Stock Market’s Role in Poverty Reduction

The stock market is considered to be an exclusive field for the wealthy and the clever. But this is not necessarily so. Policies can be formulated to use the stock market to benefit the poor and reduce poverty. For example, when a well-performing company makes an initial public offering (IPO), a portion of the shares so offered can be reserved for the poor in the same manner as it is reserved for the company's employees. The poor who get those shares will benefit from the dividend that the company distributes in the coming year and from the appreciation of the market price of the shares so provided.
Obviously, the idea is based on four major assumptions: first, the company concerned is a well performing one and will continue doing so; second, the poor who receive such shares are properly identified; third, the poor can manage the finance to buy those shares; and fourth the shares are offered at par value (not in premium). However, these conditions can be easily fulfilled.
For example, Nepal Telecom (NTC), a highly profitable and government-owned company, is planning to issue 15 million shares to the public. Its profit margin in the fiscal year 2004-05 was 40 per cent and return on investment (ROA) during the same period was 18 per cent. The company is paying dividends and it can be expected to do so even after the public issue. Globally, telecommunications is a business which witnesses only growth and profit. This is the business of Carlos Slim Helu, the Mexican businessman who is recently estimated to have become the second richest person on earth in a few years.
Though the new company law allows IPO at premium, the government can make a decision to issue NTC shares at face value at least in case of those shares that are reserved for the poor. Nobody expects the market price of NTC shares to go below the face value after they are listed in the stock exchange. Rather, the trend in the Nepal Stock Exchange is such that share prices of every company are quoted much higher (sometimes even as much as four times) than the face value after they are listed in the stock exchange. The same can be repeated in case of NTC shares.
There have been plenty of research on poverty in Nepal and these data can be used to identify the poor to whom these reserved shares can be distributed. One method can be to distribute these shares to those who live in a particular locality where poverty is found to be the severest, e.g. the remote villages. Local government units and NGOs can be mobilised to ensure that the non-poor are excluded from this benefit.
Banks and finance companies can provide loan to the poor to buy those shares in the IPO against the collateral of the same shares. The government can provide subsidy on the interest on such loans.
There are a number of ways to ensure repayment of such loans. In one method, the borrower can be made to use the dividend to repay the interest and principal. For example, if a share of Rs 100 par value is fully financed at 9 per cent interest and NTC pays 20 per cent (Rs. 20 per share) as cash dividend after the public issue, the Rs. 20 can be used to pay Rs. 9 as interest for the first year and the remaining Rs. 11 to repay the principal. The same will be repeated in the subsequent years. When the principal (with interest) used to finance the initial public offering (IPO) is fully repaid, then onwards the entire dividend goes to the shareholders and they start to generate income as dividend from the company.
Another way to repay such loan is by selling part of the shares. For example, if a household receives 20 shares of total face value Rs. 2,000 and the market price of the same shares becomes Rs. 200 per unit in the secondary market after listing, such poor households can be made to sell 10 shares and use the proceeds to repay the loan. This way, the loan can be repaid within two years. Then onwards, the holders of such shares can be restricted from selling such shares for some years so that they will have a steady source of income. Similarly, if the company gives bonus shares instead of dividend, the bonus shares can be sold off to repay the loan.
The same idea can be used to provide shares to the people of the locality where a company sets up its production unit. This idea is ideal for hydroelectricity companies. There is no need to explain that there is only growth in the power business (perhaps Nepal Electricity Authority is the only exception to this rule). Such companies should set aside a certain portion of their shares for the people of the locality affected by the power house, dam etc. This benefits not only those who receive the shares, but also those who promote such a company. The local people will feel they have ownership of the project and they will help in its smooth operation. If this happens, there will be no incidence of local people creating frequent trouble in the operation of such projects. Banks and finance companies can also be used in this case for financing the share purchase.
Thus, Chilime Hydropower Company, which is going to issue 2.3 million shares to the general public, can be made to set aside a certain portion of these shares for the people affected by its existing and future power projects. Similarly, if Manakamana Cable Car (P) Ltd. converts into a public limited company and allocates a certain percent of its share to the people of Manakamana VDC, it would be more economical for the company and its promoters than the direct grants it has been providing to the locality for schools, drinking water, health posts etc.
To use the stock exchange in this way for poverty alleviation, the government should play an active role. The related laws and rules may need to be amended, margin lending should be reallowed at least for this purpose, capital gain and dividend tax should be waived and an awareness campaign should be initiated.
Though the stock market is associated with high risks, this proposal can be tested after a detail analysis of the financial health of the company concerned. (By Rabindra Bhattarai, April/May 2007, New Business Age)