Suggestions to help stock market move in the right direction

• Ujjwal Bohara

The only secondary stock market in Nepal (Nepse) is sluggish currently. The market which crossed 1000 level some time ago is currently struggling to maintain the 900 benchmark; some even expect it to fall further at a time when market was expected to break the previous record. According to experts, it's the result of small and new investors who are being panicked and rushing to the broker's office as soon as the market rises. Some call it profit booking by big investors.

But if we try to analyze deeply all the factors, we come to find out that it's the reason of lack of educational about share market, and the biggest reason is that we have a very very high number of short-term investors in our country , and the number of long-term investors is comparatively very low. Thus due to huge number of short-term investors the market is not able to take a good turn. If we study the stock market and tax system of other countries, we find that investors are classified into two types : short-term and long-term , short-term investors are basically the one holding shares for less than a year , whereas the one holding for more than a year are long-term investors. And the long-term investors are motivated everywhere. Since presence of large number of short-term investors in the market will add more risk in the market, and lead the market into unexpected direction. If we see the condition of our country, we can find that there are a large number of short-term investors. If we look at the case that happened over the past few weeks , as soon as the company declared bonus shares , there was a huge rush to purchase the shares , and when the price reached its peak , there was a rush to sell it .

If we study the tax system of India, we find that the long-term investors are promoted in India by lower tax rate as compared to short-term investors. The capital gain tax rate for long-term investors is nil, whereas the same for short-term investors is 15 percent, after payment of STT. But in Nepal both long-term and short-term investors are treated equally and imposed with same tax of 5 percent on profit. If we think logically, imposing the same tax rate for both long-term and short-term investors is not fair. If there are two persons, one earned profit of Rs 10,000 from stock market in two years and the other earned the same amount of profit in a week, both are levied with same percentage of tax in Nepal, which is unfair. Thus if investors are segregated and imposed with different tax rates according to the period of holding than the market will definitely take a positive move, and support market to rise by increasing expectation and decreasing risk. Thus, it motivates new investors to enter the market, which will be beneficial for everyone.

The other way to promote the long-term investment is by introducing an inflation index. Let’s say a person invested Rs 1 lakh in year 2001 and other invested Rs 1 lakh in year 2010. Suppose both earned 30,000 profit, then logically the one who earned profit in small time should pay higher tax, and thus by introducing a inflation index both the investment will be brought at the same base period and pay the same tax. Thus the time value of money will be considered.

In a nutshell, my analysis says that if correct step is taken now, the number of small investors will rise significantly, which, indeed, will push the stock market to darker side, and promote an unhealthy environment. Thus, by imposing different tax rates to short-term and long-term investment, the market can be controlled. Else the stock market will no longer remain a stock market and become a casino, where people don't analyze on performance and just move following their luck or rumors. Since nothing is discouraging short-term investment currently, investors are booking profit in every couple of days, which is acting as a barrier for the sustained growth of share market.

If the suggestion that this article have offered is considered seriously, investors will hold their shares for a longer time, to reduce tax. Since they are holding their shares for long time, they will learn to evaluate the financial statement of companies and thus pick the shares with good future prospects, and not by following rumors. Hence, the price of good companies will grow and that of bad performing company will remain constant or decrease, thereby creating a healthy environment for investment.