Budget Watch: Series 4

Mass participation in industrialisation process is possible through the efficient securities market. Securities market promotes efficient collection of small and scattered savings and provides returns. It plays a key role in allocating capital to the corporate sector that will have a real effect in the economy.
The stock market in Nepal is not yet mature in terms of its infrastructure, governance, investors' confidence and pricing of stock and stability. Thus, it needs some major policies changes:
* Sebon needs operational autonomy as, at present, it has to get approval from Ministry of Finance for the issuance of necessary regulations.
* On line trading system and Central Depository System (CDS) of securities needs to be established soon. The practice of keeping physical certificates of securities has created various hurdles. The infrastructures like on line trading and CDS are must before opening the secondary markets for foreign investors and NRNs.
* There is a need to professionalise the market intermediary services by inducting new market intermediaries like underwriters, share registrars, portfolio managers, investment advisors with adequate monitoring and supervision mechanism.
* There is a challenge to adopt free pricing and proportionate allocation system in public issue of securities. The fair and transparent allocation of securities in public issue is needed. The allocation system presently followed is weighted allocation system giving more weight to the applicant applying for small number of shares.
* There is need and challenges to introduce and encourage the use of different types of securities instruments. The diversity in securities market instruments will attract the investors of various risk-return preferences and thereby promoting the size of the market.
* Trust Act, which is the basic law required to operate mutual funds, is in its legislative process that must be brought soon.
* There is poor disclosure practice, which is supported by the fact that during the fiscal year 2004-05 to fiscal year 2006-07, only 7.34 per cent of the total listed companies presenting their annual reports and other financial statements to Sebon on time.
* Reforms in related laws need to be carried out to pave the way for coming up with corporate governance codes for listed companies. These codes should in general focus on segregation of role of CEO and the Board, conduction of board meetings, effective functioning of the independent directors, audit and other internal committees, disclosure and compliances, protection of the interest of minority shareholders. The codes should be made mandatory to all.
* Institutional investors are more equipped and resourceful to judge investment value and thus make rational decisions on buying and selling securities.
* Uniform accounting and auditing standards and reporting.

Dr Chiranjibi Nepal,
chairman,
Securities Board of Nepal