I would like to congratulate SAFA for completing 20 eventful years and organizing this conference. My sincere thanks goes to The Institute of Chartered Accountant of India for hosting this historic conference on "Integrated Financial Sector in the SAARC Region". I am happy to be a part of this conference and thank the organizers for giving me an opportunity to present my views.

I believe a common financial market in the SAARC region will be a powerful mechanism to foster economic development and enhance quality of life of the people in our respective countries. Financial markets encompass institutions, financial products, market mechanism and services, which can be convenient tools to build common economic market. With a beginning today, it is for sure, going to be a reality in the future. Attended by eminent professionals and key regulators of the region, this conference will trigger productive debates and actions on common financial markets, urge to undertake reforms or to fine tune domestic markets from the perspective of regional integration. The private sector also needs to be prepared to benefit and adjust from these developments. The glorified presence of the accounting profession will also be catalytic in taking this regional concept deeper to the corporate sector and financial market within domestic jurisdictions.

As we all know, capital market in this region have diversity in size, level of growth and importance in the national economy. The dramatic modernization of some of our markets indicates that they are heading towards accelerated growth which we may call, with due apology to industrial and printing revolutions, a "financial revolution". Nepal, a late starter, with proper capital market structure founded only in 1994, is looking forward to more tangible reforms to keep in pace with the regional development.

Some basic reforms in the capital markets are already taking shape in Nepal. Effective regulation of products and intermediaries, appropriate regulation with effective enforcement, market operations and transparent standards are some of the key reform agendas. Further, the infrastructural developments including information dissemination and order routing mechanism, trading system linkages and settlement and clearing arrangement fundamental to a well functioning market have been visualized.

In this august gathering I would like to briefly talk about our current initiatives as a backgrounder and share some thoughts on regional integration issues.

Present Securities Act does not provide sufficiently for a robust, comprehensive or logical framework to provide a proper base for securities regulatory system, which meets international standards for emerging regional markets. Moreover, the rationalization in the role of relevant regulators (Securities Board and Registrar of Companies) is much needed to address the inadequacy, conflict and fragmentation of regulation. A new Securities Act that gives more authority to the regulator SEBO in terms of regulating market place, intermediaries and products is in the legislative process. Once this new act comes, subsidiary regulations shall be developed appropriate to the emerging market (an opportunity to benchmark to the SAARC standards too).

The new Securities Act is expected to define proper jurisdiction to enable SEBO to bring the stock exchange to follow market discipline and proper regulation. The only exchange in the country has to reapply for a license which would be an opportunity for the exchange to adhere to standard governance practices, properly manage its relationships with its participants- brokers, listed companies and investors, install proper disciplinary procedures and properly manage its relationship with regulators.

The set of rules in the development stage pertain to the brokers, trading, settlement (through CDS, after it is established), disciplinary rules / procedures for members and listing rules. This is where regional standards that logically conform to the international standards are going to be written and implemented.

The traditional open outcry auction system still prevails in the exchange floor. The use of modern information technology (IT) facilities is limited only to post trading processing purposes. A program to have IT solution for trading, clearing and settlement and MIS for improved operations of the exchange is being planned.

Under the loan program of the Asian Development Bank a capital market reform project is going on. It envisages to address the regulatory and infrastructural requirements of key capital market institutions, in order to build a more credible market.

Setting and enforcing internationally acceptable accounting standards and disclosure of financial and other information for making sound investment decision is a must for conducive investment environment and sustainable flows of private capital. The Accounting Standard Board and Auditing Standard Board are bringing out series of respective standards, which have been adopted by Institute of Chartered Accountant of Nepal (ICAN) council. The mandatory standards would be the basis for going public and listing in the stock exchange. Securities Board, under the new act, can enforce non-compliance, as it will have the authority to register the auditors and review the financial statements of the companies within its jurisdiction.

Corporate governance framework is already in practice in most of the markets including some SAARC countries. Nepalese corporate sector, sooner than later will have to adopt corporate governance standards to conform to the market requirement. All this means the corporate sector has to be professionally and honestly run, public must have confidence that the corporates are working on a level playing field and price sensitive information is made public on a timely basis. Some aspects like inclusion of independent directors, audit committees and compliance aspect have been mandated by the Bank and Financial Institution Ordinance. Corporate bodies from other sectors too have to adopt the good corporate governance norms in a mandatory or voluntary basis. Principles already gaining popularity in SAARC countries should be prioritized fir adoption. This, of course, should take place with the collaboration or participation of regulators, professionals and private sector.

Monetary policy these days are aimed at sustainable economic growth, moderate inflation and stable financial markets. Efficiency of all market segments is important to the transmission of monetary policy. Some developed and emerging markets have synthesized regulation under a single apex regulator with banking and money market, securities market and insurance regulation as component regulatory regimes.

The Central Bank (Nepal Rastra Bank) led reform in relation to capital market growth is mentioned below:

• Management takeover to prevent systematic failure of banks.
  
  

• Facilitating takeovers/mergers of financial institutions for consolidation of group holdings.
  
  

• Announcement of policy to admit government securities for trading through the stock exchange. This will enhance participation of retail investors.
  
  

• § New Bank & Financial Institutions Ordinance, a comprehensive ordinance relating to all form of banking, deposit-lending activities, allows some of these institutions to operate capital market functions such as merchant banking, securities trading and other agency and custodial service activities. Due to the fact that these institutions are practicing capital market functions, issues of institutional solvency, prudential regulation and conflict of interest issues can be addressed by developing understanding between the capital market and banking regulators. For the growth and dynamism of financial market, a more obvious and formal mechanism in the form of coordinating committees or that going as far as single regulator concept could be explored.

There are various acts regulating the inward and outward flows of capital investment from Nepal. Though investment and returns coming under Foreign Direct Investment can be repatriated, a free regime of capital account convertibility is yet to come. Initiative towards an opening of portfolio investment by Non-Resident Nepali is going on. There is liberal regime of convertibility of Nepali and Indian currencies but the same is not the case for other SAARC currencies. There is however restriction on outward investment by Nepali citizens and institutions.

South Asian Federation of Exchanges (SAFE) has made initiative towards strengthening Stock Exchange Listing Regimes and promoting regional harmonization of listing rules. It has come out with a study with recommendations on harmonization principles, cross-border listing and regulatory cooperation. I believe we should go for a more in-depth study to identify the harmonization standards required and work out a strategy to implement them and in the meantime promote broader framework for regional financial integration.

As our respective markets differ in size and level of growth, the potential risk of adverse effects of cross border listing and abnormal capital flows should be carefully addressed. It would be a useful idea to start educational programs on the virtues of broader market and involve different interest groups: market intermediaries, companies, investors and professionals in this process.

The government should be strategically placed to steer the internal reforms required for integration. It is a collective role of governments and central banks to adopt fiscal and monetary policies supportive to financial market growth. A series of legislative and infrastructural reforms are required before the country goes for full-fledged integration. However, it may choose to define the level of exposure in the initial stage and gradually lift the restrictions based on experiences.

It would be a good idea to give continuity to the regional integration process by designating some institution in each of our countries to work further. It may cooperate and formulate short and long-term actions aimed at market integration. In the short-run, conducting in-depth studies, sharing information and having technical cooperation, preferably with a memorandum of understanding, can serve as useful starting points. As many of our markets do not have sufficient training infrastructure, it would be a good idea to designate appropriate institution as regional training centre where participants from other markets are accommodated. Sharing of skills and ideas through technical exchange program will benefit the ultimate objectives of regional integration.