The investment environment fundamentally refers to the surrounding ecosystem in which all financial investment decisions are conceived and executed. A comprehensive framework for this investment environment typically encompasses three core pillars: the available securities, the securities markets where they are traded, and the securities regulations that govern the entire system.
The Evolution of Securities within Nepal’s Investment Environment
Within Nepal’s investment environment, securities are defined as financial assets that represent a legal claim on the income and underlying assets of an issuing entity. The nation possesses a brief but significant history of these instruments. The nascent history of the securities markets officially commenced with the floatation of shares for Biratnagar Jute Mills and Nepal Bank Limited back in 1937. Furthermore, Government bonds were issued for the very first time in 1964.
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Currently, the investment environment features a limited yet evolving range of securities. Common stock remains the most popular and dominant choice among investors. While Government bonds have been issued in sizable amounts, their secondary market trading volume remains notably low. Only a handful of preferred stocks and corporate bonds are currently available in the market, and municipal securities are yet to be introduced.
On a brighter note, mutual fund units are rapidly gaining popularity in recent times. For short-term instruments, the Treasury bill stands as the only available security for investment. Consequently, the investment environment, in terms of available products, is characterized by a focused selection of instruments, requiring investors to make strategic choices from this specific array.
Although the primary issue of securities dates back to 1937, a formalized forum for trading within the investment environment did not emerge until the establishment of the Securities Marketing Center (which was later renamed the Securities Exchange Center) in 1976. A significant upgrade occurred when the Nepal Stock Exchange (NEPSE) was established in 1993, effectively replacing the Center. NEPSE began its trading operations in 1994 and currently provides a robust trading platform for the securities of 234 listed companies (as recorded until July 2019).
The exchange has showcased remarkable technological progression within this investment environment, evolving from an open-outcry system of trading to a fully automated system today. Trading follows an order-driven system, efficiently facilitated by 50 registered brokers. While many global exchanges have moved to variable pricing, the fee for trading in Nepal still operates on a fixed percentage basis, and it may take up to three days to clear a transaction.
While the size of the market—in terms of both the number of traders and total trading volume—is still relatively small compared to developed markets, it is gradually and consistently growing. The trading landscape is heavily dominated by common stocks, while the trade of other securities (such as preferred stocks, government bonds, corporate bonds, and mutual fund units) remains very thin. The investment environment is primarily driven by individual investors, as the participation of institutional investors is rare.
It is also important to note that foreign investors (with the exception of certain institutional investors) are not permitted to trade in securities on this exchange. Although information dissemination is currently weak and at times tampered with, most investors rely heavily on technical analysis, with only a few delving into the fundamentals of the company or the broader economy for investing.
Meanwhile, the dealer market is limited exclusively to government securities. The over-the-counter (OTC) market is operated by Nepal Stock Exchange, though it remains in an infantile stage. The establishment of the Securities Central Depository Service Company (CDS and Clearing Company) and the Credit Rating Agency (ICRA Nepal) has significantly contributed to the smooth and secure trading of securities, bolstering confidence in the investment environment.
The Regulatory Framework Shaping Nepal’s Investment Environment
In a decisive move to develop and secure the investment environment, the Nepal Government established the Securities Exchange Centre in 1976, followed by the enactment of the Nepal Securities Act in 1984. This Act was later replaced by the comprehensive Securities Act of 2007, which included a pivotal provision for establishing a dedicated market regulator—the Nepal Securities Board (SEBON). Today, the three essential components of a mature investment environment—the market platform (Nepal Stock Exchange), the regulation (Securities Act), and the regulator (Nepal Securities Board)—are all firmly in place.
Further strengthening this ecosystem, the Commodities Act 2074 has also been enacted to promote and regulate the commodities market. The regulatory architecture is further supported by numerous other provisions, including the Securities Regulation, 2007; Securities Businessperson Regulation, 2007; Securities Registration and Issues Regulation, 2008; Mutual Fund Regulation, 2010; Securities’ Central Depositary Services Regulation, 2010; Credit Rating Regulation, 2011; Securities Listing and Trading Regulation 2018; Specialized Investment Fund Regulations 2018; alongside many byelaws, guidelines, and circulars.
The establishment of the Nepal Securities Board alongside these robust regulations has undeniably brought order and structure to the market. While there are occasional complaints regarding the effective implementation of legal provisions and rigorous supervision by the regulator—including rare cases of trading on insider information and violations of investor rights—the trajectory of the investment environment remains highly positive. These are merely growing pains in an otherwise rapidly maturing financial ecosystem, signaling a bright future as regulatory oversight continues to strengthen and investor awareness grows.
SUMMARY
- An investment involves the sacrifice of current rupees for future rupees. Motives for investing are: appreciation of income and wealth, safety and liquidity, hedge against inflation, and tax planning.
- Real assets are tangible assets and they possess productive capacity. They are used to produce goods and services. Financial assets represent claims on income and other assets and define the allocation of income or wealth.
- The major roles that financial markets play in the economy are: informational role, consumption timing, allocation of risk, and separation between ownership and management.
- The investment process describes how an investor makes decisions about what securities to invest in, how extensive these investments should be and when they should be made. It involves five steps: determining investment policy, performing security analysis, constructing a portfolio, revising the portfolio, and evaluating portfolio performance.
FAQ’s
When did the history of securities and trading begin in Nepal’s investment environment?
The history of securities began with the floatation of shares of Biratnagar Jute Mills and Nepal Bank Limited in 1937. However, the official forum for trading started later with the Securities Marketing Center in 1976, which was eventually replaced by the Nepal Stock Exchange (NEPSE) in 1993.
What are the main types of securities available in Nepal?
The investment environment in Nepal offers a limited but distinct range of securities. Common stock is the most popular. Other available instruments include Government bonds (issued in sizable amounts), a few preferred stocks and corporate bonds, mutual fund units (gaining popularity), and Treasury bills, which are the only short-term security available.
Who regulates the investment environment and the stock market in Nepal?
The primary regulator is the Nepal Securities Board (SEBON), which was established under the Securities Act of 2007. The regulatory framework also includes the Securities Act itself, the Commodities Act 2074, and various other regulations like the Securities Regulation 2007 and the Securities Listing and Trading Regulation 2018.
Can foreign investors participate in the Nepal Stock Exchange (NEPSE)?
The current investment environment does not allow general foreign investors to trade in securities on the exchange. However, foreign institutional investors are exempted from this restriction and are permitted to participate.
How many companies are listed on NEPSE, and what is the current trading system?
A:Â As of July 2019, there were 234 listed companies on the Nepal Stock Exchange. The exchange started with an open-outcry system but has now been fully automated, following an order-driven system facilitated by 50 brokers.
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