Capital Market of Nepal Require Depth

The necessary condition for a developed nation is that it should posses at least a well developed capital market. Our country is aiming to graduate from LDC by 2022 and build status of mid-income generating country by 2030. To achieve such target, hundreds of billion dollar investment should be poured in Nepalese economy either from private or from government sector. Internal as well as external source of fund is required to finance the investment in country. Until and unless local capital market does not get momentum, the dream of prosperous nation will not change into reality. How can we develop this capital market? The straight answer is the multiplication of number of investors along with size of investment. For this we need to institutionalize integrity and transparency in the flow of information as well as in each transaction, in the system of our capital market.
The timeline of Nepali capital market is almost 78 years old. The confidence of investors toward the market is still low. Majority of retail investors believe that there occur inside games in capital market of Nepal. The main reason behind it is the insufficient role of regulatory bodies along with the low depth of the market. This has reduced the sentiments toward investment in capital market. Rather they prefer less risky fixed deposits. The recent challenge is to create depth in the market. In simple words, the creation of a market where a bunch of investors cannot manipulate the price.
Although there are around half a million investors in Nepali capital market, only few thousands are active. The average transaction in the last few years is around 20 million rupees. This figure shows that there is little depth. In such low depth market, it becomes easier to manipulate the price. Even rumors generated by few numbers of people, affect the market’s movement. There are some evidences where one third of intraday transaction occurred for only one stock. In such cases, the same broker settled the transaction on both sides.
The full implementation of CDS will also increase the daily turnover by reducing the bottlenecks of recent semi-automated system. It also helps to increase the number of floating shares which in present is not available due to due-diligence in name transfer.
The daily turnover would also not increase until the investors outside Kathmandu valley would participate. The selling of stocks is difficult outside the valley because they can’t verify their share in their hometown. The presence of more brokers and sub-brokers outside the valley would add more active investors.
The number of companies listed in NEPSE is quite low which is 239 companies. Companies related to cement, real estate, telecommunication, hotel and hydropower need to be listed in NEPSE. Unless there are higher numbers of companies listed in NEPSE, the daily turnover will not increase. It would also facilitate to develop healthier portfolio.
Another deficiency in the market is the low participation of institutional investors. Institutional investors make investment decisions based on facts which help the market to pave a fine way. The behavior of individual investor in Nepal is of speculation and trading type. This kind of behavior has caused sudden up and down of index. The effect of this behavior will be diluted if there are more institutional investors. The participation of more investment companies and mutual funds is essential to create the depth of the market. The role of Merchant bankers licensed from SEBON for portfolio management service has great advantage to market as a whole. Portfolio management service of merchant banker can derive market from short term trading and speculation to longer term value investing.
Credit rating of companies and their instruments also help investors to categorize the investment instruments. This would decrease tendency of investors to lose optimism in short period. Investors holding good companies would not rush to sell at short decline.
The investment instruments in our capital market are limited. The equity stocks, bonds, mutual fund schemes, preference share are only available. The commodity, foreign exchange, futures, options instruments would help to diversify the portfolio.
At present, the country is at the verge of political transition of promulgation constitution. True fact is that there will be high optimism among Nepalese investors after the promulgation of new constitution. It is also inevitable that political stability followed by policy stability is necessary for economic development. The country is in the process of institutionalizing the democratic system. After the promulgation of new constitution, our society will move toward policy stability.
NRB has just prepared a draft of “Financial Sector Development Strategy 2015-2020”, envisioning an efficient, effective, inclusive and stable financial sector. This paper aims to raise daily transaction in capital market to Rs. 2 billion and financial sector contribution on GDP to 8% (3.8% in 2014) by 2020. Let us be optimistic about the implementation component of this strategy paper.
At the same time, regulatory bodies need to show their efficient and effective role to prevent insider games. They should play the crucial role for the transmission of transparent and reliable information. Regulatory bodies should be prepared themselves to formulate new policies and regulations in changing environments. At present SEBON needs to initiate more actions for development of capital market of Nepal.


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