NEPSE's Stagnation: An Investor's Perspective on Policy Gaps, Manipulation, and the Path Forward

The Nepal Stock Exchange (NEPSE) has been experiencing a prolonged period of sluggishness, leaving investors hesitant despite favorable macroeconomic conditions such as policy reforms and historically low-interest rates. This lack of investor confidence is a critical challenge that the government and regulatory bodies must address to revitalize the market. In an insightful interview, seasoned investor Pradip Sinkhada shared his perspective on the current market dynamics, highlighting key issues ranging from policy inconsistencies to market manipulation.

Sinkhada notes the conspicuous absence of the anticipated 'Saune Bull' – the traditional market surge observed at the beginning of the new fiscal year in Shrawan (mid-July to mid-August). Despite ample liquidity in the market, investors remain largely inactive, adopting a 'wait and watch' approach. This cautious sentiment is primarily due to the lack of attractive trading opportunities, leaving many on the sidelines.

One significant point of contention is the government's approach to capital gains tax. While the government increased the capital gains tax rate for the current fiscal year, it paradoxically collected less revenue than in previous periods. Sinkhada argues that this reflects a fundamental misunderstanding by the government, which seems to believe that merely raising tax rates will automatically boost revenue. Instead, he suggests, a thriving market that empowers investors would generate sustainable revenue. The focus on increasing tax burdens rather than fostering investor confidence has inadvertently stifled market growth and discouraged participation.

Investor fear, according to Sinkhada, is another major impediment. He illustrates this with an anecdote about a tiger and a buffalo, both wary of each other due to unfamiliarity, until one's action reveals its nature. Similarly, investors are apprehensive about the government's inconsistent actions – encouraging investment on one hand, while simultaneously engaging in activities that instill fear, such as the arrest of businessmen. This disparity between rhetoric and action has led investors to feel like potential prey, making them reluctant to commit capital confidently.

Regarding the Nepal Securities Board (SEBON), Sinkhada acknowledges its efforts towards technical improvements, such as filtering out weak companies from initial public offerings (IPOs) that have negative net worth. While these are positive steps, he emphasizes that policies must translate into tangible, results-oriented implementation. The market's demand side remains weak, necessitating a concerted and collaborative effort from SEBON, Nepal Rastra Bank (NRB), and the Ministry of Finance to create a robust and attractive investment environment.

The prospect of attracting Non-Resident Nepalis (NRNs) to the market is welcomed, but Sinkhada cautions that NRNs will primarily seek fundamentally strong and profitable companies. He stresses the importance of maintaining a high standard for listed companies, warning against allowing the market to become saturated with weak entities that could erode its credibility and deter foreign investment.

An alarming trend observed is the disproportionate performance of newly listed companies compared to older, fundamentally sound ones. Sinkhada attributes this to factors like promoter lock-in periods and a smaller float of shares, which make these stocks susceptible to manipulation by limited groups. The allure of potential right shares and bonus shares is often used to artificially inflate prices, diverting attention from established companies with strong fundamentals.

Concerns about the misuse of technology, specifically Artificial Intelligence (AI), for market manipulation are also raised. While direct evidence is scarce, the appearance of orders at times when manual entry is impossible suggests potential technological abuse. Sinkhada points to Nepal's weak surveillance system as an enabler, allowing influential individuals to potentially exploit AI for their benefit, underscoring the urgent need for vigilant regulatory oversight.

Despite historically low-interest rates (7-8% for bank loans), margin lending remains risky. Sinkhada explains that the current sideways market means that even these low rates might not be covered by trading profits or dividends, making debt-financed investments precarious. Furthermore, while new instruments like intraday trading and short selling are signs of market evolution, they are a double-edged sword. While they can enhance market depth, short selling, in particular, carries the risk of exacerbating panic and driving the market further down during periods of instability.

The disparity in settlement systems, where some private brokers offer one-day settlement while NEPSE's government-operated TMS takes two days, creates an uneven playing field. This allows those with faster settlements to capitalize more effectively on market fluctuations, disadvantaging general investors. Uniformity in technology and settlement processes is crucial for fairness and efficiency.

In this uncertain market, Sinkhada advises investors to adopt a cautious strategy: avoid investing with borrowed money, prioritize companies with strong fundamentals and a history of dividend payouts, and buy shares when prices are low rather than chasing rising prices. Ultimately, restoring investor confidence and fostering a healthy, transparent market requires a unified and consistent approach from all regulatory and governmental bodies.