The securities market in Nepal has seen a significant increase in the number of broker companies, with the total number reaching 90. However, this growth has come with several challenges for both new and established broker companies.
Operational Challenges for New Broker Companies
Many new broker companies are facing difficulties due to limited customers and low trading volumes. Some of them are unable to cover their office operating costs and have even experienced losses in their first year. In fact, around a dozen broker companies have a trading volume of less than Rs. 2 crore, while at least Rs. 4 crore in trading volume is required to cover basic operating expenses.
To manage these costs, some brokers are relying on funds from other sectors. Despite the competition from new companies, many of them still struggle to stay afloat due to their small scale of operations.
- Transactions up to Rs. 50,000: 0.36% commission
- Transactions between Rs. 50,000 to Rs. 5 lakh: 0.33%
- Transactions between Rs. 5 lakh to Rs. 20 lakh: 0.31%
- Transactions between Rs. 20 lakh to Rs. 1 crore: 0.27%
- Transactions above Rs. 1 crore: 0.24%
From this commission, 20% is paid to the Securities Board of Nepal (SEBON). To cover daily operating costs, a broker company needs to generate a minimum of Rs. 4 crore in daily trades, which most small brokers are unable to achieve.
Capital Requirements and Regulatory Pressure
The SEBON has set capital requirements for broker companies. Companies that intend to conduct limited operations must maintain at least Rs. 20 crore in capital, while those with full operations must have Rs. 60 crore.
While new companies are meeting these capital requirements, many older companies are failing to meet the Rs. 20 crore minimum. As a result, SEBON has instructed these companies to submit a plan by the end of December to raise the necessary capital. Those who cannot meet the requirements may need to merge with other companies or be acquired.
Opportunities for Growth
Industry experts believe that expanding the services offered by broker companies could help them become more profitable and sustainable. For example:
- Introducing margin trading
- Offering investment advice and portfolio management services
Currently, many broker companies are unable to provide these services, but expanding their offerings could help them attract more customers and generate higher income.
Mergers and Acquisitions as a Solution
Given the financial struggles of some broker companies, mergers and acquisitions (M&A) may be a potential solution. The SEBON is in the process of preparing guidelines to facilitate M&A. Broker companies that are unable to meet the capital requirements may have the option to merge with others. However, the necessary rules and guidelines for this process are still being finalized.
Conclusion
The rise in the number of broker companies in Nepal has brought competition, but it has also highlighted several challenges, including financial difficulties, limited operational scope, and capital shortfalls. Expanding the range of services offered by broker companies, along with possible mergers or acquisitions, could help address these issues and ensure the long-term sustainability of the market.