Market Watch

Need of Market Makers in Secondary Market

Published by Octron on October 5, 2009

Nepal’s share market fluctuates often without any reason, forcing ordinary shareholders to lose their hard-earned money. According to stock analysts, strong presence of market makers would have helped protect the small investers. Market makers are institutional investors who interevene in the secondary market when share prices either go down or rise unexpectedly. When the prices are going down the market makers make an attempt to stabilise the secondary market by purchasing shares in large quantities and off-loading shares when the prices tend to go unjustifiably high, thus maintaining an equilibrium in the demand and supply situation.

However, the Nepali share market has failed to attract these intermediaries and those who obtained licence about one and half decades back have quit completely.
In the early 1990s, as many as seven companies had secured license to work as market makers: The companies licensed include: Citizen Investment Trust, NIDC Capital Market, National Finance, Nepal Share Market and Finance, Rastriya Banijya Bank (RBB), Gaurishankar Finance and NMB Bank. Sadly, none are in the business now.

The NMB Bank and Gaurishankar finance had got license in 1996 and 1995 respectively whereas other five institutions had got license in 1993. Gauri Shankar had renounced its license a year after receiving license. As per the immediate legal provisions, they were allowed to do both job of market makers and issue managers. All the companies except Gaurishankar and RBB continue to work as issue managers.
Chief Executive Officer of NMB Bank Upendra Poudel said that the existing legal provisions were barring them from entering into the market making job.

“Nepal Rastra Bank’s direction to end cross-holding bars us from acquiring shares of other financial institutions even though these trade the most in the secondary market,” he said. “Secondly, there is no incentive for market makers in the primary market or Initial Public Offering. Certain percentage of shares should be allocated for the market makers in the
primary market to attract them,” he said.

Chairman of Securities Board of Nepal (SEBON) Surbir Poudel said that the SEBON had no immediate plans for giving certain incentives for the market makers. Spokesperson of Nepal Stock Exchange (NEPSE) Shambhu Pant also echoed Poudel regarding the presence of market makers.
But the capital market should have in place institutional back by bringing in market makers, according to Poudel. “The presence of such institutional intermediaries as market makers, mutual funds and a dealers is a must to end the vulnerability of the investors in the share market.”

Source: Kantipur

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