Capital Market Reform Action Plan: Investor Optimism and Skepticism, Experts’ Perspectives
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Following the government’s release of the ‘Capital Market Strengthening and Revival Action Plan, 2083’ on Monday, the Nepalese stock market showed a green trend on Tuesday. However, the enthusiasm did not last beyond a day.
After rising by two points on Tuesday, the stock market index fell by 21.19 points on Wednesday, closing at 2,612.42.
Experts note that the market’s initial two-day response to the finance ministry’s plan is temporary, and its true impact can only be evaluated over the long term.
Nepal’s capital market has been experiencing sluggish trading and weak investor confidence for some time now.
“I believe the government’s action plan will act as medicine to revive the share market, which has been in a coma for a long time,” said Radha Pokharel, President of the Nepal Capital Market Investors Association.
What Investors Say
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According to Pokharel, investors have lost over five billion rupees since the new government came into office.
“This is an action plan for reform and similar improvement ideas have been proposed before. The effects might become visible once it is implemented. Encouragement of institutional investors and various reforms could have a sustainable positive impact.”
Sagar Dhakal, President of the Stock Broker Association of Nepal, stated that the recently announced 21-point action plan follows international best practices and addresses long-standing demands.
“Since it was developed in consultation with relevant agencies and stakeholders, we can expect long-term reforms.”
While some investors and stock brokerage officials remain cautiously watchful, finance ministry and regulatory officials assert the plan is “transformative” and will have a “sustainable impact.”
Finance Ministry spokesperson Amrit Lamsal explained that the plan addresses both immediate and long-term aspects.
“There will be some immediate effects, but the plan includes long-term provisions, covering governance reforms, securities-related acts, and market infrastructure development.”
“Ultimately, this will help revitalize and expand the market over the long term.”
What Foundations Underpin the Reforms?
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Gopal Prasad Bhatt, Chairman of Nepal’s Securities Board, explained that the government’s plan aims at comprehensive reforms.
“There are many reform aspects within the plan. For example, new standards for IPO issuance will be introduced. Additionally, policies related to the ‘price discovery mechanism’ will be implemented, which will improve price formation in the market. This will provide direction to both primary and secondary markets.”
The Securities Board of Nepal is the regulatory agency responsible for supervising and structuring the capital market.
“The ultimate goal is to make the market active, disciplined, timely, and diverse by introducing various instruments,” he said. “Investors with different preferences will be able to engage with an internationally standard market through various instruments.”
Finance Ministry spokesperson Lamsal noted that the action plan will be implemented gradually.
“Various bodies are actively involved. This year, the ministry plans to amend laws related to public finance, capital markets, and insurance. Since these programs are time-bound, they will be prioritized for reforms.”
“[Through this plan,] our direction will proceed accordingly. Legal preparations will be completed.”
What Does the Action Plan Include?
The government’s plan covers contemporary amendments to the securities act, advancing restructuring of NEPSE, amendments to allow Non-Resident Nepalis (NRNs) access to the secondary market, and tax reforms to encourage long-term investment, among other topics.
“We will see a market dominated by institutional investors,” Bhatt said. “There is a subject currently before Parliament to make Provident Funds more active. Additionally, the Citizen Investment Trust and Social Security Fund will function more effectively. Stock dealers will also operate more efficiently.”
Dhakal also expressed confidence that efforts to encourage institutional investors will have a long-term impact. “Currently, institutional investors represent only 10% domestically, whereas externally it is nearly 40%.”
The relatively low number of institutional investors and less mature retail investors pose various challenges in the Nepalese market. On Tuesday, the share prices of some hydropower companies affected by the Bhotekoshi flood also increased.
“Pricing of shares is influenced by experts who analyze companies and purchase only sound shares. When retail investor participation is high, individual investors may become confused about share prices,” Dhakal explained.
Notable Income Tax Relief
The finance ministry’s action plan provides significant relief concerning income tax.
“Previously, we paid 7.5% tax on trading held less than a year, and 5% for one year holdings. The Finance Minister increased these to 10% and 7.5% respectively in the budget,” said Chhotelal Rauniyar, former chairperson of the Nepal Investors Forum.
“Currently, the 10% tax has been reduced to 5%, and medium-to-long-term investors will be taxed at 3.5%.”
“This is even better than our prior demands.”
The plan also reduces the period for banks to sell shares to 45 days, down from the previous six months.
It includes provisions for mutual fund development and bond diversification as well.
“So far, investors’ only option was shares; there were no equity funds. In India, there is an option to invest in gold. Such diversification will be welcomed,” Rauniyar said.
“Moreover, the plan mentions intra-day trading and short-selling, but since investors are not ready, these are likely to take about a year to implement.”
Intra-day trading refers to buying and selling shares within the same day, while short-selling is a process of borrowing shares that one does not own, selling them first, and repurchasing later if the price drops to return the shares.
Questions Regarding Implementation
Radha Pokharel, President of the Capital Market Investors Association, said that although the government’s plan shows initial positive signs, it is difficult to assess its long-term impact at present.
“We have proposed many reform suggestions before. Sometimes, the plans arrived but were not implemented, getting stuck midway. Such scenarios do not allow assessment of impact,” she said. “It would be good if the issues are addressed policy-wise.”
Chairman Bhatt of the Securities Board asserted that a plan of this scale has never been presented before.
“This is the first time such an action plan has been introduced,” Bhatt said. “These initiatives are time-bound, and earlier such plans never existed.”
“This is the first time that such a plan has come as a commitment from the government and the Securities Board. It is not an old idea but a clear action plan.”