Central Bank Restricts Short-Term Trading and Speculation, Here's What the Experts Think About This

Article compiled by Samin Gurung, Sharesansar correspondent and media officer.

Nepal Rastra Bank (NRB) has tightened the rules for banks and financial institutions to invest in the stock market. The central bank yesterday issued a circular with additional regulations for banks and financial institutions to invest in securities trading.

NRB will no longer allow banks and financial institutions to buy and sell shares of listed companies in the secondary market for the short term. BFIs will not be allowed to sell the listed shares and debentures within a year of buying them. Nepal Rastra Bank has made such arrangements by amending the Unified Directive. This comes at a time when NEPSE has been breaking records after record with each passing day.

Furthermore, BFIs are not allowed to invest in the shares of "D" class financial institutions, i.e. microfinance companies except for the purpose of calculating "Deprived Sector Loans". If such shares were purchased before this date, they are required to unload the shares by Poush, 2078.

There has been much speculation among the investor circle about the possible impact of this move from Nepal's capital market. Sharesansar knocked on the doors of prominent investors and leaders of investor forums to ask how they feel about this. This article is a summarized version of all of their opinions.

Hemanta Bashyal

+ Studied Financial Risk Management at Global Association of Risk Professionals
+ Studied Chartered Financial Analyst (CFA) at CFA Institute, USA

Bashyal is of the opinion that the central bank had to introduce this move in order to minimize speculative trading in Nepal's capital market. While retail investors are free to buy and sell shares as they please, Bashyal opined that the central bank had to bring this move to prevent speculative trading by institutional investors.

The correspondent from Sharesansar asked Bashyal whether this violates the concept of a free market while institutional investors buy and sell shares within a fraction of a second in the international markets, a concept better known as High-Frequency Trading (HFT). But Nepal's market and its regulator are not matured enough to handle such speculative action from institutional investors, Bashyal replied.

When asked about the impact of this move on the market, Bashyal stated that this is a temporary action from the central bank and this provision should not be kept for the long term, since this is a restrictive move. Furthermore, Bashyal opined that the uncertainty created by this move may influence the market in the short term since social media portals and investor circles are buzzing with speculation of all sorts. While the banking sector may not suffer long-lasting consequences, Bashyal opined that the impact on the Microfinance sector depends on the number of shares that commercial banks currently hold.

However, Bashyal says it is important to note that the central bank has not only influenced supply or demand alone. It has just restricted banks from buying shares of microfinance companies for the short term. As such, this move can alter demand equally as it alters supply, and this may bring little change to market momentum.

Ambika Poudel, Former Chairman of Nepal Investors' Forum

According to Ambika Poudel, banks are specialized institutions to forward loans and accept deposits. As such, the involvement of such institutions in the capital market is not their forte, and it should not be. Furthermore, banks are already involved in the capital market via their investment subsidiaries. For all these reasons, Poudel fully supports the central bank's move to restrict banks from overspeculating and investing for the short term.

On top of it all, from an investor's point of view, banks are repeatedly found to be involved in the capital market when the market is rising, with the sole intent of profiting from speculation. These institutions tend to stay away from the market when the index is sluggish. As such, Poudel opines that retail investors should not expect much from such institutions, and preventing them from being overly involved at a time when NEPSE is rising ensures the overall health of the market.

Poudel states that this move was a much-needed action from the banking regulator, i.e. Nepal Rastra Bank, and it has no significant impact on the capital market.

Chotelal Rauniyar, Chairman, Nepal Investors' Forum

The stock market should be governed by the free market mechanism of supply and demand. As such, the central bank's move certainly carries the potential to disturb the stability of the market, Rauniyar states.

Rauniyar views the central bank's move as a conservative action that baffled investors and all parties involved in the capital market. Rauniyar opines that the central bank should have consulted with the front-liners of the capital market, the regulatory board SEBON, and investor forums.

Rauniyar also stated that all investors' forums are planning to come together to discuss the topic and issue a joint response to the central bank's surprising move.

Hari Dhakal, Laganikarta Share Dabab Samuha

Hari Dhakal supports the central bank's move to encourage long-term investment from institutional investors in the capital market. However, what concerns him is how mysterious and surprising the central bank was on the matter. More alarmingly, the regulatory board itself was left in the shadow, and even the Finance Ministry had no early heads-up on the decision.

This has certainly made an impact on market psychology, Dhakal states. Not to mention, specifically targeting a particular sector does not fall under the policy of a free market. Furthermore, such an impactful decision was to be introduced in the review of the monetary policy, or the central bank's monthly summary of economic performance. However, the decision came as a surprising move, and it has the potential to disturb market stability.

Dhakal has strongly presented the matter to the Finance Ministry this morning, and he is confident that this decision will be nullified before the market opens tomorrow.

Radha Pokharel, Chairman, Nepal Punjibazar Laganikarta Sangh

Even if we ignore the violation of the free market mechanism, this decision by the central bank came at the wrong time and is too late to be of any positive impact, Pokharel says. Pokharel and other prominent investment community leaders had been repeatedly warning the authorities about the matter from a long time ago. However, the decision came at a time when the index has already seen a lot of bullish momentum and investors are heavily invested. For investors in the microfinance sector, this is a betrayal move by the central bank itself.

Furthermore, what concerns Pokharel is NRB's instruction for banks to empty their microfinance holding by Poush of this year. This gives little time for a safe landing, Pokharel states, and this can prove fatal to the stable health of the capital market. According to Radha Pokharel, the central bank should at least have given 2 years for banks to empty their microfinance holdings.

Dipak Dahal, Prominent investor

Dipak Dahal says that the short-term reaction of the market depends on the personal speculation of all parties involved since the capital market is a massive body with numerous small parts, i.e. investors.

On the flip side, Dahal thinks that the central bank's move is justified, and directing banks to invest for the long-term will force them to select fundamentally sound companies. They will also avoid picking up weak stocks with the intent to profit from the short-term fluctuation in the market trend. When asked whether the instruction to unload the shares is too short a time horizon, Dahal stated that 7 months is a long enough timeframe in the capital market.

Nonetheless, Dahal does not deny the argument that the market may react in the short term. Dahal thinks that is possible.

Samarkshyana (Samrachana) Chaudhary, Chairman, Nepal Punjibazar Sangh

Samarkshyana Chaudhary is fairly positive about the central bank's decision. During financial crises and market collapses, retail investors are the ones who are always trapped. Meanwhile, institutional investors and the big players always get an escape way out. Thus, Chaudhary is at peace with the central bank's regulatory move. While the decision might shake the market in the short term, Chaudhary is also of the opinion that this move will improve the overall health of the securities market.

Apart from forcing financial institutions to only select fundamentally good companies, Chaudhary opines that this will prevent manipulation in the microfinance sector since their limited paid-up capital and size make them prone to manipulation.