Stock investor Chandra Kandel had asked to renew his margin loans, but his bank refused saying they needed to be brought down to less than Rs40 million.

The Monetary Policy 2021-22 states that a person cannot borrow more than Rs40 million from a bank or financial institution by depositing shares as collateral, and that one cannot obtain loans totalling more than Rs120 million from multiple banks and financial institutions to purchase shares.

With the bank refusing to renew the margin loans whose renewal deadline expired recently, Kandel was forced to sell his shares to repay the loans in order to remain within the credit limit of Rs40 million.

“I had no plans to sell the stocks, but I was forced to sell them to repay the loans to reduce the size,” Kandel, who is also a lecturer at a Kathmandu-based college, told the Post.

Share investors blame the central bank's policy of discouraging investment in the sector as one of the primary reasons behind the bearish trend in the stock market in the last three weeks.

On August 12, a day before the monetary policy was announced on August 13, the Nepal Stock Exchange (Nepse) index was at 3179 points. The very next trading day on August 15, the Nepse slid to 3154.34 points.

The index did rise slightly in the following days, but it never regained its high of August 12; and subsequently went steadily downhill into bearish territory. On Sunday, the Nepse plunged to a low of 2818.73 points.

Investors said that the stock market stirred on Monday after Finance Minister Janardan Sharma called central bank Governor Maha Prasad Adhikari to ease the situation in the capital market. The Nepse rose by 161.94 points on Monday, only to lose 44.18 points and settle at 2936.6 on Tuesday.

Market capitalisation, the value of all the stocks listed on the stock exchange, shrank to Rs4,171.58 billion on Monday from Rs4,437.27 billion on August 12, reducing the value of the stocks by Rs265.69 billion.

The bearish trend in the stock market prompted some stock investors to announce protests against the central bank policy. A group of investors organised a motorcycle rally in Kathmandu with the aim of staging a sit-in in front of Nepal Rastra Bank with an 18-point charter of demands.

“The police stopped us in the Bhatbhateni area, and we staged a sit-in at the same place,” Dipendra Agrawal, a long-time stock investor, told the Post.

Gathering under the banner of the Capital Market Reform Struggle Committee, the investors demanded the resignation of Governor Adhikari and ending the maximum limit on margin lending, besides making other demands.

The central bank defended its move saying it had to intervene as the stock market was growing despite the massive impact of Covid-19 on the earnings of companies and the economy as a whole.

“The provision was created to break the monopoly of large investors on margin lending, and ensure access of small investors to financial resources to invest in the stock market,” said Nepal Rastra Bank spokesperson Dev Kumar Dhakal. “It is also aimed at minimising the risk for banks and financial institutions due to volatility in the stock market.”

On June 15, the Securities Board of Nepal had released the financial details of 51 companies saying that it was risky to invest in their stocks, and there was a huge gap between their stock prices and actuarial return on investments. The move to issue the list invited controversy amid suspicion of leakage of information to certain investors.

Agrawal argued that the market would determine the prices of stocks in a free market economy. “Who is responsible for determining the prices of stocks except the market?” asked Agrawal. “Tell us what the right price is for each company’s stock.”

He added that the new policy of the central bank had resulted in losses of millions of rupees of investors.

Ever since the central bank squeezed financing to purchase shares, investors have been lobbying the government against the move. On Monday, several investors representing the Nepal Investors’ Forum met with Finance Minister Sharma.

“We met with the finance minister on Monday, and he notified us that he had already talked with Governor Adhikari regarding the demands of stock investors,” said Rajan Lamsal, vice-president of the Nepal Investors’ Forum, a grouping of stock investors. “Our main demand is that the threshold put on margin lending be removed. There should be no limitation on the right to receive loans.”

According to a press statement of the Finance Ministry on Monday, the finance minister asked the governor to ease the situation of the stock market, and take appropriate action to address its problems.

However, Dhakal said that he was unaware of any such conversation. “The central bank has not revised its policy, but it has been making the necessary adjustments during the review of the monetary policy in the last two years,” he said. The central bank reviews the monetary policy quarterly.

Former finance secretary Shanta Raj Subedi said there was no need to change the existing limit on margin lending. In a tweet on Monday, he wrote, "The current limit on receiving loans against the collateral of shares is too high. The secondary market is determined by demand and supply. The share prices of some hydropower projects had soared despite their poor financial indicators whose correction is required. So, there is nothing to worry about the (measures of the central bank).”

He also urged the governor not to change the rules in haste.