Capital Market of Nepal: Problems and Prospects

Background
Capital markets are financial markets for the buying and selling of long-term debt or equity
backed securities. These markets channel the wealth of savers to those who can put it to longterm productive use, such as companies or government making long term investments. As per
Levine and Zervos, Capital market is one of the several factors that play a prominent role in the
economic development of the nation. No doubt, the role of capital in economic growth has been
accepted throughout the world. The provision of capital through capital market has markedly
contributed in accelerating pace of economic growth.
In Nepal, the establishment of SEBON as the market regulator in 1993 and Nepal Stock
Exchange (NEPSE) in 1994 opened an avenue to investors, both small and large, to invest in the
enterprise sector and participate in the secondary market. While SEBON concentrate its efforts
on improving the legal and statutory framework, promoting and protecting the interest of
investors, and monitoring the entire capital market including purchase, sale and exchange of
securities, the basic objective of NEPSE is to impart free marketability and liquidity to the
government and corporate securities by facilitating transaction in its trading floor through
members market intermediaries. These both players of Capital Market of Nepal have been
playing significant efforts to uplift the capital market of Nepal.
The capital market consists of primary market and secondary market. The primary market should
create a pool of funds where companies can issue different forms of securities to use as longterm sources of funds. Similarly, the secondary market is needed to provide liquidity for the
investors and ultimately it also creates value for them. Liquidity is the beauty of the secondary
market which is the main cause for the investors to invest in the primary market. The rules,
regulations and intermediaries in this market are created to make the market more efficient and
less costly. Emerging as well as developed economies show that corporations and governments
rely on the capital market for long-term sources of funds with less cost than in the banking
sector. But is Nepals capital market doing what it is supposed to do?

Capital Market of Nepal: Problems

Well, despite various measures, the Nepalese stock market is not still taking its height. There is
desperate need for the profound improvement of this market. There are many problems that pose
challenges to the development of the Capital Market of Nepal.
1. Concentration of Banks and Financial Institutions (BFIs)
One of the problems seen in our capital market is the concentration on banks and financial
institutions (BFIs). Over the period, we have seen many companies from the hotel sector and
hydropower sector, large media groups, airlines, builders, private hospitals, and even few
manufacturing companies start their businesses in the country, however, the only few hydro
companies and one telecommunication company have entered the market. The concentration of
BFIs is maximum in the market as the prevailing Banks and Financial Institution Act (BAFIA)
and the Insurance Act make it mandatory for such companies to float shares to the public.
2. Lack of expert manpower
The capital market is the collective work of all the participants like Nepal Stock Exchange
(NEPSE) as front line regulator, dealers, market makers, issue managers, depositories, brokers,
mutual funds and the Securities Board of Nepal (SEBON) as the apex regulator. All the
participants must be efficient to make the capital market effective. The role of the securities
board and exchange is more important. However, in Nepal both institutions are not equipped
with proper and expert manpower and they are also under-staffed. NEPSE is still running under
government ownership. The extreme inefficiency can be seen in the operation of depository as all
the infrastructures are in place since last few years, but still it is not in operation. If NEPSE was
privatized or if CDS and Clearing Ltd was operated by the private sector, it could have been
providing services to the investors by now. Still we do not have market makers and dealers in the
market. The number of mutual funds is far less than required.
3. Information is not easily available to investors
In Nepal, the company willing to sell its securities to the general public shall have to get listed
with Nepal Stock Exchange. Some documents like audited financial statements and annual
reports are mandatory to furnish to NEPSE for the renewal of licenses. However, very less

companies submit their annual reports to the NEPSE. It is an example of a very weak regulatory
discipline in the stock market of Nepal. Since the audited financial statements of every year of
each and every listed companies are not accessible to NEPSE, there is no possibility for small
investors to reach them.
4. High Issuance Cost
There are lots of cost for issuing securities in the Nepali capital market like the SEBON
registration cost, issue manager cost, publication cost, issuance cost and listing cost. This is the
major cause for the companies not to consider the capital market. Also, in the existing system,
there is no incentive for the promoters to go public after establishing companies and taking risk
in the initial operation phase.
5. Economy and stock exchange moving opposite direction
Nepalese economy is still struggling to recover from the 2016s devastating earthquake and
economic blockade. Nepals GDP is projected to grow by a mere 0.77% in the current FY 201516. On the other hand, (NEPSE) index is breaking new records every day. It is difficult to
establish a relationship between the magnitude of GDP growth and stock market performance.
However many studies reveal that they tend to move together over time. But it is opposite at
present. Though the NEPSE is constantly increasing, it is seen as a problem as it indicates that
our stock market is highly unrepresentative of the structure of the economy and is also immature.

Apart from above mentioned problems, lack of professionalism in brokers, high independent
buyers and sellers, and lack of rational investor is the major problem in Nepalese Capital market.
Stock market of Nepal is greatly influenced by small number of large investors and as of yet
there is no special provision to attract institutional investors in stock market. Similarly, the
number of issue managers and brokers are not sufficient as well.

Prospects of Nepalese Capital Market

The capital market of Nepal has gone a rapid transformation over the past years. The
introduction of internet trading has helped the capital market develop more. However, there is a
need for continuous efforts to bring about further transformation and improvement in its

infrastructure so that the market become safer, fair, efficient, competitive and attractive for
investors, issuers and institutions. Nevertheless, there there is a huge prospects for the
development and increment of the Nepalese capital market.
1. Increment of Paid up Capital for the bank and financial institutions
At present, Nepal Stock Exchange (NEPSE) benchmark index has climbed to a record high amid
a bull run in the market for the past few trading days. The NEPSE index increased to 1724.19
points on Tuesday June 28 2016. With the decisions of Nepal Rastra Bank to increase the
minimum paid-up capital requirement for the bank and financial institutions along with
development bank and finance companies, the stock market has taken a bullish trend and
secondary market of Nepal is highly concentrated on bank and financial institutions. It is
believed that the stock market will be in increasing trend due to the decision of Nepal Rastra
Bank to increase the minimum paid up capital.
2. Foreign Employment Bond to be issued
Nepal Rastra Bank has announced the issue of Foreign Employment bond 2075 worth Rs One
billion aimed at Nepali Migrant workers and Non-Resident Nepalese. This instrument provides
an attractive return to investors at present when fixed deposits are offering about eight per cent
interest. These bonds can be an excellent investment instrument for Nepal working abroad. It
provides assured and almost risk-free return of 10 per cent, which is quite high in the current
market scenario. Likewise, bond buyers can safely send money home to be kept in banks without
paying remittance commission to send money home. Thus, issuance of foreign employment bond
can be one of the prospects for capital market to attract foreign investment into the domestic
businesses.
3. Automation of Stock Exchange and mandatory dematerialization
A special directive has been issued to NEPSE and CDSC for the full-fledged automation of
trading, clearing and settlement and ownership transfer of the securities of all listed companies
except the companies delisted, trading suspended, listing withheld and in the merger process that
came into action from 15 January, 2016. The directive was given to the listed companies for
compulsory dematerialization of securities that came into action effective from 14th January,
2016. Thus, the companies not getting dematerialization of securities will automatically be

barred for trading from 15th January, 2016. The decision has made the capital market organizes.
Hence, the introduction of CDS and the Dematerialization of the securities is sure to reduce the
hassles that one has to go through while investing in securities.
4. Introduction of Mutual fund in the capital market of Nepal
In the fiscal year 2011/12, under the provisions of Mutual Funds Regulation, 2010 two mutual
Fund companies were licensed by SEBON and two more are in the pipeline. It is expected that
these mutual funds could play the role of institutional investor which is still absent in the
Nepalese market. Entry of few more mutual funds could put a check in high volatility seen in the
secondary market. In order to encourage mutual funds companies, SEBON has recommended to
the Ministry of Finance, Government of Nepal for making tax-free to the income of mutual funds
companies as well as to the dividends distributed to the shareholders by mutual funds companies.

Though the capital market of Nepal is small, there are huge prospects for the development of this
sector. However, the transparency and openness of transaction, quality professional services,
adequate corporate financial disclosures and improved legal regulatory and supervisory are the
urgent need of Nepalese Stock Market. The government has to play major role to encourage
individual as well as institutional investors participation and sustaining in stock market any
effort for protecting investors 86 interest or boosting their confidence or developing the stock
market is necessary, that should be enabled to operate in an environment that leads to growth and
expansion of Nepalese Stock Market.

Submitted by: Asmita Sharma

Roll no: 5
SOMTU (6th Batch)