Kathmandu: Nepal’s stock market often courts controversies due to the speculation of market manipulation including trading on insider information.
On Tuesday, after the trading hour, Securities Board of Nepal (Sebon) — an apex regulator of the country’s securities markets — issued a press statement raising concerns over the risk of investment.
The regulator made public a list of 51 companies and requested investors to take informed investment decision in the days to come. The move has got a mixed reaction in the overall capital market and among analysts.
On one hand, a section of society had strongly felt the need of regulator’s intervention, given the records of a handful of investors deliberately inflating or deflating the stock price. They welcome the move. On the other, there is a huge criticism on the move as many believe that the statement by the regulator will not be supportive to correct the course. They say it is a ‘populist’ step by the regulator and it only hits the small investors.
What is in the statement?
Stating the use of technology in the securities market, the statement has acknowledged that the daily transaction of market has set a new record with daily transaction of almost Rs 20 billion.
“The investors should analyze the risk factors before investment,” the statement said. “The market does not always remain in a bullish trend. Instead it fluctuates. Investors should not make investment decision based on rumors and influence of others.”
Instead of taking a hard look at the regulatory framework for the reform of malpractices and correction of the entire stock trading, Sebon has opted for a ‘populist move’ by unveiling a list of 51 companies for ‘irregular trading practices’.
The regulator has assured that it is in favor of safeguarding investors. “The board has been conducting studies and monitoring of each and every listed companies.”
The regulator has claimed that it identified 51 companies in high risk by conducting a study. Sebon has taken some of the indicators and tools to analyze the situation of these companies. Share price of listed companies went up by 300 percent or even higher, price-to-earnings (PE) ratio over 100 or more, earnings per share (EPS) in negative and net worth per share less than initial price and the current financial situation in the last one year are taken as indicator for risk prediction, according to the statement.
The regulator has initiated a detailed study on insider trading, circular transaction, and cornering, among other malpractices. The regulator has claimed that investors should be in the notice of such trend before making investment decision.
Is the move on the right direction?
Trading malpractices has long been a part of Nepal’s stock market. Insider trading is also an issue for many small investors and it is the regulator’s duty to bring those involved in insider trading to book. But the Tuesday’s statement by the regulator has some fundamental lapses. Some of the key concerns are presented here:
Question over investigation modality: Instead of conducting a secret investigation and punishing the guilty, Sebon made public the list of companies without a detailed study. This has raised the question over intention of the regulator. The regulator might have done this at the behest of big investors, an analyst told NL Today on conditions of anonymity. Traders who are involved in trading of 51 companies will get opportunity to cover up their malpractices as Sebon has made public the list without proper investigation and study. In a way, the regulator gave an indication to skip the stringent action by making the list public without preparation.
Not reliable tools and indictors: Whether methods such as price-to-earnings ratio, earning per share, and net worth per share are appropriate methods to claim irregularities has long been in the discussion. Stock market analysts say these methods are useful to analyze the past trend and not useful to forecast the future course. However, the regulator has taken these methods to forecast the risks.
Deviation from the principle of neutrality: The move of the regulator to list 51 companies has also raised question on the principle of neutrality. Regulator should not harm investors. Though the regulator claims that it wants to safeguard investors, the blunt statement by the regulator not only affects the investors involved in inside trading but also a huge portion of genuine investors.
Failure to safeguard small investors: Small investors who are not a part of insider trading will suffer the most from the regulator’s move. Instead of moving for the populist statement, the regulator should have identified major actors involved in insider trading, circular transaction, cornering and other malpractices. By making public the name of 51 companies, the regulator failed to take action on the guilty while punished all investors indiscriminately.
Manipulation of stock price happens in a variety of forms. Nepal’s stock market is known as a thin market where some big players often control supply chain and manipulate the market. A large number of pump-and-dump activities in stocks should come under the scanner of the regulator. There is speculation that certain brokers and big players are involved in luring small investors into artificially high trade volumes by pump-and-dump activities.
Analysts and experts privately warn that insider trading has reached dangerous levels in Nepal’s stock market. The regulator should always be alert to this fact and mobilize its intelligence to bring guilty to book. Instead of risking investment of all, the regulator should be capable enough to promote healthy market. All of its acts should be reasonable, rational and in line with the stock market’s international standard.