market to flourish outside Kathmandu valley. The coordinated approaches can only function properly.