A PROJECT WORK REPORT
ON
SECURITIES MARKETS AND REGULATION
OF SECURITIES MARKETS IN NEPAL
Submitted To
Prof. Dr. Rajan Bahadur Paudel
Faculty, Investment Management
Uniglobe College, Pokhara University
Submitted By
Even Roll Numbered Group
MBA (Finance)
Trimester III, Uniglobe College
February 15, 2013
Baneshwor, Kathmandu
i
ACKNOWLEDGEMENT
We would like to express our immense gratitude to Professor Dr. Rajan Bahadur
Paudel for his constant support and motivation that has encouraged us to come up with
such an interesting and knowledgeable report that would help us to have clear insights on
securities trading and regulation in Nepal.
We owe our sincere thanks to great many people who helped and supported us during the
accomplishment of this project work mainly to the staffs of computer lab and library of
Uniglobe College. We also extend our heartfelt thanks to our well wishers.
Even Roll Numbered Group
ii
TABLE OF CONTENTS
ACKNOWLEDGEMENT ............................................................................................... i
TABLE OF CONTENTS ................................................................................................ ii
LIST OF TABLES ........................................................................................................ iv
LIST OF FIGURES ....................................................................................................... iv
ACRONYMS ..................................................................................................................v
CHAPTER I: INTRODUCTION ..................................................................................1
1.1. History of Security Market ....................................................................................1
1.2. Introduction to Securities Board of Nepal (SEBON) ..............................................2
1.2.1. Objectives and Functions ..............................................................................2
1.2.2. Organizational Structure ...............................................................................3
1.3. Introduction to Nepal Stock Exchange (NEPSE) ...................................................5
1.3.1. Functions and Objectives ..............................................................................5
1.3.2. Organizational Structure ...............................................................................6
CHAPTER II: MAJOR ACTIVITIES OF SEBON AND NEPSE ..............................8
2.1. Activities of SEBON .............................................................................................8
2.1.1. Securities Registration and Prospectus Approval .............................................8
2.1.2. Public Issue Approval .....................................................................................8
2.1.3. Right and Bonus Share Registration ................................................................8
2.1.4. Licensing Renewal and Cancellation ...............................................................8
2.1.5. Supervision and Monitoring ............................................................................9
2.1.6. Settlement of Grievances ................................................................................9
2.1.7. Investors Education ....................................................................................... 10
2.1.8. Legal Enforcement ........................................................................................ 10
2.2. Activities of NEPSE ............................................................................................ 10
2.2.1. Facilitates Trading ........................................................................................ 11
2.2.2. Admission of New Members ......................................................................... 11
iii
2.2.3. Market Operations ........................................................................................ 11
2.2.4. Investor Awareness ....................................................................................... 12
CHAPTER III: MAJOR ISSUES AND DISCUSSION ............................................. 13
3.1. Overview of Markets ........................................................................................... 13
3.2. Trading Mechanism ............................................................................................. 14
3.3. Initial Public Offering ......................................................................................... 15
3.4. List of Underwriters in Nepal .............................................................................. 16
3.5. Private placement ................................................................................................ 16
3.6. Provisions of shelf registration in Nepal .............................................................. 18
3.7. Auction Market and Dealer Market ..................................................................... 18
3.8. Types of Order in Nepal ...................................................................................... 20
3.9. Order Matching Rules ......................................................................................... 22
3.10. Settlement ......................................................................................................... 23
3.11. About OTC Market in Nepal ............................................................................. 23
3.12. Member of NEPSE ............................................................................................ 24
3.13. Listing Requirement of NEPSE ......................................................................... 24
3.14. Provision of Block Transaction.......................................................................... 25
3.15. Circuit Breakers ................................................................................................ 26
3.16. Price Range ....................................................................................................... 26
3.17. Bond Trading in Nepal ...................................................................................... 26
3.18. Trading Cost...................................................................................................... 27
3.19. Short Sale .......................................................................................................... 28
3.20. Buying on Margin ............................................................................................. 28
CHAPTER IV: CONCLUSION AND RECOMMENDATIONS .............................. 30
REFERENCES ............................................................................................................ 32
APPENDIX .................................................................................................................. 33
iv
LIST OF TABLES
Page No.
Table 3.1: Total Private Placement of Bonds from 1997 to 2009 17
Table 3.2: Brokerage Cost for Equity 27
Table 3.3: Brokerage for Government Bond 27
Table 3.4: Brokerage for all other Stocks which is not listed in 1 and 2. 28
LIST OF FIGURES
Fig 3.1: Auction Market Example 19
Fig 3.2: Examples of Auction and Dealer Market 20
v
ACRONYMS
A/C : Account
BFI : Bank and Financial Institution
BOD : Board of Directors
B/S : Balance Sheet
CIT : Citizen Investment Trust
CRO : Company Registrar’s Office
GoN : Government of Nepal
HMG : His Majesty’s Government
IPO : Initial Public Offerings
NEPSE : Nepal Stock Exchange
NIDC : Nepal Industrial and Development Corporation
NIM : New Issue Markets
NRB : Nepal Rastra Bank
NYSE : New York Stock Exchange
OTC : Over the Counter
PL A/C : Profit and Loss Account
SEBON : Securities Board of Nepal
SEC : Security Exchange Commission
SMC : Security Marketing Center
1
CHAPTER I: INTRODUCTION
1.1. History of Security Market
The history of capital market in Nepal dates back to 1936 (1997 B.S.), the year in which
the shares of Biratnagar Jute Mills Ltd. were floated. In 1937, Tejarath Adda was set up
to facilitate loans to the government employees and was converted into Nepal Bank Ltd.
HMG Nepal introduced the Company Act in 1964 and issued 6 percent 5 years
government bonds through Nepal Rastra Bank to collect the developmental expenditures.
HMG Nepal announced the Industrial Policy in 1974 and under this policy an institution
named Securities Marketing Center (SMC) was established to deal in government
securities-development bonds, national savings bonds, and corporate securities of few
companies. At that time, the government has the virtual monopoly over the security
market. Then, Securities Exchange Center (SEC) was established in 1976 with an
objective of facilitating and promoting the growth of capital market. It was the only
capital market institution in Nepal. Securities Exchange Act was surfaced in 1984 after
which the SEC started to operate under this act. The purpose of this act was to provide
systematic and favorable market environment for securities ensuring and protecting the
interest of individuals and institutional investors as well as to increase the public equity
participation in various firms and companies. SEC had provided facilities to trade the
government securities and few of corporate securities like shares and debentures. In the
initial phase, the center listed only the shares of 10 companies and operated without
members i.e. brokers and dealers. So, initially SEC itself undertook the job of brokering,
underwriting, managing public issue, market making for government bonds and other
financial services. Apart from this, there was the absence of effective secondary market
to ensure liquidity to the securities. The interim government (1990/91) initiated financial
reform program and two indirect investment vehicles-Citizen's Investment Fund and
NIDC Capital Markets Ltd. was established with the collective investment schemes in the
corporate sector. Then, due to the rapidly growing privatization and economic
liberalization, the operation of SEC was felt to change to make it compatible with the
changing economic system. As a result, HMG Nepal brought about change in the
2
structure of SEC by dividing it into two distinct but integrated entities called Securities
Board of Nepal (SEBON) and Nepal Stock Exchange Ltd. (NEPSE). Since then they are
operating as the main bodies of securities market in Nepal.
1.2. Introduction to Securities Board of Nepal (SEBON)
Securities Board of Nepal commonly known as SEBON was established on June 7, 1993
with its mission to facilitate the orderly development of a dynamic and competitive
capital market and maintain its credibility, fairness, efficiency, transparency and
responsiveness under the Securities Exchange Act 1983. It acts as an apex regulator of
the securities market in Nepal. The major function of the SEBON is to look after
registration of the securities and approval of the public issues. However, the objectives
and functions of SEBON captures multi dimensional role in enhancing the efficiency of
security market in Nepal.
1.2.1. Objectives and Functions
As mentioned earlier, SEBON looks after the regulation of the security trading and
security market in Nepal. Moreover, it frames the policies and programs required to
monitor the securities market. As per the Securities related Act, 2007, the major functions
of SEBON are as follows:
a. Register securities of public limited companies.
b. Approve prospectus for issuing securities.
c. Provide license to operate stock exchanges.
d. Provide license to operate securities businesses.
e. Permit the operation of collective investment schemes and investment fund
programme.
f. Draft regulations, and issue directives and guidelines.
g. Supervise and monitor stock exchanges and securities business activities.
h. Take legal action against the non-compliance companies as per the legal
provisions.
i. Conduct research, study and awareness programmes regarding securities markets.
j. Advise the Government of Nepal to formulate policies and programmes relating
to securities market as and when required.
3
k. To supervise and monitor the functions and activities of securities-dealers.
l. To grant permission to operate collective investment schemes and investment
fund programs, and to supervise and monitor them.
1.2.2. Organizational Structure
The organizational structure of SEBON has seven departments and sixteen sections.
Presently, there are 37 staffs (including chairman) in SEBON. Out of 37 staff, 20 staffs
are at officer level and remaining in assistant level and support the staff. The current staff
remain inadequate to perform various functions and to tackle with many issues and
challenges of the Board including the current size of the market, challenges of market
supervision and legal enforcement and need of increasing use of information technology
for human resource management and market supervision, conducting and encouraging
research on the area of capital markets, conducting investors' education and awareness
building programmes continuously, and formulate and implement capital market master
plan in order to improve regulation and supervision of capital market. Recently
conducted research in SEBON revealed the need of staff especially human resource
manager, researcher and statistician, computer programmer, and librarian to be
inadequate.
a. The Board
The Governing Board of SEBON comprises seven members representing from
various government and non-government sectors. The seven-member board includes
a full-time Chairman appointed by the Government of Nepal for the tenure of four
years. Other members of the Board are joint secretary from Ministry of Finance, joint
secretary from Ministry of Law, Justice and Constitutional Assembly Affairs, a
representative from the Nepal Rastra Bank, a representative from Institute of
Chartered Accountants of Nepal, a representative from Federation of Nepalese
Chambers of Commerce and Industries, and an expert member appointed by the
Government of Nepal.
4
b. The Committee
SEBON has six different committees performing varieties of functions. The
governance committee provide information, advice and feedback for the formulation
and improvement of policy and procedure relating to the functions of Board, making
its activities more transparent, efficient and public oriented by monitoring the service
delivery and governance, SEBON has formed a 'Governance Committee' under the
convener of Chairman comprising two directors and deputy directors from the
Management Department and Legal Department as members. In order to make
prospectus of issuing companies more informative and credible 'Securities
Registration and Issue Approval Committee' with representatives from SEBON and
Company Registrar Office (CRO) is in operation. Provision has also been made for
the representation from the Nepal Rastra Bank and Insurance Board in the committee
as and when required. SEBON has formed 'Financial Administration and Financial
Information Analysis Committee' under the convener of Board member representing
from the Institute of Chartered Accountants of Nepal comprising Heads of the
Management Department, Financial Information Analysis Department and Finance
Section as members with the objectives of developing the recording and reporting
formats of financial information by stock exchange, securities businesspersons and
listed companies which to be kept in their offices, submitted to Securities Board of
Nepal and stock exchange along with the objectives of finalising the annual budget
and programme of the Board, updating and reviewing the annual budget and
expenditure, reviewing the audited report from the auditor and drafting the response
to the audit report. In order to provide recommendations on organization structure of
Board, need of manpower, management information system, delegation of authority,
returns and privilege to members and staff of the Board, a 'Institutional Reform
Committee' was formed under the convener of the expert member of the Board
comprising Head of the Management Department as member and Head of the
Corporate Finance Department as member secretary. In order to improve in the
compliances of the securities related legislations and to provide suggestions by
reviewing the drafted securities legislations and directives, Legal Enforcement
Committee has been made. Likewise, investigation committee was formed under the
5
convener of director in order to perform the initial work relating to legal enforcement
and to provide necessary assistance for the activities relating to legal enforcement
committee. The committee investigated the case against the NICM performing share
registrar activities without license and submitted the report to Board.
1.3. Introduction to Nepal Stock Exchange (NEPSE)
NEPSE Ltd. is a non-profit organization, operating under Securities Exchange Act, 1983.
NEPSE opened its trading floor on January 13, 1994 through its newly appointed licensed
members with an "Open Out-Cry" system for the transaction of securities with 25 brokers
and 3 market makers. NEPSE, the successor to the Securities Exchange Centre (which
was in existence since 1976), was intended to assume a lead role in the activities more
confined to the operation of the securities market, while the Securities Board was created
to function as the body responsible for the oversight regulation of the securities market.
Nepal Government, under a program initiated to reform capital markets converted
Securities Exchange Center into Nepal Stock Exchange in 1993. The trading floor is
restricted to listed corporate securities and government bonds with the market
intermediaries in buying and selling of such securities. The initial improvement of the
transparency of operations at the Exchange with its restructuring generated an interest
among the investing public in Nepal, and NEPSE experienced a substantial increase of
activity both in the primary as well as the secondary markets. A number of companies
had successful initial public offerings, with the share issues oversubscribed on many
occasions. NEPSE is a secondary market where already issued shares are traded.
Government of Nepal, Nepal Rastra Bank, Nepal Industrial Development Corporation
and members are the shareholders of NEPSE.
1.3.1. Functions and Objectives
The basic objective of NEPSE is to impart free marketability and liquidity to the
government and corporate securities by facilitating transactions in its trading floor
through market intermediaries such as brokers and market makers, etc. Some of other
functions and objectives of NEPSE which also come in purview of SEBON are listed
below:
a. To systematize the task of clearing accounts related to transactions in securities.
6
b. To supervise whether or not security dealers are behaving in the manner
prescribed in this Act, or the rules and the bye-rules framed under this Act, while
conducting business of dealing in securities, and suspend the license to conduct
the business of dealing in securities in case any securities dealer is not found to be
behaving accordingly.
c. To make or ensure necessary arrangements to regulate the volume of securities
transacted and the procedure of conducting such transactions in order to ensure
the promotion, development and clean operation of stock exchanges.
d. To make necessary arrangements to prevent insider trading or any other offenses
relating to transactions in securities in order to protect the interest of investors in
securities.
e. To systematize and make transparent the act of acquiring the ownership of a
company or gaining control over its management by purchasing its shares in a
single lot or in different lots.
f. To establish coordination and exchange cooperation with the appropriate agencies
in order to supervise and regulate matters concerning securities or companies.
g. To discharge or make arrangements for discharging such other functions as are
necessary for the development of securities and the capital market.
1.3.2. Organizational Structure
The Board of Directors (BOD), which governs NEPSE, constitutes of members
representing different sectors as per Securities Act 2006. At Present, the BOD constitutes
2 Members including a chairman from Nepal Government, 2 Members from Nepal Rastra
Bank, 1 from NIDC. Moreover, one member will be nominated by BOD as an expert in
capital market. General Manager of NEPSE will serve as a director on the BOD. The
board is the apex body of NEPSE which takes on day to day activity of the stock
exchange including various staffs of different departments. Currently, the NEPSE has a
board of 5 members including a chairman and other 4 members from different sectors
appointed by SEBON and GoN. NEPSE operates with 59 broker members and 2 market
makers. Besides this, NEPSE has also granted membership to issue and sales manager
securities trader (Dealer). Issue and sales manager works as manager to the issue and
7
underwriter for public issue of securities whereas securities trader (Dealer) works as
individual portfolio manager. At present there are 11 sales and issue manager and 2
dealers (Secondary market).
8
CHAPTER II: MAJOR ACTIVITIES OF SEBON AND NEPSE
2.1. Activities of SEBON
As we know that the SEBON looks after the regulation of the security trading and
security market in Nepal and frames the policies and programs required for monitoring
the securities market. In achieving its objectives of doing so, it performs various activities
which can be summarized in following points.
2.1.1. Securities Registration and Prospectus Approval
The Securities Act, 2007, has incorporated a provision that requires the public companies
to register all the securities to be issued with the SEBON. According to this provision,
SEBON registers the ordinary share, rights share, and debenture of companies
comprising like commercial banks, development banks, finance companies, insurance
companies, hotels and companies from other sector as well.
2.1.2. Public Issue Approval
SEBON registers securities of various companies as mentioned earlier and approves their
prospectus for public issue if deemed satisfactory and complied with existing regulations.
2.1.3. Right and Bonus Share Registration
It registers the right and bonus shares to be issued by the company. Approval to float
right and bonus shares is to be taken prior from the SEBON.
2.1.4. Licensing Renewal and Cancellation
Under the provisions of Securities Act, 2007 and Securities Businesspersons (Broker,
Dealer and Market maker) Regulation, 2007, SEBON looks after the renewal of securities
businesspersons fulfilling the criteria as required. Under the provisions of Securities Act,
2007, and Securities Businesspersons (Broker, Dealer and Market Maker) Regulation,
2007, companies willing to obtain licenses of stockbroker should submit an application to
the Board along with the recommendation of the stock exchange. Under the provisions of
Securities Act, 2007 and Securities Market Operation Regulation, 2007, SEBON also is
authorized to renew the license of NEPSE as it receives the license renewal application
from NEPSE. In pursuant to sub-section (2) of section (61) of Securities Act, 2007
securities businesspersons are required to renew their licenses by submitting the annual
9
fee as prescribed within three months of the expiry of the fiscal year. And in the case of
not being able to renew within the stipulated time by submitting the annual fee according
to subsection (2) of subsection (3), it is required to renew by paying twenty five percent
of the amount of annual fee additional as fine until three months of the expiry of time
frame. SEBON, under this provision, has published information to public about the
cancellation of license can be made.
2.1.5. Supervision and Monitoring
As per the prevailing Securities Act, SEBON carries out on-site inspection of public
issues of companies. Similarly, SEBON issues various directives to the issue managers
and monitors the compliance of the directives for the improvement on non compliances
seen in the process of inspection. Merchant Bankers are required to submit their annual
reports including profit and loss account, balance sheet, cash flow statements and
securities trading report to SEBON within three months of the expiry of the fiscal year.
As per the prevailing securities legislation, stock exchange should submit various types
of information regarding the securities trading to SEBON. Among the information to be
submitted to SEBON, NEPSE have to submit audited reports, quarterly reports, daily
trading reports, reports related to actions taken to SEBON. SEBON develops Real Time
Surveillance system with establishing electronic link to NEPSE for the supervision of
daily securities trading. With this, SEBON has made stockbrokers to clarify their trading
statements if needed after noting doubtful transactions through real time monitoring and
surveillance. Through this system, SEBON has been monitoring floor activities
accordingly or through this system, SEBON has been insistently monitoring the traded
persons and institutions including traded companies, traded value and number shares
traded. In the process of monitoring the secondary market, SEBON has been preparing
the brief reports of daily trading companies, reports of weekly traded companies, block
transactions related reports, reports of total traded amount of stockbrokers on weekly
basis, statement of securities not traded more than three months, records of promoters
share transaction and transaction records of Merchant Banker on regular basis as needed.
2.1.6. Settlement of Grievances
Grievances relating to the request for suspending the transaction, company merger,
irregularities in allotment, employee share, closure of shareholders register, shares not
10
being listed, submission of different financial statements, distribution of bonus share and
dividend less than declared, orders not being executed, fine against share certificate,
share application being cancelled and not refunding the amount on cancelled transaction
etc is received by the Board and addresses such grievances with the concerned
corporates.
2.1.7. Investors Education
Considering for the empowerment of general investors' awareness relating to securities
market, SEBON conducts training programme, educational programme relating to
securities market and the role of SEBON, publishes various tips in different newspapers
and televisions in order to increase awareness of the investors regarding investment in
securities. In addition, SEBON conducts a study with the objectives of recommending on
the improvement of organizational structure and managing human resources, utility of
information technology and its possibility considering its contribution on the
development of the capital market etc.
2.1.8. Legal Enforcement
As the section 116 of Securities Act, 2007 has authorized the Board for framing
Regulations on different subjects; the Board has authority to amend, frame and enforce
different regulations and directives. In order to improve internal governance and financial
discipline of the Board pursuant to the rules of Government of Nepal, SEBON has
enacted some regulations like Securities Board of Nepal Procurement Regulation, 2009
and Securities Board of Nepal Financial Administration Regulation, 2009 since
September 17, 2009. In addition, the board has recently amended Securities Registration
and Issue Regulation, 2008 3, Stock Exchange Operation Regulation, 2008, has issued
Bonus Share Issue Directives, 2010 Mutual Fund Regulation, 2010 Central Securities
Depository Services Regulation, 2010, has Drafted Portfolio Management Directives.
2.2. Activities of NEPSE
In order to impart free marketability and liquidity to the government and corporate
securities by facilitating transactions in its trading floor through market intermediaries
such as brokers and market makers, NEPSE carries out following major activities.
11
2.2.1. Facilitates Trading
NEPSE provides the trading floor or interface between the buyers and sellers of the
securities. Equity shares, preference shares, debentures, government bonds and mutual
funds are traded in this market. NEPSE the only Stock Exchange in Nepal introduced
fully automated screen based trading since 24th August, 2007. The NEPSE trading
system is called ‘NEPSE Automated Trading System ‘(NATS) is a fully automated
screen based trading system, which adopts the principle of an order driven market.
2.2.2. Admission of New Members
The membership of NEPSE has increased significantly in recent days. In recruiting
members NEPSE makes effort to levy an entry fee from the new members. The entrance
fee is one among many sources of revenue available to a Stock Exchange. New members
approach the Exchange for membership since they believe that the Exchange membership
would provide them with an opportunity to make profits. Such opportunities have been
made possible due to the investments made by the Exchange in the past in developing its
systems and procedures. In view of the rather subjective nature of the determination of
such fees, NEPSE should obtain the approval of the Securities Board prior to the
implementation of the entry fee.
2.2.3. Market Operations
A noticeable improvement in the operation of the Stock Exchange has been made. The
computerized record-keeping of the trading, clearing and settlement information of the
Exchange is maintained. Mainly based on formats designed in January 1994, with
necessary amendments to suit subsequent changes in operational aspects, the switch to
computerize record-keeping has provided the Exchange management with a better handle
on monitoring the activities of the members. As a result, there has been a commendable
improvement in curbing the initiation of sale transactions without possessing valid sale
documents, and in reducing the accumulation of liabilities over and above the permissible
limits and the collection of settlement dues from member firms. In addition to
maintaining the information required to supervise the activities of the member firms in a
more efficient manner, the success in the better regulation of selected aspects of member
post-trade activities is also due to the willingness displayed by certain managers of the
Exchange to initiate action against errant brokers in a timely manner.
12
2.2.4. Investor Awareness
It conducts various investor awareness programs and interactions in order to help the
investors to understand the regulations and the issues involved in the trading of the
securities. Such act of NEPSE helps in preparing the aware pool of the investors that
could be the building blocks towards developing a efficient investment environment in
Nepal.
13
CHAPTER III: MAJOR ISSUES AND DISCUSSION
Buying and selling i.e. trading of securities of listed securities are normally placed with
broker. A first step for initial investor to invest in any securities is usually the selection of
the best security. An investor has to consider the various factors before selecting
securities for investment. In short, the securities transaction rely on the mechanics or
procedures of exchange to guide investors in making wise investment decision by
diverting funds in securities of worthwhile investment merits.
In order to have clear insights on how securities are traded and how the entire processes,
right from registration of security to trade in the secondary market and transfer of the
security from one to another investor is very important and crucial to understand. Thus, it
seems essential to know and understand about following issues of securities and its
regulations in case of Nepal.
3.1. Overview of Markets
Markets is a place where buyers and sellers gather together to negotiate their products in
return of monetary value. It is traditional approach to the definition of the market.
However, today’s market has gone through fundamental changes where physical distance
between the buyers and sellers seems to have reduced by the brokers in case of the
security market. Securities markets are classified in various ways but there are no any
hard and fast rules to classify the market. On the basis of securities issue and trading
activities we can classify securities market as primary market and secondary market.
Similarly, on the basis of maturity period of security, it can be classified as money market
and capital market. Physical location is another criterion to classify security market into
organized stock exchanges and over- the counter market. On the basis of trading time, the
security market may be classified into continuous and call market. But for the purpose of
simplicity markets may be broadly divided into primary market and the secondary market
for trading of the shares.
a. Primary Market
The market where first hand securities are traded is known as the primary market.
Initial Public Offerings (IPO) is an example of the trading in the primary market. In
14
context of Nepal, various banks and companies float their shares in the market
through merchant or investment bankers which is a concrete example of the primary
market. The market is concerned with the new securities which are offered to
investors for the first time. This market is used by the companies, and the government
to raise funds for different purposes. The primary markets are also called the New
Issue Market (NIM), Initial Public Offerings, right offerings; private placement, etc.
are primary market activities.
b. Secondary Market
The secondary markets facilitate the trading of securities which has already been in
the market or the second hand securities. NEPSE is the secondary market in Nepal
which facilitates the trading of the securities from prospective buyers and sellers
through the brokerage mechanism of trading using NATS.
3.2. Trading Mechanism
NEPSE is the secondary market in Nepal. The NEPSE has adopted an auction system of
trading securities. It means transactions of securities are conducted on the open auction
principal on the trading floor. In Nepal, in order to buying and selling securities in
secondary market buyer or seller should give order to certified broker filling the order
slip as per rules and regulation of NEPSE. The buyer or seller should mention the
necessary details information such as: name of the organization, type of stock, number of
stocks and price and time period i.e. applicable for both parties. After that placement of
order, buyer or seller collects ordering slip with registration number. Then the buy or sell
orders are taken to the floor of NEPSE by the broker or his\her representative. In the floor
of stock exchange, the buying broker with highest bid will post the price and his code
number on the buying column, while the selling broker with the lowest offer will post the
price and the code number on the selling column on the quotation board. The orders to
buy and sell get executed when the prices for buy and sell match. Once the orders are
executed in the floor, it is recorded in the exchange and is committed to buyer and sellers
of the security through brokers.
15
3.3. Initial Public Offering
An initial public offering (IPO) or stock market launch is a type of public offering where
shares of stock in a company are sold to the general public, on a securities exchange, for
the first time. Through this process, a private company transforms into a public company.
Initial public offerings are used by companies to raise expansion capital, to possibly
monetize the investments of early private investors, and to become publicly traded
enterprises. A company selling shares is never required to repay the capital to its public
investors. After the IPO, when shares trade freely in the open market, money passes
between public investors. Generally it is the first sale of stock by a private company to
the public. IPOs are often issued by smaller, younger companies seeking the capital to
expand, but can also be done by large privately owned companies looking to become
publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm,
which helps it determine what type of security to issue (common or preferred), the best
offering price and the time to bring it to market. IPOs can be a risky investment. For the
individual investor, it is tough to predict what the stock will do on its initial day of
trading and in the near future because there is often little historical data with which to
analyze the company. Also, most IPOs are of companies going through a transitory
growth period, which are subject to additional uncertainty regarding their future values.
Thus IPOs commonly are underpriced compared to the price at which they be marketed.
Such under pricing is reflected in price jumps that occurs on the date when the shares are
first traded in security market.
Details of the proposed offering are disclosed to potential purchasers in the form of a
lengthy document known as a prospectus. Most companies undertaking an IPO do so
with the assistance of an investment banking firm acting in the capacity of an
underwriter. Underwriters provide a valuable service, which includes help with correctly
assessing the value of shares (share price), and establishing a public market for shares
(initial sale). An IPO is also referred to as a "public offering."
Civil Bank has floated its shares to the public for the first time to raise Rs 800 million
which is the biggest initial public offering (IPO) launched by the private sector till date.
The bank has been successful in raising the said amount from the primary market; the
paid-up capital of the category 'A' financial institution will top Rs 2 billion. In addition,
16
Commerz and Trust Bank Nepal Limited is in the process of issuing IPO of 6 million
shares at the face value of Rs. 100 from February 17, 2013. Their issue managers are
Growmore Investment, Civil Capital, Nabil Investment and CIT (Citizen Investment
Trust).
3.4. List of Underwriters in Nepal
Underwriting refers to the process that a large financial service provider (bank, insurer,
investment house) uses to assess the eligibility of a customer to receive their products
(equity capital, insurance, mortgage, or credit). The process by which investment bankers
raise investment capital from investors on behalf of corporations and governments that
are issuing securities (both equity and debt) may be defined as Underwritings. A
company or other entity that administers the public issuance and distribution of securities
from a corporation or other issuing body is known as the underwriter. An underwriter
works closely with the issuing body to determine the offering price of the securities buys
them from the issuer and sells them to investors via the underwriter's distribution
network. Underwriters generally receive underwriting fees from their issuing clients, but
they also usually earn profits when selling the underwritten shares to investors.
There are total 14 underwriters registered in SEBON (Shown in Appendix). These
underwriters are further classified on the basis of Issue management, Share Registration,
Underwriter and Portfolio Management.
3.5. Private placement
A Company can sell the entire issue to single purchaser (generally, a financial institution
or wealthy individual) of a group of such purchasers. This type of sale is known as a
private placement. Private placement also known as direct placement, because the
company negotiates directly with the investors over the terms of the offering, eliminating
the underwriting function of the investment banker, debt securities may be issued either
publicly or privately. A consideration in determining whether to issue securities privately
is depends on the type of securities, amount of funds and position of capital market. In
context of Nepal private placement of ordinary shares is rare; however, the bonds are
often floated by private placement approach. Some of the private placement made in
Nepal can be shown in the table below.
17
Table 3.1: Total Private Placement of Bonds from 1997 to 2009
Year Total Issue Amount (in millions) Public Issue Private Placement
1997 93 93 -
2002 360 100 260
2003 300 100 200
2005 100 400
2006 900 330 570
2008 2950 440 2510
2009 900 750 150
Total 6003 1913 4090
Percent 100 31.87 68.13
Source: Securities Board of Nepal.
Investors involved in private placements are usually large banks, mutual funds, insurance
companies and pension funds. Private placement is the opposite of a public issue, in
which securities are made available for sale on the open market.
Since a private placement is offered to a few, select individuals, the placement does not
have to be registered with the Securities and Exchange Commission. In many cases,
detailed financial information is not disclosed and need for a prospectus is waived.
Finally, since the placements are private rather than public, the average investor is only
made aware of the placement after it has occurred.
In context of Nepal, securities act 2063 has provision for private placement. Firm can
raise fund through private placement in following circumstances:
a. If the firm has to sell or distribute securities to less than 50 investors at a time.
b. Securities issued to own employee or staffs.
As long as shareholders are comfortable with the dilution of ownership, a private
placement can be a cost-effective method for a company to raise small but significant
amounts of capital in a relatively short time while maintaining the company's ability to
incur additional debt.
18
3.6. Provisions of shelf registration in Nepal
In context of the USA, a regulation that a corporation can evoke to comply with U.S.
Securities and Exchange Commission (SEC) registration requirements for a new stock
offering up to three years before doing the actual public offering. However, the
corporation must still file the required annual and quarterly reports with the SEC. In
terms of SEC regulations, it is formally known as SEC Rule 415. A procedure that allows
firms to file one registration statement covering several issues of the same security is
called shelf registration. Large, well known public companies that issue securities
frequently might file a master registration statement with the Security Exchange
Commission and then update it with a short form statement just prior to each individual
offering, in such a case, a company could decide at particular time to sell registered
securities and have the sale completed before noon. This procedure is known as shelf
registration because in effect the company puts in new securities “on the shelf” and then
sells them to investors when it thinks the market is right. With the registration "on the
shelf," the corporation, by simply updating regularly filed annual, quarterly, and related
reports to the SEC, can go to the market as conditions become favorable with a minimum
of administrative preparation and expense. A system of shelf registration is mostly used
by large corporations to shortcut the registration process. The benefit of the system is that
a company is able to issue securities in a matter of days as opposed to weeks or months.
Under this the flotation costs are much lower.
In Nepal there is no any provision regarding shelf registration until 2012 but
internationally it exists.
3.7. Auction Market and Dealer Market
Auction Market is a market in which buyers enter competitive bids and sellers enter
competitive offers at the same time. The price a stock is traded represents the highest
price that a buyer is willing to pay and the lowest price that a seller is willing to sell at.
Matching bids and offers are then paired together and the orders are executed. The New
York Stock Exchange (NYSE) is an example of an auction market. Auction markets
differ from over the counter where trades are negotiated. Important auction markets for
common stocks are the NYSE, the Paris Bourse, the Tokyo Stock Exchange, NEPSE etc.
Auction markets also exist for new issues such as those of government bonds. Proponents
19
of auction markets maintain that allowing investors to trade directly with each
other reduces execution costs. Operationally, this direct trading is achieved by exposing
public limit orders to incoming market orders.
For example, 4 buyers want to buy a share of XYZ and make the following bids: $10.00,
10.02, 10.03 and $10.06. Conversely, there are 4 sellers that desire to sell XYZ and they
submitted offers to sell their shares at the following prices: $10.06, 10.09, 10.12 and
$10.13. In this scenario, the individuals that made bids/offers for XYZ at $10.06 will
have their orders executed. All remaining orders will not immediately be executed and
the current price of XYZ will then be $10.06.
Fig 3.1: Auction Market Example
Sources: the journal of finance,oct. 2000
Dealer Market is a market where dealers are assigned for specific securities. The dealers
create liquid markets by purchasing and selling against personal inventory. Dealer
markets are differ from the general investment markets, in that traders who focus on
particular commodities engage in buying and selling activity using their own accounts
rather than being represented by a third party. Securities dealers who make use of a
dealer market are often referred to as Market Makers. In this type of trading environment,
the buyers and sellers make use of their own resources in order to conduct trading.
NYSE, NASDAQ, and the EuroNext markets are primarily order book markets.
20
A dealer market is different from an auction market. With auction markets, there is
usually one specialist who functions as the gatekeeper for incoming orders to buy and
sell. Essentially, the specialist works out of one location and matches the buying and
selling orders as they come in. Their sole function is to process the orders. By contrast, a
dealer market allows the traders or dealers to make use of their own resources to conduct
trading activity, do research, and provide support to their investor customers. In addition,
the Market Makers are not limited in the same manner as a specialist in an auction
market. Multiple dealers in a dealer market situation may be risking and investing their
capital in a given stock.
One of the key advantages of a dealer market; the ability to move quickly in buying and
selling securities means a greater opportunity to earn a higher return or minimize loss on
any given investment. A dealer market may be focused on any type of commodity,
including stocks and treasuries.
Fig 3.2: Examples of Auction and Dealer Market
Source: Broker Dealer Market Incorporation
3.8. Types of Order in Nepal
The secondary market is the market in which securities are traded on the stock market. In
the secondary market, companies are not in search of capital; instead, you as an investor
deal with other buyers and sellers of securities. This is where actual stock-exchange
trading takes place. All traded securities are public and available to everyone. This is the
market where different types of order are placed.
All trades are made up of separate orders, that are used together to make a complete
trade. All trades consist of at least two orders (one buy and one sell order). If a trade is
entered with a buy order, then it will be exited with a sell order, and vice versa. For
example, if a trader expected the market's price to go up, the simplest trade would consist
21
of one buy order to enter the trade, and one sell order to exit the trade. Conversely, if a
trader expected the market's price to go down, the simplest trade would consist of one sell
order to enter the trade, and one buy order to exit the trade. The following explanations
will explain each of the order types, and how these orders are used in trading:
a. Market Orders
A market order is an order which does not specify a price limit; rather market orders
are matched to the best available contra-side bid or offer. These are buy or sell orders
that are to be executed immediately at current market prices (buy or sell “at market”).
When a trade is executed, the specialist’s clerk will fill out an order card that reports
the time, price, and quantity of shares traded, and the transaction will be reported on
the exchange’s ticker tape. This simple scenario, however, is subject to a few potential
complications. First, the posted price quotes (bid and ask orders) actually represent
commitment to trade up to a specified number of shares. If the market order is for
more than this number of shares, the order may be filled at multiple prices. Second,
another trader may beat out investor to the quote, meaning that her order would then
be executed at a worse price. Finally, the best price quote may change before her order
arrives, again causing execution at a price different from the one at the moment of
order.
b. Stop Orders
Stop orders are orders that create market orders when the specified trigger price is
reached. As market orders, stop orders are not visible in the order book for any
market participant. A buy stop order is an order placed at a price above the market
that will trigger the creation of a market buy order when the market trades at the
stop price or higher. A sell stop order is placed below the market and creates a
market order if the market trades at or below the stop price.
There is no guarantee that an order triggered by a stop will be filled at the stop
price. Instead, it is treated the same as any other market order. A stop is only
activated when an actual trade takes place that is at or through the stop. Even if
both the bid and offer are through the stop price (for example, when both the bid
and the offer are higher than the buy stop price, if the market price is 1.5, a trader
22
might place a buy stop order with a price of 1.6). Stop orders are often referred to
as stop-loss orders in that they are often used to protect a trader's position from
deteriorating beyond a certain point and stopping further loss. Positions can be
initiated or closed out using stop orders. Stops are available on most futures.
c. Limit Orders
Investors may also place orders, specifying prices at which they are willing to buy
or sell a security. A buy limit order indicates that the security may be purchased only
at the designated price or lower. A sell limit order indicates that the security may be
sold at the designated price or higher. The danger of limit order is that it comes with
no guarantee it will be executed at all.The designated price may not be obtainable. For
example, if a trader placed a limit order with a price of Rs2, the order would only get
filled at Rs2 or better, if it got filled at all. Limit orders are used when you want to
make sure that you get a suitable price, and are willing to risk not being filled at all.
d. Discretionary Orders
Discretionary order gives the broker the power to buy and sell for securities at the
broker's discretion. Broker sells the securities as per market demand of purchaser by
considering other various factors. A discretionary order is an order that allows the
broker to delay the execution at its discretion to try to get a better price. These are
sometimes called not-held orders.
In context of Nepal, the market orders are executed; the prospective seller go to the
brokerage firm and fills up the slip in order to sell the securities in the market price at
particular time during the trading in the stock exchange. Stop orders and Limit orders are
not place in the exchange market in Nepal.
3.9. Order Matching Rules
The system adopts principle of order driven market. The best buy order is matched with
the best sell order. An order may match partially with another order producing multiple
trades. For order matching the best buy order is the one with the highest price and the
best sell order is the one with the lowest price. This is because the system views all buy
orders available from the point of view of the sellers and all sell orders from the point of
view of the buyers in the market. So, of all buy orders available in the market at any point
23
of time, a seller would obviously like to sell at the highest possible buy price that is
offered. Hence, the best buy order is the order with the highest price and the best sell
order is the order with the lowest price.
3.10. Settlement
NEPSE has adopted a T+3 settlement system. Settlement will be carried out on the basis
of paper versus payment. The trading is done at "T" and at T+1; the buying brokers have
to submit bank vouchers for settlement with covering letter. At T+2, the selling brokers
must submit share certificate with covering letter. At T+3, NEPSE prepares billing for
payment and this will be forwarded to the bank. Once the settlement is done the buying
brokers with the consultation of the clients must decide and present the purchased shares
if they want to record it as blank transfer. This must be completed within T+5.
3.11. About OTC Market in Nepal
Over-the-counter (OTC) or off-exchange trading is done directly between two parties,
without any supervision of an exchange. An over-the-counter (OTC) securities market is
a secondary market through which buyers and sellers of securities (or their agents or
brokers) consummate transactions. The shares of companies that have been de-listed by
NEPSE, the share of small companies which are unable to meet NEPSE’s and its
regulator SEBON’s requirements, and the shares of banks and financial institutions
(BFIs) which have issued their initial public offering (IPO) but not yet listed at the
NEPSE, can be traded over the counter.
With a view to providing further access to investors, NEPSE made OTC Bylaws, 2065
with the approval of the Securities Board of Nepal. It also started the over-the-counter
(OTC) market from 4 June 2008 to give shareholders a chance to sell or buy the shares of
companies that are either de-listed or yet to be listed on NEPSE for failing to meet the
listing criteria. This has added a new dimension to the Nepali capital market. In the OTC
Market one does not have to go to brokers to trade shares; one can come to NEPSE and
trade, paying a commission of 2 per cent for transactions of up to Rs 25,000, 1. 5 per cent
for transactions of above Rs 25,000 but under Rs 5,00,000 and 1 per cent for transactions
of over Rs 5,00,000. OTC being an unorganized secondary market, it does not require
24
the involvement of brokers. Thus in Nepal, NEPSE facilitates the transfer of the rights of
such OTC shares.
Nepal Stock Exchange has de-listed 43 companies so far for their failure to comply with
the regulations. These companies are supposed to have raised funds worth about Rs two
billion from the public. Companies such as Bansbari Leather Factory, Necon Air and
Nepal Bank were de-listed from NEPSE.
Though the OTC Regulation 2065 came into existence four years back, so far no shares
had been traded under OTC market. The shares of companies that have been de-listed by
NEPSE, shares of small companies that are unable to meet NEPSE’s and Securities
Board of Nepal's requirements, and shares of banks and financial institutions that have
conducted its initial public offering but have not yet listed at NEPSE can be traded over
the counter. For the first time in its history, the Nepali stock market has witnessed Over-
The-Counter (OTC) trading with de-listed Nepal Bank Ltd (NBL)'s shares. In October
2012, the bank's 71,928 unit shares belonging to the government were transferred to
NBL's 2,664 employees. The OTC trading, being an unorganized secondary market, does
not require the involvement of brokers and NEPSE only facilitates the transfer.
3.12. Member of NEPSE
Members of NEPSE are permitted to act as intermediaries in buying and selling of
government bonds and listed corporate securities. At present, there are 59 member
brokers and 2 market makers, who operate on the trading floor as per the Securities
Exchange Act, 1983, rules and bye-laws.
Besides this, NEPSE has also granted membership to issue and sales manager securities
trader (Dealer). Issue and sales manager works as manager to the issue and underwriter
for public issue of securities whereas securities trader (Dealer) works as individual
portfolio manager. The tenure of the membership is one year. The license should be
renewed within 3 months after the closure of the fiscal year. If not, it can be done within
another three months by paying 25% penalty.
3.13. Listing Requirement of NEPSE
As we know that, the objective of NEPSE is to impart free marketability and liquidity to
the government and corporate securities by facilitating transactions in its trading
floor through member, market intermediaries, such as broker, market makers etc. Trading
25
on the floor of the NEPSE is restricted to listed corporate securities and government
bonds. At present, 210 companies have listed their securities to make them eligible for
trading. So, the listing requirements of NEPSE is that the Corporate bodies wishing to be
member shall have to submit application in prescribed format within specified time along
with certificate of incorporation, tax certificate, Memorandum of Association , Articles of
Association and concerned Act, rules and regulations in the case of corporate body other
than company after the incorporation and the projected B/S and PL A/C for the next three
years, last three years audited financial statement, if the year of incorporation is less than
three years, the B/S and A/C of investment in shares of subsidiary company or
investment made in its parent company's share capital, details of share investment in any
other company other than subsidiary, the name, address, number of shares subscribed and
the amount invested by shareholders having more than 5% of the share capital need to be
submitted.
NEPSE has aside the following pre-requisites for listing. The companies, which do not
attain the set criteria, are not eligible for listing. The criteria aside to enlist the shares are:
a. The minimum paid up capital must be RS. 25 Million.
b. The minimum number of shareholders should be 500 but if the company has not
floated the share at the time of submitting the application from for listing, then in
this case listing can be done with the condition that the given number of
shareholders will be attained within two years.
c. The face value of the share should is either RS.10 or RS. 100
3.14. Provision of Block Transaction
Block Sales institutional investor frequently trade block of ten thousands of shares of
stock. The block transaction of over 10000 shares account for a good deal of all trading.
The larger block transactions are often too large for specialists to handle as they do not
wish to hold such large blocks of stock in their inventory. Block houses have evolved to
aid in the placement of larger block trades. Block houses are brokerage firm that
specialize in matching block buyer and sellers. Once a buyer and seller have been
matches the block is sent to the exchange floor where specialist executes the trade.
All brokers maintain an account with the stock exchange, amounting to Rs 50 million.
When a broker places a buy order, NEPSE deducts the amount required to buy the shares
26
from the broker’s account. And the amount is later restored to the broker’s account when
the broker submits the voucher presented by the buyer. Thus, block transaction is
provisioned in Nepal. Block transaction of shares are made by the institutional investors
who trade greater amount of shares at a time.
3.15. Circuit Breakers
NEPSE has implemented index-based circuit breakers with effect from 2064/6/4 (21
September 2007). In addition to the circuit breakers, price range is also applicable on
individual securities. The index-based circuit breaker system applies at 3 stages of the
NEPSE index movement of 3%, 4% and 5%. These circuit breakers when triggered bring
about a trading halt in all equity.
a. In case of 3% movement either way, there would be a market halt for 15 minutes
if the movement takes place during first hour of trading i.e. 13:00 hours. In case
this movement takes after 13:00 hours there will be no trading halt at this level
and market shall continue trading.
b. In case of 4% movement either way, there would be a market halt for half an hour
if the movement takes place before 14:00 hours. In case this movement takes after
14:00 hours there will be no trading halt at this level and market shall continue
trading.
c. In case of 5% movement in either way, trading shall be halted for the remainder
of the day.
3.16. Price Range
Price Range is applicable on individual securities. The trading of the individual securities
are not halted but allowed to trade within the price range. The price band is 10% of
previous close on either way. During the ATO session the range is 5% on either way of
Previous Close Price. After the band is 2% on either way of the Last traded price till it
reaches to 10% of the previous close.
3.17. Bond Trading in Nepal
Trading of government bond started since 1964. The bond was listed in NEPSE in mid
July 2005 for secondary market transaction. The government bond is issued for the
purpose of expenditure in development projects like hydropower, transportation etc.
27
Generally bonds are issued by government through central bank to fund budget deficit
whereas gives a tool to central bank to enhance effectiveness of monetary policy.
Likewise, the corporate bodies issue bonds to fulfill their long term financing needs.
Nepal’s bond market is underdeveloped and dominated by government securities. To
meet short term financing needs government issues short-term treasury bills and national
savings certificates. Government also issues longer tenor instruments, the Development
Bonds, and are admitted for trading through NEPSE. However, development bonds are
rarely traded and the size of the bond is quite small to satisfy demand for investment of
institutional investors (including insurance companies, the Employees’ Provident Fund,
and Citizen Investment Trust). As such, commercial banks are the largest investors in
government securities holding approximately 54% of outstanding government securities,
which they use for meeting statutory liquidity requirements.
3.18. Trading Cost
Trading cost is the commissions and other expenses related to the trade of a security.
Following are the trading cost associated with various securities.
Table 3.2: Brokerage Cost for Equity
S.No. Trading Amount Brokerage %
A Up to 50,000 1
B > 50,000 & < 5,00,000 0.9
C > 5,00,000 & < 10,00,000 0.8
D > 10,00,000 0.7
3.3: Brokerage for Government Bond
S.No. Trading Amount Brokerage %
A Up to 5,00,000 0.20
B > 5,00,000 & < 50,00,000 0.10
C > 50,00,000 0.05
28
3.4: Brokerage for all other Stocks which is not listed in 1 and 2.
S.No. Trading Amount Brokerage %
A Up to 50,000 0.75
B > 50,000 & < 50,00,000 0.60
C > 50,00,000 0.40
3.19. Short Sale
A short sale allows the investor to make profit from a decline in the security price. An
investor borrows a share of stock from a broker and sells it. Later, the short seller must
purchase a share of the same stock in order to replace the share that was borrowed. The
short seller anticipates the stock price will fall, so that the share can be purchased later at
a lower price that it initially sold for, if so the short seller will reap a profit. The short
seller must not replace the shared but also pay the lender of the security any dividends
paid during the short sale. Since there is no trend and regulations that allows the investors
to open account with their brokerage firm, short sale is not practiced in Nepal.
It should be permitted in Nepal but at the mean time sufficient regulations has to be
made. If allowed, it can gear up the trading of securities in the market which will make
the vibrant capital market. It can be considered as the factor that will help the capital
market to develop.
3.20. Buying on Margin
As mentioned earlier, there is no regulation which allows the investors to open margin
account with their broker. Thus, buying in margin is not in practice in Nepal. However,
the banks provide the funds by taking the shares or securities under collateral. It looks
like buying on margin but is known as margin lending. The purpose of buying on margin
and margin lending may vary significantly.
Both, brokers and investors, have strongly urged for easy access to margin finance to
boost the current market scenario. If investors had easy access to margin loans either
through brokers or financial institutions, then they would have been able to buy more
shares, sustainably fuelling the current surge in the stock market. The capital market
regulator Securities Board of Nepal (SEBON) has commissioned a study by an expert to
29
design the procedure for margin lending through brokers. “SEBON” has recognized the
importance of allowing margin lending by brokers to boost the market so we are going to
prepare a proper legal infrastructure once the report is out,” informed an officer at
SEBON.
Under margin lending, brokers give partial loans to clients in order to cover a larger
investment than one’s capital could directly cover for a fee. The margin account with
brokers acts as leverage for investors, allowing them to purchase shares despite being
short of cash, thus promoting transactions. However, in Nepal, margin lending is loosely
referred to as loans floated by banks and financial institutions against the collateral of
shares. Though financial institutions are not prohibited to float loans against shares to the
public, investors feel that in the current scenario, obtaining loans through financial
institutions by pledging shares has become difficult. Five years back, during the heyday
of the capital market, easy availability of margin type loans had fuelled the bullish trend
of the stock market pushing it to a peak. “If the opening up of margin finance through
brokers is going to take a long time, it will be prudent to revert to the earlier system of
banks giving a portion of stock price as loans on the recommendation of the brokers,” he
said. The broker should give permission for lending.
30
CHAPTER IV: CONCLUSION AND RECOMMENDATIONS
History has shown that the price of shares and other assets is an important part of the
dynamics of economic activity, and can influence or be an indicator of social mood. An
economy where the stock market is on the rise is considered to be an up-and-coming
economy. In fact, the stock market is often considered the primary indicator of a
country's economic strength and development. Rising share prices, for instance, tend to
be associated with increased business investment and vice versa. Share prices also affect
the wealth of households and their consumption. The smooth functioning of all these
activities facilitates economic growth in that lower costs and enterprise risks promote the
production of goods and services as well as possibly employment. In this way stock
market and trading of the securities are deemed to be crucial for the financial system and
prosperity. However, for all these to happen in the economy, the stock market should be
efficient and developed one. It is evident from the case of various countries that usually
the stock markets of the underdeveloped countries do have shortfalls in many aspects.
Same is the case for Nepal.
The possible reasons for the market inefficiency in the emerging stock market like Nepal
may be the poor institutional infrastructure, weak legal framework, lack of supervision,
slow development of the market infrastructure, poor corporate governance and
accountability, low level of capacity of major market players and lack of transparency of
market transaction. The absence of qualified analysts, institutional investors and
investment-friendly environment is a well-known constraint in the emerging market like
Nepal. The main challenges of the Nepalese stock market include frequently changing
government policies, policy-level interventions, tussles of regulatory authorities, lack of
commitments on economic agenda from political parties, and slow economic growth.
Other challenges are to widen the use of automation, strengthen regulations and
supervision, and educate investors.
Similarly, functional autonomy of SEBON (regulatory body), and NEPSE
(implementation body) are also the need of the day. Moreover, it has been seen that the
various aspects of securities trading like buying on margin, short sale, shelf registration
etc has not been provisioned in Nepal. It may have greater implications for the security
market in Nepal since such trading may boost up the trade and eventually gear up the
31
economy as a whole. Thus, it seems necessary to develop such provisions by regulatory
bodies and even more should enact the concrete regulatory and legal framework that will
help to enhance the efficiency of the stock market and trading of securities in Nepal.
32
REFERENCES
Dangol, J. (2012). Stock Market Efficiency in Nepal. International Journal of
Multidisciplinary Research.
Exchange, N. S. (2010). Information Book on Share Registration. Kathmandu: NEPSE.
Gurung, J. B. (2004). Growth and Performance of Securities Market in Nepal. The
Journal of Nepalese Business Studies.
Nepal Rastra Bank. (2013, February 6). Retrieved from NRB Website: www.nrb.org.np
Nepal Stock Exchange. (2013, February 5). Retrieved from NEPSE Website:
www.nepalstock.com.np
Nepal, S. B. (2010). Effortful in Building Fair, Credible, Transparent, Responsive,
Dynamic, and Efficient Securities Markets. Kathmandu: SEBON.
Peiris, R. (1996). The Nepal Stock Exchange: A Review. Morrin Hill: University of
Maryland.
SEBON. (2013, February 5). Retrieved from SEBON website: www.sebon.gov.np
33
APPENDIX
34
APPENDIX – 1
PROJECT WORK CONTRIBUTION BY GROUP MEMBERS
Roll No. Name of Student Topics Dealt
2 Ankur Shrestha Initial Public Offerings
4 Bindi Bade Shrestha List of Underwriters in Nepal
6 Dipika Shrestha Provisions of Shelf Registration in Nepal
8 Grisha Yadav Provision of Private Placement
10 Krishna Chalise Auction Market and Dealer Market
12 Manisha Baral Types of Order Placed in Nepal
14 Pawan Kawan OTC Markets
16 Prajwal Regmi Different Types of Member of NEPSE
18 Ritu Joshi Listing Requirement of NEPSE
20 Sajana Shrestha Provision of Block Transaction
22 Sarita Maharjan Provision of Short Sale
24 Shishir KC Bond Trading in Nepal
26 Sona Shrestha Trading Costs
28 Sushmita Amatya Buying Margin
30 Bibek Khadgi Evolution, Functions, Acts and By-Laws
35
APPENDIX-2
LIST OF UNDERWRITERS
Underwritings on the basis of Issue Management
a. NSM Merchant Banking & Investment Ltd., Putalisadak, Kathmandu
b. NCM Merchant Banking Ltd., Kamalpokhari, Kathmandu
c. Ace Capital Ltd., Lal Durbar, Kathmandu
d. Nepal Merchant Bank Capital Ltd., Babar Mahal, Kathmandu
e. Citizen Investment Trust, New Baneswor, Kathmandu
f. Elite Capital Ltd., Jamal, Kathmandu
g. Vibor Capital Ltd., Krishna Galli, Lalitpur
h. Civil Capital Market Ltd., Kamaladi, Kathmandu
i. Investment Management Merchant Banker Ltd., Putalisadak, Kathmandu
j. NABIL Investment Banking Ltd., Chabahil, Kathmandu
k. Laxmi Capital Market Ltd., Pulchowk, Lalitpur
Underwritings on the basis of Share Registration:
a. NSM Merchant Banking & Investment Ltd., Putalisadak, Kathmandu
b. NCM Merchant Banking Ltd., Kamalpokhari, Kathmandu
c. Ace Capital Ltd., Lal Durbar, Kathmandu
d. Nepal Merchant Bank Capital Ltd., Babar Mahal, Kathmandu
e. Citizen Investment Trust, New Baneswor, Kathmandu
f. Elite Capital Ltd., Jamal, Kathmandu
g. Vibor Capital Ltd., Krishna Galli, Lalitpur
h. Investment Management Merchant Banker Ltd., Putalisadak, Kathmandu
i. NABIL Investment Banking Ltd., Chabahil, Kathmandu
j. Laxmi Capital Market Ltd., Pulchowk, Lalitpur
36
Underwritings on the basis of Underwriter:
a. NCM Merchant Banking Ltd., Kamalpokhari, Kathmandu
b. Ace Capital Ltd., Lal Durbar, Kathmandu
c. Vibor Capital Ltd., Krishna Galli, Lalitpur
d. Investment Management Merchant Banker Ltd., Putalisadak, Kathmandu
e. NABIL Investment Banking Ltd., Chabahil, Kathmandu
Underwritings on the basis of Portfolio Management:
1) Vibor Capital Ltd., Krishna Galli, Lalitpur
2) Beed Invest Ltd., Krishna galli, Lalitpur
3) Araniko Capital Management Company Ltd., Mahaboudha, Kathmandu
37
APPENDIX-3
CORPORATE BONDS ISSUED IN NEPAL
SN Company
Number of
Bond
Par
Value Amount
1
Nepal Investment Bank Limited
Bond 2067 300,000 1,000 300,000,000
2 Everest Bank Limited Rinpatra 2061 300,000 1,000 300,000,000
3 Bank of Kathmandu Rinpatra 2069 200,000 1,000 200,000,000
4
Nepal Investment Bank Limited
Bond 2070 250,000 1,000 250,000,000
5
Nepal Industrial and Commercial
Bank Limited Bond 2070 200,000 1,000 200,000,000
6 Nepal SBI Bank Rinpatra 2070 200,000 1,000 200,000,000
7 Nepal Investment Bank Bond 2071 225,000 1,000 225,000,000
8
Nepal Bidhut Pradhikaran Rinpatra
2069 1,500,000 1,000 1,500,000,000
9
Himalayan Bank Limited Rinpatra
2072 500,000 1,000 500,000,000
10 Nabil Bank Limited Bond 2075 300,000 1,000 300,000,000
11
Laxmi Bank Limited Debenture
2072 350,000 1,000 350,000,000
12
Nepal Investment Bank Limited
Bond 2072 250,000 1,000 250,000,000
13 Kumari Bank Limited BOND 2070 400,000 1,000 400,000,000
Total 4,975,000,000
38
APPENDIX-4
GOVERNMENT BONDS ISSUED IN NEPAL
S.N. Name of Bond Listed
Bond
In
'000'
Listed
Amount
Rs. In
million
Interest
Rate
Maturity
Date
Listing
Date
1 Bikas Rinpatra
2072
7,500 750 6 11/9/2072 3/12/2063
2 Bikas Rinpatra
2075
12,00
0
1,200 6.5 8/12/2075 8/22/2063
3 Bikas Rinpatra
2075 'Ka'
21,00
0
2,100 6.5 11/29/207
5
12/25/2063
4 Bikas Rinpatra
2076
22,00
0
2,200 6.5 3/21/2076 4/21/2064
5 Bikas Rinpatra
2076 'Ka'
9,000 900 6.5 7/29/2076 8/13/2064
6 Bikas Rinpatra
2076 'Ga'
4,600 460 6.5 9/23/2076 10/29/2064
7 Bikas Rinpatra
2076 'Kha'
10,40
0
1,040 6.5 9/3/2076 11/8/2064
8 Bikas Rinpatra
2072 'Ka'
15,00
0
1,500 7.5 12/19/207
2
1/24/2065
9 Bikas Rinpatra
2071 'Ka'
20,00
0
2,000 8 9/20/2071 11/6/2065
10 Bikas Rinpatra
2071 'Kha'
30,00
0
3,000 9 3/16/2071 7/6/2066
11 Bikas Rinpatra
2073 'Ka'
27,50
0
2,750 9 7/28/2073 7/6/2066
12 Bikas Rinpatra
2069
15,00
0
1,500 9 10/28/206
9
12/4/2066
13 Bikas Rinpatra
2072 'Kha'
25,50
0
2,550 9 2/27/2072 3/15/2067
14 Bikas Rinpatra
2072 'Ga'
49,90
9
4,991 9 3/17/2072 4/20/2067
15 Bikas Rinpatra
2072 'Gha'
30,00
0
3,000 9.5 9/16/2072 1/21/2068
16 Bikas Rinpatra
2071 'Ga'
50,00
0
5,000 9.5 2/19/2071 5/22/2068
Total 349,4
09
34,941
39
APPENDIX-5
LIST OF ACTS AND BY-LAWS
I. Securities Regulations as per SEBON
Securities Board Regulation, 2064
Stock Exchange Operation Regulation, 2064
Securities Businessperson (Stock Broker, Dealer & Market Maker) Regulation,
2064
Securities Businessperson (Merchant Banker) Regulation, 2064
Securities Registration and Issue Regulation, 2065
Securities Registration and Issue Regulation, 2065 (First Amendment)
SEBON Procurement Regulation, 2066
Mutual Fund Regulation, 2067
Central Depository Service Regulation, 2067 (2010)
Credit Rating Regulation, 2068
II. Acts
Securities Act, 2063
III. Guidelines and Bylaws
Compliance Guidelines for Securities Broker, 2058
Securities Issue Guidelines, 2065
Bonus Share Guidelines, 2067
Portfolio Management Guidelines, 2067 (2010)
Government Securities Bylaws of SEBON, 2062
Government Securities Transaction Bylaws of NEPSE, 2062
Securities Allotment Guidelines, 2068
CDS Byelaws, 2068
40
APPENDIX-6
ORGANIZATIONAL CHART OF SEBON
41
APPENDIX-7
METHOD OF INDEX CALCULATION
After purchasing the shares in primary market, it can be purchase or sale again in another
market, which is known as secondary market. This secondary market is Nepal Stock
Exchange (NEPSE). This is only one market in Nepal. The companies who issue Initial
Public Offering (IPO) to make transaction in secondary market have to list its stocks to
Nepal Stock Exchange accompanied with certain fees. After 7 days of listing the shares/
stocks, it can be transacted (purchase or sale) in secondary market (NEPSE) through the
brokers.
For example:
Suppose Bank of Kathmandu Limited issued the ordinary shares in (IPO) of 20 lakh kitta.
To create environment of purchasing or selling of shares in secondary market (NEPSE)
by ordinary shareholders, the Bank has to list 20 lakh kitta shares in Nepal Stock
Exchange. After 7 days of listing such shares, the transaction of 20 lakh kitta of BOK
start to be transacted through brokers.
214 companies are listed in Nepal Stock Exchange till Poush 2068. These companies'
shares may or may not be transacted in Nepal Stock Exchange every day. In purchasing
or selling of shares of particular company, it may be transacted in various price levels in
single day. Among the various price levels in single day, closing price of particular
company is considered to calculate the market capitalization by multiplying closing price
with number of shares listed in NEPSE. If there is no any transaction occurred during the
day for any company the closing price of prior day is considered to calculate market
capitalization.
For example:
Suppose in NEPSE Chilime Hydropower Company Limited has made following
transaction in Poush.
42
14, 15........18
To calculate market capitalization of CHCL in Poush 18, closing price of Poush 17 is not
given because in Poush 16 and 17 CHCL shares transaction does not occur in NEPSE.
Therefore to calculate market capitalization of CHCL closing price of Poush 15 is
considered.
Market capitalization= closing price (Poush 15) × no. of total shares listed by CHCL
In this Way, market capitalization of companies that are listed in NEPSE will be
calculated individually, by adding such individual market capitalization, total market
capitalization is calculated.
For example:
214 companies are listed its ordinary shares in NEPSE. First of all NEPSE calculate
market capitalization of 214 companies shares individually and sum the 214 companies
individual calculation and find total market capitalization.
Market capitalization of company 1 xxx
Market capitalization of company 2 xxx
Market capitalization of company 3 xxx
....................................................... xxx
....................................................... xxx
Market capitalization of company 214 xxx
Total market capitalization xxxx
From 30 Magh 2050, NEPSE INDEX was started to be calculated and first day index is
supposed to be 100.
43
Numerical example:
Suppose 3 companies A, B, C are listed in NEPSE(on 30th Magh 2050). Number of
shares and closing market price of individual shares are given bellow.
Company No.
of
share
listed
Closing price Market capitalization
(No of shares listed × closing
price)
Magh
30
Falgun
1
Falgun
2
Magh30 Falgun
1
Falgun 2
A 200 10 12 11 2,000 2,400 2,200
B 300 20 18 15 6,000 5,400 4,500
C 400 50 55 52 20,000 22,000 20,800
Total market capitalization 28,000 29,800 27,500
Base Nepse Index(IB)= [Total Market Capitalization/Total Amount Of share Issued
(face value).]*100%
So Nepse Index at margh 30,2050 BS(IB)=[(28000)/(28000)]*100%=100
Now after Magh 30 ,NEPSE index is calculated as follows.
It= MVt/ MVb × IB
Where,
It = Index at time
MVt = Market value (market capitalization at time)
44
MVb = Market value at base period
IB = Index at base period
Here, Base price is Magh 30
Now,
NEPSE index of Magh 30 : It= MVt/ MVb × IB
= 28000/28000 × 100
= 100
NEPSE index of Falgun 1 : It= MVt/ MVb × IB
= 29800/28000 ×100
= 106.43
NEPSE index of Falgun 2 : It= MVt/ MVb × IB
= 27500/28000 ×100
= 98.21
In Magh 30, NEPSE index calculation is started therefore market capitalization at time is
equal to market value of base period so, NEPSE is 100.
In Falgun 1, NEPSE is 106.43, in comparison to NEPSE index of Magh 1, it is increased
by 6.43. This is because total market capitalization is increased from 28000 to 29800.
In Falgun 2, NEPSE is 98.21, in comparison to NEPSE index of Magh 2, therefore
NEPSE is decreased by 8.22. This is because total market capitalization decrease from
29800 to 27500.
45
In this way, fluctuation in share price in market, NEPSE index also fluctuates
accordingly.
Suppose in Falgun 2, D company is listed with 100 kitta shares with RS 100 per share,
now there are 4 companies, so to calculate NEPSE index of 4 companies, adjustment in
based period of total market capitalization have to be made with following formula.
Adjusted base value of market capitalization=
[New market capitalization/ old market capitalization] × Base of market capitalization
before listing new shares
=[ (27,500+100*100)/27500] × 28000
= 38181.32
Now to calculate the index in Falgun 3 base price will be 38181.32 until new shares
(bonus shares or right shares) and new companies listed in NEPSE. If new companies
listed than adjusted base value will be calculated as above.
After including new 100 kitta of company “D “ NEPSE will be calculated as follows .
Company No.
of
share
listed
Closing
price
Market capitalization
(No of shares listed × closing price)
Magh
30
Falgun
1
Falgun
2
Falgun
3
Magh30 Falgun
1
Falgun 2 Falgun
3
A 200 10 12 11 11 2,000 2,400 2,200 2,200
B 300 20 18 15 15 6,000 5,400 4,500 4,500
C 400 50 55 52 52 20,000 22,000 20,800 20,800
D 100 - - - 100 - - - 10,000
Total market capitalization 28,000 29,800 27,500 37,500
NEPSE index of Falgun 3 : It= MVt/ MVb × IB
46
= 37500/38181.32 ×100
= 98.21
In Falgun 3, NEPSE is 98.21, equal to NEPSE index of Falgun 2, therefore NEPSE is
Constant . This is because there is no change in market capitalization except the new
listed share of Rs 10000 .
Other Index
Float Index:
NEPSE started calculating float index from Bhadra 26, 2065 (Base Date). This index
represents the market capitalization of securities which are floated to public. Float index
excludes promoter’s holding, government holding, strategic holding and other locked in
shares like employees share- that will not come to the market for trading in the normal
course. It takes into account the securities held by general public that are readily available
for trading in the market.
HOW TO CALCULATE ?
Float Index =[ Current MV of all shares listed in NEPSE floated to general public/ MV
of shares in Base year] *100
Base year is 26th Bhadra, 2065 or 11th September 2008.
Sensitive Index:
Sensitive index is the index calculated from the market capitalization of companies
classified under group “A”.
47
HOW TO CALCULATE ?
Sensitive Index =[ Current MV of all shares listed in NEPSE under Group “A”/ MV of
shares in Base year ] *100
Base year is 26th Bhadra, 2065 or 11th September 2008.
Sensitive Float Index:
Sensitive float index represents the market capitalization of securities of companies listed
under group “A” which are floated to public.
HOW TO CALCULATE ?
Sensitive Float Index = [Current MV of all shares listed in NEPSE under Group “A”
Floated to public / MV of shares in Base year] *100
Base year is 26th Bhadra, 2065 or 11th September 2008.
WHY OTHER INDEX ??
The standard NEPSE index is designed on a “Market Capitalization- Weighted”
methodology, where stocks with the largest market capitalization carries the greatest
weight in the index, thus making the value of the index very vulnerable to the price
movement of such companies. The companies like Nepal Telecom, Nabil Bank and
Standard Chartered Bank comprises approximately 32% of the entire market in terms of
market capitalization. So any changes in price of the shares of these company impacts the
index substantially. Commercial banks, development banks and finance companies
together comprise of almost 70% of the entire market in terms of market capitalization
and Nepal Telecommunication claims 18% of the weight of the market. Most of the
shares of these companies are held by promoters and by government in case of NT, which
are not available in market for trading.
48
The NEPSE index takes into account all the promoter shares, government holdings,
strategic shares, employee shares and all other locked in shares while calculating the
index which gives a distorted picture of the overall market performance to the investors.
So, NEPSE introduced float index and sensitive float index to give more realistic picture
of the market performance to the investors. Free –float methodology refers to an index
construction methodology that takes in to consideration only the free float market
capitalization of a company for the purpose of index calculation and assigning weight to
stocks in index. A free float index reflects the market trends more rationally as it takes
into consideration only those shares that are available for trading in the market or the
shares issued to general public. It excludes promoters’ holding, government holding,
strategic holding and other locked in shares like employee shares. The market
capitalization of each company is reduced to the extent of its readily available shares in
the market and reduces the concentration of the top few companies. In this way big
companies with sizeable amount of locked in shares are also included while preventing
their undue influence on the index at the same time. The undue influence of large number
of locked in shares is checked. It will give the investors more clear picture of the real
market and boost their confidence.
Source: Soban Kumar Khadka