Sachindra Dhungana is the deputy general manager of NIBL Ace Capital. He has worked as the head of the business support and mutual fund department for nearly two years at NIBL Capital Markets Limited. A chartered accountant by profession, he has vast experience in mutual fund management. The Post's Subin Adhikari caught up with Dhungana to talk about the growth of the capital markets in Nepal. Excerpts:
How do you assess the overall growth of the capital markets in Nepal?
The general perception is that the capital market has just commenced in Nepal, but it’s already been 25 years since the establishment of the Nepal Stock Exchange. Some banks like Nepal Merchant Bank (NMB) started their operation as merchant banks. They started with a system where the public used to make a long queue to fill up the forms of initial public offerings (IPOs). But now, we have evolved to become technologically advanced by using Dematerialization (DMAT), which means converting physical shares and securities into electronic form. Gradually, we are in the process of introducing all technologies and practices of the international capital markets in Nepal. Nepal’s capital markets are in the process of getting on par with international standards.
Private equity funds have been growing quickly in the international markets. Also, recently in Nepal, a few capital markets and private companies have got licences from the Securities Board of Nepal (SEBON) to establish their funds. From an investor's perspective, what is the risk-reward ratio?
We have recently got a licence for venture capital from SEBON. We have set up the NIBL equity partners fund worth Rs10 billion. We have invested 35 percent in the fund as an anchor investment and the remaining we have collected from the various companies in the market. This is a new concept in Nepal. Being a licensed company, certainly, brings credibility and a distinguished identity in the market. Still, there is a drawback in playing safe. We cannot perform as aggressively as the unregistered investors. We have to analyse the pros and cons of all the probable investments and make sure that we give the best and safest returns. Along with that, there is also a risk of failure. The industry is still in its infancy. The largest risk we have analysed is regarding the exit plan. Every investment we make must have its exit. We receive a close-ended fund for 15 years and after that, we need to sell the equity. In that duration, we need to make our investment four to five times the original value. When we provide a loan of Rs100 million to a business, the value of the loan remains the same throughout the duration. But in the case of equity, we have plenty of options to multiply it tenfolds. So these are our risks and rewards as an investor as compared to the loan.
Mutual funds are considered safer beds and useful for investors. How is the attraction of small investors compared to large investors in the sector?
If we look at the global history and trends, then we can observe that the mutual funds are primarily for small investors. But in Nepal, the history of mutual funds is about a decade long. We mainly have close-ended mutual funds which have an IPO and a fixed maturity date of five years, seven years or ten years. Investors receive a dividend every year and the final amount at the end of its maturity period. The investors are getting a return, but they are below the return rate of the market. Mutual funds are considered a moderate risk and give moderate returns. It's difficult to make small investors interested in this, and because of it, the ratio of small investors is low in mutual funds. Obviously, the number of small investors has increased lately, but if we see the larger picture, they still only comprise 30-40 percent, whereas the institutional investors make up the majority. But, if we see open-ended funds such as the Sahabhagita fund by NIBL Ace Capital, the majority of the investors are small-scale individuals. This is a systematic investment plan where individuals can make investments at regular intervals. Here, we have hardly 30 percent of the institutional investors, whereas the remaining 70 percent are individual investors. So, we can say that the mutual fund is also evolving towards the right course in Nepal’s capital markets.
What are the services provided by NIBL Ace Capital?
NIBL Ace Capital provides all the services that are practised in the Nepali capital markets such as issue manager and share registrar. These are considered the conventional services provided by a merchant bank. Besides these, we are also providing some innovative services like portfolio management, open-ended and close-ended mutual funds, and corporate advisory to convert an entrepreneur’s ideas into business and venture capital. We are the first systematically registered venture capital in Nepal with a fund of Rs10 billion.
Being surrounded by many competitors, what is the biggest strength of NIBL Ace Capital in the Nepali capital market?
Nepal Investment Mega Bank is one of the largest and most experienced banks in Nepal. It’s the promoter of NIBL Ace Capital. Its network and reach among the general public are one of our greatest strengths. In addition to that, we have a team of 100 plus manpower, which is the largest in the Nepali capital market. We are in the 11th year of our operations and we have been industry leaders since being founded. We have the best portfolio management, IPO issues and real-time settlement. We also have our independent branches outside the Kathmandu Valley. And, along with that, we provide all our services virtually, too. Therefore, we have our own strengths to thrive in the market.
NIBL Ace Capital has crossed the remarkable milestone of Rs4 billion worth of assets under management in portfolio management services and Rs1 billion in a mutual fund. How do you mark this achievement?
We have been industry leaders in all our services. We started our NIBL Sahabhagita Mutual Fund with Rs200 million, but now we have crossed the milestone of Rs1 billion and are heading towards Rs2 billion within a span of two-and-half years. We are the first mutual fund in Nepal to do so. In portfolio management services, we started with about Rs600 million and now, we are serving more than a thousand customers with combined assets of about Rs4 billion. When employees of other companies were confined to their homes during the Covid-19 lockdown, we were working in the office, taking the risk. We prepared our strategies and did all the necessary exercises to move ahead. So, looking back, the journey has never been easy, but due to our team efforts, we are able to beat the industry standards and become number one on every parameter. Our products are targeted to different customer bases as per their risk appetites. Small-scale investors have a lower risk appetite, so we recommend them to go with mutual funds. Investors can start investing in mutual funds from a base amount of Rs1,000.
There is now a provision that a certain portion of IPOs is allocated for migrant workers. But until now, the participation of migrant workers in the IPOs is negligible. What should be done to bring more migrant workers on board?
After the implementation of this rule, only two to three IPOs have been issued, so, it would be too quick to judge. Moreover, the migrant workers have already been investing in IPOs through the normal procedure even before this rule came into practice. If they already have opened a bank account and a DEMAT account, they can continue investing, even while being abroad. There are also some technical aspects associated with the low response. For example, it is not possible to create a new DEMAT account while being abroad as they have to fulfil the obligation of know-your-customer (KYC) verification. Nevertheless, the number of participants under this scheme is increasing gradually. We are at the initial phase and it’s likely to pick up pace as the time passes, so it won’t be that problematic. If we really want to increase investments from abroad, we need to provide options in other instruments as well and not just by only getting limited to IPOs. IPOs are low-volume investments. For example, the current IPOs are worth anywhere between Rs100 million to Rs150 million and out of that, only 10 percent is reserved for migrant workers, which make up for only Rs10 million to Rs15 million, which doesn't make for a large sum. We need to focus on bringing large-scale IPOs as well as increasing the investments.
What are your thoughts on digital transformation in the capital industry?
These days, you can trade your stock with the tips of your fingers, sitting in your house, as compared to the open outcry system a couple of decades back. The number of investors has increased from around 15,000 to almost a million active traders now. This is the most significant transformation. The number of DEMAT accounts has reached nearly 6 million, whereas it was just a million a few years ago. This is the greatest result of digital transformation. The transformation began in 2018 and it got further accelerated due to the Covid-19 lockdown. Now, we have moved all trading to virtual mediums on the Nepal Stock Exchange. We have been adopting all the practices of the international community. Besides, we are also re-engineering our work process and shifting our internal mechanism towards automation. Gradually, we are going digital in every aspect.
Individual investors are already getting good returns by depositing money in fixed deposits, so why should they invest in mutual funds and portfolio investments?
This is an opportunity as well as a challenge for us. Challenge in the sense that investors are willing to play a safer bet by depositing money in fixed deposits and enjoy the hassle-free returns in the form of the interest. But, it's also an opportunity for us to be more innovative, develop better tactics and beat the return on the fixed-deposits. This is working as a motivating factor for us. But, the investor should also understand that the fixed-deposits are generally for a shorter duration, whereas mutual funds are generally for a decade in our market.
