Nepal's securities market is witnessing a rise in the number of institutional investors, who are considered crucial for bringing market stability and  protecting general inverters from its frequent fluctuations.

According to Murahari Parajuli, Spokesperson at Nepal Stock Exchange (NEPSE), the number of institutional investors has surged to 8,754, which he considers a notable rise in a decade.

"In just one month, 300 new institutional investors have entered the market," said Parajuli.

However, not all of them are qualified investors. Only 150 firms have been licensed as qualified institutional investors by the Securities Board of Nepal (SEBON), the market regulator. 

Until February 1, 2021, there were only 43 qualified institutional investors in the country.

The SEBON’s guidelines mandates that a firm needs to be a securities trader and established with a purpose of investing in securities to become a qualified institutional investor.

These entities, which include merchant bankers, mutual funds, investment firms and insurance companies, are crucial for maintaining market stability. 

Similarly, stock dealers are also institutional investors. But, only two stock dealers—Nagarik Stock Dealer and Nabil Stock Dealer—hold business licences currently. And, Nabil Stock Dealer has yet to commence operations.

Qualified institutional investors play a key role in determining the market price of shares before an initial public offering (IPO) through the process of book building.

The company issuing shares through book building must allocate 40% of the total ordinary shares to institutional investors. According to legal provisions, after purchasing at a set price, they are required to lower the price by 10% for the general public. 

It is believed that institutional investors, despite not being qualified institutional investors, help stabilise the market by trading large volumes of shares.

Institutional investors are expected to help maintain price stability by increasing supply when prices rise due to limited share availability, and by balancing supply to prevent excessive price drops when there is an oversupply of shares.

Rise in the number of institutional investors encourages individuals to invest through structured channels. Institutional investors are typically expected to conduct thorough research and examine every aspect of a company before making an investment. The careful approach helps ensure the safety of the investment and potentially leads to higher returns.

Sanima Capital is a licensed institutional investor accredited by SEBON. Its CEO, Bhishma Raj Chalise, said that the company invests only after thoroughly analysing the market. 

"We purchase shares only after evaluating the demand and supply and conducting a company’s technical and financial analysis," Chalise said. "Our investment decisions are based on the potential returns, even if the market were to decline tomorrow."

Chalise claimed that despite the market dropping below 3,000 points over the past three years, institutional investors were key in keeping the market within the 2,000 points-mark.

"A long time ago, the market fell from 1,100 points to 200 points; that doesn't happen now. This is because we [institutional investors] are actively involved,” Chalise added. “In the past, when the market fell and hovered around 1,800, mutual funds played a very significant role to prevent it from falling further below.”

NEPSE spokesperson Parajuli, however, has a different opinion regarding the impact of institutional investors in Nepal’s security market.

Institutional investors have yet to make a significant impact on our market as their involvement constitutes only 1% of total transactions in NEPSE, compared to 15% in foreign stock markets, said Parajuli. “There are more institutional investors in foreign stock markets.”

The recent rise in the number of institutional investors can also be attributed to the provision in the monetary policy for the current fiscal year of lifting the Rs 200 million cap on share mortgage loans for them.

Brokers have also reported that investors who previously traded individually in the secondary market are now engaging in institutional transactions.

The issue of supplying too many or too few shares in the market is partly addressed by the entry of institutional investors. Conversely, the arrival of institutional investors attracts new investors and increases demand.

Jyoti Dahal, a securities expert, explains: "Institutional investors operate systematically, pooling together fragmented small capital and investing strategically to achieve a planned profit percentage within a year. Individual investors, on the other hand, often lack such detailed planning. By joining an organisation and investing, individuals benefit from this structured approach. While institutional investments tend to be stable, they typically do not exceed the projected profit margin for the year."