An Investor-friendly Move

In what may be termed as ‘better-late-thannever’, the recent move to begin an Over-the-Counter (OTC) market trading in Nepal from Wednesday (June 4, 2008) has come as an investor-friendly move that will go a long way, in creating a conducive investment-scenario, and in providing requisite liquidity assurance to investors in the country. With the automation of stock-trading from November 5th of 2006 and a few other reforms already in place, the OTC market operation has ushered the capital market in a new era.

Imperative
The country has long felt an imperative need for an OTC market in which shares of those companies de-listed from the Nepal Stock Exchange Ltd (NEPSE), the formal stock exchange authority in Nepal. Such an alternative window to the capital market is also essential for trading those company shares, which have not yet been listed with the NEPSE, even after the initial public offering (IPO) at the primary market.

Now that the NEPSE has started the OTC market in the country following the endorsement on OTC Market Regulations by the Securities Board of Nepal (SEBON), those shares beyond the ‘formal listing’ can be traded throughout the week from 11.00 am to 13.00 pm. It usually relies on quote-driven trading. The beauty of the OTC market is that it needs no stock-brokers for intermediation; it re-injects liquidity to the securities which buyers and sellers can trade by paying commission to the OTC authority. At present, the NEPSE has fixed commission of 1 per cent on the transaction amount up to Rs. 25,000, 1.5 per cent on that of Rs. 25,000-50,000, and 2 per cent for transaction above that.

In addition to offering liquidity, the OTC market is also instrumental in reducing the investors’ crowd on the Stock Exchange floor of secondary market, as the capital market characterised with a bullish trend also partly shifts to the OTC option.
Operation of the OTC market has come as a relief to those who have invested in the shares of 38 companies including Nepal Bank Ltd, as those companies’ shares worth Rs. 969.2 million have so far been registered; it provides a much-coveted ‘exit’ to investors for retrieving their outlay on the securities that do not meet the requisite criteria for listing at the Stock Exchange.

In the absence of the OTC market, many investors have been robbed of liquidity in their investments, as they could not trade on those shares on the NEPSE’s trading floor —the secondary market, once the concerned companies failed to get duly listed, or got de-listed from the NEPSE.

In principle, the de-listing action comes as a penalty against the companies’ non-compliance of the law “to protect the investors’ interest.” But, ironically, it is the investors who have to bear the brunt. The de-listing only freezes up the investors’ money, as the de-listed company’s shares cannot be traded on the floor. It deprives them of enjoying fund-liquidity, as well as of investment opportunities elsewhere.

In its first-ever move, the NEPSE had de-listed securities of 25 companies five years ago on Ashadh 22, 2059 BS where total paid-up value of the 10,280,242 de-listed shares amounting to Rs. 261.62 million was blocked from trading.
Again on Chaitra 19, 2060 BS, securities of Nepal Bank Ltd were de-listed that fuelled a debate on legitimacy of the de-listing action. It also made illiquid the investments of about 10,000 investors, which is an extremely substantial number given the small size of Nepalese market. Conspicuously, central bank Nepal Rastra Bank (NRB) has suspended, for the time being, the OTC trading of shares of Nepal Bank Ltd that the central bank has put under ‘restructuring’ as a part of its financial sector reforms plan.

Up till now, the total number of companies facing the fate of delisting has reached 38. Importantly, NEPSE showed the two major reasons for delisting them: non-disclosure of their annual reports and financial statements for past two years and non-payment of annual listing fees. Neither of them was the investors’ default, but the companies’. Yet, the investors — numbered in thousands— had to suffer from illiquidity of their money with a spell of all uncertainty until the last Wednesday.

Way Ahead
Beginning the OTC trading is not the end. The country should visualise its way ahead for fostering a healthy, competitive capital market. Apart from bringing the delisted shares back to the listing trajectory by correcting the faults and discrepancies of the companies, there is the need to promote corporate governance. Market authorities like the SEBON and NEPSE should take proactive measures so that investors’ interests can be protected and promoted without having to take up curative and reactionary steps alone. And, sensitising investors and general public about their rights and capital market operation is extremely important. All of them are indispensable, as Nepal is bracing for the challenges that will crop up after the capital market liberalisation beyond 2010/2012 to comply with Nepal’s commitment at the World Trade Organisation (WTO).

Source: The Rising Nepal (Editorial)