Nepal does not need another stock exchange

Chandra Singh Saud

Chief Executive Officer, Nepal Stock Exchange (NEPSE)

Nepal's stock market needs reforms at multiple fronts. Implementing an online trading system, attracting Foreign Direct Investment (FDI) and real sector companies to the exchange, raising awareness of the investors, and initiating policy reforms are some of the issues that need immediate address. At the same time, the capital market regulator, the Securities Board of Nepal, is set to establish a private sector exchange while the government- run Nepal Stock Exchange (NEPSE), the operator of the secondary market in the country and frontline regulator, is putting its effort to introduce a foreign strategic partner.

Chief Executive Officer of the Nepal Stock Exchange (NEPSE), Chandra Singh Saud, says that the company is initiating reforms to enhance the efficiency and performance of the exchange.

 Modnath Dhakal of The Rising Nepal talked to Saud about the issues of VAT and other challenges that have surfaced recently. Excerpts:

Why does the government intend to impose the Value Added Tax (VAT) on the share brokers when the legal provisions exempt financial services from it?

This issue has been surfacing time and again. The brokers had protested the VAT when the Inland Revenue Department (IRD) tried to implement it. As per my personal opinion, the capital market is about financial services, and rules have exempted financial services from the VAT. But it's up to the government to implement the tax system. However, in international practices, VAT is not imposed on financial service delivery institutions. Therefore, if we want to allow the capital market to grow, it's better not to implement VAT.

But the brokers say that the implementation of VAT on trading of securities will add a financial burden as the investors will have to pay an additional 13 per cent tax along with the commission to brokers?  

That’s right. The NEPSE will discuss the issue with the brokers and will try to lobby for not executing the VAT system. What I personally believe is that the government should try to expand the tax-base instead of imposing the VAT on financial service providers. The issue should be resolved as soon as possible. Indecision brings instability in the market and confuses the investors, which are detrimental to the healthy growth of the capital market in the country.

The government can raise more revenue from the capital market with more transparency in the market, and raising the tax base and rate.

What is your take on establishing a second stock exchange with private sector investment?

I am an employee of NEPSE, therefore, what I say might not hold relevance in terms of the requirement of another stock exchange. But no situation has arisen so far in which the NEPSE couldn’t bear the load of business and transactions. The number of listed companies has come down due to mergers and acquisitions. The NEPSE has always tried to provide efficient services to the investors and facilitate the secondary market stakeholders. When the online system is fully implemented, it will counter the need of a second exchange.

However, we must reform the current structure of NEPSE. It must be able to provide international standard services to the investors. I would like to assure you that we will soon be able to make it happen. The software used by NEPSE has also delayed the reforms. Instead of buying the latest and tested software in the international market, we tried to modify and upgrade the one that we had, and it delayed the process. Therefore, I don't say the country doesn't need a second stock exchange, but I would certainly say that NEPSE will be reformed so as to make it more professional, able and efficient. There is also a possibility of introducing a foreign strategic partner in the company, which will support in transferring the latest technology, management practices and professional skills.

What should be done to reform the market?

The online trading system is the most basic prerequisite to expanding services across the country. Capacity enhancement of the employees at NEPSE and transparent transactions are other elements of reform. Implementation of Dematerialisation of Shares (D-Mat) and Applications Supported by Blocked Account (ASBA) has a very positive impact on the capital market. As a front-line regulator, NEPSE has the mandate to conduct surveillance in the market to make the transactions more transparent. We are thinking of forming a separate team for market-inspection. Increased transparency will benefit both the government and the investors. A rooster of experts from various sectors is being created to study different sectors of investment and listing the companies of those sectors at NEPSE.

But the Securities Board of Nepal (SEBON) is spearheading to establish a second exchange?

Yes, I have heard so. But NEPSE is increasing its capacity and efficiency, making reforms at multiple fronts. I hope we will be able to convince SEBON and other stakeholders about our capacity so that they will reconsider the need for a second exchange.

SEBON had directed NEPSE to implement an online trading system to facilitate the investors outside the valley. Has there been any progress?

There has been an agreement with the developer for the implementation of an online system before April next year. So the software will be ready before that. It will be fully implemented from the new fiscal year – July 15, if not in April.

Although the government has allowed Foreign Direct Investment (FDI) in the stock exchange, it has failed to attract any. Is it due to the poor investment climate in the country or inefficiency on the part of the regulator?

The government had made the move with the intention of attracting investment from the Non-Resident Nepalis (NRN) in the capital market. So, SEBON and NEPSE all are positive about it. SEBON recently formed a committee to look into the issues, such as the size of investment and profit repatriation, and create a modality for FDI in the stock market. When the modality is prepared, we will start marketing for it, reach out to the Nepali diaspora and educate the potential investors. I think we should hold a joint discussion among SEBON, NEPSE and the NRN Association executive committee in this regard. We are in the process of getting feedback on the matter from the NRNs. So, there is no one to blame.

What are the current challenges faced by the capital market in Nepal?

We are a small economy and, at the same time, our economic condition and per capita income are very low. Majority of the people are concerned with making both ends meet. Although they want to invest in the share market, they don't have enough money to materialise their intention. However, the market and awareness are growing simultaneously, which gives us hope that the market will be more developed and advanced.

Another challenge is the centrality of the capital market, which is also being addressed. As a result, 41 locations across the country have branch offices of the brokerage company. Now people need not come to the capital to invest in the securities.

There is also a need to raise capital market-related awareness. Some people are apprehensive about the share market due to the failure of some public enterprises, such as Gorakhkali Rubber Industry and Nepal Development Bank Limited. Also there are some companies which have been unable to pay dividends to the investors for more than a decade. Some public companies do not hold their Annual General Assembly in time, and investors don't get the dividends and bonuses. These things should be improved. But many investors know that such events are sporadic.

What about policy reform?

We have prepared a new policy draft, which will soon be sent to SEBON. We are amending the policies related to the rights announcement, share auction and margin trading and revising the organisational and management policies. We are thinking of introducing new human resources policies with an aim of enhancing efficiency of the employees.

Do you think political stability will have a positive impact on the capital market?

Certainly, it will have a positive impact on the capital market. When there is political stability, the political parties will have no other agenda other than economic development. It will build confidence among the investors. 

Published in The Rising Nepal daily, 2017 Dec.2