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Ramesh Kumar Hamal: Capital Market & Entrepreneurial Ecosystem Blueprint of Nepal

Capital market reformer Hamal likens Nepal’s economy to a single-engine aircraft. He advocates for an internationally compatible ecosystem supporting venture capital and private equity markets to empower entrepreneurial culture, offering diverse financing avenues for SMEs and startups. - Editor

Ramesh Kumar Hamal: Capital Market & Entrepreneurial Ecosystem Blueprint of Nepal

Ramesh Kumar Hamal is the former chairperson of Securities Board of Nepal (SEBON) and an entrepreneur with decades of business experience in international markets as well as in Nepal. An engineer by profession with a degree in Electrical Engineering, he obtained an MBA degree in International Business Management and Finance from the Asian Institute of Technology, Thailand. He has over 30 years of senior management experience in the public and private sector enterprises, primarily in international markets. He is currently the founding partner of Omstone Asia, the developer and the operator of the 5-star Dusit Thani Himalayan Resort branded and managed by Thai hospitality chain the Dusit Thani, Thailand.

In this write-up, Hamal shares his insights on the capital market and entrepreneurial ecosystem.


Capital market importance

Nepal aims to achieve the Sustainable Development Goals and (SDGs) to become a middle-income country by 2030. To achieve this growth aspiration, Nepal must close its vast infrastructure gap. According to the World Bank, the Infrastructure Investment needs are estimated at 10-15 percent of GDP or $3bn annually. A credible and vibrant capital market could help address this investment deficit. Securities markets play an important role in promoting economic activity by un-locking and providing a mechanism for efficient mobilization of scattered savings, liquidity management and risk diversification. A credible and vibrant securities market could play a catalytic role in creating a conducive investment environment and a viable exit strategy for the domestic and international institutional investments inflows (infrastructure bond trading); all of which could play a transformative role in the growth of Nepal’s economy.

Reforming capital market

In recent years, the capital market has made important improvements and has seen encouraging signs of development with fundamental regulations in place, online trading and banking and in the real sector companies listing. However, major room for improvements seem obvious in the areas of maintaining international standard corporate governance protocols and compliance; effective surveillance to identify and root out market manipulating practices; and in the areas of market and product diversification, including the operationalization of the commodities exchange market, specialized investment funds, and appropriate derivative instruments, to help maintain the market stability and provide hedging instruments for investors.

Vast improvements in regulatory capability

A world class capital market is one that stimulates investor confidence, has breadth and depth in terms of product offerings, is characterized by the highest levels of integrity, has a sound regulatory framework, a transparent disclosure and accountability regime, and is fair, robust, and is an efficient market place. To achieve this status, firstly the regulator should have a greater degree of autonomy with legislative amendments. The government should take up this as a matter of urgency. This should then be followed up by digital capability enhancement including the operationalization of the “Automated Market Surveillance System (AMSS)” to monitor the market activities in real time and to establish the market confidence by implementing zero tolerance policy on detecting and penalizing all forms of market manipulating practices. A standard reporting system should be strongly implemented for all the market participants and the listed entities. It is equally important to improve the governance, technological capabilities and its professional operations at the stock exchange to establish higher credibility and fairness in the integrity of the market transactions. After all, the stock exchange in any market is the front-line regulator and the custodian, therefore integrity of the exchange is always at the forefront of a well-functioning and a credible capital market.

Entrepreneurial culture

The entrepreneurial culture is the bedrock of economic growth and development. It fosters the growth of enterprises, stimulates innovation in product and services and most importantly empowers the youth to become job creators rather than job seekers. To develop a thriving entrepreneurial culture, the government should work immediately on the inclusion of the entrepreneurial development curriculum right from the secondary to the college and university education. This coupled with the availability and a vibrant ecosystem of funding such as venture capital and private equity for the early stage start-ups financing is critical for Nepal to leverage the potential of entrepreneurial development.

Empowering SMEs

Small and Medium Enterprises (SMEs) play a major role in most economies, particularly in developing countries. SMEs account for the majority of businesses worldwide and are important contributors to job creation and global economic development. They represent about 90 percent of businesses and more than 50 percent of employment worldwide. In emerging markets, most formal jobs are generated by SMEs, which create seven out of 10 jobs. However, access to finance is a key constraint to SME growth. SMEs are less likely to be able to obtain bank loans than large firms; instead, they rely on internal funds, or cash from friends and family, to launch and initially run their enterprises. 

Studies have shown that only 10 percent of SMEs have a chance to survive more than five years. SMEs serve as a source of entrepreneurial skills, innovation, employment and the competitiveness in pricing. Given these facts, it is important for the government to create a conducive ecosystem for the SMEs that primarily comprises early-stage financing avenues, a vibrant capital market with a separate SMEs platform at the stock exchange, and a potent venture capital market.

Separate SME platform at stock exchange

Given that the access to finance is the most critical factor for the SME’s growth and generally the survival rate of the SMEs is low, it becomes imperative that SMEs growth is powered by financing avenues outside the conventional banking system which provides collateral based lending. Angel investors or venture capital therefore become the critical sources of funding for the SMEs growth, and this alternative funding is contingent on the existence of a vibrant capital market that facilitates viable and dependable exit mechanisms for the angel investors. This is where capital market plays an important and a catalytic role in the SMEs domain. Furthermore, crowdfunding via IPO is another important source of financing for the growth of SMEs. A separate SMEs platform at the stock exchange would first and foremost address systematically the high volatility at Nepal’s stock exchange by way of separation of large and small companies in different baskets and indexing. Secondly, the separate SMEs platform would make it feasible for the small companies for listing and raising of growth funds.

Internationally compatible SMEs platform

Study of the South and South East Asian emerging markets’ SMEs platform at stock exchanges shows that there are three critical elements of regulatory mechanism for an attractive SMEs platform; a) low cost of listing and yearly renewal fees; b) reducing risk exposure for small and unsophisticated investors in the course of IPOs (note the survival rate of SMEs is low); c) internationally compatible exit mechanism that facilitates dependable and viable exits for angel investor or venture capitals. With these in mind, SEBON in May 2023 submitted a new regulation to the government for approval of a separate SME platform at Nepal Stock Exchange (NEPSE). Capital market of Cambodia that is only 10 years in its evolution already has such a separate platform for the listing of small companies. It demonstrates that Nepal’s capital market in its three decades of operation is already lagging behind. The government should take up this matter urgently in approving the proposed legislation.

VC and PE for entrepreneurial growth

In recent decades, venture capital (VC) and private equity (PE) have emerged as critical sources of funding for entrepreneurial ventures in developing nations. VC and PE investments play a vital role in fueling innovation, fostering economic growth, and supporting the development of vibrant startup ecosystems. These two alternative financing avenues act as catalysts for entrepreneurial activities for startups and growth oriented companies that may not have adequate collateral or credit history. They fuel innovation in products and services and play a vital role in driving economic growth and stimulating job creations. VC and PE investments bring not only financial resources but also managerial expertise and strategic guidance to portfolio companies. Investors often have extensive industry experience and networks that they leverage to support the growth and development of the companies they invest in. This knowledge transfer enhances the capabilities of entrepreneurs, improves corporate governance practices, and builds managerial talent within the local ecosystem.

In order for Nepal to create an enabling environment for the VC & PE ecosystems, the government should undertake with priority four important reforms: a) Implement a “tax pass-through system” for PE/VC funds; b) create a fast-track ‘ease of entry’ mechanism for foreign VC and PE investors and operators, and enable a hassle-free exit mechanism such as IPO’s; c) through legislative and regulatory changes allow foreign investors’ participation and access to the secondary market in the stock exchange; d) provide tax incentives to attract large global institutional and individual angel investors.

Potential of VC and PE

The growth of PE and VC in India presents a compelling narrative. From $11.5bn PE & VC investments (domestic and FDIs) in 2014, PE and VC investments have grown to $61.5bn in 2023. In 2021-22 alone India’s PE and VC landscape witnessed over 1,500 deals with over $100bn in investment value. It is worth exploring the reformative forces that propelled this majestic progress in just a decade, so the lessons could be learned for Nepal to transform its own PE and VC landscape. 

The Alternative Investment Fund (AIF) Regulations, introduced by the Securities and Exchange Board of India (SEBI) in 2012, have significantly shaped the market trajectory for PE/VC investments in India. These regulations brought much-needed clarity and structure to the industry; they categorized funds into two main groups: Category a) which focuses on start-ups and SMEs and Category b) encompassing both PE funds and debt funds. This regulatory shift indeed transformed the very fabric of private equity operations in India. The framework it provided addressed the diverse nature of investments: startups thrived, and larger PE funds diversified their portfolios. Secondly, India swiftly addressed political and regulatory uncertainties, rose rapidly from 142nd in the World Bank’s 2014 ease of doing business rankings to 63rd in 2022, implemented a “tax pass-through system” for PE/VC investment funds, eased the FDI entry and exit mechanisms. 

Diversified and vibrant economy 

An internationally compatible and viable ecosystem for venture capital and private equity markets that foster and empower entrepreneurial culture, facilitates multiple avenues of non-banking financing for the SMEs and start-ups, and a thriving and credible capital market with a robust SMEs platform provides the foundation for the creation of a diversified and vibrant Nepal’s economy. The current building blocks of Nepal’s economy is akin to a single engine aircraft. The above ecosystem would provide that second engine to power the Nepalese economy to the next level and to avoid the risk of a failure. In all these, establishing a true meritocratic culture of work, that transforms the culture of glorification to the culture of performance, is the most important building block.