NEPSE in 2079-80: Substantial Highlights of the Good and Bad
By Aashish Chaudhary (with inputs from Rachit Agrawal)
The share market, also known as the stock market, is crucial for any country's economic development and stability. It enables companies to raise capital, invest in growth, and create jobs, while providing investment opportunities for individuals and institutions to participate in company growth and wealth creation. The share market's liquidity allows for easy buying and selling of shares, acting as an indicator of economic health and attracting both domestic and foreign investments. Moreover, its regulation promotes transparency, corporate governance, and economic stability. Overall, a healthy share market supports capital formation, investment, and economic growth, making it a vital component of a thriving economy.
Despite, this knowledge the recently concluded financial year 2079-80, has been a mix bag for the Nepal Stock Exchange (NEPSE) as a lot was achieved and lost in the fiscal year.
THE GOOD
1. New Brokerage Companies
The financial year 2079-80 marked the end of syndicate and monopoly of 50 brokers in the Nepali capital market after a long haul of 13 years. Almost 15 years ago, additional 27 brokerage houses had applied and subsequently received brokerage licenses after two years, following which the numbers of brokers had reached 50.
The Securities Board of Nepal (SEBON) had proceeded with the due processes of awarding new brokerage licenses under three category, including general securities dealer, full operating securities broker service, and limited working securities broker service.
Firstly, 43 among the 46 applicant companies had received preliminary licenses/letter of intent (LOI) from SEBON, which occurred in three different phases.
Following the development, seven and eleven brokerage companies received final licenses from SEBON, in the first and second phase, respectively, after fulfilling infrastructural requirements.
READ MORE: 10 New Brokerage Houses Receive LOI From NEPSE in Second Phase
Subsequently, after the preliminary approval of NEPSE membership of seven new companies in the first phase, their licenses were finalized and henceforth have begun operations as well.
READ MORE: New Stock Brokers Commence Trading Following License Approval
Currently, 29 companies have received final license from SEBON, three brokers are waiting for the approval of their final license from NEPSE, while the 14 have received final approval of their NEPSE membership, seven among which have begun trading. Nagarik Stock Dealer Company Limited too received approval of extension of their services as securities broker by the regulatory body, SEBON, and have become operational as well.
In the same manner, the seven brokerage houses which have begun operations have received a Depository Participant (DP) License from CDS and Clearing Limited.
READ MORE: Seven New Brokers Receive DP License This Morning
2. 42 IPOs approved by SEBON
In the financial year 2079/80, the Securities Board of Nepal (SEBON) has achieved a significant milestone by granting permission for initial public offerings (IPOs) worth more than 22 billion rupees. This marks the highest amount ever sanctioned in any financial year, surpassing the previous record set during the financial year 2077/78 when SEBON permitted IPOs worth 15 billion 18 crores. The new record was established under the leadership of Chairman Ramesh Hamal, breaking the previous record set during the tenure of Bhishma Raj Dhungana.
During the financial year 2079/80, SEBON approved a total of 42 companies to issue IPOs. Among these companies, 29 belong to the hydropower sector, while there are 4 microfinance companies, 1 from the other group, 4 from insurance group, 2 from the hotel group, 1 from the investment group, and 1 from the production and processing group. The issuance of IPOs of the companies from the aforementioned sector has helped with market diversification, which to an extent has diluted the dominance of BFIs in the stock exchange.
Under the approval, Nepal Republic Media Limited (NRML) was listed under the other groups, Kalinchowk Darshan Limited (KDL) and City Hotel Limited (CITY) under the hotel group, Hathway Investment Nepal Limited (HATHWAY) under the investment group, and Ghorahi Cement Industry Limited (GHORAHI) under the manufacturing and processing group. Notably, Republic Media became the first media company to issue an IPO during this period. Additionally, SEBON granted permission for IPO issuance to companies with a face value of Rs 50 for the first time, with Hathaway Investments receiving the approval for shares at this face value.
The fast-paced work of SEBON enabled it to efficiently process the applications for IPOs, resulting in numerous companies receiving permission to issue shares. This has led to a record-breaking number of IPOs in the financial year 2079/80.
Furthermore, the increasing number of companies seeking to issue IPOs and the granting of IPO issuance at premium prices have contributed to the substantial total of 22 billion rupees for the financial year.
Among the 42 companies that had their IPO approved by the regulatory body, SEBON, 25 companies have completed all due processes and have been listed in the Nepal Stock Exchange. 24 of the listed companies are freely tradable, while, Khaptad Laghubitta Bittiya Sanstha's trading is currently halted to conduct merger-related processes.
Similarly, six among the 42 companies have concluded IPO allotment for all phases and are due to be listed in the stock exchange.
Two hydropower companies, including Mid-Solu Hydropower Limited and Chirkhwa Hydro Power Limited, which had their IPO proposal approved by SEBON in FY 2079-80 are yet to issue their IPO.
3. Quota allocation in public Issue for migrant workers
In the recently concluded fiscal year, the government implemented a new measure wherein 10 percent of the issued public offerings is being reserved for migrant workers.
In an agreement consisting of 19 points, signed with investors, the Securities Board of Nepal (SEBON) announced that the legal procedure enabling migrant workers to participate in public issue.
Government agencies had decided to allocate a specific quota of Initial Public Offerings (IPOs) for Nepali migrant workers for each primary share issuance. Following this development, SEBON initiated the formulation of a standard operating procedure to regulate the reservation process.
Kalinchowk Darshan Limited (KDL) became the first company to issue its IPO with 10 percent allocations reserved for the Nepali migrants working abroad after attaining work permit from the concerned authorities.
The recent measure of reserving 10 percent of the issued public offerings for migrant workers is seen as a game-changer for the capital market. This move is considered an opportunity to broaden and enhance market participation, particularly by including Nepali migrants working abroad. By extending this invitation to migrant workers, the capital market stands to gain new perspectives, increased investments, and potentially experience significant growth. This innovative step is viewed as a promising development that could open up new horizons and avenues for the capital market's expansion and success.
THE BAD:
1. The Index is still low
The NEPSE Index closed at 2,097.09 on the last trading day of the fiscal year 2079/80 on July 16 (Sunday). This had represented a gain of 12.16 points from the second last day of trading for the financial year 2079-80. Furthermore, it appears that the NEPSE index has experienced some volatility during the fiscal year, as it bounced back 281.95 points from a recent low of 1,815.14 to reach its closing value of 2,097.09. However, despite this recovery, the NEPSE index still went down by 34.44% from its all-time high, which was reached on August 18, 2021.
On the first trading day of the fiscal year 2079-80 (on 2022-07-17) i.e., Shrawan 01, 2079 the market closed at 2011.40 and closed at 2097.09 levels on the last trading day of the FY 2079-80 (on 2023-07-16) i.e., Ashad 31, 2080 after gaining 85.69 points in a matter of one year. During the same period the market capitalization has increased to Rs. 3,082,519.55 millions on the last trading day of the fiscal year from Rs. 2,872,103.74 millions on the firts day, which amounts to a net gain of Rs. 201,415.81 millions.
READ MORE: NEPSE Index Ends Fiscal Year 2079/80 with Modest Gain, Showing Signs of Recovery Amidst Volatility
2. 2079-80 Full of Legal Turmoil affecting NEPSE
While announcing the Budget for the financial year 2080-81 on Jestha 15, Finance Minister Dr Prakash Sharan Mahat in his address, had notified of that if a Nepali citizen declares income from share or real estate trading from FY 2076/77 to 2078/79, until Chaitra, 2080, the 50 percent tax levied tax in accordance with Income Tax Act, 2058 will be waived.
READ MORE: Time-line of The Rule 29 of Economic Bill, 2080 Controversy
The confusion that the proposed rule had created was grounds for a major controversy outbreak. However, later the controversy was settled, with the establishment of Capital Gain Tax (CGT) on share trading income as the final tax. In the midst of the controversy, the Nepal Stock Exchange (NEPSE) had observed panic selling.
3. Bureaucratic Hurdles
The government decided to cancel the plan for operation of the new stock exchanges.
Earlier, the Securities Board of Nepal (SEBON) had published a notice asking qualified institutions to submit applications to attain licenses for the operation of a new stock exchange.
Following the notice, three companies including Himalayan Stock Exchange, National Stock Exchange Of Nepal, and Annapurna Stock Exchange Limited had submitted applications for the new stock exchange license. However, only one candidate among the pool could have received permit from SEBON to operate the new stock exchange.
SEBON had set an ultimatum of only ten days for the interested companies to submit their applications, drawing much flak.
A writ had been filed in the Patan High Court contesting the decision of SEBON to have only provided a deadline of 10 days to submit application for the attainment of new licenses for the operation of new stock exchange.
The High Court had announced for both parties to be present in the court for discussion into the matter on Jestha 1.
However, the decision of cancellation of new stock exchange has come prior to that.
The investors realizing the need for a new stock exchange had submitted a memorandum expression the same. Therefore, it can be assumed that the governments' decision to revoke the plans for the operation of new stock exchange and all prior processes is contrary to investor sentiment.
The potential advantages of establishing an additional stock exchange in Nepal could have been significant. It would have introduced healthy competition with the existing Nepal Stock Exchange (NEPSE), leading to improved services and better pricing for investors and listed companies. The presence of another stock exchange would likely have increased market liquidity, making it easier for investors to buy and sell securities and attracting more participants to the market. Diversification of listings would have provided investors with a broader range of investment opportunities and risk profiles. The increased access to capital might have fueled business expansion and economic growth. Moreover, having an alternative stock exchange would have mitigated risks, ensuring market continuity and stability in case of technical issues or disruptions at one exchange. It might have also made Nepal more appealing to foreign investors looking to diversify their portfolios. However, challenges such as coordination with regulatory authorities, market integrity, and avoiding liquidity fragmentation needed careful consideration, and the decision to halt the process of an additional stock exchange was likely taken to thoroughly evaluate these factors and determine the most suitable course of action for the country's financial system.
In the same manner, another bureaucratic constraint faced by new brokerage companies came in the face of temporary suspension of brokerage licenses citing re-evaluation of criteria fulfilment by the Finance Committee against the decision of the supreme court. The matter was resolved later.
Insights and Experiences of Sharepro Securities' Founder on Nepal's New Brokerage Licenses
Sandeep Rana, one of the founders of Sharepro Securities Private Limited, recently licensed by the concerned regulatory bodies, and now operating as Broker No. 65, shared his insights and experiences regarding the entire process.
He commended the Securities Board of Nepal (SEBON) for its initiative to award new brokerage licenses after more than a decade, under the chairmanship of Ramesh Kumar Hamal. According to Rana, this move played a vital role in breaking the dominance and consortium of the existing 50 brokers. He stated, "In a free-market democracy, competition and opportunity should be accessible to all credible parties. Therefore, the initiative of SEBON to award new brokerage licenses under the Open Entry-Open Exit System to all eligible candidates is applaudable and in the best interest of the capital market."
Rana emphasized that the operation of new brokers will expand the outreach, accessibility, and scope of the capital market. In a competitive market, these new brokers must adopt strategies to assimilate new customers, even potentially leading to door-to-door services to attract investors. This approach has eased the hassle for investors as opposed to the past, where customers had to reach out to securities brokers.
Addressing assumptions that the entry of new brokers would spike the market, Rana argued that such a notion is faulty. New brokerage companies do not directly inflate NEPSE points as they do not invest their own capital. Instead, they facilitate investors' investments. He clarified that the development will enhance brokerage services, positively impacting the market in the long run. Any attribution of the new brokers to NEPSE trends within only 15 days of trading is flawed, as market fluctuations depend on the collective technical or fundamental standing of the listed companies. He cited an example from almost 13 years ago when 27 additional companies had received brokerage licenses, taking the total number of brokers to 50, the then existing brokers had to enhance their services.
In response to a question that despite claims of new brokers aiming to expand outreach and decentralize market access for all investors, the current concentration of broker offices in Kathmandu contradicts this goal, with only a handful of brokers operating outside the valley, Rana explained. He acknowledged that maintaining offices in the capital is convenient due to close proximity to regulatory bodies such as SEBON, NEPSE, and CDSC, which eases cumbersome processes and regular reporting requirements. However, he highlighted that brokers now offer online services for account opening, eliminating physical boundaries and enabling them to serve clients across various locations. Moreover, with the presence of banks everywhere, broker services can be extended to all regions, regardless of their location. Despite sufficient capital to maintain multiple offices outside the capital, some new brokers choose to remain in Kathmandu for convenience. Nevertheless, the concentration of brokerage services in the capital has diluted over time due to the increasing and dominant presence of brokers through virtual mediums.
Market Insights: Sagun Shakya Foresees Short-term Bullish Cycle for NEPSE and Potential Long-term High
Sagun Shakya, a technical analyst and Chief Operations Officer (COO) of Sharepro Securities, explains that an observation of current market trends indicates that the Nepal Stock Exchange (NEPSE) is poised for a short-term bullish cycle. "The NEPSE Index has touched the resistance of 2200 level twice, even exceeded the same once but was only short-lived. This is an indication that the market will potentially break the 2200 resistance level and hover between the new resistance point of 2500 and support level of 2200," Shakya explained. But, he asserted that the occurrence might manifest in 6 months to one year.
In response to a question that an investor in the market has to consider all possibilities and therefore what he thought was the lowest low in the bullish cycle, he said that despite a short-term bullish cycle technically on a cue, for a change of perspective at the moment the support level of 1800 levels can be relied upon as it has been tested twice but has bounced back from the same.
He referred to the second bullish cycle of NEPSE, where the market had remained between 1175 to 1800, where the 1100 level had acted as the support point. In line with the same, 1800 which is the high of the previous bullish cycle, will potentially act as the resistance point for the current trend.
Similarly, he also indicated the possibility of a long-term bullish cycle in the near future. He said, "The Index that fell from a high of 3200 level in the recent bullish cycle to the support level of 1800 has potentially shed all it could. And, if the same is taken into consideration, it will subsequently break resistances of 2200 and 2500, respectively, while eventually even crossing the previous high of 3200 to attain a new all-time high." This analysis has also led to the prospect of a long-term bullish cycle surpassing the previous benchmark of 3200 and setting a new high.
Investor's Insight: Deependra Agrawal's Analysis of Market Trends and Concerns
Deependra Agrawal, a big investor in the capital market, shared his analysis of the market trends observed in the past year. He said that during the last financial year, the market was in a consolidation phase after reaching an all-time high in the bullish cycle. He affirmed that the market has completed consolidation and is henceforth poised to break the ongoing bearish trend, which will potentially lead to a short-term bullish rally in the near future.
Addressing a question raised on the decisions made by regulatory bodies and the state regarding measures such as levying additional taxes on top of the Capital Gains Tax (CGT) on share trading income and stopping ongoing procedures for new stock exchange and commodity market, Agarwal expressed concerns about their impact on investor confidence and psychology. He drew a parallel to the context after the 2015 earthquake, where people feared residing in high-rise buildings due to the post-trauma of the earthquake. Agrawal compared this context to the current volatility in the market brought about by such decisions, which could even strike fear in foreign investors in the capital market. He emphasized the importance of refraining from decisions that hinder the journey of economic prosperity, asserting that investors should be prioritized when drafting and implementing any decisions that can directly or indirectly affect the share market.
