With years of international experience in the audit, accounting, advisory, and finance sectors, Sabir Bade Shrestha has worked as a senior management professional in NIBL Ace Capital and Nabil Invest. Sabir Bade Shrestha is the CEO of Mega Capital Markets Limited. He shares his professional journey and the Nepalese capital market regarding the prospects of investment/merchant banking in Nepal.
1. We came to know that you have been holding years of international experience in audit, accounting, advisory, and finance. What motivated you to enter the Nepalese capital market and investment banking sector?
Basically, my field was Audit and Accounting. That was my line of academics, my initial training as well as my first job. I spent the first 7 years of my career in Audit and Financial Reporting including the last 3 in an international audit firm in the UK. I always wanted to do something pioneering in my life whether abroad or in Nepal. I used to come to Nepal frequently during holidays and festivities. And I wanted to get involved in something new in Nepal.
I was in tune with the industry and business scenarios of Nepal. When I was following the stock market in 2010, only a limited number of people were interested in this. After in-depth research, I found this sector as quite an attractive and safe career plan and I felt that the decade in investment banking would flourish and I came to the conclusion of coming back to Nepal and landing my career here.
At the same time, many banking and financial institutions were opening subsidiaries and it amplified my curiosity about the capital market more. I was already into the good appraisal with promotional benefits in the foreign land but it was somehow limited to audit and Advisory & the Investment management part was missing in it. I developed the plan for moving from accountancy and finance to investment banking and I came to Nepal in 2012 and joined NIBL as the Mutual Fund Department Head and things went on.
As I planned, I landed in the pioneering segment of the workforce. Currently, there are 25+ merchant banks and 43 lacs + Demat account holders, and the market capitalization and all these outstretched my own expectations. So, I believe the decision I took was the right one. And my expectations turned out to be not far from reality personally and professionally too.
2. Nowadays, financial literacy on investment in the stock market and new businesses is amplifying among the Nepalese people. What sort of contributions has been made so far by merchant banks like Mega Capital in terms of this?
From the investment products or the services the merchant banks provide, we are supposed to make a profit and earn from them. Along with being service-oriented, merchant banks are profit-oriented and revenue-focused as well. We need to give returns to the investors of our banks that own us as well as the individual and institutional direct clients that put their trust in us. One of the most challenging parts while selling those services, i.e investment products, is the financial literacy level.
People may have passed certain academic tests but still don’t understand certain things of operation in terms of equities, investments, the whole process, and the considerations regarding them. Due to lack of proper financial knowledge, we see the gap there at first hand. So before starting the conversation with the potential customers, we need to make them understand the basics of shares and other investment options in the market.
People are generally familiar with the general banking terms but regarding investment, merchant banking, they still have to gain in-depth knowledge. And it really matters to the investment/merchant bankers because we cannot sell something which people don’t understand. People won’t buy or invest in the products of portfolio management until they have in-depth information regarding it. So, our marketing team should be forward in doing awareness programs or one-to-one orientation to move ahead.
We can directly talk about the product if people knew about such things in the first place. We can easily say that in order to disseminate financial literacy, the government should take action along with the central bank and regulatory bodies like SEBON but the responsibility also falls under the merchant banks to spread awareness of the services. We cannot rely on a third party to come in and spend a huge amount of budget to make the nation financially and knowledge-wise ready for the investment.
As per the capacity of the merchant banks, we need to set aside a budget for marketing as well as literacy where there is a potential to efficiently spread the knowledge. A few days back, Mega Capital did a presentation in Army Headquarter, the military police section regarding the IPOs and Demat. That event may not bring a business guarantee of revenue but the participants will definitely be literate on the investment banking products and spread the information. Such programs can slowly but surely help make investment banking a household terminology.
It will be challenging to allocate a large-scale budget to go for a nationwide drive but our main intention will be to spread awareness about the availability of services in Nepal like portfolio management, investment management, wealth management that will be beneficial to the overall economy, and the society.
Along with spreading information in social media, others are also focusing on demonstrating information on investment/merchant banking but the coordinated efforts among the merchant banks and regulatory bodies will be ideal but due to the tight schedules, interests, and priorities, it can be challenging. But if everyone does their bit with new ideas and reaches as many people in a more efficient way as possible or just replicates what we have done or left off, there will be a chain effect. But still, there’s a lot more to do.
3. What is your perspective on the present scenario of Investment banking in Nepal? Do you think the general public along with huge investors is inclined towards the Merchant banks?
The way society views merchant banks is as the institutions related to shares and IPOs. They just have the basic ideas and a few of the service verticals only. And still many lack the perception that the merchant banks also perform the activities like corporate or individual financial advisory, financial consultancy, development of a business plan, documentation for loans, and many others.
Likewise, Mega Capital has been providing corporate advisory services for loan hunting to the bigger organizations which are unable to negotiate. We do the negotiation on behalf of the client and we get the best deals for the client. That’s where the investment/merchant banks work as an intermediary between the parties. So we are at Point A where we, merchant banks, are known as portfolio managers, IPO issue managers, Depository Participant Service Providers but people are still unknown about Point B that we provide financial advisory services. There is still a huge gap between these two perceptions.
Similarly, a lot of people with big plans and projects are also unaware of such services provided by the merchant/investment banks. They expressed that had they known such services before project initiation, they would have approached for the operation of the project beforehand. Also, people with huge investments would like other investment options apart from shares, real estate, and fixed deposits such as new entrepreneurial ideas. And entrepreneurs with great ideas are not finding the perfect platform to meet the investors.
That’s where the investment banks can come in. We realize that there is a gap between the communication of the parties. We are starting with our parent company where they meet the entrepreneurs on a daily basis along with the people with huge investments. It makes sense to try to join the dots and be there to meet these people and form a pad so that these references keep channeling to us from our parent bank.
And it’s not difficult to initiate this. Entrepreneurs, investments, and intermediaries aka merchant banks can together add value to each other. We are trying to build an apparatus where they can come together not in a stringent way but in a flexible scheme and time. We want to build a channel where or when needed, people can come to discuss ideas through us but there is still a gap and we need more actions to form a connection and bridge this gap.
4. Mostly, merchant banks deal with the stock market. So whenever the market is down, what sort of anomalies do merchant banks need to face and how do they cope with them?
As merchant banks, we are very reliant on the performance of the stock market and the index. Everybody is familiar that we have only one stock market. We have lots of options in portfolio management to invest in debentures and fixed deposits but most of the clients want to invest in the share market because of the high returns even if there are higher risks.
The problem and challenges we face are because of the market mass immaturity and the market sentiments. Due to this, there is panic-buy and panic-sell that happen on a regular basis. The red live trading floor sheet in excessive selling and the green in excessive buying can be seen. Even though there are 7 to 8 different sectors like banking, insurance verticals within our market, theoretically, there should not have been uniformly panicking because one news or event hit the whole market instead of a single sector and it brings a massive impact on the whole market on that particular day. This is what we call a market immaturity here.
There would be times when such events occur and cause the market to crash, no matter how the stocks are selected, there would be depreciation of 5%, 10%, and so on. No matter how much we diversify the portfolio or reshuffle it, such incidents can cause the stocks’ price to decline. The clients undoubtedly expect profits and returns from us but such market immaturity makes it difficult to explain that their assets could have been minus 30 but it was reduced to minus 5. And it becomes very difficult to explain to the clients especially in difficult times.
The last 2, 3 years of the market was in the bearish scenario. People invested and we could only keep them above water and not give them as many returns as they hoped for. In such situations, there needs to be a definite plan. The clients expect us to be the experts and professionals so at least when the tables turn around, we need to have definite sort of plans all the time. Sometimes, tough decisions are to be taken and we should have prepared for all kinds of What Ifs. There may emerge different kinds of pressure but the key to overcoming such challenges is Preparation.
5. The trends of Private Equity and Venture capital started a few years back in Nepal. What can the merchant banks like Mega Capital do to enhance the entrepreneurial, startups, and new business ventures in Nepal?
We have formally applied for the license for the application of PE-VC services. Many PE-VC associations in Nepal work under an FDI model but we want to be a typical standard private equity-venture capital model licensed by SEBON. On the basis of the Specialized Investment Fund Regulation Act that SEBON brought out 3 years ago, we have registered for the licensing process.
When the fund management license comes to us then we will obviously set our fund plan for the sectors to invest, percentage of returns, investors to approach, and many more. At stage 1, we are in the process of licensing, and at stage 2, we will begin our activities as the fund manager. Many merchant banks are also on the same page.
We have done quite a study on this and come to a conclusion to set the plan for PE-VC activities. As per the SIF Regulation, the investors cannot invest less than 50 lacs so it is a riskier asset compared to mutual funds and other vehicles. So those who can be a part of it can only be the limited or the general partner. This also opens the door to foreign investors and all the institutions like banks, financial institutions, insurance companies, and others that encourage entrepreneurship.
We have prepared a lot on this modality and as there are other merchant banks also doing the same, there will definitely be quite a lot of competition. We are learning from the existing PE-VC associations and at the same time, learning from their mistakes as well.
There will also be challenges to find out the right sources and deals. We are developing the mechanism of standardization of how we assess the best projects among many. As fund managers, we should have the answers ready with research for the investors’ queries and decisions. For better returns, the investment will not be done only in stocks but other financial vehicles and liquid assets as well. The approach is mostly for the SMEs that have proven a revenue model that wants to scale up and have huge potential.
6. You have already gained years of senior management experience with two of the banks' subsidiaries- NIBL Capital and Nabil Invest. So, in your view, what will be the future of Merchant banking in Nepal regarding the present condition and regulations?
All the senior management professionals in the merchant banks take a long-term view of their strategies as to how they are approaching the market, clients, potential customers, their own regulators and there should be a foresightedness. In this competitive stage, if we break certain norms, then it brings long-term implications on product pricing on the market.
In terms of revenue strengths and the cut-throat competition, the quality is being compromised. It destroys the fair price for the revenue and the service which can create problems in hiring the staff as well. If we focus on short-term excessive profit, its long-term growth will be compromised and it won’t guarantee longevity. So, the senior management board of the merchant banks needs to take long-term strategies and examine if the strategies are creating long-term damage to the potential of the merchant/investment banks and PE-VC in the country as well.
If we play ethically and professionally, there is huge potential in the Nepalese market. The entrepreneurial journeys are yet to be launched in Nepal. Just like NCELL saw the opportunity in Nepal due to the untouched and unsaturated market in the past years, it earned as well and generated tons of employment opportunities as well. There are still many sectors to be flourished and developed in Nepal that have huge potential to run in the long term.
In terms of investment banking also, it’s flourishing and people need money for the business. Currently, they are only getting money with the banks with no comparative analysis of pricing and for the sake of social goodwill, generating capital from the known banks. But, if one’s project has huge potential to scale up, investment banks are there to foster the help. In Nepal, there are still many ideas and technology to be introduced, and many deals are to be sourced. And in the same way, investment in HR will also be done. And obviously, investment banks need to chew a bit on this matter.
7. What are your views on the career prospects for recent management graduates in the investment/Merchant banking sector?
There are employers in Nepal for the management graduates but the main challenge for us is not getting enough patient youth. For stable job experiences, one should have consistent focus and commitment but there is a consistent downfall. We will prefer training the people who can dedicate their commitment for at least a year or more and stay on that duration but people get distracted easily and switch on to other jobs.
If we take the jobs for granted, it won’t pay us in the long term. Abroad, people treat jobs as their family, their household, and everything. They take their jobs seriously but it is easy to ignore those options here. So my advice for the youth is to first make up your mind what you really want to do. I always ask in interviews not if you are made for this job but if we are made for you or not. If it’s not a match, that person will leave the organization within 2 or 3 weeks. They have to come to a place where they have to figure out, check and make observations if the organization is made for them or not. And thorough research should be done if this field is definitely for me or not.
Nowadays, youth are very advanced and up to date with the information but in terms of attitude and patience, there is some lacking. If they feel they want to work in merchant banks and have commitment and patience, the show is definitely theirs. Young people are at the heart of the projects and experienced people make them understand the vision but it’s in their hands to drive it.
8. How do you see the economy of Nepal in the coming 5 years?
In terms of the Nepalese economy, the scariest fact is the remittance part covers 30 to 35% of our national income, and sometimes the rate of remittance falling gradually is out of our control. If foreign employment is not generated, the remittance also declines to result in the banks panicking and fighting for deposits with the expensive loans further giving the outcomes of the credit crunch in the economy.
If the situation gets worse, it can bring more negative impacts on the economy. Even if the loans are disbursed to someone for just maintaining the books in the business, it may be risky and invites huge losses. So, banks need to act very carefully on this matter. BFIs and the central bank need to focus on the genuine quality of loans. If the loans turn bad, the collateral won’t be enough and the supply of collateral may bring land crises, housing crises, so the chance for a big crisis in Nepal is very high. It’s just that we have been lucky enough to be backed up by remittance with the supply of money.
If the deposits are done at a faster rate for the budgeting in NRB and the banking system, it will help to tackle the situation. But now defunctioning is there so there are the bureaucrats not finalizing the projects, no completion of projects during distribution further inviting liquidity crunch in the banking system. So, the private sector along with the government sector needs to work and do the job in a focused way on a timely basis. Otherwise, the economic activities may get frozen. It may sound really bleak but the situation regarding the economy is becoming vulnerable so we have to take extra care of it.
We need to examine, read and talk to a lot of people. And the media should pressurize the people in responsible positions to listen to the columnists, economists, and all who want the betterment of the country.
9. How are investment banks in Nepal adopting new technologies on top of their existing system?
In terms of technology, we have tried to bring automation to our front desk. In the past, Demat account openings were done on a manual basis; now anyone can open a Demat account online just like a bank account. The way it gets internally processed is very automated. The people in Siraha don’t need to even parcel or scan the forms here in Tripureshwor. The data in the right tags are sent to us and directly channeled to the main database, the main processing unit. A Demat account is generated within an hour.
Such technology has benefited the customers and in the case of the back office, much-advanced software is used by the technical analysts along with developing new software as well. In nutshell, technology has been more advanced than in the past days from data to decision-making, it has been quicker and faster.
10. What are the further plans to be launched by Mega Capital?
We are going towards private equity and venture capital from strength to strength. We are already one of the largest portfolio service providers with a large number of assets and we are on the verge of growing bigger. Also, services that are not just dependent on the stock market like advisory, venture capital, and many more, we want to pioneer and accomplish the projects that we are doing. And I think apart from portfolio management, Nepal is ready for wealth management services too. It may be difficult to sell those services but definitely has huge potential to sustain them. There are many more to come yet.
11. Any last message for today's youth regarding investment and capital market.
I would say that do not just rely on casual comments/headlines. There is tons of information regarding investment/merchant banking out there on the internet and the outer world. Try to envision the basics of merchant banking and how it is applied in the Nepalese market. Try to imagine the solutions and fit in the study if you are really interested in investment banking.
Build your own network of circles of knowledge of the relevant industry. Try not to jump to conclusions. Make sure your conclusions are backed by enough research and evidence that increases credibility. There should be some valid reasons. If you form the habit of making conclusions after certain research and basis, you move towards your intellectual route and you get to meet similar people along with learning, increasing the rate of success.