The Nepalese Share Market

 

Introduction of stock market or equity market or share market in Nepal:

- By Rupa Mainali

The history of securities in Nepal began in 1937 when Biratnagar Jute Mill and Nepal Bank Limited offered their shares to the public. It took 24 years before the Company Act was introduced in 1964, the same year the Government Bond was first issued. Realizing the importance of a Securities Exchange Center to stimulate the capital markets, both the government and the private sector held multiple discussions to define its structure. In 1973, Nepal Government and Nepal Rastra Bank established the Securities Exchange Center Limited under the Companies Act. Initially, the Center's duties included brokering, underwriting, managing public issues, and creating markets for securities and government bonds.

The institutional development of Nepal's capital market began with the establishment of the Securities Exchange Center (SEC). The government’s Industrial Policy supported this, and in 1993, SEC was transformed into the Nepal Stock Exchange (NEPSE). That same year, the Securities Board of Nepal (SEBON) was created as the main regulatory body. SEBON focuses on developing legal frameworks, advising the government, registering public company securities, and issuing licenses for stock exchanges, while NEPSE operates under SEBON's jurisdiction.

NEPSE, established under the Securities Exchange Act of 1983, began trading on 13th January 1994. It is the sole secondary market for listed securities in Nepal, handling the issuance and redemption of securities and financial instruments, and payments of income and dividends. The Board of Directors includes nine members, with six nominated by the government and the rest from institutional investors. Its ownership is shared among the Government of Nepal, Nepal Rastra Bank, Nepal Industrial and Development Corporation, and Members.

Figure 1: Brief history of Stock market in Nepal

Basic requirements to invest in the Nepalese share market:

To invest in the Nepalese share market, you need to start by opening a bank account with an approved bank using your citizenship certificate and other necessary documents. Next, you'll need to set up a Demat account to hold your shares in electronic form, which can be done through banks, brokers, or merchant bankers. To apply for primary and right offerings online, obtaining a C-ASBA number from your bank is essential. Additionally, creating a Mero Share account will enable you to apply for shares conveniently from home. Lastly, for trading in the secondary market, you must establish an account with a brokerage firm. These steps will ensure you are well-prepared to participate in the Nepalese share market as an informed investor.

The two major elements involved in the share market are: Demat Account and Meroshare App.

Figure 2: Total No. of DEMAT accounts and no. of Meroshare app users.

Who is more active in the Share Market?

A study conducted by Shyam and KC in 2020 found that investors in the 31-35 age group were the most active in the Nepalese stock market. However, another study shows investors between the ages of 20 to 30 years are more active in online trading. Likewise, investors from age groups below 20, 30 to 40, and above 40 are found to be comparatively less. This can be shown as:

Figure 3: Popularity of share market in different age groups

Prominent sectors of Nepalese stock market

NEPSE includes several sectors among which the most common sectors are: Finance, Hydropower, Investment, Microfinance, Manufacturing and Processing, Hotels and tourism, Life insurance, Non-life insurance, Mutual fund and others.

Figure 4: Most prominent sectors in the market

Figure 5: Performance of different sectors in the market (NEPSE historical comparison of closing stock prices: Analyzing peaks and troughs) 

NEPSE, NYSE and DSE

The Nepalese share market, represented by the Nepal Stock Exchange (NEPSE), is relatively smaller and less developed compared to its regional counterparts like the New York Stock Exchange (NYSE) in USA and the Dhaka Stock Exchange (DSE) in Bangladesh.

Market Capitalization: NEPSE has a lower market capitalization compared to NYSE and DSE, reflecting a smaller overall market size.

Trading Volume: The trading volume on NEPSE is lower, indicating less liquidity and fewer transactions compared to NYSE and DSE.

Regulatory Framework: NEPSE operates under the Securities Board of Nepal (SEBON), which is a relatively newer regulatory body compared to the NYSE Regulation (NYSER) and the Bangladesh Securities and Exchange Commission (BSEC).

Technological Infrastructure: NEPSE has been transitioning from traditional trading systems to a more digital Trading Management System (TMS), but it still lags behind the advanced technological infrastructure of NYSE and DSE.

Investor Base: The investor base in Nepal is smaller and less diverse, with a higher concentration of institutional investors compared to the more retail-investor-driven markets in India and Bangladesh.

Figure 6: Comparison of Indices of Stock Exchanges of Nepal, Bangladesh and USA:

Factors affecting the Nepalese Share market trends:

1. Political factors:

Political factors play a significant role in influencing the Nepalese share market. Changes in the political landscape, such as shifts in government, policy reforms, and political stability, can have a direct impact on investor confidence and market performance. For instance, positive political developments and stability tend to boost market sentiment, leading to an increase in stock prices. Conversely, political instability or uncertainty can lead to market volatility and a decline in stock values. Additionally, government policies related to taxation, foreign investment, and economic reforms also affect the market dynamics.

2.  Sector Performance:

Certain sectors, like hydropower and banking, have been performing particularly well, driven by specific factors. Investment in hydropower projects has been growing, supported by government policies and demand for renewable energy. The banking sector has shown strong growth due to increased lending and improved financial health of banks

3. Investor Participation:

 Increased participation from both institutional and retail investors has been driving market activity. More active trading and investment lead to higher liquidity and better market efficiency. Initiatives to promote financial literacy and easy access to the stock market through digital platforms have encouraged more people to invest.

4. Global Market Trends:

The Nepalese stock market is influenced by global economic conditions and trends, especially those in major economies like India and China. Positive global economic trends and investor sentiment can lead to increased foreign investment and market growth in Nepal. Global events, such as economic recovery post-pandemic and international trade dynamics, have had a ripple effect on the Nepalese market.

Contribution of Share market in CGT

Capital Gains Tax (CGT) is a tax on the profit made from selling assets like stocks, properties, or businesses. In Nepal, this tax is applied when you sell shares in the stock market. The amount of tax you pay depends on how long you held the asset and the profit you made from selling it.

Share market transactions in Nepal contribute to capital gains tax (CGT). In the first half on the 2024/25 fiscal year, the government collected Rs 9.82 billion in CGT from share transactions.

Figure 7: Share market’s contribution in CGT

Share market significantly contributes to the national economy of Nepal. It acts as a barometer for the country’s economic health and the primary source of capital for companies. A well-developed stock market can help to increase income, output and employment.