KATHMANDU – The Nepal Rastra Bank (NRB) on Tuesday clarified that there has not been any change in the maximum limit that the banks and financial institutions (BFIs) could invest in securities of the listed companies. The central bank’s response came amid speculations that its recent directive to reduce held-for-trading securities had an adverse effect on the share market.
Last week, the NRB had directed the BFIs to limit their investments to 1 percent of their core capital in held-for-trading securities. Held-for-trading securities are shares or bonds bought with the sole purpose of selling them at a profit in a short period.
The directive had a drastic effect on the Nepal Stock Exchange (Nepse), with its index dropping 74 points over the last five days of trading on fear that the BFIs might dispose their shares immediately.
The market plunged 25.98 points again on Tuesday to close at 921.86 points. With the share market sliding amid selling pressure, investors have blamed the regulators of being not serious to the investors’ interest.
The NRB, however, insists there has not been any change to the provision that allows the BFIs to invest upto 10 percent of their core capital in the shares, debentures or mutual funds of a listed company and 30 percent of their core capital of several listed companies.
As per the existing central bank directive, the BFIs should invest in share market by dividing such investments in three categories–Held for Trading, Available for Sale and Held to Maturity.
“Even now the BFIs can invest upto 30 percent of their core capital in Available for Sale and Held to Maturity,” said NRB spokesperson Manamohan Kumar Shrestha. “The limit has been reduced only in the case of ‘Held for Trading’.”
Available for sale is a debt or equity security not expected to be held for a long period or until maturity. Likewise, Held to Maturity security is a debt or equity security that is purchased with the intention of holding the investment to maturity.
The NRB, however, said that the directive should not make a major effect in the stock market. Shrestha said the NRB had come up with the move to control the short term speculative lending by the BFIs just to earn lucrative profit through the short-term trading of the stocks. “A number of B and C class BFIs in particular have been found to be making even 80-90 percent of their income through the short-term trading of stocks,” he said.
These BFIs were found to have been distributing a large amount of dividend through the income earned by short term trading, he added. “As a result, a large number of investors were attracted to the shares of these BFIs. But such practices expose the investors to a high risk.”
He said the BFIs could, however, divert their investments from ‘Held-for-trading’ to ‘Available for Sale’ which allows an investment of upto 30 percent. The ‘Available for Sale’ is a type of investment under which the BFIs can invest for their liquidity purpose, according to Shrestha.
Meanwhile, Nepal Investors’ Forum-a union of the investors of stock market-blamed the NRB for a big loss of the capital market. “The NRB’s inconsistent policy has left investors discouraged,” said Raj Kumar Timilsina, the forum’s president. But the government tries to assuage them, saying the investors should not be worried about the downfall in the market.
Joint Secretary at the Finance Ministry Krishna Devkota said the NRB has allowed the regulators to manage the stock market and the government would not appear as long as there is the possibility of a massive upheavel or crash . “We are closing following the development in the stock market,” said Devkota.
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