Kathmandu, June 27
A recent assessment conducted by IFC, and the Securities
Board of Nepal (SEBON) has shown that Nepal's capital market has the potential
for greater expansion and diversification through its debt markets.
Its study also concluded that the capital market is seeing
remarkable growth driven primarily by its equity markets, the IFC said in a statement
on Tuesday.
The study examines the current structure of the capital
market and recommends expanding into the debt market to support Nepal's
substantial financing needs and its sustainable economic development goals,
particularly as the country progresses towards LDC graduation and commits to
becoming a Net Zero nation by 2045.
To realise this potential, the SEBON and IFC are
collaborating on a comprehensive bond market reform and development programme
aimed at enhancing corporate bond issuance in Nepal, informed IFC.
According to it, the Nepal Stock Exchange (NEPSE) has played
a pivotal role in supporting equity market growth, boasting a market capitalisation
of $26.35 billion as of 2022, which accounts for 69.4 per cent of the country's
GDP.
In contrast, the debt markets in Nepal constitute a smaller
portion of the overall capital markets. Currently, the country has three
operational debt markets: money markets, government debt markets, and corporate
debt markets.
The money market, although small, lacks corporate money
market instruments. Government debt markets dominate, accounting for a
substantial 87.10 per cent share. However, corporate bond markets remain in
their nascent stage, primarily limited to bond issuances from banks and
attracting a limited group of institutional investors, including insurance
companies, mutual funds, and other financial institutions.
"Streamlining the bond issuance process, introducing a book-building
mechanism, and enhancing transparency are imperative to attract both domestic
and international investors," said Martin Holtmann, IFC Country Manager
for Nepal, Bangladesh, and Bhutan.
According to him, by implementing these measures, Nepal can
create a conducive environment for the growth of the debt markets, unlocking
new financing opportunities for businesses and infrastructure development.
To fully unlock Nepal's debt market potential, it is
essential to address regulatory and operational challenges, stated the study.
The study concluded that in the offshore bond issuance
space, although there are enabling legal provisions, the current regulatory
regime does not fully support and facilitate such issuances. This limitation
restricts the potential for international participation and limits the growth
of the bond market.
The bond issuance process itself is often cumbersome and
manual, leading to delays and inefficiencies. Introducing a book-building
mechanism, currently absent in the bond markets, would enhance transparency and
efficiency in pricing and allocation.
Moreover, there is a lack of incentives for issuers to opt
for bond issuance. Restrictions on unlisted companies issuing bonds and
inadequate provisions for investment in debentures issued by real sector energy
companies for priority sector lending hinder market development.
“Nepal’s infrastructure and investment needs won’t be met
until we have a vibrant bond market. We are partnering with IFC to bring in the
required reforms,” said Ramesh Kumar Hamal, Chairman of SEBON.
Efforts are underway to streamline the bond issuance
process, introduce a price discovery mechanism through a book-building system,
and facilitate the dematerialization of government securities. Introduction of
a primary dealer and market maker framework will improve pricing in the primary
market and enhance secondary market liquidity.
Published in The Rising Nepal daily on 28 June 2023.
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