TRADING OF SECURITIES

Overview of Nepal Stock Exchange

By:
Biman Khadka(5)
Mamata Thapaliya(10)
Pankaj K.C.(15)
Pravesh Timilsina(20)
Rohit Baral(25)
Suraksha Koirala(30)
Dipesh Yadav(35)

A Brief Report Submitted to:

Prof. Dr. Rajan B. Poudel
SOMTU

In partial fulfillment of the requirements for the degree of

Master of Finance and Control (MFC)

Kritipur, Kathmandu
1/1/2015

ACKNOWLEDGEMENT

This report has been prepared as per the requirement of Master of Finance and Control,
School of Management Tribhuvan University in which students are required to prepare
reports to familiarize them with the practical aspects of what has been learnt in theories in the
classroom.
We would like to express our gratitude Dr. Jeetendra Dangol, deputy director of MFC
program, School of Management Tribhuvan University for providing great help to work and
without whose approval this report would have never been completed.
We are highly indebted to Prof. Rajan B. Poudel of SOMTU, for his cordial co-operation,
supervision and inspiration without which this report would not have come into existence.
His intellectual guidance continually inspired us to complete this work.
We sincerely acknowledge our thanks to all respected teachers, friends and all colleagues in
completing this project.

Thank You!
Group Members

ABBREVIATIONS
NEPSE

Nepal stock Exchange

NRB

Nepal Rastra Bank

KYC

Know Your Customer

ATS

Automated Trading System

CDS

Central Depository System

IPO

Initial Public Offering

NATS

NEPSE Automated Trading System

GoN

Government of Nepal

OTC

Over the Counter

MC

Market Capitalization

OS

Outstanding Shares

ii

Contents
ABBREVIATIONS ...................................................................................................................ii
List of Tables ............................................................................................................................ iv
Chapter-1.................................................................................................................................... 1
1.1

Introduction ................................................................................................................. 1

1.2

History of Stock market .............................................................................................. 2

1.3

Nepal Stock Exchange ................................................................................................ 3

1.3.1

Index Dissemination in NEPSE: .......................................................................... 4

Table 1 index disssemination table .................................................................................... 4

1.3.2

Members of the stock market:.............................................................................. 4

1.3.3

Board members: ................................................................................................... 4

1.4

Importance of stock market ......................................................................................... 5

1.5

Broker and Brokerage Firms ....................................................................................... 6

1.6

Brokerage Commission ............................................................................................... 9

1.6.1

Taxation: ............................................................................................................ 10

Chapter -2................................................................................................................................. 11
2.1

Trading System of NEPSE ........................................................................................ 11

2.1.1

Over the Counter Market ....................................................................................... 11

2.1.2

Trading timings...................................................................................................... 12

2.2

Electronic trading ...................................................................................................... 12

2.3

Circuit Breakers......................................................................................................... 13

2.4

Listing and Delisting of Securities in NEPSE ........................................................... 13

2.4.1
2.5

Delisting of companies ...................................................................................... 15

NEPSE Index............................................................................................................. 16

2.5.1

Transaction Process in NEPSE .......................................................................... 18

2.6

Float Index................................................................................................................. 19

2.7

Sensitive Index .......................................................................................................... 20

2.7.1
2.8

Sensitive Float Index.......................................................................................... 20

Market capitalization ................................................................................................. 21

Chapter - 3................................................................................................................................ 23
3.1

Conclusion................................................................................................................. 23

Bibliography .............................................................................................................................. 1

iii

List of Tables
Table 1 Index disssemination table ............................................................................................ 4
Table 2 List of lisenced brokers ................................................................................................. 8
Table 3 Trading timings in NEPSE ......................................................................................... 12
Table 4 Capital requirement for public share proportion......................................................... 14
Table 5 Delisted companies ..................................................................................................... 16

iv

Chapter-1
1.1 Introduction
Stock market is the mechanism created to facilitate the exchange of the financial assets with a
maturity period of more than one year. It is a wide term embracing the buyers and sellers of
securities and constitutes all the agencies that assist the sale and resale of securities. In stock
market people buy and sell securities which are less tangible than gold but less valuable
(Ritter and Silber 2008). Stock market facilitates the exchange of financial securities, which
helps to mobilize internal and external financial resources.
Stock market is recognized as an effective way of raising funds for commercial enterprises,
and at the same time providing an investment opportunity for individuals and institutions
having surpluses. The enterprises can collect the funds from the stock market by issuing
various securities, i.e. equities, corporate bonds, mutual funds and derivatives etc. Similarly,
government can collect the funds from the stock market by issuing development bonds and
municipal bonds. Nonetheless, the selling of securities is possible only if individual and
institutional investors have level playing field in the market with ample opportunities for the
long term capital investment and short term speculative venture.
Safeguarding the interests of the investors is equally important together with overall
development and management of the stock market for attracting large number of domestic
and international investors. A small and scattered savings in the economy can be mobilized
productively with the mechanism of stock market. A person with a small amount of saving
also invest in mutual funds and get a good rate of returns without sufficient knowledge of
investment as the mutual funds are managed and operated by professional fund managers and
the fund managers make portfolios of different securities that maximize the return to the unit
fund holder.
Mass participation in country's industrialization process as visualized by the national plans is
possible through the efficient mechanism of the stock market. Stock market promotes
efficient collection of small and scattered savings from the investors and provides returns to
them in the form of dividend and interest with productive mobilization of these savings. The
global trend is to toward the capital market based financial system, which promotes the
competitiveness of financial industry and efficiency of corporation financing (Noh 2010).
Development of stock market enables high quality enterprises to increasingly finance

themselves from securities rather than bank loans (Shrirai 2004). Unlike traditional bank
based financing, developed stock market provides financing only to the firms having good
performance and transparency.

1.2 History of Stock market

Stock market in Nepal began with the issue of shares by Biratnagar Jute Mills Ltd. in 1937.
Securities marketing center (SMC) was established in April 1977 under Industrial policy,
1974 with the objective of facilitating the transaction of government, development bonds and
corporate securities. SMC started secondary trading of securities in November 1981, which
restricted to government bonds. Till 1983, the concept of well-structured secondary market
and not evolved in Nepal and also no separate Act existed to regulate the trading of securities.
Securities Exchange Act, 1983 was enacted in 1983. The Act restricted the exchange of
unlisted securities. SEC opened its floor for corporate share trading in November 1984.
Before conversion into Nepal Stock Exchange Limited (NEPSE) in 1993, it was only stock
market institution undertaking the job of brokering, underwriting, managing public issue,
market making for government bonds and other financial services. The first amendment in
Securities Exchange Act, 1983 in 1993 covered the way for the restructuring of stock market
in Nepal, which led to establish Securities Board of Nepal (SEBON) in 1993 with a mandate
to regulate and develop stock market in the country. SEBON started to register securities and
grant approval for issuing securities to the public in 1993. The first adjustment in the Act also
led to convert the then SEC into NEPSE, a full-fledged open-out-cry trading system with the
induction of stockbrokers in January 13, 1994. The first adjustment in Securities Exchange
Act, 1983 and the consequent developments were the beginning of an organized development
of stock market in the country. Securities Exchange Act, 1983 was replaced by the 1997.
As per the provision of the second amendment, SEBON provided licenses to the securities
business persons in 1997. The amendment made mandatory provisions for the listed
companies to submit annual and semi-annual reports to SEBON. This amendment also
required scurrilities businesspersons to submit annual reports incorporating the securities
transaction carried out by them to SEBON. Another Securities Exchange Act was formulated
by SEBON in 2007. SEBON started to provide merchant banking licenses under Securities
Businessperson (Merchant Banker) Regulation, 2007 on February 5, 2009. National Finance
Company Ltd is the first company obtaining merchant banking license under the new
2

regulation. Similarly, SEBON started securities data management system of Nepal (SDMSN)
on 15 November, 2009 with the central securities data bank, online reporting system, and
uninterrupted power backup.

1.3 Nepal Stock Exchange

Nepal Stock Exchange in short NEPSE, is established under the company Act, operating
under Securities Exchange Act, 1983. The Nepal Stock Exchange Limited is the only Stock
Exchange of Nepal. It is located in Singh Durbar Plaza, Kathmandu Nepal. On March 23,
2014 the equity market capitalization of the companies listed on NEPSE was approximately
US$ 7896 million. The basic objective of NEPSE is to impart free marketability and liquidity
to the government and corporate securities by facilitating transactions in its trading floor
through member, market intermediaries, such as broker, market makers etc. NEPSE opened
its trading floor on 13th January 1994.
Government of Nepal, Nepal Rastra Bank, Nepal Industrial Development Corporation and
members are the shareholders of NEPSE. Moreover, the history of securities market began
with the floatation of securities by Biratnagar Jute Mills ltd. Nepal Bank Ltd in 1937.
Introduction of the company Act in 1964, the first issuance of Government Bond in 1964 and
the establishment of Securities Exchange Center Ltd, in 1976 were other significant
development relating to capital markets.
Securities Exchange Center was established with an objective of facilitating and promoting
the growth of capital markets. Before conversion into Stock Exchange it was the only capital
markets institution undertaking the job of brokering, underwriting, managing public issue,
market making for government bonds and other financial services. Nepal Government, under
a program initiated to reform capital markets converted Securities Exchange center into
Nepal Stock Exchange in 1993.
Members of NEPSE are permitted to act as intermediaries in buying and selling of
government bonds and listed corporate securities. At present, there are 23 member brokers
and 2 market makers, who operate on the trading floor as per the Securities Exchange Act,
1983, rules and bye-laws. Beside this, NEPSE has also granted membership to issue and sales
manager securities trader (Dealer). Issue and sales manager works as manager to the issue
and underwriter for public issue of securities whereas securities trader works as individual

portfolio manager. At present there are 11 sales and issue manager and 2 dealers (secondary
market). The tenure of the membership is one year. The license should be renewed within 3
months after the closure of the fiscal year. If not, it can be done within another three months
by paying 25% penalty.
1.3.1 Index Dissemination in NEPSE:
S.no

Name

Base Year

NEPSE Index

1994-02-12

Sensitive Index

2007-01-01

Float Index

2008-09-15

Float Sensitive Index

2008-09-15

Table 1 index disssemination table

1.3.2 Members of the stock market:
Members of NEPSE are permitted to act as intermediaries in buying and selling of
government bonds and listed corporate securities. At present, there are 50 member brokers
who operate on the trading floor as per the Securities Exchange Act, 1983, rules and byelaws. Besides this, NEPSE has also granted membership to issue and sales manager securities
trader (Dealer). Issue and sales manager works as manager to the issue and underwriter for
public issue of securities whereas securities trader (Dealer) works as individual portfolio
manager.
1.3.3 Board members:
The Board of Directors (BOD), which will govern NEPSE, constitutes of members
representing different sectors as per Securities Act 2006. At Present, the BOD constitutes 2
Members including a chairman from Nepal Government, 2 Members from Nepal Rastra
Bank, 1 from NIDC. Moreover, one member will be nominated by BOD as an expert in
capital market. General Manager of NEPSE will serve as a director on the BOD.
(source: NEPSE Securities Act)

1.4 Importance of stock market

1. Economic Barometer:
A stock exchange is a reliable barometer to measure the economic condition of a country.
Every major change in country and economy is reflected in the prices of shares. The rise or
fall in the share prices indicates the boom or recession cycle of the economy. Stock exchange
is also known as a pulse of economy or economic mirror which reflects the economic
conditions of a country.
2. Pricing of Securities:
The stock market helps to value the securities on the basis of demand and supply factors. The
securities of profitable and growth oriented companies are valued higher as there is more
demand for such securities. The valuation of securities is useful for investors, government
and creditors. The investors can know the value of their investment, the creditors can value
the credit worthiness and government can impose taxes on value of securities.
3. Safety of Transactions:
In stock market only the listed securities are traded and stock exchange authorities include the
companies names in the trade list only after verifying the soundness of company. The
companies which are listed they also have to operate within the strict rules and regulations.
This ensures safety of dealing through stock exchange.
4. Contributes to Economic Growth:
In stock exchange securities of various companies are bought and sold. This process of
disinvestment and reinvestment helps to invest in most productive investment proposal and
this leads to capital formation and economic growth.
5. Spreading of Equity Cult:
Stock exchange encourages people to invest in ownership securities by regulating new issues,
better trading practices and by educating public about investment.
6. Providing Scope for Speculation:

To ensure liquidity and demand of supply of securities the stock exchange permits healthy
speculation of securities.
7. Liquidity:
The main function of stock market is to provide ready market for sale and purchase of
securities. The presence of stock exchange market gives assurance to investors that their
investment can be converted into cash whenever they want. The investors can invest in long
term investment projects without any hesitation, as because of stock exchange they can
convert long term investment into short term and medium term.
8. Better Allocation of Capital:
The shares of profit making companies are quoted at higher prices and are actively traded so
such companies can easily raise fresh capital from stock market. The general public hesitates
to invest in securities of loss making companies. So stock exchange facilitates allocation of
investors fund to profitable channels.
9. Promotes the Habits of Savings and Investment:
The stock market offers attractive opportunities of investment in various securities. These
attractive opportunities encourage people to save more and invest in securities of corporate
sector rather than investing in unproductive assets such as gold, silver, etc

1.5 Broker and Brokerage Firms

A broker is an individual party that arranges transaction between buyer and seller for a
commission. A broker also acts as a seller or as buyer. The prime responsibility of broker is
to bring seller and buyer together thus; a broker is the third person facilitator between buyer
and seller. An example would be stock broker, who makes the sale or purchase of securities
on behalf of his clients. Broker play huge role in the sale of stock, bonds, and other financial
service. There are various types of brokers such as stock broker, mortgage broker, option
broker, share broker, real estate broker, custom broker, investment broker and many more.
Brokerage firms are simply financial institutions that facilitate the buying and selling of
financial securities between buyer and seller. Brokerage firm serve a clients of investors, who
trade public stocks and other securities. A brokerage firm usually undertakes more than

simply carrying out a stock or bond trade. These firms also offer margin loans for certain
approved clients to purchase investment on credit, subject to agreed terms and condition.
Traditional brokerage firms have also become a source of up to date stock price and quotes.
In Nepal there are 50 licensed brokers. The broker and brokerage firm of Nepal are as
follows.
S.N

Securities broker

Address

Asian creation pvt.ltd

Putalisadak, Kathmandu

Trishul securities ltd.

Newpalza, Kathmandu

Primo securities pvt. Ltd

Putalisadak, Kathmandu

Thrive brokerage house pvt. Ltd

Naksal, Kathmandu

Arun securities pvt.ltd

Putalisadak, ktm

Sagaramataha securities pvt.ltd

Newplaza, ktm

Shree Krishna securities pvt.ltd

Dharmapatha, Kathmandu

Midas stock broking company pvt.ltd

Kamaladi, Kathmandu

ABC securities pvt.ltd

Indrachowk, Kathmandu

10

J.F securities pvt.ltd

Putalisadak, Kathmandu

11

Nepal stock house pvt.ltd

Anamnagar, Kathmandu

12

Stock broker opel securities investment Putalisadak, Kathmandu

pvt.ltd

13

Market securities exchange pvt.ltd

Khichapokahri, Kathmandu

14

Asutosh brokerage & securities pvt.ltd

Khichapokahri, Kathmandu

15

Malla

and

malla

stock

broking Dillibazar, Kathmandu

com.pvt.ltd
16

Kumara securities pvt.ltd

Dillibazar, Kathmandu

17

Pragyan securities pvt.ltd

Kamaldi, Kathmandu

18

Siprabi securities pvt.ltd

Kupandol, Kathmandu

19

Sweta securities pvt.ltd

Putalisadaka, Kathmandu

20

Silpa securities pvt. Ltd

New road Kathmandu

21

Premier securities company pvt.ltd

Putalisadak, Kathmandu

22

Agrawal securities pvt.ltd

Putalisadak, Kathmandu

23

Nepal investment & securities treding Purano baneswar Kathmandu

pvt.ltd

24

Kalika securities pvt.ltd

Putalisadak, Kathmansun du

25

Swarnalaxmi securities pvt.ltd

Kamalpokhari, Kathmandu

26

Dakchinkali

investment

securities Kamaladi, Kathmandu

pvt.ltd
27

Dipsikha

stock

exchange

treding Anamnagar, Kathmandu

company pvt.ltd
28

Kohinoor

investment

&securities Kamlpokhari, Kathmandu

pvt.ltd
29

Dynamic money managers securities Putalisadak Kathmandu

pvt.ltd

30

Vision securities pvt.ltd

Putalisadaka, Kathmandu

31

Secured securities pvt.ltd

Putalisadak, Kathmandu

32

Sumeru securities pvt.ltd

Hattisar, Kathmandu

33

Sani securities company ltd.

Jamal Kathmandu

34

South asian bulls pvt.ltd

Kuleshwar, Kathmandu

35

Linch stock market limited

Kuleswar, Kathmandu

36

Imperial securities company pvt. Ltd

Anamnagar, Kathmandu

37

Creative securities pvt. Ltd

Putalisadak, Kathmandu

38

NI V securities pvt.ltd

Putalisadak, Kathmandu

39

Trishakti securities public limited

Putalisadak, Kathmandu

40

Online securities pvt.ltd

Putalisadak, Katmandu

41

Cristal kanchanga securities pvt.ltd

Newpalaza, Kathmandu

42

Sundhara securities pvt. Ltd

Sundhara, Kathmandu

43

Oxford securities pvt. Ltd

Kalimti, Kathmandu

44

NASA securities pvt. Ltd

Naksal, Kathmandu

45

Bhrikuti stock brokerage pvt.ltd

Newroad, Kathmandu

46

Investment management Nepal pvt.ltd

Tripureawar, Kathmandu

47

Sewa securities pvt.ltd

Tripureswar, Kathmandu

48

Shree hari securities pvt. Ltd

Kamaladi, Kathmandu

49

Aryatara investment and securities Anamnagar, Kathmandu

pvt.ltd

50

Dibya securities & stock house pvt.ltd

Putalisadak, Kathmandu

Table 2 list of lisenced brokers

1.6 Brokerage Commission

Every time an investor buys or sells shares certain amount is paid as charge to the broker as
Brokerage Commission. The rate of brokerage commission on equity transactions, in
secondary market, ranges from 0.7 percent to 1 percent depending on the traded amount.
The following tables provide the information on brokerage commission as per the rules of
NEPSE.
A. Brokerage Commission for Equity

Traded Amount

Rate of Commission

Up to Rs.50,000

1%

Rs.50,001 to Rs.4,99,999

0.9 %

Rs.50,001 to Rs.9,99,999

0.8 %

Above Rs.10,00,000

0.7 %

B. Brokerage Commission for Government Bond

Traded Amount

Rate of Commission

Up to Rs.5,00,000

0.20%

Rs.5,00,001 to Rs.49,99,999

0.10%

Above Rs.50,00,000

0.05%

C. Brokerage Commission for all other financial instruments not mentioned in A and B

Traded Amount

Rate Of Commission

Up to Rs.50,000

0.75%

Rs.50,001 to Rs.49,99,999

0.60%

Above Rs.50,00,000

0.40%

The brokerage commission is not the net revenue of the broker. It is distributed as follows:

1. 60% of the brokerage is retained by concerned Broker.

2. 25% of the brokerage is paid to NEPSE.
3. 15% of the brokerage is deducted as TDS (Tax Deducted at Source).
Note: The rate of commission is charged on the transaction amount.
1.6.1 Taxation:
As per the, section 1, sub-section 2 of the Aarthik Bidhayak Act 2066 the provision of
section 1,2,3,4,5 and 10 will be executed immediately and the rest of the provisions are
executed from Shrawan 1, 2066.
The section 52 of the said act specifies that the capital gain tax on listed securities are as
follows:In Case of Listed Securities
Capital Gain Tax for Individuals:- 5% of the Gain
Other Than Individuals:- 10% of the Gain
In Case of Non-Listed Securities
Capital Gain Tax for Individuals: - 10% of the Gain
Other Than Individuals: - 15% of the Gain

10

Chapter -2
2.1 Trading System of NEPSE
NEPSE introduced fully automated screen based trading from 24th August, 2007. Significant
developments have been made in the secondary market in recent years, especially after the
GoN decided to reform the capital market. The computerized trading system has replaced the
open-cry-out system. NEPSE operates on the NATS, a fully screen based automated trading
system, which adopts the principle of an order driven market. Purchase & Sell of Physical
Share certificates is done through NATS. NATS adopts the principle of an order driven
market.
NEPSE has implemented the wide area network (WAN) system. Hence trading can be done
either from NEPSEs trading floor or from the brokers office. NEPSE uses a sophisticated
technology to help brokers easily perform their transactions.

2.1.1 Over the Counter Market

OTC market is a decentralized market, without a central physical location, where market
participants trade with one another through various communication modes such as the
telephone, email and proprietary electronic trading systems. An OTC market and an exchange
market are the two basic ways of organizing financial markets. In an OTC market, dealers act
as market makers by quoting prices at which they will buy and sell a security or currency. A
trade can be executed between two participants in an OTC market without others being aware
of the price at which the transaction was effected.
OTC markets are primarily used to trade bonds, currencies, derivatives and structured
products. OTC markets are typically bifurcated into the customer market where dealers
trade with their clients such as corporations and institutions and the interdealer market, where
dealers trade with each other. The price a dealer quotes to a client may very well differ from
the price it quotes to another dealer, and the bid-ask spread may also be wider in the case of
the former than in the latter. While OTC markets function well during normal times, their
lack of transparency can cause a vicious circle to develop during times of financial stress.

11

2.1.2 Trading timings

Trading on equities takes place on all days of week (except Saturdays and holidays declared
by exchange in advance). On Friday only odd lot trading is done.
The market timings of the equities are:Equities trading

Odd lot trading

Days

Sunday to Thursday

Friday

Market open

12:00 hrs

12:00 hrs

Market close

15:00 hrs

13:00 hrs

Table 3 trading timings in NEPSE

The exchange may however close the market on days other than schedule holidays or may
open the market on days originally declared as holidays. The exchange may also extend,
advance or reduce trading hours when it deems it necessary.

2.2 Electronic trading

For the first time in the country, electronic share trading began with two stockbroker
companiesKalika Securities and Trishakti Securitiescarrying out trading of 30 units of
dematerialised shares of Agriculture Development Bank.
Government authorities, including the CDS and Clearing Limited and Securities Board of
Nepal, have to bring the entire listed companies into demat system of share trading within six
months after the first transaction of dematerialised shares, according to CDS Bylaws 2012.
The government had been considering adopting online stock trading system for the last few
years. Although the Nepal Stock Exchange (Nepse) was established two decades ago to
facilitate stock trading, there had not been any digitalised system of transaction.
The government then set up CDS four years ago to promote online clearance of stock trading.
CDS had announced to start a full-fledged online clearing system by October, 2013, but
failed to do so due to various reasons, including companies reluctance to acquire licences of
clearing members (CMs) and depository participants (DPs).
With the launch of the paperless transaction, investors will now have to register their selling
orders only after converting their share certificates into the paperless format, which can be

12

done through DPs. Both CMs and DPs are directly linked to CDS through software, which
helps settle stock transaction instantly.
Investors have to wait for just three days to get the ownership transferred under the online
trading system. Apart from reducing the clearance time, the paperless shares transaction
system is also expected to boost stock transactions from outside the valley.

2.3 Circuit Breakers

Circuit breakers refer to any of the measures used by stock exchanges during large sell-offs to
avert panic selling. Sometimes called a "collar." After an index has fallen a certain
percentage, the exchange might activate trading halts or restrictions on program trading. For
example, if the Dow Jones Industrial Average falls by 10%, the NYSE might halt market
trading for one hour. There are other circuit breakers for 20% and 30% falls.
The index-based circuit breaker system applies at three stages of the NEPSE index movement
of 3%, 4% and 5%.These circuit breakers when triggered bring about a trading halt in all
equity.
In case of 3% movement either way, there would be a market halt for 15 minutes if the
movement takes place during first hour of trading i.e. 13:00 hours. In case this movement
takes after 13:00 hours there will be no trading halt at this level and market shall continue
trading.
In case of 4% movement either way, there would be a market halt for half an hour if the
movement takes place before 14:00 hours. In case this movement takes after 14:00 hours
there will be no trading halt at this level and market shall continue trading.
In case of 5% movement in either way, trading shall be halted for the remainder of the day.

2.4 Listing and Delisting of Securities in NEPSE

In Nepal, the company willing to sell its securities to the general public shall have to get
listed with Nepal Stock Exchange. Documents needed and points to be explained to apply for
listing are company objectives, ownership structure, memorandum of association, articles of
association and audited balance sheets and profit and loss accounts and annual reports for the

13

last three consecutive years to the Nepal Stock Exchange. Some documents like audited
financial statements and annual reports are mandatory to furnish to Nepal Stock Exchange at
the end of each year in order to renew the listed company. At present there are 271 companies
listed in NEPSE including banks, insurance companies, hydropower and hotels.
Listing criterions are as follows:

Paid up capital at least Rs. 2,500,000

Minimum number of shareholders 500

Face value per share Rs. 10 or Rs. 100

The following minimum proportion of public share is required as per capital amount:
Capital

% of Public Share

Upto 10 M

25 %

Rs 10 to Rs 50 M

20 %

RS 50 to Rs 100 M

15 %

More than 100 M

Determined by NEPSE

Table 4 capital requirement for public share proportion

Nepal Stock Exchange (NEPSE) had given listed companies a month-long ultimatum to
register with Central Depository System and Clearing Ltd (CDSCL) or face consequences.
CDSCL is a subsidiary of NEPSE that provides one-window service for centralized
depository, clearing and settlement services in the capital market. It acts as a central
depository for various instruments (equity, bonds, and warrants etc) especially to handle
securities in dematerialized form without physical movements of securities or execution of
transfer. Companies will be able to enlist their shares in the secondary market even without
issuing their Initial Public Offering (IPO) if the proposed securities listing bylaws comes into
implementation.

Nepal Stock Exchange (NEPSE) has brought forward the draft bylaws for discussion among
stakeholders. The proposed bylaws allow companies to list their shares in the bourse for
trading for a maximum of two years without going into public. The proposed bylaw will
replace the existing Securities Listing Bylaw 2053.The new provision is being proposed on
the wake of growing complaints that the NEPSE has failed to attract many companies, mostly
of realty sector, in the secondary market. According to the proposed bylaws, companies
14

interested to list their shares, however, will have to submit detailed time-bound plan to hand
over the shares to public through IPO or other ways.
Likewise, the proposed bylaws categorize listed shares into two types -- permanent and
temporary securities. The permanent securities include ordinary shares, irredeemable
preferential shares and bonds, while the temporary listing includes mutual fund, redeemable
preferential shares, bond, and preferential shares to be converted to ordinary ones, right
shares advice slips, unitary saving scheme, and securities to be converted into ordinary
shares.
2.4.1 Delisting of companies
Delisting is the removal of a listed security from the exchange on which it trades. Stock is
removed from an exchange because the company, for which the stock is issued, whether
voluntarily or involuntarily, is not in compliance with the listing requirements of the
exchange. Any company found to be in contravention of new, more stringent, listing
requirements, should be warned and ultimately de-listed from the exchange if they do not
comply.
In the world today, the reasons for delisting include violating regulations and/or failing to
meet financial specifications set out by the stock exchange. Companies that are delisted are
not necessarily bankrupt, and may continue trading over the counter.
As per the current rule, the companies can be delisted, if they fail to submit renewal charge,
discontinue AGM, failed to audit financial status, unreachable contact address of
registered office and discontinuation of communication from the promoters, board of
directors and management of the concerned companies to the stock exchange and the
regulators. Most of the manufacturing and trading companies are eligible for being delisted
according to the rule.

15

Delisted companies
Company name

Sector

Bhageshwori development bank BBLN

Development bank

limited
Biratnagar Jute Mills limited

BJN

Manufacturing

and

processing unit
Himgiri

Textile

Industries HTL

Limited

Manufacturing

and

processing unit

Morang Sugar Mills Limited

MSM

and

processing unit
NFL

Narayani Finance Ltd.

Manufacturing

National Pro. And Eco. Dev. ESC

Finance
Other

Centre
Nepal Bangladesh Finance & NBFL

Finance

Leasing Co. Ltd.

Nepal

Byapar

Bikash NBCK

Trading

Company(Koshi) Limited
Table 5 delisted companies

Source: Nepal stock exchange website

2.5 NEPSE Index

The calculation of the NEPSE index is based on the concept of the market capitalization. If
the ratio of current period market capitalization to the base period market capitalization is
multiplied by the multiplier 100, we get the NEPSE index. This method of index calculation
is called value weighted method.
In reality, the number of the listed companies keeps on changing, and the number of the
outstanding shares also keeps on changing as the company issues right shares or bonus shares
or common shares at the time of capital needs.

16

How is the base period adjusted in such a dynamic real world?

The actual practice to adjust the base period is as follows:
Adjusted Base Period = New Market Capitalization including new listing/ New Market
Capitalization excluding new listing * Base Years Market Capitalization
This concept is illustrated by the following hypothetical example. First of all imagine that the
initial conditions of the outstanding shares and its prices are as follows:
Companies

Outstanding shares

Closing Prices

M. C. At 0 time

1000

40

40000

1200

35

42000

1500

50

75000

Total Market Capitalization (Total market value)

157000

Now suppose that the number of outstanding shares and the prices of the stocks at period 1
changed as presented below (company A issued 50 bonus shares and prices of the stocks
altered).
Companies

O.S.

O.S

Closing Prices

New M. C.

New M. C.

excluding

including new

At 1 period

new listing

listing

At 0

At 1

Period

Period

1000

1050

45

45000

47250

1200

1200

40

48000

48000

1500

1500

55

82500

82500

17

Total Market Capitalization (Total market value)

175500

177750

Following the above adjustment formula,

Adjusted base year = 177750/175500 * 157000 = 159012.82
Now the NEPSE Index for period 1 is, (177750/159012.82) *100 = 111.78.
2.5.1 Transaction Process in NEPSE
Fill up client information form (KYC) in the broker company

Required document

1 Copy of photograph

1 Copy of photocopy of citizenship certificate /birth certificate (in case

of minor)

1 Copy of photocopy of Identity card, if govt. employee

Fill up order form

For buying single order form

For selling signature verified documents with certificates

Validity up to 15 days

Buying order executed

Pay broker required amount T + 1

(T+1 means that when a security is purchased, payment and the securities
certificate must change hands no later than one businessdays after the trade is
executed.)

Document to be received after T + 5

(T+5 means that when a security is purchased, payment and the securities
certificate must change hands no later than five businessdays after the trade is
executed)

For BT, sign BT application

18

For OT, sign transfer document

Selling order executed

Deliver signature verified document with share certificate

Selling amount to be received after T + 5

(T+5 means that when a security is purchased, payment and the securities certificate
must change hands no later than five business days after the trade is executed)

2.6 Float Index

Nepse has introduced float index and sensitive float index the globally accepted best
practice to make the secondary market index more realistic. This index does not include the
promoter share holder's shares and staff owned share which cannot be sold for certain period
of time.
The majority in the stock market is of financial institution and the majority share is of
promoter in those company and their shares are rarely sold in the secondary market. So to
measure the share transaction in the secondary market, Nepse Float index is useful one.
After the use of floating index the share market will be more transparent and the confidence
of the investor will also increases. The actual possible transaction will appear in float index
because the locked up shares are ignored while calculating the value. It will reflect the real
share market.
Free-float methodology makes the index more broad-based by reducing the concentration of
the top few companies. As the free float index ignores the locked up shares by promoters,
employee and other holder which are going to hold share for certain period. Off course this
will reduce the concentration of top companies which shares are widely held by the
promoters and other long term holders.
NEPSE started calculating float index from Bhadra 26, 2065 (Base Date). This index
represents the market capitalization of securities which are floated to public. It takes into
account the securities held by general public that are readily available for trading in the
market.
Float Index =[ Current MV of all shares listed in NEPSE floated to general public/ MV of
shares in Base year] *100
19

Float market capitalization=share price x (outstanding shares locked in shares)

2.7 Sensitive Index

The sensitive index measures transaction or share value of category A company. It only
considers share value of financially sound companies. In the present condition 120 companies
are listed as group A companies (source: NEPSE Annual Trading Report 2012/2013).
Requirement to be A grade company; paid up capital of Rs. 20 million. Having net worth of
more than its paid up value and which has submitted its financial statements during the first
six months of the fiscal year is classified under group A.
How to calculate sensitive index?
Sensitive Index = [Current MV of all shares listed in NEPSE under Group A/ MV of shares
in Base year] *100
2.7.1 Sensitive Float Index
Sensitive float index represents the market capitalization of securities of companies listed
under group A which are floated to public. It is like a float index of category A company.
It only considers the share value which is readily available for trading, it ignores the locked
up shares.

Market Indices

As of 2014-12-31
Index

Current

Points Change

% Change

NEPSE

902.33

-4.9

-0.54

Sensitive

193.7

-1.55

-0.79

Float

62.96

-0.41

-0.64

Sen. Float

52.85

-0.44

-0.83

(Source; http://www.nepalstock.com.np/)

20

How to Calculate?
Sensitive Float Index = [Current MV of all shares listed in NEPSE under Group A Floated
to public / MV of shares in Base year] *100

2.8 Market capitalization

Market capitalization (or market cap) is the total value of the shares outstanding of a publicly
traded company; it is equal to the share price times the number of shares outstanding. As
outstanding stock is bought and sold in public markets, capitalization could be used as
a proxy for the public opinion of a company's net worth and is a determining factor in some
forms of stock valuation (source :Wikipedia).
For example, the company named 'Y' has registered 5, 00,000 outstanding number of shares
@ Rs 100. Market capitalization value was Rs 50 corer. The market capitalization of each
company is added to find out total market capitalization. Stock exchange finds out the market
index on the base of market capitalization.
Market capitalization generally means the total market price of listed securities. It is derived
by multiplying the number of listed securities of all companies by the closing market price of
corresponding securities and summing up them. So, Market capitalization always indicates
the present value of the investments. The market capitalization has a directly proportional
relation to NEPSE index. I.e. when market capitalization increases NEPSE index also
increases and vice-versa.
As of 2014-12-31
Total Turnover Rs

365,010,832

Total Traded Shares

1,063,950

Total Transactions

2071

Total Scripts Traded

122

Total Market Capitalization Rs

925,355.15 Millions

Floated Market Capitalization Rs

288,284.74 Millions

(Source; http://sharebazarnepal.com.np/)
21

From above we can see that market capitalization of NEPSE (925,355.15 Millions) on date
2014-12-31.
Requirement of other indices by nepse (float indices)
The standard NEPSE index designed to follow Market Capitalization- Weighted
methodology. In this design large companies which have high market capitalization affect the
indexes. The slight change in price level affects whole the nepse index. But most of such
large companies shares are locked up or they are not readily available for public. This
creates artificial rise or fall. The large company like Nepal telecom, nabil bank, standard
chartered bank, investment bank holds market in greater extent. So any changes of price level
of such company affects whole the nepse standard index.
In 2013 a plunge in Nepal telecom share price following its book closure further dampened
the performance of stock market for week. The share price of NT that has biggest market
capitalization in stock exchange went down by RS 48 per unit that crushed other sub group
by 56.38 points. (Source; the Himalayan Times, 23 March 2013)
Thats why NEPSE introduced free float and sensitive float index techniques to measure the
realistic measure of change in stock price. This methodology only considers the freely floated
shares for calculating market capitalization. So index is constructed on the basis of free float
market capitalization.

The free float methodology gives rational view on share market

because it ignores the locked up shares. It provides the true amount of floated shares and true
impact of their price level. Market capitalization of large companies reduced to the level of
readily available shares, this will reduce the artificial impact of big companies in share
market. It is good news for both investor and potential investor of Nepalese share market.
This will give true and actual figure of share market to the investor. So depending upon the
float indexes they can make their rational decision on investment.

22

Chapter - 3
3.1 Conclusion
Securities market plays a pivotal role in mobilizing the fund in the economy. Investment in
securities market leads to channeling the fund towards productive sector. Capital market is
always important to every investor. From here they can participate in the development of
economy. Index also represents the financial figure of nation or it shows how well are the
companies of particular nation are doing. Foreign investors rely on capital market
performance before investing in the country. Stock market can be taken as an indicator of
development and financial performance.
In Nepal NEPSE is only the institution established for capital market practices which since its
establishment is continually connecting the investor or potential investor to share market. It is
responsible for calculating the indexes and changes in indexes. The basic objective of NEPSE
is to impart free marketability and liquidity to the government and corporate securities by
facilitating transactions in its trading floor through member, market intermediaries, such as
broker, market makers etc. It seems that NEPSE is partially fulfilling its objectivity but still
there is a long way to fulfill its objectivity completely. There are some regulatory issues and
transparency problem in NEPSE. Still small shareholder does not have access to full
documented information.
NEPSE is only confined to equity market; transaction of debt is negligible in stock market.
NEPSE should also focus on debt transaction. This is an era of globalization so it would
beneficial to be integrated with world market. In order to fulfill its objectivity NEPSE should
follow the securities act effectively and it should also practice good corporate governance to
develop the corporate culture in it. The disclosure of data should be available to all level of
shareholder and it should maintain high level of transparency.
The development of stock market in Nepal is critical. Being capital deficient country it
requires capital at low cost without it funding long term and intermediate term development
activities from domestic and international sources at low cost seems distant. The increasing
and dynamic stock market activities facilitating private sector participation in the industries
and infrastructure development projects of the country ultimately contribute to the economic
growth that is required in the capital deficient and underdeveloped country like Nepal.

23

Bibliography
(2005). Financial Accountability in Nepal: Country Assessment . World Bank.
The Himalayan Times. (2008). Retrieved december 23, 2014, from thtlive.com.np.
sharemarket. (2012, june 12). Retrieved december 29, 2014, from sharebazaar:
http://www.sharebazaar.com
(2013). Bank Supervision Report. NRB.
Gurung, J. B. (2004). Growth and Performance of Securities Market in Nepal.
Nepal Rastra Bank. (n.d.). Retrieved from Nepal Rastra Bank: http://www.nrb.org.np
Pushkar Bajracharya, P. K. (2002). Nepalese Capital Market Issues and Challenges. economic
review.
Zvi Bodie, A. K. (2009). investments. New York: tata Mc Graw Hill.