Recently, the Nepal Stock Exchange (NEPSE) published a notice on its website regarding "Investor Awareness," highlighting the risks of stock price manipulation through the spread of false information on various platforms. This raises an important question: why did NEPSE feel the need to issue this notice? The answer lies in the growing nature of Nepal's stock market, which now requires more mature regulatory practices. As Nepal’s capital market expands, regulators like NEPSE and SEBON (Securities Board of Nepal) play a critical role in fostering investor confidence, ensuring market transparency, and maintaining fair regulations that promote a balanced market environment rather than one influenced by speculation and rumors.

In more developed markets, such as the U.S., regulatory bodies like the Federal Reserve (FED) are held to high standards of transparency and accountability. Even a minor breach, such as the destruction of sensitive information, could raise serious concerns about regulatory ethics and governance. Similarly, in Nepal, SEBON has been regulating the capital markets since its establishment in 1993 under the Securities Act of 2006. Despite significant progress, challenges persist.

As of January 2024, Nepal’s stock exchange features 244 listed companies across sectors such as banking, hydropower, tourism, and more. The market capitalization-to-GDP ratio stands at 69.3% (as of September 26, 2024), significantly higher than many South Asian economies. In comparison, Bangladesh (17.39%), Pakistan (9.78%), and Sri Lanka (15.4%) have much lower ratios, highlighting Nepal's stock market's greater growth potential relative to its economic output. This presents a promising outlook for future market expansion, supported by 90 brokers and two dealer firms, which have contributed to a compound annual growth rate (CAGR) of 17.10% in market capitalization over the past decade. However, such growth also underscores the need for stronger corporate governance and oversight.

The total number of demat accounts in Nepal is approaching 6.3 million, representing around 21% of the total population. This growing base of market participants underscores the need for a more mature, stable, and reliable capital market. A well-functioning capital market is a key driver of GDP growth, helping mobilize savings, channel funds into productive investments, and ultimately boost economic output. In Nepal, as participation continues to rise, the need for ethical standards, effective media management, and strong corporate governance has never been more critical.

The Role of Media and Governance in Building a Mature Market

In the modern capital market, the media plays a crucial role in shaping investor behavior and influencing stock price fluctuations. Accurate reporting and responsible journalism are vital to prevent misinformation from destabilizing markets. For example, in India, SEBI recently took action against a former CNBC Awaaz editor for unethical trading, highlighting the importance of integrity in market operations. Similarly, incidents involving deepfake videos, such as manipulated footage of the NSE CEO circulating false investment tips, demonstrate the risks of unchecked media manipulation.

Nepal is not immune to such risks. As digital and social media increasingly influence the stock market, it is crucial for regulatory bodies to collaborate with media outlets to ensure the accurate dissemination of information and prevent the spread of false or misleading content. Mismanagement of media can weaken the stock market, increase volatility, and erode investor trust. Therefore, regulators and the media must work together to foster an ethical and transparent investment environment.

The Future of Nepal’s Capital Market

For Nepal’s stock market to evolve into a mature and efficient system, regulatory bodies like SEBON must adapt to emerging challenges. With 244 listed companies, 30 merchant banks, 92 brokers and dealers, and a growing number of investors, SEBON needs to strengthen its capabilities. This includes expanding its human resources with expertise in finance, economics, and corporate governance to effectively monitor listed companies, track abnormal stock price movements, and ensure comprehensive financial disclosures.

A key question remains: Is SEBON adequately resourced to manage Nepal's growing capital market? Does it have the infrastructure needed to ensure transparency and accountability among listed companies? For SEBON to fulfill its vision of a modern securities market, it must operate with maturity and accountability, staying aligned with the market’s increasing complexity

In comparison, India’s stock market has evolved from a weak to a semi-strong form of efficiency. SEBI, India’s regulatory body, has played a critical role in promoting corporate governance, transparency, and market integrity. Today, the Bombay Stock Exchange (BSE) ranks as the 11th largest stock exchange globally, with a market capitalization of $5.6 trillion. This success highlights the significance of strong regulatory frameworks in building a globally competitive and resilient market.

The Path Forward for Nepal’s Capital Market

Nepal's capital market is at a critical juncture. As the market grows, the role of SEBON and NEPSE in regulating and developing the securities market will become increasingly vital. However, they cannot achieve this alone. All stakeholders, including the media, listed companies, brokers, and investors, must work together to foster corporate governance, transparency, and ethical behavior. A mature capital market requires a collective effort to build trust, reduce risks, and promote sustainable growth.

With the right regulatory framework and stakeholder cooperation, Nepal’s capital market can continue to grow and become a key driver of the nation’s economic prosperity. SEBON, NEPSE, and other market participants must collaborate to build a capital market that is efficient, transparent, and trustworthy, laying the foundation for long-term economic growth.

(Luitel has worked in Capital Markets in various capacities- as Portfolio Manager and Research Analyst.)

 

(This opinion article was originally published in  December 2024 issue  of New Business Age Magazine.)