Cracking Nepal’s new stock exchange dilemma 

The overall picture of public penetration of the capital market in a country can be seen through the measure of financial literacy. Most policy makers in Nepal view the stock market only as a betting game and scrutinize it at every attempt. It is undeniable that trading and investment in stocks carry tons of risk. So it should be taken just as another business keeping in mind the dynamics of the stock market. In order to address the literacy gap and growing demands of market participants, Securities Board of Nepal (SEBON) has opened up doors for new private stock exchange companies and securities brokerages with amendments in the Securities Market Operation Regulations (2008) from mid-September 2022. We should welcome this approach and be skeptical at the same time.

This move from SEBON has led to various remarks regarding negative impacts of the new stock exchange on small investors and NEPSE in Nepal. We can clear these hoaxes with the concept of multiple listing of companies in domestic exchanges. Companies are able to list their shares in multiple domestic stock exchanges in the country. Companies from various sectors in Nepal see it as a good opportunity to increase their liquidity in the stock market. With shares listed in multiple exchanges, traders have access to increased transaction of shares and reduced spread as time goes by. Spread is the difference between bid and ask price. Bid price is the highest price a buyer will pay for a stock at any given time. Ask price is the lowest price a seller is willing to sell a stock at any given time. Lesser the spread, greater the liquidity of a stock. 

We all can agree that there will be a significant impact on NEPSE with the introduction of a new stock exchange in Nepal. Its revenue stream will start to shrink with transactions divided among the exchanges. It is high time NEPSE realizes that market participants are exhausted with their modality, T+2 settlement, less user-friendly trading portal and lack of stock derivative products (options and futures) for hedging purposes, intraday trading mechanism and many more issues.

Although the automated trading system (TMS) was introduced in mid-2018 in NEPSE, it has been criticized for being primitive when compared to cutting edge systems introduced in neighboring countries. Besides TMS issues, protests by investors on multiple occasions show reluctance for necessary changes from both the exchange and regulatory body. NEPSE being a government entity has not been able to improve its system as it has to go through a public procurement process that is time consuming. All these procurement hassles and lack of pragmatic approach from both the SEBON and NEPSE has been able to successfully keep our capital market nascent. Adding to this, a very lower stance of policy makers towards NEPSE is inevitable to kill enthusiasm of the young traders and keep the capital market nascent for much longer. 

Let us take a look at NEPSE in another perspective. Capital markets in general are driven by market forces and they seldom turn corners based on protests and hunger strikes. Whenever there are extreme movements in the NEPSE index, specifically around major bottoms there have been so-called protests and hunger strikes with agendas to preserve investor capital. We should be aware that protests and hunger strikes can’t prevent market crashes all the time, rather regulations with very few loopholes do. It is the responsibility of the exchange and regulatory body to create sufficient financial literacy so that new investors get the idea of risk associated with the market and not suffer from herd mentality. Does every trader and entrepreneur not deserve the dynamic and vibrant capital market with swift operations and provisions of proper hedging mechanisms?

NEPSE needs to stay afloat so that it can compete with the new privately run exchange via any means necessary for the better future of the stock market in Nepal. Privatization of NEPSE can be thought of in this regard to an extreme.

Apparently at present, there is no provision of intraday trading, that’s why restriction of short selling applies in NEPSE. Intraday trading is said to occur when positions are squared off on the same day before the market closes. Short selling refers to selling first and then buying back later with assumption of drop in the stock price. There’s no provision of the derivative market by NEPSE. Derivative products come in the form of options and futures. These are complex products but carry much importance when it comes to hedging portfolios for institutional as well as individual investors. Investors with ideas of derivatives have been left only with means of averaging and margin lending for hedging purposes. The perks of options and future contracts bring a dynamic approach to hedging and give actual meaning of being a trader as well as investor.

Albeit a smaller market, there is dire need of a new modern stock exchange from the private sector to meet the growing demands of market participants in Nepal. The ownership should be as per the guidelines of the recently amended Securities Market Operation Regulations so that a limited group of businesses don’t rule over the market. SEBON should relax its restriction on short selling and rather prevent naked short selling only. Naked shorting is the illegal practice of short selling shares that have not been affirmatively determined to exist. The introduction of a new stock exchange in Nepal will serve its purpose only if it has the provisions of intraday trading, short selling, provides an array of derivative products (options and future contracts) that make hedging easier and most importantly cutting edge software technology and efficient clearing agency. We should not forget that management efficiency from SEBON plays a vital role here. If we introduce a new stock exchange one one hand and the regulatory approach from SEBON remains the same on the other, there is no point in establishing a private exchange. Also, NEPSE needs to stay afloat so that it can compete with the new privately run exchange via any means necessary for the better future of the stock market in Nepal. Privatization of NEPSE can be thought of in this regard to an extreme.

Adding to the requirements, there are a number of entrepreneurs with house product ideas waiting for the provisions of online brokerage so that they can push to provide service at a much cheaper rate than existing stock brokerage companies at present. The success of Zerodha and Angel brokerage platforms in the Indian stock market can be taken as an example. Such an exchange could open up windows of opportunities for well performing startups as well. It could give a sense of financial freedom to traders thinking of going full time and a better platform for individual as well as institutional investors. We know reality hits hard but let’s hope this time it hits us harder with access to a dynamic stock exchange at our hands in no time.

Nabin Kafle ​​is a researcher at Samriddhi Foundation, an economic policy think tank based in Kathmandu. The views expressed in this article are the author’s own and do not represent the views of the organization. 

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