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ApEx Series | Of the beginning of NEPSE and its bears & bulls

Sunny Mahat

Sunny Mahat

ApEx Series | Of the beginning of NEPSE and its bears & bulls

From having to visit the exchange center and then the brokers to fill out buy and sell orders and wait for weeks for confirmation, the share market now processes all transactions within hours

Around 1935 then Prime Minister Juddha Sumsher Rana recalled the Nepali Ambassador to Great Britain Gunjaman Singh to Kathmandu. The goal was to use his experience and exposure there to help establish the first Industry Council of Nepal. Two years later, Biratnagar Jute Mills and Nepal Bank Limited were created. Both the organizations issued shares to the public, making them the first securities to be floated in the Nepali market.

In 1976, the government created the Securities Exchange Center to manage public issuance, create a market for government bonds and function as a stock brokerage firm. But as more public companies were starting to emerge, a dedicated stock exchange had become a necessity. And so, in 1993, the Securities Market Center was converted to the Nepal Stock Exchange (NEPSE) and the exchange officially opened its trading floor on 13 January 1994.

These days, NEPSE functions under the Company Act 2006 and the Securities Act 2007 with the objective of imparting free marketability and liquidity to the government and corporate securities by facilitating transactions on its trading floor through members, market intermediaries such as brokers and market makers. 

After its 1994 opening, the securities market began functioning with the ‘open outcry’ system on February 11 the same year and the Base Index for NEPSE was set at 100 on February 12. By the end of 2050/51 (1994/1995), the index had reached 226.03. The NEPSE index reached its all-time high of 3111.09 on 3 August 2021 . The open outcry was a popular method around the world for communicating orders in trading pits in which traders used verbal and hand signals. Signals and shouts made in a particular manner and sequence conveyed trading information, intention, and acceptance in trading pits.

The 2011 bang

“NEPSE did not reach its current digital and automated state overnight,” says Shankar Man Singh, former CEO of NEPSE (2009-2013). Singh recalls how most trading procedures were manual and time-consuming. At the time Singh took over the reins of NEPSE, there was also an ongoing court case against the examination, selection, and licensing processes of brokers.

“It was during my tenure that we were able to settle the case and issue licenses for 27 more brokers, taking the total number to 50,” Singh explains. “We also established the CDS and Clearing Limited in 2011.” With the arrival of CDS and Clearing—a subsidiary company of NEPSE that served as a centralized depository, clearing, and settlement services—the safekeeping, deposit, and withdrawal of securities certificates and transfer of ownership/rights of instruments got easier.

The securities exchange in Nepal has come a long way. Initially owned by the Industry Council (51 percent) and Nepal Rastra Bank (41 percent) with a paid-up capital of Rs 1 million as Securities Market Center, NEPSE now has a paid-up capital of Rs 500 million. Ownership has also shifted to a combination of government and private entities that include the Government of Nepal (58.66 percent), Nepal Rastra Bank (14.60), Employees Provident Fund (10), Rashtriya Banijya Bank (6.14), Laxmi Bank Ltd (5), Prabhu Bank Ltd (5) and other securities/brokers (0.60).

At present, there are 50 licensed brokers with 43 branches that operate on the trading floor as per the Securities Act 2007, rules and bylaws.

Financial expert and a seasoned stock market trader Mukti Aryal recalls waiting for up to two months to transfer the shares he bought to his name. Selling a scrip also took considerable time as there weren’t enough  buyers. As a management student who also did his thesis on stock market and as the research department head for Citizen Investment Trust, one of the biggest investors in NEPSE, Aryal had been following Nepali securities market since the early 1990s. But it was only in 1996 that he officially entered the market as a trader with around Rs 400,000 of his savings.

“Working with the CIT, I had to analyze what shares to sell, buy and hold and present it to the investment committee,” Aryal explains. “That’s how I got acquainted with the market.” Aryal recalls Nepal Lever (now Unilever) among the industries and banks such as Nepal Bank Limited, Grindlays (now Standard Chartered), Nepal Arab Bank (now Nabil), Nepal Indosuez Bank (now Nepal Investment Bank Limited), Himalayan Bank and SBI bank as the most sought-after scrips of the period. 

“Most people were unaware about the market and, unlike these days, there was little price fluctuation,” Aryal says. “Still, trading was not so easy when we had to completely depend on the brokers with no access to information.”

New age, same mindset

Ambika Prasad Poudel, one of the biggest names associated with the Nepali share market, agrees. “There were limited brokers and investors had no access to information on what was happening in the market. There was no information on market depth either,” Poudel recalls. “We placed buy or sell orders and sometimes were informed weeks later that the transaction never happened. The brokers controlled everything.”

Even at its primitive stage, NEPSE had become a victim of corruption and served the people in power more than it served common investors.

Poudel is also on the board of multiple companies listed under NEPSE. A management student, he started his share market journey in the early 1990s when NEPSE was still called the Securities Exchange Center. Recalling the manual processes of buying/selling and keeping of physical copies of shares, Poudel adds that there were thousands of unaccounted shares lying around at NEPSE and broker offices. “Now we have an excellent tracking system and can monitor every market and broker activity. We never imagined we would see so many improvements.”

Although the methods of trading have changed and even improved, the market’s mentality remains the same, Poudel adds. In his almost three decades in the securities market, Poudel has seen his share of bears and bulls.

“In the market cycle, every time we head towards a bearish trend from a bullish one, we lose around 70-80 percent of investors who had entered the market during the bull run,” Poudel explains. “Similarly, when we move towards bull from bear, we add new investors in almost the same ratio. This is the nature of the market.” This is also a reason why there are only a few long-surviving traders and investors.

When the market is on a bull run, investors get optimistic, assuming the market will forever grow. This mindset has not changed in all these years and is the reason behind the failure of most traders.

People think that as the number of investors as well as market capitalization keeps increasing, there will never be a prolonged market slump. “But whatever goes up must come down. So, although the market might not fall to the previous levels, it will go down,” Poudel adds. “Ultimately, in the capital market, there are more losers than winners.”

Poudel says he has risen and fallen plenty of times in the share market and keeping an open mind and adapting quickly to changes has helped him survive. 

The 2018 bigger bang

One of the biggest failure stories has to be that of trader and investor Nirmal Pradhan. Sometimes mockingly dubbed Nepal’s answer to Warren Buffett and considered a poster child for the share market, Pradhan was lured into the market when he first got allotted the IPO of the Nepal Industrial and Commercial Bank (now NIC Asia) in 1998. Pradhan had filled seven different forms out of which he was allotted 250 units each for two of the accounts. The stock opened in the market with a price range of Rs 380-400, almost quadrupling his investment.

This newfound success had Pradhan, aged 45 then, investing almost Rs 40 million in the secondary market. “I had no idea that it was near the end of the bull market when I invested,” Pradhan recalls. “My investment dwindled to almost zero in the next 45 days.” But Pradhan was resilient and continued to trade, recovered his losses and continued investing.

While Pradhan had initially entered the market without much knowledge, Durga Tiwari was a comparatively late entrant. She entered the market in 2005 as one of the rare female traders, who, by now, has stayed put for over a decade. A homemaker in the past, Tiwari decided to take formal lessons in share market investing after failing her Public Service Commission examinations three times in a row.

Tiwari entered the market with some of her savings, buying 50-100 units of commercial banks. She also applied for almost every IPO and continued trading with whatever little fund she could manage. Tiwari recalls her initial days in the market when the index had touched a high of 1,175 and was falling towards 700. “Despite my experience and training, I failed to foresee the bearish trend and suffered,” she says.  

Tiwari had at one point built a portfolio of almost Rs 10 million. During the bearish run, it fell to Rs 3.3 million, when the index tumbled below 300 in 2012. “But unlike most people I did not leave the market,” Tiwari says. “I stayed put and recovered all my losses.” Tiwari remembers how she used to sit at the broker’s office every day during trading hours before the online trading system started. “Now I sit in front of the computer and trade every single day. This is my full-time job.”

Even with its many technical glitches, most share market investors ApEx talked to accept that the NEPSE Online Trading System (NOTS) launched in November 2018 has vastly changed securities trading in Nepal. NOTS made transactions faster and more transparent, in what was undoubtedly a huge step towards the modernization of the Nepali share market.

From having to visit the exchange center and then the brokers to fill out buy and sell orders and wait for weeks for confirmation, the share market now processes all transactions within hours.

“We started at a time when everything had to be written on paper and blackboards, Ambika Prasad Poudel recalls. “In the 1990s, who would have thought that an investor could buy any number of shares they wanted with a button’s click?”