June 16 saw a bloodbath in Nepal Stock Exchange (Nepse), the country’s sole share market, as the signature index lost 52.41 points in a day, the biggest fall since the start of the latest ‘bull run’ at the start of 2021. By the day’s end, around Rs 1 billion had been wiped off the market-value.
The drop came a day after the Securities Board of Nepal (Sebon), the country’s share market regulator, released a list of 51 companies that it advised traders and investors to stay clear of. According to Sebon, these companies are in poor financial health. But the real reason for the list’s publication, many suspect, was to favor certain traders who had already gotten a whiff of the Sebon directive through insider trading. But this is only the latest in the list of Nepse-related controversies.
Buoyed by lack of other investment opportunities and suspected insider trading, Nepse had set a new record of 3,025.80 points on June 14.
While the bull run (which is expected to continue despite the June 16 slump) has excited (short-term) traders and (long-term) investors, the exchange’s online trading system has let many down. As more and more Nepalis enter the market, Nepse’s online trading system has been overwhelmed. The number of traders and investors using the system has increased 17-fold in the past year, from 38,000 to over 660,000. As traffic on the system has shot up, traders are facing technical glitches and failing to place orders or sell stocks when they want to, often incurring big losses in the process.
The problem, however, is deeper rooted, observers say. The stock exchange has issued licenses to only a limited number of brokers and this has created one big bottleneck for market expansion. The number of brokers remains capped at 50 and no new license has been issued in a decade. Also, online the infrastructure they have was never designed to handle the large volumes of trade seen in the market these days.
This is why brokers, especially those handling a large number of clients, have faced problems. Traders say it is difficult for them to not only place orders, but also to get updated information about the market from the Nepse’s Trading Management System (TMS).
Investors are often confused as the TMS software does not accurately update collateral and transaction details. With no proper information or guidance, rumors play a powerful role in guiding investor behavior.
Nepse officials say they are willing to issue more licenses for new brokers, especially subsidiaries of commercial banks. But the whole process has been entangled in red tape for a long time.
Back in 2019, Nepse had decided to issue stock broker licenses to subsidiaries of commercial banks. It even invited applications for such licenses on 2 August 2019.
The issue of licensing then caught the attention of Parliament’s Finance Committee, which on August 14 formed a sub-committee under lawmaker Ram Kumari Jhakri to prepare a report on the issue. Specifically, the sub-committee was tasked with studying the capital market and looking into the prospect of increasing the number of brokers.
They saw but they didn’t
When the sub-committee sought more time to weigh the prospect of adding brokers, the exchange had no option but to halt the new broker license issuance process, say investors, Nepse officials, and government representatives contacted for this news report.
Sub-committee chair Jhakri, however, denied that their study had anything to do with the issuance of broker licenses. Belying Jhakri’s words, the sub-committee members had in fact visited India, Bangladesh and Sri Lanka to study their stock exchange operations and regulatory bodies.
During the study visits, they learned that allowing banks to operate as stock brokers was a common practice in stock exchanges of Colombo, Mumbai and Dhaka, according to government officials involved in the study who spoke on condition of anonymity. But surprisingly, they remained silent on the matter on their return.
Most lawmakers on the sub-committee were unaware of the workings of the capital markets. Jhakri told ApEx that she started studying it only after she was appointed the sub-committee chair.
The Finance Committee has also in principle accepted that giving such licenses to banks is an international practice, according to the same sub-committee’s 86-page report endorsed after 11 months. Yet nothing of the sort has happened in Nepal.
Critics say that Nepse’s efforts to allow more platforms to trade physically or electronically were ‘intentionally’ thwarted as trade volume began to grow and profits soared—the daily average turnover has nearly doubled in the past 12 months.
At the start of the Covid-19 pandemic in March 2020, the share market was shut amid a lack of robust infrastructure for online trading for 50 days. Meanwhile, the Jhakri committee submitted its report on 7 July 2020.
The Finance Committee forwarded the report to Nepse and other stakeholders. But rather than clearing the way for the exchange to add new brokers, the report instead criticized Nepse for lack of preparation to induct new brokers.
An excerpt of the report reads, “Nepse has not undertaken enough preparations to permit banks to get stock broker license”. The sub-committee report also states that the market had not gone into full automation, which is not true. Nepse marked the first anniversary of full automation in November 2019, around eight months before the committee finalized its report.
After it got the report, Nepse wrote to the Securities Board of Nepal (Sebon), the stock market regulator, seeking its opinion. Nepse Information Officer Murahari Parajuli says this was done as Nepse could not, on its own, decide whether to add brokers.
“The report did not specifically talk about issuance of new stock broker licenses,” says Parajuli.
Meanwhile, investors are paying the price for the delay. Says Chhote Lal Rauniyar, chairman of Investors Forum, “Traders have faced major congestion due to poor online systems of the broker agencies. There are 700,000 online traders but only 50 stockbrokers.”
“Sebon is seemingly favoring existing brokers and is reluctant to spread the access of the capital market across the country,” adds Rauniyar. He says giving broker licenses to banks, with their network of around 4,000 branches across the country, will significantly increase market reach.
Sebon officials deny they are behind the delay in issuing new stock broker licenses and rather point the finger at Nepse.
Sebon spokesperson Niraj Giri says there is no confusion over giving licenses to brokers as Nepse can do so by following the parliamentary committee’s directive. (But then the Finance Committee never explicitly endorsed the idea of increasing the number of brokers.)
In fact, the sequence of events narrated above suggests a systematic attempt to prevent the issuance of new licenses. Government officials with direct knowledge on the matter say they won’t be surprised if new licenses are not issued for a “few more months” as the bullish run in the market continues.
Brokerage commission ranges from 0.27 percent to 0.40 percent of the transaction amount on both buying and selling. An average daily turnover of Rs 12 billion in the market makes for a combined Rs 32.4 million to Rs 48 million daily earnings for the 50 brokers. Each broker’s daily earning hovers around Rs 640,000 to Rs 960,000.
The stock brokers are suspected of using their money-power to lobby against new licenses. Chairman of the Stock Brokers’ Association of Nepal Santosh Mainali rebuts the charge. Rather than new licenses for banks, he argues, the priority right now should be on policies to upgrade brokers’ software and to expand the branches of existing stock brokers.
The majority of existing stock brokers also lack robust infrastructure including servers to handle the burgeoning number of transactions. They have not upgraded the servers that were installed when there were under 40,000 online traders in total. “This issue can be best addressed by increasing competition among brokers,” says Rauniyar of Investors’ Forum.
But Mainali of the stock brokers’ association refuses to be blamed for technical glitches customers face. “We have set the server capacity in line with the flow of online trade,” he claims.
Nepse in turn says it has no technical problems whatsoever. “We have repeatedly reviewed our system. We have also found that brokers with a higher number of online traders mostly face such problems,” says Nepse Spokesperson Parajuli, adding that only 20 percent of the stock market’s installed online capacity has been utilized so far.
Brokers are also accused of delaying payments to clients. Parajuli says they have never received any complaint in this regard. “The law clearly says clients can claim compensations at Sebon over delayed payments,” he adds. The reason complaints are not filed, investors say, is because one, they have no knowledge of such a provision and two, there is little hope of redress against the brokers who have friends in high places.
As money keeps rolling in, the 50 brokers will do everything in their power to preserve their ill-gotten privilege.