Nepal Stock Exchange (NEPSE)
The Nepal stock exchange, in short, NEPSE, is established under the law of the company, which operates under the 1983 Stock Exchange law.
History of Nepal Stock Exchange (NEPSE)
The history of the stock market began with the listing of shares of Biratnagar Jute Mills Ltd. and Nepal Bank Ltd. in 1937. With the Introduction of the Companies Act in 1964, the first issue of government bonds in 1964, the establishment of Securities Exchange Center Ltd. In 1976 there was another significant development related to capital markets.
The Securities Exchange Center was established with the aim of facilitating and promoting the growth of capital markets. Before the exchange, it was the only institution in the capital market to carry out the work of intermediation, subscription, management of public issues, creation of a market for government bonds and other financial services. The government of Nepal, as part of a program to reform capital markets, converted the Stock Exchange Center in the Nepal Stock Exchange in 1993.
Member in Nepal Stock Exchange (NEPSE)
Members of the NEPSE can act as intermediaries in the purchase and sale of government securities and listed corporate securities. At the moment, there are 50 member brokers, operating in the commercial market in accordance with the Securities Exchange Act of 1983, rules and regulations.
In addition to this, NEPSE has also granted membership to a securities dealer (distributor) of issue and sales. The issuer and sales manager works as an issuer manager and the subscriber of the public issue of securities, while the securities operator (trader) works as an individual portfolio manager.
Membership is for one year. The license must be renewed within 3 months from the end of the fiscal year. Otherwise, you can do it within another three months by paying a 25% penalty.
Board of Directors in Nepal Stock Exchange (NEPSE)
The Board of Directors of NEPSE consists of nine directors in accordance with the Securities Exchange Act, 1983; six directors are nominated by the government of Nepal and different institutional investor. Two from the licensed members and the General Manager of the NEPSE is Ex-Officio Director of the Board.
Capital Structure in Nepal Stock Exchange (NEPSE)
The authorized capital of the exchange is Rs. 50 million. The issued capital is Rs.30 million of this, Rs 26.39 million is subscribed by Government of Nepal,
The listing fee and the annual fee to be paid by the listed company is based on the issued capital of the company.
Trading System in Nepal Stock Exchange (NEPSE)
NEPSE has adopted an “online system” for the trading purpose. It means transactions of securities are conducted using the internet. The market makers quote their bid and offer price on their own website. Once the bid and offer price matches, contracts between the buying and selling brokers or between the brokers and market makers are concluded.
Stock Market Development
Although the role of the financial sector in the economic development of a nation remained controversial for some time, recent theories in finance suggest that stock market does promote long- term growth (Duke, 1999; 36). Development of equity markets in any country requires political and economic stability and growth-oriented policies as pre-condition.
At the second stage, equity prices rise and the investors gradually gain confidence in the equity market. They accept equity as an alternative to traditional bank deposits and government securities. Equity markets gain more credibility and market liquidity increases.
Investors long for rising in risk-adjusted returns and demand a wide variety of securities to match their risk preferences. Rules and regulations are refined and the equity markets start functioning on the basis of self-discipline, equity markets at this stage gradually get integrated into the international markets and attract foreign investors.
At the third stage, equity markets become an integral part of the overall financial system. Investors get higher, less volatile returns and easily absorb new issues of stock and bonds. The volume of trading increases as the equity markets become more liquid and firms go for initial public offerings to replace their debts.
At this stage a mechanism for risk transfer develops, creating markets for equity and currency hedging instruments such as derivatives and index products. At the final stage, the equity markets get highly integrated with the global markets and the equity premiums match the internationally competitive levels. Equity markets at his stage achieve stable growth and attain a mature state.
Despite its history of more than 25 years with respect to the above – mentioned observation, the equity market in Nepal has barely entered the first stage of development. Due to current political and economic instability, absence of growth-oriented policies and weak regulatory framework of the stock market has failed to gain investors’ confidence.
Unavailability of timely information and weak supervision and monitoring has made the stock market highly risky for general investors. Investors have not yet accepted investment in stock as an alternative to bank deposits and government securities except in the case of stock of some commercial banks (K.C. and Snowden, 1997: 1083).
By encouraging and dissemination of information, stock markets reduce the cost of mobilizing savings and facilitate investments. Well-developed stock markets enhance the efficiency of the market for corporate control by mitigating the agency problems between the stock owners and managers. In countries where stock discipline is effective, firms tend to be more productive, thereby creating more wealth per unit of money invested (Diamond and Verecchia, 1982: 275).
Stock markets help the expansion of economic activity by providing liquidity to financial assets traded in them. Investments in real assets require long- term commitment of capital, however, investors are reluctant to commit their investment less risky because they allow savers to buy and sell financial assets they hold cheaply and quickly and restructure their portfolios any time according to their risk-return preferences.
At the same time, firms enjoy permanent access to long-term capital through equity issues. By making assets less risky and providing easy access to a permanent source of capital, liquid stock markets improve the allocation of resources, boost investment and enhance long- term economic growth by encouraging investor myopia.
It is argued that such stock markets may weaken investor’s commitment to exert corporate control because they prefer to sell the stocks of the misgoverned companies rather than to monitor and force managers to improve their performance. However, empirical studies suggest that greater stock market liquidity boosts and in many cases precede economic growth.
Regulation of Security Markets
Securities market should be strictly regulated to stop the malpractices and to develop efficiently. Securities Board (SEBON) of Nepal is the supreme body to regulate the Nepalese securities markets. It was established on 26 May 1993 under the provision of the Securities Exchange Act, 1993.
The objective of the board is to promote and protect the interest of investors by regulating the securities markets, not only these, to regulate, monitor, direct and coordinate the entire capital market is also the objective of the SEBON. SEBON works under the Ministry of Finance (MOF). SEBON regulates both primary and secondary markets.
To regulate primary markets different acts and laws have been passed are made under the act as well as the Company Act, 1997. The related regulations and guidelines are Securities Exchange Regulation 1993, Securities mandatory to take services of an issue manager by the issuing companies.
To regulate secondary markets as well as the members, different Acts like Member of Stock Exchange and Transaction Byelaws 1998, and securities listing Byelaws 1996 have been passed, SEBO also monitors whether the activities carried out by the NEPSE are in accordance with the above laws or not. Similarly, SEBO regulates all the members of the secondary as well as primary markets like issue managers, stock brokers, dealers, market makers, and corporations.
Major Regulating Agencies
Three government agencies, viz. Securities Board, Company Registrar’s Office, and Nepal Rastra Bank are involved in approving and registration of public issues. Though Securities Board is the only regulatory body in the securities market to supervise and regulate the overall functioning of the market, the functions performed by other two agencies seem to of duplication of works.
Here, how all three bodies work in approving and registering the public issue are elaborated.
Securities Board is empowered by Securities Exchange Act 2040 for the development of the capital market, protection of Investor’s interest, approval of stock exchange, regulation of market intermediaries, secondary and primary markets, mutual funds and conducting investment awareness programs for various interest groups. When the prospectus is submitted for the registration purpose, the securities board betting and if disclosures in the prospectus are found then Board registers the securities to be issued in the public and grants permission on it.
Nepal Rastra Bank, the central bank, approves prospectus when banks and finance companies propose a public issue. It also gives permission to issue debentures in the public along with the approval on the interest rate on debentures and bonds. Under NRB directive bank and finance companies are required to issue shares equivalent at least 30 and 40 percent in both situations if they have foreign joint venture stake.
Company Registrar’s Office
The company Registrar’s office is the only agency where companies are registered. It monitors the operations of the companies and makes arrangements for winding up of the companies when required. Approval on the prospectus is granted by the company Registrar’s office only. Before granting an approval it obtains the advice/opinion from the securities board and for banking and finance companies opinions/advice on the prospectus is taken from Nepal Rastra Bank too.
Nepal Stock Exchange
While issuing securities to the general public consent should be obtained from the NEPSE. For this, the issuing companies and issue managers are required to submit the prospectus.
When a public issue is made by an insurance company, the insurance board also performs the vetting of the prospectus as it is done by Nepal Rastra Bank.
Concerned Ministers of Government
The companies which are incorporated by special acts are required to get their prospectus approved from concerned ministers. For example, companies such as Nepal Investment Trust, Rastriya Beema Sansthan, Nepal Industrial Development Corporation are under the preview of the Ministry of Industry and Ministry of finance.
Thus the prospects of these companies are required to be approved by the ministry of industry and ministry of Finance instead of the company registrar’s office.
Author: Hari adhikari
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