Leveraging Technology in Securities Market

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Leveraging Technology in Securities Market

There are also provisions related to punishment for fraudulent transactions. However, it’s unfortunate that the authorities have largely failed to crackdown or control cases of insider trading, fraudulent transactions, or price manipulation in the securities market despite strong regulations.

--BY DILIP KUMAR MUNANKARMI

Those countries which have made adequate investments in information technology to ensure their citizens’ access to modern technology and information have reaped the benefit of development and become prosperous. Though Nepal has moved ahead in utilising information technology, its investment and regulation in this sector remain poor. Barring the telecommunication and banking sector, technology is still a ‘far-fetched’ system for many sectors. The securities market of the country has accorded a high priority to the policy of utilising technology. While various aspects of trading of securities including dematerialisation, transaction, clearing, cost calculation, and verification of securities trading have seen the use of technology in recent years, stakeholders are facing various problems as the use of technology in the trading has been made easy.

Importance of information
Those with access to real and adequate information can help in driving the price of securities in the secondary market and register maximum gains through better portfolio management and capital gains. This means the information of any company is crucial in making an investment or trading decisions. Investors accord high value to insider information of any listed company. However, getting access to information about companies is very difficult in Nepal. Even the information that is publicly available is insufficient, confusing, unreliable, or difficult to understand. Many investors do not understand the importance of information. Those who understand the value of information lack the capacity of analysing it. The lack of reliable information or capacity to analyse the available information has led investors to take risks more than their capacity.

Information source and access
Though the direct source of financial or other fundamental information of any company is the company itself, all investors do not have direct contact with the company. They do not have any alternative to the publicly available disclosures or reports like quarterly, annual, or other prospectus of the companies that should be released periodically.

The Nepal Stock Exchange is the official source for the information related to the securities market including capital market scenario, transactions, capitalisation, and market index whereas information related to the issuance and regulation of securities can be obtained from the Securities Board of Nepal (Sebon). Nepal Rastra Bank, Beema Samiti, and Electricity Regulatory Commission are the official sources for the sectors that these regulatory bodies govern.

Mutual fund managers are other important sources of information in the securities market. Press, online news portals, discussion groups, market experts and analysts, and social media platforms also offer informal information related to the securities market. However, such information derived from informal sources is not always credible or reliable.

There is no practice in Nepal for public companies to disclose their financial situation, plans, and other business position except when required by the laws and regulations. Even those statutory disclosures are either incomplete or inaccurate or ambiguous. They do not want to take responsibility for proactive, real, and adequate disclosures. To fulfill the legal requirement, they appoint an information office and publish financial results and other information, but do not take initiatives to make sure that they reach the investors.

Despite legal provisions related to disclosures of information regularly, there are still challenges related to flow, analysis, archival, regulation, and monitoring of the information.

Listed companies should be required to run their websites and update them regularly for the free flow of official information. While there have been some improvements in terms of making information related to FPO, rights issues, and auctions, there is still room for reform. Such listed companies must operate the website and update it regularly, to ensure adequate information flow through local, national and online media. It is also the responsibility of mass media to verify or cross-examine the credibility and accuracy of the information that they publish. In a race to publicize information quickly, the credibility and accuracy of information have often been compromised. There is even a practice of avoiding responsibility or accountability for the information released on the official site of Nepse and Sebon. Information flooding social media or online news portals are mostly of poor quality which prompts investors to make wrong investment decisions.

Legal provisions
There are various provisions regarding disclosures of information in the Securities Registration and Issuance Regulation, 2016.

It requires listed companies to submit Sebon various quarterly reports as well as report various financial indicators like earning per share, price-earnings ratio, and per-share net worth in a prescribed format and publish them in a national level newspaper within 30 days after the expiry of the quarterly period.

Similarly, a listed company must submit its annual reports and other financial reports to the Sebon in prescribed formats within five months of the end of each fiscal year.

Before the annual general meeting, listed companies must present their agenda to the Sebon as well as decisions and other details of the AGM after 30 days of the completion.

Similarly, there are other conditions and scenarios laid out in the regulation related to the disclosures. To make the flow of information systematic and responsible, the Securities Act has a provision related to insider trading. Some provisions make insider trading a criminal offense. There are also provisions related to punishment for fraudulent transactions.

However, it’s unfortunate that the authorities have largely failed to crackdown or control cases of insider trading, fraudulent transactions, or price manipulation in the securities market despite strong regulations.

Technology in the capital market
Nepal's capital market is still in its infancy when it comes to the use of informational technology. Though the shares were issued in 1937, the Open Out Cry system was in place until 1984 for the clearing and settlement. Only in 2007, did the country adopt the computerized system for trading. Dematerialisation, Application Supported by Blocked Amount (ASBA), and Centralised Application Supported by Blocked Amount (C-ASBA) systems were adopted only after 2014. The automated online trading system was brought into operation in 2018 which has made it easier for trade. However, the current system is still incomplete as it does not include all aspects of the trading or securities transactions.

Rising costs
In other parts of the world, technology has become a means of reducing costs along with time for the production and distribution of goods and services. However, technology has not helped in lowering costs for investors in Nepal's capital market. Along with charges of opening and renewing Demat accounts with the start of dematerilisation system, investors have to pay Rs 25 for the ownership transfer. 'Mero Share' developed by CDSCL also charges investors to use its services online.

There are additional costs like cheque clearance and IPS charges. While technology has made the process of applying shares, receiving dividends, ownership transfer, and payment, it has also added a financial burden upon investors.

Risk with technology
Technology also comes with risks. As one should rely on others for hardware, software, satellite, or media, there is also the risk of a data breach or unauthorised access. No matter how secured the technology is, it is risky due to personal and business interests. Moreover, low investment in computers and software also increases the technology risks in the market.
To make capital market technology-friendly, there should be balanced sharing of costs, easy access for all investors, an alternative to investors who do not have access, skills, or knowledge of new technology, and measures to prevent unauthorized access to data and secured transactions.

Mr. Munankarmi is Share analyst and Investor.

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