What makes NYSE and DSE better than NEPSE? What can NEPSE do about it?

Aakriti Thakali Most often our position can be best described by accessing our relative performance in comparison to others. NEPSE (Nepal Stock Exchange), the sole stock exchange of our country, has a monopolistic grab in Nepalese securities market but still isn’t devoid of scrutiny and comparison with other stock exchanges around the word. The following article accesses the performance of NYSE (New York Stock Exchange), the king of $1 trillion club, and DSE (Dhaka Stock Exchange), a relatively smaller bourse, which then is compared to NEPSE to derive constructive conclusions. Being a small market, NEPSE is performing fairly well but the native investors have no bases of comparison to quantitatively analyze if it is performing in its optimum capacity. So the main agenda of this article is to see where we are wrong and what things can be done to change the current deviations. We are aware of many macro-economic conditions like political instability that has hindered the development of Stock Market in Nepal. So the analysis considers all other factors too, but the primary emphasis is given to the internal operations and structural composition of the bourse. 1. PHASE OF DEVELOPMENT With a history of over 2 centuries, NYSE, today, is a fully developed bourse with very few hassles compared to other exchanges. The NYSE regulation is responsible to look after the activities inside NYSE to ensure no illegal or unethical means are used. Similarly, Bangladesh is in the developing phase. Development of the DSE has been contributed to its stern policy and its effective implementation while stock market should be allowed to work freely and independently. However according to a study done by Mahdy Hassan on “Role of Stock Exchange in the Economic Development”, DSE still faces some problems like price manipulation, delay in settlement, irregular dividends, improper financial statements etc. If DSE is able to be sterner and minimize these problems then it is one step away from being an effective exchange. Under the same parameters used to determine the development of NYSE and DSE, NEPSE is still an infant. There is urgency of expansion of NEPSE services to the regional levels rather than just concentrating solely in the valley. Hence, to make the stock exchange a vehicle of growth, initiatives must be taken to protect investors, improve corporate governance and make the companies operate in a conducive and transparent manner. 2. DIVERSIFICATION Diversification is the core strength of any successful Stock Exchange or investment portfolio. The NYSE spans all industries and sectors including the financial sector, industrial sector, energy sector, healthcare sector, consumer goods and services sector etc. Similarly, in DSE companies are listed from multiple backgrounds or industries, which diminishes the chance of crash over the collapse of one particular sector. Further diverse industrial sectors mean stronger portfolio management for the investors. However, in NEPSE we can see dominance from the banking and financial institutions. The primary reason for it is The Regulations. NRB is the most active and effective regulatory body in Nepal and as per its instructions BFIs are required to release certain percentage of the capital to the public. On the other hand, big business houses are basically family owned and don’t want to enter in the market because (a) The IPO is still to be done at par i.e Rs 100, which is much less than their book value. (b) They don’t want to relinquish control. (c) They already have enough sources of funding. The high concentration of BFIs in NEPSE results in volatility. If there’s a problem in BFIs then the NEPSE’s index is also severely affected and this isn’t just assumption. The latest example we can see is the bearish market trend going on. After the increment of minimum paid-up capital for BFIs by NRB, most of the institutions are going for mergers, issuing right and bonus shares etc. to raise capital. This has increased the supply of shares into the market, while the demand stays the same. And by the simple rule of demand and supply, when supply goes up the price is sure to go down. So if NEPSE is able to attract real sector companies too, then the indices can be made more stable and investors will also have an opportunity to create a diversified portfolio to risk minimization. We can see the level of diversification in each bourse via these numbers: *Note: The percentage composition is based on the number of listed companies. 3. GOVERNMENT STAKE, REGULATING BODY AND OWNERSHIP STRUCTURE The NYSE is owned by Intercontinental Exchange (ICE). It is a Fortune 500 company who owns exchanges for financial and commodity markets. As of November 2017, ICE operates 23 regulated exchanges and marketplaces. Since the ownership of the bourse is in the hands of someone who knows the system and procedures of the market, this explains the efficient operation and performance of NYSE. Similarly, NYSE is a self-regulating bourse subject to government oversight by Securities Exchange Commission (SEC). Since NYSE regulation’s only job is to oversee and regulate the activities of NYSE there is a least chance of manipulation and illegal and unethical activities. Similarly, DSE is a public limited company whose shares are publicly floated to general investors. The members of DSE comprises representative from the relevant financial and industrial sectors. It boasts the strong management team, and there have been few cases of unethical activities from the management team. But as in any publicly traded companies, DSE wasn’t run by their actual owners which might have been the reason for the 2010/11 Bangladesh Share market scam. Finally, the ownership structure of NEPSE comprises of Government of Nepal, Nepal Rastra Bank, Nepal Industrial Development Corporation and members (brokers). There has been talks of privatizing NEPSE but it hasn’t resulted into any solidified actions. SEBON (Securities Exchange Board Of Nepal) is the regulating body of NEPSE, but since government has such huge stake in NEPSE; SEBON doesn’t seem to be able to work as autonomously as it is supposed to. And by the simple rule of nature, when investors feel that there is no one above NEPSE to protect them, they might get reluctant to freely move their money in the market. 4. LEVEL OF TECHNOLOGICAL ADVANCEMENT As far as technological advancement is considered, being a developing country we are still far behind the western world and the most developing countries in Asia too. As discussed in point 1, both NYSE and DSE have a settlement cycle of T+2 days which is a result of implementation of latest available technology. Whereas we still have a settlement cycle of T+3 days. In NYSE, traders wanting to make an investment can buy and sell stocks online. Trading takes place on the trading floor through floor brokers and Designated Market Makers. The NYSE assigns Designated Market Makers to each stock to provide liquidity—the only exchange that requires this assignment. Trading is automated, with the exception of occasional high-priced stocks, making the NYSE the premier hybrid market. Trades execute in less than a second via electronic means, while manual trades typically take nine seconds. Likewise, trades run in a continuous auction format. Similarly, in DSE the trading is screen based fully automated since 1998. All the bids/offers, depth and required broker particulars are all recorded and can be retrieved for future reference. What is more exciting is the luxury provided to the investors whereby they can place buy and sell order via their smart phones. NEPSE uses NATS (NEPSE Automated Trading System) to carry out its operations i.e. the purchase and sale of physical as well as dematerialized securities. NATS is a fully screen based automated trading system which adopts the principle of an order driven market. Automation of stock exchange incorporates three things: automation of trading floor; automation of clearing and settlement; electronic ownership transfer of securities. Till date NEPSE has not adopted online trading system but NEPSE has already planned to launch online trading system in near future. Also, paper certificates are already dematerialized which is a positive change in the stock market. 5. INCENTIVES FOR INVESTORS AND LISTED COMPANIES The companies listed in the NYSE can reach to a worldwide audience through the NYSE platform. People from all over the world can have access to information regarding the listed companies and can also invest in them. Every day, the NYSE Market Access Center provides listed companies with individual stock trading insights and analyses, as well as a consolidated view of stock trading straight from the NYSE floor. The Market Access Center is staffed with experienced personnel who have access to industry’s most advanced trading tools so they can provide the listed companies with fundamental, technical analysis and interpret factors that influence the markets, including sector trends, options activity and peer and industry reviews. Such expertise and services are not available for companies listed in NEPSE index. Share market is one of the attractive avenues to invest in Nepal. Being a developing country and also a heavily import based economy, Nepal doesn’t present investment opportunity in other sectors, especially to the minority investors. So, this lack of investment opportunity in other sectors can be capitalized by the securities market. But in reality, investors in NEPSE are limited to big cities and even among them, the number of players in secondary market is significantly low. We haven’t even been able to incorporate people from other regions and NRN (NonResident Nepalis) into our market, FDI (Foreign Direct Investment) sounds like a far-fetched dream. We understand that comparing NEPSE to NYSE is like comparing a middle grader with a tenth grader, but we also need you to understand that comparison is not just to show how weak we are but to understand what makes them better than us and using that learning to improve ourselves. So, based on the comparisons above and the general sentiment of investors here are a few steps that can be taken by NEPSE to be better than yesterday:

1. Minimizing transaction costs in order to make market more competitive and lucrative to investors. Currently, in order to carry out a buying or a selling transaction, an investor has to pay 0.4%-0.6% of brokerage commission, 0.015% fee to SEBON and Rs. 25 per company to the DP (Depository Participant).

2. Amendment in Securities Registration and Issuance Regulation and Guidelines including the provision of free pricing in public issue of securities, especially IPO.

3. Integration of De-mat and bank account and allied services more effectively.

4. Uniformity, credibility and standardization of stockbrokers’ back office system.

5. Restructuring and operation of over-the-counter (OTC) market.

6. Competitive and efficient credit-rating services. ICRA Nepal, the only credit-rating agency of Nepal has been rating securities since 2012. However, investors are reluctant to rely on the rating provided by them. So a more transparent rating system should be introduced.

7. Facilitating Citizen Investment Trust (CIT) for its involvement in buying and selling of securities as an institutional investor and establishment of internet-based trading system.

8. Providing incentives to the real-sector companies in raising capital from the stock market. One such measure can be to allow them to issue IPO at premium.

9. Opening up of secondary market for non-resident Nepalese (NRN) and Foreign Direct Investment (FDI).Inflow of funds from beyond the national boundaries can be both boon and bane, but being a developing country this is a risk we should be open to take. Rather we can formulate policies that can create a win-win situation for both the parties.

10. Structural improvement in the NEPSE and CDSC. Since most managerial posts in both the organizations are filled by same personnel, conflict of interest might occur. So changes in the organizational structure and recruitment is suggested.

11. More authority to SEBON for effective regulation of NEPSE

12. Full-fledged automation to provide avenue from geographically dispersed investors to invest in Nepalese economy.

13. Currently, the investors can buy securities through commercial banks via ASBA. However in order to sell it they have to visit the brokers’ office. So if brokerage license is provided to commercial banks too, investors will have an easier platform to buy and sell securities, which also might entice them to be more active in secondary market.