Capital Market in Nepal Year III Semester V PDF

Shreejan Bhandari/ Yukta Amatya Capital Market in Nepal Year III Semester V Contents Introduction to the capital market Functions of the capital market Participants of capital market Primary market Secondary market Regulatory Framework Market Efficiency Trading Mechanism Risks and...

Shreejan Bhandari/ Yukta Amatya Capital Market in Nepal Year III Semester V Contents Introduction to the capital market Functions of the capital market Participants of capital market Primary market Secondary market Regulatory Framework Market Efficiency Trading Mechanism Risks and Challenges  Capital Market A capital market is a financial marketplace where individuals, corporations, and governments raise long-term funds through the issuance and trading of financial instruments. The two primary components of capital markets are the primary market and the secondary market. The primary market involves the issuance of new securities, enabling companies and governments to raise capital directly from investors. On the other hand, the secondary market facilitates the trading of existing securities among investors without the involvement of the issuing entity.  01. 02. Capital Price Allocation Discovery Functions of 03. Capital Markets 04. Risk Liquidity Management Provision Key Participants Investors: Individuals and institutions purchasing securities. Issuers: Entities (government, corporations) issuing securities to raise capital. Intermediaries: Brokers, merchant banks, and other financial institutions facilitating trades. Merchant Banks They are institutions accredited by SEBON for doing Merchant Banking Activities. MBA includes 6 major businesses: Issue Management RTA/RTS Underwriting Portfolio Management Corporate Advisory Fund Management Merchant Banking Activities Issue Management : Support Institutions to issue their securities (Equity/Debt) to the public via private placement or Public Offering Registrar to Shares (RTS) and Registrar and Transfer Agents (RTA): Support Institutions to keep up-to-date regarding the books of Directors, Basic Shareholders and Shareholders. Also they keep the records of the signatures and help verification of signatures in an General Meeting (AGM/SGM). Moreover, they provide the shareholders list to the public Merchant Banking Activities Underwriting: During a public offering, the underwriters provide assurance to the issuing company that they will purchase the unsubscribed portion of the public offering and making the issue fuly subscribed as per the need Portfolio Management: Manage the wealth of the client and investing in Cash, Listed Equity and Debt and in Fixed Deposits to maximize the returns for their clients. They either directly make decisions or provide suggestions to the clients Corporate Advisory: Provide support to the institutions in maintaining their Capital structure, develop business plans/feasibility study, provide financial valuation and help the company collect equity and debt (loan syndication) that is not a public offering (deal brokerage service). Also they provide other specific services as per the need of the client/institution Merchant Banking Activities Fund Management Mutual Funds:They are a type of portfolio service that collects small amount of the public, invest in the listed stocks/debentures and Fixed Deposits (Bank Deposits) and try to maximize the returns for their unit holders. Close Ended- The fund has a tenure and is traded in NEPSE Open-Ended- The fund does not have a tenure and is traded via the Fund Manager itself The unit price is usually Rs 10 per unit SIF: They are high risk fund usually catering to high net worth clients where they invest in listed/unlisted equity/debt and provide high return to the clients. One unit is of SIF is no less than Rs. 5 million. They are also classified as either Private Equity, Venture Capital or Hedge Fund Primary Market It is the market where institutions place their fresh offering to the public. It can be done in one of the following ways: IPO- When for the first time the institution offers their shares to the public (freshly issued), it is the Initial Public Offering. In Nepal, IPO can be issued at par, at premium or price is discovered through Book Building Process FPO- When the institution offers their freshly issued shares to the public after their IPO, it is called FPO. For FPO, it can only be either issued at par or at premium Right Offering- When institutions issues freshly stocks but is reserved for current shareholders, it is called right offering Primary Market It is the market where institutions place their fresh offering to the public. It can be done in one of the following ways: Private Placement- When institutions do not go for the public but contact businesses/individuals directly, it is called private placement IPO equivalent of Mutual Funds is called New Fund Offering (NFO) Debt is also issued via IPO process or via Private Placement (40% - 60% respectively) Secondary Market It is the place where the securities are traded after they have been issued through the primary market In Nepal, NEPSE is the only Secondary Market for trading of Shares/Debentures and listed Mutual Funds Rationale IPO: Businesses usually issue IPO for the following reasons: To increase the capital base of the company To increase the public participation in the management and have expert seat in the BOD (Many minds Many thoughts, prudent regulation) To increase public awareness of the company and increase their trustworthiness For regulatory purposes (BFIs mandated to issue 30% shares to the public) Rationale FPO: It is issued when After issuance of public offering and 5 years have passed and the company requires additional capital When the existing shareholders cannot meet the increased capital demand For regulatory purposes Right Offering: It is usually issued when When the company has shareholders that can support in increasing the share capital and if the company do not want to dilute the shareholding structure Initial Public Offering Initial Public Offering is the process of offering shares of company to the public for the first time. IPO Process 01. Preparation 04. Setting IPO Price the Regulatory 02. Approval 05. Public Issue 03. Roadshow 06. Listing Prospectus Introduction to the company and company history Products and Services provided by the company including intellectual property Introduction to their basic shareholders, BOD and Management team Financials of the Company (Past 3 years to projection of additional 3 years) Material Information related to the company which might impact the decision making of the prospective shareholders Rationale of valuation (Incase of Premium and Book Building) The usage of fund injected and business plan of the company Details regarding how, when and in what way investors can apply for the IPO/FPO/Right/NFO  Demat Account Demat account is an account that is used to hold securities in an electronic form. The full form of Demat account is a dematerialization account. Demat account provides facility of holding shares and securities in electronic format. During online trading, shares are bought and held in a Demat account, thus facilitating easy trade for the users. The purpose of dematerialization is to eliminate the need for the investor to hold physical share certificates and facilitating a seamless tracking and monitoring of holdings. Features of Demat Easy share transfers Easy conversion Pledging securities and provide loan Freezing Demat accounts Multiple accessing options Speedy Facility Corporate benefits & actions Advantages of Demat Lower Risks Easy Holding Odd Lots Reduced Costs Reduced time Disadvantages of Demat Annual maintenance charges Tech savvy High frequency of share trading C-ASBA Registration Number (CRN) The full form of CRN is Centralized Applications Supported by Blocked Amount (C-ASBA) Registration Number. It is the special number provided by a bank to its client for the share related activities (applying for IPO,FPO,NFO, right share). CRN has to be provided while applying as a confirmation on the bank account of the investor. The bank then holds the said amount as application for IPO, FPO, NFO, Right share issue Factors to be considered while investing in primary markets Public announcement of issuing company Prospectus of the issuing company Promoter of issuing company Management of the issuing company Financial position (Net worth, profit loss position etc) Financial plan Risk position of the company Credit rating of the company Securities Board of Nepal SEBON was established by Government of Nepal on June 7, 1993 as an apex regulatory body of Securities Markets. It has been regulating the market with power conferred by the Securities Related Act, 2006. SEBON has been given the power to regulate and manage the activities of the securities markets and persons involved in the business of dealing in securities by regulating the issuance, purchase, sale and exchange of securities for the purpose of protecting the interests of investors in securities, by developing the capital market to mobilise necessary capital for the economic development of the country. Functions of SEBON Provide advice to Government on matters related with the development of capital market. Issue necessary securities regulations and directives. Register the securities of public companies. Regulate and systematize the issue, transfer, sale and exchange of registered securities. Issue license to operate stock exchange. Issue license to stock broker, dealer, merchant banker and fund manager. Issue license to depository company, depository participant and credit rating agency. Register mutual funds, grant permission to operate collective investment schemes, and supervise and monitor them. Functions of SEBON Approve the bye-laws of stock exchange and depository company. Take necessary actions to prevent insider trading or any other offenses relating to transactions in securities in order to protect the interest of investors in securities. Establish coordination and exchange cooperation with appropriate agencies in order to supervise and regulate matters concerning securities or companies. Discharge or make arrangements for discharging such other functions as are necessary for the development of the capital market. SEBON regulates NEPSE CDSC Credit rating company Stock broker Merchant banker Issuing Company Listed Companies Mutual fund Depository participants C-ASBA institutions Securities Act 2006 The Securities Act, 2006 along with various regulations and guidelines, made by the power conferred by the Section of 116 of the Act provides a legal basis for the regulation of securities markets in Nepal. Features Regulate the issue and trading of securities. Protect the legal rights of investors. Develop the capital market to mobilise necessary capital for the economic development of the country. Promote the development of a broad-based economy. Nepal Stock Exchange (NEPSE) Nepal Stock Exchange (NEPSe) plays a crucial role in the financial landscape of Nepal, serving as the primary platform for securities trading in the country. The Nepal Stock Exchange, established in 1993 NEPSE was established under the Securities Act, aiming to provide a regulated and transparent marketplace for securities trading. Functions of (NEPSE) To facilitate the buying and selling of various financial instruments, primarily stocks and bonds. Allowing liquidity and valuation of the company's worth Fostering economic growth by channeling savings into productive investments Serves as a barometer of the country's economic health Maintaining fair and transparent trading practices NEPSE Index A stock market index tracks the movement of a market as a whole. A security market index is also a number that indicates the movement of the overall securities’ prices in the secondary market. In other words, securities market indexes have been constructed to give a quick answer to the question: what is the market doing? An index is an indicator that indicates or represents the changes in the values between two distinct time periods; a base time period and another particular time period. CDS & Clearing Ltd. CDS and Clearing Ltd. is the sole depository in Nepal established in 2067 B.S. under Company Act 2063 with an objective to render service of dematerialization of securities. It is a subsidiary company of Nepal Stock Exchange Ltd. (NEPSE). The authorized capital and issued capital of CDSC is NRs. 500 million and NRs. 300 million respectively. The parties involved with CDSC includes depository participant, issuer, registrar and transfer agent (RTA) and stock brokers. The major objective of CDSC is to render the service by dematerializing the securities CDS & Clearing Ltd. Deposit, withdrawal and transfer of securities, Electronic credit of securities directly into the investor’s demat account allotted in primary market. To safeguard the investors’ securities into the electronic form and to debit/credit the particular investor’s account as per the transactions. Quicker distribution of securities allotted by issuers under IPO & corporate actions and benefits of the issuers, To provide secure and convenient electronic procedures for pledge and unpledge of securities. To provide updated statement and reconciliation statement.  Efficient Market Hypothesis (EMH) The Efficient Market Hypothesis (EMH) is a theory in financial economics that suggests that financial markets are efficient in processing and reflecting all available information. In other words, it posits that asset prices in financial markets already incorporate and reflect all relevant information, making it difficult or impossible for investors to consistently achieve higher-than-average returns through analysis or trading strategies. The Efficient Market Hypothesis was developed by economist Eugene Fama in the 1960s and has three main forms: 1. Weak Form Efficiency 2. Semi-Strong Form Efficieny 3. Strong Form Efficiency Trading Mechanism Trading mechanism consists of offline and online methods Terms used in TMS TMS = Trading management system NOTS = NEPSE online trading system DNA = Direct NOTS Access LTP = Last Traded Price CLI = Client CNC = Cash and Carry EQ = Equity BO = Bracket Order Trading Mechanism Terms used in TMS MF = Mutual fund NCD = Non-convertible debenture PS = Preferred stock WS = Warrants PCD = Partially convertible debenture FCD = Fully convertible debenture Trading Hours Cost of buying and selling of securities Cost of buying and selling of securities Index Based Trading Halt Price Changes Factors to be considered while investing in secondary market Dividend announcement Right share issued by the company Change in the management Future plan of the company Financial indicator of the company (EPS, DPS, P/E ratio, Net worth per share, Price to book ratio, capital adequacy ratio, Non performing loan (NPL) to total loan etc), Trend of price, and Minute of Annual General Meeting. Technical Analysis  Issues & Challenges Lack of Investor Awareness and Education Market Infrastructure and Technology Regulatory Challenges Insider Trading and Market Abuse Financial Market Globalization Market Concentration Risk Management Market Volatility