Stringent policies, lack of awareness and high attraction for equity shares are among the reasons that have prevented the trading of debt instruments in the country’s only secondary market.

The Nepal Stock Exchange (NEPSE) has not diversified beyond common stocks since it was established more than two and a half decades ago despite government assurances to encourage the trading of other types of securities. Debt instruments such as government bonds and corporate bonds have also not been admitted to trading on the country’s only bourse.

Debentures, also known as corporate bonds, are debt instruments that companies listed on the Nepal Stock Exchange can issue to borrow money from the market. They issue these low-risk instruments that yield a fixed return for investors, mainly to manage working capital.

The Securities Board of Nepal has made it mandatory for listed companies to set aside at least 40 percent of their debentures for the general public. With no compulsory provision in place currently, mainly institutional investors have been purchasing debentures. Nabaraj Adhikari, deputy executive director of the board, said the Securities Listing and Trading Regulation had been revised to include this rule.

Adhikari said the amended regulation aimed to create a lenient policy for individual investors who wish to invest in the debt market. According to him, the regulation has set a minimum limit in a bid to encourage a large number of individual investors to invest in debentures. According to the board, it has listed 23 types of bonds issued by the government and 20 corporate bonds issued by listed companies. However, none of these securities is being traded on the secondary market.

Debentures offer a fixed rate of return to investors over the prescribed time period. As per stock market rules, individual investors can post sales order on the NEPSE software if they wish to sell debentures on the secondary market, but only for lots of 25,000 units.

The new software launched by NEPSE supports the trading of debt instruments. The automated online software introduced by NEPSE last November is equipped with the necessary features to support the trading of both government and corporate bonds, Adhikari said.

According to him, the government tax on the return provided by debentures is higher than the tax on the interest earned on bank deposits. The government levies 6 percent tax on the return provided by debentures while the tax on interest earned on bank accounts is 5 percent, he said.

Lack of interest among stock brokers due to the low commission they get on bond transactions has also affected the trading of debt instruments. As per board officials, the commission on the debt instruments is just 0.05 to 0.20 percent. Stockbrokers get 0.4 to 0.6 percent commission on share transactions and 0.4 percent commission on the trading of mutual fund plans.  Commercial banks, in particular, are leaning towards issuing a large number of debentures in order to borrow funds for their portfolio management in the midst of a liquidity shortage.  According to the board, it has permitted six commercial banks to issue debentures worth Rs15.58 billion between mid-July and mid-March this year, while two more are in the process of receiving permission to float debentures worth Rs4 billion.