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November 2014 Stock Taking

Published on: 2014-11-13 00:00:00     985 times read    0  Comments
--By Niranjan Phuyal
 
Historically stock exchanges started as a mutually governed, non-profit making, self-regulated cooperative like structures. Mostly brokers were the owners of such exchanges. However, due to the change in the technology and the concept of securities commission as apex regulator, the exchanges started to convert themselves as profit making companies and ownership was transferred to others from the brokers. This process is considered as demutualization. Stockholm Stock Exchange was the first stock exchange to demutualize in 1993. Few other European stock exchanges like Helsinki Stock Exchange, Copenhagen Stock Exchange and London Stock Exchange followed this process during the 1990s. Bombay Stock Exchange started its demutualization process in 2005. 
 
Unlike other exchanges, Nepal Stock Exchange (NEPSE) was started as a government owned non-profit institution. Only less than one percent of the share was allotted to the brokers and other members at the time. Later in 2008, NEPSE was converted to profit making company though the ownership structure remains unchanged. Since then, the issue of demutualization (privatization) and corporatization of NEPSE remains on the discussion table, unresolved.
 
What is demutualization and corporatization?
Demutualization is a process to convert member owned cooperative like structures to a joint stock company. The word is most popular for stock exchanges because many stock exchanges have converted themselves to companies from mutually owned (mostly by brokers) institutions. Some other exchanges are in this process. Corporatization is the process to give ownership to some corporate companies with high corporate governance measures. In the process of demutualization the brokers or members who hold shares in exchanges sale their stake to the corporate companies or such companies get the ownership of stake from the additionally issued shares. So, the term ‘demutualization and corporatization’ is used jointly.
 
Privatization issue of NEPSE
For over a decade, demutualization (privatization) of NEPSE has surfaced time and again in different contexts. Although NEPSE was a non-profit seeking organization previously, it was never a mutually owned institution. It has been converted into a profit seeking company and the representation of brokers in NEPSE board has been eliminated. So, in the present context, demutualization could not be the appropriate word for NEPSE. Demutualization would be limited up to less than one percent shareholding from the brokers and other members, which is not the main issue. Rather it can be said that NEPSE should be privatized and corporatized.  
 
In the FY 2010-11 budget, Nepali government theoretically accepted to privatize NEPSE. But the progress was very slow. Only Nepal Rastra Bank (NRB) announced its readiness to offload its stake in NEPSE ownership. No efforts were seen in this regard from other key stakeholders. The bureaucracy most probably might remain passive as NEPSE is earning good profit for the government. Though current year’s budget speech had announced programme to conduct a study to find a strategic partner for NEPSE, it remains unclear whether the study is for initiating the process of privatization or only for finding a strategic partner. 
 
 
Why strategic partner with NEPSE?
Generally, strategic partners are obtained for access to better technology from efficient organization. The second purpose could be to get cheap foreign funds. In case of NEPSE, foreign strategic partner could be important for both technology and funds. 
 
Nepali capital market is considered to be at the bottom among neighbouring markets in terms of using advanced technology. Though installing online trading system at NEPSE have been in the air for some years, it still uses semi-automated system. All pre and post trading activities are paper based. It’s more than 5 years of the establishment of depository company but still it is not implemented properly.  The huge potential for secondary trading from outside the capital and from across the world, especially that from the NRNs, remains untapped due to the lack of use of latest technology at NEPSE. 
 
Installing and upgrading technological equipment and facilities at NEPSE, is very slow due to the bureaucratic hassles and the lengthy government procurement process. Moreover, cost of such facilities and equipment for a small exchange like NEPSE could be very high. The appropriate solution, in such situation, could be to get a strategic partner who could provide world-class technology along with arrange necessary funds to NEPSE. Furthermore such collaboration could also help Nepse to prepare more segments and scrip in  the market like Exchange Traded Funds (ETFs), derivatives and others. 
 
However, to make NEPSE really efficient, only policy to acquire strategic partner is not sufficient. Along with that, the process of privatization and corporatization should also be initiated. 
 
In case of privatization, the shares of government and NRB should be offloaded. But this is not like a process of privatization of other government owned companies. Stock exchange is something different than that. Like the share holding pattern of National Stock Exchange in India, ownership stake of the government and NRB in NEPSE can be sold out to local companies that have best corporate governance with ceiling on maximum share holding percent. To get more funds for NEPSE, current paid-up capital of NEPSE can be increased to NRs 1 billion and additional shares can be issued to the strategic partner and other local companies. This will flow huge amount of funds for NEPSE, which could be utilized for risk diversifying measures, education and other services to the investors. 
 
There are few cases of issuing shares of the stock exchanges to general public in the international market. After issuing shares to general public, such exchanges are listed in the same exchange. Before doing so, the exchange should be highly efficient. So, there should be an intensive study on whether NEPSE should issue shares to general public or not. 
 
Nepali capital market is suffering with various problems and most of them are related with technology. To get efficient technology and to acquire more funds for strengthening NEPSE, it is the right time to start the process of privatization, corporatization and finding a foreign strategic partner. It will not only help NEPSE but also create demand to strengthen the Securities Board of Nepal (SEBON) and thereby become even more beneficial for the whole market. 
 
The author is asst manager at NEPSE and a visiting faculty at KUSOM.
 

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