‘The stock market is picking up’

The Chief Executive Officer of the Royal Securities Exchange of Bhutan Limited (RSEBL), Dorji Phuntsho talks to
Business Bhutan’s reporter Dechen Dolkar on the status of the stock market exchange in Bhutan and how it has picked up gradually despite being the smallest stock market in the world.

Q. At one point in time, Bhutan’s stock market was described as one the most inactive in the world. How has the stock market picked up over the years?

A. It’s true, at that period of time the concept of investment in stocks and share trading has remained fairly a new concept to everyone. The concept of public share ownership started when the Royal Government of Bhutan move to promote the private sector diversified few state-owned companies to the public. As there was no market platform to sell the shares held by the public, the Royal Government together with the Royal Monetary Authority established The Royal Securities Exchange of Bhutan in 1993 with the objective to provide a market platform to transact shares and boost liquidity. Back then, only few companies were listed on the Exchange with limited investors. Also the general perception of the investors towards investment in shares was for long term thereby contributing to a dormant market.

Further, secondary market trade was mainly confined to Thimphu and to a certain extent in Phuentsholing as the brokers was the four pioneer financial institutions, and their operation concentrated only in urban areas. The trading platform back then was also a standalone system where the brokers placed the orders only when they had a matching order and trading was executed only twice a week.

With the automation of the entire stock market system in 2012, we were able to introduce trading online and we gradually moved to three trading days a week. Since the cost of the trading system was more than the revenue generated, we started working towards developing our in-house system that was launched in 2018, and today we have moved to trade intervals of five times a day and five days a week.

In terms of the trade volume, on average the transaction is about Nu 5mn a day. Considering the volume of shares available as free float, we feel that it has picked up well over the years. The annual trade volume has also hit over Nu 1 billion every year since last two years.

Q. There is still a lot of illiteracy when it comes to how stocks are traded. Can you please explain how the stock market functions in simple words?

A. In simple terms, the stock market is a place where the shares of the listed companies are transacted between the investors. Companies that qualify to raise funds from the market, offer their shares to the public through a process called Initial Public Offering (IPO) and subsequently list its shares on the stock exchange.

Since it is an organized market, the brokers are involved in channeling the investors buy/sell orders in the market. The brokers as the member of the stock exchange will have a prescribed Know Your Customer (KYC) form based on which they will open a trading account for the person after which he/she is eligible to buy/sell shares.

As shares/stock represents ownership of the companies, investors trade only those shares that are listed on the stock exchange.

Q. Why does the value of the shares fluctuate? When does the value of shares increase or decrease?

A. Generally, market price of the shares is the reflection of the investor’s expectation. It reflects the value of the company based on its present performance as well as future prospects. The price of the shares may rise or fall due to macroeconomic reasons or factors within the company itself. The price at which the investors are willing to buy and sell reflect their perception towards the company.

However, when we talk about the value of shares, it means the intrinsic value per share of that company which is the book value per share. It is the difference between the company’s total assets and total liabilities divided by the number of outstanding shares. Should the company dissolve, the book value per share is the value of the asset that the shareholders will receive after deducting debts and liabilities. The book value per share increases if the company ploughs back profit to built reserves and it decreases if there is a payout from the reserves. The book value per share can be also used as an indicator while investing, if the book value per share is more than the market price, it means that the share is underpriced or the other way round.

For instance, a company’s book value may be Nu 15 but selling at the market price of Nu 40, since the price is determined through supply and demand based on the market perception of the investors, the stock market provides an avenue for wealth creation as it determines that shareholders net worth.

Q. RSEB has been at the forefront of innovating capital markets in the country. What are some of the major initiatives it has taken over the years to promote stock trading and capital markets in the country?

A. Maintaining the records of shareholders list in excel format prior to the automation of the stock exchange system was one of our biggest challenges. Since the entire shareholder registry was maintained in a simple format with limited security, there was a lot of room for manipulation and discrepancies. Besides that, any physical disaster or hard disk failure would have resulted in wiping off the shareholder’s record and information worth Nu 20bn. Keeping that as our top priority, we have developed a secure central depository system where all securities are maintained in de-materialized format with the best risk management measures.

Since 2010, we have emphasized strongly on technology, as it is key to the development of any capital market and stock exchange in particular. The stock market system is a complex system as compared to other systems as it involves integration of many segments, which are usually the functions of different agencies in other capital markets. In our case, RSEB as a Stock Exchange houses Central Depository as well as Clearing and Settlement as divisions, which we have managed to automate the functions with our trading platform seamlessly. Today I must admit that we have built the entire system in-house, which is at par with other developed exchanges in terms of logic and processes.

We have also designed and built our own mobile app for trading called m-CaMs with the aim to provide a good user experience and make it convenient for our investors to trade in securities. Today we have close to 1000 users who can trade through their smartphones.

To support our start-ups and young entrepreneurs, we have also established an Alternative Market for Investment (AIM) and Crowdfunding platform. We are hopeful that these companies who have raised funds through the platforms will ultimately scale up and get listed on RSEB in the future.

Trading in commodities is also a part of the capital market, RSEB has also developed the commodity market platform for agricultural commodities in partnership with FCB and efforts are under way to include other commodities besides trading in potatoes online.

Considering the technological disruption, we are working on the feasibility of securities tokenization particularly on debt instruments such as bonds with the objective to broaden the market and enhance liquidity.

On the protection of shareholders and minority interests, one of our accomplishments was the introduction of auctioning of rights issue. Prior to our intervention, when a company announces a rights issue, the shareholders who do not subscribe to their rights for whatever reasons get left out. We thought that it was not fair for the company to deprive the rights of their shareholders especially in our context where our shareholders are either ignorant or financially illiterate. Therefore, we developed a system where all unsubscribed rights shares are auctioned live through our e-auction platform in the market. Any proceeds from the auction above the face value are deposited in the shareholder’s account. That way we were able to protect the interest of the beneficial owners and I believe that no stock exchanges in the world have gone to such an extent to protect the interest of the shareholders. So far RSEB has carried out rights issue an auction for DrukPNB, T bank, Dungsum polymer, GIC-Bhutan Reinsurance, and RICB since 2018.

Q. Since two companies, Jigme Mining and Eastern Bhutan Coal Company got delisted, how has it affected the stock market?

A. The immediate impact of delisting of shares from an exchange will be on market capitalization. Since two companies got delisted, we have witnessed the fall in our market capitalization and for the investors, the availability of choices of stock has also decreased from 21 to 19 stocks. 

Q. Since some of the companies have decided not to declare the dividend though they have made a profit in 2020, how will this affect the stock market?

A. Ideally, as a shareholder of a company you would expect a return on your investment above the inflation rate, however, while investing in shares, a shareholder must also consider the capital gain or capital appreciation due to an increase in the market price of the shares they hold. Any appreciation in the price of the shares should be viewed as a gain besides receiving a dividend payout.

Considering the pandemic, as you mentioned, many companies have not declared dividends and this may have discouraged many investors to invest further in the market. However, considering the market data, prices of the many shares have remained stable and for few shares, it is on an increasing trend.