A STUDY ON NEPALESE STOCK/SHARE MARKET

Mob and Riot Management Training School

Lamapatan, Pokhara

Individual Research Paper

Submitted to Mob and Riot Management Training School
In partial Fulfillment of Requirement for the S.N. 15(kha)
ASI Basic Course

Submitted by

ASI CADET NAMARAJ SHAHI

May 2024

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 TABLE OF CONTENT
Page
Table of Content List
of Tables List of
Figures
List of Abbreviations

CHAPTER - I
INTRODUCTION

1.1 Background of the Study 1

1.2 Statement of Problem 3
1.3 Objective of the Study Significance of the Study Limitation of the Study 4
1.4 Organization of the Study 4
1.5 5
1.6 5

CHAPTER - II REVIEW OF LITERATURE

Conceptual Frame-work
Financial Market
Types of Stock Market 6
Securities Board of Nepal 6
Regulation of Security Markets 7
Major Regulating Agencies 8
Review of Thesis 10
2 . 3 . Securities Market 10
12
15
16
17
18

2.3.1 Stock Market

2.3.2 Classification of Common Stock Participants in Stock Market
2.3.3 CHAPTER - III
RESEARCH METHODOLOGY

Introduction19
Research Design19
Population and Sample19
Sources of Data19

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3.5 Data Collection Technique Tools of Data Analysis 20
3.6 3.6.1Arithmetic Mean 21
Diagrams and Graphs 21
21
3.7

CHAPTER IV
DATA PRESENTATION AND ANALYSIS
Presentation and Analysis of Secondary Data
Analysis of Number of Listed Companies 22
Analysis of Paid –up Value 25
26

CHAPTER - V
SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 Summary
5.3 Recommendation Reference 29
30

3
 LIST OF FIGURE

Table Page
4.1 Amount of Issue approval and number of issue approval 23
4.2 Number of listed company 25
4.3 Paid of –Value 27

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 LIST OF FIGURE

Figure No.
4.1 Trend of Amount of Issue Approval
4.2 Trend of Number of Issue Approval 24
4.3 Increase or decrease in Number of listed Company's 26
4.4 Increase and Decrease in Paid – up Value 27

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 ABBREVIATIONS

AGM: Annual General Meeting

AMEX: American Stock Exchange
B.S: Bikram Sambat
BODs: Board of Directors
BSE: Bombay Stock Exchange
CATS: Computer Assisted Trading System
CBS: Central Bureau of Statistics Fig: Figure
FM: Frequency Modulation
GDP: Gross Domestic Product
HMG: His Majesty Government
i.e : That is
Ltd: Limited
NEPSE: Nepal Stock Exchange
SEBON: Security Board of Nepal
SEC: Security Exchange Centre

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 CHAPTER - I
INTRODUCTION

1.1 Background of the Study

Capital Markets are the markets consisting long-term securities issued by the
government or a corporation. Capital Market typically relates with financial assets
which have life spans of greater than one year. Capital Market is a means through
which scattered saving and investable resources are converted into actual investment.
Capital market is one of the several factors that play a Prominent role in the economic
development of the nation (Levine and Zervos,1998: 1-3). The saving institutions
such as banks, investment trusts or companies, specialized financial corporations and
stock exchanges are some of the important constituents of capital market (Bolton and
Thadden, 1998;5). The primary role of capital market is to allocate the economy’s
capital stock among various productive sectors (Fisher and Jorden, 2000:23). Capital
invested in such sectors acts as seed money and generates more funds for further
investments. No modern corporation of any size can function effectively without
ready access to capital markets at the lowest possible cost (Bernstein, 1987:54).
Nepalese Stock Market is very small as compared to other neighbor countries. Capital
plays a vital role in the economic development of a country. Being a capital deficient
country, Nepal has to make every endeavor to mobilize available capital effectively.
Securities are financial assets. Securities market share mechanism created to facilitate
the exchange of financial assets. Therefore, the market exists in order to bring
together the buyers and sellers of Securities. Capital market is the mechanism
designed to facilitate the exchange of financial assets by bringing orders from buyers
and sellers of securities together. Stock market has been global phenomenon in the
present world regardless of the size of any particular region.
Securities Market is place where buying and selling of securities take place in
an organized way. The parties involved in Securities Market are investors,
intermediaries and specialists. Security Market provides mobility of the scattered
savings. Securities market is the pivot on which the economic development oscillates;
it does mean that securities market is the foundation stone of any economic
development. Securities market in developed countries has become an integral part of
economy (Brennan,1995: 11) and its role in developing countries is increasing day-by

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day. Insecurities market, the securities of listed companies are traded through
organized brokerage firm (Douglas, 1991). It is, thus, a mechanism for bringing
together buyers and sellers of financial assets in order to facilitate trading. During the
last one and half decade the financial sector in Nepal has grown significantly. It is
said that despite a history of almost half a century of developmental efforts under
different national plans, conscientious efforts to develop financial sector started quite
late in Nepal. The history of capital market started since the period of Rana Prime
Minister Juddha Shamsher. Haste up a holding company namely Biratnagar Jute Mills
under joint financing agreement with an Indian Jute processing industry in 1936(1933
B.S) as the first modern industry in the country. After that various mills of rice,
cotton, sugar and other were established to mobilize economy’s capital for the
industrial development. In 1937(1994 B.S), Nepal Bank Limited as commercial Bank
was established. In the same year, But Rana family did not like the participation of
public in the ownership structure of industries and all the shares of company were
gone to Rana families, the expansion of capital market to the desired level has been
estimated. In 1950(2007B.S) democracy was established, the interim government
were much busy in devising measures to recognize the sick industries and gave little
attention to initiate the development of stock market. The process of stock market
development in the country actually started in1976 when the government established
Securities Exchange Centre to provide and develop market for securities. However,
visible impact on the development of financial sector was observed only when the
government changed its restrictive policy and opened up hitherto closed financial
sector to private sector and foreign participation in the establishment of banks. With
the adoption of privatization and economic liberalization policy the process gets
further impetus and the financial institution in Nepal grew at a faster pace especially
in quantitative terms. Securities exchange centre was established with the objective of
facilitating and promoting the growth of capital markets. Before its conversion into
Nepal stock exchange, it was only capital market institution undertaking the job of
brokering, underwriting, managing public issues, market making for government
bonds and other financial services. It was converted in NEPSE i.e. Nepal Stock
Exchange in 1993.The basic objective of NEPSE is to impart free marketability and
liquidity to the government and corporate securities by facilitating. Nepalese capital
market was given proper structure in June 1993 with theestablishmen t, SEBON as the
market regulator. Since its establishment, SEBON has been concentrating its efforts
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on improving the legal and statutory frameworks which are the

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bases for the healthy development of capital market. This amendment paved the way
for establishing SEBON as an apex regulatory body as it widened the horizon of
SEBON by bringing Market intermediaries directly under its jurisdiction and also
made it mandatory for the corporate bodies to report annually as well as semi annually
regarding their performance. The main objective of SEBON is to promote and protect
the interest of investors by regulating the securities market, to monitor and control the
entire capital market, sale and distribution of securities and purchase, sale or exchange
of securities. SEBON was established with the objective to render contribution to the
development of capital markets by making securities transactions fair, healthy,
efficient and responsible. Whereas, its main function share to provide licenses to stock
exchange and securities business person and to monitor the activities carried by
NEPSE to know if they are in accordance with the laws or not. Despite this, Nepalese
stock market is still underdeveloped and there is lot of shortcomings in Nepalese stock
market. Hence, the present study is conducted on Nepalese stock market in order to
find out its potential of growth, major problems and prospects by using secondary as
well as primary data.

1.2 Statement of Problem

Development of capital market in general and stock market in particular is a
must for a sound industrial development of the country. Capital market institutions
help to investments. It is an effective instrument of expanding productivecapacities of
the country. Due to the lack of information and poor knowledge investors are
manipulated or exploited by the financial institutions or other market intermediaries
such as extent that investing in common stock is intolerably hazardous. Investor’s
attitude and perception plays a vital role in rational decision which is influenced by
the knowledge and access to the data required for the analysis. Most of Nepalese
investor invests their fund in single securities because of less knowledge about risk-
return behaviors of the securities. The development of stock market in Nepal is both
challenging and difficult. The problem like lack of professionalism in brokers,
independent buyers and sellers, well trained manpower; management delay of shares,
rational investor exist from Nepalese stock market. Because of embryonic nature,
Nepalese stock market is not effective enough to The companies used different rules
and regulation in stock market development. There is not consistency between Acts
and Niyamabali.

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 A Nepalese capital market is very small in comparison with other developedst
ock markets. There are a few numbers of brokers, limited number of listed companies,

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very few transactions and most importantly investors are unknown about the pros and
cons of the stock market. The market is almost totally captured by individual investors
who buy very little number of shares and therefore they do not bother analyzing the
data and information before buying and selling stock. The variety of securities
available in the market allows each investor to select asset that suit his risk,
preferences and beliefs. But there is lack of different types of securities in the stock
market
This present study is carried out to answer the following research questions:
Is growth rate of Nepalese stock market satisfactory?
What are the problems of Nepalese stock market?
What are the problems of Nepalese investors?
What are the prospects of Nepalese stock market?
What are the environmental conditions of Nepalese stock market?

1.3 Objective of the Study

The general objective of the study is:
To examine the growth of Nepalese stock market.
To identify the existing problems and challenges faced by the Nepalese stock market.
To analyze prospects of Nepalese stock market.

1.4 Significance of the Study

Stock market recognizes the situation of economy. When stock market
is booming the economy is good and when stock market is declining the economy is
bad. Stock markets have direct relation with the economic growth. Economic growths
come with more earning capacity, opportunities to save and also the opportunity to
invest. It must be noted that economic growth is, too a great extent, dependent on the
industrialization in a country. It represents the study to find out the problem, prospects
and growth in the near future. What policies can be formulated, what regulatory acts
are needed and necessity of amendments regarding the rules and regulation to develop
it and make the market perfect functioning. The standard is one of the elements to
stock market development. Financial statement should maintain accordingly which
fulfill the requirement of related parties needed information This study will be useful
to the university students who are curious to know about the current status of
Nepalese stock market, its growth, issues and challenges for the development of stock
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market. Similarly, the recommendations that this study intends to propose on the
basis of its

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findings are expected to be useful for the policy makers associated with the
development of capital markets.

1.5 Limitation of the Study

It is not a comprehensive study. There are some limitations of the study. Lack
of experiences, time, limited budget, up to date information are the main limitation of
the study. Apart from this some more limitation are presented below. The subject of
the study is only “Growth, Problems and Prospects of Nepalese Stock Market”. Up to
16 years' period data are collected for the analysis purpose. The study covers only the
past and present state of stock market in Nepal, hence does not make any prediction
about the future.

1.6 Organization of the Study

As discussed in the previous section, this study intends to find the
Growth, problems, prospects of stock markets in Nepal. This study has been organize
dinto 5 chapters. Each are devoted to some aspects of the study. This study is divided
into five main chapters. The first chapter Introduction consists of general background,
statements of Problems of the study, and objectives of the study, Significance of the
study, limitation of the study and organization of the study The third chapter
represents the Methodology adopted for the research design, sources and
technique of data collection, population and sample. The fourth chapter includes
presentation and analysis of secondary and primary data. Major findings from both
types of data have been also presented in the last portion of this chapter. The fifth
chapter elaborates summary of the study, conclusion and recommendations with
bibliography and appendixes.

CHAPTER - II

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 REVIEW OF LITERATURE

In this chapter, an attempt is made to review some of the literatures concerning

the stock market in Nepal. The chapter deals with the review of relating to the topic
“A Study on Nepalese Stock Market in the light of its Growth, Problem and
Prospects” in detail. Various books, journals articles and some previous research work
related to this topic and many indirect topics are reviewed in the context of Nepalese
stock market as well as international stock market.

2.1 Conceptual Frame-work

2.1.1 Financial Market
Financial market denotes the place or mechanisms where financial instruments
are traded. Financial instruments denote also paper evidence, showing the exchange of
instruments between concerned parties. A financial market is
a place where firms and individuals enter into contracts to sell or buy specific product
s, such as stocks, bond on future contracts. This market provides ameeting place for
buyers and sellers where price is determined. Financial markets provide a forum in
which suppliers of funds and demanders of loans and investments can transact
business directly whereas the loans and investments of institutions are made without
the direct The two key financial markets are the money market and the capital market.
Transactions in short term debt instruments, or marketable securities (bonds and
stocks) are traded in the capital market (Gilman, 1988:30). Financial market is the
place where the financial instruments are traded. It enables individuals to choose
between current and future consumption. Second, it also provides the opportunity of
interaction between buyers and sellers to determine the price of assets. Third it
provides liquidity to investors. Fourth, it encourages management to comply with the
existing rules and regulations. Therefore, financial experts mentioned it as a brain of
the entire economic system. The failure of the financial market, as a brain, obstructs
the progress of whole economy. So, financial market from savers to users of funds to
facilitate the efficient allocation and growth of financing and investment in financial
assets transformation to generate income to savers and users (Shrestha and
Bhandari,2007:9). A country’s financial system may be bank dominated or market
oriented. Each of this system has different mechanisms for handling holder’s interest
and addressing corporate control
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issues and agency problems. Though historically countries seem to follow one of
these paths for development of its financial system, in recent years, some
countries are developing their financial system through
convergence between these two. the payments of goods, services
and productive inputs. Similarly, it helps tomanage funds efficiently and use them.
Financial system consists of financial institutions, financial markets and
financial instruments. Financial intermediaries (financial institution)
are organization that issue financial claims against themselves and use the to
purchase primarily the financial assets of others. Financial claims simplyrepresent the
right hand side of balance sheet for any organization, so the key distinction between
financial intermediaries and other types of organization involves what is on the left
hand side of the balance sheet. Financial intermediaries provide an indirect method for
corporation to acquire funds. Financial institutions are said to be the bridge between
the savers and users. They also collect scattered deposits and give loans to maximize
their wealth. Financial institutions actively participate in the money market and the
capital market, as both suppliers and demanders of funds. Financial intermediaries
include, saving and loan associations, saving banks, credit unions, life insurance
companies, mutual funds, pension funds etc. The financial system is an important
element of modern economy.

2.1.2 Types of Stock Market

i) Primary Market
Securities available for the first time are offered through the primary market.
The issuer may be a brand new company or one that has been in business for many
years. The securities offered might be a new type for the issuer or additional amounts
of a security used frequently in the past. The key is that these securities absorb new
funds for the offers of the issuer (Fischer and Jordan, 2000: 9). The primary markets
are media through which new financial assets issued or generated. They are the media
through the demanders and suppliers of today’s funds, the creators and acceptors of
financial claims meet. In these primary markets, financial assets are created and
exchanged, satisfying in the part the financial needs of demanders and suppliers of the
primary market of country is dominated by the government securities due to the
existence of insignificant new issues market for industrial securities.

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ii) Secondary Market

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The secondary financial markets are that market where many outstanding assetsare
traded from old to new owners. The secondary market provides liquidity for financial
assets making them more attractive. So, secondary market is a place where the
securities once sold are purchased and repurchase to provide liquidity to the
government securities. In Nepal, the secondary market is very thin because of limited
distributors of the securities. NEPSE is established in order to promote the market
used to support the market even involving itself buying and selling activities if
necessary. Secondary market allows outstanding securities to be traded from old to
new owner. The advantage of secondary market is to provide cash and investment
opportunities to investor and to make certain assets more attractive to buyers and
sellers. Secondary market comprises the stock exchange, the over- the –counter
market. Secondary market in simple, are markets in which outstanding securities are
traded. It is the market that creates the price allow for liquidity. If secondary market
did not exist, the investors would have no place to sell their assets. Without liquidity
many people would not invest at all. The corporations whose securities are being
traded are not involved in secondary market transactions and, thus, do not receive any
funds from such a sale (Brigham, 2001: 115). In conclusion, secondary market is a
place where once securities purchased and sold to provide liquidity to the government
securities and the market is operated by the securities exchange center. The trading of
government securities is very thin because of limited distributors of the securities
Securities with the following characteristics tend to be traded in the Over the counter
market: securities of companies with a small capitalization, securities of companies
which owned by a few holders; securities of government and their subdivision, and
securities which are purchased in large books (such as government securities) by
banks, life insurance companies, and other large investors, securities listed in an
organized exchange etc.

2.1.3 Securities Board of Nepal

Securities Board of Nepal was established on June7, 1993 as an apex regulator
of securities markets in Nepal. As per the Securities Act,2006, the major objectives of
SEBON are to regulate issue and trading of securities and market intermediaries,
promote the market and protect investor’s rights. The duties and responsibilities of
SEBON are as follows. Register securities and approve prospects of public
companies.
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 Provide license to operate stock exchanges.

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  Provide licensee to operate securities business.
 Give permission to operate collective investment schemes and investment
funds.
 Draft regulations, issue directives and guidelines, and approve bylaws of stock
exchanges.
 Supervise and monitor stock exchanges and securities business activities.
 Take enforcement measures to ensure market integrity.
 Review reporting of issuer and listed companies, and
securities businesspersons.
 Conduct research study and awareness program’s regarding securities market.
 Coordinate and corporate with other domestic as well as international
regulators.

Board of Directors
The Board of Directors of NEPSE consists of nine directors in accordance
with Securities Exchange Act, 1983; six directors are nominated by 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
The authorized capital of the exchange is Rs. 50 million. The issued capital
isRs.30 million of this, Rs 26.39 millions is subscribed by Government of
Nepal, Nepal Rastra Bank, Nepal Industrial Development Corporation and licensedme
mbers 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 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 the 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 permanent source of capital,
liquid stock markets improve allocation of resources, boost investment and enhance
long- term economic growth by encouraging investor myopia. It is argued that
such stock markets may
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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.

2.1.4 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, 1993under the
provision ofhe board is to promote and protect the interest of investors by regulating
thesecuritie s 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 have been passed. The public issue activities through the primary
market areregulated by the securities Exchange Act, 1983, the regulation and
guidelines are made under the act as well as the Company Act, 1997. The related
regulations and guidelines are Securities Exchange Regulation 1993, Securities
Registration and Issue Approval Guidelines, 2002 and securities Allotment
Guidelines, 1997. Similarly, to regulate the public issue it has made it mandatory to
take services of an issue manger by the issuing companies.

2.1.5 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 securities market to
supervise and regulate the overall functioning of the market, the functions performed
by other two agencies seems to of duplication of works. Here, how all three bodies
work in approving and registering the public issue are elaborated.
i) Securities Board
Securities Board is empowered by Securities Exchange Act 2040 for the development
of 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
prospectus is submitted for the
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ii) Nepal Rastra Bank
Nepal Rastra Bank, the central bank, approves prospectus when banks andfinance
companies propose public issue. It also gives permission to issue debentures in the
public along with the approval on 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.

iii) 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 prospectus is granted by the company Registrar’s office only. Before grantingan
approval it obtains the advices/opinion from the securities board and
for banking and finance companies opinions/advices on the prospectus is takenfrom
Nepal Rastra Bank too.

iv) 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.

v) Insurance Board
When a public issue is made by an insurance company, the insurance board also
performs the vetting of prospectus as it is done by Nepal Rastra Bank.

vii) 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 suchas
Nepal Investment Trust, Rastriya Beema Sansthan, Nepal Industrial Development
Corporation are under the preview of the Ministry of Industry growth stock include
higher price/ earning ratios than the market average, substantial potential for above
average long-term price appreciation, price volatility and correlation of capital to fuel
growth, therefore little or no dividend pay-out in the early years. Maturi, 1994: 138).
Mahat (1981)
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 Capital Market, Financial Flows and Industrial Finance in Nepal” has said
that there is absence of secondary market to ensure liquidity tithe securities on
demand. Any attempt to stimulate investment in industrial sources would
naturally depend on the extent to which the securities are salable in the
market. Only the existence of stock exchange can enable the security holders
to sell their securities for cash and purchase alternate securities if they wish.
In Nepal, in the absence of such a stock market, and industry security is an
illiquid form of asset, even more illiquid then the real estate for all practical
purpose.

Nepalese capital market offers a wide range of financial services andinstrumen

ts. It also has to provide the opportunity for a large number of investors to participate
directly or through mutual savings schemes. While implementing this policy the
securities board advices the government regarding the development of secondary
market for government securities and the opening of foreign portfolio investment,
formulate prudential standards for the primary issue as well as secondary trading ofgo
vernment bonds and studies the possibility of introducing as over the counter
exchange system and brings in the concept of introducing broker in order to facilitate
easy entry bout Rs 21681.14 million in 2008/09 compared to Rs 2344 million in
2000/01.This scenario despite increasing number of listed securities and scrip’s is
not favorable. No doubt, it is true to a large extent but the problem is not confined to
the p resent situation alone. The management of the companies and the attitude of the
broad of directors and intermediaries are to blame a lot.

2.2 Review of Thesis

There are various masters’ thesis prepared by various researchers in the past year.
Among them, some of these are reviewed here for analysis of literatures. Bhattarai
(1990) has carried out on “Share Market in Nepal”.
In which, he emphasized the historical background and the analysis of various
financial variables affecting the smooth operation of share market. This study was
mainly based on secondary data obtained from various sources. He has applied both
financial and statistical tools in the study. He found that out of 12 sample companies 2
companies were useful to cross over the average price-earning ratio, as a result,
market price of shares were highly skewed. Moreover, there was mismatch between
23
calculated that the involvement of more and more institutions as well as individual
investors in

24
capital market through broker’s network raised the transaction volume. Rumors
spread by brokers and create genuine speculation. Fair plays of bulls and bears make
market equilibrium resulting price stabilization speculation on the trading of shares is
encouraged. Thus, the market starts to walk randomly reflecting true value of shares.
Investors are facilitated by providing alternatives to make diversified portfolio. Bhatta
(1996) in his thesis paper
“Assessment of the performance of listed companies in Nepal”
concludes that a highly significant positive correlation ship has been addresses
between risk and return chapter of the company. Investors expect higher return form
that stock, which associates higher risk. Nepalese capital market is not efficient one.
So the stock price does not contain all the information relating to market and company
itself. Neither investors analyze the overall relevant information of the stocks nor does
the member of stock exchange try to disseminate the information. So the market
return and risk both may not show high priced stocks. In the addition, Bhatta further
addressed that Investors of Nepal have not yet practiced to invest in portfolio of
securities. An analysis of the two securities portfolio shows that the risk can be totally
minimizes if the correlation is perfectly negative. In this situation, the risk can totally
be diversified, but when there is perfectly positive correlation ship between the returns
of the two securities the risk is not diversified. To some extend he focused in the
analysis of risk and return in common stock investment. But due to many other
aspects to analysis investor cannot easily assess the results. Indeed, study did not
focus the viewpoint of investors rather it concentrates the companies and stock
market. However, this study also explores some dimension for further research in his
topic. Khatiwada (1996) in his thesis paper “A study on securities Investment in
Nepal” concludes that; leaving some exceptional cases aside, almost all the
companies experienced their market price going down by less than fifty percentin
1995. Even the banking group could not spare the share price going down more
specifically, the year 1995, was a disheartening period for the stock price. It is
because, almost all the companies share price during the year were down even in
some cases below the face value. Through the study conducted by Katiwada did not
focus the analysis of individual security and the viewpoint of investors, it explores
some dimension to further research in this aspect. Bhatta’s (1997) study on “Dynamic
of Stock Market in Nepal” revealed that resource mobilization has a vital role in the
developing economy like Nepal. The development of Stock Market in Nepal is a
25
must for the resource mobilization. There are various problems of

26
Nepalese Stock market, which have checked the resource mobilization in the
economy. In his research work, he set the following objectives:
To analyze the trend of Nepalese stock market.
To diagnoses and compares the sect oral financial status of the stock
in Nepalese stock market. To analyze the market shrew prices of the Nepalese stock
market.
 To find out the impact of the secondary or primary market and vice versa. He
made the following recommendations:
 The government should make not only policies for the capital market
development but also implement these policies appropriately.
 Investment in corporate sector should be encouraged and their share should be
listed in the stock exchange.
 The regulatory authorities of the stock market should create environments to
rise the trading of share in the stock exchange.
 The government should make appropriate policies and programs for the
enhancement of the entrepreneurship development in the Nepalese economy.

In conclusion, he tried to show that although it has become late to take steps to
overcome such problems of the Nepalese stock market in order to make it active and
supportive; the stock market has a good prospect for the resource mobilization to
finance the productive enterprises in the Nepalese economy. Sherestha (2000) had
studied on “Growth and Prospect of Stock Market in Nepal”.
He tried to show the role of the capital market in Nepal which has been
increasing as to mobilize the saving of the nations and canalized them in
to productive activities. But, the major problems in the process of developmentare to
increase the level of saving and canalize those savings into investment, which leads to
economic growth. Capital market is playing a crucial role in the process of growth.
In this way, the important of capital market arises as to proper allocation of accumulat
ed savings to various economies. Objectives ofthe study were to identify the legal
obstacles in the stock market development and to analyze existing transaction system.
After the analysis of the study, He made the following recommendations:
The provision of Annual General Meeting (AGM) should be with in fourmonths from
the completion of each financial year.

27
  Financial statement and annual reports of the company’s should
be presented to authority within the three months from the completion ofeach
financial year.
 Stock market translation is depending on the demand and supply of security
for sell or buy. Market moves are the important indirect factor for the stock
market translations. GDP, interest rate, rate of inflation, foreign exchange
rateand commodity price are the main movers of stock market. They affect the
share price of the companies in the market.
 Government and investors should be conscious in these factors whereas so
many changes will be in these movers. Government should be more concerned
in decreasing of GDP, and increasing of interest rate, rate of inflation and
commodity price. Government should give attention to the foreign exchange
rate, which also change frequently in Nepalese capital market.
 Information is the one of the main elements of stock market development.
Every information provided by the companies. Therefore security board and
stock ex changelimited should be in coordination in the information provided
by the companies for stock market development.

2.3. Securities Market

The securities market is the place where large number of financial
securities(shares, bonds, debentures etc) is traded according to the prescribed
rules(Investors Guide, 1978:11).So far as the securities market is concerned, it is
important constituent of capital market; it has wide term embracing the buyers and
sellers of securities and all the agencies and institutions that assist the all sales and
resale of corporate securities (Rugh, 1965: 50).In Nepalese context, it is mandatory to
register the portion of securities issued to the public with the security Board of Nepal
(SEBON). Then the firms are eligible to issue the registered portion of securities
through recognized bodies. The recognized bodies mean those who have received
certificate from SEBON to act as issuing house and security promoter to get
membership from security exchange market. Security market exists in order to bring
together buyer and sellers of securities, meaning that they are mechanisms created to
facilitate the exchange assets. There are many ways in which security market can be
distinguished. One is primary and secondary markets. Interestingly, the primary

28
market itself can be subdivided into considers the life span of financial assets. Money
markets typically involve financial assets that expire in one year or less; where as
capital market typically involves financial assets with spans of greater than one year
(Sharpe, Alexander and Bailey, 2000: 9-10).Securities market provides an effective
way of raising money for commercial enterprises and at the same time provides an
investment opportunity for individuals and institutions. Securities markets have both
theoretical and practical perspectives. Securities markets provide value and
significances to the financial assets. Practically, the activities of buying and selling
securities on the security markets are extremely important for the allocation of capital
within economics the securities market serves as a reliable guide to the performance
of companies and thereby promoting efficiency. Holders of stocks and bonds may
decide to obtain cash for their investments by selling their securities to other
investors. Similarly, others in the economy have cash to invest and are desirous of
buying stocks and bonds. The problem is to bring together the order of prospective
sellers and prospective buyers so that an exchange of securities for cash may take
place. An efficient system whereby investors can convert their securities into cash
quickly at or near the current market price makes investors more ready to put their
savings into stocks and bonds (Bradley, 1663:303).

2.3.1 Stock Market

Stock market is known as secondary market in the other side of market segment under
issued previously by corporate bodies; such securities are also traded in the stockexch
ange. Stock market does not include securities of private company as they are not
capable of being dealt in on stock exchange and are not marketable securities due to the
restrictions on transferability. In order to take the benefit from stock market the
corporate bodies should have listed the security in the stock exchange. Stock market
covers activities pertaining to the dealing in securities, whether good or bad, for the
liquidity and marketability. Only the securities of existing companies are tradable on
the stock exchange irrespective of issuers corporate bodies or government (Vaidya,
2000: 72).A stock market is a market for trading of publicly held company stock and
associated financial instruments. Originally, stock markets were “open out cry”,where
trading occurring on the floor of a stock exchange. Most modern stock trading is done
in electronic exchanges where buying and selling occurs viaonline matching of order
placed buyers and sellers (Manandhar 2063:2.8).
29
2.3.2 Classification of Common Stock
Common stock is often viewed as a homogeneous type of security.
Themajority of common stocks have similar voting, income, and liquidation rights.
Nevertheless, despite the homogeneous nature of common stock, it is important to
realize that the risk
–return characteristics of stocks can very significantly. Indeed, stocks are often
classified on the basis of these characteristics (Cheneyand Moses, 1995: 19).
Blue –chips Stocks
Stocks of very large, firmly established corporations, such as General Motors, IBM,
and Xerox, are often referred to as blue chips. Many of these are included in 30 stocks
that comprise the Dow Jones Industrial Average. Because of their dominant industry
positions, strong balance sheets and size, these stocks are often viewed as
conservative investments.
Growth Stocks
A common stock that is likely to experience above average price appreciation is
known as growth stock. Accomplishing this may be a more difficult task than it first
appears to be, however. First, the business may be successful increasing its market
share or developing new markets.
Income Stocks
Stocks that have a long – term record of stable cash dividends are often referred to as
income stocks. For example, utilities are noted for their stable cash dividends .There
stock prices, however, can be quite volatile depending on economic and market
cycles. Small Stocks
There is no standard definition of how small a company must be to be a small stock.
A NYSE traded company with a total capitalization of less than $500million may be
considered small in relation to blue – chip stocks.

Treasury Stock
Corporations have authorized, issued, outstanding and treasury stock. If corporation
decides to buy back its own stock, the acquired stock is called treasury stock that has
been issued but is not outstanding. Consequently, it does not maintain voting rights
and is not entitled to dividends.
2.3.3 Participants in Stock Market
The major participants in Stock Market are:
30
i) Broker

31
Various types of broker participate in stock market. A stock broker is a member of
stock exchanges and sub broker is any person who acts on behalf of a stock broker
as an agent or otherwise for assisting the investors in buying, selling or dealing in
securities through such broker. Condition for granting of certificates to stock broker,
the rules stipulates the registration is necessary for acting as broker or sub-broker.
The conditions for grant of a certificate of registration to act as stock-broker area. He
many ways except that they always stand ready to buy and sell securities at their bid
and asked price for which they are market makers. The market maker is any company
or corporate body which deals in securities at the stock exchange in its own name or
iii) Issue Manager
Issue manager carry out the functions related to public issuance of securities on behalf
of the issuing company. Issue managers are required to submit their annual reports
including profit and loss account, balance sheet, cash flow statements and securities
trading report to SEBON within four months of the expiry of the fiscal year. In this
fiscal year eight issue managers have submitted their reports of the fiscal year 2008/09
to SEBON.

CHAPTER - III
RESEARCH METHODOLOGY

32
3.1 Introduction
Research means to search or study about a phenomenon. Generally research is an
effort to search new fact, knowledge and principle in scientific ways. Therefore this
chapter highlights the research methodology used for the study of “A Study on
Nepalese Stock Market in the Light of its Growth, Problem and Prospects”. In this
regard, this chapter explains not only talk of the research methods but also consider
the logic behind the methods, which are used in the context of our research. This
chapter consists of the research design, population, sampling procedure and sources
and analysis of data.

3.2 Research Design

Research design is the conceptual structure within which research is conducted. In
other words, a plan of study or blue- prints for study is called research design or
research strategy. It facilitates the smooth sailing of the various research operations,
thereby making research as efficient as possible. Research design is a plan, structure
and strategy to obtain the objectives of the study. This research is based on secondary
data and primary data analysis. Hence, the historical and descriptive research design
has been used to conduct the study on focus of growth, problems and prospects of
Nepalese stock market It deals with the stock market on the basis of available
information.

3.3 Population and Sample

The analysis of stock market, its growth, problems and prospects depends on
the number of company listed in the Nepal Stock Exchange and major economic
indicatortotal population. Moreover, the companies that are in existence and doing sha
re transactions in NEPSE and the factor that affects the present economic growth are
considered as the convenient sample of the study.

3.4 Sources of Data

The required data have been collected from the various sources; but mainly
from the annual reports of securities exchange board, Nepal covering a period of
1993/94 to 2008/09. The main place of data was the central office of Nepal Stock
Exchange (NEPSE), Securities Boards office, Kathmandu and Economic Survey
published by Ministry of Finance. The main source of data is annual report of the
SEBON. Besides annual report, various bulletins available and useful to the study are

33
also taken into consideration. The research is mainly based on the secondary data

34
Primary Data
The primary data are collected through questionnaire and informal interview
of concerned persons like officer of SEBON and NEPSE, share broker and investors.
All together 50 copies of questionnaires, were distributed to the persons and
institution respective of their professions and nature of activities of which 80 percent
of questionnaire have been collected during the study period.

Secondary Data
The secondary source of data are the annual report of the Security Board
Nepal, different books from library, periodicals, newspaper cuttings, company's
magazines etc. Guidelines and unpublished thesis, research work that directly related
to the financial performance and stock market would form secondary data for the
purpose of this study. Significant information are also collected from Internet and
various websites like www.nepalstock.com.np,www.sebon.com.np ,www.mof.gov.np
etc.

3.5 Data Collection Technique

The research contains of both primary as well as secondary data. their reports of the
fiscal year 2007/08 to SEBON. In this fiscal year, out of nine issue managers, Five
were involved in the issue management activities.

Stock Broker
Stock Brokers are required to submit their annual reports including profit and
loss account, balance sheet, cash flow statements and securities trading report to
SEBON within four months of the expiry of the fiscal year. In this fiscal year22 stock
brokers submitted their reports of the fiscal year 2007/08 to SEBON.

Paid-up Value, Turnover and Market Capitalization

The total paid-up value of the listed securities by the end of 2008/09 fiscal
year reached Rs.61140 million. The paid-up value in the last fiscal year wasRs.29465
million. By the end of 2008/09 fiscal year, the market capitalization of the listed
securities reached Rs.512939.07 million. In the last fiscal year, the capitalization was
Rs 366247.5 million. By the end of this 2008/09 fiscal year, the percentage
contribution of market capitalization on nominal GDP is estimated to be 53.43.

3.6 Tools of Data Analysis

35
 On the basis of secondary and primary data collected from the trading
report, published books, journal and questionnaire with different financial and non-
financial expert and staff as well as officers of NEPSE and SEBON were done, so
effective analysis of data could be done on effective manner. To draw the conclusion
by analyzing the collected data simple statistical tool are used as follows:

3.6.1 Arithmetic Mean

An arithmetic mean is the value, which represents the group of values and
gives an idea about the concentration of values in the central part of the distribution.
An average gives us a point, which is most representative of the data. It depicts the
characteristic of the whole group. The value of arithmetic mean lies in between the
two extreme observations of the entire data. It is an envoy of the mass of
homogeneous data. An arithmetic mean of a set of observations is defined as the ratio
of the sum of all the observations to the total number of observation. The Value of the
AM is obtained by adding together all the items and by dividing this total by the
number of items. Mathematically, Arithmetic Mean (AM) is given by,
NXX
Where, X = Arithmetic Mean ∑X = Sum of all the values of the variable Xn = Number
of observations.

3.7 Diagrams and Graphs

Diagrams and graphs are visual aids which give a bird’s eye view of a set of
numerical data which show the information in a way that enables us to make
comparison between two or more than sets of data. paid up value over the period
except in fiscal year 1997/98. The paid up value was decreasing from Rs 4476.5
million to Rs 4459.8 million from fiscal year1996/97 to 1997/98. The highest paid up
value was Rs 61140 million in the fiscal year 2008/09 whereas lowest was Rs 2182.2
million in 1993/94.From the figure, it is seen that the growth rate in fiscal year
1994/95 was
35.73 percent. There was a positive growth rate of paid up value over the periodexcep
t in the fiscal year 1997/98. The highest growth rate was 107.5 percent in the fiscal
year 2008/09 whereas the lowest was negative 0.37 percent in the fiscal year 1997/98

36
 CHAPTER IV
DATA PRESENTATION AND ANALYSIS

In this chapter, the relevant and available data and information from Nepal
stock exchange (NEPSE), Security Board of Nepal (SEBON) and different articles are
growth, problems and prospects of stock market in Nepal. Data presentation andinterp
retation is the important part of a research work which analyze the data and
information using various tools and techniques to get the best results.
The data are collected through primary sources and secondary sources. Such
collected data are presented in systematic formats and analyzed using different tools
and techniques. The analysis of questionnaire is also done in this chapter. This chapter
has and analysis of secondary data and second part is concerned with presentation
and analysis of primary data.

4.1 Presentation and Analysis of Secondary Data

This section deals with the presentation and analysis of the collected
secondary data. This part of the chapter reveals the growth of Nepalese stock market
in terms of amount of issue approval, number of issue approval, and number of listed
companies, paid –up value, annual turnover, market capitalization and NEPSE Index
etc with different years.4.1.2

Analysis of Amount of Issue Approval and Number of Issue Approval

The issuing company should register the securities in SEBON and get issue
approval before going to the public. During the process, SEBON reviews
the prospects and other relevant documents submitted by the existing rules andregulati
ons. In the process, SEBON has also been taking the comments of the experts as and
when it deems necessary.

37
38
 Table 4.1 shows the amount of issue approval, number of issue approval
andtheir percentage of growth from fiscal year 1993/94 to2008/09. At
the beginning fiscal year 1993/94, amount of issue approval, number of issueapproval
was 244.4 million and 16 respectively. From Table 4.1, the trend of growth of amount
of issue approval and number of issue approval seems fluctuating. The lowest and
highest amount of issue approval were 174 million and 16828.51 million in the fiscal
year 1994/95 and 2008/09 respectively. The annual public issue amount in the fiscal
year 2008/09 is about fourth times more than that of the fiscal year 1993/94.
Similarly, the growth rate of amount of issue approval was highest in the fiscal year
2007/08 i.e.
364.74 percent and lowest growth rate of amount of issue approval was occurred in
the fiscal dearie. declined by 61.40 percent. After the fiscal year 2003/04, the trend of
growth rate of amount of issue approval was declining and rose after 2007/08.

Source: Annual Report, SEBON, 2008/09

Table 4.5 and Figure 4.6 show the market capitalization of listed securities
from fiscal year 1993/94 to 2008/09. The highest market capitalization was
Rs512939.07 million in fiscal year 2008/09 whereas lowest was Rs 12295 million in
1995/96. The market capitalization was decreased from Rs 13872 million to Rs 12295
million from fiscal year 1993/94 to 1995/96 and continuously increased to Rs
46349.4 million in
39
2000/01. In the fiscal year 2001/02, it decreased to Rs 34703.9 million. Thereafter,
there was increasing trend in market capitalization till the fiscal year 2008/09.

4.1.2 Analysis of Number of Listed Companies

Number of listed companies is an indicator of size of stock market. The size
of stock market increases with the increase in number of listed companies and vice
versa. Generally large stock market size indicates a developed stock market. Since
listed companies, in Nepalese context are only allowed to issue financial securities
and transact their shares in NEPSE. Listing of company is compulsory to make
securities trading eligible according to the section 8 of securities exchange
Act,1983.

Table 4.2 shows the number of listed companies and percentage of growth of
number of listed companies from fiscal year 1993/94 to 2008/09. The number of
listed companies was 66 in the base year 1993/94. There was increasing trend of
listed companies from 66 to 115 from fiscal year 1993/94 to 2000/01which was
decreased to 96 in the fiscal year 2001/02. After that, it increased to108, 114,
125,135, 135, 150 and 159 in the fiscal year 2002/03, 2003/042004/05, 2005/06,
2006/07, 2007/08, 2008/09 respectively. However, the number of listed companies

40
Table 4.2 shows the number of listed companies and percentage of growth of number of listed compan
the period.

4.1.5Analysis of Paid –up Value

The situation of paid –up value in Nepalese stock market in various years is presented below:

41
42
 Table 4.3 and figure 4.4 shows the paid up value and percentage of growth
of paid up value from fiscal year 1993/94 to 2008/09. There is increasing trend of
paid up value over the period except in fiscal year 1997/98. The paid up value was
decreasing from Rs 4476.5 million to Rs 4459.8 million from fiscal year1996/97 to
1997/98. The highest paid up value was Rs 61140 million in the fiscal year 2008/09
whereas lowest was Rs 2182.2 million in 1993/94. From the figure, it is seen that the
35.73 percent. There was a positive growth rate of paid up value over the periodexcep
t in the fiscal year 1997/98. The highest growth rate was 107.5 percent in the fiscal
year 2008/09 whereas the lowest was negative 0.37 percent in the fiscal year 1997/98.

43
 CHAPTER - V
SUMMARY, CONCLUSION AND RECOMMENDATION

In the previous chapters, researchers explained the introduction, review of

literature research methodology and presentation and analysis of data. This chapter
presents the summary, conclusions and recommendations from the analysis of primary
and secondary data regarding the growth, problems and prospects of Nepalese stock
market.

5.1 Summary
Stock market in recent years has become an integral part of economic
development. It can play a vital role in encouraging and channeling the saving to
provide the entrepreneurs for investment in profitable projects in the
economy. Examples from the developed countries have proved that the stock market
is the cause and economic development is the effect. Stock market serves as a direct
link between the suppliers and the users of capital fund. Thus, stock market has both
theoretical and practical perspectives. This study mainly aims to examine the situation
of stock market in Nepal. The specific objectives of the study are to examine the
growth of Nepalese stock market, to identify the problems and challenges of stock
market and to analyze the prospects of stock market in Nepal. This study is based on
both secondary and primary data analysis. The required secondary data are collected
from the annual report of SEBON and its web site:http://www.sebo@ntc.np,the
trading report of NEPSE and its web site:http://www.nepalstock .com, Nepal Rastra
Bank etc. For the further support of this study, survey of questionnaire from various
respondents and indirect interview of officers of related authority and investors have
been taken. Both historical and descriptive research design are carry out this study.
The growth of Nepalese stock market is examined on the basis of amount of issue
approval, number of issue approval, number of listed companies, annual turnover,
market capitalization and paid –up value. Primary data are analyzed on the basis of
Likert scale using various measurement-base statements. During the fiscal year
1993/94, the annual turnover is in fluctuating manner. The number of listed
companies is in increasing trend except in the fiscal year2001/02. The number of issue
approval and amount of issue approval are more or less satisfactory. Amount of issue
approval was in increasing trend after the fiscal year 2002/03.Similarly, amount of
44
market capitalization and paid-up value are in

45
increasing trend. The growth of NEPSE Index was in fluctuating manner due to the
decline in the investor’s confidence level on the capital market. From the analysis of
and brokers are not sufficient. The growth of market capitalization is satisfactory.Mos
t of the respondents are agree with following statements, legal rules and regulations
are not sufficient. Information is not easily available to investors; Stock market is
greatly influenced by small number of large investors. There is no special provision
to market. Nepalese stock market is the characteristics of rumor based market. There
isin sufficient knowledge of investor about the stock market which is the
major problems of the Nepalese stock market. Stock market has also seen many prosp
ects from the survey. They are: the number of listed companies andturnover of listed
companies are increasing yearly, most of the respondents are agreed with stock
market provides satisfactory return, the growth amount olio is increasing, and stock
market provides liquidity and marketability. Similarly trend of large companies listed
in NEPSE and increasing interest of educated and business people are the greater
interest or boosting their confidence or developing the stock market is necessary, that
should be enabled to operate in an environment that leads to growth and expansion of
Nepalese Stock Market.

5.3 Recommendation
Based on the analysis of primary and secondary data, this study has reached to
the following recommendations. The Securities Board of Nepal has the
responsibility of regulating the entire securities market in Nepal. To make the
Board effective, the number of staff should be adequate and properly trained in all
aspects of securities market. It should bring new and emerging stock market
regulatory regimes to match international standards. The number of listed
companies is increasing every year but the increase is not proportionately
among the various sectors. Out of the total increase, the numbers of banks and
finance companies have dominated. So the government should bring new policy to
attract more manufacturing and processing, trading and other companies to come in
the public and to listtheir securities in the stock exchange. The market is totally
dominated by corporate the breadth of the market, more government securities
must list in Nepal Stock.

46
 Reference

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