Wednesday, September 19, 2012

Weak regulators hit investors’ confidence

Weak regulatory and institutional environment are key factors in blocking the economic growth in the country.
Has the capital and money market regulators been strong enough to penalise the foul players that are distorting the markets, public would have gained confidence on the government and its regulatory agencies, which in turn could have helped increase Public Private Partnership ventures to propel economic growth, according to a study by the World Bank.
However, the regulators, from the company registrar’s office to central bank, Securities Board of Nepal and the front line regulator Nepal Stock Exchange to Insurance Board to Department of Commerce and Nepal Telecommunications Authority (NTA), they all failed to regulate and monitor the market efficiently ridiculing the law and order and basic rights of the public.
The regulators, instead of being proactive and penalising the foul players, seemed reactive. The million dollar question is; can the company registrar’s office grant a licence to any company to ‘legally cheat the public’? History has it that the company registrar’s office has been awarding licences to companies like Unity that cheated public legally and get protection from the government.
If the company is listed, it is Securities Board of Nepal that has to protect the public investors not the fraud companies and their promoters. The capital market regulator may not even have the data of those listed companies that have disappeared in the last one decade fooling the public.
Making regulation is not enough as it is only an instrument to be used to correct the market and penalise foul players to boost public confidence. The regulator of the capital market — that has failed repeatedly to penalise the foul players — is lately 'over enthusiastic' to regulate the commodity market and the Finance Ministry is happy that it is getting tax, as if after paying tax a company can 'cheat' more people. Without proper technology and added skilled manpower, the current structure of Sebon can definately not be able regulate the technical market like commodity and derivatives.
Similarly, the central bank and Insurance board have been letting the 'foul players' continue their business risking the public money.
Capital market, though called capitalist model, helps socialise the profit, unlike the companies that are socialising the loss and privatising the profit currently. It is the mechanism that can help channel public money to the productive sectors but the domestic capital market failed to function in a professional way, due to its weakness, forcing the public shy away and look alternative in the informal sectors like Dhukuti, the informal pooling of money that is borrowed and re-borrowed among a group of people.
The case of the front line regulator, Nepal Stock Exchange (Nespe), is not different. It is partnering with the brokers in making profit and public are being cheated.
Not surprising, Department of Commerce wakes up once in a year before festive season and tries to fool the public by raiding some traders that might give them more chances to bargain with others to merrily celebrate festival.
Globally, those who want less or no regulation argue that the inefficiency of the government or the regulator has created big bureaucracy increasing the cost of doing business.
Similarly, those who argue that government regulations are necessary to protect public claim that the corporations are not looking after the public's interest and that it is necessary to have regulations.
Both schools of thoughts emerged to protect, basically, the public interest but in Nepal, the government and the regulators themselves are confused.
They are neither free market appreciators nor can they claim to be following closed market economic model. According to the interim constitution, however, the country has adopted mixed economic model. But in the mixed economic model too, the government and regulators' basic responsibility is to protect the public interest and ensure stability of the economy by penalising the foul players.
Sadly, in Nepal, neither the government nor the regulators have made any effort to protect the public; instead they seem to be in support of black marketers and foul players.
The incumbent government led by the caretaker prime minister Dr Baburam Bhattarai and his associates — due to their ideological disillusionment — misinterpreted free market to weaken the role of private sector but is supporting its handpicked players to promote cartel and crony capitalism.
"If free and competitive markets work, they efficiently allocate products among consumers according to their preferences, allocate inputs among producers, and enable producers to obtain the maximum output with given amounts of inputs," according to Adam Smith, the most ardent supporter of free markets, who opined that self-interest — not selfishness — property rights and division of labour are three important interrelated pillars of economic growth. "Property rights, if clearly defined and enforced, ensure that people are free to transact their goods and services at positive prices. Self-interest of sellers to make profits and of buyers to obtain products they prefer at the lowest prices brings sellers and buyers together in a market transaction. Self-interest in competitive markets maximizes economic welfare of the society and division of labour facilitates scale economies."
But the Bhattarai-led government and his regulatory agencies have completely failed in protecting public interest, maintain minimum law and order to ensure their rights, and are helping socialise losses and promote their hand picked players, defaming the free market.

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