Convention Organized by

Capital Markets Regulation and Development

Thursday, 17 December, 2015, New Delhi, India

Advocate Amar Jibi GhimireVice Chairman

Nepal Institute of Company Secretaries

Some facts about Company Secretary in Nepal

Lawyers/ Chartered Accountants are also working as a part time Company Secretary

Companies Act, 2063 has defined specific roles of Company Secretary

Majority people think that Company Secretary is a full time job, however, the Supreme Court of Nepal gave the verdict to define position of the Company Secretary as special types of position depending on the nature of appointment,

hence can be part time or full time

Glimpse on Capital Market

Capital Market is: the part of a financial system relating to raising capital by

dealing in shares, bonds, and other types of financial assets – law applicable define the name of the assets

the securities market where various entities such as governments, local governments, business enterprises raise funds. – applicable laws to defines who can raise

Capital Market mainly includes the stock market (equity securities) and the bond market (debt) however, name can be any as applicable law define

Legal definition prevails every things

Understanding Capital Market Regulation and Development

For better understanding let us separate into two folds : Capital Market Regulation Capital Market Development

Regulation part is mainly related to the legal paradigm – depending upon “so called” hard law verse soft law

Development is mainly associated to economical prospect- hence typically does not prefer to have the complex legal framework though it does not deny on granting power to regulatory mechanism

Conventional approach - unregulated market is good for better development .

Understanding Capital Market Regulation

Capital market regulating: legal framework regulatory frameworks

First Question – Is there really “hard law” ? Is there really a powerful regulator?

In the countries like ours – So called “hard law” are possessing the character of “Soft Law”

Real need of Hard Law Nepal is full of “so called” hard law where remedial

procedure are ambiguous

Capital Market Development

Development means series of stages Stage is a period in development in which

market exhibit specific behavior and establish particular capacities.

Development to be judged from:positive and negative aspects

Development must focus how desirable change in the market is best achieved and that is based on either Regulating or Deregulating Capital Market

Nevertheless, from Nepalese history – well regulating market is much needed for the development of capital market

Capital Market Development in Nepal

7 decades history of Nepalese Capital MarketBiratnagar Jute Mills Ltd. (1993). Where public issuance owas made. No

Regulatory frameworkSecurities Marketing Centre (SMC) was established in 1976 (after 40

years of first public issue) under the Industrial Policy.SMC started secondary trading of government bonds in November 1980

until Securities Exchange Act was enacted. Securities Exchange Act was enacted in 1982, which restricted the

exchange of unlisted securities.

SMC was converted into Securities Exchange Centre in 1983, Securities Exchange Centre was the only stock market institution

undertaking the job of brokering, underwriting, managing public issues and market making for government bonds.

The first amendment in Securities Exchange Act in 1992 paved the way for the restructuring of stock market in Nepal, which led to establishment of Securities Board of Nepal (SEBON) in 1992. It is the apex regulating body of capital market in Nepal.

The first amendment in the Securities Exchange Act also converted the then SEC into NEPSE, a full-fledged open-out-cry trading system with the induction of stockbrokers.

The first amendment in the Securities Exchange Act was actually led beginning of an organized development of stock market in Nepal.

Capital Market development in Nepal

Securities Act, 2063 Securities Board Regulation, 2064 Stock Exchange Operation Regulation, 2064 Securities Businessperson (Stock Broker, Dealer & Market

Maker) Regulation, 2064 Securities Businessperson (Merchant Banker) Regulation,

2064 Securities Registration and Issue Regulation, 2065 Mutual Fund Regulation, 2067 Central Depository Service Regulation, 2067 (2010) Credit Rating Regulation, 2068

Capital Markets Governing Regulations in Nepal

Mutual Fund Guidelines-2069 Compliance Guidelines for Securities Broker, 2058 Securities Issue Guidelines, 2065 Bonus Share Guidelines, 2067 Portfolio Management Guidelines, 2067 (2010) Government Securities Bylaws, 2062 Government Securities Transaction Bylaws, 2062 Securities Allotment Guidelines, 2068 CDS Byelaws, 2068

Capital Markets Governing Regulations

Capital Market Regulators

Capital Market Regulator Securities Board, Nepal Office of the Company Registrar Financial Institution Regulator Nepal Rastra Bank (mainly through

monitory policy)Insurance Business Regulator Insurance Board However - Hotel, Hydropower, Industries and other sectors do not have effective regulator. Hence a kind of monopoly.

Capital Market Regulator in Nepal

SEBON was authorized to issue licenses to the securities businessperson by the second amendment in the act in 2053 after which it started to issue licenses. From the same year it was made mandatory for the listed companies to prepare and submit annual and half-yearly report to SEBON.

 In the last decades, there has been tremendous development in the capital markets in Nepal. NEPSE, a government owned entities, is the only stock exchange in the country. It issue licenses and acts a regulator of the stockbrokers. Currently share trading are executed through 50 brokers firm licensed by NEPSE.

NEPSE started automated trading system from Bhadra 2064 and calculated overall index from 2060.

SEBON pre-approval is mandatory for all public issues and right issues. It maintains securities data management system of Nepal with the central securities data bank and online reporting system. SEBON issues license to merchant banking under the Securities Businessperson (Merchant Banker) Regulation 2064.

 Currently the market capitalization of shares listed in NEPSE stood at more than NPR 350 billion with 182 listed companies. There are 23 brokerage firms and more than 15 merchant bankers acting as financial intermediaries in the capital market of Nepal. Although a lot has been achieved in the development of capital market, there are still a lot to be done for the development of stable and matured capital market.

Capital Market Regulator

Only one market that NEPSE Types of securities Listed are:

Equity shares Preference Shares Corporate bonds Government Bonds Units of mutual funds

Types of Securities Listed at NEPSE (Nepal Stock Exchange)

Facts about Nepalese Capital Market

Total 232 companies are listed In 1994, Nepal Stock Exchange (NEPSE) started its trading

with 62 listed companies. From 2005 government bonds are being listed and traded at

NEPSE At present there are 232 companies listed with NEPSE and

47 companies who do not comply with the legal requirements have been delisted till now.

One company, Nepal Bank Ltd, has been relisted. Now, NEPSE is becoming automated. CDS – Central Depository System and Clearing Limited is

active

Facts about Nepalese Capital Market

Small market hence minor news can affect the market – Constitution Promulgation, Nepal band, Terai Band

Company with Indian Investment– Nepal Lever shares of NRs. 100 went up to NRs. 30,000 - this is the record breaking value

Hydropower developing companies are also becoming player in capital market:

Regulator mandated 10% shares to the people of project affected areas

Employees of lending agencies can get shares – though claimed controversial – but upheld by the court

Capital Increment Implementation Plan of B&FI

Through the Monetary Policy for Fiscal Year 2015/16, central Bank named, Nepal Rastra Bank raised minimum paid-up capital for the Banks and Financial Institutions by as much as four times. – as equivalent to India As per the new capital plan, 'A' class commercial banks are required to raise their paid-up capital to Rs 8 billion from current Rs 2 billion within two years.(IRS 5 billion)

Insurance Act is on the way where by paid up capital may go up by more than a billion

Huge Remittance – Very Expensive Real Estate

Capital Market Theory

As so many businesses wish to come to capital market as early as possible because it is the place to collect money on Profit Sharing Basis: hence: Returns from Investment – Who are responsible

to ensure good return Investment Analysis and Portfolio Management –

Awareness Responsibility Appropriate pricing for assets - mainly risky

assetsHolding-Period of ReturnsRisk-Free Returns

Conclusion

Financial Institutions Regulation – Capital Market Regulator are having problems to coordination with FI Regulator

Disclosure Regulation – Family Owned Business are the main problems about corporate culture hence do not disclose as needed – Company Secretaries are also in difficulties

Financial Activity Regulation – which laws prevails though capital market regulator has main roles to play

Regulation of Foreign Investors Participants – Dealing on Companies with Foreign Investment

Difficulties in identifying Restrictive verses Non-restrictive regulation – so enhance legal understanding

Conclusion cont.

It is said that development does not take pace in restrictive regulation as it does not support growth and not flexible to maintain the pace with changes in the capital market, nevertheless,

Do not bring ambiguous laws – Regulator think it is beneficial to regulate

Get the clear legal and regulator mechanism so that regulator’s independence and autonomy is prevailed – Example how freely they can bring regulation, directives

Focus on capacity enhancement of the regulatory, further enhancement of skills and knowledge, in term of technology is must