Abhishek kushwaha

Imagine Nepal’s stock market flooded with billions in foreign investments. Large institutional investors pouring money into high-cap sectors, banking stocks skyrocketing, and NEPSE reaching new heights. But what if this dream scenario also comes with risks, market crashes, manipulation, and economic instability? One of Nepal’s biggest investors, Dipendra Agrawal, strongly advocates for opening Foreign Portfolio Investment (FPI) and Foreign Institutional Investment (FII). In any podcast or interview, he consistently emphasizes one point: if Nepal’s stock market is to grow, Foreign Portfolio Investment (FPI) and Foreign Institutional Investment (FII) must be allowed. According to him, as long as FPI and FII remain restricted, high-cap sectors like banking will struggle to perform. But how true is this statement? Will opening FPI and FII truly help Nepal’s high-cap sectors thrive? And what exactly are FPI and FII? Let’s find out.

Understanding Foreign Investments:

Before diving into FPI and FII, we must first understand Foreign Direct Investment (FDI) since foreign investments come in various forms, including FDI, FPI, and FII.

Foreign Direct Investment (FDI) refers to foreign investors establishing companies or investing directly in Nepalese businesses. Simply, FDI means foreign investments in Nepal.     For example:

• If Toyota opens a factory in Nepal, that is FDI.
• If a Chinese company constructs a hydropower project in Nepal, that is FDI.
• If an Indian company opens a cement factory in Nepal, that is FDI.

Any foreign investment made in Nepal is categorized as FDI. These investments significantly contribute to economic growth by creating job opportunities. According to the Department of Customs, Nepal received NPR 23.39 billion in investments across 200 different projects in the last six months of the financial year. This has led to the employment of nearly 10,000 Nepalese workers. Clearly, FDI plays a crucial role in job creation and economic development.

Now that we understand FDI, let’s move on to FPI and FII.

What Are FPI and FII Investments?

Foreign Portfolio Investment (FPI) and Foreign Institutional Investment (FII) involve foreign investors entering Nepal's capital markets.

• FPI refers to investments made by foreign individuals or entities in Nepal’s stock market, bonds, mutual funds, and other financial instruments.
• FII refers to foreign institutional investors such as mutual funds, hedge funds, pension funds, and insurance companies investing in Nepal’s stock market.

For example, if a mutual fund in the United States sees growth potential in a Nepalese listed company, it can invest in Nepal's stock market (NEPSE). This allows American private investors to benefit from Nepal's market without directly purchasing shares themselves.

Unlike FDI, which focuses on long-term investments in projects and businesses, FPI and FII primarily involve short-term investments in Nepal’s stock market.

The Current Status of FPI and FII in Nepal

The Nepalese government has already opened the doors for FDI, but FPI and FII investments remain restricted. If Nepal were to allow FPI and FII investments, what benefits could it bring?

Benefits of Allowing FPI and FII Investments:

1. Increased Liquidity:
• One of the biggest challenges in NEPSE is the lack of liquidity. Some stocks frequently face a shortage of buyers or sellers. FPI and FII investments could help maintain liquidity in the market.
• Higher liquidity would also attract large corporations such as Surya Nepal and Dabar to list on NEPSE.
2. Market Expansion & Growth:
• The entry of major institutional investors would bring significant capital into Nepal’s stock market, increasing the total market size.
• More companies would be encouraged to go public, leading to more IPOs and a stronger overall economy.
3. Higher Valuation & Better Pricing:
• Despite having strong fundamentals, many banking sector stocks in Nepal remain undervalued due to a lack of investor interest.
• If FPI and FII investments were allowed, foreign investors would seek out fundamentally strong companies, increasing demand and driving up stock prices.
• A well-performing stock market would benefit existing investors and make Nepal’s stock market more competitive globally.

Potential Disadvantages of FPI and FII Investments:

1. Market Volatility:
• Large-scale foreign investments could create significant price fluctuations.
• If FPI and FII investors withdraw funds suddenly, it could trigger panic selling, leading to drastic price drops.
2. Risk of Market Manipulation:
• Large institutional investors might manipulate stock prices by investing heavily in a company, spreading positive news, and then exiting at a high price, leaving small investors with losses.
3. Currency Depreciation Risk:
• If foreign investors withdraw large sums of money, Nepal’s foreign exchange reserves could be pressured.
• A decline in Nepalese Rupee (NPR) value could increase import costs, drive inflation, and negatively impact the economy.

Why Has Nepal Not Opened FPI and FII Investments?

Despite the advantages, the Nepalese government has been hesitant to open FPI and FII due to two primary reasons:

1. Weak Regulatory Bodies:
• Nepal lacks a strong financial regulatory framework to monitor and control FPI and FII activities.
• The country’s stock trading system (TMS) frequently faces operational issues, raising concerns about the ability to handle foreign investments efficiently.
2. Political Instability:
• Nepal’s unstable political environment makes it difficult to introduce long-term investment policies.
• Frequent changes in government (switching between Congress, UML, and even discussions about monarchy) create uncertainty, discouraging foreign investors.

Will FPI and FII Help Nepal’s High-Cap Stocks Perform Better?

Returning to the question raised at the beginning, will FPI and FII help high-cap stocks like banking sector stocks perform better? The answer appears to be yes.

• High-cap stocks will likely see increased liquidity and investor interest.
• The trend of low-cap stocks dominating Nepal’s market may decline.
• Increased institutional investment could enhance market stability and long-term growth.

In summary, FPI and FII investments come with both advantages and disadvantages. While they can boost liquidity, expand the market, and enhance stock valuation, they also introduce risks like volatility, market manipulation, and currency depreciation. The main roadblocks preventing Nepal from opening FPI and FII investments are weak regulatory oversight and political instability. However, if these issues are addressed, allowing FPI and FII investments could be a game-changer for Nepal’s stock market.

Let’s wait and see how Nepal’s stock market evolves in the coming years. Thank you for reading !