Primary Market and It
Primary Market and It
INTRODUCTION
The major concern of countries of the world has been to accelerate the economic
growth and thereby to increase the welfare of their people. Economic growth
requires capital investment. This would require fearing up of saving, creating,
conducting and enabling investment atmosphere and developing efficient capital
market to facilitate mobilization of both ownership and debt capital through
appropriate instrument. The development of corporate culture depends upon a
sound financial system, a set of complex and closely connected or inter-mixed
institution, agents process, markets, claims etc. in an economy.
The worldwide movement towards open and market oriented economic system
in the economy. It has led to growth and expansion of banking and financial
system too. As a matter development of new financial instrument and improved
and diversified financial services are taking place. One of the concrete financial
services is merchant banking function. Under merchant banking function
financial institutions provide necessary information on the financial instruments
to any industry or any concern involved in business, in addition to consultancy
services on procedural formation to use the instruments and all necessary
management services.
As democracy established in 2007 B.S., the interior government were much busy
in advising the measure to recognize the sick industries and gave little attention
to initiate and development of stock market until 2033 B.S. A government owned
and operated Security Exchange Center was established in 2033 B.S. In 2047
B.S, when democracy was resolved the interim government, in its short period
Citizen Investment fund (CIF) has established. The establishment of NIDC
Capital Market Ltd. is also another major step to improve financial system in
Nepal.
Primary Market
The primary markets are those where new financial assets are issued or
generated. They are the media by which demanders and suppliers of todays
funds and the creators and accepters of financial claims meet. In these primary
markets, financial assets are created and exchanged, satisfied in the part of the
financial needs of both demanders and suppliers of todays fund. At the present
concept, it is the market for direct issuance of government securities. The
primary market of the country is dominated by the government securities due to
the existence of new issue market for individual securities.
Securities generally have two stages in their life time. The first stage is when the
company initially issues the securities directly from its treasury at a
predetermined offering price. This is the primary market offering .It is referred
to as the initial public offering (IPO).Investment dealers frequently buy initial
offerings on the primary market and resell the securities on the secondary market.
With the increase in pubic issue, the services required in the other sectors of
securities business such as issue management, market making, brokerage
service, underwriting activities also increase. This will help to benefit the people
involved in such type of business. When the public issues increases, the
corporate bodies also increase the volume of trading in the stock exchange. So,
the development of primary market has significant impact on the development
of secondary market.
The downfall of NEPSE index is mainly due to the unfair market practices that
went undetected for a long period in share market. The unfair share market
practices cover wash sales, concerning of the share market, churning, formation
of pools and cartels, misuse of insider information and so on. In wash sales, there
are simply records of a sale but there is no sale of share at all.
Corporate bodies started offering public issues after the economic liberalization.
Investors are investing their fund into stocks without studying the prospectus of
the company or even without knowing about the companys area of business and
its future business opportunities. This led to over-subscribing of the shares.
Investors need sufficient information about the company before investing in the
initial public offering. However, there is a general feeling among the investors
that the information disclosed through the public announcement and prospectus
does not truly reflects the true picture of the future prospects of the company. It
is found to be true in some extent, some companys performance after the public
issue had been found to be very poor though they showed very optimistic
forecasts in the prospectus. After the policy of economic liberalization adopted
by Government of Nepal, one of the prime objectives of the government is to
attract foreign investment in various sectors such as hydropower,
telecommunication, manufacturing and processing industries. Foreign investors
are given attractive incentives through various act and policies. However, they
are not allowed to invest in Nepalese capital market.
2.1 Introduction
In course of the study, various books, articles, dissertations and other reference
materials were reviewed. This chapter includes the review of existing empirical
literature briefly in the subject of various developing countries including Nepal.
The reviewed materials are classified into two sub- headings: International
context and Nepalese context.
In the past few years, the liquidity is very high in Nepalese market. With higher
liquidity and very few alternatives available for investment, Nepalese investors
are forced to look at the government bond market and commercial banks and
financial companies. Since the commercial bank and finances companies have
not been able to fully utilize their funds the interest rate for deposits have
considerably decrease and the real rate of return after adjusting inflation may go
to negative. Therefore, the public investors are looking for other alternatives,
which give them higher return for their investment. This may be one of the
reasons for heavily oversubscribing the public issues offered by corporate
bodies.
In course of the study, various books, articles, dissertations and other reference
materials were reviewed. It includes the review of existing empirical literature
briefly in the subject of various developing countries including Nepal. And their
findings are easily found on various books, research papers, seminar papers, and
reports of the international institution, issues of the journal and article about
Primary Share Market has been studied in detailed. Here attempt has been made
to review them. The source of the study is based on available reports, manuals,
workshops, proceedings, and research papers.
Simha (1960) In connection with the necessary capital market in his book The
Capital Market in India has observed that capital is an extremely fascinating
subject and efficient capital market is an indispensable prerequisite to economic
development. In fact, even as regards the resources for the public sector, the
capital market has a rather important role to play.
Panta (2003) Conducted research on the topic of Current Status of Share Market
in Nepal the trend of the Nepalese stock market and present status of primary
and secondary market as well as problems and prospects of Nepalese stock
market. The findings are as follows:
The development of stock market primarily depends on program and
their implementation.
In Nepal, the overall policy environment has not been conductive to
the development of the stock marker therefore it is difficult to
develop more efficient secondary market, trading system for both
equity and debt security.
Restriction on foreign portfolio investment hindered market
development.
NEPSE does not have appropriate policies and memberships are fee
structure to attract members outside KTM.
In Nepal, banks dominate primary market in government debt
instruments. OTC trading is no permitted therefore secondary
market is totally inactive.
Lack of necessary provisions in the laws and regulation of the
privatization and automatics of stock exchange as well as for the
establishment of central depository of securities (CDS).
The findings on the term nature of sources and uses of funds and the current
ratios of various size and industry groups also do not give any ground for
complacency. Some industries were found to have financed a large part of
the increase in current assets with the long-term sources of funds, while for
others the increase in long-term source was hardly sufficient even to
finance the long-term assets formations. He was given high attention to the
working capital management in Nepalese industries
CHAPTER THREE
RESEARCH METHODOLOGY
3.4.2 Pie-diagram
A pie- diagram is a widely used aid that is generally used for diagrammatic
presentation of the values differing widely in magnitude. In this method all the
given data are converted into 360 degree as the angel of a circle is 360 degree
and all components of the data are presented in terms of angels that total 360
degree for one set of data.
3.4.3 Percentage
Percentage is one of the most useful tools for the comparison of two quantities
or variables. Simply, the word percentage means per hundred. In other words,
the fraction with 100 as its denominator is known as a percentage and the
numerator of this fraction is known as rate of percent.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
Table No. 4.1 shows varied number of issue approved by SEBON during the
period. Highest numbers of issues are approved in the fiscal year 2071/72 and
2072/73. Lowest issue approved percentage 1.54 and equal in the fiscal year
2067/68 and 2069/70. Over the 16 year of issue approval the number of issue is
fluctuating every year. The total number of issue varies at various time periods.
The number of issue was 16 in the initial fiscal year 2057/58 but at the end of
fiscal year 2072/73 the total number of issue approved was reached to the point
of 324 issues. The highest number of issued was 64(19.75%) in the fiscal year
2071/72 and 2072/73. The second highest issue was 34 issues (10.49%) in the
fiscal year 2070/71. The number of issue was 29 (8.95%) and it was the third
highest issue. Similarly, we can describe each and every years fluctuating. We
can also describe the above fluctuation in bar-diagrams way.
Figure No. 4.1
Yearly no of issue
Number of issue
70
60
50
40
30
20
10
Number of issue
Above Table No. 4.2 shows securities wise issue approved by SEBO. During the
fiscal year 2057/58 to 2072/73 total issued amount is 39389.90 million.
Debenture, Ordinary Share, Preference Share and Right Share are issued Rs.
5853, Rs. 6880.83, Rs. 636.5, and Rs.26019.57 respectively. Out of it highest
amount issue was right shares which are approximate 66% of the total amount
issue. Ordinary share issue is around 17%, and which is the second highest.
Debenture and Preference shares are issued approximately 15% and 2% of total
issued amount. It showed that most popular securities issued in Nepalese primary
market are right share. This is clearly shown by pie-diagram below.
Percentage of Total
Debenture (14.86)
Ordinary Share (17.47)
Preference Shares (1.61)
Right Shares (66.06 )
Table No. 4.3 shows that the highest amount issue was Rs.16828.51 million in
fiscal year 2072/73. It is the 42.42% of the total issued amount. In fiscal year
2071/72 total amount issued is Rs. 10668.51 million which is 27.08% of the total
issue amount. The third and fourth highest issue amount is Rs. 2443.28 and Rs.
2295.50 million in the fiscal year 2069/70 and 2070/71 which is 6.20% and
5.82% respectively of the total issued. Least amount issue is Rs. 173.96 million
in the fiscal year 2065/66 which is only 0.441%. Second and third lowest issue
is Rs. 244.40 and Rs. 258.00 million respectively in the fiscal year 2057/58 and
2069/70. Similarly total amount issue is Rs. 293.74, Rs. 326.86, Rs.332.20,
Rs.410.49, Rs.462.36, Rs.556.54, Rs.1027.50, Rs.1441.33 and Rs.1626.82
million in fiscal year 2059/60, 5056/057, 2067/68, 2071/72, 2068/69, 2066/67,
2067/68, 2072/73 and 2068/69 respectively which represents 0.745%, 0.829%,
0.843%, 1.04%, 1.17%,1.41%,2.605,3.65% and 4.13% of the total amount
issued respectively.
Table No. 4.4 shows that the year wise number and types of securities issued in
the Nepalese capital market. The number of issue was 324 in total. Among this
highest issued security is right share which is 153 in total. Secondary highest is
ordinary share issue which is 150 issues in total number of issues. Preferred share
issue is the lowest one which is 5 in number and 16 is debenture issues among
the total number issued which the second lowest is issued in number.
50
40
30
20
10
Over subscription of the share are the great problems in the primary market. At
present, most of the primary issue being oversubscribed. Almost public issue is
done by finance sector and commercial bank sector and this public issue is being
over subscription. Over subscription and under subscription of share issued by
different companies are presented in the Table No. 4.5.
Table No. 4.5 shows that during the period of fiscal year 2057/58 to 2072/73
total companies 150 issued their common stock for public subscription and
among them common stock issue of 136 companies 990.67% have been
oversubscribed, common stock issue of 11 companies 7.33% have been
undersubscribed and remaining 3 companies 2% issue have been fully
subscribed.
During the study period 324 companies have issued different types of securities
to the public. The total amount of the issue is Rs.39389.90 million. Among the
issues commercial bank sector has issued highest portion to the general public.
Total issued amount of the commercial bank is Rs. 15956.48 million which
represents 40.51% of the total issue approved. Second highest amount of public
issue covered by others sectors and which is Rs. 11596.12 million represented
by 29.44% of the issue amount. Similarly, finance company, development bank,
manufacturing, hotel, insurance and trading issued amount Rs.4573.06,
Rs.3151.12, Rs.1634.64, Rs.1288.02, Rs. 1004.42, Rs.51.21 million which
represent 11.61%, 8.34%, 4.15%, 3.27%, 2.55%, 0.13% respectively.
Figure No. 4.6
Sector wise issued amount
Percentage of total
Commercial bank
Development bank
Finance companies
Hotel
Insurance
Manufacturing
Trading
Others
Table No. 4.8 shows different types of securities issued in Nepalese capital
market. Most of the companies are seen to issue right and ordinary shares. 153
companies issued right share to the public in Nepalese capital market. Ordinary
share is another popular security for the companies to collect additional fund.
150 companies issued ordinary share until the fiscal year 2072/73. Debenture
and preference shares are seen very less attractive securities in the Nepalese
capital market. Only 16 companies have issued debentures and 5 preference
shares. The past experience shows that investors are not interested to invest in
the debenture and preference share. Probably it is because of less return as
comprised to common stock and lack of awareness.
Figure No. 4.8
Number of issues according to type of securities
Number of securities
Debunture
Ordinary Shares
Preference share
Right share
The retail investors are in search for long-term instrument with higher return for
their savings. The number of insurance companies is growing and government is
planning to establish a pension fund for its employees. Provident fund, pension
fund as well as insurance companies would prefer to invest in the equity of
profitable companies through IPO rather than depositing on the bank.
Entrepreneurs, who are establishing new business in response to liberalizations,
will be constrained in realizing their capital gains if they cannot sell part of their
original equity in successful company after some years of growth. Thus, there
exists opportunities for the investors to invest in the stock of corporate bodies
and the corporate bodies have the opportunities of collecting required capital
through the issue of stock through primary market. However, there are a lot of
things to be done to transform the present state of primary market in to a healthy
and efficient one where corporate bodies can easily raise funds according to their
requirements and investors can invest their savings into a long-term instrument
with higher return.
Although there are many hurdles, the availability of enough liquidity in the
market and the governments liberal economic policy, which is encouraging
foreign as well as domestic investors to invest in various sectors such as
hydropower, telecommunication, and infrastructure projects, is certainly going
to have high prospects for primary market in Nepal.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 Summary
Primary market is one of the major components of capital market. Capital market
facilitates the exchange of financial assets by bringing together buyers and sellers
of securities. Capital market provides an effective way of raising money for
commercial enterprises and in the meantime provides an investment opportunity
for individual and institutions. Thus, primary markets have both theoretical and
practical prospective. This study mainly aims to examine the primary markets
problem and prospects in Nepal. The specific objectives of this study were:
To assess the current situation of primary market in Nepal.
To explore the problems faced in the primary market.
To examine the future prospects of the primary market.
Although, some studies regarding the different issues of primary market are
already conducted in Nepal, the study based on the primary market its problem
and prospects in Nepal is probably the first in Nepal. This study is based on the
secondary data with large sample of primary issue companies from different
sectors. This study covers almost all sectors/companies (i.e. banking sector,
finance sector, development bank sector, manufacturing and processing sector,
hotel sector, insurance sector, trading sector and other sector) issuing securities
to the public. For the purpose of this study, the necessary secondary data has
been collected since 2057/58 to 2072/73 with respects to annual reports, other
bulletin of NEPSE and its website: http://www.nepalstock.com , the annual
reports of SEBO/N and their website: http://www.senonp.com and the annual
reports of specific companies. This study is based on time series data analysis of
324 observations. The time series data are used to trace out the current situation
of primary market problem in Nepal. This study used different tools to
accomplish its objective. The multiple bar diagram, pie-chart were used to
analyze the picture of primary market condition in Nepal.
5.2 Conclusion
Based on the findings of the study, it is being concluded that companies have
issued basically four types of securities in Nepalese capital market. (That is
ordinary shares, preference shares, and debenture and right shares). The total
number of issue of the Nepalese capital market is increasing day by day. The
number of issues was 16 in the fiscal year 2057/58 but at the end of fiscal year
2072/73 total number of issued is reached to 324 issues. The highest number of
issue are 64(19.75%) in the fiscal year 2071/72 and 2072/73 each. Lowest issues
during the period are 5(1.54%) in the fiscal year 2067/68 and 2069/70 each. Total
issue amount is Rs.39389.90 million during the study period. Ordinary share,
right share, debenture and preference share are issued Rs.6880.83, Rs.26019.57,
Rs.5853.00, Rs.636.50 million respectively.
The highest amount issue is right shares which approximately 66% of the total
issue amount. Ordinary issue is 17.47% of the total issue amount which is the
second highest. Debenture and preference shares are issue approximately 15%
and 2% of total issue amount. It shows that most popular and common security
issue in Nepalese primary market is right shares.
The total amount issue by during the study period is Rs.39389.90 million.
Commercial bank issues Rs.15956.48 million which is the 40.51 percentage of
the total issued amount. Finance companies are issues Rs.4573.06 million i.e.
11.61 percentages of the total issued amount. Manufacturing sector issues
Rs.1634.64 million i.e.4.15 percentage of the total issue amount. Development
banks and other sectors issues are Rs.3151.12 and Rs.11596.12 million. It covers
8.34 percentages and 29.44 percentage of the issued amount. Insurance
companies issue is Rs.1004.42 million i.e.2.55 percentage of total issued amount.
Hotel and trading sectors issue are Rs.1288.02 and Rs.51.21 million to the public
which is the 3.27 percentage and 0.13 percentage of the total issue amount.
The highest amount issue of Rs.16828.51 million in the fiscal year 2072/73. It is
the 42.72 percentage of the total issue amount. Lowest amount issue is Rs.173.96
million in the fiscal year 2065/66 which is 0.441 percentage of the total issue
amount. Highest percentage growth of primary issues is 3.65 times in the fiscal
year 2071/72. Average percentage growth of primary issue is 56 percentages
during the study period.
Likewise, the situation of sector wise issue also indicate that all shared issued of
banking sector, insurance sector, hotel sector, development sector and other
sector are fully over-subscribed while in the case of finance sector and
manufacturing sector and processing sector companies majority of such issues
were also over-subscribed by many times. These all indicates the problem and
prospects of primary market in Nepalese capital market.
5.3 Recommendation
To develop and expand the Nepalese primary market more effective and efficient
the following recommendations have been recommended:
The government should make clear and specific plans and policies to
expand the capital market and should implement these.
The Securities Board Nepal and other concern authorities should conduct
public awareness and investors education programs to increase the level
of investors awareness.
Large and ineffective government corporations should be privatized in
order to develop the Nepalese stock market through the wide spread
distribution of shares to public investors.
The information and financial statements of the companies should be
published properly and timely.
The market intermediaries should be educated, trained and
professionalized.
The government should allow foreign investors to invest in Nepalese
capital market.
Encourage active participation of other sectors of the economy besides
banks, finance companies and insurance through the enforcement of good
corporate governance. Investment in corporate sectors should be
encouraged.
Encourage to the issue of debenture, preference share and other
instruments to the public because most of the companies issues common
stock for the public.
To developed the Central Depository System to establish the stable
security market.
To developed the Credit Rating System.
The market should be open to the NRN members.
The Primary Market should be open to Institution Foreign Investors.