project work report on nepse and sebon

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

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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

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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

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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

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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

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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

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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

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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.

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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.

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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

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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.

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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

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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).

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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

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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.

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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.

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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.

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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

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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.

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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,

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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.

http://en.wikipedia.org/wiki/Mortgage_loan

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

http://financial-dictionary.thefreedictionary.com/Registration+statement

http://financial-dictionary.thefreedictionary.com/Issue

http://financial-dictionary.thefreedictionary.com/Security

http://financial-dictionary.thefreedictionary.com/Annual+report

http://financial-dictionary.thefreedictionary.com/Quarterly

http://financial-dictionary.thefreedictionary.com/Securities+%26+Exchange+Commission

http://financial-dictionary.thefreedictionary.com/Market

http://financial-dictionary.thefreedictionary.com/Expensed

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

http://www.wisegeek.com/what-is-an-auction.htm

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


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.


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

http://en.wikipedia.org/wiki/Share_(finance)

http://en.wikipedia.org/wiki/Economic_growth

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


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


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



....................................................... xxx

....................................................... 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


= 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


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


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


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

project work report on nepse and sebon

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