The global COVID-19 pandemic propelled an unexpected growth of the share market in Nepal. The entire economic and business sector was battered by the pandemic as health safety measures and lockdowns sent many industries and trades out of operation, resulting in hundreds of thousands of job losses, and a sudden fall in export trade. But to the surprise of many, the share market caught the bullish trend and registered continued growth.
The NEPSE (Nepal Stock Exchange) index, which was at 1178 in July 2019 jumped to 1590 October-end last year while the country was trying to return to normalcy after a four-month-long lockdown during the first wave of the coronavirus.
Market capitalisation reached Rs. 4143 billion in August 2021 from Rs. 2118 billion in October 2020. Meanwhile, the NEPSE index touched its highest point of 3138. This bullish trend in the time of pandemic was the result of the expansion of share markets with the online application, a large supply of shares and limited sectors of investment during the difficult times.
Share Market Boom
The post-lockdown in 2020 witnessed a massive influx of shares through the initial offering. For example, 80 million units of shares worth Rs. 8 billion were issued by Nepal Infrastructure Bank Limited (NIFRA) while about half a dozen hydropower companies and service sector industries like Chandragiri Hills issued their shares to the public.
While the four-month-long lockdown snatched away jobs and income from about a million people, savings of a large number of people, especially government and private sector employees and entrepreneurs involved in the business of essential goods, increased significantly. The lower-middle and middle-class people, called the engine of the economy, had no opportunity to spend their money. Had there been a normal situation, people would have gone out for dining, trekking, family trips and adventure tourism and thus would have spent money.
Meanwhile, restrictions and limited mobility affected the celebrations of the New Year 2077 and the major festivals – Teej, Dashain and Tihar. This resulted in inflated savings of many since investment in other areas was uncertain thus the share market became a comfortable resort to utilise the savings and earn money while staying at home.
At the same time, the Security Board of Nepal (SEBON), the capital market regulator, and NEPSE, the operator of the stock exchange, pushed a rapid information technology transformation in the sector. The share transaction was made fully automated and people can apply for Initial Public Offerings (IPOs) from their computers or hand-held devices. Likewise, Trade Management System (TMS) was also launched to enable people to conduct their shares trading themselves.
Capitalisation Larger Than Economy
These conditions paved the way for the entry of millions of investors into the share market and market capitalisation surpassed the size of the economy of the country. On August 19 last year, the market capitalisation reached Rs. 4443.1 billion while the size of the economy by the end of the last fiscal year 2020/21 was estimated at Rs. 4266.3 billion.
According to CDS and Clearing (CDSC) Limited, the number of Demat accounts has reached 4.7 million by 26 November 2021. In March last year, the number was 3.12 million, while by mid-August last year only 1.85 million Demat accounts were opened. A Demat account is a repository to store the shares and securities in electronic formats, which helps in the safe, fast and reliable transaction and transfer of shares. It is also said dematerialization of shares.
The exponential growth of about 1.6 million in Demat accounts over the last eight months is enough to tell about growing public attraction to the share market, at least for those buying IPOs. The online application of the IPO facility via Mero Share made it possible for people residing in remote rural areas to buy shares. Every IPO brought out in the last two years is oversubscribed by multiple times. As per the CDSC statistics, there are 3.85 million Mero Share users in the country at present.
Protecting Small Investors
With an increasing number of investors entering the secondary capital market, concerns are growing about promoting their interests and protecting them from losing investments in the stock market.
The recent correction in the share market has created a slight panic on the part of small investors, which is sure to grow if the NEPSE index slides further. According to the share market experts, the recent bearish trend in the market is the result of the policy of the Nepal Rastra Bank that put a ceiling to the margin lending – a loan obtained against the collateral of investors' existing shares. The monetary policy for the current Fiscal Year 2021/22 has set the margin lending size at Rs. 120 million at maximum for organisational investors and Rs 40 million for individual investors.
Although the number of share market investors that obtained margin lending was larger than the amount Rs. 120 million is just about 160, the new policy shook the entire market. It happened because the large investors have their influence on the market and small investors as well as on media, which may result in a fear of the oversupply of shares that can result in the market downfall.
Many investors waited for the NRB to correct the policy through a review of monetary policy in November last year, but the central bank kept it intact and made no amendments to its policy. However, an investor said that the market would see a recession for some days but the index wouldn't go below the 2600 point.
As Nepali share market is not run by the rule that the international markets like the rules that guide the Bombay Stock Exchange or the New York Stock Exchange, it is immature to predict the growth or fall of Nepali share markets. The price of some hydropower companies that have negative net worth is above Rs. 600.
But large investors often spread rumours about growth or decline in the market to create panic in the market just to secure their profits. When small investors flooded to sell their shares fearing the further decline in the market, it is called a 'panic sale'.
Many investors say that the ceiling set for margin lending is just an excuse for the large investors while it does not make any difference for them. "This is a useless agenda that large investors are trying to pull up to a quarterly review of monetary policy," said an investor.
Indicating a panic sale seen in the last few days, Ambika Prasad Poudel, an investor, wrote on social media that the decreasing NEPSE pressurised the investors to sell the shares but the large investors should not be blamed for it in future.
Capacity to Invest
Executive Director of SEBON, Niraj Giri, said that investors must know their capacity to bear the risks. "No business or market guarantees profits or benefits. Risks are associated with every business and investors may lose sometimes. They should have an alternative to soaking up the shocks created in the stock market," he said.
The new entrants of the market must spend some time studying and understanding the stock market. They should analyse the last three years' financial status of the company they are going to invest in, the profits it made and dividend it distributed. It does not take much time but most of the investors are not interested to spare some time understanding the market and running after the rumours or suggestions of their friends and relatives.
"An investor investing Rs. 1 million in a grocery shop or a café spends more than 10 hours in the business and tries to understand its nitty-gritty, but a person who invests Rs. 5 million in the share market barely spends an hour a day to understand and assess the market situation," said Raj Kumar Timilsina, former President of Investors' Forum.
Know the Company
While buying an IPO, an investor must know the financial status such as net worth and loss, management aspects and risk aspects of the issuing company. He/she should invest only after a thorough analysis of these elements. Investors should remain aware of the risk of a change in the market price of the shares after their listing at the stock exchange.
In the secondary market, they should purchase shares through the stockbrokers listed at SEBON. They can get updates about the market from the website of the NEPSE and can consult a share broker for wise investment options. It is better to diversify a portfolio across various sectors like banking, insurance, hospitality and information technology so that a recession in a sector would not affect the investors much.
Similarly, investors should be vigilant about the new policies that can affect the stock market. The policy of the central bank, SEBON and another sectoral regulator can instantly influence the market. They should also be aware of the bonus share or cash dividend announced by the company they have invested in so that they can obtain the benefits in due time.
Insider Trading and Cornering
Likewise, investors should be aware of insider trading and cornering. Insider trading refers to the use or abuse of strategic information like the announcement of a bonus or merger and acquisition of a company to buy or sell the shares before the announcement of the information publicly. Although it is illegal, it goes unabated in the absence of a robust mechanism to monitor insider trading.
Experts suggest that SEBON should have the right to tap the telephone or scrutinise emails/messages of the member of the board of directors of the company for the period of proposing bonus, dividend and merger or acquisition. Else, such information should not be disclosed in the agenda for the annual meeting sent to the directors of the company. It should be disclosed at the meeting and publicly announced immediately.
Similarly, cornering is carried out for acquiring shares of a small company in a large number to manipulate its price. According to Investopedia, the term implies that the market has been backed into a corner, and there is nowhere for the market to move to find other sellers and buyers.
In the case of Nepal, shares of Chandragiri Hills and some microfinance banks were cornered, a source at SEBON said. It can be checked by creating a division at the exchange to trade the shares of small and medium enterprises (SMEs). Two different boards can be created at NEPSE to facilitate the trading of the shares of small companies on a separate platform.
SEBON has made significant progress in terms of policy formulation regarding the market development, monitoring and regulation but it has largely failed in the regulation part.
Investors' awareness
The capital market regulator, SEBON, Investors' Forum, Merchant Bankers' Association of Nepal, NEPSE and many other stakeholders are organising training and awareness programmes for the share investors. Even the brokers are conducting such programmes on their own. But they say that there is a need to increase the frequency and reach of such programmes.
Capital Markets
A capital market is a platform where securities are bought or exchanged. Companies that need funds sell securities to raise money while traders buy or trade securities to earn profit by selling the derivatives (now digital) or from the dividend or bonus of the respective company. The stock market, commodity exchange and bond markets are the parts of the capital market.
This market is divided into primary and secondary markets. New securities are issued in the primary capital market. This is where companies raise money for their business from public investors. Similarly, the secondary market is the venue where the investors trade the securities previously issued by companies. These tradable assets are called financial instruments – a document representing a legal agreement that involves certain monetary value.
Published in The Rising Nepal Daily's Friday Supplement on 3 December 2021.
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