NRN Investment through Capital Market

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--By Niranjan Phuyal
‘Economic Roadmap for Prosperous Nepal’ was the main theme of 8th NRN regional conference held on Nagano, Japan from September 18 to 19. About three hundred NRNs had participated from different part of the globe to discuss on the given theme. After brainstorming for the two days, the conclusion was that although there could be some kind of legal, bureaucratic and political hassles for foreign investment, Nepal is in a stage to be the place for huge foreign investment and NRNs should take this as a good opportunity for the financial, technical and managerial investment in Nepal. 
One of the session during the programme was about the foreign and NRN investment in Nepal through capital market. Nepali economy is getting Foreign Direct Investment (FDI) for last few decades. However, it is not able to attract enough funds required for its infrastructure development and on other industries. Even in the last one decade, we are not able to get sizeable foreign FDI in the economy. The recent example of the difficulties faced by the Nepali promoters to get FDI for "Hetuda Kathmandu Tunnel Highway" shows there are some kind of inefficiencies with us. So, the conference has urged the government to make the regulation more investment friendly as well as to open capital market for the NRN investment. 
The issue of NRN or foreign investment through capital market is important because it is more liquid than FDI. Rational investors want their investment to be more liquid so that when required they can convert it into cash. Government of Nepal also has theoretically accepted to allow NRNs to investment in capital market. The NRN Act, 2064 also says that NRNs can invest freely as an investor in Nepal. But there are some hassles about the procedures. 
First, there are some legal difficulties about the investment in Nepali capital market. NRN Act, 2064 has defined NRNs in two categories as foreign citizen of Nepali origin and Nepali citizen residing abroad. Nepali citizen residing abroad has Nepali citizenship and passport. As per the Securities Registration and Issuance Regulation 2065, while applying for the securities in primary market, the investor should include a copy of citizenship certificate along with the application. Similarly, when buying the shares from secondary market, the buyer should produce a copy of citizenship certificate. So, this provision has stopped the possibility of investment from the side of foreign citizen of Nepali origin. 
Again, let's suppose Nepali citizen residing abroad invest in the primary market. Or, foreign citizen of Nepali origin starts an investment company here to investment in capital market. But the provision of repatriation of investment for NRNs in NRN Regulation, 2066 is not so clear and is very lengthy. As per this provision, NRNs can take away their investment or the profit but have to get approval from concerned authorities each time. But the nature of secondary market is different and it is not practical to get permission each time while investing or while taking away their sale proceedings. This method of repatriation is not investment friendly in secondary market. The Mutual Fund Regulation, 2067 has provided authority to launch mutual funds scheme for the companies owned by NRNs but the detail procedure for this in not clear. Portfolio Management Guidelines, 2067 from SEBON has mentioned that the portfolio manager could buy or sell securities in the name of NRNs but it is not clear if NRNs can only buy or sell through portfolio managers. 
There is some other practical confusion that should be cleared by proper regulations. For example, parents invest in shares on the name of their children when they are in Nepal. But later on if they moved to foreign countries and their children get foreign citizenship; the regulation is silent about the procedure to transfer or sale of such shares. Similarly, there are some other practical problems and long bureaucratic procedures for the NRN investment in capital market. 
The next major hurdle for such investment is the technology adopted in capital market. Currently, the primary market investment is completely paper based. Different documents are required to be attached with the investment application. It takes many days to allot the securities once it is applied. There are more technical difficulties for the secondary trading in the market. Shares trading still done on paper based certificate and there is no online trading facility. Once purchased, it takes months to get the certificate. Orders are to be made through the broker office. Market depth is not available for making decision before buying and selling shares in secondary market. There are many issues of information dissemination as well as transparency in the secondary market. Due to the lack of proper technology, the capital market is not able to provide opportunity for the interested investors out of Kathmandu. Even for the possible investors residing in foreign countries, it is just a matter of discussion. 
The issue of corporate governance, implementation of law and order, political stability, concentration on banks and financial institutions etc are also some of the reasons for NRNs not to invest in Nepali capital market. Provision to issue share at par in primary market is one of the major reasons for not to attract investors in capital market. Lack of diversified scrips and non-regulated commodity market can also create mistrust for the NRN investment. 
Although there are many obstacles for the foreign as well as NRN investment, it is the right time for the government and concerned authorities to create a proper environment. There are some issues and confusions which can be corrected with simple modification on the regulations or through new directions. Proper technology in the market is best solution for many problems. If online facility is provided in both primary and secondary market, many NRNs will definitely enter into the market. The digitization of clearing and settlement process is the prime requirement for the flow of money from the foreign countries. 
The most important obstacle to be solved is about the repatriation of investment. The NRN Regulation, 2066 No 10 has defined about the process of repatriation and it is basically for the FDI. These features are not enough for the capital market investment. Investors in capital market may require frequent transfer of funds and it is not addressed in the regulation. For this, the concerned authorities like Nepal Rastra Bank, SEBON, NEPSE, and even Ministry of Finance should think seriously. The practice of separate Dollar account for foreign investment followed in neighbouring countries like Sri Lanka and India could be the better option.   
As concluded in above stated conference, Nepal has a huge potential to attract foreign investment and few symptoms have already been visible on the surface. Normally, every investor wants liquidity on their investment. Liquidity can be provided through capital market. So, the NRNs and foreigners should be provided with enough facility in the market to raise the confidence of such investors. Economy of India started to move towards prosperity when nonresident Indians started to invest in India mainly through capital market. So, NRN investment through capital market could be the milestone toward the journey for prosperous Nepal.
The author is asst manager at NEPSE and a visiting faculty at KUSOM.

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