We should be in a position to launch full automated trading within next fiscal year.  

Nepal Stock Exchange Limited, the only stock market of the country, has been firing on all cylinders over the past few months – ever since its new Chief Executive Officer and General Manager Sitaram Thapaliya took over the mantle. It could be more of a coincidence, but coming a investor forum, investors in general have a lot of expectation from Thapaliya, and vice versa. Likewise, this year is an important one for the NEPSE in that it has pledged a number of reforms, including upgrading its trading system. ShareSansar.com caught up with him to bring to you the latest from the stock exchange. An excerpt:

Ever since you have taken up the top post at NEPSE, the market is consistently surging, propelled mainly by surplus liquidity and the prospect of political stability in the country. Now even SEBON seems a bit wary about the rate of the market growth. In your opinion, is the Nepse index overpriced or the rally is justified at the moment?

The dividend pledged by the listed companies is much higher than the interest rates offered by the BFIs. The average return of the capital market stands at around five percent while the interest yield of the money market is just 3 percent. In this light, the growth is not just natural but there is a scope for further growth in the market. Nevertheless, we are a bit concerned about the pace of the growth. The market is growing at slightly abnormal pace.

You chaired the investors’ forum before taking up the mantle of NEPSE General Manager earlier this year. Naturally the investors expect a lot from you in term of addressing the problem they face. Do you think you have been able to live up to the expectation? And, what do you expect from the investors?

I was not a regular trader in the past. I was more into educating the investors about the market, especially about the importance of having enough information before making investment. Hence, I had to make the investment aware about the perils of investment done on the basis of market rumor as well as the tendency of the listed companies not to disclose some vital information to the investors. To meet these objectives, I organized the investors and established and led the forum for some time.

I expect and urge the investors to plan their investment only on the basis of information regarding the financial condition of the listed companies and not on the basis of some “tips” provided by others.

What are you doing to address major technical snags related to trading intranet and the streaming of live price? By when can we expect fully automated trading at the NEPSE?

After I took over as the general manager, I started to enquire about the factors that have slowed down our website. We soon realized that one of the major factors was related to the web hosting. It is being hosted outside the country. We have already initiated the process to shift our webhosting from Canada to GIDC at the Ministry of Home Affairs within three months, which will make the website much faster.

To stream the live price of the shares of the listed companies, NEPSE is also planning to scroll the live price on television channels. We have already sought Expressions of Interest (EoI) for a technology that enables the live price of shares to scroll on television set. It would be useful to the investors as they can see the live price from television and they do not necessarily have to rely on our website. NEPSE is also asking the EoI for the development of mobile apps and other useful tools related to the share market.

Insofar as the fully automated trading system is concerned, we are hiring consultants to decide whether to upgrade the Comaq system it has been using or to shift to an entirely new system. We will publish an expression of interest to this effect very soon. The consultant will advise us whether to upgrade the system or to adopt a new system. As per our plan we should be in a position to launch full automated trading within next fiscal year.

For the time being, the NEPSE has also renewed AMC with the agents of Comdaq system and was testing the system for upgradation on a regular basis, especially during the weekends.

At present, especially when the turnover tends to be higher, investors are struggling to register their client IDs and to place their orders. Is it not possible to give more terminals to the brokers so that they can branch out for the convenience of investors and the brokers themselves? Here we would also like to draw your attention to small investors who have been complaining that during the market rally, brokers give priority only to big investors.

We want to give more terminals but the system cannot support more terminals unless the system is upgraded. However, we don’t need to upgrade or change the entire system for to add more terminals. We think, within two months, we should be in a position to give more terminals to the brokers and also establish more remote workstations in all the major urban centers so that share trading can take place from anywhere across the country.

In regard to the small investors’ complaints that the brokers are not paying attention to them, we would like to strongly urge the brokers to take the orders from all the investors on time-priority basis and execute it accordingly. We have also heard a few complaints. Nonetheless, we don’t think that it is as serious as you are suggesting.

What we are suggesting is that this case is just starting to get serious. The situation will aggravate further as the market continue to surge. There was no complaint when the market had not picked up. As the market started to rally the complaints also started to grow. Hence, small investors will be complaining more about brokers’ failure to execute their orders in days to come.

To address this problem, we have to upgrade our system. We cannot simply add more terminals without upgrading the capacity of the system. If we give more terminals to the brokers within the existing system, the entire system will slow down further. See, the problem is not that we don’t want to give more terminals to the brokers or more facilities to the investors. We have some compulsions here. In fact, we want to assist the brokers and investors in all possible ways. We want to give more terminals to the brokers and Remote Work Stations (RWS) to all the major urban centers as soon as possible so that the trading, which is by a large limited only to the capital, can be expanded across the country. Today more than 95 percent of the total trading is limited to Kathmandu! It is important to end this situation also because involving more investors outside the capital will make the market more stable by reducing the existing volatility.

Hence, we need to upgrade both our hardware and software. And this also entails a lot of money. And, you know how hard it is for a state run enterprise to manage fund to upgrade its system. Here I would also like to add one thing: We think it’s high time the brokers, too, upgrade their infrastructure as the volume and the depth of the market has increased. Part of the complaints from the small investors could be related to brokers’ infrastructure.

So when do you think NEPSE will be in a position to give more terminals to brokers and RWS?

Good news is that we may not have to upgrade or change the entire system to add more terminals and to give RWS. Making a few upgrades in the existing system and managing data migration should be enough for this. Hence, we expect to be in a position to give more terminals to brokers within two months.

Yet another issue that is bothering investors is that of NEPSE calculation. We do NEPSE calculation on the basis of the market capitalization. On the other hand, companies with large paid-up capital such as NTC, Standard Chartered and Nabil Bank are driving the market. Tomorrow, let’s say, once Tama Koshi hydropower project gets listed it would start driving the market. Hence, don’t you think that calculating the market on the basis of market capitalization is somewhat flawed?

Yes, we have also realized that. The stakeholders have been suggesting that the market index should be calculated on the basis of floated shares. Since this is not urgently pressing issue, we are focusing more on upgrading the system. But we are seriously considering reviewing the way we calculate our index. We need to educate the investors, and other stakeholders, including mass media, since they are basically focusing only on NEPSE’s benchmark index, though we all should be focusing more on float index.

Information is key to investment. However, it seems that only big investors have access to all required information related to the stock trading, including insider information. On the other hand, information disclosure is not as transparent as it should have been. How do we go about it?

Insider information is proving a tough nut to crack even for us. Only a few days back we were compelled to take a tough decision, which many listed companies might not have appreciated. But we had to ask the listed companies to hold their meetings and take any decision that could influence the price of their shares only after 3:00 PM once the market closes. This decision was more of a compulsion on our side to stop a few investors from getting insider information at the cost of the rest. Holding the meeting after 3:00 PM will also give them enough time to duly notify us about their decision. This also relives much pressure for the listed company, especially the work pressure of the company secretaries. We, too, can post the information related to the listed company on our website on time. Hence, this decision of ours also helps promote information disclosure in a transparent manner as even print media will have enough time to publish any such decisions of the listed companies.

To make information disclosure more effective and transparent, we are redesigning our website in such a manner that the concerned companies themselves can upload their decision on the site. Remember that most of the information leakages in the past occurred due to relatively lengthy process that makes the company representatives to come and deliver the decision in writing at the NEPSE. By slashing that time period, we can considerably reduce the possibility of information leakage.

It’s been two years since NEPSE established CDS and Clearing Limited as its subsidiary to act as the central depository system. At the time of its inception, it was said that CDS will come into operation “soon”. But it still has not fully come into operation. What is causing the delay?

CDSC has not been able to carry out dematerialization process at the desired pace. On the other hand, the brokers have put forth some conditions to join as Depository Partners. I am not in a position to give your insight into the process pertaining to the CDS since I do not represent NEPSE at CDSC. Our board directors are the concerned representatives.

Stakeholders have been pressing the stock exchange to bring in real sector for further growth and maturity of the share market. But there aren’t too many good real sector companies in the country and even their growth is limited given the size of the domestic market. Do you think the real sector should be brought into the market at the earliest?

We definitely need to reduce the concentration of BFIs in the stock market. Today BFIs cover more than two-thirds, of the total market concentration. This is not a good situation. We are, therefore, holding discussion with the SEBON, to bring in real sector companies to dilute the concentration of BFIs. But the real problem here is that the real sector players aren’t much interested to join the market. We need to find out the reason behind their reluctance. Our preliminary study points at two things: First, the real sector companies do not want to join the market since they already have enough capital to operate on their own. They say that why should they float the IPO when they don’t need the capital to run their business profitably. Secondly, they might be interested if they can get premium value to their shares in the market, which the regulations discourage. May be it’s high time the regulations are reviewed in such a way that both the real sector and the investors are in a win-win position.

Can’t we make it mandatory for the real sector to join the market? Many stakeholders, including prominent economists across the world, believe that the stock market must be mandatory to the real sector as they need to share more of their profit with the customers because they make profit from the customers.

We might have to do that as well. At this point, however, we are seriously contemplating over a mandatory provision for the hydropower companies to join the market. The way they are developed, it is important that they mandatorily join the stock market. It will make them more transparent. This will also make the capital market deeper and more sustainable and the investors would get an opportunity to diversify their investment portfolio.

Talking about the hydropower sector, some of the leading investors and experts from the field have suggested that the state should take the initiative to legally channelize a portion of the remittance to the stock market, especially in the shares of the hydropower. Even if we can channelize 5 percent of the total remittance, it will not only make the market far more stable, it would also bring about drastic in the living standard of Nepali migrant workers and their families. Are you planning anything along that line?

The government needs to give it a serious consideration. It is a very good proposition. Today the bulk of billions of rupees remitted by Nepali migrant workers in the Gulf and other parts of the world are entering the country through formal and informal routes, and this money is being spent on consumption, especially on food and other essential commodities.

Many countries have more than one stock exchange. Do you think Nepal, too, needs at least one more and preferably privately run share market, as demanded by many stakeholders?

If we look elsewhere in the world, the stock exchanges are merging. At the time when we are talking about cross-border listing and trading, do we really need another stock exchange in a small country like Nepal? If you ask me personally, I don’t think we need another stock exchange in this country. Yes, we can always privatize it if that can ensure better performance. I would like to urge the government and the regulators to think along that line. NEPSE cannot offload the state’s stake in the exchange. The government needs to do so.

Much was expected from the mutual funds introduced for the maturity of the stock market. But there are only two schemes in the market and there is not much charm among the investors. Why are not mutual funds fairing as desired? What is going on over here?

I think the investors are not yet fully aware of the benefits of mutual funds. Anyway, we need to bring in more mutual funds, besides more of institutional investors as well as real sector to bring the market depth. Here I would also like to inform that even foreign investors have approached us with an interest to invest in Nepal’s stock market. We need to create an environment to welcome them, as well.

Regarding the OTC trading, a very few investors realize that it can be done through the stock exchange. What do you have to say about this?

I think it is again related to the lack of awareness. Hence, I think it has more to do with investors’ awareness. Any scrip that has been delisted or such companies which could not comply listing conditions can be traded through OTC. The investors need to understand that. Moreover some public limited companies which have not floated shares to general public can also be incorporated in OTC market and for this we are thinking to discuss with SEBON and CRO.

What is your take on the debt market? Why can’t it pick up in Nepal?

True. Our debt market remains negligible. A few companies issue debt bond if they need money, and they are not even traded. If we can enclose bond warranty then maybe we can promote debt market, too.

Is there anything else that you want to inform us?

We are also exploring the possibility of carrying out rights renouncement through the stock exchange. It will add derivative scrips in our market.