ipo management practice in nepse

8/13/2019 IPO Management Practice in NEPSE

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A

(.. . .20072030185)

831462

:

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In partial fulfillment of the requirements for the degree of

A (A)

,


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ACKNOWLEDGEMENT

I acknowledge the cooperation and assistance received from our respected Professors, lecturers

and friends during my summer project period. First of all, I would like to express my profound

sense of gratitude to the project supervisor Mr. Prakash C. Bhattarai. I acknowledge the

cooperation and assistance received from my respected Mr. ShantaBhattarai, NirmalUprety and

SitaramBartaula whose individual guidance and supervision made the project work complete in

the time. We would like thanks to member of Ace institute of Management.

At last but not least, I expressed thanks to Librarians of SEBON, Mr. Nemal Man Shakya

Librarian of Ace institute of Management and Mr. Ramesh Bartaula for giving support during

this research period.

Mr.Bal Kumar Dhimal

Researcher

December 2009


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Table of Content

Subject Page No

Acknowledgement .........................................................................................i

Lists of Table .................................................................................................ii

Lists of Figures ..............................................................................................iii

List of Acronyms ...........................................................................................iv

Executive Summary .......................................................................................v

Chapter I ___________________________________________________1-6

1. INTRODUCTION....................................................................................1

1.1 Background of study .....................................................................1

1.2 Statement of problem ....................................................................3

1.3 Objective of study .........................................................................4

1.4 Importance of study .......................................................................5

1.5 limitation of study .........................................................................6

Chapter II__________________________________________________7-18

2. LITERATURE OF REVIEW...............................................................7

2.1. Concept of IPO ...........................................................................7

2.1.1. Introduction of IPO ......................................................7

2.1.2 Reason behind issuing IPOs..........................................7

2.1.3 Advantage and disadvantage of IPOs ...........................7

2.2.1 Review of thesis ........................................................................8

2.2.2 Brief introduction of capital markets component ....................9

2.3.1Brokerage for equity ..................................................................12

2.3.2 Regulation of securities market ................................................12

2.3.3 Listing and listing requirement .................................................13

2.3.4 Types of listing .........................................................................14

2.4.1 Conceptual framework ..............................................................16


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2.4.2 Hypotheses ................................................................................18

CHAPTER III ______________________________________________19-25

3. RESEARCH METHODOLOGY..........................................................19

3.1 Research Method .........................................................................19

3.1.1 Research area ............................................................................19

3.1.2 Research Design........................................................................20

3.1.3 Nature and resource of data ......................................................20

3.1.4 Data collection techniques ........................................................21

3.1.5 Data Analysis tools ...................................................................22

3.1.5.1 Statistical tools ...........................................................22

3.1.5.2 Financial tools ............................................................24

3.1.6 Population and sample ..............................................................25

CHAPTER IV_______________________________________________ 26-33

4. DATA PRESENTATION AND ANALYSIS.......................................26

4.1 Data Presentation& analysis of capital market ............................26

4.1.1Amount of public issues offered ....................................26

4.1.2 Comparison of growth the IPO and Capital market .....28

4.1.3 Capital market structure and Capital.............................30

4.1.4 Sector wise Listed Companies ......................................31

4.2 Major finding of the study ...........................................................33

CHAPTER V _______________________________________________35-39

5. SUMMARY, CONCLUSION AND RECOMMENDATION............35

5.1 Summary ......................................................................................35

5.2 Conclusion ...................................................................................37

5.3 Recommendation .........................................................................38

Bibliography ...............................................................................................39

Appendix __________________________________________________40-72


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Table 1.1Capital and flotation cost...15Table 1.2: Amount of Public Issues Offered.27

Table 1.3: Comparison of Growth between the IPO and Capital Market29

Table 1.4: Capital market Structure and capital...30

Table 1.5: Sector wise Listed Companies.31


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Chart1.1: Amount of Public Issues Offered28

chart1.2: Comparison of Growth between the IPO and Capital Market.30

chart1.3: Capital market Structure and capital...31

Chart 1.4: Sector wise Listed Companies..32


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1. AMEX American Stock Exchange2. BSE Bombay Stock Exchange3. GDP Gross Domestic Production4. MOF Ministry Of Finance5. NEPSE Nepal Stock Exchange6. NRB Nepal Rastra Bank7.

NYSE New York Stock Exchange

8. OTC Over The Counter9. RD Research Design10.ROA Return On Equity.11.SEBON Security Board Of Nepal12.SEBO Security Board13. 14. 15.. 16. 17. 18.A A 19. 20. 21. 22. 23.. 24. 25. : 26. :


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EXECUTIVE SUMMARY

This report analyses different aspects of IPOs and Capital Market management of Nepal and

presents recommendations to be implemented for their proper management.

The sample size is 33 [using formula {(2 *2)/t2}], 4 samples from commercial banks, 7

samples from Development banks, 17 From the Finance companies and 5 from the insurance

companies. In the research data collated from different source like expert, brokers etc. IPOs

growth plays a significant role in the growth of Capital Market; however there is no direct

relationship between them.

Amount of public issue offering has a decreasing rate at the initial phase which is -28.82. After

that, from the fiscal year 1995/96 to FY 1197/98 the growth rate has increased. Similarly, the

growth of capital market and IPOs both have decreased in the FY 1994/95 but in the Fiscal Year

1998/99 growth of capital market increased but the growth of IPOs has decreased.It shows that

they do not have direct relationship. The trend of capital growth is in an average increase but for

IPOs it is fluctuating.

Number of Issuer Companies and Financial Intermediaries is increasing along with the public

issue in the later years which have played a positive role in the growth of IPOs and the Capital

Market.

Public issue in 1993/94 was 2.444 billion. It was increased by 106.682 percent in the year

2007/08. In the same way the number of issuer companies also increased to 64 in number from

16. Similarly, financial intermediaries such as brokers, issue manager, underwriter, dealer,

investment bankers are increasing. Many report, journals, and researches show that financial

intermediaries are essential component of capital market and from the data collected by this

research have shown that their increase has a positive effect in the growth of IPOs and Capital

Market.


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Strong Regulation Body is required for the proper management and promotion of IPOs and the

Capital Market.

Numbers of listed companies are rapidly increasing in the SEBON. Due to the lack of strong

regulation body of Security Board of Nepal and central bank, large amount of public capital has

the risk of going under loss. Nowadays many joint stock companies are losing their performance

as well as the market position. Some corporations are bearing loss and probable solvency. The

result of bad performance of corporations is indicating that a huge amount of public investment

is under risk. Negligence of monitoring body of capital market or SEBON and Nepal Rastra bank

(central bank) and their inappropriate procedure are responsible for all the risks in the capital

market. Many financial institutions have borne loss and some were even dissolved. Securities

Act is not effective and appropriate in accordance with the present situation. It directly affects

the increasing capital market and initial public offerings (IPOs). There is no any provision for

non-listed company and de-listed companies. The major problem of capital market is the poor

management and the lack of appropriate investment policy. In the current situation, investors out

of the valley (Kathmandu) are unable to take the benefit of capital market. Capital market is

losing huge amount of investors due to the lack of appropriate information, appropriate technical

resources and branches in different place of the country. Hence, an appropriate and strong

regulating body with effective management is the one of the major requirement of the Nepalese

Capital Market.


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CHAPTER I

INTRODUCTION

1.1Background of study

Many factors play significant role in the development of business. To run business in the initial

phase or smoothly at existing period, money is needed. Money can be facilitated either by money

from the capital market or the money of promoters. Money market provides capital for short term

period but business needs long term asset. For improvement of long-term asset capital market

provides fund for various companies. Hence capital market is an essential market for business.

Initial public offering (IPOs) is a part of primary market mechanism. When an institution raises

capital to be collected from public through issuance of its securities for the first time, then its

issue to the public is termed as initial public offering. Studies also show that overall Nepalese

capital market is a best alternative for the investment in the Nepalese businesses, in the other part

of world, capital market is an old concept but in Nepal capital market is an emerging market.

Stock market helps to develop financial structure of country. Historical record of Nepalese

capital market began with by issuing share of BIRATNAGAR JUTE MILL. Secondary market

was established in 2050-02-13 B.S. Nepal stock exchange was established with 25brokers and 5

market makers. During the period of 2064 B.S. the broker and market makerbecome 31and 6 by

adding 6 brokers and one market maker respectively. 152companies are listed in the security

board of Nepal on May, 2009; which includes; 17 Commercial banks, 23development banks, 58

finance companies, 18insurance companies, 21 manufacturing and processing companies, 5

trading companies, 4 Hotels and 6 other companies .Security board of Nepal (SEBON) was

established in 2050-02-25.The capital market experienced an impressive growth in the last two

years. Improvement in the peace and security situation, the central bank policy to increase the

paid-up capital of banks and financial institution, market reforms, institutional and infrastructural

developments related to the capital market has contributed to this growth. The activities of both


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the primary and secondary markets have done a lot for this improvement in the Nepalese Capital

Market which could be explained in detail as follows:

Primary Market:- In the FY2007/08 the Security Board of Nepal(SEBON) granted permission to

71 companies for mobilization of NPR11.56 billion while 33 companies got approval to mobilize

NPR 2.75 billion in the preceding year. The number of capital mobilization has been raised by

1312.25 percent and 320.36 percent respectively. Secondary market:- The Nepalese stock market

continued to expand in the FY2007/08 too. With the restoration of peace and a subsequent boost

in investors confidence, major indicators of the share market grew tremendously. Almost all the

major indicators of the secondary market like a amount of share traded, number of listed share,

the number of transactions, annual turnover, total market capitalization of listed shares, market

capitalization and GDP Ratio, capitalization turnover and the GDP ratios all increased in the

review period. Nepal is experiencing an increase in the capital market along with the

considerable issue in the initial public offering.

derivative market

1.2 Statement of Problem

Nepal has an infant capital market as compared to the other capital markets. By the way, it is

good indicator for the financial sector as well as Nepalese economy. Those companies can get

listed in the security board of Nepal (SEBON), which have good financial structure and sound

financial position. They are listed under the Company Act, 1997 and Security Exchange Act,

1983. The issuer companies and issue manager perform their public issue and issue management

activities. Nepal stock market is suffering from unstable political conditions, lack of rational

investors, corporate governance to name the few, hence IPOs, an important mechanism of stock

market, is bound to be under influence. More specifically the study has sought answer to the

following research question.

i) Are capital instruments sophisticating IPOs management in the Nepalese capitalmarket?


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ii) Is sophisticated market structure more effective in IPOs management in theNepalesecapital market?

iii) Are improved financial intermediaries enhancing the IPOs management in theNepalese capital market?

iv) What are the challenging issues in the IPOs management in the Nepalese capitalmarket?


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1.3Objective of the study

Capital market of Nepal is still in its early days. Likewise, its other mechanisms, IPOs practicesare also very limited. The objectives can be categorized into two parts, they are as follows:

1.3.1 General Objective

The main objective of this research is to identify the effect of increasing stock and initial public

offering (IPOs) in the capital market of Nepal. This study is also carried out to fulfill the degree

of BBA.

1.3.2 Specific Objectives

a) To identify how the capital instruments sophisticates the IPOs management in the capitalmarket.

b) To investigate the relation of market structure and IPOs management in the capitalmarket.

c) To identify how the financial intermediaries enhance the IPOs management in the capitalmarket.

d) To find out challenging issues of the capital market and how it opposes the IPOsmanagement.


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1.4) Importance of Study

Capital market has many mechanisms, IPOs and its practices are very much limited in Nepal.Under this perspective this study is expected to provide some insights into different aspects of

IPOs and how is it being practiced in Nepal. It also makes background to investors to invest in

securities market in a better place.

We know that the Nepalese capital market is in its infant period; hence, there is lack of huge

capital. Without capital infrastructure, country cannot develop financial structure, lack of capital

structure leads to poor performance of manufacturing company and financial institution and

other important companies. In the global era sole trading concern and partnership firm areoutdated so corporation or joint stock companies are becoming more effective. Without the

development of joint stock companies financial position of a country cant be strengthened.

Therefore, development of Joint Stock Company is necessary for the financial development of

company.

The main purpose of this research is to identify the effect of increasing stock (common shares,

preference shares, treasury bills, bonds, debentures etc.) in the capital market and the procedure

and management of initial public offering. This research not only focuses on the study of effect

of increasing stock, however, it also focuses on other problem such as why the share market is

not being effective out of the valley (Kathmandu) or other part of the country. This research will

also find out why capital market is being unable to address those investors who live in the other

parts of the country and why NEPSE is unable to make any branches in the other parts of the

country. This research also tries to explore why Nepalese government is unable to make an

appropriate system or market for the non- listed and restricted companies. It also tries to find out

the effects in the capital market after making new market for non-listed companies. This research

plays a significant role to take an appropriate decision regarding the present capital market

problem. Why investors are only interested in investing on common shares rather than investing

in treasury bills, debentures, bonds where common stocks are more risky than others. The

research has been made with a hope that it is able to find out all causes of ineffective Nepalese

Capital Market and to make recommendation to the relevant sector as like Nepal Stock Exchange

(NEPSE), Security Board of Nepal (SEBON) and Nepal Rastra Bank (NRB) which is important

for both the existing and new investors.


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This research addresses different issues of capital market and tries to investigate different rules,

regulations and procedures of Nepal Rastra Bank, Security Board of Nepal and Nepal Stock

Exchange. The research will address the issues of primary market. Due to the above reasons this

research plays a significant role in the Nepalese Capital Market.

1.5. Limitation of Study

This research tries to address many factors but it is unable to address some specific issues due to

lack of sufficient resources, technical problems, lack of data and other factors which are as

follows:

a) Insufficient resourceFor this research, no organizations has provided the fund, this research has been conducted under

the academic course requirement of Pokhara University. Therefore, there is chance for the

shortage of resource.

b) Access and reliability of dataThis research requires secondary data, primary data only is not sufficient to define objective of

the research. Restriction is availing of relevant data from respected sectors too limits the scope of

the research.

c) Time frame of study

The time frame bound by the University that it must be completed within University academic

schedule has affected the research.

d) Difficult to decide on without the proper basis of comparison

It uses various statistical tools for analyzing data, outcomes of which is not final and it needs

further investigation.


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CHAPTER II

LITERATURE REVIEW

2.1 Concept of IPO

2.1.1 Introduction of IPO


capital form public through issuance of its securities for the first time, then its issue to the public

is termed as initial public offering.

2.1.2Reason behind issuing IPOs

Every business organization requires fund to run in the initial phase and to run smoothly in the

existing period. It means IPOs are issued to accumulate capital but it is not only the single goal.

According to the nature of the organizational structure some businesses are more risky and some

are less risky, hence, the companies try to diversify their risks. IPO is a better mechanism to

diversify the risk of a company. A good organization needs sufficient liquidity, to maintain

liquidity organization issues IPOs. Companies always try to gain high leverage from non-

financing sources; therefore, IPOs are the only one best source to make high leverage from non-

financing.

2.1.3 Advantages and disadvantages of IPOs

Initial public offering (IPOs) enhances liquidity of the organization. It also provides sufficient

fund for capital extension of the companies. Issuing the IPOs in the capital market heightens the

prestige and recognition of the company among the suppliers and prospective customers. Some

drawbacks do exist in IPOs as it is made by the limited decision power of the management. After

the issue of IPOs the data is provided up to date, hence, information flow cost increases. The

company must adopt legal provisions like auditing and underwriting fees which increases the


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direct cost. Management also spends more time and effort to manage IPOs, therefore indirect

cost also increases.

2.2.1Review of Thesis

Gurung (1999) carried out the research study entitle Share price Behavior of Listed companies

in Nepal with the basic objectives of analyzing the price movement of the shares of listed

companies in Nepal. The study was based on historical price data covering the period of five

years from Jan. 1994 to dec.1998. The study as per its nature was large based on secondary data.

The study concluded that, the performance of banking group is highly attractive and liquid as

signified by their trading turnover. The performances of listed companies have been

deteriorating. This implies the uncertainty and instability in stock market. Similarly, the market

was bullish during the initial period of the study but due to political instability, immature

liberalization and privatization policy of then HMG.

Shrestha (1996) has conducted a research study on public response to primary issue of shares in

Nepal. The main objective of the study was to evaluate the primary market of shares, analyze the

pattern of public response to the shares and to identify the problems of primary and secondary

market in Nepal. He has used both primary and secondary data from 12 selected companies for

the period of 3 years from January 1993 to January 1996. He has employed average chi-square

test and correlation coefficient for deduction.

The study conducted that the public response to the issue of shares of banks, finance and

insurance companies were better than that of manufacturing and processing, trading, hotel and

others group of companies. The success of response to the public issues largely depends on the

response from within Kathmandu valley and to some extent, the issues of share seem to attractfrom outside the valley.

Bhattarai(2006) has performed a study on public response to initial public offering in Nepal

with the basic objective of assessing public response to the initial public offering. However, the

study also focused on the dealing process and pace of the IPO. The study has used both primary

and secondary data. Primary data were mainly collected through direct questionnaire provided to


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the general investor while secondary data were collected from various publication of SEBON,

NEPSE and various other institutions.

The study conducted there most of the general investor in Nepal do no have significant

information regarding the primary market but still they very much interested to invest money in

the primary market. It also found that almost each sector was getting good response from public.

Especially financial institutions and insurance companies were becoming more preferable for

public than the other non-financial sector.

Adhikari (2005) has conducted a research survey on an analysis of determinants of IPO under

pricing in Nepal the basic objectives of the study was to analyze the under pricing of IPOs in the

context of Nepal. Beside the study also examined the trends of public offering market and

process of going public in Nepal. For the process of study data of the periods of 4 years form

fiscal year 1999/2000 to 2003/04 were used.

The researcher concluded that under pricing does not occur among Nepalese firms. The

researcher also added that the result is not consistent with the theory and differences finding of

empirical studies conducted in different countries. IPOs market in Nepal does not enjoy only

right to set the price of countries. IPOs markets in Nepal do not enjoy any right to set the price of

their own issue. The price setting process is totally controlled by the regularly body because of

this reason, Nepalese merchant banker could not play any role to influence the offer price of

IPOs.

2.2.2 Brief introduction of capital markets components

a) Security Market: Security market is that market where various securities like common stocks,debentures, bonds, treasury bills etc. are traded. Securities are sources of capital for any

business organization or Company, issuance of such instrument of capital is done to raise fund

in the capital market. A securities market can be defined as a place for bringing the buyers and

sellers of financial assets together in order to facilitate trading. Securities markets are primary

market and secondary markets. Market indexes are the indicators of performance of the market.

For example either the market is moving upward, downward or is stagnant. Mainly there are

two types of secondary markets.


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b) Primary market: a primary market is the place where corporation and government issue new

securities. All securities, whether is money or capital markets, are initially in the primary

market. This is the only market in which the company or government is directly involved in the

transition and receive directs benefits from an issue that is the company actually receives the

proceeds from the sale of securities. Once the securities begin to trade among individuals,

businesses, governments or financial institution, savers and investors, they become parts of

secondary markets. The term Primary Market is a market where original sale of securities by

an issuer to the public. The issuer receives cash, which may be invested in productive assets or

retirements of debts.

a) Investment Banking: The efficient functioning of a financial market require a number offinancial institution. One of these institutions is an investment banking firm. The firm acts as a

middleman in the distribution of new securities to the public and creates a primary market.

Therefore, the people or institutions are responsible for finding out investor for the initial public

offering (IPOs) of securities sold in the primary market are called investments bankers. The

principal function of the bank is to buy the securities from the issuing company and then resell

them to investors. For acting the role of mediator, the investment banker received the difference,

or spread, between the prices they pay for the securities are resold to the public. The process of

issuing securities to the public is called underwriting and in this sense, the investment bank is

also called an underwriter. The group of underwriters is called an underwriting syndicate. The

underwriting takes place in two ways. The first is typical underwriting. In this arrangement, the

investment banker purchase the securities from the company and re-sales them to the public.

The other type of arrangement is best effort basic, instead of underwriting the securities issued

by the company. Under this arrangement, the investment bankers agree only to sell as many

securities as they can at on established price. They have no responsibility for securities that are

unsold. They bear no risk.

b) Secondary markets: The securities market in which securities are traded secondly. The organizedstock exchanges are the examples of secondary market. Organized securities exchange are the


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physical locations where trading of securities is done under a set of rules and regulation.

Investors usually purchases securities in the secondary market by calling securities brokers. In

the secondary market investors buy and sell securities themselves, the issuer never get any cash

flow from the traders. Nepal Stock exchange (NEPSE) is an example of organized stock

exchange and this is the only stock exchange in Nepal similarly, the New York stock exchange

(NYSE), Tokyo Stock Exchange, American stock exchange(AMEX), Bombay Stock

Exchange(BSE) are the examples of organized Stock Exchange.

c) NEPSE: The securities exchange center was established with an objective of facilitating andpromoting the growth of the capital market. Before its conversion into stock exchange, it wasonly the capital market institution undertaking the job of brokering, underwriting, managing,

public issue market making for government bonds and other financial services. in 1933, the

center was converted into Nepal stock exchange(NEPSE) with the basis objectives of imparting

free market ability and providing liquidity to the government and corporate securities by

facilitating transaction in its trading floor through market intermediaries, such as brokers,

market makers etc. and it is a nonprofit organization, operating under securities Exchange

Act,1983. NEPSE opened its trading floor on 13 January 1974 through licensed members. His

majestys government, Nepal Rastra bank, Nepal Industrials Development Corporation and

licensed members are the shareholders of the NEPSE.

d) Brokers: A broker act as a middleman who matches buying and selling orders, thereby securingboth the buyers and sellers depend with brokers. A broker does not take title to the securities

involved in traction the transition. A commission is charged by the broker for his assistance in

the consummating the transaction. A stockbrokers, as a member of stock exchange and sub

broker as any persons who acts on behalf of a stock broker as an agent or otherwise, assist in

buying, selling or dealing in securities.

2.3.1 Brokerage for equity

S.No. Trading Amount Brokerage %

A Up to 50,000 1

B > 50,000 &< 5,00,000 0.9


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C > 5,00,000 &< 10,00,000 0.8

D > 10,00,000 0.7

2. Brokerage for Government Bond


A Up to 5,00,000 0.20

B > 5,00,000 &< 50,00,000 0.10

C > 50,00,000 0.05

3. Brokerage for all other stocks which is not listed in 1 and 2.


A Up to 50,000 0.75

B > 50,000 &< 50,00,000 0.60

C > 50,00,000 0.40

e)2.3.2Regulation of securities market

Securities markets are the mechanism for the trading of securities and it should be strictly

regulated to stop the malpractices and develop efficiently. Securities Broads (SEBO) Nepal is the

supreme body to regulate the Nepalese securities markets. It was established on 26 may, 1993

under the provision of the Securities Exchange ordinance, 2005. The objectives of the board are

to promote and protect the interest of investors by regulating securities market. Not only these, to

regulate, monitor, direct control and coordinate the entire capital market is also the objective of

SEBO. SEBO works under the ministry of finance (MOF).

SEBON: regulate primary market different acts and laws have been passed. The public issue

activities through the primary market are regulated by the Securities Exchange ordinance, 2005.

The related regulation and guidelines are Securities exchange regulation 1993, Securities

registration and issue approval guidelines, 2002 and securities allotment guidelines, 1997.

Similarly, to regulate the public issue it has made it mandatory to take services of an issue

manager by the issuing companies. To regulate secondary market as well as members, different


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acts like members of stock exchange and transaction byelaws 1998, and securities listed byelaws

1996 have passed. SEBO also monitors whether the activities carried out by NEPSE are in

accordance with the above laws or not. Similarly, SEBON regulates all the members of the

secondary market like issue manager, stock brokers, dealers, market marketers and corporations.

2.3.3 Listing And listing requirement

Listing means the registration of issued securities with the stock exchange to make them eligible

for trading. Corporate- sectors generally raise the required fund through the market either by

issuing the common stocks or preferred stocks or debt instrument as like bond and debenture, if

the features of marketability and liquidity are not added nobody will be interested to invest the

hard earned saving in these instrument. This is simply because the investors are in need of fund

and the invested securities are essential. Securities Exchange act, 1983 also prohibits the trading

of unlisted securities. It has a provision for listing. It means all the public companies must enlist

their securities. In order to enlist securities with the stock Exchange, the company must submit

an application form in the prescribed format along with required documents and listing and

annual fee. These document are essential to the analyze the profitability of the company to be

assured that the proposed securities to enlist will be traded frequency in the trading floor. The

major document that are to be submitted are listed below

a) Names and addresses of the shareholders, directors and their holding.b) Names and Addresses of the shareholders holding more than 5 percent of the issued

shares.

c) Names and addresses of the Managing Directors, chief executive officers, accountants,auditors, company secretary and their holding , if any.

d) In case of an existing company, the last three years audited balance sheet and profit andloss accounting and in case of a newly established company, projected balance sheet and

profit and loss accounts for next three years.

e) Shareholders list.f) Documents that reveal the name and address of the company and the date of business

commencement.

g) Specimen of a share certificate.


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h) Tax registration certificate.i) Approval latter from SEBON for public issue (only if the listing is required after going to

the public) and a letter from the NRB, the central bank.

j) Investment details of the company and promoters and directors, if associated with anyother organization.

k) The name and address of associated organization.l) Resolution passed by the board of the directors of listing.m)Memorandum and articles of associated and prospectus.n) If the organization is established under a special act, a copy of such act.

2.3.4Types of listing

Securities Exchange byelaw, 1996, has categorized the listing of securities into two types:

temporary listing and permanent listing.

1. Temporary listing: Temporary listing should be made for redeemable preferred stocks or

debentures. The listing will be valid till 15 days before the maturity.

2. Permanent listing: Common stocks; irredeemable preferred stocks, debentures, closed endfund will be listed permanently.


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Pre-requisites for listing

It enlists the securities of any company, the following conditions need to be met, andotherwise no company can be enlisted with the NEPSE.

a) If the shares to be listed are common stocks.b) The minimum paid up capital must be RS 25 million.c) The minimum number of shareholders should be 500, but if the company has not floated

at the time of submitting the application form for listing, then listing can be done with the

condition that the required number of shareholders should be attained within two years.

d) The face value of the shares should be either Rs 10 or RS 100e) The flotation of the shares needs to be based on the basis of the issued \capital. It is given

below

Capital as per the decision of NEPSE with the pre-approval of SEBON. The percentage

stated above should be issued and allotted to the general public. Once a company has met

the requirement for listing, it must meet additional requirements established by the

exchange and SEBON in order for its securities to be traded. For example, the listed firm

must publish quarterly earnings reports, and fully disclose its financial information

annually etc.

Table 1.1

Capital Flotation %

Up to Rs 10 million

Above Rs 10million to Rs 5 million

Above Rs 50 million to Rs100 Million

Above Rs 100 million

25%

20%

15%

As per the decision of NEPSE with the pre-

approval of SEBON


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2.4.1Conceptual framework

Conceptual map of share market is a clear concept of share market. It also identifies the variablesof capital market and their relationship. It also helps in the further investigation and research to

make it more effective and usable.

Com

monstock

s,

bond

s &

debe

nture

s,

prefe

rence

share

s and

treas

ure

bills

are

the

finan

cial

instrument of capital market; the sophisticated capital instruments are contributing a lot to the

capital market by making huge capital fund available for manufacturing and service sectors. The

increasing capital instrument enhances the capital market. Hence, capital market is dependent

/


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variable and capital instruments are independent variables. Some factors perform their jobs like

moderating variable; SEBON creates platform to make capital instrument and NEPSE provides

secondary market for those capital instrument, financial institutions convert small scale saving

into huge investment and at last central bank controls the money market and facilitates the

capital market. Financial intermediaries (brokers issue dealer, market maker and issue manager)

also play the role of moderating variable for the IPOs management & capital market. For the

capital market there are some challenges that influence its growth and performance like the

ineffective information, no facilitated OTC, lack of trading floor and many more. Such factors

affecting the performance of capital market are also called the intervening variables. The overall

explanation concludes that IPOs management in capital market is a dependent variable and thereare other factors that contribute either for a positive or negative effect in the capital market.


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2.4.2Hypotheses

Hypothesis is the backbone of research. It is the starting point of investigation. Researchers usedifferent types of hypothesis according to nature of research. In this research, mainly research

hypothesis and null hypothesis are used. Research hypothesis is an assumption that is close with

research objectives and null hypothesis is an assumption that reflects for no effect or no

difference. The hypotheses related with research are as follows.

Ho=the null hypothesis

HA=the alternative hypothesis

I. Ho: There is no relationship between IPOs management in capital market and financialinstruments

HA: If capital instruments increases, the IPOs management in capital market is more

sophisticated.

II. Ho: There is no relationship between IPOs management in capital market and structure ofcapital market.

HA: if the market structure becomes more sophisticated, then the IPOs management in

capital market becomes more effective.

III. Ho: There is no relationship between IPOs management in capital market and financialintermediaries.

HA: if financial intermediaries are improved, then the IPOs management in capital market

is also improved.

IV. Ho: There is no relationship between IPOs management in capital market and challengingissues.

HA: if challenging issues are increased, then IPOs management in capital market becomes

more complicated.


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CHAPTER III

RESEARCH METHODOLOGY

3.1 Research method

3.1.1 Research Area

This research has been conducted to analyze IPOs management and capital market hence it data

has been gathered from Nepal Stock exchange (NEPSE), Securities Board of Nepal (SEBON),

Nepal Rastra Bank (NRB). It investigates and measures the attitudes and activities of investors,

brokers and NEPSEs employees.

Nepal stock exchange (NEPSE) is a nonprofit organization, operating under security Exchange

Act, 1983. It was established in 2050A.D. the official building is located atRamShah Path near

the Singha durbar. The basic objective of NEPSE is to impart free marketable and liquidity to

the government and corporate securities by facilitating transaction in its trading floor through

member, market intermediaries, such as brokers, market makers etc.

Security board of Nepal (SEBON) is located at Gaushala near the Pasupatinath Temple. The

main objective of SEBON is to facilitate an organized company to increase its production

capacity and fixed assets. It also helps in the investigation, development and promotion of the

products.

Nepal Rastra Bank: Nepal Rastra Bank (NRB), the central bank of Nepal is located in Baluwatar,

Kathmandu. The main objective of NRB is to regulate, control and develop the monetary

systems. It also promotes, regulates and develops the national capital. It develops rules,

regulations and procedures related with national capital market.

This research also covers the investors and stock experts. It includes the behavior, attitude and

contribution of investors and stock experts in the capital market.


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3.1.2Research Design

Research Design (RD) is a plan for the collection and analysis of the data. It presents a series ofguide posts to enable to researcher to progress in the right direction in order to achieve the goal.

The design may be a specific presentation of the various steps in the research process. These

steps include the selection of a research problem, presentation of problem, formulation of

hypothesis, conceptual clarity, and methodology, survey of literature and documentation,

bibliography, data collection, testing of the hypothesis, interpretation, presentation and report

writing.

A research design is the specification of methods and procedure for acquiring the informationneeded. It is the overall operational pattern of framework of the project that stipulates what

information is to be collected from it will ensure that the information obtained is relevant to the

research questions and that it was collected by objectives and economical procedure. To obtain

the correct answers for existing problem; the researcher has used Historical and Explanatory

research method in this research.

Historical research is concerned with past phenomena. It is a process of collecting, evaluating,

verifying past evidence with systematically and objectively to reach a conclusion. Accuracy of

the gathered information is the main ingredient of success in historical research. There are two

main sources from where past evidences can be found. One is the primary source, where

researcher was the direct observer of the recorded event and another is secondary source. In this

research both the methods has been used for the data collection.

The basic objective of this study is to find out effect of increasing IPOs in capital market to

obtain this goal Historical Research has been used as a systematic research method. The study is

based on primary and secondary data; information obtained from SEBON, NEPSE, NRB,

investors as well as experts.

3.1.3Nature and Resource of data

Data are collected from two sources. They are primary sources and secondary sources

The primary data are collection through questionnaire. In this research mainly two type

questionnaire tools used: self-administrative and interviewee administrative. Online


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questionnaire, mail questionnaire, delivery and collection questionnaire are Self-administrative

questionnaire. Telephonic questionnaire and interview schedules are also used to collection

primary data. Observation, interview as well as group discussion also include to collection

primary data.

Secondary data source

Secondary data collected through different source. This research mainly depend on secondary

data because the information related stock can gathered through primary tools hardly possible

hence it used secondary data related with share market, SEBON,NEPSE, Central bank. The

project used subjective sectors the following sources of data have also been used in the course ofstudy.

a. Journal of SEBON, NEPSE and central bank.b. Economic magazine, newspapers, and journal.c. Periodic return submitted by SEBON, NEPSE and central bank.d. Various articles publics in the newspaper.e. Various publications dealing in the subject matter of the study.

3.1.4Data collection techniques

For the gathering different facts, information secondary data and primary data are used in the

report to understanding the history of stock market and emerging challenge of it. The tools and

techniques to collection of primary data are as follows.

a. Online questionnaire: It is electronic data collection tool, which allows researchers tocollect information through internet, website, or email in a format that can be directly

read and analyzed. In this research only used form online questionnaire


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b. Mail questionnaire: In this mail questionnaire, the researchers allow to sendquestionnaire direct to respondent. It is most effective tools to collect primary data if

the respondent and researcher have positive relationship.

c. Delivery and collection questionnaire: The researcher allows sending questionthrough postal and collected them after certain time. It is most appropriate where high

technology (telephone, email, internet, mobile etc.) is restricted as like Humla, Jumla

place.

d. Telephonic questionnaire: It is most effective tools to collection of data. It also helpto measure attitude, concept and reliability of data due to it observe pitch of sound,

data flow speed and confidence of respondent.

3.1.5 Data Analysis tools

For the purpose of analysis, two tool used. They are as following

a) Statistical toolsb) Financial tools

3.1.5.1Statistical Tools: Some important statistical tools are used to achieve the objective of the study.

In this study statistical tool such as mean, standard deviation, co-efficient variation and co-

efficient of standard deviation are used. The above statistical tools are broadly categorized in to

two sectors;Descriptive Statistic and Inferential Statistic.

A) Descriptive Statistics: Statistics, which describes the data that have been gathered, arecalled descriptive statistic. Such data are often in form of raw, unorganized numerical

values. These statistics focus on two aspects of the distribution: the central tendency and

dispersion.

i) Mean: A mean is average value or the sum of all observations divided by thenumber of observation and it is denoted and given by the formula; x= mean of

the value, N= Number of the observation. During the analysis of data, mean is


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calculated by using the statistical formula Average on excel data sheet on

computer.

ii) Standard Deviation: The standard deviation measures the absolute dispersion.It is said that the value of standard deviation the higher the variability and

vice-versa. Karl Pierson introduced the concept of the standard deviation in

1823 A.D. and this is denoted by the small Greek letter called Sigma; =

x2/N

Where X = (x-x mean), during the analysis of data, standard deviation is

calculated by the statistical formula (SIDEV) on excel data sheet on computer.

iii) Coefficient of variation: the standard deviation calculation from aboveformulated given as absolute measure of dispersion. The coefficient of

variation measure the relation, measure of dispersion hence it also measure

their variability. The coefficient of variation is given by the formula and

coefficient of variations

C.V= standard deviation/mean *100

B) Inferential statistics: they are defining as statistics that help to establish relationshipamong the variables, from which conclusion can be drown.

I) Correlation coefficient (p): It measures the relationship between two variables.Where one variable is dependent or its value depend on another variable. And

another is independent which value not depend on another variable. The value of

correlation consist any values from 0 to 1. If the value is 0 the correlation

perfectly uncorrelated or there is no relationship exists. If the value 0

0.5 this

means less relative correlated. If p=0.5 relatively correlated and 1 is perfectly

correlated.

II) Regression coefficient(): regression analysis is used to measure the strength ofthe relationship between two or more variables. Regression analysis is used to

predict or estimate the value of one dependent or response or endogenous

variables based on the known values of independent or explanatory variables. The

unknown variable which we have to estimate or predict is called dependent

variables.


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III) Coefficient of determination (r2): the coefficient of determination measures thestrength or extant of the association that exists between dependent variable (y)

and independent variable(x). It measures the proportion of variation in the

dependent variable(y) that is explained by the regression line. In other word,

coefficient of variation measures the total variations in the dependent variable due

to independent variable and its denoted by r2.

3.1.5.2Financial Tools:

a. Return on Assets (ROA): It measures the productivity of the assets. It is measured interms of relationship between net profit and assets. This ratio judge the effectiveness in

using the total supplied by the owners and creditors. Higher ratio shows the higherreturn on assets used in business there by indicating effective use of resources available

and vice-versa. It is calculated by EAT divided by total assets.

b. PE Ratio: The price/earnings (P/E) ratio how much investors are willing to pay per Rs. ofreported profits. To compute the P/E Ratio, we need to know the firms earning per share.

The ratio of the price per share to earnings per share shows the Rs. Amount investors will

pay for Rs. 1 of current earning, this suggests that the company is regarded as being

somewhat riskier than most, as having poorer know unloved has above average risk. It is

calculated by MPS divided by EPS; clearly earnings yield and price-earnings ratio are

simply two ways to measure the something. In practice, earnings yield are less commonly

stated and used, P/E Ratio.


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3.1.6 Population and Sample

This research has been conducted on topic IPOs Management in Capital Market. It takes

population of research from listed companies in NEPSE. Out of 150 listed companies with the

listing of 13 new companies with the merging of NB finance and leasing company with bank

and de-listing of 5 companies, the total number of listed companies remains to 142 during the

fiscal year2007/08. In this research we take only four sectors as population as Commercial

banks, Development banks, Finances and Insurance companies. Where 114 companies IPOs

from 142 companies taking as population from FY 1993/94 to 2007/08, rest of the 4 sectors

restricted from population. Similarly, even though IPOs could be debt, preference share and

common equity. The studies only focus on IPOs of common equity. It also analyzesthe existingstate of IPOs in Nepal. The offers (amount and number of issue) from collected scheme like

mutual fund and citizen investment have not been considered. Sampling method selected

stratified random. It represents different section of the population in study. The population

divided as strata (capital fund) and simple random sample is taken from each such sub group. A

variant of simple stratified sampling is called proportionate sampling. The sample size is 33

[using formula {(2 *2)/t2}], 4 samples from commercial banks, 7 samples from Development

banks, 17 From the Finance companies and 5 from the insurance companies (calculation part at

appendix).


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CHAPTER IV

PRESENTATION AND ANALYSIS OF THE DATA

The chapter includes presentation and analysis of data collected through secondary and primary

source. it reveals existing state of IPOs in Nepal, analyzes IPOs and its relevant sectors and

finally presents relation of IPOs management in capital market and its challenges. All the

analyses are based on simple statistical and financial tools.

4.1 Data Presentation & Analysis of capital market

4.1.1 Amount of public issues offered.

Securities act, 2063 provisioned that any company which goes for IPOs must get issue approval

from Security Board of Nepal (SEBON) prior to make their offer to public. Since first year of

SEBON is operation on FY 1993/04, it has given issue approval from security260issues,

amounting Rs 22561.4 million till FY 2007/08. As securities regulation also provisioned that the

company, which got issue approval, may commit their offer any time within two months from

the data date of issue approval (Security Registration and Issue Approval Guideline, 2002)


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Table 1.2: Amount of Public Issues Offered

From the past data, amount of public issue was 2.444 billion in 1993/94. In 1994/95 it was

1.7396billion which was decreased by 28.82%. After 1995, capital market is increased by

68.85%, 13.09%and 39.18% in the year 1996, 1997 and 1998 respectively. But, in 1998/99

capital market decreased by 44.19%, which was 2.58 billion. In fiscal year 2006/07 capital

market was decline and after the year it was unexpectedly increased by 364.74%.

Fiscal

Year

Amount of public

issue(in Billion)

Growth in Capital

Market

1993/94 2.444 -

1994/95 1.7396 28.82

1995/96 2.9374 68.85

1996/97 3.322 13.09

1997/98 4.6236 39.18

1998/99 2.58 44.19

1999/00 3.2686 26.68

2000/01 4.1049 25.582001/02 14.4133 251.12

2002/03 5.5654 61.38

2003/04 10.275 84.62

2004/05 16.2682 58.32

2005/06 24.4328 50.18

2006/07 22.955 6.048

2007/08 106.682 364.74


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Ch

4.1.2 Comparison of Growth betwe

Growth of capital market rep

increasing tendency of publi

predict picture of economic g

rt 1.1: Amount of Public Issues Offered.

en the IPO and Capital Market

esents the strength of capital market and gr

companies. Hence the relationship of mar

owth.

wth of IPOs show the

ket and IPOs helps to


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Table 1.3: Comparison of Growth between the IPO and Capital Market

The above table shows comparison analysis of capital growth and IPOs growth. In fiscal Year

1994/95 IPOs and capital market both decreased by 23.67% and 28.82% respectively. But in

1995/96 both increased by 30.34% and 68.85% and amount of IPOs reach to 226.74 million. In

the following year the IPOs and capital market increased in

same trend. In 2006/07 IPOs decreased by34.41% in result the growth in capital market was -

6.048%. But it was unexpectedly increased by 142.97% in IPOs and 364.74% in Capital Market.

Fiscal Year Amount of IPO

(in Million)

Growth in IPO Growth in Capital

Market

1993/94 227.90 - -

1994/95 173.96 -23.67 -28.82

1995/96 226.74 30.34 68.85

1996/97 57.00 -74.86 13.09

1997/98 119.40 109.47 39.18

1998/99 148.00 23.95 -44.19

1999/00 202.26 36.66 26.68

2000/01 278.70 37.79 25.582001/02 319.46 14.63 251.12

2002/03 394.30 23.43 -61.38

2003/04 657.50 66.75 84.62

2004/05 377.48 -42.59 58.32

2005/06 579.83 53.61 50.18

2006/07 380.30 -34.41 -6.048

2007/08 924.00 142.97 364.74


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Chart1.2: Comparison of Growth between the IPO and Capital Market

4.1.3 Capital Market Structure and Capital

Capital structure incudes financial institutions, security board and stock exchange and central

bank. It takes only financial institution and capital market for IPOs management. The trend of

data does not show any significant relationship between issues companies and capital market.

Table 1.4: Capital market Structure and capital

100

50

0

50

100

150

200

250

300

350400

1994

/95

1995

/96

1996

/97

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

2002

/03

2003

/04

2004

/05

2005

/06

2006

/07

2007

/08

Fiscal Year Amount of public issue(in Billion)

Number of IssuerCompany

1993/94 2.444 16

1994/95 1.7396 10

1995/96 2.9374 12

1996/97 3.322 5

1997/98 4.6236 12

1998/99 2.58 5

1999/00 3.2686 62000/01 4.1049 9

2001/02 14.4133 12

2002/03 5.5654 18

2003/04 10.275 14

2004/05 16.2682 14

2005/06 24.4328 29

2006/07 22.955 34

2007/08 106.682 64


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From the above table, the number of listed companies leads by finance companies, which is

38.73%. Secondly, the development bank has more coverage with 16.20%. And other companies

like commercial bank, insurance companies and manufacturing and processing companies have

average coverage with 11.97%, 11.97% and 12.68% respectively. Lastly, hotels, trading

companies and other companies have very little contribution with 2.82% for each.

Chart 1.4: Sector wise Listed Companies

&


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4.2 Major Finding of the Study

The study was set out to analyze different aspect of IPO in Nepal. The data, which were obtained

through secondary & primary sources, were analyzed using different statistical tools and modes

which resulted in following findings:

4.2.1 Amount of public issued offering has a decreasing rate at the initial phase which is -28.82. After

that, from the fiscal year 1995/96 to FY 1197/98 the growth rate has increased. The data shows

that the capital market has an average growth. Hence, it supports the alternative hypothesis that if

capital instrument increases, the IPOs management in capital market is more sophisticated.

4.2.2IPOs growth plays a significant role in the growth of capital market. The data shows that there is no

direct relationship between them. The growth of capital market and IPOs both have decreases in

the FY 1994/95 but in the Fiscal Year 1998/99 growth of capital increased but the growth of

IPOs has decreased. It shows that they do not have direct relationship. The trend of capital

growth is in an average increase but for IPOs it is fluctuating.

4.2.3Public issue in 1993/94 was 2.444 billion. It was increased by 106.682 in year 2007/08. In the same

way the number of issuer companies also increased to 64 in number from 16. The number of

institutions can play a significant role in capital market but the information show that they do not

have any direct relationship.

4.2.4 Financial intermediaries such as brokers, issue manager, underwriter, dealer, investment bankers

play a significant role in the growth of IPOs and capital in the capital market. Many report,

journals, and researches show that financial intermediaries are essential component of capital

market. Hence, it supports the alternative hypothesis i.e. if financial intermediaries are improved

then the IPOs management in capital market also improves.

4.2.5Numbers of listed companies are rapidly increasing in the SEBON. Due to the lack of strong

regulation body of Security Board of Nepal and central bank, large amount of public capital is

under loss. Nowadays many joint stock companies are losing their performance as well as the

market position. Some corporations are bearing loss and probable solvency. The result of bad

performance of corporations is indicating that a huge amount of public investment is under risk.


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Negligence of monitoring body of capital market or SEBON and Nepal Rastra bank (central

bank) and their inappropriate procedure are responsible for all the risksin the capital market.

Many financial institutions have borne loss like Nepal Bangladesh Bank, Lumbini Bank etc. and

some were even dissolved, like Nepal Development Bank. Securities Act is not effective and

appropriate in accordance with the present situation. It directly affects the increasing capital

market and initial public offerings (IPOs). There is no any provision for non-listed company and

restricted companies. The major problem of capital market is the poor management and the lack

of appropriate investment policy. In the current situation,investors out of the valley (Kathmandu)

are unable to take the benefit of capital market. Capital market lost huge amount of investors due

to the lack of appropriate information, appropriate technical resources and branches in differentplace of the country. It supports the alternative hypothesis i.e. if challenging issues are increased

then IPOs management in capital market becomes more complicated.


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CHAPTER V

SUMMARY, CONCLUSION AND RECOMMENDATION

This chapter covers three parts of the study: summary, conclusion & recommendation. The first

part goes over with summarization of the whole study, the second part depicts the conclusion and

the final part presents the recommendation in the light of its finding.

5.1 Summary

Money can facilitate by either money market of capital market. Money market provide for short

term but business need long term assert. For improvement of long-term assert capital market

provide fund. Hence capital market is essential market for business. Initial public offering (IPOs)

is a part of primary market mechanism. When an institution raises capital form public through

issuance of its securities for the first time, then its issue to the public is termed as initial public

offering. It also study overall Nepalese capital market capital market is a best alternative for the

investment, in the other part of world capital market is old concept but in Nepal capital market is

new emerging market. Stock market helps to development of financial structure of country.

Historical backgrounds of Nepalese capital market begin issuing share of BIRATNAGAR JUTE

MILL. Secondary market established in 2050-02-13 BS. Nepal stock exchange established with

25 brokers and 5 market makers. During the period 2064the broker and market maker become 31

and 6 by adding 6 brokers and one market maker respectively. The 152 companies are listed in

the security board of Nepal at may, 2009, 17 Commercial bank , and 23 development banks, 55

finance companies, 17insurance companies, 18 manufacturing and processing companies m5

trading companies, 4Horel and 6 other companies .


capital form public through issuance of its securities for the first time, then its issue to the public

is termed as initial public offering. Initial public offering (IPOs) enhanced liquidity of

organization. It also provide sufficient fund for capital extend of companies. Issuing the IPOs in

the capital market heightens the prestige and recognition of company among suppliers and

prospective customers. Some drawbacks exist in IPOs. It made of limited decision power of


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management. After issue IPOs the data are providing up to date hence information flow cost

increase. The company must be adopt legal provision as like auditing and underwriting fees

hence direct cost increases. Management also spent many time and effort to manage IPOs,

therefore indirect cost also increase.

The securities exchange center was established with an objective of facilitating and promoting

the growth of the capital market. Before its conversion into stock exchange, it was only the

capital market institution undertaking the job of brokering, underwriting, managing, public issue

market making for government bonds and other financial services. in 1933, the center was

converted into Nepal stock exchange(NEPSE) with the basis objectives of imparting free market

ability and providing liquidity to the government and corporate securities by facilitating

transaction in its trading floor through market intermediaries, such as brokers, market makers etc.

The public issue activities through the primary market are regulated by the Securities Exchange

ordinance, 2005. The related regulation and guidelines are Securities exchange regulation 1993,

Securities registration and issue approval guidelines, 2002 and securities allotment guidelines,

1997.

The main objective of research is to identify the effect of increasing stock and initial public

offering (IPOs) in the capital market of Nepal. In this research we take only four sectors as

population as Commercial banks, Development banks, Finances and Insurance companies. The

114 companies IPOs from 142 companies are taking as population from FY 1993/94 to 2007/08.

The simple size is 33 [using formula {( 2 *2)/t2}]. Sample taking from commercial banks, 7

sample from Development banks, 17 From the Finance companies and 5 from the insurance

companies .Presentation and analysis of data collected through secondary and primary source,

reveals the existing state of IPOs in Nepal, analyzes IPOs and its relevant sectors and finally

presents relation of IPOs management in capital market and its challenges. All the analyses are

based on simple statistical and financial tools.


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5.2. Conclusion

5.2.1 In the Nepalese capital market, the capital instrument is increasing and IPOs management

in capital market is becoming more sophisticated. The capital market has an average growth.

5.2.2 Growth of capital market and IPOs have significant relationship but not direct. Capital

market is in developing phase but IPO (primary market) is not so much sophisticated. Hence, the

structure of primary market is not so much developing.

5.2.3 Capital market structure influences the capital market but they havent direct relationship.

In Nepal, financial market structure is growing gradually and capital market is also being

sophisticated.

5.2.4 NEPSE make plans to improve financial intermediaries, according to their plan they have

added more brokers, merchant banks and issue managers. The increasing numbers of

intermediaries plays a significant role in the development of capital market of Nepal.

5.2.5 Under regulation of SEBON many listed companies are under risk due to weak monitoring

bodies and inappropriate rules and regulations. For example; Nepal Development Bank was

dissolved, however, just before it was dissolved, Nepal Development Bank received approval toissue right shares due to the poor management of central bank (NRB) and SEBON.


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5.3 Recommendation

5.3.1 The Nepalese public has huge money that must be utilized by the capital market to developcapital infrastructure and long term project. It plays a significant role to develop the economic

system. It also helps to improve the GDP.

5.3.2 Primary market is not so sophisticated hence government should develop basic

infrastructures for the primary market. And capital market should be familiar with modern

technology.

5.3.3 Capital market structures as like NEPSE, SEBON, and Financial institution is not mature

and sophisticated. Hence it must be developed by giving authorities as well as responsibilities.

They should provide off the job training and on the job training for human resources.

5.3.4 SEBON should make proper plans for the improvement of intermediaries such as brokers,

investment banker and dealer. Now capital market has only one dealer which is not sufficient for

the market. Hence NEPSE should develop more dealers.

5.3.5 Government should make the authorities and responsibilities of central bank, SEBON and

NEPSE clear. Government should control the regulation body of SEBON, NEPSE and central

bank.


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Questionnaire

Dear respondent this questionnaire is to get the data for my research conducted to know the IPO

management in capital market. So it will helpful if you fill this questionnaire to obtain data for my

research.

For Investors:

Age: Address:

1. Why are public interested to invest in stocks?a) To get more profit margin.

b) Few investment options.

c) Just following the public trend.

d) Others.

2. Are public interested to invest in IPO?a) Yes b) No

If yes/no

3. Why do people invest on stock rather than bond?a) High return on stock.

b) Stock facilitated market.

c) Other factors.

4. Is Nepalese capital market risk free?a) Yes b) No

5. Can Nepalese market cope with the global economy?a) Yes b) No

6. How can a small investor diversify their risk?a) Creating a stock portfolio b) Creating bond portfolio c) Creating Stock & Bond


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7. Which type stock do you prefer?a) Banking Companies b) Manufacturing Companies c) Hotels

d) Others

8. Do you know about Nepal Stock Exchange?

a) Yes b) No

9. Which type of institutions do you prefer to purchase their IPOs?

a) Financial Institutions.

b) Hydropower Projects.

c) Trading and Manufacturing Companies.

d) Hotel and Services.

10. Why are people interested to invest on financial sectors?

a) High return with low risk.

b) Strong supervision by central bank.

c) Because everybody invest.

d) Others

11. Does stock that pays special dividend always go down by the amount of the dividend?

a) Yes b) No

12. How do you value a common stock?

13. Which of the following best describes the stock brokers?

a) Market Maker.

b) Commission Taker.

c) Advisors.

d) None of the above.

Questionnaire


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Dear respondent this questionnaire is to get the data for my research conducted to know the IPO

management in capital market. So it will helpful if you fill this questionnaire to obtain data for my

research.

For Stock Experts:

1. What determines a stocks price?a) Wealth of organization

b) Profit margin of company

c) Company management

d) Cash flow of company

e) Political situation

f) All of them

g) None of the above

2. How does the stock market work?

3. If you are looking at many companies with equal risks which ones will have the highest stock price?

a) Company with highest dividend paid.

b) By creating a portfolio.

c) Cash flow of investors.

d) Others.

4. Is Nepalese Capital Market capable enough to cope with the global economy?

a) Yes b) No

5. How can small investors diversify their risk?

a) Creating a Portfolio.

b) Investing on one company.

6. What is stock repurchase?

a) Purchasing own stocks by the company itself.

b) Purchasing of stock sold in the market by investors themselves.

7. How and why do the stock prices fluctuate even after the stock exchanges close trading for the day?


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a) Changes in the policies of stock market.

b) Political Changes.

c) Investors Expectations.

d) Availability of stocks.

8. Why would a company issue a stock dividend instead of cash dividend?

a) To maintain the companys liquidity.

b) To fulfill the capital requirement.

c) To increase the involvement of investors in the company.

d) Others.

9. What are the challenges and opportunities of Nepalese Capital market?

Challenges Opportunities

.. .

10. What are the capital market instruments?

a). d). ..

b). e). .

c). f).

12. What is the reason behind the increment of capital realization in the primary market in fiscal year

2007/08 A.D.?

a) Outcome of successful Peoples Movement 2062/063 B.S.b) Matured Financial Institutions.c) Public Awareness and interest in the Share Market


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Bibliography

1. Bhattarai, R.(2006). Stock market in Nepal. Kathmandu: Buddha Academic2. Brau, J. C. & Fawcett S. E.(2007). Initial Public Offerings: An analysis of theory and

practices. The journal of finance 61:399-436. Available

http://www.blackwell_synergy.com[2009,November,18]

3. Guring, Jas B.(1999). Share price behavior of listed companies in Nepal. master diss.,Tribhuvan University.

4. Nepal Stock Exchange.(2007/08).Annual report. Kathmandu: Author.5. Nepal Stock Exchange[online] (cited2009). : http://www.nepalstock.com

[2009,November,22]

6. Security Board of Nepal.(2007/08).Annual report. Kathmandu: Author.7. Security Board of Nepal[online] (cited 2009). Available:

http://www.sebonp.com[2009,November,18]

8. Shrestha, Raju(2007).An Analysis of Different Aspect of IPO and Its practices in Nepal.Master diss, Tribhuvan University.

9. Shrestha, Suraj K.(1996).A Study on the Public Response to Primary Issue of Share inNepal. Master diss. Tribhuvan University.


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Appendix1 SEBON

1.1 Introduction Security Board of Nepal (SEBON)

Securities Board of Nepal (SEBON) was established by the Government of Nepal on June 7,

1993 as an apex regulator of Securities Markets in Nepal. It has been regulating the market under

the Securities Act, 2006. The functions, duties and powers of SEBON as per the Act are as

follows.

To offer advice to Government on matters connected with the development of the capital

market.

To register the securities of corporate bodies established with the authority to make apublic issue of its securities.

To regulate and systematize the issue, transfer, sale and exchange of registered securities. To give permission to operate a stock exchange to any corporate body desirous of doing

so, subject to this Act or the rules and bye-rules framed under this Act.

To supervise and monitor the functions and activities of stock exchange. To inspect whether or not any stock exchange is executing its functions and activities in

accordance with this Act or the rules and bye-rules framed under this Act, and to suspendor cancel the license of any stock exchange which is not found to be doing so.

To issue licenses to conduct the business of dealing in securities, subject to this Act, orthe rules and the bye-rules framed under this Act, to companies or institutions desirous of

conducting the business of dealing in securities.

To supervise and monitor the functions and activities of securities-dealers. To grant permission to operate collective investment schemes and investment fund

programs, and to supervise and monitor them.

To approve the bye-rules concerning transactions in securities framed by stock exchangesand institutions engaged in the business of dealing in securities, and, for the purpose of

making necessary provisions concerning the development of the capital market and

protecting the interests of investors investing in securities, issue orders to have necessary

alterations made in such bye-rules of stock exchange and institutions engaged in the

business of dealing in securities.

To systematize the task of clearing accounts related to transactions in securities.


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To supervise whether or not security dealers are behaving in the manner prescribed in thisAct, or the rules and the bye-rules framed under this Act, while conducting business of

dealing in securities, and suspend the license to conduct the business of dealing in

securities in case any securities dealer is not found to be behaving accordingly.

To make or ensure necessary arrangements to regulate the volume of securities transactedand the procedure of conducting such transactions in order to ensure the promotion,

development and clean operation of stock exchanges.

To make necessary arrangements to prevent insider trading or any other offenses relatingto transactions in securities in order to protect the interest of investors in securities.

To review or make arrangement for reviewing the financial statements submitted by thecorporate bodies issuing securities and security dealers, and issue directives deemed

necessary in that connection to the concerned corporate body.

To systematize and make transparent the act of acquiring the ownership of a company orgaining control over its management by purchasing its shares in a single lot or in different

lots.

To establish coordination and exchange cooperation with the appropriate agencies inorder to supervise and regulate matters concerning securities or companies.

To discharge or make arrangements for discharging such other functions as are necessaryfor the development of securities and the capital market.

The Governing Board of SEBON is composed of seven members including one full time

chairman appointed by the Government for tenure of four years. Other members of the Board

include joint secretary of Ministry of Finance, joint secretary of Ministry of Law, Justice and

Parliamentary Affairs, representative from Nepal Rastra Bank, representative from Institute of

Chartered Accountants of Nepal, representative from Federation of Nepalese Chambers ofCommerce and Industries, and one member appointed by the Government from amongst

the experts pertaining to management of securities market, development of capital market,

financial or economic sector.

There are seven departments and sixteen sections in the organization of SEBON. Under the

Management Department, there are two divisions namely Human Resources Section and

Finance Section. There are also four sections under the Planning and Development Department


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namely Research Section, Training Section, Information Technology Section and International

Affairs Section. There are also two sections under the Corporate Finance Department namely,

Public Issue Section and Collective Investment Scheme Section. Likewise, Under the Regulation

Department, there are two sections namely, Stock Exchange Regulation Section and Market

Intermediaries Regulation Section. There are also four sections under the Surveillance

Department namely, Stock Exchange Surveillance Section, Market Intermediaries Surveillance

Section, Trading Surveillance Section and Corporate Surveillance Section. Finally, under Legal

Department, there are two sections Research and Investigation Section and Enforcement Section.

The major financial sources of SEBON are the government grant, transaction fee from the stock

exchange and registration fee of corporate securities. Other financing sources include registration

and renewal of stock exchange and market intermediaries and the income from mobilization of

its revolving fund.


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Appendix 2 Public Issue Approval

(Fiscal Year 1993/94)

S. N. Name of Issuing Company Types ofsecurities

Amount of Issue

Approved (Rs. inmillion)

Permission

DateIssue

Manager/Fund Manager

1 Nepal Med Ltd. Ordinary Share 2.70 28/07/1993 CIT

2 NIDC Capital Markets Ltd. Mutual Fund 100.00 28/07/1993 NCML

3 Nepal Share Markets Co. Ltd. Ordinary Share 4.00 21/09/1993 NCML

4 Himalayan General Insurance Co. Ltd. Ordinary Share 12.00 28/09/1993 NCML

5 Harisiddhi Brick & Tiles Factory Ltd. Ordinary Share 53.20 12/12/1993 NCML

6 Nimrod Pharmaceuticals Ltd. Ordinary Share 18.00 16/12/1993 CIT

7 Nepal Lever Ltd. Ordinary Share 13.80 30/12/1993 NCML

8 Necon Air Ltd. Ordinary Share 16.50 10/01/1994 CIT

9 Necon Air Ltd. Preference Share 14.00 10/01/1994 CIT10* United Insurance Co. (Nepal) Ltd.

#Ordinary Share 24.00 30/01/1994 NCML

11* Nepal SBI Bank Ltd. # Ordinary Share 36.00 22/02/1994 CIT

12* Peoples Finance Ltd. Ordinary Share 9.80 08/05/1994 CIT

13* Annapurna Finance Ltd.#

Ordinary Share 2.00 10/05/1994 NSML

14 Nepal Film Development Co. Ltd. Ordinary Share 21.90 05/06/1994 NCML

15 Agro Nepal Ltd. Ordinary Share 9.00 12/06/1994 CIT

16 Birat Shoe Ltd. Ordinary Share 5.00 21/06/1994 NCML

17 Birat Shoe Ltd. Preference Share 2.50 21/06/1994 NCML

Total 344.40


S. N. Name of Issuing Company Types ofsecurities

Amount of Issue

Approved(Rs. in million)

Permission

DateIssue Manager/

Fund Manager

1* Premier Insurance Co. Ltd. # Ordinary Share 12.00 18/08/1994 NCML

2 Ace Laboratries (Nepal) Ltd. Ordinary Share 12.26 04//09/1994 NFCL

3* Nepal Bangaladesh Bank Ltd. Ordinary Share 36.00 29/09/1994 NCML

4* Everest Insurance Co. Ltd. Ordinary Share 12.00 03/10/1994 NCML

5 Himgiri Textile Industries Ltd. Ordinary Share 19.20 08/11/1994 CIT

6 Balaju Textile Industries Ltd. Ordinary Share 7.50 24/11/1994 NSML

7* Kathmandu Finance Co. Ltd. # Ordinary Share 8.00 29/01/1995 NCML

8 LeatherageBansbari Tannery &Shoe Factory Ltd. Ordinary Share 15.00 14/03/1995 NCML

9* Citizen Investment Trust Ordinary Share 16.00 10/04/1995 NFCL

10* Everest Bank Ltd. Ordinary Share 36.00 26/04/1995 NCML

11 KoshByabasthapan Co. Ltd. Ordinary Share 30.25 14/06/1995 NFCL

12 Citizen Investment Trust Unit Scheme 50.00 29/06/1995 CIT

Total 254.21


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S. N. Name of Issuing Company Types of

securities

Amount of Issue

Approved

(Rs. in million)

Permission

Date

Issue Manager/

Fund Manager

1* Nepal Abbas BikashBitta Co. Ltd. Ordinary Share 20.00 01/08/1995 RBB

2* Narayani Finance Co. Ltd. # Ordinary Share 4.00 11/09/1995 NFCL

3 Nepal Finance & Saving Co. Ltd. Rights Share 2.00 22/10/1995

4 Shree Brikuti Pulp & Paper Nepal Ltd. Ordinary Share 105.00 05/12/1995 CIT

5* Yeti Finance Co. Ltd. # Ordinary Share 8.00 05