The Nepali share market is seeing significant changes driven by company financials, project investments, margin loan growth, and regulatory updates, alongside impacts from flash floods on hydropower projects and revised share sale rules by the Nepal Securities Board.
Nepal’s share market is being shaped by important factors such as companies’ financial health, their investments in other projects, the expansion of margin lending, and upcoming changes in regulations. Recently, a flood in the Budhigandaki River damaged four hydropower projects. At the same time, the Nepal Securities Board (SEBON) updated its rules regarding prior notice for primary shareholders selling their shares. Also, the growing availability of margin loans through brokers has added new opportunities and some risks to the market.
Budhigandaki Flood Damages Four Hydropower Projects
A flood in the Budhigandaki River has damaged staff housing, construction materials, equipment, roads, and bridges of four hydropower projects. However, initial reports suggest that the damage is not as extensive as the destruction caused by the Bhotekoshi flood in the past.
The staff housing of Times Energy, the company constructing the 341-megawatt Budhigandaki Hydropower Project, was swept away by the flood. Some construction materials and equipment at the project site were also washed away. According to available information, the project has not suffered other major damage.
Sahas Urja, a company listed on the Nepal Stock Exchange (NEPSE), has invested approximately Rs. 1.10 arba in Times Energy. Therefore, the impact of the Budhigandaki project damage on Sahas Urja’s investment has become a concern for investors.
Similarly, various structures of the 24.5-megawatt Doban Khola, 30.59-megawatt Yaru Khola, and 16-megawatt Machhakhola Hydropower Projects also sustained damage. Access roads for some projects were affected, and Bailey bridges in others were damaged. According to the information, these projects did not experience large-scale damage either.
Compared to the extensive damage caused by the Bhotekoshi flood to hydropower projects, the impact in the Budhigandaki region appears limited. Nevertheless, the real extent of damage, the restoration efforts, and the operational status of the affected projects will significantly impact future days.
SEBON Amends 15-Day Prior Notice Rule
The Nepal Securities Board (SEBON) has amended its rule requiring basic shareholders to give prior notice before selling shares, a move that analysts say has been met with positive feedback in the share market.
Previously, a directive issued on Bhadra 5 mandated basic shareholders to provide 15 days’ prior notice if they intended to sell 5 percent or more of their ownership shares. Following criticism from various parties, the Board revised this regulation.
Under the revised rule, the requirement for prior notice when selling shares purchased from the secondary market has been removed, regardless of the quantity. Likewise, investors who were basic shareholders at the time of an IPO issue must now inform the board five working days in advance if they wish to sell 15 percent or more of their total shareholding after the lock-in period ends.
This notification will remain valid for up to three months. If shares are not sold as stated in the notice, or if additional shares are bought within the same period, details about these actions must be publicly disclosed.
This regulation is expected to help manage potential selling pressure when a large volume of shares enters the market at once. Additionally, it could promote transparency by deterring the practice of issuing sale notices without selling, or even buying shares instead.
Based on feedback from large investors, institutional investors, brokers, and other stakeholders, the revised regulation is analysed as a positive development.
Margin Trading Expands: 19 Brokers Take Rs. 25.55 Arba in Loans
As margin trading expands in the share market, the amount of loans flowing through brokers is also increasing. According to available details, nineteen brokers have already borrowed Rs. 25.55 arba from banks and financial institutions.
Although the Nepal Securities Board introduced guidelines for margin trading back in 2074 B.S., its effective implementation took a long time. In Kartik 2079 B.S., NASA Securities was the first to announce the availability of margin loans.
At that time, high interest rates and service charges, along with unclear methods for brokers to secure necessary funds, hindered the expansion of margin trading.
However, after the Securities Board introduced new margin trading guidelines in 2082 B.S., it became easier for brokers to obtain working capital and receivable financing from banks and financial institutions, allowing them to offer margin loans to investors.
According to available information, NASA Securities has taken the largest loan, approximately Rs. 3 arba. About Rs. 1.5 arba of this has already been disbursed as margin loans, as stated by NASA’s Managing Director, Madan Poudyal.
Similarly, Capital Max Securities (Broker Number 62) has also announced starting margin trading after securing a bank loan. According to the company’s Chief Operating Officer, Pratik Adhikari, loans worth approximately Rs. 54 crore were booked within a few days of the announcement.
Of Nepal’s total 92 brokers, 49 have received final approval for margin trading, while 12 brokers are in the process, according to NEPSE Spokesperson Murahari Parajuli.
Lower Margin Loan Interest Rates Benefit Investors
Initially, margin loan interest rates were about 19 to 20 percent. More recently, brokers are offering loans at comparatively cheaper interest rates.
Currently, many brokers are proposing interest rates around 7.5 to 8 percent, with some rates going up to 10 percent. The decrease in interest rates has boosted the possibility of margin trading through brokers, alongside the option of taking loans from banks and financial institutions.
When obtaining a loan against shares from banks and financial institutions, investors must complete the process of pledging and releasing collateral. However, margin trading through a broker may be comparatively easier for buying and selling shares, subject to the relevant regulations.
Margin loans can provide additional capital to short-term traders and help increase trading activity in the market. However, if share prices fall, investors’ own capital could be significantly affected. Therefore, when trading with borrowed funds, it is essential to have clear knowledge of price fluctuations, interest costs, and condition for maintaining a margin.
Margin Trading May Increase Demand for Qualified Companies
There are specific criteria for selecting companies eligible for margin trading. Available information indicates that companies that have been profitable for at least two out of the last three years are qualified for margin trading. NEPSE regularly publishes a list of these eligible companies.
This increases the likelihood that new capital available in the market will be drawn towards companies with relatively stronger financial positions and those qualified for margin trading.
In the past, there was a greater emphasis on the tendency for prices of companies with fewer available shares to increase. However, after some of these companies experienced significant price drops later, the need to study company financial health, dividend capacity, and future growth became clearer.
Since margin trading can increase demand for qualified companies, it can help create an environment where fundamental company conditions gain importance in the market. Additionally, it is expected to help brokers reduce the challenges they face in managing buying and selling payments.
What Profit or Loss on a Rs. 10 Lakh Transaction?
While margin loans boost an investor’s trading capacity, the profit generated from them is not guaranteed. For instance, if an investor has Rs. 3 lakh and takes an additional Rs. 7 lakh as a margin loan to trade shares worth a total of Rs. 10 lakh, changes in the share price can significantly impact their own capital.
If the value of a total Rs. 10 lakh portfolio increases by 10 percent, its value reaches Rs. 11 lakh. In such a scenario, there is a value increase of Rs. 1 lakh before deducting loan interest and other fees.
However, if the value of the same portfolio drops by 10 percent, its value falls to Rs. 9 lakh. Since the liability to repay the loan principal remains unchanged, the investor’s own capital experiences a substantial decline.
Margin trading involves initial margin and maintenance requirements. If the portfolio value drops below a specified limit, the broker may require additional funds to be deposited or shares to be sold. Therefore, when trading with a loan, one should assess their capacity to tolerate potential losses, not just potential profits.
What Effect on the Share Market After Ashoj End?
As Ashoj end approaches, there is a possibility of selling pressure in the market due to loan interest payments and quarterly financial settlements. With fewer trading days in Kartik month because of Dashain, Tihar, and Chhath festivals, market activity could also be affected.
On another note, the time for publishing quarterly financial statements is also nearing. Especially for hydropower companies, if they have been able to produce electricity at full capacity, positive impact is expected to be seen in their financial reports.
It has also been noted that due to floods in the Bhotekoshi region, 431 megawatts of electricity production remained outside the national transmission system. In this situation, the income generated by other operating projects from electricity production and sales will be important in the upcoming financial reports.
Along with these factors, the expansion of margin loans, SEBON’s amendment to the 15-day prior notice rule, and the government’s policy view towards the share market can also play a role in determining the market’s direction in the coming days.
However, even with these seemingly positive aspects, it does not necessarily mean the share market will definitely increase. Company financial conditions, share prices, market supply, investor sentiment, and the overall economic situation will influence the market.
Therefore, it is appropriate for investors to make investment decisions based on the company’s real condition and their own risk tolerance, rather than solely relying on rumors or the possibility of price hikes.
AI Disclaimer: This article was originally published on https://bajarkochirfar.com. It has been translated with the help of AI. For the best understanding and accurate facts, we recommend reading the original Nepali version.
