Friday, October 21, 2011

Investors Protection Plan in Offing

KATHMANDU, OCT 21:  The stakeholders of Nepali capital market are rooting for establishment of funds to compensate the investors for losses arising from defaults from the other parties.

“Nepal Stock Exchange (Nepse), along with Securities Board of Nepal (sebon) are preparing a mechanism for the establishment of Investment Protection Fund and Trade Guarantee Fund to protect investors’ and stakeholders’ interest,” said managing director of Nepse Shankar Man Singh.

Sebon has already started the necessary procedures for establishing Investor Protection Fund in coordination with Company Registrar Office.

Investor Protection Fund will compensate the investors incase broker defaults on payment on the behalf of the client resulting in cancellation of order or investors incurring losses due to some technical failure of the stock exchanges’ or brokers’ trading system.

Similarly, Trade Guarantee Fund, on the other hand will ensure timely execution of settlements of contracts and protect the interest of investors and the other stakeholders.

“The creation of these funds is supposed to inculcate confidence in the minds of secondary market participants,” Singh pointed out.

The main objective of Trade Guarantee fund is to guarantee settlement transactions of the members of the exchange that is no brokers or sub-brokers default any payments. All the members of stock exchange are required to make initial contribution towards Trade Guarantee Fund.

Almost all of the major stock exchanges worldwide have such funds to reimburse or compensate the losses of investors and the members in case of technical failure or human error. The regulators have even made it mandatory for the stock exchanges to create protections funds.

“The stock exchange and brokers can contribute small portion of the transaction fee for the funds,” Singh said, adding that the unclaimed dividends of the listed companies can also be included as a part of the fund.

Moreover, the capital market has been opened for Non Resident Nepalis (NRN), stock market has to put in place the mechanisms that safeguard the investors’ interest to attract large number of international players in the capital market.

“The investors with exposure to international market are cautious about the existence of such protection funds that will build confidence in the market,” he added.

The existence of Investor Protection Fund will also be indispensable once the regulator permits the brokers to undertake margin lending to clients.

“Incase a client fails or refuses to pay the lent amount, if the market swings to unfavourable direction, brokers will incur heavy loss, so we need guarantee funds in the market,” informed president of Stock Brokers Association of Nepal (SBAN) Anjan Raj Poudel.

Under the margin lending, the brokers give partial loan to client in order to cover a larger investment than one’s capital could directly cover.

Poudel also pointed out that investors and brokers had borne losses earlier too, when the buyers have defaulted on payment and even provided cheques that bounced.

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