In the fiscal year 2060/61, when the total annual turnover of NEPSE was Rs 2.14 billion, the government received Rs 3.1 million as capital gains tax. Exactly 21 years later, in the fiscal year 2081/82, when the turnover of NEPSE exceeded Rs 2.1 trillion, the government of Nepal received more than Rs 18 billion as taxes from the market.

The secondary market, which had a daily turnover of less than Rs 10 million till 20 years ago, saw a turnover of about Rs 30 billion in Bhadra 2081.  In the space of a decade, the size of the country's capital market has increased significantly.  The number of investors has increased from a few thousand to more than 7 million.  The market capitalization is about Rs. 45 trillion, the number of listed companies is 286, and about 87 companies are awaiting approval from the Nepal Securities Board to issue primary shares. 

The aforementioned numbers are better than those of countries with emerging economies and higher per capita incomes than ours.  Until a decade ago, only bank financial institutions, which were forced by law, carried out primary issuances and the secondary market was mainly centralized in bank financial institutions. Now, hydropower, manufacturing companies, hospitality-related companies and other companies are also entering the market. Has the market really developed?

It is believed that the formal secondary market trading in the world began in 1602 with the trading of shares of the Dutch East India Company on the Amsterdam Stock Exchange in the Netherlands. The Bombay Stock Exchange was established in neighboring India in 1875. But long before that, companies had been established in those countries and capital collection had begun. The bubble and crash in the British Stock Exchange led to the issuance of bubble laws in 1720. At that time, Mahindra Malla was ruling Kathmandu. Prithvi Narayan Shah had not yet been born.

The history of the capital market in Nepal is not very long. The history of companies issuing shares in Nepal is believed to have begun with Biratnagar Jute Mills in 1993. The company, formed in partnership between Prime Minister Juddhashamsher Rana and Indian businessman Radhakishan Chamaria, had a capital of Rs 160,000.

The secondary market, which used to trade less than Rs 10 million a day until 20 years ago, saw a turnover of about Rs 30 billion in Bhadra 2081. Of this, 75 percent was owned by the Indian side and 8 percent by the government, while 25 percent was owned by Nepalis. As mentioned in Sardar Bhim Bahadur Pandey's book 'Tyas Bakhatko Nepal', many companies were established in Kathmandu at that time because this company was able to achieve good success in a short time. But due to political and business reasons, most of them could not continue.

Nepal's organized securities market began with the establishment of the Securities Buying and Selling Center in 2033 BS to trade government bonds. Later, with the promulgation of the Securities Trading Act in 2040 BS, secondary market trading of shares also started through this center from 2041 BS.

The capital market is considered to have been regularly traded since 2050 with the formal establishment of the Stock Exchange and the Nepal Securities Board. From 2050 to 2064, shares were traded through 'open out cry'. The electronic trading system was started in 2064, which helped the securities trading to formally go outside the confines of Kathmandu. Full demat (dematerialized) share trading began in 2072. Full online trading began in 2075.

Despite the increase in the number of investors, market access and market size with the use of technology, as in 2041, only shares are traded in the market except for a limited amount of bond trading. Except for those forced by law, only a limited number of companies have come to the market.

The financial condition of some companies that have come to the market independently seems weak. Many companies that have a positive impact on the country's economy, are well-managed and run on profit, still do not want to come to the market. The market is mainly focused on speculation.

More than 90 percent of the transactions are carried out by individual investors, while the number of institutional investors is limited, the market is not yet open to foreign investors, the necessary tools for market risk management and related intermediary companies are not in the market. Some of the convenience that should be obtained through the use of technology is still far away. The biggest thing is that in this market with risks related to capital, there is a need for investors with the necessary amount of financial and technical knowledge.

Where did the confusion come from?

As mentioned above, this is a risky market. But in practice, we (the government and investors) have shown a tendency to see share investment as risk-free, the government is happy to receive revenue at any cost, and investors are trying to make profits in a short time. Both these trends are fatal for the capital market. In trying to make profits in a short time, speculation flourished and the government was also happy to see taxes on effortless speculation. Speculation is necessary but only to a limited extent. If instead of taxes, the government had focused on market policy, long-term investment facilitation, foreign investment facilitation, project-based investment policy, policy to facilitate industries using local resources, etc., the economy would certainly have received what it needs today through the capital market.

The number of investors and the breadth of the market are necessary for liquidity and effectiveness in value creation in the market. In this sense, although it is appropriate to issue shares in the primary market with paid-up shares in the initial period and make a policy of distributing shares to as many investors as possible, the market is prone to fluctuations due to the failure to emphasize the technical and financial knowledge of investors along with this policy.

The financial condition of some companies that have come to the market independently seems weak. Many companies that have a positive impact on the country's economy, are well-managed and run on profit, do not want to come to the market yet. The market is mainly interested in betting. Providing an opportunity to reduce risk is another important aspect of the market. But like in the 2040s, we have still concentrated our trading only on shares. The trading history of the world's capital markets over the past 400 years says that there are different types of investors in the market. Natural persons generally enjoy betting. Therefore, according to the nature of the investor, various types of instruments are needed in the market.

Those who can take a lot of risk prefer 'derivative' instruments, those who take a medium level of risk prefer shares and those who take a low level of risk prefer bonds. But there is no diversification of instruments in Nepal. The theory that companies can reduce risk by diversifying remains limited to finance for individuals. Because the investment behavior of individuals is to follow the crowd, invest in rumors, become greedy when it increases and become afraid when it decreases. Therefore, there is more fluctuation in a market dominated by individuals. But the number of institutional investors in Nepal is very low. No matter how many studies are prepared until institutional investors are able to invest independently, the bond market cannot be strong. One way to reduce the risk of institutional investors is to keep a portion of their portfolio in bonds. What can be done?

The long-term investment generated by the government through the electricity investment policy of the 2050s and the capital market is the main factor in the country, which was experiencing unimaginable load shedding a decade ago, reaching a state where it can export electricity today. Similarly, a positive situation is seen for the cement industry and the steel industry in the post-COVID situation. This is a very positive aspect. If easy policies are established in other industries including information technology, pharmaceutical companies, hotels and tourism, the industry will flourish, the capital market will also come into use, and the government can also receive revenue as a long-term source.

Capital market metrics such as market capitalization, growth in the index, number of listed companies, turnover, number of investors and access are certainly important . These metrics show the liquidity, fairness and effectiveness of the market in creating shares . All these three elements are the benchmarks for measuring the strength of the capital market . But this is not enough . The main objective is to create low-cost capital and develop entrepreneurship . 

It does not make sense to say that the capital market has a large contribution to the economy just because the market capitalization is almost equal to the gross domestic product . Because the National Statistics Office has not yet calculated how much capital market entities have contributed to the gross domestic product . But it is necessary to measure the effectiveness of the capital market based on how much the real sector industries in the capital market have contributed to the gross domestic product . Among the real sector companies listed on the NEPSE, the contribution of the water resources industry to the gross domestic product has been increasing for a few years, the main reason for which is the capital market.

The most important issue is that government bodies such as metropolitan cities and local governments can use the capital market to promote long-term investment. Capital can be raised by issuing project-based long-term bonds to invest in roads, bridges, large projects, etc. If a policy is adopted to collect tolls (taxes) for such projects and pay the interest and principal of the bonds from them, small and large projects can be carried out with domestic investment. The local community also gets a sense of ownership of such projects. Such practices can be seen countless times in foreign markets.

However, for this, a long-term capital market policy is necessary for the government rather than a revenue-oriented one. Along with financial literacy related to the capital market, general investors and government officials, political leaders, etc. need knowledge of the technical aspects of the capital market.