Why SEBON is not doing enough to implement CDS remains a mystery

Mr Raj Kumar Timilsina is the Chairperson of Nepal Investors Forum, which has incepted almost a decade ago to safeguard the rights of share investors as well as to sensitize the stakeholders about the benefits of share trading. But many share investors are critical of the Investor Forum – like all other investors’ associations – in that they have not been able to reach out to the chunk of investors spread across the country. Investors also have few issues as well as lot expectations from other stakeholders such as the government, regulators and the brokers. ShareSansar had a rendezvous with Mr. Timilsina to discuss all these issues.

An excerpt:

Investors’ associations in Nepal are often criticized for being largely passive when it comes to protect the rights of investors. What do you say?

I don’t understand why they criticize us. Ever since the forum was established in 2062 BS, we have always been in touch with the regulators whenever any policy regarding the stock market is formulated. And we have been actively engaged in making the investors aware about the benefits, as well as prospects and challenges of the market. Though we have heard of other investors’ organizations, we can boast that our forum is far better than them when it comes to sensitizing the share investors and safeguarding their interest. We have been frequently organizing awareness raising programs for the investors and those who are aspiring to invest in the stock market. I don’t know why they think we are not being active enough -- you can’t expect us to expedite the works to be done by SEBON or CDSC.  All we can do is push them to speed up things, which we have been doing from time and again.

What are your plans, as the newly elected chair of the Investors’ Forum to promote the form in terms of membership and its activities?

I am with the forum ever since its inception. I started off as a member of the forum, and went on to become the general secretary, and have now become the chairperson. Hence all I am looking forward to is to give continuity to the mission and vision of the forum.

As the chairperson of the Investors’ Forum as well as a share investor, what do you expect from the upcoming budget to be announced by a pro-market government?

We hear that the upcoming budget will address lot of issues dogging the market, though we cannot be reassured until the budget is actually announced.  We hope the capital gain tax will be effectively replaced by transaction tax. Likewise, paving the way for easy entry of NRN and foreign investment would definitely have a huge positive impact in the market. And we are very hopeful that these issues will be addressed by the budget.

The government must have sought feedbacks from the Investors’ Forum for the promotion of stock market to be included in the budget. There are many expectations as well as problems faced by investors due to loopholes in the laws governing the capital market, among other issues. Could you shed some light on the feedbacks?

We have directly given some inputs to the Ministry of Finance and we have also given many feedbacks to the concerned regulators. Only a few days back, there was a pre-budget discussion at the central bank. We were also invited there.  We have also been taking part in the meetings of Revenue Consultative Committee on budget. Hence, we have left no stone unturned to give our feedbacks for the budget. But how many of those suggestions would be included in the budget needs to be seen.  

CDS is being implemented, but the process is very slow. And it is unlike that we have a full-fledged CDS in near future. Even T+3 seems unlikely anytime soon. What is delaying the CDS process in your view, and how important it is to have a full-fledged CDS operation at the earliest?

The dispute between the brokers and SEBON over the net worth of the brokers. This matter has been by and large settled with both sides agreeing to the net worth of Rs 50 lakh. But now the brokers are neither applying for the DPs, nor explaining if they have any issues with that. If they have any genuine grievances they should talk it out. But the CDS implementation should not be further delayed due to this delay on the part of the brokers. This has given a pretext for the listed companies to delay dematerialization of their stocks. Here, I would like to clarify that the other reason the listed companies are not coming forward for demat is that they might be reluctant to pay the taxes for the current fiscal year, which is ending within a month.

I would also like to urge Nepal Stock Exchange Limited to direct all the listed companies to mandatorily go for demat within a certain timeframe – though CDSC has already urged the companies to do so.  And the Investors’ Forum will mount pressure on the listed companies if they do not come forward to demat their stocks by Shrawan. We would be forced to exert pressure on the companies since demat is in greater interest of the investors.

Won’t you exert pressure on the brokers too to become more accountable to investors when it comes dematerializing their stock at the earliest?

We have been pressing the brokers to become DPs as soon as possible. A few of them have already applied for the DPs, and we hope the rest would follow the suit soon. If the brokers are waiting for the current fiscal year to be over to avoid renewal charge for the DPs then it is outrageous in that the renewal charge is very nominal. But what they have been telling us is that the bank guarantee that they need to furnish to become the DP is being delayed on the part of Bank of Kathmandu, which is supposed to issue such guarantee. Yet another reason could be this: as all the board of directors of the broker’s company have to formally authorize the company to apply for the DP, the process could have been delayed as some of the board directors could be out of the station. Nonetheless, we want to be loud and clear that the brokers have to become DPs within Shrawan. Actually the brokers are the ones who should be taking the major initiative when it comes to implementation of CDS since they are the contact point between the investors and the CDS as they are not just DPs but also clearing members. It is unfortunate that the Investors’ Forum is taking the initiative for the early implementation of CDS and the brokers are lingering it. We have told the brokers’ association in no uncertain terms that we might be forced to lobby against them if all their member companies do not become DPs by Shrawan 2 when the CDS will be mandatorily implemented.

As the chairman of the Investors Forum, how optimistic you are that the CDS will come into implementation. How long do you think it may take?

Well, it all depends on the brokers and the authorities concerned. It’s been six years since we have been hearing that the CDS will come into implementation shortly. As I mentioned before, if the brokers start to get proactively involved in this, and if the stock exchange issues a directive to the listed companies to compulsorily demat their stock within a stipulated time period, say 30 or 35 days, then it can be implemented immediately. For this the regulator should take the lead. But why the regulator is not doing remains a mystery for us. Why are they not coming boldly to ask the stakeholders for mandatory implementation of CDS, which is so good for the stock market even though we all know that it will end many of the problems such as those related to lost and theft of share certificates, duplicates certificates, and complications of share ownership transfer, and will lead to shortened and efficient clearing and settlement processes.  CDS will not only make the life easier for all the stakeholders, from the regulators to brokers and investors, but it will also lead to market expansion. If you look at the history of the stock market around the world, the market has grown by around ten times once the CDS gets implemented.

How do you rate the relationship between share investors and brokers? Have you faced any issues with them?

Investors and brokers have to directly interact in the stock market. They have to have a good relationship. Without the relationship between the two sides, there is will be no transaction in the market. Hence, we have good relations with the brokers. Nevertheless, there are certain issues we have with them such as the delay in CDS-related issues and timely settlement of share ownership transfer and payment. Though there were some other problems caused by a few brokers in the past, we cannot hold the entire community of brokers as bad. All in all, we have good relations with the brokers.

How important it is to bring in good companies from the real sector to the stock market?

I think it is very important. Our stock market is overwhelmingly dominated by BFIs, though the stake of other sectors such as insurance and hydropower are growing steadily over the recent years. But the real sector industries, which have more market capitalization than the BFIs, are out of the stock market. For instance the market capitalization of cement factories in the country is more than the total market capitalization of the stock exchange. But such companies are not listed in the stock market. Similarly, other manufacturing and service-oriented companies such as Dabur and Ncell are not in the stock market. Similarly Chaudhary Group’s companies are getting listed in foreign stock exchanges, but not in its country of origin. What the regulators need to do is to encourage them to enter the stock market. They should try to understand why the real sector companies are hesitant or reluctant to join the local stock market. The Investors’ Forum has been taking initiative for that. We have submitted a set of suggestions to the regulators to help bring the real sector companies to the stock market. We have also given similar suggestions to the last as well as incumbent finance minister. We hope the upcoming budget as well as monetary policy will announce something in this regard.

Mutual fund schemes have been receiving only lukewarm response in the market. On the other hand, more schemes are coming up. How beneficial are such schemes for the investors, and the market in general?

Mutual funds are introduced to help even those people who do not understand the stock market properly or who cannot analyze the market efficiently to benefit from the share trading. Hence such schemes are not just beneficial for investors, but for the entire market, as they give more depth to the market. And I can see that the investors are gradually getting attracted to mutual funds as the price of both the mutual funds in the market have increased around 30 percent since they were launched. I think the mutual funds can expand their area of investment, rather than heavily relying on the stock market, they can fare much better.

Disclosure of information by the listed companies is vital for investors. But many investors complain that such information are not released on time, or that a handful of big players exploit such information before the general investors could benefit from it. How honest do you think the listed companies are when it comes to timely flow of information that could affect the share price?

We have faced many such problems related to information disclosure in the past, and we continue to do so now – though not as much as we did in the past. After we pressed the stock exchange to address this problem, they have come up with one-window policy as per which any decision taken by any of the listed companies after the market closes at 3:00 PM that could influence the market price must be posted on the NEPSE’s website before the market reopens at noon on the next day. Grievances of investors regarding timely disclosure of information that could influence the market have been addressed to a certain extent over the recent months. Nonetheless, there are other issues. For instance, vital information about merger of BFIs are leaked to the vested interest groups and not disclosed on time to general investors. The regulators have not been able to do anything to control this. If the scrip of any company gets traded at the circuit level without any information that could influence its price, then the regulators should seek clarification from the concerned company about it. We have already requested the stock exchange to do so.

What about the rumors being spread by some players, including big investors to manipulate the market for their vested interest? For instance, rumors were recently doing rounds for days and weeks in the market that Himalayan Bank is seeking merger with Ace Development Bank or that Prime Commercial Bank seeking merger with Narayani National Finance. But they turned out to be hoax. What can we do to discourage such a tendency?

I would like to urge the investors to be alert themselves when it comes to rumors. If you are prudent enough, it is not difficult to know whether such rumors are right or wrong by calling the company concerned.

And then a lot of investors are affected by merger in other ways, too. If BFIs merge then the trading of their scrip gets halted abruptly for months, and there is no guarantee that the merger will be completed. Investment worth billions of rupees is frozen for months and sometime even for more than a year in the name of merger. On the other hand, the regulators are not paying attention to this situation. And some companies, for instance, Kist Bank Limited, do not even publish their DDA on time. This is a big problem, especially for thousands of small investors. The problem is getting more serious since more and more BFIs are seeking merger or acquisition. As the chair of the Investors’ Forum, what do you think should be done to address this situation in such a way that the merger process will not be halted but the investors do not have to suffer the way they have been suffering now?

Yes, thousands of investors are suffering due to abrupt halt in trading of scrips of BFIs, which enter into the merger process. This problem of lengthy merger process can be addressed to a large extent if the trading of the companies is resumed after the swap ratio is finalized through the DDA. We have time and again lobbied with the central bank regarding this matter, but the central bank has always turned a deaf ear. Moreover, we are demanding action against the BFIs, which pull out of the merger/ acquisition process without solid reasons, and compensation for the shareholders who had to suffer for months if the merger fails.

And some companies can intentionally seek merger just to divert the attention from its bad balance sheet as most of the shares are held by the promoters and they are the ones to take any decision regarding merger. We all know what happened during the merger process between Corporate, which did not have good balance sheet, and Social Development Banks. But Social eventually went on to seek merger with Global IME Bank. In the process trading of the scrip got halted for a year.    

The central bank is the authority which prepares the merger/ acquisition policies. But these policies do not pay attention to the interest of the general shareholders. With regard to the merger of the BFIs, the central bank’s policy only states that the trading must be halted. This is the reason the general shareholders have been suffering. Hence, as I mentioned before, the companies that cannot complete the merger process due to bad reasons should be punished, and that the shareholders must be compensated for the halted trading. Staging the drama of merger to serve one’s ill motives is a kind of financial crime, and the regulators must wake up to this reality.

How aware and active are the regulators when it comes to protecting the rights of investors? And how efficient is they role in promoting the market?

The regulators have been doing certain things to regulate the market. It’s not that they are not doing anything, but they are not doing enough. For example, SEBON’s own by-law states that all the listed companies must demat their stocks within six months of the implementation of CDS. But SEBON has not been able to enforce its own regulation. The regulators recently struggled to transfer the ownership of shares of certain companies being traded in BT. They have completely failed to take action against those who are spreading all sorts of rumors to influence the market. They have not been able to ensure timely flow of information of to general share investors by the listed companies. A handful of big investors and players are manipulating such information for their advantage. They have no plan to control malpractices of BFIs in the name of merger, as we just discussed.  

Compared to the scenario five years ago, how rational and mature the investors have become now in your view?

The investors have become much mature now. Back then many investors did not even know what kind of scrip they were buying. They were only driven by rumors. I am in this market for the last 12 years. Now the scenario has changed, and only a negligible percent of investors are investing only on the basis of rumors without doing any homework on the company they plan to invest. We have really come a long way, and it is very good for the market, too. Looking by the way certain scrips are steadily growing in the market, we can understand that a lot of investors are investing after properly analyzing the scrips in very rational manner.

Since you are a noted investor yourself and have extensive experience in the market, what do you suggest to the relatively newer investors who are looking forward to make good investment?

You should first of all see the financial strength of the company before investing in its scrip. You should also check the background of the management team and promoters of the company you want to go for. It is also important to take into account the history of the company when it comes to the kind of dividend it has been offering over the years, as well as its profitability i.e. how much dividend they might offer in future. If you ask me, I prefer those companies with the gradually increasing trend of dividend rather than those companies that offer handsome dividend in a certain year and a very low dividend the next year. That’s portfolio management. Another thing an investor should take into account is portfolio diversification. Do not put all the eggs in one basket. Instead of investing heavily in one scrip, you should look for a number of different good companies. If you follow this you are bound to get good returns.

Which sectors do you prefer to invest in – banking, insurance, hydropower or any other?    

I prefer the banking scrip the most. Then come hydropower and insurance stocks.  Then there are only three hotels and hardly any from the manufacturing groups.

Which are the best scrips in your opinion?

I, as the chairman of the Investors Forum, would not like to answer that question directly. If I mention which scrips I like the most, many investors might feel that I am being biased. Hence, all I would like to say is that you can find out the best scrips if you do your homework properly.

Could you then suggest which are the most undervalued scrips in your opinion?

I think the banking scrips are somewhat undervalued in the present context.

Where do you see the market six months down the line?

If we can ensure CDS implementation, foreign institutional and NRN direct investment in the stock market, the benchmark index would breach the previous all-time high of 1,175 levels within six months.  If we can ensure a new constitution on time and jump start economic growth then we can continue to newer heights.

Lastly, if any investor, who does not know you personally, wants to approach the Investors Forum, how can they do so?

For that they can log on to investorsforum.com to contact us. If any investor has a genuine problem then they can directly approach us, and we would take their concern to the authorities concerned.