Stock dealers shy of entering share market

Wide fluctuations in stock prices due to rumours have been a common phenomenon in Nepal. The presence of stock dealers (wholesale purchasers and sellers of shares who use their leverage to maintain stability in share prices) would have helped control such mood swings, but such companies didn't last very long. They aid in stabilizing the market by selling a high volume of shares when prices are rising unexpectedly and purchasing large quantities of stock when prices are going down.

Although four companies received licenses from the Securities Board of Nepal (SEBON) to operate as stock dealers in 1996, they are not functioning anymore, said officials of the Nepal Stock Exchange (NEPSE). Only United Finance Limited (UFL) has been renewing its license. The other three, HISEF Finance got its license cancelled after a year and Citizen Investment Fund (CIF) and Nepal Sri Lanka Merchant and Finance had their licenses annulled after two years.

UFL's assistant general manager Deepak Agrawal is himself unaware about its being listed as a dealer on NEPSE. "We haven't got a stock dealer's license and we are not operating as one," he told Post. He, however, said that the company had been purchasing and selling shares on behalf of investors. "We are helping investors outside Kathmandu to purchase and sell shares because they are not well aware of the share market," he added. The manager of CIF said it didn't dare handle bulk share trading due to the volatile share market.

"The government also has not given us any policy tool to mitigate our risks as market makers," he said. According to him, SEBON has not continued ensuring a certain percentage of shares for institutional investors (dealers/mutual funds) during the initial public offerings. Earlier, SEBON had made a provision requiring that a certain amount of shares be allocated to mutual funds. NEPSE spokesperson Shambhu Pant said that dealers would not get into business ventures until they were given certain risk mitigating incentives. "There is a tradition of setting aside a certain percentage of the shares for dealers in most countries," he said.

Another difficulty for potential stock dealers is the directives issued by Nepal Rastra Bank (NRB) which prohibits financial institutions to keep cross-holdings. However, as per the Securities Entrepreneurs (stock brokers, dealers and market makers) Regulation 2007, only public limited companies can operate as dealers. Most public limited companies are financial institutions which account for around 90 percent of the share market. NRB regulations bar financial institutions from operating as dealers as they have to keep shares of other financial institutions. Shares of financial institutions are mostly traded on the market. Stock broker Jagadish Agrawal said that there should be harmonization of regulatory mechanisms between the two regulatory bodies, SEBON and NRB, to attract dealers to the stock market.
Source:Kantipur