Stock brokers: Making hay while sun shines

Stock brokers: Making hay while sun shines
eKantipur.com, 9-Jun-2007
By KRISHNA REGMI

Stock brokers in Nepal are having a great time: their commission rate is one of the highest in the world and their profits are soaring. On top of that, their profits, in a way, are being protected by regulations that bars entry of new brokers in the ring.

As a result many brokers are raking in vast sums of money in commission. For example, during the last ten months of the current fiscal year, the highest-income generating broker earned on average, Rs 960,000 per month after taxes.

The commissions compiled by the Nepal Stock Exchange (NEPSE) show that the second highest earner made Rs 910,000 per month. The third, fourth, fifth and sixth highest earning brokers made Rs 870,000, Rs 740,000, Rs 630,000, and Rs 615,000 per month respectively.

NEPSE clients complain that the commission rate offered to brokers is too high, something that the NEPSE officials also agree with in private.

The commission rates at the regional stock markets also justify these complains. For instance, the Bombay Stock Exchange, India and Chittagong Stock Exchange, Bangladesh, have imposed upper ceilings of one percent for brokerage commission. However, in Nepal the lower ceiling is one percent and it can go up to 1.5 percent.

Fixed number of brokers for the last 11 years is another issue since it concentrates the incomes from stock commissions within a small group and keeps the interest rates high.

Notwithstanding the expanding size of the market, NEPSE has not added brokers for the last 11 years. At the time of its establishment in 1994, NEPSE had appointed 25 brokers. Two years later, it was expanded to 32. But the number declined later to 23, as some left the service and some were blacklisted by NEPSE.

In the beginning, there were only 60 companies; now 133 companies are listed for trading. Likewise, the market capitalization-- the value of listed shares-- shot up by over 21 times, to 148 billon rupees.

"Due to strong lobbying from the brokers, no concrete efforts were made in the past to allow the entry of new brokers," said a NEPSE official, preferring to remain unnamed.

But Rewat Bahadur Karki, general manager of NEPSE said the stock market has dispatched a letter to the Securities Board of Nepal (SEBON), a regulatory body, asking its permission to appoint 27 more brokers.

"However, there is no response as yet," he said, adding, "As soon as we get a nod, we will increase the number of brokers."

Deepak Raj Kafle, chairman of SEBON said the board is awaiting endorsement of the Brokers and Dealers Regulations that it has forwarded to the government to clear the way for expansion of the number of brokers.

Kafle also said absence of professional brokers was one of the reasons behind the erratic movement of share prices and the high rate of commissions.

Due to absence of competition coupled by weak regulations, the brokers are not rendering quality service. The recently prepared report by NEPSE points out that there is an immense need for brokers to professionalize their services, providing investors with an efficient and quality service. They have not maintained proper offices, and most do not have email addresses or fax machines, said the report.