Bulls, Bears And Buffaloes

Nepal's Infant Stock Market Gets Cracking

Immediately after Kathmandu's stock exchange was opened in 1984, a letter arrived from a village in West Nepal with an urgent request:

("Bandits are becoming very troublesome. Please arrange for security.") The officers of the infant agency, all primed up and eager to sell stocks and shares, were taken aback by this call for police protection. The villagers had understood the name "Securities Kharid Bikri Kendra" to mean a Government agency that somehow sold protection from thugs and bandits.

While the bewildered Pradhan Pancha from West Nepal is certainly an extreme case, his confusion, is not unique. What, after all, is a stock exchange doing in a country where commerce is still primitive, industry undeveloped, and where the handful of major joint stock companies date back to the times of the Ranas? And where the wallowing buffaloe and the scrawny mountain cow represent better the sluggish marketplace and the emaciated economy than the "bear" and the "bull" of the global capital markets.

THE BIG BLACKBOARD

While cynicism might be the rule when it comes to discussion of the Security Exchange Centre (SEC), however, the people who run this small outfit from Kathmandu's Dillibazar section are quite bullish. They are buoyed by recent upturns in the market. The dog days of the late 1970s are now a thing of the past, they say, pointing to hectic activity on the stock market "floor", which is actually a blackboard with the going rate of stocks scrawled with chalk.

Investors are euphoric over the availability of shares of several multinational banks. The SEC's roster has 32 companies listed, and about eight companies are added every year. The premium generated is increasing at a whopping average of 64 percent annually — it totalled NRs 371.7 million in 1987-88. The number of shareholders in the country has risen from 4000 in 1984 to over 20,000 today.

"We might be small in comparison to other countries, but you have to admit that we are well on our way," says an SEC worker, an unlikely hybrid of Government official and stockbroker -but that is the Nepali stock market.

Today's SEC began in 1976 as the Securities Marketing Center. As a Government-sponsored institution, it was convenient and logical to organise a market for Government securities, which it did in its first years. In fact, Government bonds still make up the lion's share of total stock transactions. The new institution also served some of the functions of a merchant bank. It was only in November, 1984, that a full fledged stock exchange was inaugurated by mandating the compulsory listing of all corporate shares. The SEC is the only institution in the country which can deal in stocks and shares.

The stock exchange was established under the tutelage of the then American Ambassador to Nepal, Leon J. Weil. Like an envoy from Wall Street, which was, in fact, where he came from, Weil played an advisory role till his term ran out in 1987, patiently explaining the concept and operation of a stock market to both Government officials and the business community. Even today, though, the Kathmandu cognoscenti still mistake "securities" for some form of bank collateral and equate the SEC to a loan providing center.

IDENTITY CRISIS

There is, in fact, some confusion in the SEC's own charter and mandate, for it started as a merchant bank and has ended up being both a stock exchange and a merchant bank at the same time. (A merchant bank deals in the primary issue of shares, while a stock exchange is where secondary transactions take place. This conflict and crisis of identity has prevented the Center from being effective as either bank or exchange.

Stock exchanges everywhere are manned by brokers, who are the spontaneous outcome of the free market. Nepal has had it backwards. The SEC began work in 1984 by clamping down on the few brokers that operated then and assuming the role of the sole stockbroker. Since 1984, the brokers have had to work clandestinely, which has led to "mutual trading" and increasing concentration . of shares in the hands of a few elite groups. Both buyers and sellers often enter the trading floor of the SEC in collusion, having been brought together by "illegal" brokers.

The SEC has realised the need to introduce brokers into the system in a controlled manner, with itself as the licensing authority. Analysts warn that the transition must be carried out with extreme care otherwise the investors' precarious confidence in the stock market will shatter.

The main problem of the stock exchange is the low supply of shares available. This is partly because there are no brokers to provide door-to-door services, motivating buyers and sellers. "The supply of shares would rise many fold if brokers are included in the system," says retired Major Punya Bickram Rana, Nepal's pioneer broker.

Another way out, some say, is for the Governent to divest the shares it currently holds in public sector undertakings. Divestment backed up with a well-thought-out and consistent privatisation policy would make an impact on the development of a healthy capital market. Of the total paid up capital of NRs 495.7 million outstanding in the market, 42 percent is in HMG's control. Individuals hold only 12.4 percent, while the remaining are owned by foreign companies and domestic institutions.

SHY TYCOONS

Those same persons who urge privatisation also ask why the big business houses such as Golchha, Dugar and hod do not go public. Business houses in India such as Birla, Tata and Reliance hold less than five percent in the companies they promote. Why are the Nepali businesses content with the obvious limitations of sole ownership and why do they shy away from using public resources? Part of this reluctance is due to fear of losing control over the business.

But that is a very limiting attitude. As Ambassador Weil said in a parting address to the Kathmandu Rotarians, the expansion of the economic base can only flow from "the ingenuity, energy, and initiative of private entrepreneurs". In South East Asia, Japan and even in neighbouring India, he said, economic growth was propelled not by governments, but by vigorous private sectors.

Businessman Niranjan Tibrewala agrees, but points out that in Nepal the Government has no clearcut, stable policy regarding industries and public limited companies. That makes privatisation risky, he says.

The stock market movement of the past year shows that the people do not hesitate to invest if- a project is promising and well managed. For example, the subscription rate of multinational joint ventures such as the Grindlays Bank has gone up as much as 500 percent, while that of the Nepal Arab Bank (NABIL) and the Nepal lndo Suez Bank has each gone up more than 200 percent. Contrast this with the case of the public limited companies. Market response to the Rastriya Beema Sansthan, the Nepal Industrial Development Corporation and Himal Cement was tepid, showing a clear lack of confidence.

Finance experts maintain that the only way out for HMG is to bolster the private sector giants with liberal policies and make them enter the capital market. At the same time, the public sector enterprises must be allowed to "freewheel" with minimal operational interference from the Government.

AVOIDING A CRASH

The overpricing of stocks worries Manohar Krishna Shrestha, finance expert and Reader at Tribhuvan University, who says that it could turn investors away if sustained long enough. This could lead to a market crash, which would take years to recover from. "At present, the prices quoted attach more value to the scarcity factor of shares than the actual performance of the company," says Shrestha. The only way out of the bind seems to be to increase the supply of shares so that it catches up with the demand, and let the laws of economics take over.

There are many hurdles before the SEC, not the least of which is an economy that really needs to "take off' if the stock market is to prosper and provide an impetus to commerce and industry as well as to provide the public with an opportunity to invest. The day that ready cash is converted to stocks and shares rather than jewelry, land in Kathmandu's hectic real estate market or in buildings, will be the day when the SEC will have come into its own. That moment will also say something about the national economy as a whole.