CAPITAL / STOCK MARKET OF NEPAL

Introduction of Stock
Normally, the stock of any organization constitutes the equity stake of its owners. It
represents the residual assets of the company that would be due to stockholders after discharge of
all senior claims such as secured and unsecured debt. Stockholders equity can not be withdrawn
from the company in a way that is intended to be unfavorable to the companys creditors.
Stock Exchange
A stock exchange is a form of exchange which provides services for stock brokers and
traders to by or sells stocks, bonds on other securities. Stock Exchange also provides facilities for
issue and redemption of securities and other financial instruments, and capital events including
the payment of income and dividends.
History of Stock Market in the world

Amsterdam Stock Exchange in 1602 in the city of Amsterdam, Netherlands. Paris

Bourse in 1724 in Paris, France.

Philadelphia Stock Exchange in 1790 in Philadelphia, USA.
London Stock Exchange in 1801 in London, England.
o However, a market had existed previously (with records beginning in 1698: agro-

commodity) at Jonathans Coffee House, also in London.

Milan Stock Exchange in 1808 in Milan, Italy.
New York Stock Exchange in 1817 in New York, USA. This exchange was preceded by

the Buttonwood Agreement of 1792.

Frankfurt Stock Exchange in 1820 in Frankfurt, Germany. 1820 denotes the first records
of shares being traded. There was, however, a market for bonds (debt instruments) since
the late 18th century.

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Bolsa de Madrid in 1831 in Madrid, Spain.

Toronto Stock Exchange in 1861 in Toronto, Canada.
Australian Stock Exchange in 1872 in Sydney, Australia.

History of Stock Market in the Nepal

Stock market began with the issue of shares by Biratnagar Jute Mills Ltd in 1937.

Security Marketing Centre (SMC) was established in April 1977 under Industrial Policy,
1974 with the objective of facilitating the transaction of government development bonds
and corporate securities.

SMC started secondary trading of securities in November 1981 which restricted to

government bonds.

Security Exchange Act, 1983 was enacted in 1983.

The then SMC was converted into Securities Exchange Centre (SEC) in 1984. SEC
opened its floor for corporate share trading in November 1984.

The first amendment in Securities Exchange Act, 1983 in 1993 paved the way for the
restructuring of stock market in Nepal, which led to establish Securities Board of Nepal
(SEBON) in 1993 with a mandate to regulate and develop the stock market.

The first amendment in the Act also led to convert the then SEC into NEPSE, a fullfledged open-out-cry trading system with the induction of stock brokers in January 13,
1994.

Central Depositary System

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In the context of global, central depositary system is not new to stock market. But in the
case of Nepal, it is regarded as the innovation in the stock market. The CDS provides its services
within an online computer system with Participants having direct online access to the system.
Trades are settled within a rolling T+3 settlement cycle on a strict Delivery versus Payment
(DvP) basis. Final and irrevocable transfer of funds occurs through the central bank with sameday funds on settlement date. The CDS has established a Guarantee Fund to guarantee the
settlement of transactions in the event of a default by a Participant. The Fund is managed by a
Business Conduct Committee that monitors operations relating to risk management.
Central Depositary System in Nepal
Several activities have already taken place in order to substitute the present paper versus
payment settlement system by an independent electronic computerized central depositary system.
The formation of a three member committee by the government under the chairmanship of the
Securities Board of Nepal is regarded as key in the process of adapting the CDS.
The story of Central Depositary System and clearing turned true after the formal
inauguration of the Central depositary on 31, March, 2011 by Yuvraj Khatiwada. At the same
time the software was handed over by Ambassador Rakesh Shud from Embassy of India which
was prepared by Tata Consultancy. Operation of CDS system will open the new era in capital
market of Nepal as it will wipe out inconsistency and manipulation in stock trading as every
transaction and executer can be easily traced out. The safety, security of physical holding to
electronic medium will eliminate thefts, interceptions and subsequent.

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The capital market regulator has expressed hope that the operation of central depository
company will change the face of the secondary market. Since the operation of Central
Depository System (CDS) will displace manual share transfer with automated system allowing
the hassle free participation of investors outside the valley in trading due to easier settlement,
moreover CDS is supposed to promote securities market in the cities outside the capital where
despite the presence of brokerage services the difficulty of share transfer and settlement has
discouraged the transaction.
As per the website of the Security Board of Nepal, Earlier, the board had refused to
approve the CDSC bylaw and directed it to revise the fee structure as the transaction would have
been expensive affair for the investors. The current fee structure is determined at minimum
threshold so that company will be at break-even point.
The regulator has not yet given membership to the depository participants that are an
integral part of central depositorys settlement process. The depository participants will hold the
investors records in a dematerialized form. They will act like bank for the securities while
CDSC is going to be the clearing house that will settle the account after each share transactions.
According to the CDS Regulation-2068 any a bank or financial institution, stock broker,
registrar and transfer agent, custodian or such other entity as may be prescribed by the board
from time to time. The depository participants need to have Rs 1 million net worth to get license.

Merchant bankers seem to be better suited as depository participants due to net worth and
infrastructure which brokers lack but the adjustments might be made in order to include the stock
brokers as depository participants.
The operation of CDSC will contribute in higher number of transaction as

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dematerialization of physical scrip will make multiple transactions possible in a single day. The
CDSC will deposit the bonus shares and shares bought in public offerings automatically in the
investors account at depository participants. The listed companies need to apply to get their
shares dematerialized to CDSC within the six months of its operation.

PEST Analysis (political, Economical, Social and Technology)

The Pest analysis of Nepal capital market evaluates the external macro-environment of
this market from the point of view of the Political, Economical, Social and Technological factors
who can give us the possibility to understand market grow or decline, potential and direction for
operations. These affect all firms belonging to the analyzed market, factors which usually are
beyond the firms control and sometimes present themselves as threats, but however, changes in
the external environment also create new opportunities. The pest analysis takes into the
following factors:
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Political:

Current legislation of the market, regulatory bodies and processes,

government policies, trading policies.

Economical: Nepalese economy situation, economy trends, general taxation issues,

taxation specific to product/service, market and trade cycles.

Social Factors:
Number of inhabitants, consumer attitudes and opinions, media
views, law changes affecting social factors, buying access and trends, advertising and

publicity.
Technological Factors :

Information and communication, mechanisms/technology,

innovation potential, global communication.

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SWOT analysis (Strength, Weaknesses, Opportunities and Threats)

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Strength:
High number of executives which make the work of customers very convenient.
Share market funds provide same day liquidity, allowing investors to redeem

their shares.
Share market funds offer investor market-based yields
Share market funds provide a low-cost cash management vehicle for retail and
institutional investors. In part, stock market funds achieve low cost through
economies of scale-pooling the investments of hundreds to thousands of retail

investors, sometimes with the large balances of institutional investors.

Weakness:
No guarantee of, and investors are explicitly warned that money market
funds seek to offer investors return of principal may not always be

possible.
Less awareness among general masses about the different services
provided by agencies.
Inflation and Deflation rate is high.
Nepal too much depends on loan.
Nepal is facing financial pain despite healthy banks.

Opportunities:
Opportunity to remind funds that purchase of illiquid securities.
This could be the board the opportunity to question the most
knowledgeable people directly and to confirm that the adviser is

dedicating sufficient resources to credit analysis.

We probably would change the way we manage our short-term portfolio if
NAV was allowed to fluctuate, but I guess it would depend on the degree

of fluctuation.
The recent market events, although painful afford the money market fund
industry the opportunity to assess the regulations that govern its

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operations, and the more stringent practices adopted by some money

market funds that go beyond those regulations.
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Threats:

Reorganization of agencies of stock market structure. The all agency have

started to redefine their objective to attract customers attentions.

A few stock markets have been permitted to increase their number of
branches and its entry has talked directly solve out the problem of
investors.

The conclusion of the PEST analysis of the Nepalese Capital Market from the point of
view of the political, Economical, Social and Technological Factors are spitted in the four
categories of a SWOT analysis: Strength, Weaknesses, Opportunities, and threats. The scope of
using both of analysis is to analyze from all the aspects the Nepalese Capital Market and to
identify which are the strength, weaknesses, opportunities, threats on this market.

Five model of stock market:

The model of pure competition implies that risk-adjusted rates of return should be constant
across firm and industries. While some people see equity investing as a technical exercise that
involves analyzing price charts and others see it as a purely quantitative process that involves
estimating the value of the company based upon its share price near-term earnings potential
compare to competitors.
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Threats of entry:

also known as barriers to entry, this concept involves the analysis

of how easy it is for new investor to enter the industry and consequently compete-away

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the profit currently earned by existing investor within the industry. Porters list the

following barriers to entry

Economies of scale
Product differentiation
Capital requirement
Cost advantage independent of size
Access to distribution channels.
Power of Suppliers: where suppliers can exert power over a particular business or
industry due to their possession of a stronger competitive position, it is almost certain that
such a group of suppliers will raise prices and or restrict output in order to improve their
own rerun on capital at expense of the buyers. Normally, investor himself as regarded as

the supplier in the selling process.

Power of Buyers:
similar to those that face powerful suppliers, companies that strong
buyers- or buyer group- can fund that they or forced to offer favorable prices or credit
terms in order to retain customers. In the stock market, investor himself is considering as

the buyer.
Threat of Substitutes: porter notes that where a product or service is unique, companies
are able to charge much higher prices than if the face completion from alternatives.

Degree of Rivalry:
This includes:

Exit barriers
Industry concentrations
Fixed costs
Corporate stakes

Benchmarking of Capital Market:

CAPITAL / STOCK MARKET OF NEPAL

When evaluating the performance of an investment, its important to compare it against

an appropriate benchmark. In the financial field, there are dozens of indexes that analysts use to
estimate the performance of any investment.
Most investors use Net Multiple and Net IRR as performance measures. The combination
of Multiple and IRR helps control for the assumed performance persistence and timing
dependency of IRR. Recently, net DPI has emerged as an additional indicator of performance.
Investor like that DPI quantifies actual returns rather than anticipated return as indicated by
Multiple and IRR.
With fund performance numbers in hand, benchmarking is the default answer for finding
future winners in the market. Investors use peer benchmarking in an asset class to understand
relative performance. For this work, benchmarking datasets need to cover a representative set of
funds for a given time period, market focus and geographic exposure.
As we know that, while peer benchmarks are relative, investor portfolio returns are
absolute. We rarely talk about this insight in the private equity and venture capital industry. To be
clear, a first quartile private equity funds can be the worst performer in multi-asset portfolio or
vice versa. This has led investors to look to public market equivalence benchmarking as way to
quantify public returns relative private fund returns.