The history of securities trading in Nepal is not very long. In Nepal, B.S. In 1993, the Companies Act was promulgated. In 1994, Biratnagar Jute Mills and Nepal Bank issued their first shares to the public. Although the securities were issued in 1994, there was no clear legal provision for securities trading in Nepal at that time. The legal provisions related to the operation and management of securities transactions started from the ‘Securities Transaction Act 2040’. The Act was amended twice. In the beginning, the Securities Transaction Act was formulated to make necessary legal provisions for the purchase and sale of securities issued by the Government of Nepal and to establish an appropriate institution for it. The Act had made minimum provisions for the operation and management of government securities by establishing a security purchase and sale centre.

The Securities Act, 2063 has come into effect by replacing the earlier Act. In the first decade of its establishment (2050-2059 BS), the focus of the Board has been on strengthening the legal and regulatory structure of the stock market. During this period, activities in the primary and secondary markets are also increasing. In the second decade of its establishment (2060-2069 BS), the Board focused on making the market internationally oriented by developing the necessary infrastructures in the securities market. During this period, the open bidding system of securities trading was replaced in the capital market of Nepal and the semi-automated trading system was introduced. Similarly, during this period, the central deposit company of securities was established and the market gradually moved towards dematerialization and the credit rating institution was established. Collective investment funds came into operation for institutional investors.

The third decade of the establishment of the Board (2070-2079 BS) i.e. the period after 2070 BS can be considered as the stage of market modernization in the securities market of Nepal. During this period, there was a provision for complete non-physical trading of securities in the market. The entire transaction of Nepal Stock Exchange (NEPSE) has started online. The system of issuing shares at a premium price was started by the companies and the IPO issuance process was completed through book building. During this period, there is not only a provision of ten percent reservation in the issuance of public shares to the Nepali citizens who have gone abroad for employment, but many other changes can be seen in the stock market.

Banking institutions play an important role in financial intermediation at the beginning of the development of the economy. Such institutions collect the savings of the savers and provide loans to the investors to invest. The work of this type of intermediary has a positive impact on the economy and also helps in production. This will help in the economic growth of the country. Not everyone can take as much loan as they want from the banking sector. Loans do not provide enough resources, especially for long-term investments. Banking institutions try to invest only for a short period of time. Banks and the financial sector are reluctant to make long-term investments. Therefore, it is not possible only for the development of banks and financial institutions for large investments and risky investments. Capital can be mobilized easily from the capital market that can earn the trust of investors. The capital market also includes the bond market.

Investment instruments can be collected by issuing bonds with a fixed percentage interest rate. Shares can be issued in such a way that the company is owned in the capital market. The company can raise the means of investment by selling the shares to the general public and institutional investors. Not only the shares issued by the company, but investors also participate in its risk. In Nepal, the development of the capital market is used for the accumulation of money for the economy, for the smooth development of the economy.

NRN

Development of this sector is impossible until the Institutional Non-Resident Nepali (NRN) is brought into the capital market. This issue has been raised for a long time. Domestic investment alone is not enough for the development of the capital market. Foreign investment is also important. Foreign investment can be brought in from NRNA for the first time. In 2007, the Securities Board of Nepal (SEBON) had tried to bring NRNs into the capital market for the first time. In that process, the process of bringing NRNs into the capital market was initiated by formulating banking laws, foreign exchange laws, etc. However, the environment for NRNs to invest in the capital market has not been created yet.

Just as the history of the capital market in Nepal is short, the issue of bringing NRNs into the stock market has not been raised much. Along with the issue of bringing foreign investment in Nepal’s capital market, the issue of bringing NRNs in the share market has been discussed. The issue of bringing NRNs to the capital market has been raised since I was in the Securities Board, but it has not been possible so far.

Mutual funds have come in to increase institutional investment. However, there is no legal guarantee so far even though it is said that NRNA will be opened in the context of foreign investment. Although the Securities Registration and Issue Regulations-2073 BS have a provision regarding the issuance of debentures by international financial institutions, there is no provision for NRNs to apply for the securities issued by a Nepali company. As of now, there is no legal provision allowing anyone other than Nepali citizens to invest in Nepal’s capital market (primary and secondary market).

Although the issue of bringing foreign investment into the capital market has been raised for some years, it has not received legal recognition. In the budget for the fiscal year 2079÷80, it was said that legal provisions would be made to open investment by NRNs in the secondary market of securities. Similarly, in the budget for the fiscal year 2080÷81, the issue of allowing NRNs to enter the capital market continued. Although the announcement has been made to open the way for NRNA to invest in hydropower and other real sector companies listed on the stock exchanges and to mobilize its capital, technology and experience in national development, no process has moved forward.

Lately, the Securities Board of Nepal (SEBON) and Nepal Rastra Bank (NRB) have been working to bring NRNA into the capital market. They seem to be doing things that can be done in their own way. The board has also conducted various studies regarding the entry of NRNs into the secondary market of securities. A study committee was formed in the fiscal year 2075÷76 BS under the coordination of the Executive Director of the Department of Regulation with the objective of allowing NRNs to enter the securities market. However, the report of the committee does not appear on record.

In 2077÷78 BS, the board had assigned the responsibility of carrying out a study on the entry of NRNs in the securities market. Niraula’s report states that the Securities Board of Nepal (SEBON) can allow NRNA to invest in the securities market by making some policy provisions in line with the legal provisions of the NRNA Act 2064, Foreign Byelaws (Regularization) Act, 2019 and Sections 432 and 433 of the Civil Code Act, 2074. It seems that the government and the concerned bodies should initiate the legal process as the grounds taken by the report are correct.

The report has suggested the board to make some procedural arrangements before trading in securities. Likewise, the NRNA has suggested on bank account, demat account, customer identification, wish person or legal heir, short-term transaction arrangement, quantitative restriction on investment, repatriation of profit invested in securities and locking period of the securities purchased. NRNs who want to invest in Nepal’s securities market have been asked to open a demat account on the basis of a copy of NRN identity card, passport or residence permit (visa) with a validity of more than 6 months.

The securities broker has to open a business account at the broker’s office approved by the Securities Board of Nepal (SEBON) with a copy of NRN identity card, passport or residence license (visa) with a validity of more than 6 months. As per the provision, an investor with an investment of more than one hundred thousand US dollars can open a non-residential external account of current or savings nature in a ‘A’ class bank with the approval of the Securities Board of Nepal (SEBON) by being present in person or through his/her authorized representative.

Likewise, it has recommended that the investor himself or his/her authorized representative should be present at least once while withdrawing money from that account or sending remittance, the permanent account number (PAN) should be obtained and prior approval of the Securities Board of Nepal should be obtained if the investment is more than $ 100,000. In addition, the board has to give such information to the Rastra Bank. The report has included suggestions that NRNs can directly invest up to $ 500,000 while doing transactions in NEPSE, bring such money from licensed banks and financial institutions and can invest up to $ 10 million in mutual funds.

There are legal provisions, but inadequate

The Constitution of Nepal has made provisions for granting citizenship to NRNs with various conditions. Provisions have been made to utilize the knowledge, skills, technology and capital of NRNs for the national development. There is also a Foreign Investment and Technology Transfer Act for such Nepalis. As per the provision, NRNs can sign investment agreements with commercial banks under different conditions. Currently, NRNs can invest in Nepal by fulfilling the conditions set by the Nepal Rastra Bank if they want to invest directly. There is also a provision that NRNs can open an account in convertible foreign currency with a commercial bank or financial institution. A foreign company with more than 50 percent share of NRNA can invest in the industry or business or sector that is open for foreign investment in foreign currency.

Similarly, the eighth amendment to the Share Issue and Allotment Directive-2074 BS has opened the way for NRNs to invest in the share market. The NRNs can operate in the securities market of Nepal subject to certain conditions and limits. However, this is not the kind of arrangement that NRNs can buy shares of all companies in the secondary market on a personal basis, as expected by the general investor. It has opened an effective door for the use of NRN’s property in the capital market and in the physical development infrastructure of the country. NRNs investing in shares of a joint venture are required to submit their Nepali citizenship or non-resident identity card and Permanent Account Number (PAN Number).

The provisions related to investment, accounting, payment and repatriation of the joint venture investment company shall be as per the Foreign Investment and Technology Transfer Act, 2075, Industrial Enterprise Act, 2076, Nepal Rastra Bank Foreign Investment and Foreign Debt Management Bylaw-2078 and the Nepal Rastra Bank. Although it has adopted the ease and flexibility to invest, it has not encouraged the investors as it has adopted the traditional system of return. There is still a need for improvement in the return of investment. Although the government has made many reforms to bring NRNs into the share market, it has not been enough yet.

It is necessary to open the foreign portfolio market to bring foreign investment in the capital market or any other sector. It seeks a proper easing of the crisis in foreign exchange. This makes it easier for NRNs to convert their accounts. The issue of bringing NRN÷investment in the law should be clearly stated. If such an arrangement is made, it is necessary to create an environment where NRNs can take and bring their money by looking at the fluctuations in the capital market. Although the law has made it easier to bring in capital, it is very difficult to take the money earned. Although the financial sector strategy has also mentioned the need to study the investment of NRNs in the issue of securities, the work has not moved forward.

Bringing NRNs into the capital market of Nepal will have a positive impact on the Nepali economy. In this way, a lot of investment comes in. The size of various industries and businesses can be increased by investing in NRNs. This will help in the economic progress of the country. All sides are positive to allow NRNs to invest in Nepal. However, if Nepal’s economy is in trouble tomorrow, NRNs are cautious that withdrawing their investment in large quantities will cause problems.

For example, in 1997, Southeast Asia suffered a major economic crisis. It cannot be said that such a crisis will not occur in Nepal as well. Therefore, it is necessary to be careful on many issues while bringing in NRN investment. It is necessary to create an environment conducive for investment by combining both the easy and difficult aspects of the law. For this, the Securities Board of Nepal Act needs to be amended. Similarly, there is a need to amend some issues in the NRB’s guidelines and act÷regulations. Although some of the recent policies have made the investment climate positive, there are certain conditions that need to be followed when capital is outflowed.

“We need to find ways to facilitate the flow of foreign capital into the capital market. “Providing easy access to the NRNs in the capital market and the secondary market will bring financial resources to Nepal,” the report states, “With such investment, the knowledge and network of NRNs will flourish economic activities.” When external capital flows into the secondary market, there is the possibility of controlling the negative impact on financial stability through the inflow and outflow of capital on a large scale in the short term. However, as stated in the report, it does not have to be implemented as it is. In the current situation, capital is flowing through various means and all the stakeholders should be alert towards this.

What should be done to bring in investment?

Now various agencies are saying that they are working to bring investment to NRNA. But all of them are limited to gossip. The implementation aspect is weak. It is said that the provision made by the government in the citizenship bill for NRNs has made it easier to bring in investment. But that hasn’t made it any easier. Capital markets have opened up in many countries of the world. There is still a lot of work to be done in Nepal. Nepal’s capital market needs to be further developed.

If NRNA and foreign investment are to be brought into the capital market, it is necessary to make our capital market fully auto÷operated. Nepalis and foreign investors living abroad should be able to do business wherever they are. There should be a provision to buy and sell computer÷mobiles abroad in Nepal’s capital market and develop manpower accordingly. Only then can Nepal’s economy grow. Capital cannot be brought in only by bringing it into law. Access to technology is one of the reasons for the lack of foreign investment in Nepal’s capital market. Technology development is necessary to bring NRN investment in the capital market. Nepal Stock Exchange (NEPSE) should be strong on the basis of technology. The capital market should be expanded to reach the international level and the capital market should be taken forward from a new angle.

(Article by former Governor of Nepal Rastra Bank and former chairman of the Securities Board of Nepal (SEBON)