Banking News – In an interview on the current state of Nepal’s capital market, veteran investor and market analyst Chhotelal Rauniyar said the stock market is currently facing weak investor confidence, policy uncertainty and declining market activity. He argued that the government and regulatory authorities need to introduce immediate and practical policy reforms to restore confidence and strengthen the capital market.

How do you view the current movement of the stock market following the formation of the new government?

The expectations of investors were high when the new government came to power. The government’s strong electoral mandate created expectations that it would remain stable and introduce positive policies for the economy and capital market.

Investors, industrialists and businesspeople expected the new government to bring good policies. There was also an expectation that the stock market would recover, that previous losses would be recovered and that the market could again cross the 3,200-point level and reach a new all-time high.

That expectation was not unreasonable. However, after the government was formed, the market did not respond as expected. Instead, it became increasingly uncertain and moved without a clear direction.

What do you think caused the market to remain uncertain?

The major issue is lack of clear policy direction. Investors were expecting policy clarity, but many decisions remain pending.

There were also concerns over political, business and industrial developments. Such uncertainty affects the psychology of investors. Mass psychology in the capital market is already weak, and investor confidence is low.

The government has held meetings with investors, the Nepal Rastra Bank governor and other stakeholders, and a new SEBON chairman has also been appointed. However, these steps have not yet produced the kind of long-term improvement investors are expecting.

What is your assessment of the government’s capital market policies?

I had high expectations from the Finance Minister because of his academic and professional background. However, the budget increased the capital gains tax on medium- and long-term investors and short-term traders.

The timing was also inappropriate. When the market is already weak and investor confidence is low, increasing taxes further creates additional pressure.

If the market had been performing strongly, such an increase might have been easier to absorb. But when investors are already facing substantial losses, increasing the tax burden is like increasing the cost of medicine for a seriously ill patient.

The earlier tax rates should be restored, and the government should focus on policies that encourage investment and market activity.

What immediate measures should the government take?

The government and regulators can implement several measures relatively quickly. These are not necessarily complicated reforms. Many of them can be implemented within a short period if the Finance Ministry and SEBON take the initiative.

One important measure is to reconsider the restriction on banks and financial institutions buying and selling shares. Previously, banks and financial institutions were allowed to participate in the secondary market under regulatory requirements.

At present, banks and financial institutions have significant liquidity, but that liquidity is not being effectively channelled into productive investment and the capital market.

If banks and financial institutions are allowed to participate in the secondary market within a properly regulated framework, it could help create demand and absorb some of the supply coming into the market through IPOs, rights shares and bonus shares.

What is your view on capital gains tax?

The government should reconsider the current capital gains tax structure.

The capital market has already suffered significant losses. According to the discussion, investors lost around Rs 15 trillion during the previous market downturn, while the broader decline in market value has continued to affect investor confidence.

Increasing capital gains tax when the market is weak does not necessarily increase government revenue. In fact, if the tax burden reduces trading activity, government revenue can also decline.

The figures discussed in the interview indicate that capital gains tax collection was around Rs 11 arab in the current period, compared with more than Rs 16 arab previously. This shows that higher tax rates alone do not necessarily result in higher revenue.

The government should therefore consider lowering the rate and encouraging greater market activity.

What other costs in the capital market need to be reviewed?

The overall transaction cost should be reduced.

Investors pay charges involving brokers, NEPSE, SEBON and CDSC, and such charges apply across transactions. These costs should be reviewed based on current market conditions.

The charges should be structured in a way that reduces the overall cost for investors and encourages greater market participation.

There is also an issue with the fragmentation of share transactions. When shares are purchased in multiple transactions, the holdings can appear in several fragmented lots, resulting in additional charges.

This system should be reviewed so that the same stock purchased during the day can be consolidated appropriately for charging purposes.

What is your concern regarding “churning”?

The issue of churning also needs attention.

According to Rauniyar, the term is discussed in SEBON’s investor guidance materials in relation to inappropriate or fraudulent commission-related activity. Such practices should be addressed clearly, and unnecessary costs imposed on investors should be removed.

The objective should be to reduce transaction costs and make the market more investor-friendly.

What is your view on intraday trading, short selling and auction markets?

Nepal’s capital market needs modern market instruments.

Intraday trading, short selling, auction markets, futures markets and commodity markets should be developed gradually.

However, these instruments should be introduced in a way that protects ordinary investors.

In the case of short selling, a covered short-selling system would be more appropriate initially than allowing uncontrolled naked short selling. Investors and market participants should also receive adequate training before such systems are fully implemented.

SEBON, NEPSE and brokers can conduct training programs, including online training, to help investors understand new trading mechanisms.

Should Nepal introduce ETFs and other investment instruments?

Yes. Nepal needs more investment options beyond individual shares.

Exchange-Traded Funds (ETFs) should be considered. There are also international examples of gold-related investment products and bonds that provide investors with alternatives to direct equity investment.

The development of diversified investment products would provide investors with more choices and help broaden the capital market.

What is your view on the tax imposed on dividends and bonuses?

Another issue is the additional tax burden on investors receiving dividends and bonuses.

Companies already pay taxes at different stages, while investors can face an additional tax when receiving dividends or bonus-related benefits. This creates concerns about double taxation.

The government should review this structure and consider whether the current system is appropriate.

Should dividends and bonuses be distributed faster?

Yes.

At present, investors may have to wait for a considerable period after the end of a financial year before receiving dividends and bonuses.

With modern digital accounting systems, financial statements and reports can be prepared much faster. Therefore, the process of holding AGMs and distributing dividends and bonuses should be streamlined.

Dividends and bonuses should ideally be distributed within a shorter period after the end of the financial year.

Faster distribution would increase transactions and economic activity while also benefiting brokers, NEPSE and CDSC through increased market activity.

What is your view on annual renewal fees for Demat accounts?

The requirement to renew Demat accounts every year should also be reconsidered.

Once an investor opens a Demat account, there should be an option for long-term or lifetime validity, or at least a system where renewal is required only once every five years.

There are around 80 lakh investors, including many people living in remote areas. Annual renewal charges and repeated documentation create unnecessary inconvenience for investors.

A simpler and more investor-friendly system would encourage participation.

What changes are needed in the system of shares pledged against loans?

When investors pledge shares to obtain loans, the shares and subsequent bonuses or dividends can remain frozen.

If an investor has already provided shares equivalent to a significant portion of the loan as collateral, the additional bonus or dividend received on those shares should not necessarily need to remain frozen.

Bonus and dividend income belongs to the investor, not the bank or financial institution, and the system should be reviewed accordingly while protecting the lender’s interests.

What is your view of the current online TMS system?

The current online trading system has generated considerable dissatisfaction among investors because of issues such as system downtime, hanging and technical problems.

If Nepal wants to develop an internationally competitive capital market and attract NRN and foreign investment, it needs a tested, trusted and internationally recognized trading system.

NEPSE and SEBON should work toward introducing an international-standard TMS and online trading infrastructure.

With the market capitalization reaching a significant level, investment in modern technology infrastructure should not be considered a major obstacle.

Should the 10-unit IPO allocation system be removed?

I strongly believe the 10-unit IPO allocation system should not be removed.

The system was introduced to support ordinary and small investors and to expand participation in the capital market. It helped people who received small IPO allocations become secondary-market investors.

Today, Nepal has around 80 lakh Demat accounts, and the expansion of investor participation is one of the outcomes of such policies.

Small investors, including housewives and students, consider even a 10-share allocation an important asset. Therefore, the system should be strengthened rather than removed.

If institutional investors require larger allocations, their participation can be increased through other mechanisms such as book building and larger institutional allocations, rather than removing opportunities for small investors.

Can Nepal increase market capitalization to 150 percent of GDP?

It is possible if the government adopts appropriate policies.

Nepal’s market capitalization was around Rs 45 trillion at one point, and given the growth of rights issues, bonus shares and other market instruments, the market could have reached a higher level.

The goal should be to build a capital market capable of supporting the broader economy.

India provides an example of how a capital market can expand significantly over several decades. Nepal can also aim high, but the policy environment must support rather than restrict capital market development.

How important is the capital market for the overall economy?

The capital market is closely connected to the broader economy.

A strong capital market supports banks, financial institutions, businesses, industries and investment.

At present, a large amount of liquidity is available within banks and financial institutions, but credit demand remains weak. According to the discussion, around Rs 14 trillion in liquidity has been concentrated within the banking system, while only a relatively small amount is being channelled into industries and businesses.

The problem is not simply the availability of money. Investor and business confidence is weak.

Until confidence improves, businesses may remain reluctant to borrow and invest.

What should the government do to restore investor confidence?

The government needs to move from assurances to immediate implementation.

Investors have heard many promises about intraday trading, short selling, auction markets and other reforms. These are positive developments, but investors need concrete action.

The capital market is currently in a weak psychological state. Immediate policy measures can help restore confidence, increase transactions and gradually bring investors back into the market.

If transactions increase, capital gains tax collection can also increase, while brokers, NEPSE, CDSC and other market participants benefit from higher activity.

What is your final message to the government and regulators?

The government should implement the practical reforms discussed above without unnecessary delay.

I am not asking the government to artificially increase the stock market. I am asking for policies that create a healthy environment in which the market can grow naturally.

The government should focus on reducing unnecessary costs, reviewing taxes, improving technology, expanding investment instruments, protecting small investors, increasing institutional participation and introducing modern market mechanisms.

The capital market has lost substantial investor wealth and confidence. Restoring that confidence through sound policy is essential not only for investors but also for the broader economy, banking sector, businesses and industries.

If the government implements the necessary reforms, investor confidence can gradually return, transactions can increase and the capital market can once again contribute more effectively to Nepal’s economic growth.