Securities Board of Nepal Jawalakhel, Lalitpur, Nepal 9 October 2020
Published on the occasion of World Investor Week 2020
INVESTORS’ HANDBOOK ON SECURITIES MARKETS AND COMMODITY DERIVATIVES MARKETS
Securities Board of Nepal (SEBON) Jawalakhel, Lalitpur, Nepal 9 October 2020
Published on the occasion of World Investor Week 2020
Investors’ Handbook
III
Investors’ Handbook
Editorial in securities markets and commodity derivatives markets in order to empower The Nepalese securities markets is being and protect the interest of general modernised due to some structural investors at large. As a continuation of changes in the recent years. The full- this, World Investor Week (WIW) 2020 fledged dematerialised transaction Organising Committee is pleased to of securities, the introduction of ASBA, bring out “Investors’ Handbook on C-ASBA and Meroshare system in Securities Markets and Commodity the primary market enabling the Derivatives Markets”. The purpose of applicants from 77 districts to access the handbook is to provide the basics the service through more than 2500 of securities markets and commodity BFIs as service providers, branch derivatives markets to the students of expansion of merchant bankers and Schools and Colleges at early age and stockbrokers outside of Kathmandu investors at large to enable enhancing valley and adoption of on-line trading their understanding and making system have made Nepalese securities informed investment decisions of their markets techno-friendly, investment hard-earned incomes and savings. friendly and countrywide resulting The Handbook is a compilation of increased attraction of public towards the basic information about financial the securities markets in recent days. markets, securities markets, commodity Low level of participation of institutional derivatives markets, SEBON and its investors in the markets, lack of functions, IPO process, shareholders’ diversified instruments and low level rights, primary and secondary markets, of understanding and awareness in investment instruments, services securities markets continues to be provided market participants, most a cause of concern. Investors and useful terms of the markets, and tips for even students tend to use thumb rules investment. or seek advice from friends, market We request students and investors to intermediaries and relatives, which are use this handbook as guidance for often poor approximations compared understanding of securities markets and to those that follow from a scientific making better investment decision. analysis. They will tend to make bad choices, contribute insufficiently, begin We would like to thank the Chairman of saving late, stay away from modern SEBON and Management of SEBON for finance, or fall prey to fraud or mis-selling providing us the opportunity in bringing of financial instruments. If they get bad out this publication. We are also advice, the outcomes will be poor, and thankful for entrusting us with the task of they will lose faith in the market system. organising the WIW 2020. Taking note of aforementioned facts, Finally, we welcome valuable Securities Board of Nepal (SEBON) has comments and suggestions in making been focusing on the investor education this publication more useful and and awareness building programme effective in the future.
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WIW 2020 Organising Committee
Dr Nabaraj Adhikari, Deputy Executive Director and Coordinator Deepa Dahal, Deputy Executive Director and Member Anuj Kumar Rimal, Acting Director and Member Yam Nath Aryal, Assistant Director and Member Sanu Khadka, Assistant Director and Member (Invitee Member)
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ABBREVIATIONS
SEBON Securities Board of Nepal RII Retail Individual Investor AMC Asset Management SRO Self Regulatory Organisation Company CGT Capital Gain Tax SBAN Stockbroker Association of STT Securities Transaction Tax Nepal UCC Unique Client Code MBAN Merchant Banker UIN Unique Identification Association of Nepal Number NEPSE Nepal Stock Exchange Ltd. VCF Venture Capital Fund BTI Banker to the Issue DMAT Dematerialisation (of BO Beneficiary Owner securities) NOTS NEPSE Online Trading System WIW World Investors Week Ltd. DIS Debit Instruction Slip CBI Central Bureau of SASRF South Asian Securities Investigation Regulators Forum CDSC CDS and Clearing Ltd. ANNA Associations of National (Central Depository Services) Numbering Agencies CIS Collective Investment AFIE Asia Forum for Investor Scheme Education IPF Investor Protection Fund OECD Organisation for Economic DP Depository Participant Cooperation and FAQs Frequently Asked Questions Development F&O Futures and Options APEC Asia-Pacific Economic GoN Government of Nepal Cooperation ICAN Institute of Chartered US SEC United States Securities and Accountants of Nepal Exchange Commission IPO Initial Public Offering ASIC Australian Securities & ISIN International Securities Investment Commission Identification Number SEBI Securities and Exchange KIM Key Information Board of India Memorandum FSA Financial Services Agency, MBs Merchant Bankers Japan MFs Mutual Funds OJK Otoritas Jasa Keuangan, Indonesia NAV Net Asset Value PSU Public Sector Undertaking QIB Qualified Institutional Buyer
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Investors’ Handbook
Table of Contents Contents Page No. Message from the Chairman iii Editorial v Abbreviations vii Table of Contents xi
Chapter 1 An Introduction to Financial Markets 1 Money Markets 1 Capital Markets 1 Securities Markets 1 Primary market 2 Secondary market 2 Desirable Characteristic of Financial Markets 2 Market Efficiency 2 Market Depth 3 Market Width 3 Undesirable Activities of the Markets 3 Market Cornering 3 Wash Sales 4 Churning 4 Pump-and-Dump 4 Financial Market Styles 4 Order Driven Markets 4 Quote Driven Markets 4 Principal and Agency Trading 5 Financial System 5 Overview of Nepalese Financial System 5 Bank and Financial Institutions 6 Securities Markets 6 Insurance Sector 7 The Non-Banking Financial Intermediaries (NBFIs) 7 Cooperatives 7
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Chapter 2 Introduction to Securities Markets and Commodity Derivatives Markets 8 Securities Markets 8 Role of Securities Markets 9 Risk Associated with the Securities Markets 9 Systematic Risk 9 Market Risk 10 Industry Risk 10 Business Risk 10 Regulatory Risk 10 Historical Development of Securities Markets 10 Development of Securities Market in Nepal 10 Commodity Derivatives Markets 11 Types of Commodity Markets 12 Basis of Nepalese Commodity Derivatives Market Operation 13 Adoption of Risk Reduction Mechanism 13 Objectives of Commodity Derivatives Market Regulation 13
Chapter 3 Introduction to Securities Board of Nepal (SEBON) 14 Major Function, Duties and Power of SEBON 14 Legal Framework 16 Objectives of Securities Laws of Nepal 16 International Relations of SEBON 16
CHAPTER 4 Public Issue of Securities 17 An introduction of Public Issue 17 Initial Public Offering (IPO) 17 Further Public Offering (FPO) 17 Rights Issue 18 Private Placement 18
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Bonus Share Issue 19 Public Issue Process 19 In case of Right 20 SEBON’s Role in Public Issue of Securities 21
CHAPTER 5 Financial Instruments 22 Money Market Instruments 22 Securities Markets Instruments 22 Common Types of Securities 23 Shares 23 Bonds/Debenture 23 Categories of Bond 24 The Risk Faced by Investors in Bond 24 Interest Rate Risk 24 Inflation risk 24 Liquidity Risk 25 Default Risk 25 Mutual Funds 25 Derivatives 25 Hybrid Instruments 25 Specialised Investment Fund (SIF) 26 Private Equity (PE) 26 Venture Capital (VC) 26 Hedge Funds (HF) 26
CHAPTER 6 Investment Planning & Process 28 Determining Steps to Investing 28 Importance of Investment 28 Investment Objectives 28 Specification of the Financial Goals 29 Assessing the Financial Capacity 29 Investment Process 30
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Level and Management of Risk 31 Process of Investment 33 Purchasing Process 33
Chapter 7 Right of Shareholders 35 Major rights of shareholders entrusted by Securities Related Act, 2006 and Company Act, 2006 35
Chapter 8 Market Participants: Nepal Stock Exchange Ltd. 38 An Introduction to NEPSE 38 Trading Sessions in NEPSE 38 Price Range 38 Order Matching 38 Trade Management System for Brokers and Clients 39 Invest as an Informed Investor 39 Market Index/Indices 39 Basis of Indices/Index 40 In a Price Weighting 40 In a Value Weighted 40 An Equal Weighting 40 Calculation of NEPSE Index 40 Sensitive Index 40 Float Index 41 Circuit Breaker and Trading Halt 41 Classification of Listed Companies by NEPSE 41 Market Participants: Depository Services 42 An Introduction to the Depository System 42 Service Offered by CDSC 43 Parties Involved with CDSC 43 The Purpose of Opening a Demat Account 43 Dematerialisation (Demat) & Rematerialisation (Remat) 43 Beneficial Owner (BO) 43 Depository Participant (DP) 44 An Issuer 44 Registrar and Transfer Agent (RTA) 44 International Securities Identification Number (ISIN) 44
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Beneficial Owner Identification Number (BOID) 44 Services Rendered by a DP to the Investors 44 Software used by CDSC for the Depository System 45 Mechanism of Data Security in the System 45 Benefits of opening a demat account for investors 45 Market Participants: Merchant Bankers 46 History of Merchant Banking 46 Functions and Services Offered by Merchant Banker 47 Capital Structuring 47 Project Evaluation and Due Diligence 47 Legal Aspects 47 Pricing of the Issue 47 Preparing of Prospectus and Offer Documents 48 Marketing of the Issue 48 Arrangement of Collection Center and Collection of Application 48 Responsibilities of Merchant Banker to the Investors 48 Market Participants: Stockbroker 48 Consideration Required while Selecting Stockbrokers 49 Responsibilities of a Stockbroker 49 Details an Investor Need to Submit to Broker 49 Unique Client Code 50 Brokerage Charge/Commission 50 Capital Gain Tax (CGT) 50 Market Participants: CRA for Credit Rating Services 50 Credit Rating Service and IPO Grading 50 Credit Rating History in Nepal 51 Grading of Public Issue 51
Chapter 9 Investor Education 52 Objectives of Investor Education Programme 52 Investor Education in Nepal 52 SEBON Initiatives Towards Empowering General Investors 52 Handling Investors’ Grievances 53
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Chapter 10 16 Mantras for Wise Investment 54
Chapter 11 DO’S & DON’TS: 58 DO’S & DON’TS: Primary Market 58 DO’S & DON’TS: Secondary Market 58 DO’S & DON’TS: Dealing with Stockbrokers 60
Chapter 12 Frequently Asked Questions (FAQ) 61 FAQ: Primary Market 61 FAQ : Secondary Market 64 FAQ: Mutual Fund (MF) and CIS 67 FAQ: Depository & DP Services 68 FAQ: Derivative Markets 79
Chapter 13 Most Useful Terms of the Markets 87
Annexures 106 Annexure 1. List of Securities Acts, Regulations, Directives, Byelaws 107 Annexure 2. List of Stockbrokers 108 Annexure 3. List of Merchant Bankers 111 Annexure 4. List of Related Websites 114
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Chapter 1 bills, commercial papers, bankers’ acceptance, certificates of deposits, An Introduction to Financial Markets etc.
Financial markets is a marketplace, Capital Markets where creation and trading of financial Capital markets is a market for long-term assets like shares, debentures, bonds, debt and equity shares usually for more derivatives, currencies and so forth than one year. In this market, the capital takes place. It plays very important role funds comprising both equity and debt, in allocating scarce resources in the are issued and traded. This includes economy of the country. The financial both private placement sources of debt markets can be broadly classified into (i) and equity as well as organised markets money markets and (ii) capital markets like stock exchanges. as in figure 1. Securities Markets Figure 1 It is composed of two terms “Securities” and “Markets” referring financial instruments issued to raise funds and a place or places where securities are bought and sold respectively. It provides facilities and people engaged in such transactions, the demand for and availability of securities to be traded, and the willingness of buyers and sellers to reach agreement on sales. Secondary markets include over-the- counter markets and stock exchange.
The primary function of the securities markets is to enable to flow of capital from those that have it to those that need it. Securities market helps in transfer of resources from those with idle resources to others who have a Money Markets productive need for them. Securities markets provide channels for allocation Money markets is a market for debt of savings to investments and thereby securities that pay off in the short-term decouple these two activities. As a usually less than one year, for instance, result, the savers and investors are not the market for 90-days treasury bills. constrained by their individual abilities, This market encompasses the issuance but by the economy’s abilities to invest and trading of short-term non-equity and save respectively, which inevitably debt instruments including treasury enhances savings and investment in the economy.
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Securities markets can be further Desirable Characteristic of Financial divided into the (i) primary market and Markets (ii) secondary market. (i) Market efficiency, (ii) Market depth, Primary Market and (iii) Market width are prerequisite of financial market. These factors are A market where securities are directly the desirable characteristics of financial offered to the general public by a market. company or issuer with the help of merchant bank as an intermediary who Market Efficiency acts as an expert of issue management on behalf of the issuer. The issue The primary market provides an management is done by issue manager intermediary function by channeling under merchant banking function funds from investors (with savings) to licensed by the Securities Board of firms and businesses that are seeking Nepal (SEBON). funds for investments. Secondary Secondary Market markets, on the other hand, reinforce the primary market by providing the A market where securities, both equity flexibility for investors to liquidate their and debt, are traded after being holdings when desired. initially offered to the public in the primary market and listed at the stock Financial markets also perform an exchanges. Trading of listed securities allocative function, by directing investor take place in the secondary market. savings to business and investments with the highest returns. Firms and businesses For a company, secondary equity that are efficiently operated and are markets serve as a monitoring and able to identify superior investment control conduit—by facilitating opportunities will command higher value-enhancing control activities, prices for their securities and will attract enabling implementation of incentive- the needed capital. Resources thus will based management contracts, and flow to the best uses in the economy. aggregating information (via price However, this depends on whether discovery) that guides the management the market is efficient, in the sense that decisions. For an investor, the secondary whether stock prices accurately reflect market provides an efficient platform the expectations about companies’ for trading as well as liquidity of his performance. Markets are usually investment made in securities. classified under one of three levels of efficiency; (i) weak, (ii) semi strong and Over the counter market is one of (iii) strong. segments of secondary market. Non- listed along with delisted securities of In the weak form efficient market, public limited companies can be traded stock prices are assumed to reflect all on OTC market platform provided by the NEPSE normally without the past information including price and involvement of market intermediaries. It volume information which means that is off-exchange trading of shares. abnormal profits cannot be mode of trading based on historical information.
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The market reflects all publicly available security. On the other hand, if demand information in the semi strong form exceeds supply, prices rise to such efficient markets, while reflecting all a degree that potential buyers may information whether public or nonpublic postpone the purchase of the security. in security prices. In the semi strong form, investors cannot make abnormal profits Market Width using publicly available information, and not even inside information if the The market for a security is said to have market is efficient at the strong from width or broad, if it is characterised level. by large transaction volumes. In such markets, not only prices are able to In addition to efficiency, liquidity is change continuously because of the another desirable property in a market. existence of lots of orders (as in a deep Liquidity enables an investor to sell market), but the order sizes above and a security quickly and easily at a fair below the current market price are also price. Money market securities such as large. As a result, there is no incentive government treasury bills tend to be for buyers or sellers to postpone their very liquid, while real estate assets are decisions. Market makers are willing to typically illiquid. Market participants are accept smaller margins (spread) as the willing to pay a premium for securities high turnover volume compensates for that are liquid and inflict a discount on the small margins. securities that are illiquid. The liquidity of a security is particularly affected by (i) Undesirable Activities of the Markets market depth and (ii) market width. Developed capital markets need Market Depth proper regulations in place to prevent undesirable activities that distorts the The market for a security is said to have efficiency of the market are (i) Market depth, if there are plenty of buy orders cornering (ii) Wash Sales, (iii) Churning, and sell orders within a narrow range and (iv) Pump-and-Dump around the current market price. In a deep market, the existence of many Market Cornering orders means that the price of the security is quickly brought to equilibrium This happens when a person buys all as the demand and supply for that or most of the available quantities of security changes. In contrast, shallow a certain security, to create a form of markets are characterised by shortages monopoly that may later enable him to or oversupply resulting in discontinuity sell the security at a higher price, he is of buy and sell orders and large price said to be cornering the market. Market jumps. If supply exceeds demand regulation generally prohibits such the price of the security declines by a activity large amount that may cause material losses to holders of the security, which may force them to postpone selling the
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Wash Sales statements. The perpetrators of this scheme already have an established It means to create an illusion of trading position in the company’s stock and activity for a given stock. One form sell their positions after the hype has led of wash sale is when a person sells a to a higher share price. This practice is security to his son or a family member illegal based on securities law and can and then buys back the same security lead to heavy fines. on the same day at either at higher price or lower price, depending on Financial Market Styles the illusion that the person is intending to create. The primary motive of such Financial markets can operate on actions is to mislead the market in order different basis or styles. The major basis to make unethical profits. are (i) Order Driven and (ii) Quote Driven Market. A deceptive investor could use this technique to artificially raise the price Order Driven Markets of a security by selling the stock at a high price and buying it back at a lower In an order driven market, potential price on the same day. Encouraged buyers and sellers of securities indicate by this false impression of false trading how many securities they want to buy activity other investors enter the market or sell and at what price. The trading as buyers resulting in a further rise in the system brings buyers and sellers together security’s market price. This allows the where their requirements match. Most deceptive investor to sell his holdings at of the major stock markets around the these artificially higher prices world operate form of order driven trading system, such as the New York Churning Stock Exchange and the London Stock Exchange and Nepal Stock Exchange Churning happens from a stocker Ltd. broker’s part. It takes place when a broker engages in frequent and Quote Driven Markets unnecessary trading on behalf of the client. This is done by some unscrupulous A small number of stock exchanges also brokers to generate increased operate under a quote driven style. In income from trading commissions. It is a quote driven style, the exchange considered unethical and is an illegal enables financial institutions to act as activity market makers. Market makers are obliged to provide two-way quotes Pump-and-Dump to buy and sell particular securities throughout the standard market hours. Pump-and-dump is a scheme that In order to generate profit, the market attempts to boost the price of a stock maker will quote a lower price to buy through recommendations based on the securities (the bid price), and a false, misleading or greatly exaggerated higher price to sell the securities (the
4 Investors’ Handbook offer ask price). The difference between related services, markets, and institutions the prices is often referred to as the bid- intended to provide an efficient and offer ask spread. The key advantage regular linkage between investors and that the quote driven system offers over depositors. the order driven system is the ability to trade throughout the trading day. This is 1According to OECD a financial system because the market makers are obliged to quote prices and be able to trade in at consists of institutional units and markets least a set minimum number of securities. that interact, typically in a complex In an order driven market, liquidity manner, for the purpose of mobilising could dry up, if there are no orders to funds for investment, and providing buy (or to sell). The disadvantage of the facilities, including payment systems, for quote driven system is that investors are the financing of commercial activity. effectively paying for the provision of liquidity through the bid-offer spread, The financial system is composed of compared to the order driven system the products and services provided where the orders are matched. by financial institutions, which includes banks, insurance companies, pension Principal and Agency Trading funds, organised exchanges, and the many other companies that serve In both the order driven and quote to facilitate economic transactions. driven market styles, firms can act in two Virtually all economic transactions capacities – (i) agent or (ii) principal. A are effected by one or more of these firm acting as agent simply arranges the financial institutions. They create trade on behalf of the client, charging financial instruments, such as stocks a commission. Firms acting as principal and bonds, pay interest on deposits, actually buy or sell securities themselves, lend money to creditworthy borrowers, such as market makers in quote driven and create and maintain the payment markets. Clearly, firms taking principal systems of modern economies. positions take greater risks than those acting as in an agency capacity. Overview of Nepalese Financial System Financial System The financial system enables In a simple, a financial system allows the lenders and borrowers to exchange exchange of funds between different funds. Nepal has a financial system that financial market participants like is controlled and regulated by separate lenders, investors, and borrowers. The independent regulators in the sectors systems operate at national and global of insurance, banking (money market), levels and consisting of complex, closely 1. Glossary of statistical terms-OECD
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capital markets, cooperative and other services sectors. Nepalese financial system as at 30 August 2020 is in the figure 2.
Figure 2
Under the financial system of Nepal, the provisions under .BFIs Act, 2017 and there are five sub-systems namely bank Nepal Rastra Bank Act, 2002. and financial institutions (BFIs), securities markets, insurance companies, non- Securities Markets banking financial institutions and co- operatives. Each sector is the sub- It consists of different market participants system of the financial system since the and their interactions such as (i) stock activities in one sub-system affects not exchange (NEPSE), (ii) listed companies, only another sub-system but can affect (iii) stockbrokers, (iv) merchant bankers, the entire financial system. (v) central depository company (CDSC), (vi) depository participants (DPs), (vii) Bank and Financial Institutions clearing members, (viii) ASBA members, (ix) credit rating companies and so forth. As of 30 August 2020, there are a total of Securities Board of Nepal (SEBON) is the 27 commercial banks, 20 development regulatory authority of the securities banks, 22 finance companies, 85 markets in Nepal. Securities Markets is microfinance companies, and one regulated under the Securities Related infrastructure development bank. BFIs Act, 2006. are regulated by Nepal Rastra Bank (NRB), the-central bank of Nepal with
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Insurance Sector economic, social, and cultural needs and aspirations through a jointly- Insurance sector consists of life, non-life owned and democratically-controlled and reinsurance companies and their enterprise ”. Cooperatives may include interactions. The objectives of insurance (i) non-profit community organisations, sector regulation is to systematise, (ii) businesses owned and managed regularise, and develop the insurance by the people who use their services (a business in Nepal. Insurance Board is consumer cooperative) (ii) organisations the regulatory authority of insurance managed by the people who work sector in Nepal. It regulates insurance there (worker cooperatives), (iii) companies with the provisions under the organisations managed by the people Insurance Act, 1992. to whom they provide accommodation (housing cooperatives), (iv) hybrids such The Non-Banking Financial as worker cooperatives that are also Intermediaries (NBFIs) consumer cooperatives or credit unions, (v) multi-stakeholder cooperatives such They are just intermediaries or as those that bring together civil society middlemen transferring funds from and local actors to deliver community ultimate lenders to ultimate borrowers. needs, (vi) second and third-tier The financial intermediaries obtain cooperatives whose members are other funds by issuing to the public their own cooperatives. liabilities such as saving deposits and loan shares and then use this money Financial cooperatives play an to buy financial assets namely stocks, important role in the financial systems of bonds and mortgages for themselves. the country. They act as a safe haven for In this way the financial intermediaries deposits and are major sources of credit intermediate between original savers for households and small- and medium- and final borrowers”. sized firms. In Nepal, co-operatives are regulated by the Department of Co- Non-banking financial institutions, in operatives under the Cooperative Act, Nepal, consist of Employees Provided 2017. Fund (EPF), Citizen Investment Trust (CIT), Deposit and Credit Guarantee Fund and Social Security Fund. The EPF and CIT established under special Acts, operate under the supervision of Government of Nepal, Ministry of Finance (MoF).
Cooperatives
A cooperative also called as co- operative, co-op, or coop is “an autonomous association of persons united voluntarily to meet their common
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Chapter 2 production plays a vital role. Production of output depends upon material Introduction to Securities Markets inputs, human inputs, and financial and Commodity Derivatives Markets inputs. Material inputs are in the form of raw materials; plant, and machinery, Securities Markets etc., Human inputs are in the form of Securities markets is a market for intellectual, managerial and labour securities (equity, debt and unit), where manpower. Financial inputs are in the business enterprises (companies) and shape of capital, cash, credit etc. The Governments can raise long-term proper availability and utilisation of funds for the initiation and expansion these inputs promotes the economic of business. It is defined as a market in development of a country. which money is provided for periods longer than a year (raising of short-term The financial inputs, among other funds takes place on other markets sources, emanate from the securities like the money market). Financial market system. The securities market regulators, such as SEBON regulates thrives with investors’ confidence based and oversee the securities markets in upon their return on investment as well as its designated jurisdictions to ensure an from anticipated capital appreciation orderly development of the markets from their investment. and protection of investors. Investors are a heterogeneous group; Securities markets normally imply any they comprise wealthy and middle exchange marketplace where financial class, educated and illiterate, young assets and securities are traded. So and old, expert, professional and non- capital markets is a broader term in the professional and lay-man. However, all sense that it includes trading of bonds, investors are in need protection; not derivatives, and commodities as well as the protection for assured growth of securities or stocks. On the other hand, their investments but protection from share/stock markets can be taken as non-governance, malpractices and a category of capital markets where fraudulent. Most investors have three securities/stocks are traded. These two investment objectives: (i) safety of the terms have been used interchangeably. hard-earned or saved invested money, (ii) liquidity of the invested money, Securities market development is and (iii) returns on the investments essential for the economic development made. Securities markets regulators of a country. The objective of economic have to fulfil dual responsibilities by activity in any country is to promote allowing to raise capital for economic the well-being and standard of living development on one hand and to of its people, which depends upon protect investors at large on the other the distribution of income in terms of hand. However, it is beyond debate goods and services in the economy. that unless the interests of investors are For the growth process in the economy,
8 Investors’ Handbook protected, raising of capital would liquid markets make it possible to obtain be difficult. Efficient securities markets financing for capital-intensive projects should, therefore, provide a mechanism with long gestation periods. for efficient raising capital as well as have adequate safeguards to protect The existence of deep and broad the interests of the general investors. securities markets is absolutely crucial Role of Securities Markets and critical in spurring the growth of our country. An essential imperative for Securities markets plays an extremely Nepal has been to develop its capital important role in promoting and markets to provide alternative sources sustaining the growth of an economy. of funding for companies and in doing It is an important and efficient means to channel and mobilise funds to so, achieve more effective mobilisation enterprises, and provide an effective of investors’ accumulative savings. source of investment in the economy. Securities markets provides a valuable It plays an important role in mobilising source of external finance as well. savings for investment in productive assets, with a view to enhancing a Risk Associated with the Securities Markets country’s long-term growth prospects. It thus acts as a major catalyst in One should always keep in mind that transforming the economy into a more investment in securities markets is not risk efficient, innovative and competitive free. Securities markets risk usually defines marketplace within the country. the risk involved in the investments. The stark potential of experiencing losses In addition to resource allocation, following a fluctuation in the securities prices is the reason behind the capital capital markets also provide a medium market risk. for risk management by allowing diversification of risk in the economy. A Systematic Risk well-functioning securities markets also tends to improve information quality Securities market risk, which is not diversifiable, is typically known as as it plays a major role in encouraging systematic risk. Systematic risk is the adoption of stronger corporate common to the entire class of liabilities governance principles, thus supporting or assets. Depending on economic a trading environment, which is founded changes, the value of investments can on integrity. fall enormously. There may be some other financial events also impacting Securities market has played a crucial role the investment markets. In order to in supporting periods of technological check securities market risk, allocation progress and economic development would be fruitful. throughout history. Among other things,
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Risk is an integrated part of the Business Risk investment. Higher the potential of It may affect the investors if the return, higher is the risk associated with company goes through some changes it. Examination of the risks involved in in management, strategies, market the securities market investment is one share and labor force. of the prime aspects of investing. The element of risk is what distinguishes an It is important for investors to realise investment from savings. that returns on equities can be cyclical and that the market will move in both Investment in stocks (shares) or bonds directions. normally comes with the types of risks Regulatory Risk are (i) Market Risk, (ii) Industry Risk, (iii) Business Risk, and (iv) Regulatory Risk It is generally defined as the risk of having the ‘license to operate’ withdrawn by a Market Risk regulator, or having conditions applied (retrospectively or prospectively) that It is the overall risk involved in capital adversely impacts the economic value market investments. The stock market of an enterprise. Regulatory Risk are risks rises and falls depending on a number arising out of changes in regulations and of factors. The collective view of the laws, either specific to the company/ investors to invest in a particular stock or industry or the country as a whole. bond plays a significant role in the stock market rise and fall. Even if the company Historical Development of Securities is going through a bad phase, the stock Markets price may go up due to a rising stock market while conversely, the stock price History of global capital markets dates may fall because the market is not back to 1602 AD when a stock exchange steady even if the company is doing was established in Amsterdam, well. Netherlands and shares of Dutch East India Company were traded initially. Industry Risk Development of Securities Market in It may arise from the market forces and Nepal regulations relating to a given industry. Thus, all stocks within an industry would • In Nepal, for the very first time Nepal be affected by industry related factors. Bank Ltd and Biratnagar Jute Mills Regulatory Risk are risks arising out of issued shares to public in 1937, changes in regulations and laws, either specific to the company/industry or the • SEBON was established by country as a whole. Government of Nepal on June 7, 1993 as an apex regulatory body of Securities Markets)
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• Secondary market got momentum OTC market and trading of formally only in 1976 after promoter shares, increasing number establishment of Securities Marketing of stockbrokers, etc. Center and then separation of • CDS and Clearing Ltd. was regulation and market operation established on 22 December 2010 with the establishment of Securities as central depository system of Board as regulator and exchange securities. as secondary market operator. The separate exchange was made • Credit rating Company ICRA Nepal with the conversion of Securities Ltd. was established in 11 November Marketing Center into Nepal Stock 2011 as joint venture with ICRA Ltd., Exchange Ltd. in 1993. India which has collaboration with Moody’s rating agency. SEBON • Primary issues made by foreign joint granted license to ICRA on 3 venture banks in the early 1983 such October 2012. as Nabil Bank Ltd. (erstwhile Nepal Arab Bank Ltd.), Standard Chartered • Dematerialisation of securities has Bank Ltd. (erstwhile Nepal Grindlays been made compulsory through Bank Ltd.) and Nepal Investment DP along with demat account Bank Ltd. (formally Nepal Indosuez which has aided in full automation Bank Ltd.) were remarkably taken of secondary market on 15 January by the market back then. 2016. • Licenses were issued to stockbrokers • Centralised application supported in 1994, by blocked amount (C-ASBA) has begun from 14 January 2017 • Issue and Sales Managers and optionally and it was made few Mutual Funds that enabled compulsory from 16 July 2017 . primary issues of around Rs.5.42 billion by multiple Companies in • Online trading of securities has the decades of 1990s and NEPSE begun on 6 November 2018. operated on open outcry system Commodity Derivatives Markets of trade through stockbrokers that saw trading volume of around Rs. Commodity derivatives markets is a 9.46 billion during the period, Market mechanism in which multiple buyers index remained to be 204.86 points and sellers trade commodity-linked and listing of 108 Companies at the contracts on the basis of rules and Mid-July 2000. processes laid down by the exchange • In the decade of 2000s many reforms and regulator. were made to improve secondary market including replacement of A commodity exchange is considered to open outcry system by automated be essentially public because anybody computerised trading system (ATS) who wishes to transact must take the in 2007, start of real time surveillance services of registered members. system, circuit breaker practice,
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Most of the trading in the commodity which the traders or participants can derivatives market is being done by hedge their risks or protect themselves people who have no need for the from the adverse price movements in commodity itself. They just speculate the underlying assets in which they deal. on the direction of the price of these commodities, hoping to make money if Types of Commodity Markets the price moves in their favour. • Commodity spot market - a seller would deposit the commodity - in The commodity derivatives market is its standardised units - and receive a direct way to invest in commodities payment for them when delivered rather than investing in the companies to the buyer. The buyer would pay that trade in those commodities. on receipt of the commodity in question. Products which are traded in • Commodity futures market- the commodity derivatives market buyer and seller would agree to include financial instruments namely a contract, whereby the buyer forwards, futures, foreign currencies would agree to buy, and the seller and indexes. Commodity derivatives, to sell, a standardised unit of the which were traditionally developed for commodity for a price fixed in the risk management purposes, are now contract at a future date. Once growing in popularity as an investment agreed between buyer and seller, tool. the contracts could then be traded again repeatedly between different The forward contract is an agreement market participants until such time between two parties to buy or sell the as they become due for settlement. underlying assets at a specific time in the • Physical delivery commodity futures future for a specified price determined market-a buyer of a commodity today and futures is standardised futures contract who holds the forwards freely exchangeable on the contract at the expiry date will market. The historical role of forward receive the commodity in question and future contracts has been to and the seller receives cash. ‘hedge’ against inherent risks existing in • Cash settlement commodity future commodity markets. There is absence of market- the contract includes a equity derivative market; however there reference price and, on the date is unregulated commodity derivative of settlement, the reference price market in Nepal. is compared with the price in the contract and one of the parties Commodity derivative markets can makes a cash payment to the other, provide benefits to an economy by depending on whether the contract providing facilities for producers and price exceeds or is less than the consumers of commodities to protect reference price. themselves against the risk of price fluctuations. Commodity derivative market provides a vehicle through
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Basis of Nepalese Commodity declined during the day, the client Derivative Market Operation is required to pay, via the broker to the clearing member, an amount • The exchanges provide facilities equivalent to the reduction in the for the buyers and sellers of the value of the contract during the contracts to see the best bid and day. offer price currently in the market. Each of the markets also has liquidity • If a client fails to make a variation providers in the form of one or more margin payment, clearing market makers that deal in the member will, in principle close commodities and provide bid and the contract by selling it on the offer prices to customers. exchange. If the value of the contract has increased, clearing • Buyers and sellers access the market member makes a payment to through brokers who are licensed the client via the broker, of the by the exchange and trade on the amount of the gain. exchanges as agents for the clients. • The reference price is based on the • Trading is done by buying and prices on world markets. selling contracts designed by the Objectives of Commodity Derivatives exchange. Each of the exchanges Market Regulation design their own contracts and the • Commodity Derivatives Market contracts for any one exchange is regulated by SEBON with the are different from those in other provision under the Commodities exchanges. Exchange Market Act, 2017. SEBON • Each exchange has one or more has implemented Commodity “clearing members”. A clearing Exchange Market Regulation, 2017. member is responsible for making The major objectives of commodity sure that a trade is settled. derivatives market regulation are under: • The clearing member (or members) establish between themselves the • Regulate the issue and trading of overall net obligations of each of commodity derivatives products, the clients of the brokers and make commodity derivatives exchanges, payments between themselves clearing and settlement houses and through a settlement bank to settle warehouses. the accounts. • Protect the legal rights of investors. Adoption of Risk Reduction • Develop the commodity derivatives Mechanism markets for the proper scope of hedging, arbitrage and speculation • Once a trade is made, the client, in commodity derivatives products through the broker, must make a and underlying products related deposit (known as “initial margin”) commodity markets. of between 1 - 3 percent of the • Promote for integrated development nominal value of the commodity. of commodity spot and commodity • Every day, the value of the contract is derivatives markets. assessed on the basis of movements in the underlying reference price. If the value of the contract has
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Chapter 3 Major Function, Duties and Power of SEBON Introduction to Securities Board of 2 Nepal (SEBON) The function, duties and power of SEBON have been defined by the SEBON was established by Government Securities Related Act, 2006 which have of Nepal on June 7, 1993 as an apex been listed as under. regulatory body of Securities Markets. It has been regulating the market with • To offer an advice, as per power conferred by the Securities necessity, to the Government of Related Act, 2006. SEBON has been Nepal on matters incidental to the given the power to regulate and development of capital market; manage the activities of the securities • To register the securities of any markets and persons involved in the corporate body established with business of dealing in securities by the authority to make a public issue regulating the issuance, purchase, of its securities; sale and exchange of securities for the purpose of protecting the interests of • To regulate and systematise the investors in securities, by developing the issue, transfer, sale and exchange capital market to mobilise necessary of registered securities; capital for the economic development of the country. • To grant permission to any corporate body, which is desirous of operating The Governing Board of SEBON is a stock exchange, to operate the composed of seven members including stock exchange subject to this Act one full time chairman appointed by or the rules and bye-laws framed the Government for tenure of four under this Act; years. Other members of the Board include joint secretary of Ministry of • To regulate and monitor the Finance, joint secretary of Ministry of activities of the stock exchange; Law, Justice and Parliamentary Affairs, • To inspect as to whether or not representative from Nepal Rastra any stock exchange is executing Bank, representative from Institute its activities in accordance with of Chartered Accountants of Nepal, this Act or the rules and bye-laws representative from Federation of framed under this Act, and to Nepalese Chambers of Commerce and suspend or revoke the license of Industries, and one member appointed such a stock exchange, if it is found by the Government from amongst the that the same has not been done; experts pertaining to management of securities market, development of • To issue a license to companies or capital market, financial or economic institutions, which are desirous of sector. 2 Section 5 of Securities Related Act, 2006
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carrying on the securities business to carry on securities business where subject to this Act or the rules and any securities business person is not bye-laws framed under this Act; found to have maintained such a conduct; • To regulate and monitor the activities of securities business person; • To make or cause to be made, such arrangements as may be • To classify securities businesspersons necessary to regulate the volume of and fix their standards according securities and the mode of securities to their functions and capability transactions for the promotion, by fulfilling such procedures as development and healthy prescribed; operation of stock exchanges;
• To grant a permission to operate • To make such arrangements as collective investment schemes and may be necessary to prevent insider investment fund programmes, and trading or any other offense relating to regulate and monitor the same; to securities transactions as referred to in Chapter 9 for the protection of • To approve bye-laws of stock the interests of investors in securities; exchanges and those bodies which are related with securities • To review, or cause to be reviewed, business and engaged in securities financial statements submitted by transactions, and to issue orders to corporate bodies issuing securities stock exchanges and those bodies and securities business persons, which are related with securities and give such directives to the business and engaged in securities concerned corporate bodies as it transactions to make necessary deems necessary in this connection; amendment in their bye-laws with a view to making necessary provisions • To regulate and make transparent concerning the development of the act of acquiring the ownership capital market and protecting the of a company thereby gaining interests of investors in securities; control over its management by purchasing its shares in a single lot or • To systematise the clearance of in several lots; accounts related to securities transactions; • To maintain coordination and exchange cooperation with the • To supervise whether or not security concerned agencies in order to business persons have maintained supervise and regulate matters such conduct as prescribed in concerning securities or company this Act or the rules, bye-laws and affairs; and directives framed under this Act, while carrying on securities business, • To perform or cause to be performed and suspend or revoke the license such other functions as may be
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necessary in relation to securities its standards, the CDSC under the and the development of capital coordination of Board has obtained market. membership of Association of National Numbering Agencies (ANNA). The Legal Framework company obtained membership as the 92nd member from the General The Securities Related Act, 2006 along Assembly of ANNA held in Armenia on with various regulations and guidelines, June 2 and 3, 2016. made by the power conferred by the Section of 116 of the Act provides a Board has been performing the role legal basis for the regulation of securities of founding member of Asia Forum for markets in Nepal. 3List of Securities laws Investor Education (AFIE), established and rules is incorporated in the Annex-1. on 2010.
Objectives of Securities Laws of SEBON obtained the member of South Nepal Asian Securities Regulators Forum SASRF, an association of regulatory • Regulate the issue and trading of bodies of SAARC region, SEBON has securities. been regularly maintaining relations, exchanging required knowledge and • Protect the legal rights of investors. information and doing co-ordination and support. • Develop the capital market to mobilise necessary capital for the SEBON has been participating economic development of the in securities markets related country. programmemes organised by IOSCO, World Bank (WB), Asian Development • Promote the development of a Bank (ADB), Asia-Pacific Economic broad-based economy. Cooperation (APEC), Toronto Centre Implicit throughout provisions under and regulators of securities markets of Securities related Act, 2006 is the belief different countries around the globe. that regulation should facilitate capital formation and economic growth.
International Relations of SEBON
SEBON became Associate member of International Organisation of Securities Commissions (IOSCO) in July 2016.
To internationalise the Nepalese securities markets and enhance
3 Major legal structure is given in Annexure-1
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CHAPTER 4 IPO can be further classified into (i) Initial Public Offerings (IPOs), (ii) Further Public Public Issue of Securities Offerings (FPOs).
An introduction of Public Issue Initial Public Offering (IPO)
Public issue is related to primary market. In an IPO, issue typically made by a Primary market is the market where first company when it needs money for time issue of securities is made by a growth-expansion, diversification, or public limited company to the investors. acquisitions or even to meet its increasing Under it, the existing owners dilute their working capital requirements. shareholding in favour of new investors. In a public offering, an issuer makes According to the Securities Related an offer to new investors to join its Act, 2006 “4Public issue” means an offer shareholding family. To do so, the issuer made by a body corporate before the company is required to make detailed public for the subscription of its securities disclosures as per SEBON’s Regulations by publishing a prospectus. in its offer document released to the public. IPO can be made on fixed Figure 3 price/face value, premium pricing, and free pricing through book-building system.
Further Public Offering (FPO)
In FPO fresh securities are issued. It is typically made by a company when it needs money for growth-expansion or diversification or acquisitions or even to meet its increasing working capital requirements. An FPO is also the preferred route (over a rights issue) when the company wants to bring in new investors-both institutional as well as retail. So, FPO is one when an already listed company makes issue of securities to the public through an offer document. Primarily, public issues can be classified FPO is allowed or approved to go to as (i) Initial Public Offering (IPO), (ii) Rights public by SEBON only when it is made to Issue (eligible existing shareholders), (iii) satisfy several criteria such as 5(ka) Out of Preferential Issues (also known as private last five years, company should operate placements), and (iii) Bonus issue. in profit at least for three years having 5 Rule 16 of Securities Registration and Issuance 4 Section of 1(V) of Securities Related Act, 2006 Regulations, (2016
17 Investors’ Handbook more net worth per share than paid of According to Securities Related Act, capital per share., (Kha) Company must 2006 7”Right issue” means an have passed three years issuing it’s IPO, (Ga) The agenda of FPO should have offer made to the existing shareholder passed from the AGM of the company, or any person nominated by such (Gha) If issue is to make more than the shareholder for the subscription of any paid up value, mechanism of forming securities issued by a body corporate. FPO price and the basis of the price • Normally issued to existing should be established, shareholders Rights Issue • Issued at Fixed Price, normally Rs.100 It is an issue when an issuer or listed • Shareholder have Right to company issues fresh securities to its Renounce (transfer his right to existing shareholders in a particular other person) ratio to the number of securities • Unsubscribed Shares Disposed held prior to the issue as on a record to Public by way of auction by date. This route is normally used by Merchant Bankers a company who would like to raise capital without diluting the stake of its Right issue also required to meet existing shareholders, as in a rights issue following criteria : the stake held by each shareholder • Should need the grading of right remains the same even after the issue. issue from credit rating company8 There could be some cases where the promoter may not like to bring in his • Should issue the offer documents capital or money and therefore allow • Should filing application to SEBON dilution of his stake by giving up on his with necessary documents, rights entitlement to someone else. It is information within 2 months of known as 6right renounce. The same is the agenda passed by AGM applicable also in case of public share. regarding issuing right share9.
Rights issues are typically made at Private Placement a discount to the prevailing market Fundamentally, private placement price, and hence are seen as a reward offerings are securities released for sale to the shareholders particularly for only to accredited investors such as those companies which have been investment banks, pensions, or mutual performing well and market price of funds. Those accredited investors are its share is higher than the face value. generally qualified institutional investors On the other hand, it can be financial (QIB) registered with the regulatory burden to the shareholders when the authority. company is not performing well and market price of the share is below its 7 Section 1(y) of Securities Related Act, 2006 face value. 8 Rule 9Kha(1) of Securities Registration and Issuance Regulations, 2016 6 Rule 19 of share registration and issue 9 (1Ka) of Rule 17 of share registration and issue regulations, 2016 regulations, 2016
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A private placement is an issue of While public issue and rights issues securities by a company to a select involve a detailed procedure, group of persons, which is neither a preferential issues and bonus issues are public issue nor a rights issue, with the relatively simple and easy. condition that the number of investors should not exceed specified number. Bonus share is required to registered This is a faster and economical way for with SEBON. a company to raise capital. The pros and cons of public issue or Private Placements by a listed company going to public are given under: occurs when the company offer it’s • Access to capital beyond which issue upto 50 persons. is privately available, According to the Securities Related Act • Facilitation of mergers and 10”Private placement” means an act to acquisitions, make an offer by a letter, dispatch or • Access to secondary equity any electronic communication media financing through FPOs, for the sale of securities to a maximum • Increased publicity and improved of fifty investors. financial status • Provision of an exit strategy Bonus Share Issue for original investors, including venture capitalists and angel A Bonus issue is issue of securities to its investors, as well as owners existing shareholders in a particular ratio to the number of securities held on a • Dilution of ownership, record date, without any payment for • Legal hassles, the same. The shares are issued out of • High auditing and legal fees the company’s free reserves or from the • Increased scrutiny by regulators share premium account. Bonus issues and public. are typically seen as a reward to the shareholders. It is one of the returns in the • Large number of shareholders. investment made in the securities other • Need to comply with good being cash dividend which is distributed governance and corporate out of profit that a company makes governance during a year. It helps to appreciate • Need to comply with reporting in the investment of investors since it requirements helps in grow the investors investment • IPO Grading: Every company in a multiple manner. It is one of the coming out with an IPO has to go attractions of investment in the securities in for an IPO Grading. market. The proportion of dividend declaration depends on the dividend Public Issue Process policy of the company. A growing or constant dividend policy is considered After getting approval of public issue to be good from the investment from SEBON the merchant banker must perspective. peruse the following process: 10 Section 1(m) of Securities Related Act, 2006
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In case of IPO & FPO of the project, the issue should be opened minimum of 15 days and • Publish notice along with offered maximum of 30 days14. documents regarding public of shares should be published prier • Issue manager scrutinises the to 21 days of issue open applications received for IPO (*applications not meeting all the • Arrangement of collection criteria are excluded from the centers (All ASBA members and allotment) their branches can be collection centers) • Allotment and refund of application amount of the IPO • Application for IPO remains open at least for 4 working days and • Application for listing and maximum of 15 days if not fully dematerialization should be subscribed with the first 4 working given to NEPSE within 7 days days11 (application can be after getting IPO approval from made by both on-line as well as SEBON15. submitting forms available in the • Credit the securities in the d-mate ASBA member where investors account of the allottee have their bank account). Note:* Not filling up the form in proper • Allotment should be made way for example not mentioning the within 30 days if total number of PAN for certain amount of application, application is 2 lakhs, 40 days if short of balance or amount in the bank, total application is from 2to3 lakhs duplication of application leads to and 50 days if the total number of disqualify application for IPO, application is above 3 lakhs, from the date of close of IPO. 12 In case of Right • Amount should be transferred • Arrangement of collection to the account of the issuing centers (All ASBA member and company or issue manager from their branches can be collection the allotees bank account within centers) 3 days of allotment of share13. • Issue open at least for 21 days • Amount of applicants should and maximum of 15 days if not be released or unlocked within subscribed with the first 21 days in 3 days after transfer of allotees case of right issue16 (application amount to issuer or issue manager can be made by on-line as well bank account. as physical forms available in the • In case of IPO for affected local ASBA member where investors 11 Rule 10(2) of Securities Registration and have their bank account) Issuance Regulations, 2016 14 Rule 10(3) of Securities Registration and 12 Section 29(1) of Securities Issue and Allotment Issuance Regulations, 2016 Guidelines, 2017 15 Share issue and allotment Guidelines, 2017 13 Rule 14(1) of Securities Registration and 16 Rule 18(1) of Securities Registration and Issuance Regulations, 2016 Issuance Regulations, 2016
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• Scrutinise the applications Any company making a public issue or received (*applications not a listed company making a rights issue, meeting all the criteria are whatever is size of capital, is required excluded from the allotment) to file a draft offer document with SEBON for its vetting. The company can • Allotment and refund of proceed further on the issue only after application amount should be getting issue approval from SEBON. made within 15 days of the close In the issue approval process, the of Right issue17 company is required to incorporating all changes suggested by SEBON. The • Public notice should be published validity period of SEBON’s issue approval as a process of selling the remains for19 2 months only, i.e., the unsubscribed right issue/share company has to open its issue within through auction process after this period otherwise the company seven days of the allotment of the is required to file again to SEBON with right share. updated information and data along with fees. For public issue purpose, an • Listing of share in the NEPSE for issuer or issuing company is required to trade appoint a merchant banker to draft the prospectus or offer documents • Credit the securities in the d-mate and to manage all issue management account of the allottee activities. There is compulsion of grading of IPO by licensed credit rating agency Note:* Not filling up the form in proper irrespective of the size of issue public way for example not mentioning the issue. The company’s merchant banker PAN for certain amount of application, has to ensure that it is in compliance short of application amount in the bank, with all the requirements of the SEBON duplication of application, Regulations and Guidelines. SEBON examines the compliance with these 18 Investor can renounce his right share guidelines and also ensures that if he wish. all material information have been disclosed in the offer documents. SEBON’s Role in an Issue of Securities
Disclosure-based regime is under the aegis of SEBON from its establishment. So the public issue is based on the disclosure rather than merit based. The investors are supplied with all the information required to make informed decision for investment in the securities.
17 Rule 21 of Securities Registration and Issuance Regulations, 2016 18 Rule 19 of Securities Registration and Issuance 19 Rule 44(1) of Securities Registration and Issuance Regulations, 2016 Regulations, 2016
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CHAPTER 5 most challenging as well as rewarding. But investment in securities requires Financial Instruments considerable skill and expertise and carries the risk of loss if the choice of Financial Instruments may be certain securities is not right or they are not contracts or any document that acts as bought/sold at right time. So, the choice financial assets such as debentures and of securities and timing of transaction bonds, receivables, cash deposits, bank matters a lot to succeed in the market. balances, swaps, cap (interest rate limit), futures, shares, bills of exchange, There are a large variety of instruments forwards, Forward Rate Agreement referred to as securities in common (FRA) etc., to one organisation and as parlance. a liability to another organisation and Some instrument have that have both these solely taken into use for trading the features of money markets and purposes. securities markets are (i) Warrants, (ii) Types of Financial Instruments. Financial dual currency bonds, (iii) exchangeable instruments are categorised in (i) debt, (iv) equity-linked notes, and (v) Money Markets Instrument, (ii) Securities convertible debentures, etc. These are Markets Instrument, and (iii) Hybrid called hybrid instruments. Instrument According to the Securities Related Act, Figure 4 200620 “Securities” means any shares, stocks, bonds, debentures, debenture stocks or collective investment scheme
Money Securities Hybrid certificate issued by a body corporate Market Market Instrument Insturment Instrument or treasury bonds, saving bonds or bonds issued by the Government of Nepal or by a body corporate against the guarantee of the Government of Nepal, Money Market Instruments and this term also includes such other Some of the instruments that are traded securities as may be specified by the Board to be transacted or transferable in the money market are (i) call or notice through the stock exchange or the money, (ii) caps and collars, (iii) letters instrument to purchase, sell or exchange of credit, (iv) forwards and futures, such securities. (v) financial options, (vi) financial guarantees, (vii) swaps, (viii) treasury These include bills, (ix) certificates of deposits, (x) term (i) Shares, scrips, stocks, bonds, money, and (xi) commercial papers. debentures, debenture stock or other Securities Markets Instruments marketable securities of a like nature in or of any incorporated company or Securities markets is the place where other body corporate; capital/securities markets instruments such as shares, bond, debenture and (ii) Units or any other instrument issued units are created and traded. Among by any collective investment scheme to all investment options available, the investors in such schemes; securities are considered to be the 20 Section 2 (f), Securities Related Act, 2006
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(iii) Units or any other such instrument take. As the company keeps doing issued to the investors under any mutual better, your stocks will increase in fund scheme; value. Holding of share entitles you the ownership of the company. You (vi) Any certificate or instrument issued will have voting right as well as right of to investor by any issuer being a special nomination of the board of director for purpose distinct entity which possesses being a shareholder of the company. any debt or receivable including Share have different categories such mortgaged debt assigned to such as (i) Common/Ordinary Share, (ii) entity and acknowledging beneficial Preferential Share. Preferential can be interest of such investor in such debt or redeemable and non-redeemable. receivable including mortgage debt as Shares are described as ‘high-risk asset the case may be; classes’ when compared with other (vii) Government securities; types of investments. The primary risk of investing in shares is that it can result in (viii) Such other instruments as may be loss of capital. declared by the central government to be securities; Bonds/Debenture
(ix) Rights or interest in securities; Companies need money to undertake projects. They then pay back using the Common Types of Securities money earned through the project. One way of raising funds is through (i) Shares/Stocks, (ii) Bonds/Debentures, bonds. When a company borrows (iii) Units (MF): and (iv) Derivatives. from the bank in exchange for regular Figure 5 interest payments, it is called a loan. Similarly, when a company borrows from multiple investors in exchange for Shares Bonds timely payments of interest, it is called a bond. In Nepal, one unit of bond (par value) is equivalent to Rs.1,000. Securities Public limited company can raise the Markets capital by issuing the bond. In Nepal, most of listed banks and few finance companies have issued the corporate Mutual Derivatives Funds bonds to the public. Issue of bond can be made by private placement as well as to the general public. Fixed interest is Shares offered to the bond which is known as coupon interest. Shares are a certificate of ownership of a corporation. Thus, as a stockholder, Thus, a bond is a means of investing you share a portion of the profit the money by lending to others. This is why company may make as well as a it is called a debt instrument. When you portion of the loss a company may invest in bonds, it will show the face
23 Investors’ Handbook value – the amount of money being bond, (iii) a bond with specified coupon borrowed, the coupon rate or yield – interest with a finite maturity is a regular the interest rate that the borrower has to bond, (iv) a bond selling at below its par pay, the coupon or interest payments, value is discount bond and (v) a bond and the deadline for paying the money setting at above its par value is premium back called as the maturity date. If bond. you’re looking for a bond option that helps you save tax. Decision of issuance In the Nepalese securities markets, the of bond depends on the cost of capital many corporates such as commercial that a company assess to raise its fund. banks and some finance companies, Bonds also trades in the secondary particularly listed companies, have market. issued debenture with fixed maturity periods. On the other hand, Nepal In the context of Nepal, there is little Government have been issued transaction of bonds in the secondary bonds. Debenture issued by the listed market. Development of bond market companies have been traded in the is very essential for the development secondary market. Government bonds of the securities markets. Investment in has not organised trading platform yet. the bond or debenture is relatively safe because return in it is fixed. So, it is also The Risk Faced by Investors in Bond called fixed income instrument. An investor who purchases bonds faces Bond and debenture sounds like risks from a variety of sources such as (i) the same and has been used inflation risk, (ii) default risk, (iii) liquidity interchangeably. Though there is risk, and (iv) interest rate risk. a slight difference between these Interest Rate Risk two terms. Normally debentures are issued and purchased only on the It is also called Price Risk. The market creditworthiness and reputation of the price of a bond is inversely proportional company or issuing company. It is not to the level of interest rates. When secured by any sort of the physical interest rates fall, bond prices increase assets or collateral. Bonds are normally and conversely when interest rates rise, backed by the asset of the issuer. So, the bond prices decrease. As interest rates debenture is considered to be slightly fluctuate randomly in the economy, risker than the bond often pushing the the bond will experience random price interest (coupon) rate comparatively movements. This random variation in higher than of bond. price is termed price risk. Bond investors therefore experience price gains when Categories of Bond interest rates fall and suffer price losses Bond can be of different types such as when interest rates rise. (i) a bond with out specified maturity Inflation Risk period is perpetual bond, (ii) a bond without any coupon interest and sold It is related to the concept of interest at substantial discount is zero coupon rate risk discussed above. As inflation
24 Investors’ Handbook increases so do interest rates, which then of investors, and then invests that sum affects bond prices. While most financial in financial instruments available. assets are influenced by inflation, bonds This is handled by a professional fund are affected most severely. manager on the result of rigorous research, therefore thought to be safer Liquidity Risk investment.
A liquid security market is where an Every mutual fund scheme issues units, investor is able to sell a security at which have a certain value just like short notice without having to offer a a share. When you invest, you thus substantial price discount A market for become a unit-holder. When the securities that are actively traded tend instruments that the MF scheme invests to be liquid Bond markets, especially in make money, as a unit-holder, you get corporate bond markets tend to be thin money. In Nepal, one unit is equivalent with infrequent trading. Bondholders to Rs.10 wishing to sell in such markets may have This is either through a rise in the value to offer a price discount and therefore of the units or through the distribution suffer a loss to attract buyers. of dividends–money to all unit-holders. Default Risk There are normally two types of mutual fund in term of its life. They are close- It is risk when a corporation that borrows ended and open-ended. Close-ended funds by issuing bonds is unable to mutual funds have fixed maturity period make the promised interest and and open-end mutual funds have principal payments, the bond is, said generally no maturity period. to be in default. The likelihood that a Derivatives bondholder may lose his money through such non-payment is termed default The value of financial instruments risk. While government bonds do not like shares keeps on changing. So, suffer from this problem (because they it is difficult to fix a particular price. can ultimately increase taxes or simply Derivatives instruments come handy in print money to repay the bonds), all such case. corporate bonds have some amount These are instruments that help you of default risk, albeit in varying degrees. trade in the future at a price that you Assessing the likelihood of default is not fix today. Simply put, you enter into an an easy task as it requires a thorough agreement to either buy or sell a share analysis of the financial performance of or other instrument at a certain fixed the borrowing company. Credit rating price in nature. of company and bond is very important to know the risk factor in such case. Hybrid Instruments Mutual Funds Some instrument have that have both the features of money markets and These are investment vehicles that allow capital markets are (i) Warrants, (ii) dual you to indirectly investing in share or currency bonds, (iii) exchangeable bonds. It pools money from a collection
25 Investors’ Handbook debt, (iv) equity-linked notes, and (v) and financially handle the risks of such convertible debentures, etc. These are investments. These limited partners often called hybrid instruments.. consist of university endowment funds, Specialised Investment Fund (SIF) pension funds, wealthy people, and other companies. (Private equity firms A Specialized Investment Fund (SIF) is a typically serve as the general partner.) fund dedicated to “well informed and qualified investors” offering adaptability Venture Capital (Vc) and risk protection. A SIF may invest in Venture capital (VC) is an important all asset classes and follow any type source of funding for new businesses of investment strategy, but a fund is (e.g., start-ups) that do not have access always subject to risk and diversification to other sources, such as business requirements. loans from banks or capital markets, The primary objective of a SIF is the but do have potential for long-term collective investment of the funds growth. Although these investments raised from its investors, while applying often involve high risk, they can also the principle of risk diversification.21 offer above-average returns. The VC investors often negotiate to obtain The most common fund under SIF are (i) equity ownership, representation on Private Equity (PE), (ii) Venture Capital the company’s board of directors, (VC), and (iii) Hedge Fund (HF). and/or an active role in managing the Private Equity (Pe) company’s operations. Private equity (PE) is ownership of (or an Hedge Funds (Hf) interest in) an entity that is not publicly traded. Often, it is high net worth Hedge funds (HF) are a type of individuals and/or firms that purchase investment partnership where a number shares of privately-held companies of investors (i.e., the limited partners) or acquire control of publicly-traded pool their funds together to be invested companies (and possibly take a public by a professional fund manager (i.e., company private). The aim is to invest in the general partner) according to companies that have growth potential the fund’s investment strategy — and then use the private equity which may be innovative or otherwise investment to turnaround or expand nontraditional when compared to the business. The company can then be more familiar investment options. While sold for a profit. structurally similar to a mutual fund, HFs generally invest more aggressively and Private equity firms (also known as are limited to “qualified” investors (i.e., private equity funds) offer investment those who meet certain net worth opportunities to a limited number of requirements, making them better able accredited investors (limited partners) to tolerate the increased investment who are better able to understand risk). Compared to the heavily regulated
21 https://limestone.eu/fund-platforms/ specialised-investment-fund/
26 Investors’ Handbook mutual funds, HFs operate with a wide of a company22. degree of investment latitude and are often leveraged to maximise their Venture Capital Fund means the returns. funds whose securities are the initial phase of operation and not listed with HFs differ from private equity (PE) firms stock exchange market, or a fund in that HFs usually focus on short or in the business related to innovative medium term liquid securities that are knowledge, skills, or competency or more quickly convertible to cash. HFs new goods, services, technology, or also do not have direct control over intellectual property23. the business or asset in which they are investing. By contrast, PE firms are Hedge Fund means a fund established geared toward longer-term investment to make investments in any sectors 24 strategies in illiquid assets, where they with high risks . However, the existing have more control or influence over regulation does not have sufficient operations to influence the long-term modality of operation of hedge fund. returns. SEBON is going to frame a detailed directives in this regard. The Specialised Investment Fund
Regulations, 2019 has explanation of 22 Rule 14(2)(a)(1)Specialised Investment Fund, these funds. Regulagions, 2019 23 Private Equity Fund means a fund Rule 14(2)(b)(2)Specialised Investment Fund, injecting initial equity, or other Regulagions, 2019 24 instruments related to equity, or making Rule 14(2)(c)(3)Specialised Investment Fund, investments as per the desire of partner Regulagions, 2019
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CHAPTER 6 8. Compare the product with other investments opportunities available Investment Planning & Process 9. Examine if it fits with other Investment is important because one investments you are considering or needs to invest to maximise returns on you have already made, one’s savings, appreciate one’s assets 10. Deal only through registered and also to be able to generate cash intermediaries flows for meeting several financial needs of the future. One must, however, invest 11. Seek all clarifications about the with knowledge and full care in order intermediary and the investment, to not only protect one’s hard-earned 12. Explore the options available to capital but also generate good returns. you should something go wrong, Therefore, investors need to invest in and then, if satisfied, make the systemic way or making and following investment. an investment plan. Importance of Investment Investment planning is a planned process of matching One needs to invest to maximise returns one’s financial goals and objectives on one’s savings and also to be able to with one’s financial resources. It is a part generate cash flows for meeting several of financial planning. financial needs of the future. One must invest with knowledge and full care in Determining Steps to Investing order to not only protect one’s hard- Before making any investment decision earned capital but also generate good assurance of the following points are returns. must: Investment Objectives 1, Obtain written documents explaining the investment There are normally three objectives such as (i) Safety, (ii) Return; and (iii) Liquidity. 2. Read and understand such documents This means that one would like an investment to be absolutely safe, while 3. Verify the legitimacy and validity of it generates handsome returns and the investment provides high liquidity. However, it is 4. Find out the costs and benefits difficult to maximise all three objectives associated with the investment simultaneously. Typically, one objective 5. Assess risk-return profile of the trades-off against another. For example, investment if one wants high returns, one may have to take some risks, or if one wants high 6. Know the liquidity and safety liquidity, one may have to compromise aspects of the investment on returns. For people who have a 7. Ascertain if the product is regular income, growth-oriented appropriate for your specific goals investments, with some risks, are ideal.
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Specification of the Financial Goals Rs. 5,000 For the next 2 Investments are made with certain p.m. 20 years financial objectives. These objectives Beginning Rs. should be defined clearly and be from 12th year 3 1,50,000 measurable in money terms. For from now till p.a. example, it is not enough to say “I 16th year. want to retire comfortably”. Such an Every investor should take out time and objective should be stated, as “I want prepare such a statement of financial to retire with the ability to spend Rs. goals covering as many requirements 2,00,000 annually, adjusted for inflation”. as possible. This is the basis on which An investor saves today, to meet certain the financial plan would be prepared. financial needs tomorrow. Unless the If the financial capability is found to investor is clear about the purpose of be inadequate to meet all these goals saving, his efforts would not result in then they have to be prioritised. the desired benefits. An investor should The investors’ financial needs depend therefore first identify his financial needs. on the age, stage in the career path, size For example, an investor may have one of the family, needs of the other family or more of the following financial needs: members etc. Some of the needs can 1. To retire at age 55 with an annual be identified with precision while others income of Rs.3,00,000. I am now 35 can only be tentatively determined. years of age There may be unanticipated needs as well for which provisions have to 2. To completely payoff the housing be made. Sometimes financial needs loan by the time I retire 20 years later. change with investor’s changing circumstances. 3. To pay for my daughter’s college education that would cost me Rs. In order to prepare a financial plan, 1,50,000 per year for 4 years. these goals have to be stated in clear and determinable terms of age, The first step for an investor is to clearly amounts and time frame. The financial write down the financial needs. The planning process is merely an exercise financial needs would be expressed in of allocation of today’s money to terms of the amount required and the meet tomorrow’s needs. The financial future date on which required. In the plan is not static. It has to be reviewed above three examples, we would write: from time to time to account for the changing circumstances. When Amount Example required required Assessing the Financial Capacity Number Each year An investor sets aside some money Rs. beginning 1 3,00,000 today to realise the financial goals from the 20th p.a. stated in the financial plan. How much year from now money can be set aside now depends
29 Investors’ Handbook on the present circumstances. This can a part of the process of investing, it is be understood by understanding the just part of the process. As investors, it income, assets and liabilities of the is not surprising that we focus so much individual investor. The balance sheet of our energy and efforts on investment lists the investor’s assets and liabilities. philosophies and strategies, and so little Hopefully, the assets exceed the on the investment process. It is far more liabilities and this excess is the net worth. interesting to read about how Peter All assets and liabilities should be valued Lynch picks stocks and what makes at the current market value instead of Warren Buffett a valuable investor, than any cost basis. For example, if you own it is to talk about the steps involved in an equity share bought at Rs. 1,000 and creating a portfolio or in executing it is worth Rs.5,000 now, your balance trades. Though it does not get sufficient sheet should reflect Rs.5,000. attention, understanding the investment process is critical for every investor for An investor should live within his several reasons: means. Means is the income. Out of this income, routine expenses are met. 1. The investment process outlines The remaining amount is available for the steps in creating a portfolio, and savings. An investor should prepare a emphasises the sequence of actions statement of income and expense. It involved from understanding the is called “Cash Flow Statement”. The investors risk preferences to asset sources of income are salary, dividends, allocation and selection to performance interest, self-employment earnings etc. evaluation. By emphasising the sequence, it provides for an orderly After identifying the income, an way in which an investor can create investor should identify the expenses. his or her own portfolio or a portfolio for Expenses are generally grouped into someone else. living expenses, payments already committed and taxes. 2. The investment process provides a structure that allows investors to see the The excess of income over expenses source of different investment strategies in each year is the amount available and philosophies. By doing so, it allows to save. The investor tries to achieve investors to take the hundreds of his financial goals subject to his saving strategies that they see described in capacity. The Cash Flow Statement the common press and in investment is prepared under different scenarios. newsletters and to trace them to their These are death, disability and common roots. retirement. 3. The investment process emphasises Investment Process the different components that are As investors, we would all like to beat needed for an investment strategy to the market and we would all like to be successful, and by so doing explain pick “great” investments on instinct. why so many strategies that look good However, while intuition is undoubtedly
30 Investors’ Handbook on paper never work for those who use Asset allocation decision is perhaps them. the most important decision in the investment process. The essence of Investing well has a secret formula– asset allocation lies in the fact that, over having the right information, planning time, it can determine up to 90 percent and making good choices. of the portfolio’s return.
Level and Management of Risk How much risk an investor can take Different securities carry different risk- depends on his financial circumstances return profiles. Generally, higher risks and the mental make-up. Every carry higher returns and vice-versa. The investor must know his own unique risk risk could be in the form of credit risk profile and then make the investment (counter party may default payment decisions. Factors determining the types as it may not have integrity), return risk of investor are (i) Preparedness to take (the return from the investment may high risks and (ii) Averse (opposed) to depend on several contingent factors) taking risks. and liquidity risk (it may be difficult to There are scientific methods by which convert security into cash). an investor can understand his/her risk Investment decisions are based upon profile. For example, answering the the investors’ life cycle stages and following set of questions could give an other factors such as liquidity, safety, idea about his/her risk profile: return on investments, tax savings, Age Groups active involvement required to manage the investment, and minimum • Between 25-35 amount requirement for selecting the • Between 35-50 instruments. • Between 50-65 It is not always possible to meet all • Above 65 financial goals with available savings. Your Position is Best Described by If savings are limited but the needs are substantial, then the savings should be • You are self-dependent and do invested in avenues that would offer not support anybody high returns. But usually, high return also • You have dependent(s) means high risk. All investors are not in a • Nearing towards retirement position to take high risks. • Already Retired There are investment opportunities • How much of the following needs that are high on risk and there are have been taken care of? (Fully, investment opportunities that are low partially, not at all) on risk. Each is called an asset class. • Insurance An investor allocates his savings to • Retirement one or more asset classes depending • Children’s education upon his circumstances. This decision is called the asset allocation decision. • Housing
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• Medical Financial circumstances and the investor profile dictate the investment avenues • What proportion of your current for an investor. Financial instruments expenses is funded from vary in terms of the liquidity, safety, investments? and returns they offer. The challenge • Nil in making the investment decision • Up to 15% is to choose the right combination • Between 15% and 30% of instruments keeping in mind the • Between 30% and 50% financial situation and investor profile. • More than 50% Each investment option has some Future Earnings advantages and some limitations. For example, while bank savings account • far exceed inflation would be highly liquid (you can withdraw • be marginally ahead of inflation whenever you like), investment in Public • keep pace with inflation Provident Fund would be difficult to • not keep pace with inflation withdraw. • When the price of the share you Risks are generally positively correlated have purchased drops steeply with probability of returns. For example, you would returns in equity shares can be high, but • Sell your investment the associated risks are also relatively • Sell part of your investment higher than other options. Risks can be classified into unsystematic and • Do nothing systematic. Unsystematic risks are those • Buy more of the same investment that can be minimised by diversifying Each of the above questions would one’s portfolio. For example, instead impact the risk profile of an investor. of investing in the shares of steel For example, lower the age, greater is companies alone, one could invest the expected willingness to take risks. into other sectors like Pharmaceuticals This is because younger people have a and Software. In this situation, your lifetime of earnings ahead of them and portfolio may not be terribly affected thus can afford to take higher risks with even if the steel sector were to register their present savings. Similarly, in case a a mediocre performance. On the person does not have any dependents, other hand, systematic risks are those he can take more risk. that cannot be minimised through portfolio diversification. For example, a At the very basic level, there are three Korean investor could not possibly have asset classes from which to choose from minimised or eliminated his loss due to based upon an investors’ risk profile. the currency crisis in South East Asia, They are equity, debt and cash. Equity is through a strategy of diversification of risky, debt has low risk and cash has even his portfolio. lower risk. Within each of the above asset classes, the investor has to select The character of the investor is also specific instruments for investment. important. Some investors have the
32 Investors’ Handbook time and the knowledge to study their 2. The investment process provides a investment portfolios carefully- these structure that allows investors to see could be called as ‘active’ investors. the source of different investment Others do not intend to watch their strategies and philosophies. By investments regularly, due to lack of doing so, it allows investors to take time or knowledge or inclination, and the hundreds of strategies that they are looking for essentially safer avenues see described in the common press for parking their funds. and in investment newsletters and to trace them to their common roots. Process of Investment 3. The investment process emphasises As investors, we would all like to beat the different components that are the market and we would all like to needed for an investment strategy pick “great” investments on instinct. to be successful, and by so doing However, while intuition is undoubtedly explain why so many strategies that a part of the process of investing, it is look good on paper never work just part of the process. As investors, it for those who use them. Investing is not surprising that we focus so much well has a secret formula–having of our energy and efforts on investment the right information, planning and philosophies and strategies, and so little making good choices. on the investment process. It is far more interesting to read about how Peter Purchasing Process Lynch picks stocks and what makes Warren Buffett a valuable investor, than From Where to Purchase the it is to talk about the steps involved in products? creating a portfolio or in executing • Brokers: Brokers offer several trades. Though it does not get sufficient services like purchase/sale of attention, understanding the investment equity, debt and derivative process is critical for every investor for products, mutual fund units, IPOs, several reasons: etc.
1. The investment process outlines • Banks: Many banks offer facilities the steps in creating a portfolio, for purchase/sale of equity, debt and emphasises the sequence of and derivative products, mutual actions involved from understanding fund units, IPOs etc. physically as the investors risk preferences to well as through their websites asset allocation and selection to performance evaluation. By • Mutual Funds: Almost all Mutual emphasising the sequence, it Funds facilitate online and provides for an orderly way in which physical buying/selling of mutual an investor can create his or her own funds. portfolio or a portfolio for someone else. • Stock Exchanges: Close ended mutual funds are traded on stock exchanges and can be brought
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through brokers. Open ended • The next step is to select a broker mutual funds can also be bought/ and fill a KYC form and enter into sold on the stock exchange a broker-client agreement. platform. • The broker then allocates a Steps Involved for Becoming a unique client ID, which acts as the Securities Market Investor identification.
• The basic requirements are a bank • You are now ready to buy/sell account and a demat account. securities. The demat account is normally linked to a bank account in order • PAN No. is compulsory for the to facilitate paying in and out of transactions of Rs 5 lakhs and funds and securities. above
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Chapter 7 • To receive the residual proceeds in case of winding up. Right of Shareholders • Participation and Vote in AGM
Shareholders or Investors are considered To participate and vote in Annual to be the real owners of a company. general meetings (AGM) and enjoy They are the source of capital required voting right. (be entitled to attend to mobilise via capital market. They the general meeting and cast votes benefit, through dividends and capital at the rate of one vote for each appreciation, and wealth maximum share held by him)25. when the company performs well. On the other hand, they equally carry the • Proxy risk of losing part or fully their investment Subject to Sub-section (1) or (2) , to the extent of their investment if the where a shareholder who is entitled company performs badly and goes for to vote is not able to personally liquidation. attend the meeting, he/she may As an owner of the company, a appoint a proxy to vote in his/her shareholder has some fundamental stead, by an instrument of proxy rights along with he should perform his executed in the prescribed format role responsibly. and signed by him/her and the proxy so appointed shall be entitled Major Rights of Shareholders to attend or vote in the meeting26, entrusted by Securities Related Act, 2006 and Company Act, 2006 are as • Appointment of Proxy under: Appoint another person as his proxy • To participate in the public issue to attend the general meeting and of securities, vote instead of him/herself27. • To receive the shares on allotment • Signing in the Minutes or purchase within the stipulated time and to be refunded his In the case of a company which has money back within the stipulated no company secretary, the minutes time in case of not allotted. shall be signed by the Chairperson • To receive dividends in due of the meeting concerned and by time once approved in general a representative of shareholders meetings. appointed by a majority of the general meeting28. • To receive corporate benefits like rights, bonus, etc. once approved. • To receive offer in case of 25 Section 71(1) Company Act, 2006 takeover, delisting or buyback 26 Section 71(3) Company Act, 2006 though buyback is not allowed in 27 Section 71(2) Company Act, 2006 Nepal. 28 Section 75(1) Company Act, 2006
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• Getting of Minute • Right to Get Annual Financial Statement If any shareholder wishes to get a copy of any minutes of the general If any shareholder makes a request meeting, the company shall for a copy of the annual financial provide such copy by collecting statement, directors’ report and such fees as specified by its articles auditor’s report as referred to in of association29. Sub-section (3), the company shall provide a copy of such reports or Put a Matter for Discussion and statements to such shareholder32. Decision • Agenda to be Passed During If the shareholder or shareholders AGM representing at least five per cent of the total number of votes shall so Except as otherwise provided in desire, he/they may, by submitting this Act, matters of distribution an application to the directors prior of dividends to shareholders, the issue of a notice under Sub- appointment pf directors and their section (2) of Section 67, cause remuneration, appointment of any matter to be presented at auditor and his remuneration of the annual general meeting for such other items as required by this discussion and decision30. Act or the articles of association to be decided by the annual • Call of AGM general meeting of the company can be presented at the decided At least twenty one days prior to by the annual general meeting of the holding of the annual general the company can be presented meeting, every public company at and decided by that meeting. shall make arrangement so that Provided, however, that on the the shareholders can inspect rate of dividends to be distributed and obtain copies of the annual to the shareholders shall be made financial statement, directors’ report in a manner to exceed the rate of and auditors’ report as referred to such dividends fixed by the board of in Section 84 and publish a notice directors.33 in a national daily newspapers for information thereof. Information • Extra General Meeting of the statements and reports as referred to in Sub-section (3) may If the shareholders holding at least also be disseminated through ten percent shares of the paid–up electronic communication media, capital of a company or at least as per necessity.31 twenty five per cent shareholders of the total number of shareholders make an application, setting out the 29 Section 75(5) Company Act, 2006 30 Section 77(2) Company Act, 2006 32 Section 77(5) Company Act, 2006 31 Section 77(3)&(4) Company Act, 2006 33 Section 77(6) Company Act, 2006
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reasons therefore, to the registered (1) Notwithstanding anything office of the company for calling contained elsewhere in this Act, an extra-ordinary general meeting a company listed in the stock of the company. (4) If the board exchange shall not be required of directors does not call the extra- to send the annual financial ordinary general meeting within statement and director’s report to its thirty days from the date on which shareholders or debenture-holders an application is made pursuant Provided, however, that an abstract to Sub-section (3), the concerned of financial statement prepared shareholders may make a petition pursuant to Sub-sections (2) and (3) to the Office setting out the matter; shall be sent to every shareholder and if a such petition’s made, the along with the notice of annual Office may cause to call such general meeting.35 meeting.34 • Abstract Financial Report
Provisions on sending abstract of financial reports to shareholders:
34 Section 82(3)&(4) Company Act, 2006 35 Section 84(1) Company Act, 2006
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Chapter 8 to either fill the order entirely at once at the time of limit price or Market Participants: Nepal Stock better, or do not fill it at all. ) Exchange Ltd. The distinction in AON, FOK and OIC An Introduction to NEPSE order is that unlike FOK/IOC order, AON order will not be cancelled if it cannot Stock exchange is a market place be filled immediately, and can be used where securities are traded. It is related in addition to Day order or Good Till to the secondary market. Nepal Stock Cancelled (GTC) order. If the order is Exchange Ltd. has been established a Day Order, when there is not enough (NEPSE) in order to provide trading supply to meet the quantity requested platform for trading of listed securities by the order at the limit price or better, to provide liquidity of investment made then the order will be cancelled at the in the securities market. NEPSE was closing of the trading day. established under the Company Act, 2006 and operates under Securities Order Conditions in term of Price can Related Act, 2006. be classified as (i) limit, (ii) market,
The basic objectives of NEPSE is to • Limit : refers the price quoted by impart free marketability and liquidity the buyer or seller. to the Government and corporate securities by facilitating transactions • Market : refers to the price in its trading floor through member, determined in the market, usually market intermediaries, such as stock last trading price. broker, market maker. Price Range
Trading Sessions in NEPSE • <=2% up or down from Last Trading • Pre-Open Session (10:30 AM to Price (LTP) for each transaction in 10:45 AM) case of Regular Session. • Special Pre-open Session (10:30 • <=5% up or down from LTP in case AM to 10:45 AM) of POS (Pre-Opening Session) • Regular Session (CT) (11:00 AM to • For a given stock not more than 3:00 PM) 10% from previous close price can Order Types be varied in a day. • Regular Order Matching : An order matching • Odd-lot system is an electronic system, • Negotiated matching buy and sell orders Order Retention for a security on a stock market, • End of Day (EOD) a commodity on a commodity market and any other electronically traded • Good till Cancel (GTC):- 15 days financial instruments. It can be (i) Before in our case Matching, and (ii) After Matching.
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Trade Management System for weighting. The distinctions between Brokers and Clients these three methods of construction will be considered in more detail in the Trade Management System (TMS) is next section. The purpose of indices defined as an independent, broker- is to provide a barometer of the neutral, multi-asset trading platform. It performance of the overall stock market. consolidates pre-, at and post-trade At a given point in time some stocks analysis, pre-built and broker-provided may be advancing while others may be algorithms, interactive charts and declining. The index is the average that position monitoring, multi-asset and provides the general direction of the portfolio trading capabilities, order market. The mutual fund industry uses management and FIX connectivity in these indices as benchmarks to assess a multi-broker execution management the performance of particular funds system. and fund managers.
Invest as an Informed Investor The following table 1 highlights the Investors should not buy securities characteristics of some of well- known on impulse, a hot tip or follow the international equity indices: herd mentality. Investors should Table 1 discriminate between information, The casting away irrelevant and illogical The Index Weighting Stocks Included pieces of information, and checking Exchange London Value 100 largest for opportunities and facts before FTSElOO Stock weighted stocks buying securities. Examination of the Exchange fundamentals of securities before taking Frankfurt Value DAX40 40 largest stocks a decision to invest is considered to be Exchange weighted Tokyo an important step. Price 225largest NIKKEI225 Stock Weighted stocks Market Index/Indices Exchange New York DOWJONES Stock Price Market index is a yardstick of INDUSTRIAL 30 largest stocks Exchange weighted performance of the stock markets. AVERAGE Market Indices are computed to provide New York NYSE Value More than 2,000 Stock an indication of the overall performance Composite weighted largest stocks of the stock market or specific segments Exchange NASDAQ Value Almost 5,000 of the market. The Dow Jones Industrial NASDAQ Composite weighted stocks Average (DJIA), for instance, is an Paris Value CAC 40 largest stocks average of the 30 largest stocks in the Exchange weighted NYSE and Value US, while the Dow Jones Transportation S&PSOO 500 largest stock Index is an average for only the stocks of NASDAQ weighted Nepal transportation companies. Technically, Stock Value Whole Price NEPSE an average can be constructed by Exchange weighted Index using different weighting schemes: price Ltd. weighting, value weighting, or equal
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Basis of Indices/Index market. Movements of the index should represent the returns obtained by Basis of index can of different weigh “typical” portfolios in the country. such as (i) price, (ii) value and, (iii) hybrid of price and value. The ups and downs of an index reflect the changing expectations of the stock In a Price Weighting market about future dividends of Nepal’s It is a scheme a stock with a higher price corporate sector. When the index goes will have a greater influence on the up, it is because the stock market thinks average. that the prospective dividends in the future will be better than previously In a Value Weighted thought. When prospects of dividends in the future become pessimistic, the It is a scheme the stock of a company index drops. The ideal index gives us with a larger value (measured by market instant-to-instant readings about how capitalisation = price per share times the the stock market perceives the future of number of shares outstanding) will have particular country’s corporate sector. a greater influence on the average. Calculation of NEPSE Index An Equal Weighting By multiplying the ratio of current It is a scheme as the name implies period’s total market capitalisation to assigns the same importance to every base period’s total market capitalisation stock comprising the average. The Dow by 100, we get the NEPSE index. This Jones Industrial Average (DJIA) is an method of index calculation is called example of a price weighted index, value weighted method= 119.43. while the S&P500 index in the US and the Thus, NEPSE index for the current period TASI (Tadawul All Shares Index) in Saudi is 119.43 with reference to the base Arabia are examples of value weighted period. indices. The Dow Jones Industrial Average (DJIA) is the oldest and most Sensitive Index widely known index representing the 30 largest and most significant stocks in the Sensitive index is the index calculated US economy. Originally, the Index was from the market capitalisation of computed by dividing the sum of the 30 companies classified under group “A”. stock prices by 30. However, over time, The sensitive index was introduced the weights have been altered to reflect by NEPSE from January 01, 2007 and stock splits, stock dividends, and new that date marks the base market stocks replacing older ones. The implied capitalisation. Unlike NEPSE index, weight for this index is determined by the sensitive index considers only the share price and it is therefore a price selected companies. These companies weighted index. are taken if they fulfill the following criteria: Minimum paid-up capital of Rs A stock market index should capture 1 Arab. z the behaviour of the overall equity
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Sensitive Index =[ Current MV of all shares necessary rational decision. listed in NEPSE under Group “A”/ MV of shares in Base year ] *100. (Base year is NEPSE has a provision of circuit breaker. 26th Bhadra, 2065 or 11th September It is index-based circuit breaker which 2008). was started for the first time in 21 Sep 2007. It had three stages index breaker Float Index for 3 percent, 4 percent and 5 percent index movement increase or decrease. NEPSE started calculating float index NEPSE amended its circuit breaker from 11 September 2008 (Base Date). rule in 2 April 2019. According to the This index represents the market amended rule circuit breaker now goes capitalisation of securities which are as under: floated to public. Float index excludes promoter’s holding, government • If NEPSE index fluctuates 4 percent holding, strategic holding and other amid first hour of trade, market locked in shares like employees share- will halt for 15 minutes that will not come to the market for trading in the normal course. It takes into • in case of second hour of trade, account the securities held by general if market fluctuates for 5 percent public that are readily available for then market will halt for 30 minutes trading in the market. • if NEPSE fluctuates 6 percent, Float Index =[ Current MV of all shares trading shall be halted for listed in NEPSE floated to general public/ the remaining period of time. MV of shares in Base year] *100. (Base Classification of Listed Companies year is 11 September 2008.) by NEPSE
And there are 12 sectorwise sub-indices NEPSE had started the classification of calculated by NEPSE. listed companies into Group ‘A’ and Circuit Breakers and Trading Halt Group ‘B’ since fiscal year 1996/97 which was changed to the quarterly Circuit breaker is a mechanism of classification of ‘A”, ‘B’, ‘G’ and ‘Z’ stabilizing market in order to check (Four) Groups on October 15, 201836. sudden rise or fall in the index resulted NEPSE classifies listed companies into from falling and rising the prices of shares Group ‘A’ based on the following sharply. The objective of circuit break is criteria: to control the stock market movements for unreasonable fluctuations. Circuit - Paid up capital should be at breaker is mechanism of halting or least Rs.1000 million. stopping securities transaction for - Listing of securities was made a specific period. Trading halt gives three years before. market participants time to analyze event, news, announcements and take 36 Rule 11 under the Securities Listing and Trading Regulations, 2018 and Securities Listing Byelaws, 2018.
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- Should be in profits and classified in any of the ‘A’, ‘B’ dividend distributed in the last and ‘G’ Groups. three consecutive years. In NEPSE’s changed first classification, - Have rated by Credit Ratings no any listed company was Agency average or above the classified into Group ‘A’ and Group average. ‘B’, 22 companies were classified into Group ‘G’, and 174 companies –– Should have financial in Group ‘Z’ Group respectively. statements in the formats/ standards specified by the Market Participants: Depository Regulators. Services –– Have conducted AGM within An Introduction to the Depository the six months of the fiscal year System end. A depository takes the ownership • NEPSE classify listed companies guarantee of the shareholders by into Group ‘B’ based on the holding those securities and other following criteria: market instruments, which are listed, in the secondary market, distributed –– Paid up capital should be at or allotted and can be deposited least Rs.500 million. into the electronic form. In fact, a –– Listing of securities was made depository facilitates the holding three years before. and/or transacting securities in book entry form. The investor has to open a –– Should be in profits at least two demat account to avail the services of years in the last three years. depository. Additionally, the depository maintains the record in the account of –– Have rated by Credit Ratings the investors. Agency one level below than the average. In Nepal, CDS and Clearing Ltd. (CDSC) was established as the sole depository –– Have conducted AGM within authority in the year 2011 under the six months of the fiscal year Company Act 2006, with the authorised end. capital and issued capital of Rs. 500 –– Should not have accumulated million and Rs. 300 million respectively. loss. It is wholly owned subsidiary company NEPSE classify listed companies into of Nepal Stock Exchange Ltd. (NEPSE). Group ‘G’ if the listed companies have The major objective of CDSC is to not completed two years after listing. render service of dematerialisation • NEPSE classify listed companies of the securities (such as shares, into Group ‘Z’ if the listed preference shares, debentures, bond, companies have not been government securities, etc.) and
42 Investors’ Handbook update the transactions in the record The purpose of opening a demat by safeguarding the deposit on behalf account The purpose of opening a of the buyers. demat account are as mentioned below: Service Offered by CDSC • To convert the physical securities • Deposit, withdrawal and transfer into the electronic form, of securities, • To deposit and transfer the NEPSE • Electronic credit of securities listed securities in a dematerialised directly into the investor’s demat form, account allotted in Initial Public • To credit the securities allotted Offering (IPO), through IPO and corporate • safeguard the investors’ securities actions (such as rights share issue, into the electronic form and bonus issue, merger, etc.) in a to debit/credit the particular dematerialised form, To receive investor’s account as per the the statement of the securities held in a demat account, transactions occurred in the book entry system, • To pledge the securities held in a demat account, • Quicker distribution of securities allotted by issuers under IPO and • To rematerialise the securities held corporate actions and benefits of in a demat account. the issuers, Dematerialisation (Demat) & Rematerialisation (Remat) • Provide secure and convenient electronic procedures for pledge Dematerialisation is a process of and unpledge of securities. converting physical securities into electronic form while rematerialisation • To provide updated statement is the process of converting securities and reconciliation held in a demat account in electronic Parties Involved with CDSC form back in physical certificate form.
The following parties are involved with Beneficial Owner (BO) CDSC: A Beneficial Owner is the person who Beneficial Owner (BO): The investor have opened the demat account with Depository Participant (DP): Agent of CDSC through a registered DP in order the depository to deposit their securities or instruments which are capable of being deposited Issuer: Issuing Company in demat form. Registrar and Transfer Agent (RTA): Agent of the Issuer
Stock Brokers
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Depository Participant (DP) Beneficial Owner Identification Number (BOID) A Depository Participant is an agent of the depository who has received It is a unique identification number given the registration certificate from the to BO which is generated only when Security Board of Nepal and the BO opens the demat account in CDSC membership license from CDSC. To through an authorised DP. BOID must be an authorised DP, the DP has to be mentioned in all future transactions. comply following eligibility criteria: Shall BOID cannot be duplicate. It means be a Bank or Financial Institution, Stock two BOs cannot have same BOID which Broker, Registrar and Transfer Agent, replicates that the securities cannot be custodian or such other entity as may be prescribed by the Board from time to transferred into the wrong account. time, Shall have minimum net worth of Sample of BOID rupees ten million, Have not been black CLIENT ID (8 listed by Credit Information Bureau. DP ID (8 digits) digits) An Issuer 1 3 0 1 0 6 0 0 0 0 0 7 0 2 2 2
An issuer means any entity such It has 16 numbers altogether. The first 8 as corporate bodies/ government digits refers to the DP or it is the DP code organisations that issue securities or and the second is client code. market instruments to the public to raise its capital and those securities and Services rendered by a DP to the instruments can be held in depository in investors electronic form. DP provides the following services to the Registrar and Transfer Agent (RTA) investors: Registrar and Transfer Agent (RTA) • To open the demat account, means any person / body corporate Dematerialisation of securities, who on behalf of any corporate body, maintains the records of holders of Rematerialisation of securities, securities issued by such body corporate • To maintain record of securities and deals with all matters connected in the electronic form, Settlement with the transfer and redemption of its trades by transferring/receiving securities. the securities from/in BO accounts, ISIN (International Securities Settlement of off-market trades Identification Number) that is occurred between BOs outside NEPSE, An ISIN is a unique 12 digit alphanumeric code given to the securities such as • To provide electronic credit of shares, preference shares, debentures, securities allotted by issuers during bonds, etc. when the security is admitted IPOs, in the depository system. The first two • To deposit the financial corporate digits of the ISIN code indicate country of registration for the security and code benefits (such as: bonus, right 4 to 6 indicate the issuer code. shares, etc.) issued by issuers in
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the demat account of BOs, Benefits of opening a demat account • To facilitate in pledging of for investors dematerialised securities. A demat account has become a Software used by CDSC for the use necessity for all categories of investors depository system due to numerous following benefits:
They are as follows: • Eliminates risk associated with physical certificates, a. Central Depository Accounting • In demat system, the ownership System (CDAS). of securities are held in electronic b. Clearing and Settlement (CNS) form. Hence, the risk associated with physical certificates such as c. DP Secure (DPS) loss during carrying of certificates CMC Limited is provider of above from one place to another, software. These software are also been worn out, theft, cost incurred used by Central Depository Services while making the duplication of (India) Limited (CDSL) and Central certificates, etc. are eliminated. Depository Bangladesh Limited (CDBL). • Immediate transfer of securities: CDSL has been providing various When an investor buys securities advices and technical support to CDSC. from the market, the securities Mechanism of Data Security in the are immediately credited into system his/her account along with the ownership. The securities do not The data in CDSC system is very have to be sent to RTA for transfer significant. CDSC implies the proper of ownership in demat system. precautions to secure the processed Moreover, the investors do not and stored data. This system safeguards have to wait for a long time the data from unauthorised access, period to get registered in the misuse and unpredictable loss. CDSC book of RTA as the legal owner of uses following back up to secure the the securities. data: • Immediate settlement cycle: The transactions of securities • Local Back Up are settled within T+3 settlement • Remote Back Up cycle in electronic form. At the last day of the settlement NEPSE • Disaster Recovery Site cycle, the securities are credited • DP also maintains Back Up for into the demat account of the buyer resulting the immediate each day transaction. settlement cycle. • Immediate distribution of shares allotted in IPO: The shares allotted in IPO can be easily
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and immediately credited in merchant for sourcing of funds as well the demat account of investor as information and lending expertise held with CDSC. Hence, the required managing the funds as a investor does not have to wait legitimate agent of the business entities. to receive the share certificate Undertake to subscribe to the securities from the issuers. This aids to list offered by the company in case these the securities immediately in the are not fully subscribed by the public. stock market. Easy in portfolio History of Merchant Banking management: Investors receive the statement of their account “Merchant Banking was originated in periodically which helps them in the 18th and early 19th centuries in the managing portfolio and receiving United Kingdom when trade between the detail information about their countries was financed by bills of investment. Solve the problem exchange, drawn on the principle of address change: Investors do merchant houses. With the growth in not have to inform their individual international trade, the established issuers about the change of merchants started the practice in address through correspondence lending their names to the new comers separately. Investors can register and accepting the bills of exchange the change through their DP on their behalf. They would charge a only. DP updates and informs commission for the purpose and thus the change to all issuers of the acceptance business became the securities held by an investor hallmark of Merchant bankers. Once through the depository system. these banks had gained the confidence Easy in pledge of securities: In of the government, they also entrusted case, the dematerialised securities with the job of issuing bonds in the are pledged, such account can London market. be locked in. While pledging the securities, the securities do not In USA, merchant banking came into need to get transferred from the existence in in the early 19th century pledgor’s account to pledgee’s after the introduction of Blue Sky Laws account. to protect investors from fraudulent promoters and security salesmen. In the Market Participants: Merchant context of Nepal, Finance Company Banking Services Act 2042 gave birth to a new dimension Merchant banking can be defined to the merchant banking services as as a professional service provided by the act permits finance companies the merchant bankers to the issuers or to sell and purchase the bonds issued corporates in order to help realise their by His Majesty”s Government or financial needs. Merchant works as a securities issued by other companies pool between the issuers and investors or institutions, to underwrite them and to channelise the fund required to the to form syndicate for such purpose or issuer. It helps in facilitating the country’s to participate in such syndicates and development process by acting as a to act as broker under the Securities
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Exchange Act, 1983. Similarly section3 Manager), (x) Depository Participants, (g) of the same act permits them to (xi) Portfolio management service, etc., perform functions of merchant banking with prior approval of NRB. Capital Structuring
Citizen Investment Trust (CIT) is a pioneer The Merchant Bankers while designing merchant banker of the country the capital structure take into followed by other finance companies account the various factors such as viz. NIDC Capital Market, National leverage effect of the company, the Finance Co., Nepal Share Market, etc. cost of capital, the considerations At present few financial institutions of management control, size of the (basically finance companies) are company, and general economic involved in different merchant banking factors. These excises are done mainly activities. in order to meet the fund requirement of the company taking due cognisance SEBON has Securities Businessperson of the investors’ preference. (Merchant Banker) Regulation, 2064 to regulate them. According to the Project Evaluation and Due Diligence definition of the regulation 2(Gha) Due diligence and project evaluation under the definition “Merchant banking is another major responsibility of the business” means one or more business merchant banker. Where a bank/ as mentioned in Regulation 16. financial institution the merchant banker Functions and Services Offered by has already appraised the project relies Merchant Banker on the said appraisal before accepting an assignment. However, where a Generally, merchant banker offers their bank/ financial institution have not services to the corporate sectors/issuer appraised the project, the merchant and investors who want to place their bank undertakes a detailed evaluation savings in appropriate investments. The of the project before taking up an range of service offered by merchant assignment for issue management. bankers is: Legal Aspects Out of wide range of various services provided by Merchant bankers, The factors that are looked into in case of the legal aspects: compliance with Merchant banks, in Nepali, mainly the SEBON Regulations, Guidelines and provide services such as (i) issue the Companies Act, the management, (ii) underwriting, (iii) share registrar (RTS/RTA), (iv) management Pricing of the Issue of auction of unsubscribed shares, Normally, the merchant banker looks (V) management of merger and into the various factors while pricing acquisition, (vi) corporate advisory the issue. Some of the factors are past service, (vii) qualified institutional buyer financial performance of the company, (QIB), (viii) Fund manager (MF), (ix) Special Investment Fund Manager (SIF
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Book value per share, Stock market general public through various vehicles performance of the shares (for existing such as press, brokers, etc. companies, stock market perception of the company/group promoters, price Responsibilities of Merchant Banker earnings ratio of the company/industry, to the Investors brand equity, if any. The Merchant Investor protection and empowerment banker has a vital role to play in pricing is fundamental to a development of of the instrument under FPO and book- capital market. Protection is not to be building system of public issue though understood in a way to compensate these activities may not be significant for the losses if investors suffer. The under the fixed pricing of the securities. responsibility of the Merchant Banker Preparing of Prospectus and Offer ensuring the completeness of the Documents disclosures is of paramount importance in view of the fact that entire reliance It is the job of merchant banker to is based on offer document either prepare and assist in filing a prospectus prospectus or letter of offer because an and offer documents with the SEBON. independent and professional market intermediary like a merchant banker Marketing of the Issue has done in the time of public issue.
Marketing of the public issue is one of the The list of Merchant Bankers is Presented major responsibilities of the merchant in Annexure 2. banker. Normally, the first stage is the pre-issue marketing for placement of Market Participants: Stockbroker the issue with the financial institutions, banks, mutual funds, The second A broker is a member of a recognized stage is the marketing of the issue to stock exchange, who is permitted to the general public through various do trades on the trading system of the vehicles such as press, brokers, etc but stock exchange. In Nepal, stock brokers in the name of marketing issuer is not are a member of Nepal Stock Exchange allowed to induce the general public to Limited and they provide buy and sell subscribe the securities. Such conduct is services to the investors and execute considered to be punishable. clients order to the NOTS. Stock Broker is enrolled as a member with the NEPSE Arrangement of Collection Center and is licensed from SEBON. There are and Collection of Application 50 brokers at present in Nepal and many of them have at least one or Marketing of the issue is a vital more braches in different major cities of responsibility of the Merchant Banker. Nepal. The first stage is the Pre-issue marketing for placement of the issue with the To ensure the stockbroker is financial institutions, banks, mutual licensed/registered in SEBON funds, FII”s and NRI”s. The second stage is the marketing of the issue to the One can confirm it by verifying the registration certificate issued by SEBON.
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A broker’s registration number begins • Maintenance of separate books with ‘1’ and goes to ‘50’. Till date, there of accounts and records for is no concept full brokerage service clients; and sub-broker in Nepalese securities • Maintenance of money of clients market. Brokers service is confined only in a separate account and to buy and sell securities on behalf of their own money in a separate clients. account; Consideration Required while • Issue of daily statement of selecting Stockbrokers collateral utilisation to clients; • Appointment of authorised The broker/branch-office must be representative and compliance registered with SEBON and NEPSE which officer; one can verify from the registration • Issue of contract note to his client certificate displayed at his office. The list within 24hrs of the execution of of such authorised brokers/branches is the contract; available in the web-sites of SEBON and NEPSE. He should have the infrastructure • Delivery/Payment to be made to to transact your business with speed the client within 24 hrs of pay–out; and accuracy. Besides, the investor and should also look for your convenience • Maintain and update of KYC form such as location, cost and quality of • Other duties as specified in the service, etc. SEBO and NEPSE; • An investor should consider the Details an Investor need to submit to following factors when selecting broker a broker: • From where the broker/branch The brokers have to maintain a has learnt the business? database of their clients, for which the investor would have to fill client • How long has he been serving the registration form. In case of individual securities industry? client registration, the investor has to • Whether he has eligible broadly provide following information: qualifications as a broker? • Name, date of birth, photograph, • How many clients does he serve? address, educational qualifications, • What fees and expenses does he occupation, residential status charge? (Resident Nepali/NRN/others), • Does payment is made as per source of income, annual income rule? slab. Responsibilities of a Stockbroker • Unique Identification Number (wherever applicable). Entering into an agreement with his • Bank and depository account client or with sub broker and client; details.
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• PAN which also serves as unique Currently, brokers can charge client code. • Rs. 25 on the trading amount below • Proof of identity submitted either as Rs. 5,000. Citizenship, Pan No./Passport. • 0.60 % on the trading amount above • Photo. Rs. 5,000 and up to Rs 50,000; In case of Institutional Client, • 0.55 % on the trading amount of Rs. following information has to be 50,000-500,000; provided: • 0.50 % on the trading amount of Rs. • Name, address of the Company/ 5,00,000 to Rs.20,00,000; Firm. • 0.45 % on the trading of Rs. 20,00,000 • Unique Identification Number to Rs.1,00,00,000; and, (wherever applicable). • Date of incorporation and date of • 0.40 % on the trading of of commencement of business. Rs.1,00,00,000 and above. • Details of PAN Account Number. Capital Gain Tax (CGT) • Details of Promoters/Partners/ Key managerial Personnel of the Capital gain tax is, tax deducted at Company/Firm in specified format. source (TDS), being levied on the gain • Bank and Depository Account one make in the sell of securities. It is 5 Details percent for individual investor and 7.50 • Copy of the Resolution of board of percent for institutional investors. directors’ approving participation in equity naming authorised persons The list of Stockboker is presented in for dealing in securities. Annexure 3. Unique Client Code Market Participants: CRA for Credit In order to facilitate maintaining Rating Services database of their clients, it is mandatory Credit Rating Service and IPO for all brokers to use unique client Grading code, which will act as an exclusive identification for the client. For this A credit rating is a quantified assessment purpose, Citizenship number with the of the creditworthiness of a borrower frequently used bank account number in general terms or with respect to a and the depository beneficiary account particular debt or financial obligation. can be used for identification, in the A credit rating can be assigned to any given order, based on availability. entity that seeks to borrow money— an individual, corporation, state or Brokerage Charge/Commission provincial authority, or sovereign The brokerage commission on securities government. as per the 37regulation is as under: Credit Rating is an assessment of the 37 Rule 32(1) of Securities businessperson (Securities borrower (be it an individual, group or Broker & Market Maker) Registrations, 2008 company) that determines whether
50 Investors’ Handbook the borrower will be able to pay the company’s financial position. In case loan back on time, as per the loan the IPO proceeds are planned to be agreement. used to set up projects, either greenfield or brownfield, Credit Rating History in Nepal Credit Rating company evaluates • Credit Rating in Nepal, started the risks inherent in such projects, when SEBON granted license to the capacity of the company’s the ICRA Limited on October 3, management to execute the same, 2012. and the likely benefits accruing from the • Now there are two credit rating successful completion of the projects companies. CARE Ratings Nepal in terms of profitability and returns to Limited (CRNL) is incorporated shareholders. Due weightage is given in Kathmandu, Nepal licensed to the issuer company’s management by the Securities Board of Nepal strengths and weaknesses, and to issues, on November 16, 2017. CRNL if any, from the corporate governance provides credit ratings and perspective. related services. Grading of Public Issue IPO Grade does not comment on the valuation or pricing of the issue Grading of Initial Public Offerings that has been graded, nor does it (IPOs) is a service aimed at facilitating seek to indicate the likely returns to the assessment of equity issues shareholders from subscribing to the IPO. offered to the public. The Grade assigned to any individual IPO is a IPO grading and it’s five-point IPO symbolic representation of Credir Grading scale have been used by ICRA: Rating company’s assessment of the “fundamentals” of the issuer concerned Currently there requires compulsory on a relative Grading scale. rating for any new instruments to be offered in securities markets. IPO Grades are assigned on a five- Furthermore as per monetary policy of point point scale, where IPO Grade fiscal year 2018/19, every bank credit 1 indicates the highest Grading and above 5 million requires compulsory IPO Grade 5 the lowest Grading. An credit rating in BFIs. IPO Grade is not an opinion on the price of the issue, pre-orpost-listing. The list of related websites is presented The emphasis of the IPO Grading in Annexure 4. exercise is on evaluating the prospects of the industry in which the issuer company operates, the company’s competitive strengths that would allow it to address the risks inherent in the business(es) and effectively capitalise on the opportunities available, and the
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Chapter 9 limelight, SEBON, as a capital market regulator of Nepal, has been given Investor Education due emphasis on literacy programme and has been conducting Securities Investor education focuses on issues Markets and Commodity Derivatives relevant to the education and Markets investors training to the general information needs of individuals investors. Mostly, the trainings have been who participate, or are considering targeted to school/college students, participating, in the financial markets. teachers, businesspersons, project In addition, investor education can affected-locals of the hydropower sites, also help investors better assess the lawmakers, and economic reporters relevance and suitability of investment of the country from one decade. advice. Also, SEBON have been conducting Objectives of Investor Education Capital Market Expo in different Programme districts of Nepal in order to promote the financial literacy regarding Share Main objectives of investor education Markets and Commodity Derivatives programmes are: Markets. SEBON every now and then • Enable investors to understand participating in different trade expo/ and manage risk fair programmemes conducted by the other regulator, financial reporters and • Expanding outreach of financial Federation of Nepalese Chamber of services and products Commerce around the country. • Participation in financial markets with esteemed confidence SEBON Initiatives Towards • Reduce investors vulnerability to Empowering General Investors fraudulent schemes Major initiatives by SEBON are: • Informed financial and retirement • Training on securities and planning commodity market in all the • Protecting investors by educating provinces of Nepal in the co- them on their rights operations of local Federation Investor Education in Nepal of Nepalese Chamber of Commerce and Industry (FNCCI) To develop securities market and • Joint training with other commodity derivatives market by way participants such as Nepal of protecting the interest of general Stock Exchange ltd. CDSC ltd. in investors is one of the duties of SEBON. different provinces. It is common understanding among the • Bimonthly basic level training on financial regulators in the world that the securities markets and commodity financial literacy is one of the effective markets at SEBON’s premises. weapons through which the interest of Virtual training of the same. investors is protected at large. In this • Organising capital market fair
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in different provinces and also stockbrokers and merchant participating in such programme bankers. organised by other regulators • Training to the officials of market throughout the country participants with meeting method • Dissemination of educational Handling Investors’ Grievances materials such as books, journals, law compilations, and other In order to handle and solve the publications in schools, colleges, investors’ grievances and complains capital market expo venues, immediately, SEBON has a mechanism public places. of receiving investors grievances and • Capital market related complains through SEBON’s Web-site programme through Kantipur FM as well. SEBON has set-up a separate radio with direct questions/queries sub-section in order to work on such by investors, grievance and complain received. In • Bimonthly Radio Interaction with addition, SEBON has provided investors investors on securities markets and a toll free number for this purpose. The commodities market from Radio number is: 1660 01 44433 Nepal. • Training to the employees of market participants such as
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Chapter 10 • Strong stocks are also liquid stocks. • Bear in mind that the share issued Mantras for Wise Investment without issuing prospectus cannot be sold for three years from the date “Save your hard-earned or saving wisely of allotment of the share (example: and invest even more wisely.” promotor share has 3 years of lock- Investment is necessary because in period)38. (i) savings will depreciate in value/ Mantra: 3 purchasing power, to maintain the value of money caused by the inflation • Read carefully prospectus and offer that takes place in the economy, in documents (iii) in order to maintain security in the • Do not gamble away your hard- old age. But bear in mind that mindless earned money or saving. or reckless investing is hazardous to • Due diligence is a must. wealth. Investment with the following • Read about the offer. This is an mantras would help you from reckless advice difficult to practice with investment and lose your money. offer documents now running many Mantra: 1 pages. You must, at least sections on risk factors, litigations, promoters, • Financial education empowers the company history, project, objects of new investors so obtain at least the issue and key financial data and basic level training from recognised so forth. institution if you do not know much about the securities market Mantra: 4 before you jump to the market for • Follow life-cycle of investment investment. • You can afford to take greater risks Mantra: 2 when you are young. • Select and invest only in • As you cross 50, start getting out of fundamentally strong companies risky instruments. (companies which can run its • By 55/60, you should be totally operations from its “share capital” out of equity. (You can’t afford to plus “reserves“) lose your capital when you have • Do not go for momentum or market stopped earning new money). trend. Mantra: 5 • Invest only in companies with strong • Start with primary market and invest fundamentals; these are the ones in IPO that will withstand market pressures, and perform well in the long term. • IPOs are a good entry point in the securities market. They are issued • Bear in mind that equity investments cannot be sold back to the 38 Rule 38(1) of Securities Registration and company/promoters. Issuance Regulation, 2016 ( 2073)
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through the primary market. • Bear in mind the type of fund • IPOs have to be bought; these are whether it is open-end or close-end not forced upon the investors. Mantra: 7 • The problem is that we put IPOs on • Learn to sell a pedestal and expect them to perform forever. An IPO becomes a • Most investors buy and then just listed stock on the listing date. It will hold on (most advice by experts on the media is also to buy or hold, then behave like that. rarely to sell). • Decide whether you are investing • Profit is profit only when it is in your in an IPO or in a company. If as an bank (and not in your register or IPO, then exit on listing date. If as a excel sheet) in a way that a bird in company, then remain invested as hand is better than two at the bush. you would in a listed stock. • Remember, you cannot maximise • In any case, invest only if the the market’s profits so don’t be qualified institutional buyer (QIB) greedy. oversubscription is healthy. • Set a profit target or margin, and sell • Be familiar with ASBA, C-ASBA, and it once you meet it. Meroshare in order to invest. Mantra: 8 Mantra: 6 • Find and deal only with licensed/ registered intermediaries • IPOs are only from very good and profitable company with very little • Many unauthorised operators in risk of fraud. the market who will lure you with promises of high returns, and every • Also invest in Public Sector now and then vanish with your Undertaking (PSU) i.e., A state- money. owned enterprise. • Dealing with registered • Don’t get bothered by the listing intermediaries is safer and allows price; stay invested. recourse to regulatory action. • Invest in mutual funds, but select the • Visit SEBO’N website to know about right fund and scheme licensed intermediaries (stock brokers and merchant banks for PMS • In Nepal, mutual funds are service providers) before investing dominated by small investors. in secondary market. • Mutual funds are a better vehicle Mantra: 9 for a small investor. • There are too many mutual funds, • Let not greed make you an easy prey! too many schemes; select the right one. • Many scamsters are roaming around, to exploit your greed. • Monitor the periodic NAV constantly, • Most scams rob small investors. the higher is the NAV the better is position of you investment is. • Be careful about the entity seeking your money.
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• Invest in those securities registered in Mantra: 13 the SEBON • Go through the grading/rating Mantra: 10 provided by credit rating company • Beware of the media, especially but don’t over-depend upon the stock-specific advice based ‘comfort’ factors like on exaggerated analysis on on-line • IPO Grading media and electronic media • Make sure that the company has • Too many “saints” in the capital independent directors. market offering free advice, in • Don’t blindly take decisions based reality, many of these advisors have on accounts just because these are vested interests. audited, • Also beware of the get-rich schemes • High incidence of fraudulent being sold through SMS and emails. accounts and of mis-advertising of • Don’t get carried away by attractive financial results. Satyam case is a headlines, appealing visuals, catchy wake up call. messages. • Read qualifications and notes to the Mantra: 11 accounts. • Look out especially for unusual • Beware of fixed/guaranteed returns entries-related party transactions, schemes sundry debtors, subsidiaries’ • Any one who is offering a return accounts. much greater than the bank lending rate is suspicious. Mantra: 14 • Remember plantation companies- • Cheap shares are not necessarily promised huge returns worth buying • Beware of the grey market premia • Do not chase price, chase value. • These are artificial and normally • Price can be low because the created by the promoter himself. company in fact is not doing well (but hype over the company/sector Mantra: 12 may induce you). • Don’t get overwhelmed by sectoral • Worse, the price can be low specific frenzies. because the face value has been • Remember, all companies in a split. sector are not good. Each sector will • Consider whether there is split of have some very good companies, share provision. some reasonably good companies • Keep in mind that you can exercise and many bad companies. right renounce i.e., give your right • Be also wary about companies that for right share to other and obtain change their names to reflect the the right for right share from other in current sectoral fancy. order not to miss in making gain.
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Mantra: 15 Mantra: 16 • Be wary of companies where • Be honest and patient promoters issue shares/warrants to • Be patient and honest, Honest themselves. to yourself as only then you can • Preferential allotments to promoters demand honesty. are almost always made for the • Need to form/join strong investor benefit of the promoters only. (The associations and fight for our rights. fair route should be rights issue). • Keep yourself IT-friendly, as • Don’t be fooled by Corporate investment in not possible without it Governance Awards/CSR these days. • There is a high incidence of fraudulent companies upping their CG and CSR activities.
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Chapter 11 issuer company/group companies. :: Don’t expect the price of the shares DO’S & DON’TS : Primary Market of the issuer company to necessarily DO’s go up upon listing, and forever. Read the Prospectus/Debenture DO’S & DON’TS : Secondary Market Indenture/Abridged Prospectus DO’s carefully, with special attention to: 33 Before investing, please check about the credentials of the company, 33 Risk factors its management, fundamentals 33 Background of promoters and recent announcements made by them and other disclosures 33 Company history made under various regulations. 33 Outstanding litigations and defaults Corporate governance practices 33 Financial statements of the company. The sources of 33 Object of the issue information are the websites of companies, databases of data 33 Basis of Issue price vendors, business newspapers and 33 Paid-up capital magazines etc. 33 Industry-specific 33 Adopt trading/investment strategies commensurate with your risk- 33 Past financial data and financial bearing capacity as all investments projection carry different degree of risk, the 33 Instructions for making an degree of which varies according application to the investment strategy adopted. 33 In case of any doubts/problems, 33 Assess the risk-return profile of the contact the compliance officer investment as well as the liquidity named in the offer document. and safety aspects before making your investment decision. 33 In case you do not receive, within due period, the credit to demat 33 Transact only through SEBON- account or refund of application recognised stock exchanges. money, lodge a complaint with 33 Deal only through SEBON-registered the compliance officer of the brokers/sub-brokers. issuer company and with the issue 33 Read carefully and complete all manager. required formalities for opening an account with the broker (Client DON’Ts registration, Client-Trade Member agreement etc). :: Don’t be influenced by any implicit/ 33 Sign the “Know Your Client” explicit promise made by the issuer Agreement. or any one else. 33 Give clear and unambiguous : : Don’t invest only based on the instructions to your broker/sub- prevailing bull run of the market broker/DP. index or of scrips of other companies 33 Insist on a contract note for each in the same industry or scrips of the
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transaction and verify details in 33 Check your tax paid receipt the contract note, immediately annually on receipt. If in doubt, crosscheck DON’Ts details of your trade available :: Don’t forget to take account of the with the details on the exchange’s potential risks that are involved in website. any investment. 33 Pay the required margins in the :: Don’t undertake off-market prescribed time. transactions. 33 Deliver the shares/depository slip in :: Don’t deal with unregistered case of sale and pay the money intermediaries. in case of purchase within the : prescribed time. : Don’t fall prey to promises of unrealistic returns or guaranteed 33 Pay the brokerage/payments/ returns. margins etc. to an authorised : person only. : Don’t invest on the basis of hearsays, rumors and tips. 33 Diversify & find the right time to buy : and sell. : Don’t be influenced into buying into fundamentally unsound companies 33 Invest with long horizon-Short-term based on sudden spurts in trading investments in the securities market volumes or prices or favourable can result in big losses, and losses articles/stories in the media. become less and less frequent, : the longer the time horizon of the : Don’t follow the herd and don’t investment. play on momentum. : 33 Scrutinise both the transactions and : Don’t blindly follow investment the holding statements that you advice given on TV channels/ receive from your DP. websites/SMS and online medias. : 33 Handle Delivery Instruction Slips (DIS) : Don’t invest under peer pressure or Book issued by the DP carefully. blindly imitate investment decisions Insist that the DIS numbers are pre- of others who may have profited printed and your account number from their investment decisions. (Client ID) is pre-stamped. :: Don’t try to time the market. 33 In case you are not transacting :: Don’t get misled by companies frequently, make use of the freezing facility provided for in your demat account. 33 Keep copies of all investment documents. Ask all relevant questions and clear your doubts before transacting. 33 Invest based on fundamental and technical analysis as for as possible
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showing approvals/registrations be signed by the broker before from Government agencies as the commencing operations. approvals could be for certain other 33 Insist on a bill for every settlement. purposes. 33 Insist on periodical statement of :: Don’t get carried away with accounts. advertisements about the financial 33 Issue account payee cheques/ performance of companies. drafts only or use IPS in the trade :: Don’t blindly follow media reports name of the broker. on corporate developments, as 33 Ensure receipt of payment/deliveries some of these could be misleading. within 72 hours (T+3) of payout. :: Don’t show irrational exuberance as 33 In case of disputes, with broker file there is limit of everything. written complaint to intermediary/ :: Don’t get misled by guarantees stock exchange/SEBON within a of repayment of your investments reasonable time. (and returns) through post-dated 33 In case of disputes with the branch cheques. broker, inform the main broker :: Don’t hesitate to approach the immediately. proper authorities for redressal 33 Familiarise yourself with the rules, (SEBON, NEPSE, CDS ect) of your regulations and circulars issued by doubts/grievances. stock exchanges/CDSC/SEBON. :: Don’t leave signed blank Delivery 33 Keep track of your portfolio in your Instruction Slips (DIS) of your demat demat account on a regular basis. account in the open. 33 Ensure that you have money before :: Don’t give signed blank DIS to your you buy. DP or to your broker. 33 Ensure that you are holding securities DO’S & DON’TS: Dealing with before you place an order. Stockbrokers DON’TS DO’S :: Don’t deal with unregistered 33 Deal only with SEBON licensed/ brokers/branches-brokers or other registered brokers/broker branch unregistered intermediaries. offices and verify that the broker/ : broker branches have a valid SEBON : Don’t execute any document registration certificate. with any intermediary without fully understanding its terms and 33 Submit your detailed KYC as conditions. required by the securities laws. :: Don’t leave the custody of your 33 State clearly who will be placing Demat Transaction Slip (DIS) book in orders on your behalf and give clear the hands of any broker/sub-broker. and unambiguous instructions to your broker. :: Don’t forgo obtaining all documents 33 Insist on client registration form to of transactions even if the broker is well known to you.
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Chapter 12 to the following, the areas listed below are generally looked into by the CRAs Frequently Asked Questions (FAQ) while arriving at an IPO grade FAQ : Primary Market –– Business Prospects and Competitive Whom should an investor approach Position if there are any problems with the (a) Industry Prospects disclosures? (b) Company Prospects In case a person has any information about the issuer or its directors or any –– Financial Position other aspect of the company which is –– Management Quality material but has not been disclosed or –– Corporate Governance Practices some information has been disclosed incorrectly, he can notify SEBON about –– Compliance and Litigation History the same. –– New Projects—Risks and Prospects Is Grading Optional? Does IPO grading consider the price IPO grading is mandatory. Any issuer at which the shares will be offered in who wishes to offer shares through an the IPO? IPO is required to obtain a grade for his IPO. No. IPO grading is done without taking into account the price at which the Who is Authorised to Award the IPO Grades? security will be offered in the IPO. Since IPO grading does not consider the issue IPO grades are awarded by the SEBON- price, the investor needs to make an registered CRAs: independent judgment regarding the What are the factors that are price at which to bid for the shares evaluated by the CRA to assess offered through the IPO, irrespective of the fundamentals of the IPO while the IPO grade. arriving at the grade? The IPO grading process is expected Does an IPO grade, which to take into account the prospects indicates ‘above average or strong of the industry in which the company fundamentals’ mean high safety? operates, the competitive strengths of An IPO grade is not a suggestion or the company that would allow it to recommendation as to whether one address the risks inherent in its business should subscribe to the IPO or not. IPO and capitalise on the opportunities grade needs to be read together with available, as well as the company’s the disclosures made in the prospectus financial position. including the risk factors as well as the price at which the shares are offered in While the actual factors considered for the issue. grading may not be identical or limited
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Empirical data now clearly shows that i. Small Investor : Investors investing a high graded IPO may not provide below Rs.50,000 in an IPO. positive returns and vice versa. ii. Big Investor : Investors investing At What Stage is an Issue Required to above Rs.50,0000 in an IPO. Obtain the IPO Grade? Reservation in IPO IPO grading can be obtained either before filing the draft offer documents SEBON guidelines provide that an issuer making an issue to public can allot with SEBO or thereafter. However, the shares on a firm basis to some categories Prospectus must contain the grade as specified below: given to the IPO. i. To the locals of project affected Can the Issuer Reject an IPO Grade? area (at most 10%)
IPO grade/s cannot be rejected. ii. Mutual Funds (5% at most) Irrespective of whether the issuer finds the grade given by the CRA acceptable or iii. Employees of the issuing company not, the grade has to be disclosed in the (5% at most) offer document/issue advertisements. Is it Compulsory for the Investors to However, the issuer has the option of have a Dmat Account? approaching another CRA. In such an event too, all grades obtained for the All applications in public issues are to IPO will have to be disclosed. made compulsorily in the demat mode. Investor should open a demat account What is the Roll of SEBON in the IPO in case he wishes to apply for shares in Grading Exercise? an IPO/FPO. SEBON does not play any role in Is it Compulsory for an Investor to the assessment made by the CRA. have a Pan No.to Apply in An IPO/ The grading is intended to be an FPO? independent opinion of the CRAs Yes. It is compulsory to have a PAN to licensed by SEBON. apply above Rs.10 lakhs and has to Who Bears the Cost of the IPO be disclosed in the application form. Grading Process? (Photocopy of the PAN is no longer required to be attached with the The company making the IPO or issuing application form). shares is required to bear the expenses How does one know if he has been incurred for grading its IPO. allotted any shares?
What is the categorisation of The issue manager is required to make Investors? available the list of the allotees. Issue manager normally puts the allotees list Investors are classified under the in its website where investors can check following two categories-: whether they have been allotted or not.
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How long does it take after the issue What is Systematic Risk? for the shares to get listed? Systematic risk is most simply defined The listing on the stock exchanges is as the inherent risk an investor takes done within 7 days from the finalisation by having money invested into a of the basis of allotment. specific asset class. It is a risk that can be managed through strategies like What is Book Building? asset allocation and diversification, but Book Building means a process by which the only way that it can be eliminated a demand for the securities proposed entirely is to not be invested in the to be issued is elicited and built up and market. the price for the securities is assessed Put another way systematic risk is on the basis of the bids obtained. The the opportunity cost associated with regulation is under the drafting process. choosing one type of investment over Book building is a process of price another. The investing mantra “stocks discovery. The applicants bid for the beat bonds; bonds beat cash” reflects shares quoting the price and the quantity the concept of systematic risk and that they would like to bid at. The bids associated reward. There is potentially have to be made within the price band a higher reward for investing in stocks, specified by the issuer. Lower price is but also a higher opportunity cost. known as floor price and higher price Systematic risk in the market deals with is known as cap within the price band. macroeconomic, or general economic, Retail investors also have the option of factors. These include things like interest not bidding at a particular price but rates, inflation, and unemployment. rather using the ‘cut-off’ option. After Macroeconomic features look at the the bidding process is complete, the economy as a whole as opposed to a ‘cut-off’ price i.e. the final issue price is specific industry (such as technology arrived at by the issuer depending upon stocks or utility stocks). the bids received at various prices. Though an issuer can stipulate the final Like many things, the best way price to be any price including the to understand systematic risk is highest price of the price band in case to understand unsystematic risk. the entire quantity of shares proposed to Unsystematic risk is related to a specific be sold are bid for at that price, he can asset class or even a group of securities also choose any lower price point within within an asset class. For example, there the band. All applicants who have bid are times when a specific stock sector at or above the cut off price are then like industrials is declining while another, eligible for allotment and are allotted like technology, may be advancing. shares at the same cut off price even Likewise, different asset classes like if they had bid at a higher price (Dutch stocks and 10-year Treasury bonds auction process). The basis of allotment tend to move in different directions. is then finalised and allotment/refund is Unsystematic risk usually lies in company- undertaken. specific or sector-specific concerns.
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FAQ : Secondary Market Is there any provision where an investor can get faster delivery of What is the process of trading? shares in his account? Step 1. Investor / trader decides to The investors/clients can get direct trade delivery of shares in their beneficiary Step 2. Places order with a broker to buy accounts. To avail this facility, you / sell the required quantity of respective have to give details of your beneficiary securities account and the DP-ID of your DP to your broker along with the Standing Step 3. Best priced order matches Instructions for ‘Delivery-In’ to your based on price-time priority Depository Participant for accepting Step 4. Order execution electronically shares in your beneficiary account. communicated to the broker’s terminal Given these details, the Clearing Corporation/Clearing House shall send Step 5. Trade confirmation slip issued to pay out instructions to the depositories the investor / trader by the broker so that you receive pay out of securities directly into your beneficiary account. Step 6. Within 24 hours of trade execution, contract note is issued to the Are all the investors mandated to investor / trader by the broker comply with PAN requirement?
Step 7. Pay-in of funds and securities No, in primary market investors investing before T+3 day above Rs.10 lakhs and in secondary investors investing above Rs.5 lakh for Step 8. Pay-out of funds and securities single transaction require the PAN No. on T+3 day What is Trade for Trade Segment? In case of short or bad delivery of funds / securities, the exchange orders In a Trade for Trade segment, settlement for an auction to settle the delivery. If of trades is done on the basis of gross the shares could not be bought in the obligations for the day. No netting is auction, the transaction is closed out as allowed and every trade is being settled per NEPSE rule. separately. In case of purchase of shares, when What is auction? does an investor have to make payment to the broker? The stock exchange purchases the requisite quantity in the Auction Market It is advisable to make payment by and gives them to the buying trading way of account payee cheque in the member. The shortages are met through name of the broker/branch office only. auction process and the difference in A proper receipt should be collected price indicated in contract note and from the intermediary. You should price received through auction is paid receive payment for securities within 72 by member to the exchange, which is hours of declaration of pay-out by the then liable to be recovered from the respective stock exchange. client.
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What is Margin Trading Facility? Factors that should be taken into account before investing in securities Margin Trading is trading with borrowed funds/securities. It is essentially a An investor must have account trading leveraging mechanism which enables in securities market investors to take exposure in the market Beneficial owner Account (B.O. over and above what is possible with account)/Demat Account: It is an their own resources. SEBON has been account opened with a depository prescribing eligibility conditions and participant in the name of client for procedural details for allowing the the purpose of holding and transferring Margin Trading Facility from time to time. securities. Corporate brokers with net worth Trading Account: An account which is of at least Rs. 5 crore are eligible for opened by the broker in the name of the providing Margin trading facility to their respective investor for the maintenance clients subject to their entering into of transactions executed while buying an agreement to that effect. Before and selling of securities. providing margin trading facility to a client, the member and the client have Client Account/Bank Account: A bank been mandated to sign an agreement account which is in the name of the for this purpose in the format specified respective client and is used for debiting by SEBON. It has also been specified or crediting money for trading in the that the client shall not avail the facility securities market. from more than one broker at any time. Following factors should also be The facility of margin trading is available considered before investing in only for group of securities as prescribed securities: by NEPSE. i. whether there is a regulatory For providing the margin trading facility, framework in place in respect of the a broker may use his own funds or borrow security and you are protected in from commercial banks. A broker is not case of any eventuality; allowed to borrow funds from any other ii. whether the offer of the security is source. in compliance with the due process SEBON’S Role in the Secondary of law; Market iii. whether the security has any counter party risk; SEBON is the regulatory authority of securities markets and commodity iv. whether the security can be markets and has the responsibility to liquidated to cash easily so that you protect the interests of the investors and can meet your liquidity needs; to promote the development of, and v. whether the security generates to regulate, the securities market and returns compatible with its risk; and for matters connected therewith and incidental thereto. vi. whether the security fits into your investment portfolio and meets your
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investment goals (diversification, The brokers/branches are the investor’s investment horizon, regularity of link to the stock exchange. They are income, growth opportunities, the intermediaries in the market, under the quality of the issuer, etc.). regulatory discipline of SEBON/the stock exchange. They enter into transactions vii. One can convert a security to cash in securities on the investor’s behalf. if it is listed and traded actively on An investor’s relationship with them is stock exchanges. One can sell governed by the terms set out in the securities on an exchange and get client- broker agreement. cash as per the settlement cycle of the exchange. Since transactions on Besides, the stock exchanges offer a stock exchanges enjoy settlement ready market for the securities. Larger guarantee, one will invariably get number of buyers and sellers available cash in time. If one does not get at a stock exchange ensures liquidity to cash for whatsoever reason, there is the investors. an institutional arrangement to settle the claims. However, all securities Moreover, when one deals through are not listed on exchanges and an exchange, the investor gets the not all listed securities are actively best price prevailing at that time for traded. If liquidity is of paramount the trade and the right to receive the importance, one should look at the money or securities on time. history of trading of that particular The other benefit of trading on an security. exchange is that an investor does viii. It is advisable to trade only through not have to take any counterparty a stock exchange. Stock exchange risk which is assumed by a clearing lists securities and provides investors corporation. If an investor were to deal an opportunity to trade in the (buy or sell) directly with another person, listed securities. It ensures certain he is exposed to the counter party compliances and disclosures from risk, i.e. the risk of nonperformance by companies in the investor’s interest. that party. However, when one deals It guarantees settlement of trades through a stock exchange, this counter executed on behalf of the investors party risk is removed due to trade/ and provides the protection if the settlement guarantee offered by the broker becomes a defaulter. stock exchange mechanism though NEPSE does not have the settlement Any trade in securities outside Guarantee Fond yet. stock exchanges other than spot transactions is not backed by ix. Investor also has several protection regulatory framework of exchanges mechanisms against defaults by or SEBON. Hence, an investor does the broker. Finally, an investor has not get any protection if he trades an access to the investor grievance outside an exchange. redressal mechanism of the stock exchanges.
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FAQ-Mutual Fund (MF) and CIS low NAV. Investors should understand that in case of mutual funds schemes, Mutual Fund lower or higher NAVs of similar type An investor can either select an existing schemes of different mutual funds have scheme of a mutual fund or invest in a no relevance. At the entry point for New Fund Offer of a mutual fund. the investor in an existing scheme, the NAV reflects the present value of the How to choose a scheme from a underlying assets, and a higher NAV in number of schemes available? fact shows a comparative high quality of assets. An investor should first define his investment objectives, for example, What is the Net Asset Value (NAV) of short-term returns or long term capital a scheme? appreciation. Accordingly, suitable schemes matching the investment The performance of a particular objective offered by various mutual scheme of a mutual fund is denoted by funds should be identified. Net Asset Value (NAV).
One must study the offer document of Mutual funds invest the monies the mutual fund scheme carefully. The collected in a scheme from the investors past track record of performance of in the securities markets. The NAV is the scheme or other schemes of the the market value of the securities held same mutual fund is an important input in the decision making. Though past by the scheme. Since market value of performance of a scheme is not an securities changes every day, NAV of a indicator of its future performance and scheme also varies daily. The NAV per good performance in the past may or unit is the market value of securities of may not be sustained in the future, this is a scheme divided by the total number one of the important factors for making of units of the scheme on any particular the investment decision. One may also date. For example, if the market value compare the performance with other of securities of a mutual fund scheme schemes having similar investment is Rs. 200 lakh and the mutual fund has objectives. Special attention should issued 10 lakh units, the NAV per unit be paid to the scheme highlights, of the scheme would be Rs.20. NAV is scheme specific risk factors, details required to be disclosed by the mutual of fees, expenses and load and past performance, apart from the investment funds on a daily basis for open ended objectives and policies and comparing schemes and on a weekly basis for it with other schemes. close-ended schemes. If schemes in the same category of How does one know the performance different mutual funds are available, of a mutual fund scheme? should one choose a scheme with a The performance of a scheme is lower NAV? reflected in its net asset value (NAV). Many investors are tempted to invest NAVs of mutual fund schemes are in schemes that are available at a published in the newspapers. NAVs are
67 Investors’ Handbook also available on the websites of the undertaken in custody of the manager respective fund manager. and so mobilised that various persons or bodies that have participation in it. Mutual funds are also required to publish their performance in weekly, monthly Schemes offered by Citizen Investment and half-yearly and yearly basis. From Trust (CIT) is example of a CIS, under these statements, an investor can also open-end scheme. look into other details like percentage FAQ : Depository & DP Services of expenses of total assets as these have an affect on the yield. What is a Depository?
Investors should study these reports A depository is an organisation which and keep themselves informed about holds securities (like shares, debentures, the performance of various schemes bonds, government securities, mutual of different mutual funds. They can fund units etc.) of investors in electronic form at the request of the investors also compare the performance of the through a registered Depository schemes in which they have invested Participant (DP). It also provides services with similar schemes of the other mutual related to the transactions in securities. funds as also with the benchmarks like NEPSE Index. How is a depository similar to a bank? If a Mutual Fund Scheme is wound up, what happens to the money invested? It can be compared with a bank, which holds the funds for depositors. In case of winding up of a scheme, According to the Securities Related the mutual fund pays a sum based Act, 2006 40”Depository” means a on prevailing NAV after adjustment of bank or financial institution that expenses. makes agreement with the scheme manager and thereby undertakes the What is a Collective Investment responsibility of providing custodial Scheme? services such as safely holding and operating the assets of any collective According to the Securities Related Act, investment scheme. 2006 39”Collective investment scheme” Depositories are required to be means such an investment fund, unit registered with SEBON. At present, trust or similar other participatory fund Central Depository and Clearing Limited management programme as specified (CDSC) is only one Depository registered by the Board, from time to time as may with SEBON. be operated by a scheme manager in accordance with this Act in order Who is a Depository Participant? to distribute returns, to the participants A depository interfaces with the investors of the concerned programme through its agents called Depository proportionately, accrued from the Participants (DPs). If you want to avail efficient investment service on saving of the services offered by a depository, investment amount which has been 39 Section 1(w) of Securities Related Act, 2006 40 sectoion 1(d) of Securities Related Act, 2006
68 Investors’ Handbook you need to open an account with a of bonus/ split/ consolidation/ DP. This is similar to opening an account merger etc. with any branch of a bank in order to • Holding investments in equity utilise the bank’s services. and debt instruments in a single account What is Dematerialisation of Securities? What is the process of convert physical shares into electronic Dematerialisation is the process by holding (dematerialise the which physical share certificates held securities) by an investor are converted into an equivalent number of securities in In order to dematerialise physical electronic form and credited into the (paper) securities, one has to fill in a investor’s account. DRF (Demat Request Form) which is available with the DP and submit the What are the benefits of same along with physical certificates Dematerialisation? that are to be dematerialised. Separate • A safe, convenient way to hold DRF has to be filled for each ISIN. The securities Immediate transfer of complete process of dematerialisation securities is outlined below: • No stamp duty on transfer of • Surrender certificates for securities dematerialisation to the DP. • Elimination of risks associated with • DP intimates to the Depository physical certificates such as bad regarding the request for delivery, fake securities, delays, dematerialisation through the thefts etc. system. • Reduction in paperwork involved in transfer of securities • DP submits the certificates to the RTA of the Company. • Reduction in transaction cost • RTA confirms the dematerialisation • No odd lot problem, even one share can be sold request from the depository. • Nomination facility • After dematerialising the • Change in address recorded certificates, the RTA updates with DP gets registered with all the accounts and informs the companies in which investor depository regarding completion holds securities electronically of dematerialisation. eliminating the need to • Depository updates its accounts correspond with each of them and informs the DP. separately • DP updates the demat account • Transmission of securities is done by of the investor. DP eliminating correspondence with companies What is an ISIN? • Automatic credit into demat ISIN (International Securities account of shares, arising out- Identification Number) is a unique
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12 digit alpha-numeric identification Can different securities issued by number allotted for each security (e.g. the same issuer have same ISIN? INE383C01018). ISIN is not assigned to a company; in fact, for even equity shares No, different securities issued by the issued by a company of different types same issuer will have different ISIN code. like equity-fully paid up, equity-partly What are the services provided by a paid up, equity with differential voting / DP to the investors? dividend rights issued by the same issuer will have different ISINs. DP provides the following services to the investors: To open the demat account, Do Dematerialised shares have Dematerialization of securities, distinctive number? Rematerialization of securities, To Unlike physical shares, dematerialised maintain record of securities in the shares do not have any distinctive electronic form, Settlement trades by numbers. These shares are fungible, transferring/receiving the securities which means that all the holdings of from/in BO accounts, Settlement of a particular security are identical and off-market trades that is occurred interchangeable. between BOs outside NEPSE, To provide electronic credit of securities allotted Can odd lot shares be by issuers during IPOs, To deposit the dematerialised? non-financial corporate benefits (such as: bonus, right shares, etc.) issued by Yes. Odd lot share certificates can also issuers in the demat account of BOs, To be dematerialised. facilitate in pledging of dematerialised Is it compulsory for every investor securities. to open a beneficial owner (BO) Which software does CDSC use account to trade in the capital for depository system? Who is the markets? provider of that software?
Though trading in physical format is CDSC uses three different software for permitted, because of the inherent depository system. They are as follows: a. strengths of the electronic mode, over Central Depository Accounting System 80% settlements presently takes place in (CDAS) b. Clearing and Settlement the electronic demat mode. For better (CNS) c. DP Secure (DPS) The above prices of shares to be bought or sold mentioned software is provided by and for the convenience of operations, CMC Limited. These software are also an investor should have a depository been used by Central Depository account. Services (India) Limited (CDSL) and Moreover, SEBON now allows issue of Central Depository Bangladesh Limited securities through an IPO/FPO only in (CDBL). CDSL has been providing the demat format, and as such investors various advices and technical support wishing to participate in the primary to CDSC. 18. What kind of company market should have a depository is CDSL? CDSL is sponsored by the account. Bombay Stock Exchange Limited (BSE)
70 Investors’ Handbook and a cross-section of leading Indian The data in CDSC system is very & foreign banks. While 36.61% of the significant. CDSC implies the proper equity capital of CDSL is held by BSE, precautions to secure the processed more than 62% is held by leading banks. and stored data. This system safeguards CDSL facilitates the holding of securities the data from unauthorised access, that are listed in secondary market of misuse and unpredictable loss. CDSC India in electronic form and enables uses following back up to secure the securities transactions to be processed data: (i) Local Back Up, (ii) Remote by book entry through a DP. Back Up (iii) Disaster Recovery Site Additionally, DP also maintains Back Up Which software does CDSC use for each day transaction. for depository system? Who is the provider of that software? With the CDSC’s centralised database, the issuer can get upto-the-moment CDSC uses three different software for information on any changes in its depository system. They are as follows: holding pattern of a security. Thus, (i) Central Depository Accounting the company effectively monitors System (CDAS) (ii) Clearing and the change in holding and is alert to Settlement (CNS) c.DP Secure (DPS) The any undue threat. Issuers can save above mentioned software is provided substantial time of managing the by CMC Limited. These software are share department. It reduces the also been used by Central Depository work load of the department and Services (India) Limited (CDSL) and allows the management to use the Central Depository Bangladesh Limited excess manpower in other productive (CDBL). CDSL has been providing departments. New technology various advices and technical support like e-Voting system for corporate to CDSC. improves transparency and corporate What kind of company is CDSL? governance standards and also helps in reducing the administrative CDSL is sponsored by the Bombay Stock cost associated with postal ballot Exchange Limited (BSE) and a cross- while facilitating declaration of results section of leading Indian & foreign immediately after the close of the banks. While 36.61% of the equity capital voting. Issuers can hugely benefit from of CDSL is held by BSE, more than 62% is such advanced technology which is held by leading banks. CDSL facilitates possible to achieve through a central the holding of securities that are listed in depository company. secondary market of India in electronic form and enables securities transactions Can a demat account be directly to be processed by book entry through opened with CDSC? a DP. A demat account cannot be directly What precaution does CDSC apply opened with CDSC. The demat account for the security of data in the system? has to be opened only through a DP
71 Investors’ Handbook of CDSC. 22. Can an investor, already the demat account of investor held having a demat account with CDSC; with CDSC. Hence, the investor does open another account? An investor, not have to wait to receive the share already having demat account with certificate from the issuers. This aids CDSC; can open another demat to list the securities immediately in account. the stock market. Easy in portfolio management: Investors receive the What are the benefits of opening a statement of their account periodically demat account for investors? which helps them in managing portfolio and receiving the detail information A demat account has become a about their investment. Solve the necessity for all categories of investors problem of address change: Investors due to numerous following benefits: do not have to inform their individual Eliminates risk associated with physical issuers about the change of address certificates: In demat system, the through correspondence separately. ownership of securities are held Investors can register the change in electronic form. Hence, the risk through their DP only. DP updates and associated with physical certificates informs the change to all issuers of the such as loss during carrying of securities held by an investor through certificates from one place to another, the depository system. Easy in pledge worn out, theft, cost incurred while of securities: In case, the dematerialised making the duplication of certificates, securities are pledged, such account etc. are eliminated. Immediate transfer can be locked in. While pledging the securities, the securities do not need of securities: When an investor buys to get transferred from the pledgor’s securities from the market, the securities account to pledgee’s account. 24. DO are immediately credited into his/her all DPs have access to account details account along with the ownership. The of all BOs of CDSC? A DP does not have securities do not have to be sent to access to account details of BO of any RTA for transfer of ownership in demat other DP except that account only system. Moreover, the investors do not which it has rendered the depository have to wait for a long time period to services. get registered in the book of RTA as the legal owner of the securities. Immediate How can an investor avail the settlement cycle: The transactions services of the Depository? of securities are settled within T+3 To avail the services of a depository, an settlement cycle in electronic form. At investor is required to open a Beneficial the last day of the settlement cycle, the Owner (BO) account with a Depository securities are credited into the demat Participant (DP) of any depository. account of the buyer resulting the immediate settlement cycle. Immediate How should an investor select the distribution of shares allotted in IPO: right DP?
The shares allotted in IPO can be The most important factors are: easily and immediately credited in • Credibility of the DP (reputation,
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antecedents, experience of other Bank account details are necessary for investors, infrastructure) the protection of interest of the investors. • Various charges that are levied When any cash or non-cash corporate by the DP benefits such as rights or bonus or dividend is announced for a particular • Location of the DP office (proximity scrip, the depositories provide to the to your office/residence, business concerned company/ RTA, the details hours) of the investors and their electronic • Other services offered by the holdings as on record / book closure DP like banking, broking etc. to date for reckoning the entitlement of ensure one-window dealing and corporate benefit. The disbursement convenience. of cash benefits such as dividend is How is a Depository Account credited directly by the company/ opened? RTA to the beneficiary owner through the ECS (Electronic Clearing Service) The DP will provide an account opening facility wherever available or by issuing form. This form must be supported by warrants on which the bank account copies of any one of the approved details are printed for the towns where documents to serve as proof of identity the ECS facility is not available. The (POI) and proof of address (POA) as printing of the bank account number specified by SEBON. PAN card in original on the dividend warrant prevents any at the time of opening of account is not fraudulent misuse. mandatory. Can multiple account be opened The investor should carry all documents by a person? in original for verification by the DP. Yes, an investor can open not more The investor would also be required than two accounts in the same name to sign an agreement with the DP in a from different DP. depository prescribed standard format, which details the rights and duties of the Can an investor operate joint investor and the DP. The DP is required account on “either or survivor” basis to provide the investor with a copy of just like a bank account? this agreement and also the detailed No. The demat account cannot be schedule of charges. operated on “either or survivor” basis like a bank account. The DP will open the account and give an account number, which is called the Is addition or deletion of names of BO ID (Beneficiary Owner Identification accountholders permitted after Number). opening the account? Why is an investor required to give No. The names of the account holders his bank account details at the time of a BO account cannot be changed. of account opening? If any change has to be effected by addition or deletion, a new account
73 Investors’ Handbook has to be opened in the desired holding What should be done if the Address pattern (names) and the securities then of the investor changes? need to be transferred to the newly opened account, and the old account The investor should immediately inform may be closed. his DP of any change in his address, who in turn will update the record with Does the investor have to keep any the depository. There is no need any minimum balance of securities in his more to inform all the companies/RTAs account? individually. No. What is the procedure for buying or selling dematerialised securities? DP Charges/Fees The procedure for buying and selling The investors are required to pay only dematerialised securities is almost similar the following charges: to the procedure for buying and selling • Transactions fees (only for sell physical securities. The only difference transactions) : Rs. 25 for each lies in the process of delivery (in case of transaction sale) and receipt (in case of purchase) • Account opening: Rs; 50 of securities. • Annual account maintenance In case of purchase: charges: Rs.100 • The broker will receive the Also charges some fees for securities in his account on the dematerialization, family transfer, death payout day. transfer, Mero share account, freeze/ fnfreeze and issue of DIS: • The broker will give instruction to its DP to debit his account and Flexibility is provided by the depositories credit BO’s account. and SEBON to fix the above charges BO will give ‘Receipt Instruction’ to DP (The DP may revise the charges any time for receiving credit by filling appropriate but has to provide a 30 days’ notice to form. However, the BO can give all its account holders). standing instruction for credit to his account that will obviate the need of Can an investor change the details giving Receipt Instruction every time. of his Bank Account? In case of sale: Yes. The investor must immediately inform the DP regarding the change in BO will give delivery instruction through his bank account and corresponding a Delivery Instruction Slip (DIS) to DP change in MICR / IFSC code (as all to debit his account and credit the monetary benefits like dividends are broker’s account. Such instruction directly credited to the bank account/ should reach the DP’s office at least 24 bank account is printed on the hours before the pay-in, failing which warrants). the DP will accept the instruction only at the BO’s risk.
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What is Delivery Instruction Slip Are shares allotted in public issues (DIS)? What precautions should one credited directly in the electronic take with respect to the DIS? form?
A DIS is like a bank cheque book. To Yes. give the delivery of the sold shares, the investor needs to fill the DIS. The How does one know that the DP has following precautions should be taken: updated the account after each transaction? Obtain from DP the DIS booklet and ensure the DP issues an acknowledgment The DP provides to the investor a for the DIS booklet issued to the investor. Transaction Statement periodically, which gives details of current balances Ensure that DIS numbers are pre-printed. and various transactions made during Ensure that the investor’s account the period. If desired, the DP can number [Client ID] is pre-stamped on be asked to provide the Transaction each DIS sheet. Statement at intervals shorter than the stipulated ones, at a small cost. For joint accounts, all the joint holders need to sign the DIS before delivering it The depositories also provide an SMS to the broker. Alert facility whereby investors can Do not use loose DIS slips. receive alerts for debits to their demat accounts and for credits in respect Do not leave blank signed DIS with allotment under an IPO/FPO. The investor anyone (broker/ sub-broker, DP or any needs to provide his mobile number to other person). the depository for this purpose. Keep the DIS book safely. The DPs can provide the transaction If only one sale entry is made in the DIS statement in electronic form under slip, strike out the remaining space to digital signature subject to their entering prevent misuse by any one. into a legally enforceable arrangement with the BOs to this effect. The BO should personally fill all details in the DIS. What if there are any discrepancies in the statement of holdings? If the DIS booklet is lost / stolen / not traceable, the investor should inform the In case of any discrepancy in the DP immediately in writing. On receipt of statement of holdings, the investor such intimation, the DP will cancel the should contact his DP and in case of unused slips of the DIS booklet. discrepancies in corporate benefits, he should contact the company / Is it possible to give delivery instructions RTA. If the discrepancy is not resolved, to the DP over the internet? the investor should approach the Yes, now it is compulsory to send DIS concerned Depository. through internet with is called EDIS.
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Can one pledge Dematerialised Only the securities pledged are blocked securities? in the account of pledger in favour of the pledgee. The pledger would Yes. continue to receive all the corporate What should one do to pledge demat benefits. securities? What is lending and borrowing of The procedure to pledge demat securities? securities is as follows: If an investor required to deliver a • Both BOs, investor (pledger) and particular security does not readily the lender (pledgee) must have have that security, he can borrow the BO accounts with the same same from another person who is willing depository; to lend, as per the Securities Lending • The pledger will need to instruct and Borrowing Scheme. his DP to create a pledge by submitting the Pledge Request Can lending and borrowing be done Form. directly between two persons? • The pledgee will need to confirm the request through his DP. No. Lending and borrowing has to • Once this is done, securities are be done through an ‘Approved pledged. Intermediary’ registered with SEBON. The approved intermediary would borrow All financial transactions between the the securities for further lending to the pledger and the pledgee are handled borrower. Lenders of the securities and outside the depository system, as per borrowers of the securities are required the usual practice. to enter into separate agreements with What is the procedure for closure of the approved intermediary for lending pledge after repayment of the loan? and borrowing the securities. Lending and borrowing is effected through the After the repayment of loan, the pledger depository system. can request for a closure of the pledge by instructing the DP in a prescribed How does an investor lend the format. The pledgee, on receiving the securities lying in his account? payment, will instruct his DP accordingly Yes. The investor needs to enter into for the closure of the pledge. an agreement with an approved Can a pledger change the securities intermediary. After that, one can lend offered in a pledge? securities any time by submitting the lending instructions to the DP. Yes. If the pledgee agrees, the pledger can change the securities offered in a How does the investor get back the pledge. securities lent by him? Who receives the corporate benefits The intermediary may return the on the pledged securities? securities at any time or at the end of
76 Investors’ Handbook the agreed period of lending. The What is transmission of demat intermediary will return the securities securities? together with any benefits received during the period of the loan. Transmission is the process by which the securities of a deceased account How does one receive the corporate holder are transferred to the account benefits which accrue on the securities of his legal heir/nominee. Transmission during the period of lending? in the case of demat holdings is very convenient as the transmission Initially, the benefits are given to the formalities for all securities held in a intermediary. However, whenever the demat account can be completed by securities are returned / recalled, the submitting documents just to the DP, intermediary will need to return the whereas in case of physical securities, benefits to the lender. the legal heirs/nominees/surviving Who can nominate? joint holders have to independently correspond with each company of Nomination can be made only by which the securities are held. individuals holding beneficiary accounts either singly or jointly. Non-individuals In the event of death of the sole including society, trust, body corporate, holder, how should the successor karta of Hindu Undivided Family and claim the securities lying in the holders of power of attorney cannot demat account? nominate. The claimant should submit to the Who can be a nominee? concerned DP the Transmission Request Only an individual can be a nominee. Form (TRF) along with the following A nominee cannot be a society, trust, supporting documents body corporate, partnership firm, Karta 1. In case of death of sole holder of Hindu Undivided Family or a power of attorney holder. where the sole holder has appointed a nominee, a notarised Why is it important to nominate? copy of the death certificate.
Nomination is helpful in a smooth 2. In case of death of the sole holder, transmission of shares to the nominee where the sole holder has not upon the death of the BO. appointed a nominee, a notarised Can nomination once made be copy of the death certificate and changed? any one of Succession certificate or copy of the probated will or the The nomination once made can be Letter of Administration. changed at a later date by the BO. The DP will then transfer securities to the account of the claimant.
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Can electronic holdings be What should one do in case converted back into physical a company sends company certificates? objection?
Yes. This process is called When one receives a company rematerialisation. objection for transfer, he should proceed to get the errors/discrepancies If an investor wishes to get back his corrected. He may have to contact securities in the physical form, he will the transferor (the seller) either directly need to fill the RRF (Remat Request Form) or through your broker for rectification and request his DP for rematerialisation or replacement with good securities. of the specified securities in his account. Then one can resubmit the securities The process of rematerialisation is and the transfer deed to the company outlined below: for affecting the transfer. In case one is unable to get the errors rectified or get Investor makes a request for them replaced, he has recourse to the rematerialisation. seller and his broker through the stock exchange to get back the money. DP intimates the depository of the request. What is ASBA?
Depository confirms rematerialisation ASBA means “Application Supported request to the RTA. by Blocked amount”. ASBA is an application containing an authorisation RTA updates accounts and prints the to the investor’s bank to block in his share certificates. bank account an amount equivalent to the application money. The money Depository updates the accounts and remains in the bank. Upon finalisation of downloads the details to the DP. the basis of allotment, only the amount Registrar dispatches the certificates to equivalent to the allotment amount is the investor. debited to the bank account, and the rest is freed up. If the allotment is nil, then What procedure does a company the entire blocked application amount follow for transfer of securities? gets released.
On receipt of request for transfer, the Who can apply through the ASBA company proceeds to transfer the process? securities as per provisions of the law. All investors are allowed to apply In case they find some mistakes in through the ASBA process. transfer deed and cannot effect the transfer, the company returns back the What are the benefits for the investor securities giving details of the grounds applying through ASBA? under which the transfer could not be effected. This is known as company Applying through ASBA process has the following benefits for the investor: objection.
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(i) The investor need not pay the Is there any different treatment in application money by cheque. He allotment for ASBA and non-ASBA only issues an authorisation to his forms? bank to block the bank account to No. ASBA forms are treated at par with the extent of the application money. the non-ASBA forms (ii) The investor does not have to bother Who is a Portfolio Manager? about refunds, as in ASBA only that much money which is required for Any person who pursuant to a contract allotment of securities, is taken from or arrangement with a client, advises the bank account. or directs or undertakes on behalf of the client (whether as a discretionary (iii) The investor continues to earn interest portfolio manager or otherwise) the on the blocked money as the same management or administration of a remains in his bank account. portfolio of securities or the funds of the client, as the case may be is a portfolio (iv) The ASBA application form is much manager. In Nepal, merchant banks simpler. are allowed to serve PMS services as per merchant bank regulation. (v) The investor deals with a known intermediary i.e. his own bank. What is the difference between a discretionary portfolio manager Is it mandatory for investors to apply and a non- discretionary portfolio through ASBA only? manager?
Yes, it is mandatory. The discretionary portfolio manager individually and independently Where can one submit the ASBA manages the funds of each client in application forms? accordance with the needs of the client in a manner which does not partake At present, almost all the commercial character of a Mutual Fund, whereas banks and most of development the non-discretionary portfolio manager banks and finance companies are manages the funds in accordance with participating in the ASBA process. the directions of the client.
Can one use the existing application Visit https://cdsc.com.np/ form for public issues for applying frequentlyaskquestionFor more FAQ through ASBA? FAQ : Derivative Markets No. The application form for ASBA is different from the regular application What is a derivative? form for public issues. The ASBA Derivatives are financial contracts which application forms are available with the derive their value from movements in designated branches. the spot price of an underlying asset. For example, wheat farmers may wish
79 Investors’ Handbook to enter into a contract to sell their (b) a contract which derives its value harvest at a future date to eliminate the from the prices, or index of prices, risk of a change in prices by that date. of underlying securities; Such a transaction would take place How are derivatives categorised? through a forward or futures market. This market is the “derivatives market”, Derivatives are usually broadly and the prices of this market would categorised by the: be driven by the spot market price of wheat which is the “underlying”. The • relationship between the term “contracts” is often applied to underlying and the derivative denote the specific traded instrument, (e.g. forward, option, swap) whether it is a derivative contract in wheat, gold or equity shares. The world • type of underlying (e.g. over, derivatives are a key part of the equity derivatives, foreign financial system. The most important exchange derivatives, interest contract types are futures and options, rate derivatives, commodity and the most important underlying derivatives or credit derivatives) markets are equity, treasury bills, commodities, foreign exchange, real • market in which they trade (e.g., estate etc. exchange traded or over-the- The term ‘Derivative’ indicates that it counter) has no independent value, i.e. its value • pay-off profile (Some derivatives is entirely “derived” from the value of have non-linear payoff diagrams the underlying asset. The underlying due to embedded optionality) asset can be securities, commodities, bullion, currency, live stock or anything • There is no definitive rule for else. In other words, Derivative means distinguishing one from the other, a forward, future, option or any other so the distinction is mostly a matter hybrid contract of pre determined of custom. fixed duration, linked for the purpose of contract fulfillment to the value of a Why should an investor use specified real or financial asset or to an derivatives? index of securities. Derivatives are used by investors to: The term Derivative has been defined in • provide leverage or gearing, Securities Contracts (Regulations) Act, such that a small movement in as:- the underlying value can cause (a) a security derived from a a large difference in the value of debt instrument, share, loan, the derivative. Since the investor whether secured or unsecured, is required to pay a small fraction risk instrument or contract for of the value of the total contract differences or any other form of as margin, trading in futures is security; a leveraged activity since the
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investor is able to control the What are the downsides of total value of the contract with a derivatives? relatively small amount of margin. Thus the leverage enables the A major disadvantage of derivatives is investors to make a larger profit the risk of losing money. While derivatives (or loss) with a comparatively help increase profits and reduce risks, small amount of capital. they may also make an investor lose out on a lot of money or other assets. For • speculate and to make a profit if example, a cotton farmer enters into the value of the underlying asset a contract with a weaver. The cotton moves the way they expect (e.g. producer may agree on a fixed price to moves in a given direction, stays sell the cotton to the weaver on harvest in or out of a specified range, time. This ensures a fixed income and reaches a certain level) a sure customer for the cotton farmer. • hedge or mitigate risk in the On the other hand, the weaver is also underlying, by entering into a ensured of a supply of cotton. This derivative contract whose value agreement could be a disadvantage moves in the opposite direction when the price of cotton fluctuates. If to their underlying position and the price of cotton goes up, the farmer cancels part or all of it out would still have to sell the cotton at • obtain exposure to underlying the earlier agreed cost. This makes where it is not possible to trade the farmer lose out on the profit. Price in the underlying (e.g. weather fluctuations on the cotton could affect derivatives) the weaver too. If the price of cotton goes down, he still has to pay the high • create optionality where the cost that was agreed in the contract, value of the derivative is linked regardless of the decrease in cotton’s to a specific condition or event price or value. (e.g. the underlying reaching a specific price level) Investors must understand that What are the benefits of investing in investment in derivatives has an derivatives? element of risk and is generally not an appropriate avenue for someone of Derivatives facilitate the buying and limited resources/ limited investment selling of risk and many people consider and/or trading experience and low risk this to have a positive impact on the tolerance. An investor should therefore economic system. Although someone carefully consider whether such trading loses money while someone else gains is suitable for him or her in the light of his or money with a derivative, under normal her financial condition. An investor must circumstances, trading in derivatives accept that there can be no guarantee should not adversely affect the of profits or no exception from losses economic system because it is not zero while executing orders for purchase and / or sale of derivative contracts, sums in utility. Investors who trade in derivatives at the Exchange are advised to carefully read
81 Investors’ Handbook the Model Risk Disclosure Document no wheat will be available because and the details contained therein. of events unspecified by the contract, This document is given by the broker like the weather, or that one party will to his clients and must be read, the renege on the contract. Although a third implications understood and signed party, called a clearing house, insures a by the investor. The document clearly futures contract, not all derivatives are states the risks associated with trading insured against counterparty risk. in derivatives and advises investors to bear utmost caution before entering What is a forward contract? into the markets. In a forward contract, two parties agree What is hedging? to do a trade at some future date, at a stated price and quantity. No money Hedging is a technique that attempts to changes hands at the time the deal is reduce risk. It helps in reducing the risk signed. associated with exposures in underlying market by taking a counter- positions Why is forward contracting useful? in the futures market. For example, an investor who has purchased a portfolio Forward contracting is very valuable in of stocks may have a fear of adverse hedging and speculation. The classic market conditions in future which may hedging application would be that reduce the value of his portfolio. He of a wheat farmer forward -selling his can hedge against this risk by shorting harvest at a known price in order to the index which is correlated with his eliminate price risk. Conversely, a bread portfolio, say the Nifty 50 or the BSE factory may want to buy bread forward Sensex. In case the markets fall, he in order to assist production planning would make a profit by squaring off his without the risk of price fluctuations. If short Nifty 50/ BSE Sensex position. This a speculator has information or analysis profit would compensate for the loss he which forecasts an upturn in price, suffers in his portfolio as a result of the then he can go long on the forward fall in the markets. market instead of the cash market. The speculator would go long on the Hedging can be done by using forward, wait for the price to rise, and derivatives. Derivatives allow then take a reversing transaction transferring the risk associated with making a profit. the underlying asset from one party to another. For example, a wheat What are the problems of forward farmer and a miller could sign a futures markets? contract to exchange a specified amount of cash for a specified amount Forward markets worldwide are afflicted of wheat in the future. Both parties have by several problems: reduced a future risk: for the wheat a. lack of centralisation of trading, farmer, the uncertainty of the price, and for the miller, the availability of b. illiquidity, and wheat. However, there is still the risk that c. counterparty risk.
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The forward market is like the real estate settlement enables the settlements of market in that any two persons can obligations arising out of the future/ form contracts against each other. This option contract in cash. often makes them design terms of the deal which are very convenient in that What is the difference between specific situation for the specific parties, futures and forward contracts? but makes the contracts non-tradeable Futures markets were designed to if more participants are involved. Also solve all the three problems of forward the “phone market” here is unlike the markets. Futures markets are exactly centralisation of price discovery that like forward markets in terms of basic is obtained on an exchange, resulting economics. However, contracts are in an illiquid market place for forward standardised and trading is centralised markets. Counterparty risk in forward (on a stock exchange). There is no markets is a simple idea: when one of counterparty risk (thanks to the institution the two sides of the transaction chooses of a clearing corporation which to declare bankruptcy, the other suffers. becomes counterparty to both sides Forward markets have one basic issue: of each transaction and guarantees the larger the time period over which the trade). In futures markets, unlike the forward contract is open, the larger in forward markets, increasing the are the potential price movements, time to expiration does not increase and hence the larger is the counter- the counter party risk. Futures markets party risk. are highly liquid as compared to the Even when forward markets trade forward markets. standardised contracts, and hence What is an Option Contract? avoid the problem of illiquidity, the counterparty risk remains a very real Option contract is a type of derivatives problem. contract which gives the right, but not an obligation, to buy or sell the What is a Futures Contract? underlying at a stated date and at a A futures contract is a legally binding stated price. The buyer/holder of the agreement between two parties to option, purchases the right from the buy or sell an asset at a certain time seller/writer for a consideration which in the future at a certain price. Future is called the premium. While a buyer/ contracts are organised/standardised holder of an option pays the premium contracts in terms of quantity, quality and buys the right to exercise his option, (in case of commodities), delivery time the seller/writer of an option is the one and place for settlement on any date who receives the option premium and in future. The contract expires on a is therefore obliged to sell/buy the pre-specified date which is called the asset if the buyer exercises it on him. expiry date of the contract. On expiry, The underlying asset could include futures can be settled by delivery of securities, an index of prices of securities the underlying asset or cash. Cash etc.
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Options are of two types - Call and Put What are index future and index options: option contracts?
“Calls” give the buyer the right but not Futures contract based on an index the obligation to buy a given quantity i.e. the underlying asset is the index, of the underlying asset, at a given price are known as Index Futures Contracts. on or before a given future date. For instance, futures contracts on NIFTY Index and BSE-30 Index. These contracts “Puts” give the buyer the right, but not derive their value from the value of the the obligation to sell a given quantity of underlying index. underlying asset at a given price on or before a given future date. Similarly, option contracts, which are based on some index, are known as Further, Options are classified based Index Options Contracts. However, on when they can be exercised. The unlike Index Futures, the buyer of Index two most popular types are European Option Contracts has only the right or American. American options are but not the obligation to buy / sell the options contracts that can be exercised underlying index on expiry. Index Option at any time upto the expiration date. Contracts are generally European Style This request for exercise is submitted to options. the exchange, which randomly assigns the exercise request to the sellers of the An index in turn derives its value from the options, who are obligated to settle the prices of securities that constitute the terms of the contract within a specified index and is created to represent the time frame. European options are sentiments of the market as a whole or options that can be exercised only on of a particular sector of the economy. the expiration date. The price at which Indices that represent the whole market the option is to be exercised is called are broad based indices and those Strike price or Exercise price. that represent a particular sector are sectoral indices. As in the case of futures contracts, option contracts can also be settled by What are the benefits of trading in delivery of the underlying asset or cash. Index Futures compared to any However, unlike futures, cash settlement other security? in an option contract entails paying/ An investor can trade the ‘entire stock receiving the difference between the market’ by buying index futures instead strike price/exercise price and the spot of buying individual securities with the price of the underlying asset either at efficiency of a mutual fund. the time of expiry of the contract or at the time of exercise/ assignment of the The advantages of trading in Index Futures are: option contract.
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• The contracts are highly liquid What are Currency Futures? • Index Futures provide higher leverage than any other stocks Currency futures are contracts to buy or sell a specific underlying currency • It requires low initial capital at a specific time in the future, for a requirement specific price. Currency futures are • It has lower risk than buying and exchange-traded contracts and they holding stocks are standardised in terms of delivery • It is just as easy to trade the short date, amount and contract terms. side as the long side • Only have to study one index Currency future contracts allow instead of 100s of stocks investors to hedge against foreign exchange risk. Since these contracts What is a mini derivative contract? are marked-to market daily, investors The lower minimum contract size means can—by closing out their position—exit that smaller investors are able to hedge from their obligation to buy or sell the their portfolio using these contracts currency prior to the contract’s delivery with a lower capital outlay. This means date. a better hedge for portfolio and also What are the disclosure requirements results in more liquidity in the market. to the listed companies?
Why longer dated index options? Companies whose shares are listed in Longer dated derivatives products are stock exchange or stock exchanges are useful for those investors who want to called listed companies. Listed companies have a long term hedge or long term are required to issue annual report and exposure in derivative market. The periodic report such as quarterly reports premiums for longer term derivatives to their shareholders. The responsibilities of products are higher than for standard financial statements preparation rests with options in the same stock because the the company’s management. Financial increased expiration date gives the statements of listed companies are required underlying asset more time to make a to prepare under Nepal Financial Reporting substantial move and for the investor to Standard (NFRS). make a healthy profit. Investors are one of the major stakeholders What is the Expiration Day? of financial statements. These are used to assess the present and the future business It is the last day on which the contracts and profitability of an enterprise as the expire. Futures and Options contracts investors’ primary interest is in the future expire on the last Thursday of the growth of a company’s stock price and/ expiry month. If the last Thursday is a or the likelihood of the company paying trading holiday, the contracts expire dividends. Financial statement is must for the on the previous trading day. For E.g. fundamental analysis. The January 2019 contracts mature on January 31,2019.
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Financial statement consists of components to SEBON, (ii) Annual report should be such as (i) Balance Sheet, (ii) Profit & Loss submitted to SEBON within 5 months of the Account or Income Statement, (iii) Funds expiry of the fiscal year as per Annax-15) Flow Statement, (iv) Change in equity, and and the report should be prepared in line (v) Notes to Accounts, It also encompasses with the accounting standard i.e.,NFRS Auditor Report and Directors and CEO issued by Institute of Chartered Accountants Report. of Nepal (ICAN) and by their primary regulator (iii) Required to submit the agenda Reporting provisions by listed companies is of AGM prior to conducting the AGM and mentioned in Rule 26 of Securities Registration discussed agenda and minute of the same 41 and Issuance Regulation,2016 will be submitted to SEBON after 30 days The summary of reporting requirements are: of AGM. (iv) Required to submit the price (i) Quarterly Report is required to publish sensitive information mentioned in Annax-16 as per Annax-14, in a National daily paper before 3 days if the company has any such within 30 days after the expiry of quarter information. period and required to submit the same
41 Rule 26 of Securities Registration and Issuance Regulation,2016
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Chapter 13 individual and has an ability to provide financial backing for small startups or Most Useful Terms of the Markets entrepreneurs, typically in exchange for ownership equity in the company. Accelerators Quite often, angel investors are found Programmemes which support early- among an entrepreneur’s family and stage, growth-driven FinTech companies friends. The funds that angel investors through education, mentorship, and provide may be a one-time investment financing. Start-ups enter accelerators to help the business get off the ground for a fixed period of time, and as part of or an ongoing injection to support and a cohort of companies. The accelerator carry the company through its difficult experience is a process of intense, early stages. rapid, and immersive education aimed Annuity at accelerating the life cycle of young innovative companies, compressing A series of equal payment at equal years’ worth of learning-bye-doing into interval of time for a fixed number of just a few months. periods. Series of equal payments at the end of each year is ordinary annuity Analyst Ratings and series of equal payments at the These ratings from stock brokers and start of each period is annuity due. ratings agencies urge traders to “buy,” Arbitrage “sell,” or “hold,” and are determined by the projected performance of a When a particular security or commodity stock and its current level of risk. Some trades on two different markets, investors serious investors often live and die (if can create a profit by leveraging the only proverbially) by the words of their temporary price differences in each favorite analysts and will base their venue. This strategy has become a trading strategy on their expertise and particularly popular method of making insight—while others will only take their money with cryptocurrency, since the ratings with a grain of salt. individual currencies may be traded on multiple markets, and its price may be Analyst Ratings Trading different. Investors with an eye on the Analysts may suggest additional actions markets or serious foresight can buy low with ratings like “underperform” and in one market, and sell high in another. “outperform” to give more nuance to Asset Allocation their projections beyond “buy,” “sell,” and “hold.” Balancing out the percentage of various asset classes (such as stocks, An Angel Investor bonds, and cash) in your portfolio is An angel investor also known as a private called asset allocation; the goal is to investor, seed investor or angel funder minimise risk and maximise reward. is someone who has a high net worth
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Average Daily Trade Volume-ADTV two months or beyond, this is called a Bear Market. It’s common for pessimism, The number of trades for a particular fear, and other negative sentiments security, divided by a specific number from investors to accompany a bear of days, will yield its ADTV, or average market, and even fuel its downward daily trading volume. spiral. Cyclical bear markets can 52- Week high last from a few weeks to a few years, while secular bear markets can last 1-2 The highest closing prices of a given decades stock within the past 52 weeks are captured in this technical indicator to Beta assess value and predict prices. This measurement tracks the relative 52-Week low volatility of a given security in comparison to a particular standard. The lowest prices of a stock at closing that occurs within the past 52 weeks. Bid-Ask Spread The data captured serves as a technical Market makers facilitate orderly trading benchmark for predicting prices and with this tool, which helps them buy and assessing a stock’s value. sell securities. Back-End Load Black Swan
When investors sell their shares in Black swan is used to describe an a mutual fund, they pay this sales extremely rare and unpredictable commission. event that triggers a perfect storm of Balance Sheet catastrophic consequences.
An accounting of a company’s assets, Blockchain liabilities (debt), and the capital it This decentralised, digital ledger receives from shareholders. provides a secure record of digital Balanced Fund currency transactions. Though blockchain started out as a way to keep A mutual fund with a mixture of stocks, a record of digital currency, the premise commodities, and/or bonds. of decentralised record-keeping carries huge implications for how information Bar Chart is stored. Companies in all types of This price evaluation tool gives a visual industries from health to supply chain representation of a particular security’s are exploring the possibilities offered change in price over time. by a secure, decentralised accounting system. Bear Market Blue-Chip Shares When prices in the market have declined by 20% or more during the last Known for the stability of the stock and
88 Investors’ Handbook the lasting quality of the company, commonly relates to the stock market, blue-chip stocks tend to have market it can also be applied to other asset capitalisations of over $5 billion. These classes such as bonds, currencies, companies tend to be household brand commodities, and even real estate. names that have imprinted their name Though stock prices always rise and on the American conscious, such as fall, the upward trend indicated by the Coca-Cola, Disney, and IBM. Many of term “bull market” can last for months these companies are also attractive to or years. investors because they issue dividends. Buyback Bollinger Bands Companies can actually purchase A way to analyze the relative stability back their shares of stock in what is or volatility of a particular security called a share repurchase programme by showing its price activity with or stock buyback. bandwidths that represent the space between its highs and lows. Buy-Side Analysts Bond Institutional investors such as hedge, mutual, and pension funds employ buy- An organisation such as a government or side analysts to do equity research. company can issue loans, represented by fixed-income bonds that offer Call Option the investor a relatively more stable Investors buy the right to purchase return. After a certain period of time, a specific number of shares of stock established at the outset of the bond, at an agreed price, without locking it can be redeemed for a particular themselves into the obligation. price. Government bonds are regarded as one of the most secure investment Call Option Volume vehicles, since it is extremely unlikely that the U.S. government will default on The amount of buying and selling of its obligation to repay the loan. a certain security is called its volume. Stocks, currencies, and other types of Book Value per Share (BVPS)) asset classes all have a trading volume.
A ratio that compares common Candlestick shareholder equity in a company to the volume of outstanding, unowned This technical indicator shows investors shares. the opening and closing prices of a particular security during a certain Bull and Bear Market amount of time.
Investors get buyers fever and continue The positive difference in value to drive up prices, whenever a particular between an asset’s selling price and market or asset class rises in value; this is what the investor first paid for that asset called a bull market. Though the term is its capital gain.
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Capital Gains Distribution Certificate of Deposit (CD)
This is a payment distributed to This financial product allows banks, shareholders of a mutual fund once credit unions, and brokerage firms to certain stocks and securities have hold deposited funds until the mature been liquidated and the dividends and at a fixed date; in return, they offer the interest earned have been calculated. depositor a fixed rate of return. Cash Asset Ratio Capital Gains (CG) This measurement tool allows investors This trading strategy relies on to compare short-term liabilities and highly liquid assets. technical analysis on price movement patterns that create and Cash Flow inform defined trading channels. Circuit breakers The amount of cash and/or equivalents a company brings in, obtained by Circuit breakers are a security measure calculating its income and subtracting that has been put in place by the its expenses. Cash flow also applies Securities & Exchange Commission to individual investors as well, if they (SEC) as an effort to reduce panic- have income-generating assets such as stocks that pay dividends, rental selling on U.S. stock exchanges. properties, or ownership in a business. Closed-Ended Mutual Funds Investors often regard cash flow as the wellspring and fuel of their financial These special mutual funds have their success and growth. Cash coming or shares traded in the open market, much receiving is cash inflow and going out like stocks or EFTs. or giving out is cash outflow. Commodities Current Yield Raw materials used every day by It is coupon interest dividend market price of bond. millions or billions of consumers, the prices of which are based on supply Coupon Interest Rate and demand. Fixed interest rate at which bond holders Compound Annual Growth Rate are paid at the end of each period. (CAGR)
CD Ladder This rate represents the mean average This investing strategy divides a fixed rate of growth of a particular security amount of money equally between over a specific time period. multiple CDs (certificates of deposit) Compound Interest (Rate) even if they were purchased at different maturity dates. Interest accrued on both the principal and the interest from the previous period is called compound interest.
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Conflict of Interest Correction
It normally refers to a situation A statistical even where security or where an individual’s personal assets prices decline at least 10% from interests conflict with the professional a recent peak. interests of their employer or the company in which they are invested. Cost of Capital Consumer Price Index (CPI) This amount of money is what’s needed to make capital budgeting worthwhile. This index examines the average cost of particular services and consumer goods Cost of Debt ranging from food to tech to health. The effective interest rate, expressed as Convertible Shares a percentage, that a company will pay on all of its outstanding debts This class of preferred shares give shareholders an actual ownership stake Cost of Equity in the company. The return a business can expect from Corporate Governance received equity financing. For individual investors, this is the expected return in Corporate governance in the business exchange for their investment through deals with the systems of rules, buying shares. practices, and processes by which companies are governed. In this way, Cost of Fund the corporate governance model It is the interest rate paid by financial followed by a specific company is the institutions for the collection of funds distribution of rights and responsibilities or deposits that they deploy in their by all participants in the organisation. business. According to OECD good corporate Cost of Goods Sold (COGS) governance helps to build an environment of trust, transparency and Also referred to as the cost of sales, this accountability necessary for fostering business stat shows how much cost is long-term investment, financial associated with each sale the business stability and business integrity, thereby makes. supporting stronger growth and more inclusive societies. The principles of Coverage Ration OECD cover six key areas of corporate A series of ratios used by investors to governance framework such as (i) the assess the ability of a company to meet rights of shareholders; (ii) the equitable their financial obligations. treatment of shareholders; (iii) the role of stakeholders in corporate governance; Cryptocurrencies (v) disclosure and transparency; and (vi) the responsibilities of the board. A digital currency formed from a series of coded transactions, the record of
91 Investors’ Handbook which is kept on a digital ledger called Debt- To-Equity Ration blockchain. The first digital currency was This metric shows how much debt a Bitcoin, which has since skyrocketed in company has, in relation to the value of price even as others such as Ethereum their stock. have come on the scene. Though cryptocurrency seems strange to most Depreciation consumers, it’s becoming increasingly This accounting practice allows a accepted as payment, even among company to record a portion of an online retailers. asset’s cost over its lifespan as an Current Ration operating expense.
One of the financial rations that explains Derivative the liquidity position. Also called the A contract between two parties, working capital ratio, this metric allows the value of which is determined by investors to gauge a company’s underlying securities such as stocks, liquidity. bonds, commodities, or precious metals.
Day Trading Diluted Earnings Per Share
Buying and selling securities within a This metric helps analysts estimate single day, even within several hours the quality of earnings per share (EPS) or minutes. Investors with either a offered by a particular stock. serious understanding of the market or Discount and Premium Bond a high-risk tolerance track the market all day, buying low and selling high. Bond that sells below par value is Some investors use these profits as discount bond whereas bond that sells their primary source of income, though above the par value is premium bond. many amateurs who have not put in Discount Rate the requisite research have failed. The interest rate the Federal Reserve Dead Cat Bounce Banks charge to financial institutions borrowing money from their short-term This type of event occurs as part of (usually overnight) discount window. a long-lasting downtrend in price. This is the most common definition. When the price falls significantly from a previous high, it may appear to bounce Diversification back or suggest a reversal of the Allocating capital in a way that reduces downtrend. risk and volatility, by investing in a variety Death Cross of asset classes is called diversification. For example, investors diversifying their A technical chart pattern indicating investments might invest their capital in that a particular security could be stocks, real estate, commodities, and exposed to major selling pressure. angel investing. Even within a particular
92 Investors’ Handbook asset class, investors may diversify their Earning Per Share (EPS) holdings, for example purchasing stock in many different types of industries. EPS is a metric that divides company profit by the number of outstanding Dividend common shares to show how much An investing strategy that focuses on earning power each individual share stocks that pay out higher dividend carries. yields or have dividends that are growing quickly. These stocks are issued Earnings Reports by companies who disburse a portion of These reports are part and parcel of their profit on a regular basis. A dividend the legal obligation that publicly held payout for each stock might only be companies have to reveal an accurate pennies, but if an investor owns many shares of that stock, their earnings can picture of their financial performance. snowball into a massive amount. Some Economic Bubble investors derive the majority of their income from dividends. When an asset class rises in value based Dividend Achievers on investor sentiment rather than actual stat-driven analysis. A company the common stock of which has posted increasingly larger dividend Economic Report payouts at least annually over the last These reports offer a variety of 10 years. data about different sectors of the Dividend Kings economy, both domestic and global; they are published regularly by Dividend kings are companies who several departments in the Federal have increased their dividend payout Government. for at least 50 consecutive years. Dividend Reinvestment Plan (DRIP) Efficient Market Hypothesis (EMH)
This plan is a programme that allows Refers to a model that implies stock prices investors to reinvest the profits disbursed reflect all available information, in other by the securities they own which have word, stocks are neither underpriced paid dividends. nor overpriced, and always fairly priced considering the available information. Dividend Yield The reason for this is as there is a large This stat, also called a dividend-price numbers of rational market participants ratio, shows a company’s dividend as a are constantly trading based on the percentage of its stock price. available information, and their active trading sets the stock price such that all Dow Jones Industrial Average (DJIA) available information is priced in. One of the most-watched indices worldwide, these 30 blue chip stocks are tracked as an indicator of the market’s overall health.
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Equal Weight Rating Federal Reserve
This analyst rating indicates the The Fed plays a crucial role in guiding performance of a particular security domestic monetary policy; it is the will match the average return of other central bank of the United States. The stocks covered by the analyst. centralised control of the monetary system was implemented in 1913 in Equity Income order to alleviate and mitigate potential financial crises—further crises such as Income generated from stock dividends, the Great Depression have led to an which are cash earnings paid out to increase in its responsibilities and roles. shareholders by the company. Fiduciary (role/responsibility) Exchange-Traded Funds (ETFs) One with an ethical and legal duty These pooled investment products are to put the needs of their client above comprised of securities in a specific their own interests, such as a broker or type of index or industry. In this way, financial planner. A fiduciary figure is an ETF is like a cross between owning contractually bound to provide their individual stocks and participating in a client with well-intentioned financial mutual fund. advice. Deviating from this responsibility is regarded as unethical, and in many Ex-Dividend cases, could be a crime.
Once the issuing company announces FinTech a date of record for their dividend, the It is a culturally shortened derivation of first day of trading after that date is ex- the words Financial Technology. It refers dividend for that security. to the use of technology that is used to FAANG Stocks automate and provide innovation to, financial services. These are stocks issued by Facebook, Float Amazon, Apple, Netflix, and Google (Alphabet). The number of shares issued by a company, which are traded without Fiscal Policy restriction on a secondary market. It is the guiding force that helps the Forex Government decide how much money it should spend to support the economic The Foreign Exchange Market (FX) is the largest in the world, with the highest activity, and how much revenue it must amount of liquidity. earn from the system, to keep the wheels of the economy running smoothly. The Front-End Load examples of expansionary fiscal policy are tax cuts and increased Government A sales charge paid by investors when spending. they purchase into a mutual fund.
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Fundamental Analysis called technical analysis. There, not much attention is paid to the financial It is when an investor analyses a performance of the company. company’s future profitability based on Investment decisions are taken based its business environment and financial on patterns of the company’s historical performance. Both qualitative and share price. quantitative aspects of the company are considered. On the basis of these Green Investing aspects, investor decide whether or not Investing in stocks, bonds, or mutual to invest in the shares of the company. funds that focus on companies and/ The basic idea here is to assess general or projects dedicated to conserving efficiency of a company’s operations, natural resources, producing natural its future growth and profit-making energy, and clean air and water is potential. called Green Investing. Fundamental analysis is further divided in to two categories (i) Qualitative Gross Domestic Products (GDP) and, (ii) Quantitative. Under qualitative This measurement indicates the analysis key quantifiable aspects of monetary value of all final services and the performance of a company is goods produced by a specific country accessed. Particularly (i) ratio analysis within a specific time frame. and, (ii) earnings projection are looked into it. Growth and Income Funds
Under quantitative analysis, an This mutual fund or ETF attempts to grow understanding of the important aspects in value through capital appreciation that cannot be explained in numbers and provide income through dividends. is developed. Particularly (i) industry Growth Stocks structure, (ii) management analysis, (iii) corporate governance, (iv) earning These are stocks issued by companies quality, and (v) asset liability analysis that increase in value, rather than are looked into it. So, it is also informally producing higher dividends. Their rising referred to as hygiene check. prices optimally outperform the general trend of the greater market. In order to perform quantitative or qualitative analysis, an investor must look High-Yield Dividend Stocks at a company’s revenue generating capabilities, balance sheet, cash flow, Stocks that pay out generous dividends operational activities, management are regarded as a proven way for track record, investors to increase their assets. They are a solid choice for investors of all Fundamental analysis is distinct from types, and not just those who are averse the other branch of equity analysis to risk.
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Hold Rating sale of stock to institutional investors on a major stock exchange, for the A hold rating indicates investors should first time. On rare occasions, individual neither buy nor sell a particular security investors can purchase stock in the IPO. since it will most likely stay at a relatively constant price. Innovation Hub
Holder of Record In simple, an innovation hub is a physical or virtual space that has resources The registered owner of a security is the dedicated towards innovation and holder of record; it can be an individual investor or entity like a financial entrepreneurial outcomes. From institution. financial perspective it refers to places where FinTech innovators can Index Funds effectively engage in discussions and experience information sharing with This mutual fund includes securities each other and with the financial picked to match or track specific regulatory authority market indices like the S&P 500. They are regarded by some as the most stable Insider Trading form of investing for individuals saving for retirement. Buying or selling a security based on information that is not available to the Indenture public. Participants in insider trading The legal agreement or contract that are often leveraging information that contains terms and conditions of a should be or will soon be public. As a bond issue. result, insider trading is regarded as an illegal activity. Inflation Institutional Investors The general decline in a currency’s purchasing power, which is often These large companies or firms buy accompanied by a price increase of and sell securities along the lines of goods and services. their investment strategy, along with facilitating trades for members and Initial Coin Offering (ICO) shareholders. Also called a token offering, this Intrinsic Value crowdfunding tool allows an investor to provide a cryptocurrency startup This stat helps determine whether a with existing traditional currency or particular security is overvalued or cryptocurrency in return for tokens of undervalued. the new cryptocurrency. Interest Rate Risk Initial Public Offering (IPO) The risk arising from the fluctuation of This formal process involves a private interest rate to the bond holder. company raising capital through the
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Invested Yield Curve operation and Development (OECD) is an international organisation that This curve indicates market conditions works to build better policies for better in which short-term debt instruments lives. It’s goal is to shape policies that (like 2-year bonds) have a higher yield foster prosperity, equality, opportunity than long-term debt instruments (like a and well-being for all. It draws on 10-year bond). Both the short-term and almost 60 years of experience and long-term instruments of debt must be insights to better prepare the world of of the same quality, for example, U.S. tomorrow. Together with governments, Treasury Bonds. policy makers and citizens, we work International Organisation of on establishing evidence-based Securities Commissions (IOSCO) international standards and finding solutions to a range of social, economic It is an association of organisations and environmental challenges. From that regulate the world’s securities and improving economic performance futures markets. It is in international and creating jobs to fostering strong regulatory authority of securities education and fighting international regulators of the world. tax evasion, we provide a unique forum and knowledge hub for data World Investor Week (WIW) and analysis, exchange of experiences, World Investor Week (WIW) is a week- best-practice sharing, and advice long, global campaign promoted by on public policies and international IOSCO to raise awareness about the standard-setting importance of investor education and Leveraged Buyout (LBO) protection and highlight the various initiatives of securities regulators in these This financial transaction involves two critical areas. acquiring a company through borrowed money. The buying party does not have In October, IOSCO securities regulators to put their own capital at risk, and and other IOSCO members on six instead has leveraged capital from continents will provide a range of other sources. activities, such as launching investor- focused communications and services, Liquidity promoting contests to increase A measurement of how easily an asset awareness of investor education such as stocks, cash, real estate, or initiatives, organising workshops and valuables could be bought or sold conferences, and conducting local/ without affecting the standard price. national campaigns in their own jurisdictions. Lock-Up Period Expiration Also known as a lock-up agreement, Organisation for Economic Co- investors are restricted from buying or operation and Development (OECD) redeeming shares for a period of time The Organisation for Economic Co- usually numbering 90-180 days.
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Management Fee Most Active Stocks
Compensation for an investment Also called a road map for day traders, manager to manage the fund for the this list of the most active stocks is a trader. useful index for those investors poised to Margin buy and sell for profit. Collateral supplied by a trader to their Moving Average (MA) broker in order to trade securities, futures, and currencies. This lagging indicator, also called a moving average or rolling average, Market Perform gives investors a projected view of This rating suggests a neutral outlook on how a security is trending, without a stock’s projected performance when committing to particular prices. compared to benchmark indexes; it’s Municipal Bonds (MB) also referred to as a hold rating. Market Timing Also known as “munis,” these government-issued certificates of debt A trading strategy that focuses on fund daily operating expenses or larger changing the ratio of different assets public works projects. within a portfolio to take advantage of changing prices within each asset class. Mutual Funds (MF) Momentum Indicators A mutual fund is a company that pools These technical indicators help traders money from multiple investors and uses confirm the veracity of a buy or sell a proprietary investing strategy to place rating. that capital into select securities. Many mutual funds are comprised of stocks Monthly Dividend Stocks in a particular index or industry, while These securities are issued by companies others offer more diversification. Mutual that pay dividends every month, which funds are a safer way for the average some investors rely on as a regular retail investor to place money in stocks source of income. while mitigating risk. Monetary Policy NASDAQ
It is the macroeconomic policy laid This American Stock exchange is the second-largest marketplace in the down by the central bank. It involves world in terms of market cap. management of money supply and interest rate and is the demand Net Asset Value (NAV) side economic policy used by the government of a country to achieve This value is found by subtracting the liabilities of a mutual fund from the macroeconomic objectives like market value of its shares, and then inflation, consumption, growth and dividing that number by the number of liquidity. shares.
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Net Income (NI) Overbought
A company’s earnings after expenses, A security with this rating is trading this stat indicates whether or not above its true value. a company is making money and retaining profit. Oversold
Net Margin A security with this rating is trading below its true value. Also known as profit margin, this is the amount of remaining revenue after a Price-to-earnings growth is a refined specific period of time. variation of the P/E ratio that also Neutral Rating assesses a company’s potential for growth. Analysts use this rating to indicate that a stock will trade within a tight range. Regulatory Oversight Body No Load Funds The regulatory authority that has the right of supervision and monitoring other These funds do not charge a sales fee market participants entrusted with a for transactions, in contradistinction to fair and orderly in trading of securities the standard 4-6% charged by most markets and derivatives markets. For funds. example, SEBON being the regulatory Operational Income (OI) oversight body, supervises and monitors NEPSE and CDSC with regard to The income of a business after listing, trading, clearing, settlement, deducting its operational expenses. dematerialization of securities and Option Trading depository operation to ensure NEPSE and CDSC performs its regulatory duties This sale of buyer-seller contract allows and obligations in an effective manner. the purchaser to have the right without obligation to buy or sell a certain security Self-Regulatory Authority (SRO) at a certain price and on or before a certain date. A Self-Regulatory Organisation or SRO can be defined as an organisation Outperform Rating that is formed to regulate certain This rating indicates that analysts expect professions or industries. They are usually a stock to beat the market or index in non-governmental organisations, which that particular stock is located. established with the aim of creating rules to promote order among businesses Outstanding Shares and organisations.
All the shares of a corporation that have Par Value been authorised, issued, purchased, and held by investors. These investors Stated price that is redeemed to bond have ownership in the corporation and holder at maturity also stated price of have shareholder rights. equity shares.
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Percentage Decliners PE Growth (PEG)
These are securities that show the This valuation allows investors to see biggest losses in terms of percentage. to what degree a stock is accurately priced, by comparing stock prices to Percentage Gainers company revenue. These stocks show the greatest gains in Producer Price Index (PPI) terms of percentage changes, though this stat does not take trading volume This weighted index of prices reflects the into account. views of producers and wholesalers of that item. It is released monthly by the Portfolio Manager BLS (Bureau of Labor Statistics). A financial professional or group thereof Profit Margin who purchases and sells assets in a mutual fund, closed-end fund, or ETF A commonly used stat, profit margin (exchange-traded fund). helps investors see the profitability of their trading activity. Preferred Stock Put Option These stocks grant the shareholders a stronger claim of ownership and This financial contract between buyer company earnings than common stock. and seller gives the owner of the put the right (but not obligation) to sell 100 Price Target shares of a certain stock at an agreed This estimate of the future price level price to the buyer before or on the of a stock, futures contract, ETF, or expiration date. commodity, is made by investment Quantitative Easing analysts and financial advisors. A programme in which the central bank Price to Earning Ration (PE) of a given nations leverages a supply This stat compares the current price of newly minted currency to purchase of each share to its earnings and is assets like government bonds from frequently used in determining the value banks, pension funds, and insurance of a stock and its issuing company. companies. Some investors feel strongly about the Quick Ration PE ratio’s ability to accurately reflect the true value of a stock and advise It is one of the financial rations, also investors against purchasing shares of known as the acid-test ratio, this stock with high PE ratios. Though the measure of liquidity shows how quickly price of those stocks may point to good a company could extinguish its current health, the PE ratio indicates they are liabilities if it chose to do so. actually overvalued.
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Quiet Period Resistance Level
The waiting period that begins once The price point at which an assets price the company and underwriters agree begins to slow, or even reverses with an to proceed with an initial public offering increase in transaction volume. (IPO). Retained Earnings Quiet Period Expirations A company’s profit after paying out The date on which the SEC (Securities dividends to shareholders. This is to the & Exchange Commission) approves a company what disposable income is to company’s registration for an IPO and a private individual. the end of the quiet period or waiting period. Return on Assets (ROA)
Range Trading - A strategy based on This particular profitability measure technical analysis of price movement helps investors gauge their return on between support and resistance. investment as it relates to their assets. Real Estate Investment Trust (REIT) Return on Equity (ROE) ETF How efficiently a company leverages A company that owns income- its assets provided by shareholders (e.g. producing real estate and sells shares of stock sales) to create more income. ownership to investors, similar to a stock. Return on Investment (ROI) REITs create an opportunity for retail investors to get involved in real estate ROI indicates profit on a particular when the costs of doing so on their own investment as a percentage of earnings might be prohibitive. in comparison to the cost of investing in Recession that particular security or asset.
A downturn in economic activity Reverse Stock Split through multiple consecutive quarters Also called a stock merge, this of increasing decline. Recessions are also often associated with a drop in deliberate corporate action is made spending, spurring economic reforms to by a company that wants to reduce stimulate the economy. However, some the number of outstanding shares investors view low stock prices during while increasing the price per share a recession as a prime motivator for proportionally. maximising the value of their dollar and purchasing more shares. Risk Tolerance- How willing an investor is to take on volatility and variability in Relative Strength Index their investment returns. This momentum oscillator measures price by speed and change, moving between 0 and 100.
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Rule 72 has to receive his money. Settlement is the process whereby payment is made It is the rule relating to return of by the buyers, and shares are delivered investment. This simplified equation by the sellers. helps investors estimate the number of years it would take to double their S&P Index investment or money, based on its rate 500 different large cap companies are of return. The period or years that takes listed in The Standard and Poor’s Index. to double your investment is derived by a popular stock market index that dividing 72 by the annual rate of return. follows their price and performance. Regulatory Sandbox Sell-Side Analysts A framework set up by a financial sector These analysts work for investment regulator to allow small scale, live banks or brokerage firms and track the testing of innovations by private firms performance of various securities such in a controlled environment (operating as stocks, bonds, and commodities. under a special exemption, allowance, or other limited, time-bound exception) Short Selling under the regulator’s supervision. The sale of a stock not actually owned In other word it is a regulatory by the seller. They may have borrowed approach, typically summarised in it or have it lined up for a transaction, writing and published, that allows live, despite their lack of ownership. This time-bound testing of innovations under strategy is motivated by an expected a regulator’s oversight. Novel financial drop in price. products, technologies, and business models can be tested under a set of Special Dividends rules, supervision requirements, and Cash payments made to shareholders appropriate safeguards. that are separate from regularly paid Rolling Settlements dividends.
A rolling settlement implies that all Stochastic Momentum Index (SMI) trades have to be settled by the end of This index helps gauge momentum for the day. Hence, the entire transaction a given security and is used in technical – where the buyer pays for securities analysis as an alternative to stochastic purchased and seller delivers the shares oscillators. sold – have to be completed in a day. Supposing your friend agrees to buy Stock Portfolio Tracker a book for you from a bookshop, you An online stock trading tool that will have to pay him for it eventually. replaces manual spreadsheets and Similarly, after you have bought or sold paper statements, providing minute-by- shares through your broker, the trade minute information on all the securities has to be settled. Meaning, the buyer in a portfolio. has to receive his shares and the seller
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Stock Split Support Level
This corporate action increases the A technical metric of movement in terms number of outstanding shares by of price, when an asset has reached a dividing each share. price floor. Stock Symbol Swap An abbreviation used to quickly identify publicly traded shares of stock, it may A derivative instrument where two consist of numbers, letters, or even both. parties contractually agree to exchange a sequence of ash flows, Stocks Increasing Dividends taking place on a certain date or at Investors focused on stable income love targeted intervals, as stipulated in their dividend stocks that consistently up contract. their payouts to shareholders. Simple moving average (SMA) Stop Order This is right out of middle-school math. This trading order will execute a buy You take the mean of a set of values. or sell action when a stock reaches a In the case of a stock chart, the values particular price. that are averaged are the prices over a Straddles period of time. To calculate the simple moving average you add up the prices This options trading strategy takes in the time frame and then divide by advantage of expected volatility, even the number of prices in that set. So to if investors do not know which way the calculate a 10-day SMA, you would stock price will move. add the closing price of a stock for the Strangles last 10 trading days and divide it by 10. For a standard moving average, all This options trading strategy is values are weighted equally. predicated on anticipating price movements that move with conviction Short-selling in one direction or another. An investor sells short when he Street Name anticipates that the price of a stock may fall from the existing price. So, the Investors holding securities in “street investor borrows a share and sells it. name” means their name will not be Once the share price dips, he will buy listed in company records. the same share at a lower price, and return it back, while pocketing a profit Strike Price in the bargain. Simply put, you first Also called the exercise price, this is the sell at a high and then buy at a low. price at which a buyer of an option Short-selling helps traders profit from declining stock and index prices. Since contract can exercise his option (right this is usually conducted in anticipation to buy or sell).
103 Investors’ Handbook of a stock movement, short-selling average loss of down periods during is considered a risky proposition. the time frame being measured. RSI is An example, suppose you expect usually calculated over 14 trading days. shares of Standard Chartered Bank Ltd. to fall tomorrow for whatever reason, An RSI can range from 0 to 100. An RSI you enter an order to sell shares of at or above 70 usually indicates an that bank at the current market price. overbought condition. An RSI of 30 or Once the share price falls adequately below usually indicates an oversold tomorrow, you buy at the lower rate. condition. The difference in the sale and buying Technical Analysis prices is your profit. However, if the share prices increase after you sold at It is the study of chart patterns and a reduced price, then you end up with statistical figures to understand market a loss. trends and pick stocks accordingly. One day the share price is up; another day it Standard Deviation may be down. But over time, if you look This is a statistic that measures the at the stock price’s movement, you historical volatility of an investment. A may see trends and patterns emerge. large standard deviation means that The study of these chart patterns and there is a greater variance between its trends in stock prices is called technical price and the mean, indicating a wider analysis of stocks. When you learn price range. Calculating the standard technical analysis of stocks, you will deviation requires finding the mean understand the big role that technical of all the data points, calculating the indicators play. Technical analysis has difference between each data point stood in premises of assumption that and the mean, squaring and then the history repeats. Fundamentals of finding the mean of all those differences, technical analysis are (i) market prices and then taking the square root of that reflect all the information about a number. Most trading programmes will stock, (ii) patterns tend to repeat, and calculate the standard deviation for (iii) stock prices follow trends. Technical you. analysis is useful before entering to the securities market. Relative Strength Index (RSI) The Bottom Line on Technical This is a simple calculation that measures Analysis the magnitude of recent price changes to track momentum that may indicate The allure of technical analysis is that when stocks are overbought or oversold. there are great gains that can be made The calculation of the relative strength if only you know how to accurately index is as follows: interpret the price movement of different stocks. But investors should RSI = 100 - 100/(1 + RS) take caution that they are not using RS (Relative Strength) = the average technical analysis merely to support gain of up periods during the time their own assumptions. In this way, it’s frame being measured divided by the a lot like fundamental analysis. Both
104 Investors’ Handbook methods require investors to allow the Trade Cycle (Business Cycle) facts to inform their trading. It is economy-wide fluctuations in Technical analysis is not for everyone, total national output, income, and but if you are the kind of investor that employment usually lasting for a period has enough time, enough restraint, of 2-10 years, marked by widespread and enough trust in statistics, there can expansion or contraction in most sectors be a lot of satisfaction in accurately of the economy. Upward and downward predicting price movements. However, movements in macroeconomic as much as we would like to believe variable such as in output, inflation, otherwise, nobody can predict the interest rates, and employment form market with 100% certainty all the the business cycle that characterizes all market economies. time. Human behavior gets in the way of even the most accurate technical Trade War predictions. Technical analysis allows traders to analyze price trends and An economic policy carried out when make decisions that are in sync with one country attempts to rectify an their tolerance for risk. imbalance in trade, by raising import tariffs on imported goods and services Total Return from a specific country or countries.
The actual rate of return of an investment portfolio over a defined time period.
Trade Deficit
A condition in which one country imports more goods and services than it exports.
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Annexures
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Annexure 1. List of Securities Acts, Regulations, Directives, Bye-Laws Acts 1. Securities Related Act, 2006 2. Commodities Exchange Market Act, 2017 3. Asset (Money) Laundering Prevention Act, 2008 Securities Market and Commodities Exchange Market Related Regulations 1. Specialised Investment Fund Regulations , 2019 2. Securities Listing and Trading Regulation, 2018 3. Commodities Exchange Market Regulations , 2017 4. Credit Rating Regulations, 2011 5. Central Depository Service Regulations, 2010 6. Securities Registration and Issue Regulations, 2016 7. Securities Businesspersons (Merchant Banker) Regulations, 2008 8. Securities Businesspersons (Stockbroker, Dealer & Market Maker) Regulations, 2008 9. Stock Exchange Operation Regulations, 2007 10. Securities Board Regulations, 2007 Bylaws
1. CDS Bylaws, 2011 2. Securities Transaction Operation Bylaws, 2019 3. Securities Listing Bylaws, 2019 4. Securities Transaction Clearing and Settlement Bylaws, 2012 5. Government Securities Bylaws of SEBON, 2005 6. Government Securities Transaction Bylaws of NEPSE, 2005 Directives/ Guidelines and Policy
1. Book Building Directives, 2020 2. SEBON Information Technology Policy, 2019 3. AML Related Directions, 2019 4. Corporate Governance for Listed Company Related Directives, 2017 5. Securities Purchase (Public Issue) Related Directives, 2016 6. Portfolio Management Directives, 2010
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Annexure 2. List of Merchant Bankers
SN Company Area Address Kamalpokhari, Issue Manger, Underwriter, Kathmandu 1 Sunrise Capital Ltd. Share registrar, Portfolio Contact No. Management 4428550,4428660, Fax : 4428688
Issue Manger, Underwriter, Share Naksal, Kathmandu, 2 NMB Capital Limited registrar, Portfolio Management Contact No: 4253096
New Baneshwor, Issue Manger, Underwriter, Contact No: 3 Citizen Investment Trust Share Registrar 4785321/4785319, Fax: 4785320
Issue Manger, Underwriter, Jamal, Kathmandu, Global IME Capital 4 Share Registrar, Portfolio Contact No: 422640, Limited Management Fax: 4222534
Hattisar Marga, Kamaladi Muktinath Capital Issue Manger, Underwriter, Share Mode, Kathmandu, 5 Limited Registrar, Portfolio Management Contact No: 4446108/4446109 Kamaladi, Kathmandu, Issue Manger, Underwriter, Civil Capital Market Contact : 6 Share registrar, Portfolio Limited 4168654/416664, Management Fax: 4168734 Kamaladi, Kathmandu, Issue Manger, Underwriter, Share Contact: 7 Prabhu Capital Limited registrar, Portfolio Management 4221946/4221952, Fax: 4222802 Naxal, Kathmandu, Issue Manger, Underwriter, NABIL Investment Contact: 8 Share registrar, Portfolio Banking Limited 4411604,4411733, Management Fax: 4410554 Pulchowk, Lalitpur, Laxmi Capital Market Issue Manger, Underwriter, Share Contact: 9 Limited registrar, Portfolio Management 5551363,5551463, Fax: 5537743 Issue Manger, Underwriter, Lazimpat, Kathmandu, NIBL Capital market 10 Share registrar, Portfolio Contact: 4005080 Limited Management Fax: 4005084
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SN Company Area Address Ravibhawan, Kriti Capital and Kathmandu, 11 Portfolio Management Investment Limited Contact: 4276786,4281776 Ravibhawan, Kathmandu, 12 Samridhi Capital Ltd. Portfolio Management Contact: 4781501,6201789 National Merchant Kalikasthan, Kathmandu, 13 Portfolio Management Banker Limited Contact: 4430746 Naxal, Kathmandu, Issue Manger, Underwriter, Siddhartha Capital Contact: 14 Share registrar, Portfolio Limited 4257767,4257768, Management Fax: 4257764 Pepsicola, Kathmandu, Provident Merchant Share registrar, Portfolio Contact: 15 Banker Limited Management 4993450,5147097, Fax: 4993450 Batuleghar, Dillibazar, Kathmandu, Issue Manger, Underwriter, Share 16 CBIL Capital Ltd Contact No. 4418667, registrar, Portfolio Management 4417723, Fax No. 4428958 Naxal, Kathmandu, Issue Manger, Underwriter, Share Contact No. 4428956, 17 Sanima Capital Ltd registrar, Portfolio Management 57,44, Fax No. 4428958 Kathmandu Plaza, 2nd Floor, Kamaladi, Y-Block, Issue Manger, Underwriter, Share 18 BOK Capital Ltd Kathmandu, Registrar, Portfolio Management Contact No. 4168701, 4168702
Hattisar, Kathmandu, Nepal SBI Merchant Issue Manger, Underwriter, Share 19 Contact No. 4435671, Banking Ltd registrar, Portfolio Management Fax No. 4435612
Babarmahal, Issue Manger, Underwriter, Share Kathmandu, 20 NIC Asia Capital Ltd registrar, Portfolio Management Contact No. 4221994, Fax No. 4222458
RBB Merchant Banking Issue Manger, Underwriter, Share Teku, Kathmandu, 21 Ltd registrar, Portfolio Management Contact No. 4253595
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SN Company Area Address Putalisadak, Kathmandu 22 Aakash Capital Ltd. Portfolio Management Contact No.:4430196 Arkash Capital Advisors Thapathali, Kathmandu 23 Portfolio Management Ltd. Contact No.:4101676
Wealth Management Maitidevi, Kathmandu 24 and Merchant Portfolio Management Contact No.:4418664 Banking Ltd.
K.C.L Astosh Capital Hattisar, Kathmandu, 25 Portfolio Management Ltd. Contact No. 4429149 Issue Manger, Underwriter, Share Naxal Kathmandu 26 Kumari Capital Ltd. registrar, Portfolio Management, Contact No: 01- Corporate Advisory 4415173,4445500 Issue Manger, Underwriter, Share Nepal Bangladesh Kamladi kathmandu 27 registrar, Portfolio Management, Capital Ltd. Contact No: 01-4233780 Corporate Advisory Issue Manger, Underwriter, Thapathali Kathmandu: Share Registrar, Portfolio 28 Janta capital ltd. 01-4265272 Management, Corporate Advisory Issue Manger, Underwriter, Century Capital Share Registrar, Portfolio Kamladi Kathmandu 29 Markets Ltd. Management, Corporate Contact No: 01-4168698 Advisory Issue Manger, Underwriter, Share Mega Capital markets Tripureshwor, Kathmandu 30 registrar, Portfolio Management, Ltd. Contact No: 01-4262775 Corporate Advisory Thamel, Kathmandu 31 Himalayan Capital Ltd. Portfolio Management Contact No. 01-42588345 Machhapuchhre Jamal, Kathmandu 32 Portfolio Management Capital Ltd. Contact No. 01-4229941
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Annexure 3. List of Stockbrokers
S.N. Stockbroker Name B.N. Address Phone Fax
Kumari Securities 1 1 DilliBazaar, KTM 4418036 4423689 Service Pvt. Ltd.
2 Arun Securities pvt ltd 3 PutaliSadak, KTM 4239567 4239565
3 Opal Securities Pvt. Ltd. 4 Baluwatar, KTM 4423509 4423509 Market Securities 4 5 Newroad, KTM 4248973 4249558 Exchange Co. Pvt. Ltd. Agrawal Securities Pvt. 5 6 DilliBazaar, KTM 4424406 4424657 Ltd. 6 J F Securities Pvt. Ltd. 7 PutaliSadak, KTM 4256099 4433673
Aasutosh Brokerage & 7 8 Newroad, KTM 4227510 4240162 Securities Pvt. Ltd. Pragyan Securities Pvt. 8 10 Kamaladi, KTM 4413392 4415958 Ltd. Malla&Malla Stock 9 11 DilliBazaar, KTM 4432088 4425750 Broking Co. Pvt. Ltd. Thrive Brokerage House 10 13 Naxal, KTM 4419051 4416018 Pvt. Ltd. Nepal Stock House Pvt. 11 14 Anamnagar, KTM 4265888 4255732 Ltd. Primo Securities Pvt. 12 16 PutaliSadak, KTM 4168175 4168214 Ltd.
13 ABC Securities Pvt. Ltd. 17 Newroad, KTM 4230787 4226507
Sagarmatha Securities 14 18 PutaliSadak, KTM 4439315 4439315 Pvt. Ltd. Nepal Investment & 15 Securities Trading Pvt. 19 Baneshwor, KTM 4495450 4490727 Ltd. 16 Sipla Securities Pvt. Ltd. 20 Newroad, KTM 4255782 4255078 Midas Stock Broking 17 21 Kamaladi, KTM 4240089 4240115 Co. Pvt. Ltd. Siprabi Securities Pvt. 18 22 Kupondol, Lalitpur 5530701 5011206 Ltd. Sweta Securities Pvt. 19 25 PutaliSadak, KTM 4444791 4416936 Ltd. Asian Securities Pvt. 20 26 PutaliSadak, KTM 4424351 4431395 Ltd.
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S.N. Stockbroker Name B.N. Address Phone Fax
Shree Krishna Securities 21 28 Dillibazar, KTM 4441225 4431592 Ltd. Trishul Securities & 22 29 PutaliSadak, KTM 4440709 4438197 Investment Ltd. Premier Securities Co. 23 32 PutaliSadak, KTM 4231339 4266422 Ltd. Daksinkali Investment & 24 33 Kamaladi, KTM 4168640 4168742 Securities Pvt.Ltd.
25 Vision Securities Pvt.Ltd. 34 Anamnagar, KTM 4770408 4438124
Kohinoor Investment & 26 35 Kamalpokhari, KTM 4442858 4442857 Securities Pvt.Ltd. Secured Securities Pvt. 27 36 PutaliSadak, KTM 4262861 4224523 Ltd. Swornalaxmi Securities 28 37 Kamalpokhari, KTM 4417178 4417177 Pvt.Ltd. Dipshikha Dhitopatra 29 38 Anamnagar, KTM 4102532 4254490 Karobar Co. Ltd. Sumeru Securities Pvt. 30 39 Hattisar, KTM 4444740 4424209 Ltd. Creative Securities Pvt. 31 40 PutaliSadak, KTM 4168205 4168203 Ltd.
32 Linch Stock Market Ltd. 41 New Baneshwor, KTM 4469367 4469068
33 Sani Securities Pvt.Ltd. 42 Jamal, KTM 4166005 4166006
South Asian Bulls Pvt. 34 43 Kuleshwor, KTM 4284785 4284785 Ltd. Dynamic Money 35 Managers Securities 44 Kamalpokhari, KTM 4413421 4414522 Pvt.Ltd. Imperial Securities Co. 36 45 Anamnagar, KTM 4231004 4232344 Pvt. Ltd. Kalika Securities Co. 37 46 PutaliSadak, KTM 4011074 4011144 Pvt.
38 Neev Securities Pvt.Ltd. 47 Kamaladi, KTM 4168601 4168573
Trisakti Securities Pvt. 39 48 PutaliSadak, KTM 4232132 4232133 Ltd. Online Securities Pvt. 40 49 PutaliSadak, KTM 4168298 4246392 Ltd.
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S.N. Stockbroker Name B.N. Address Phone Fax Crystal 41 Kanchanjangha 50 New Plaza, KTM 4011176 4011072 Securities Pvt.Ltd. Oxford Securities Pvt. 42 51 Kalimati, KTM 4273850 4278113 Ltd. Sundhara Securities 43 52 Sundhara, KTM 4212215 4263583 Pvt.Ltd. Investment 44 Management Nepal 53 Tripureshwor, KTM 4256589 4256590 Pvt. Ltd. 45 Sewa Securities Pvt.Ltd. 54 Tripureshwor, KTM 4256642 4256644
Bhrikuti Stock Broking 46 55 Newroad, KTM 4223466 4224648 Co. Pvt. Ltd. Sri Hari Securities Pvt. 47 56 Kamaladi, KTM 4437562 4437465 Ltd. Aryatara Investment & 48 57 Anamnagar, KTM 4233596 4233597 Securities Pvt. Ltd. Naasa Securities Co 49 58 Naxal, KTM 4440384 4440385 Ltd Deevya Securities & 50 59 PutaliSadak, KTM 4421488 4422313 Stock House Pvt. Ltd.
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Annexure 4. The List of Related Websites
MoF: https://mof.gov.np CRO: http://application.ocr.gov.np SEBON: https://www.sebon.gov.np NEPSE: http://nepalstock.com.np CDSC: https://cdsc.com.np ICRA Nepal: https://www.icranepal.com CARE Rating: https://www.careratingsnepal.com
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Securities Board of Nepal Jawalakhel, Lalitpur, Nepal 9 October 2020
Published on the occasion of World Investor Week 2020