capital markets development in nepal by kriti capital & investments ltd

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Capital Markets Development in Nepal Presented By: Deepesh Vaidya Managing Director Kriti Capital & Investments Ltd.

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Nepal has seen growth in debt financing from financial institutions but hasn’t been able to create an environment for long term equity/debt capital creation. This presentation aims to promote awareness about the capital markets and need for it to be developed so as to develop the whole economy.

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  • 1. Capital Markets Development in Nepal Presented By: Deepesh Vaidya Managing Director Kriti Capital & Investments Ltd.

2. Why Capital Markets? Access to finance In Development Phase Access to Financing from Financial Institutions Access to Financing from Capital Markets Access to Finance 3. Capital Markets: Modes of Access to Finance Access to Capital Markets Long Term Debt Instruments Long Term Equity Capital Hybrid Capital Instruments Short Term Capital Markets Instruments 4. Capital Markets Transactions Company Inception Entrepreneurial Initiatives Access to Private Capital for inception or initial growth Venture Funds/Private Equity Market Very limited in Nepal Going Public Access to public capital for further expansion Has history of operations Can be exit for initial venture investors Secondary Transactions Liquidity to investors Market Valuation Pre-IPO IPO Post-IPO 5. Capital Markets A Platform For Investors and Businesses to connect Connect Sources and Uses of Funds Raises Capital (Equity + long term debt) Provides Liquidity to Investments Provides continuous Investment Opportunities Barometer of Public Confidence in the Economy 6. Capital Markets Stakeholders Capital Markets Regulators Entrepreneurs Market Intermediaries Investors (Individual/ Institutional) 7. Capital Markets: Recent Trend INCREASED INTERACTION BETWEEN THE INVESTORS & THE BUSINESSES 8. Increased Interest: Raising Capital 244 174 294 332 462 258 327 411 1,441 557 1,028 1,627 2,443 2,296 9,968 16,829 10,822 6,754 2,950 10,601 5,840 - 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 Amount of Securities Issued IPO (in million NPR) 9. Increased Interest: IPO Market Company Issue Type Issue Amount Subscription Naya Nepal Laghubitta Bikas Bank IPO 6,000,000 50 times Sanima Mai Hydro Power Ltd. IPO 211,000,000 30 times Kalika Micro Credit Development Bank IPO 20,000,000 58 times Ridhi Hydro Power Development Company IPO(local) 30,000,000 2 times+ Ridhi Hydro Power Development Company IPO(ordinary) 117,000,000 93 times+ Matribhumi Bikas Bank IPO 15,400,000 4 times Nagbeli Laghubitta Bikas Bank IPO 4,290,000 200 times Cosmos Development Bank IPO 17,500,000 5.7 times Mithila Laghubitta Bikas Bank IPO 7,072,500 76times + Nepal Community Development Bank IPO 30,000,000 4 times Century Commercial Bank IPO 920,000,000 20 timnes Mount Makalu Development Bank IPO 6,000,000 60 times Sahara Bikas Bank IPO 6,000,000 79 times Laxmi Laghubitta Bittiya Sanstha IPO 30,000,000 76 times Siddartha Equity Oriented Scheme Mutual Fund Unit 800,000,000 2 times+ Source : Bizmandu 10. Increased Interest: Rising Liquidity Average daily investments for the year 2,278,155 10,879,133 56,484,054 104,216,164 67,295,009 30,089,063 74,039,943 151,811,507 369,591,675 Average Trading Volume 11. Increased Interest: Resurgent Market Index - Nepse 12. Nepse: Is it the Peak? DO WE HAVE A BUBBLE? WILL AUG/SEPT 2008 REPEAT? DO INVESTORS HAVE INVESTMENT OPTIONS? ARE ENTREPRENEURS EASILY ABLE TO RAISE CAPITAL? 13. Market Multiples FY 2007 - 2008 2014 Average EPS Average PE (Price as of August 28, 2008) Average EPS Average PE ( Price as of July 3,2014 Commercial Banking Sector 37.25 45.35 34.29 29.95 Insurance Company (Life) 126.48 10.86 70.60* 44.59 Insurance Company (Non- Life) 9.22 21.26 35.93 20.90 Hydropower Sector 65.87 22.16 44.20 43.76 Nepal Telecom 52.95 23.15 76.49 7.84 As of Q3 2013-14 (unaudited) * As of FY 2069/70 Will September 2008 Repeat? 14. Institutional Funds Available: Ever Increasing Institutional Investors (NPR in million) 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 Insurance Companies 24,533 31,524 35,868 50,224 60,987 73,650 % Annual Growth 12% 28% 14% 40% 21% 21% Employees Retirement Fund 62,794 72,650 86,705 102,328 121,440 140,710 % Annual Growth 16% 19% 18% 19% 16% Citizen Investment Trust 12,886 16,193 20,135 25,625 32,689 36,830 % Annual Growth 26% 24% 27% 28% 13% 15. Retail Investments NPR in million 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 (9 mos) Cooperatives 29,308 45,677 121,831 117,295 139,544 147,070 158,163 % Annual Growth 56% 167% -4% 19% 5% Remittance 142,700 209,700 231,700 253,600 359,600 434,582 397,799 % Annual Growth 47% 10% 9% 42% 21% Total Cumulative Funds 272,221 375,744 496,238 549,073 714,259 832,841 555,962 Total annual funds generated 145,388 246,223 330,195 284,534 418,787 478,182 577,576 * In USD (mm) 1,425 2,414 3,237 2,790 4,106 4,688 6,080 Institutional Funds Available: Ever Increasing 16. The Problem in Existing Capital Market Ecosystem NEPAL STOCK MARKET INVESTORS BUSINESSES Pre-IPO IPO Post-IPO Next Focus Area Amendments Requried 17. Pre-IPO Capital Markets Start Up Financing (Pre IPO Market) Current Scenario Capital Markets is virtually absent in this space But Pre-IPO market is very crucial to bring depth in the stock markets Is very crucial to bring economic activities in the access of the general public Will promote entrepreneurship Complements growth in bank loan market 18. Current Problems: Ecosystem Focus in access to debt financing rather than access to financing Regulations are not comprehensive to cover all aspects of Capital Markets Capital market has been mostly identified as secondary trading of securities (NEPSE) Organized market for venture financing/private transactions is non existent Regulatory restrictions on investing in ventures provisioning requirements No risks based incentives 19. Current Problems: Existing Market Even in the Secondary Stock Market: Stock market skewed by shares of BFIs Lack of investors education on share pricing Lack of institutional investment environment Lack of incentive for long term investment in the capital market Issues on information dissemination compliances Asymmetric access to information 20. Finding Solutions Ecosystem What needs to be done? Capital Markets reform focused on comprehensive development of Capital Markets secondary market complemented by development in IPO market, which in turn is sourced from Pre-IPO market 21. Finding Solutions Pre IPO Market - What needs to be done ? Identification of venture financing or private equity financing as capital markets activities Identification of procedure for raising investments from larger population who are willing and able to take venture risk PE funds/QIBs/HNI Incentive for undertaking the initial risk (vide capital gain tax benefit) Allowing such funds to divest portion of their investments through IPO Market pricing in IPOs 22. Finding Solutions IPO Market Recent Improvements Revision of allotment model Still inefficient Credit Ratings 23. Finding Solutions IPO Market - What needs to be done? Allowing divestment as a source for IPO Market value based pricing free pricing mechanism Pro rata allotment Enhance Merchant Bankers role: Detailed due diligence / disclosure / be answerable Process simplification: Use of CDS membership for digital application with standard and unique individual investors code 24. Finding Solutions Secondary Market (Post IPO) Recent improvements CDS System ongoing for full implementation Will bring efficiency in secondary trading Faster Transaction Cycles Addition of Brokers Mutual Funds (small investors + passive investments) Pushed with tax benefit Institutionalize Investments 25. Finding Solutions Secondary Market (Post IPO) - What can be done Information disclosure Accountable investor relationship officer Real time market data to other market intermediaries Incentive for long term investments Capital gain tax waiver on long term investments Push for Active investments Allowing portion of the existing Retirement Fund to be invested in capital markets through intermediaries 26. Summary Need to channel growing Investable funds and Investment interest Nepal has seen growth in debt financing from financial institutions but hasnt been able to create an environment for long term equity/debt capital creation Capital Markets reform needs to be a focus for economic growth of the country Need for regulator to i)issue regulations to facilitate growing service need of the capital markets, ii) execute supervisory role and iii) play judicial role by passing orders and rulings as per the Act Understanding the ecosystem and acceptance of Pre-IPO market as an essential part of the capital market ecosystem 27. Summary Develop market pricing mechanism in IPO market Encourage long term investments through tax incentives Having expertise in financial intermediation, Merchant Bankers need to play crucial role in facilitating and supplementing current investment needs Need to promote institutional investors and their participation in the capital market ecosystem, including price discovery Need for strong corporate governance and information disclosure practice among public companies Promote overall capital markets ecosystem and enhance role of every stakeholder in the ecosystem 28. @KritiCapital www.facebook.com/KritiCapital www.kriticapital.com.np www.linkedin.com/company/kriti- capital-&-investments-ltd