SEBON puts NEPSE overhaul and margin lending at top of reform agenda

The Stock Broker Association of Nepal had gathered its members to exchange greetings for Dashain, Tihar and Chhath, the country's biggest holidays. One of the speakers used the occasion to declare that the age of the traditional brokerage run by a single owner had passed, Clickmandu reported.

The speaker was Dr Gopal Bhatta, chairman of the Securities Board of Nepal (SEBON), the regulator of the country's capital markets. In the same address he set out a wide programme of change: a technical and institutional rebuild of the Nepal Stock Exchange (NEPSE), the full launch of margin lending, and a set of instruments meant to let investors earn returns even when prices fall, according to Clickmandu's account of his remarks.

For a market where, in Bhatta's account, investors have had no way to profit from a downturn, the question is whether the regulator can deliver this much at once, and how brokers will adapt when it does.

Margin lending: brokers with bank-like powers

The reform with the most immediate commercial weight is margin lending, under which investors would borrow through their brokers to buy shares. Bhatta said the long-awaited system would begin within the Nepali month of Asoj 2083, once its standard operating procedure is finalised.

The design rests on plumbing. Brokerages, NEPSE, commercial banks and CDSC, the central depository that holds shares in electronic form, are to have their technology joined into a single network, so that a broker's approval of a client's borrowing limit would prompt commercial banks to release the money at once, he said.

1. 1Broker approves client's credit limit
2. 2Approval passes across the linked broker, CDSC, NEPSE and commercial bank systems
3. 3Commercial bank releases the funds directly

Source: Clickmandu, citing SEBON chairman Dr Gopal Bhatta

SEBON is working with Nepal Rastra Bank (NRB), the central bank, so that the credit can be priced at competitive call money rates, the rates banks charge one another for very short-term loans. Bhatta stressed that margin lending differs from a conventional loan secured against shares, and said brokers would gain financial powers comparable to those of banks, Clickmandu reported.

If it works as described, brokers would sit where credit decisions are made, with commercial banks supplying the funds behind them. As with any borrowed money in a stock market, leverage can deepen losses in a falling market just as it amplifies gains in a rising one.

The end of the one-man brokerage

Bhatta said brokers must become full corporate entities offering a broader mix of financial services, and that SEBON had introduced new policies to lift their standing and operating quality. The regulator will also actively promote mergers and acquisitions in the sector and smooth the regulatory path for such deals, he said.

Read alongside the margin plan, the direction looks clear. The regulator appears to want fewer, more institutional firms, and it is pairing new powers for brokers with pressure to consolidate. For owner-run firms, merging, selling or reorganising as companies are the paths the policy points towards.

Profiting from a falling market

Bhatta announced that short selling, intraday trading, exchange-traded funds (ETFs) and securities lending and borrowing (SLB) will all be available before fiscal year 2083/84 closes, and instructed market participants and stakeholders to prepare, Clickmandu reported.

These are standard tools in larger markets. Short selling and SLB let investors bet against shares they consider overpriced; ETFs offer diversified exposure in a single traded product; intraday trading lets positions be opened and closed within one session.

NEPSE: ownership is the government's call, technology is SEBON's

On the exchange itself, Bhatta confirmed that SEBON now holds the report of a high-level committee the government appointed to examine NEPSE's restructuring and broader ownership, issues that have caused wide unease among market participants. The regulator stands ready to implement its recommendations, he said.

He drew a careful line. Whether the state keeps NEPSE or hands it to private owners is a decision for the government alone, he said. Modernising the exchange's systems for executing trades, its handling of risk and its underlying technology, by contrast, is a task SEBON regards as pressing, and the board will shortly issue directives to drive it, he added.

Bhatta also said SEBON would use its powers to guide NEPSE into strategic alliances with well-regarded international stock exchanges, with the aim of making the institution stronger, Clickmandu reported.

Two new laws instead of patchwork

Underpinning all of this is new legislation. Rather than keep amending existing law bit by bit, the regulator has written two fresh bills, which it plans to forward shortly to the Ministry of Finance for approval, Bhatta said.

One would cover the market as a whole, from its core infrastructure and the conduct of brokers and merchant bankers to mutual funds and the trading of shares and bonds. The other concerns the regulator: patterned on the Nepal Rastra Bank Act, the law governing the central bank, it is meant to strengthen SEBON's independence as a supervisor and its regulatory authority, Clickmandu reported.

That second bill may matter more than its dry description suggests. Patterning the regulator's law on the central bank's points to an ambition for comparable standing.

Farms before gold

On a commodity exchange, Bhatta was emphatic that SEBON will put agriculture first. A market built on farm produce, he argued, would lift national output and employment directly, while one limited to precious metals or fuel would do little for Nepal's productive economy, Clickmandu reported.

What to watch

The first test is whether margin lending starts within Asoj 2083 as promised, and how the financing terms with NRB are settled. Next come SEBON's directives on NEPSE's technology and risk systems, and whether the government acts on its committee's ownership recommendations. Watch too for the two draft bills at the Ministry of Finance, the first broker mergers, and whether the new trading instruments arrive before fiscal year 2083/84 ends. Bhatta closed by calling on SEBON, NEPSE and brokerages to move together on technology and modernisation, pledging the regulator's policy support, Clickmandu reported.