KATHMANDU, June 14: Though the stock exchange is supposed to be a reflection of a country’s economy, Nepal Stock Exchange (Nepse) is not as the secondary market is dominated by the bank and financial institutions (BFIs). Except for a couple of real sector companies that are doing well at Nepse, BFIs, and lately insurance companies, lead rallies and slumps at Nepse.
The government has been trying for long to persuade the real sector companies to go public, but so far they have not shown much interest on the olive branch the government has offered them.
Unveiling the budget for Fiscal Year 2016/17, Minister for Finance (MoF) Bishnu Prasad Paudel on June 28 announced a 15 percent tax rebate on income for companies listed in the stock market.
Companies in Nepal pay 35 percent corporate income tax. After the new measure comes into effect on July 16, publicly-listed companies will effectively be paying only 20 percent corporate income tax.
The 15 percent rebate would therefore be a big incentive for privately-held companies to convert themselves into publicly-traded ones by listing their shares in the stock market for regular trading. However, the government has not made it clear how long it will offer the rebate.
Previous attempts -- including similar rebates -- to get real sector companies like those involved in the manufacturing industry and agriculture sector to list their shares at the stock market have not met much successful.
Observers say the stock market does not mirror the country’s economy mainly because of the lack of presence of real sector companies in there.
“Nepal Stock Exchange is heavily dominated by BFIs and then by insurance companies. This stock market has so far failed to truly reflect the economic direction the country is on,” Priya Raj Regmi, the president of Stock Brokers Association of Nepal (SBAN), says. “That’s why the whole stock market suffers when the banking and financial sector faces a problem. The lack of presence of other companies has also made it difficult for investors to diversify their portfolio as they have limited scope for investment.”
While nearly 10,000 public companies are registered at the Office of Company Registrar, only 231 companies are listed in the country’s only stock exchange.
BFIs alone account for two-third of the listed companies at Nepse. The shares of 189 BFIs are available for trading at the market.
Stakeholders say that such measure alone is not adequate to make private companies float their shares for public trading.
“The waiver in income tax is of course a good step toward encouraging the production-based companies to be listed. This incentive will largely encourage new companies to register themselves as publicly-traded companies. However, more needs to be done before existing production companies go public,” Pravin Raman Parajuli, the president of Merchant Bankers Association of Nepal (MBAN), says.
Parajuli says that a review of the current share-pricing mechanism needs to be done to bring more companies into the public domain.
“Why would companies be interested when they are not allowed to sell their shares to the public for more than their book net worth,” Parajuli, who is also the CEO of Nabil Investment Banking Ltd -- a subsidiary of Nabil Bank Ltd, says.”
If the government allows the companies to float their shares at premium instead of the current provision of par value, it will have a bigger influence in convincing companies -- particularly the production and real sector companies -- to get listed in the stock market.”
NMB Capital Ltd CEO Shreejesh Ghimire tells Republica that the government should come up with a complete reform package for the development of the capital market rather than bringing in ‘piecemeal’ incentive approaches. “Conflicting laws should be harmonized and audit standards should be made and enforced,” he says.
Currently, public companies must to float primary shares to the public at the face value of Rs 100.
While a company is allowed to float shares at a premium, the condition that the premium should not exceed the net worth per share has been keeping back companies which want to embrace such a pricing model, experts say.
Many experts say the government should adopt a carrot-and-stick approach to prod companies to go public.
“The stock market has the dominance of the BFIs and insurance companies. Why? Because regulators of these sectors made it mandatory that they float their shares to the public. A similar approach should be taken with the companies of other sectors along with the incentives,” an official at the Ministry of Finance told Republica requesting anonymity.
Securities Board of Nepal (SEBON) Chairman Rewat Bahadur Karki says a provision about using financial statement and tax amount as a reference for credit mobilization through BFIs announced in the budget speech will also help prod companies to go public.
“As it will promote fair business, companies wary of corporate disclosure and the need for transparency may think that it would better to get listed in the stock exchange when they have to submit real financial statements for credit and also cash in on the tax incentive for publicly-traded companies,” Karki says.
He also says that SEBON has requested Nepal Rastra Bank (NRB) -- the central bank -- to put listed companies in priority for lending from BFIs in its upcoming monetary policy.