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02 Financial Market

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Financial Market

Kiran Thapa
Financial market
 The place where financial assets (stock and
bond ) are traded.
 Example: Nepal Stock Exchange (NEPSE),
Bombay Stock Exchange (BSE), National
Stock Exchange (NSE), New York Stock
Exchange (NYSE).
Classification of financial market
Money and capital market
• Money market
 It is the market for short term

securities having maturities period


of 1 year or less than 1year.
 High liquid instruments are traded

in this market.
Features of money market
Features of money market includes
 low default risk
 high liquidity
 short maturity
 low transaction costs.
 Low return
Contd.
 Instruments traded in this market are
• Treasury bills
• Commercial paper
• Banker’s acceptance
• certificate of deposits (CD)
• Eurodollars
• Repurchase agreements (Repo)
• Federal funds or LIBOR or interbank loan.
LIBOR = London interbank offered rate
Contd.
 Participants in the money markets are
• commercial banks
• central bank
• securities dealers
• corporations
• money market mutual funds
• insurance companies
• individuals.
Purpose for money market
 Raising funds
 Supplying funds
 Meet daily expenditures
 Raising and investing temporary funds
 Synchronize cash inflows & cash outflows
Types of money market
• Primary market
 Primary is the market where first hand

money market securities are traded. For


example, T-bills issued by NRB, CD issued
by Bank etc.
• Secondary market
 Secondary market is the market where

second hand money market securities are


traded. For example, market maker of
government securities.
Capital Market
 The capital market is the market for long-
term securities.
 Companies and the government can raise

funds for long-term investments the capital


market.
 The capital market includes the stock

market, the bond market, and the primary


market.
- Capital market is divided into primary and
secondary market
Participants of capital markets
 Issuers
 Investors
 Depository institutions
 Non-depository institutions
 Investment banking firms
Importance of capital market
1. Link between Savers and Investors
2. Encouragement to Saving
3. Encouragement to Investment
4. Promotes Economic Growth
5. Stability in Security Prices
6. Benefits to Investors
Primary market
 The primary market is the market for first
hand securities.
 Primary market includes
• INITIAL PUBLIC OFFERINGS (IPO)
• FURTHER PUBLIC OFFERING (FPO)
• RIGHTS OFFERING
• BONUS SHARES
• PRIVATE PLACEMENT
• NEW FUND OFFER (NFO)
• PROMOTER SHARES AND SHARES FOR LOCAL
PEOPLE
Contd.
 Participants in the primary market includes issuing
company, investment bankers and investors.
 The main function of primary market is to make
the financial capital available to make new
investments in building, equipment, and stock of
necessary goods.
 The investment bankers perform the role of an
expert in issuing new securities.
 These bankers make available advice to the
business firms regarding the nature of security,
maturity, and interest rate and underwrite the
issue of securities.
Investment banker
- If a firm sells new securities to raise cash, the
offering is called a primary issue.
 The agent responsible for finding buyers for

these securities is called the investment


banker.
 Investment banker is also known as issue

manager.
- Investment bankers are neither investors nor
bankers.
 They purchase primary issues from security

issuers and, then, arrange to immediately resell


these securities to the public.
Contd.
 The investment banker acts as the
middleman in channeling individuals'
savings and funds into the purchase of
business securities.
 NMB Capital Limited, Citizen Investment
Trust (CIT), Prabhu Capital Limited, Global
IME Capital Limited, NABIL Investment
Banking Limited, Civil Capital Limited and
Siddhartha Capital Limited are the popular
investment bankers in Nepal.
Contd.
Functions of investment banker
 Issue Management
 Underwriting
 Mutual Fund
 Portfolio Management Services (PMS)
 Depositary Participant (DP)
 Registrar to the Shares (RTS)
 Corporate advisory services
SECURITIES ISSUE PROCESS (IPO /FPO PROCESS: 10 STEP PROCESS)

 Company Decision
 Appointment of Issue Manager
 Prospectus preparation
 Filing with SEBON
 review by the Prospectus Vetting Committee
of SEBON
 Clarification/update
 Prospectus approval by SEBON
 Issue open and issue close
 Allotment and Released
 Listing for the Secondary Trading
Book building method of IPO
- SEBON issued Book Building Directive
2077.
 Requirements:

• Company should operate at a profit for


the last 3 years
• Approval from the AGM of the company
to issue IPO through Book Building
• Per share net worth should be 150% of
the per share capital.
• Company should have average or above
average ratings from the rating agencies.
IPO process through book building
- Company decision
- Appointment of Investment Banker
 Preliminary prospectus preparation
 Conduct road show (Discussion program)
 Obtain intent price
 Determine price limit
 Filing with SEBON for approval
 Collecting the bids from qualified institutional

investor
 Determine the cut off price
 Issue securities to the public
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
-SPEED E-Facility
-Corporate benefits & actions
Demat a/c opening process
 Shortlist a depository participant (DP) that offers demat
related services.
 Fill up the application form along with the KYC and has
to present an attested copy of Nepali citizenship
certificate and a passport size photograph for the
form.
 The individual has to also present their bank account
details mandatorily to open an account.
 In the case of an institution, the institution has to
submit their registration certificate of incorporation,
PAN/ VAT details, minutes of the BoD to open a demat
account, a copy of citizenship certificate and a
passport size photograph authorized by the BoD to
operate the demat account.
Contd.
 The DP will take one working day to open
the demat account and provide the
Beneficial Owner Identification Number
(BOID).
 The account holder after opening the
demat account will receive a Debit
Instruction Slip (DIS) from the respective DP
for future share transactions. The DIS acts
as a medium to allow the shareholder to
sell their shares.
Demat process
 Fill the dematerialization request form (DRF
and deposited along with physical share
certificates to be converted into the electronic
form. On each share certificate, 'Surrendered
for Dematerialization' needs to be mentioned
by the respective DP and it shall be forwarded
to the respective Registrar to the Shares (RTS)
for dematerilization process.
 Once the request is approved, the share
certificates in the physical form will be
destroyed and a confirmation of
dematerialization will be sent to the DP.
Contd.
 The RTS will then confirm the
dematerialization of shares to the
respective DP.
 Once this is done, the shares will be
credited in the shareholders demat account
and the holding of shares will reflect in the
investor's Demat account electronically.
 This process shall takes few days from the
submission of dematerialization request
Rematerialization
 The process of converting electronic holdings of
securities into physical form (certificates) is known as
rematerialisation.
 Procedure of Rematerialisation
1.Fill-up a remat request form (RRF) & submit it to DP
2.After verifying the request, the DP forwards it to the
depository.
3.The depository (CDSC) then confirms this request to
the company’s Share Transfer Agents.
4. RTS prints these certificates and dispatches to the
holder & send a confirmation to the depository.
5.The DP sends a rematerialisation intimation to the
account holder.
Contd.
Advantages
-Lower Risks
-Easy Holding
-Odd Lots
-Reduced Costs
-Reduced time
Disadvantages
-Annual maintenance charges
-Tech savvy
-High frequency of share trading
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
Contd.
 Once the shares are allotted the investor’s
applied amount will be deducted from the
account and if not allotted it will release the
blocked amount from the account.
 If any company provides bonus shares or
cash dividend, the bonus shares will be
deposited in the demat account and the
cash dividend will be deposited in the bank
account provided by the client at the time
of demat account opening.
Factors to be considered while investing in primary
markets

The following information must be analyze to


invest in the initial public offerings (IPO)
• 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
Secondary market
 Secondary markets are the markets in which
existing, previously issued securities are traded
among investors.
 The Nepal Stock Exchange (NEPSE) is a secondary
market, because it deals in outstanding, or
previously issued, stocks and bonds as opposed to
newly issued stocks and bonds.
 Secondary markets also exist for mortgages, other
types of loans, and other financial assets.
 The company whose securities are traded in the
secondary market is not involved in the transaction
and, therefore, does not receive any funds from
such as sale.
Contd.
 Its main function is to provide liquidity to
the purchasers of securities. This market
remains as a center to convert stocks,
bonds, and other securities into cash
immediately.
 Since the secondary market provides
liquidity to the securities, the investors are
encouraged to buy securities in the primary
market.
 The transactions are more in secondary
market than in primary market.
Functions of financial market
- MOBILIZATION OF SAVINGS
- FACILITATES PRICE DISCOVERY
- PROVIDES LIQUIDITY TO FINANCIAL ASSETS
- REDUCES THE COST OF TRANSACTIONS
Stock brokers
- Brokers arrange trades for their clients
 Buying and selling of shares and other securities
 Providing advisory services
Provide margin loan
Search for traders who are willing to trade
Represent their clients at exchanges
Introduce their clients to electronic trading
systems
Match clients’ buy and sell orders
Provide DP services
Stock dealers
- Dealers keeps an inventory of securities.
- Dealers are always willing to buy and sell.
- Set asked price (selling price) and bid price
(purchase price).
- Dealers are market makers.
- Dealers have to be compensated for bearing
risk.
 Compensation is known as dealer’s spread.
 Dealer’s spread = Ask price – Bid price
Factors to be considered while investing in secondary
market

The following information must be analyzed to


invest in the 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.
Risk of investment
 Market risk: The risk of investments declining
in value because of economic developments or
other events that affect the entire market.
 Market risk include equity risk, interest rate
risk, currency risk.
 (i) Equity risk: The market price of shares
varies depending on demand and supply.
 (ii) Interest rate risk: Risk of losing money
because of a change in interest rate.
 (iii) Currency risk: Risk of losing money
because of a movement in the exchange rate.
Contd.
 Liquidity risk: The risk of being unable to
sell your investment at a fair price.
 Concentration risk: The risk of loss
because your money is concentrated in
one investment or type of investment.
 Credit risk: The risk that the company that
issued the bond will run into financial
difficulties and unable to pay interest and
principal at maturity.
Contd.
 Reinvestment risk: Risk of loss from
reinvesting principal or income at a lower
interest rate.
 Inflation risk: Risk of a loss in purchasing
power because the value of your investment
does not keep up with inflation.
 Horizon risk: Risk of investment horizon may
be shortened because of an unforeseen event.
 Longevity risk: The risk of surviving from
savings. Relevant risk who are retired, or are
nearing retirement.
Contd.
- Foreign investment risk: The risk of loss
when investing in foreign countries.
Regulation of capital markets
- Regulator
- Regulation
Issues in capital markets in Nepal
 Structural deficiency in formulation of
regulation
 Inadequacy in securities market legal
framework
 Lack of institutional infrastructures
 Efficiency of stock exchange
 Absence of institutional investors
 Information disclosure
 Securities instruments
Nepal Stock Exchange
 First and only one secondary market
 Securities market began with the floatation of shares
by Biratnagar Jute Mills Ltd and Nepal bank Ltd in
1937.
 Introduction of the Company Act in 1964.
 First issuance of government bond in 1964.
 Securities Exchange Center (SEC) was established in
1973.
 It was converted into Nepal Stock exchange (NEPSE)
in1993.
 Nepal Stock Exchange (NEPSE) is established under
the Companies Act- 2006, operating under
Securities Act- 2007.
Contd.
 Basic objective is to provide liquidity to the government
and corporate securities.
 NEPSE opened its trading floor on13th January 1994
 Regulator is SEBON.
 In August 2007, the company introduced automated
trading system.
 1993: Securities Board of Nepal (SEBON): Regulator of
Capital market of Nepal.
 2007: NEPSE started Automated Computerized system for
the trading.
 2011: Entry of Collective schemes in the market.
 2015: Dematerialized transaction started.
 2016: Fully automated trading system started
 2020: Online trading system
Trading mechanism
 Trading mechanism consists of offline and
online
 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
Contd.
 MF = Mutual fund
 NCD = Non-convertible debenture
 PS = Preferred stock
 WS = Warrants
 PCD = Partially convertible debenture
 FCD = Fully convertible debenture
Contd.
 Trading session: 3 trading session
• Special Pre opening session:10.30 to 10.45
• Pre opening session : 10.30 to 10.45
• Continuous session : 11 to 3
• Closing session: 3 to 3.05 (NA)
 Types of order: Market and limit order
Contd.
-REGULAR: An order which is completed on the
exchange and that confirms the order of lot size or
greater than that.
-ODD-LOT: An order which is completed on the
exchange and that confirms the order less than lot
size.
-MANUAL: An order which is placed by the brokers
and is reported individually by the buying and
selling brokers.
-BLOCK: An order which is placed by the brokers
and confirms to the minimum block trade specified
by the exchange and is reported individually by the
buying and selling brokers.
Classification of listed companies
Listed companies are classified on the basis
of following parameters:
• Paid up capital
• Period of listing of securities
• Distribution of dividend
• Rating made by a credit rating agency
• Whether financial statements are prepared
in a format as prescribed by a regulatory
agency.
• Whether general meetings are held on
scheduled time.
Class A
▪ The paid up capital of the company must be 1
arab.
▪ The Company must be listed for last three years.
▪ The Company must be in profit at least for the
last three years and dividend must be distributed
in each year.
▪ The listed company must be rated by rating
agency with higher rating than average rating.
▪ Financial statement must be prepared according
to the respective regulators.
▪ Annual general meeting must be completed
within 6-month of end of fiscal year.
Class B
▪ The paid up capital of the company must be 50
crore.
▪ The Company must be listed for last three
years.
▪ The Company must be in profit at least for the
last two years from last three years.
▪ The listed company must be rated by rating
agency with one step down than average rating.
▪ Annual general meeting must be completed
within 6-month of end of fiscal year.
▪ The listed company must not have cumulative
loss.
Contd.
Class G:
If company fulfill the conditions of Class A
and B but listing time is less than 2 years,
then company is classified as ‘G’.
 
Class Z:
If the listed company not included in A, B,
and G, the that company is categorized as
class Z.
Condition of order
- End of Day (EOD): This indicates the placed
orders if not executed will be retained until
end of today.
- Good till Cancel (GTC): This indicates the
order if not executed should be retained
until it is cancelled. This system has
provided facility for exchange to set the
time period in days till which the pending
orders can be retained in GTC.
Contd.
GTD: GTD stands for 'good 'til day (or date)' and is a type
of order that is active until its specified date.
IMMEDIATE OR CANCEL (IOC): This condition indicates that
the orders should be Executed in full or part immediately
the unexpected order will not be sent to public order book
but cancelled immediately by the system.
FILL OR KILL (FOK): This condition indicates the order must
get executed entirely or cancelled immediately. The
unexpected order will not be sent to Public order book but
killed (cancelled) immediately.
ALL OR NONE (AON) : This condition indicates the order must
get executed entirely & if not executed the order is sent to
public order book. In this condition too, NEPSE has modified
the system allowing entering the quantity of a stock to be
traded either at the multiple of lot size or greater than that.
Cost of buying and selling of securities
Contd.
INDEX-BASED TRADING HALT
Price change
Trading hours
Settlement
 T+2 for stock
 T+0 for debenture
Market depth
Role and importance
▪ Provide trading floor for the listed
securities.
▪ Enlist corporate as well as government
securities like shares, preferences shares,
development bonds and corporate bonds.
▪ Supervise and regulate its members.
▪ Timely dissemination of information.
▪ Act as a front line regulator for members.
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.
Contd.
 An index has base period to facilitate the
comparison.
 The stock market indexes are published in
financial newspapers and business
periodicals and used in various research
studies, and employed as a basis for
investment strategies.
 Furthermore, many researchers, investors,
different concerned institutions and
employees of different organizations use
indexes.
Contd.
The significance of stock market indexes
are as follows:
1. Evaluation of portfolio performance
2. Stock market and macroeconomic variables
3. Prediction of future market movement
4. Measurement of the systematic risk
 Methods of index calculation
 (i) Price weighted: DJIA and Nikkei 225
 (ii) Value weighted: NEPSE
 (iii) Equal weighted: Value line
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.
Structure
 1. Chairman : appointed by GON (tenure 4 years)
2. Joint secretary of Ministry of Finance
3. Joint secretary of Ministry of Law, Justice and
Parliamentary Affairs,
4. Representative from Nepal Rastra Bank,
5. Representative from Institute of Chartered
Accountants of Nepal,
6. Representative from Federation of Nepalese
Chambers of Commerce and Industries, and
7. One member appointed by the Government from
amongst the experts pertaining to management of
securities market, development of capital market,
financial or economic sector.
Functions
• To offer an advice, as per necessity, to the
Government of Nepal to the development of
capital market;
• To register the securities of any corporate
body established with the authority to make a
public issue of its securities;
• To regulate and systematise the issue,
transfer, sale and exchange of registered
securities;
• To grant permission to any corporate body,
which is desirous of operating a stock
exchange, to operate the stock exchange
Contd.
• To regulate and monitor the activities of
the stock exchange;
• To inspect as to whether or not any stock
exchange is executing its activities in
accordance with this Act or the rules and
bye-laws framed under this Act
• To issue a license to companies or
institutions, which are desirous of carrying
on the securities business subject to this
Act or the rules and bye-laws framed under
this Act;
Contd.
• To regulate and monitor the activities of
securities business person;
• To classify securities businesspersons and
fix their standards according to their
functions and capability by fulfilling such
procedures as prescribed;
• To grant a permission to operate collective
investment schemes and investment fund
programmes, and to regulate and monitor
the same;
SEBON regulates
• NEPSE
• CDSC
• Credit rating company
• Stock broker
• Merchant banker
• Stock dealers
• Issuing Company
• Listed Companies
• Mutual fund
• Depository participants
• C-ASBA institutions
Main features of Securities Act.

- The Securities Related 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.
CDS and 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
Contd.
-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.
Depository participant
 A depository participant (DP) serves as a mediator
between the depository (Central depository system &
clearing limited = CDSC) and investors.
 Functions of depository participants are
•opening demat account
• dematerialization of securities
• re-materialization of securities
• maintain record of securities in electronic form
• settlement trades by transferring/receiving
• allotted IPO/FPO/right share will be credited by
issue manager and RTS will deposit bonus shares,
and facilitate in pledging of dematerialized
securities.
Nepalese financial market
• General Overview
• Instruments and institutions
Equity instruments
- Common stock
 Preferred stock
 Right shares
 Further public offerings
 Mutual fund schemes

Debt instruments
- Corporate bonds
- Government bonds (Development bond, National saving,
Citizen savings bond, Foreign employment bond)
Contd.
•Institutions
 (1) SEBON

• NEPSE – 1
• CDSC - 1
• Listed Co. – 243
• Merchant banker – 30
• Mutual fund – 14
• Stock broker – 50
• Stock dealer – 1
• Credit rating agency: ICRA and Care rating (2)
•Depository participant (DP) = 81
• C-ASBA member - 64
Contd.
• Nepal Rastra Bank
- Commercial bank – 27
- Development bank – 20
- Finance company – 21
 Micro finance – 84
Cont.
• Insurance Board of Nepal
- Reinsurance co – 1 + 1
 Life insurance co – 19
 Non-life insurance co. 20
 Total insurance companies = 41
Contd.
• Non-Banking government corporation
- Employee provident fund -1
 Citizen Investment Trust -1
 Deposit and Credit Guarantee fund -1
 Nepal Infrastructure Bank Ltd. - 1
Contd.
• Department of Cooperative
- Cooperatives – around 34,000
Role and importance (Primary market)

- Promote long term investment


 Employment opportunity
 Industrialization
 Revenue generation
 Economic growth
 Mobilize savings
Role of secondary market
 Raising capital
 Collection of revenue
 Generation of employment
 Provide liquidity
 Valuation of securities
Participants of capital markets
 Issuers
 Investors
 Depository institutions
 Non-depository institutions
 Investment banking firms
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