Stock Market

The hottest news of the month in the stock market in December 1999 was the public issue of shares of Nepal Industrial and Commercial Bank (NICB). The bank expected to raise Rs. 175 million from 1,750,000 units of shares at Rs. 100 per share.

When the bank revealed that the collections on the very first day of the issue (December 2) totaled Rs. 120 million, this became an added encouragement to the common people who were already eager to invest in the banking sector. In fact, for the last two years, there had been no fresh public issue of banking sector shares, and so far this sector is paying good returns to the stockholders. As a result, small investors, big investors and speculators created mammoth crowds at the issue centers. The issue was closed early on December 10. By then the bank had already collected subscription for a whopping Rs. 1,220 million, thus providing the share issue a tremendous success.

The gigantic collection, however, has put the bank and issue managers under great pressure. The bank is required to complete share allotment within 60 days, end settlement procedures within 75 days and get listed with the Stock Exchange within 90 days. If the entire procedures can be conducted within the specified time period, it will certainly be good for both types of applicants – those who fail to get the shares as well as those lucky ones who get the shares from the drawing of the lots. Those who fail to acquire the shares will benefit as they will then get back the money that they paid down along with the application and they will be able to utilize the amount in other investments. Timely listing will also enable short-term players to exercise their option to sell the shares they get and maintain their liquidity.

A demand for shares worth Rs. 1,220 million means a total collection of Rs. 610 million, since the bank had demanded 50% payment along with the applications. Once the allotment process is complete, Rs. 522.5 million in total will have to be refunded to the people who will be denied of the NICB shares. They will lose the interest on their individual investment for 75 days.

According to the data from latest public issue of shares, small and medium investors account for two third of the applicants. These investors generally deposit their money in saving and fixed accounts in banks. The 75-day interest on the money of the unsuccessful NICB share seekers will amount to about Rs. 6.44 million. Those unsuccessful bidders, who have borrowed money on interest to invest on the NICB shares, will run greater loss. Moreover, those people who have gone for the 60:40 scheme or the 16% diminishing interest rate schemes with financial institutions will lose Rs. 2 on every Rs. 100.

On completion of the listing, in order for short term investors to make a profit, the opening market value of the shares will have to be above the par value. Even to maintain a break even, it should at least be enough to give a return equal to the interest rate of the bank. Therefore, in order to maintain the break-even it is necessary that the opening market price of NICB shares be above Rs. 50.74 per unit. This is on the assumption that the bank will not call for the balance Rs. 50 and trading on these shares on the Stock Exchange will be possible on the 91st day. If the 50% balance is also called up, the opening market value of each share must be above Rs. 100.99. This means, the market capitalization of the shares of the market opening must be Rs. 176.785 million.

Since the promoters of the NIC bank have already paid up their subscriptions, the 50% payment call is almost a certainty once the allotment procedure is complete.

The market value of shares after the listing will affect short-term players. After the listing, the opening market value of shares of commercial banks since the year 2050 B.S. have remained thus: Nepal SBI Bank – Rs. 850, NB Bank – Rs 139, Everest Bank – Rs. 122, Bank of Kathmandu – Rs. 160. Since our capital market has now matured up to some extent, the market value of NICB shares might not touch the Rs. 850 mark like the SBI Bank’s. But it will certainly remain near Rs. 150, view investors. Only time will show whether their expectations will be met. The prospectus of the bank has projected net worth per share at Rs. 102.7 at the end of the fiscal year 199-2000 (July 16, 2000).

Another important aspect about the NICB share issue is the 75 days time period for which the financial institutions and the issue managers will have in their hands Rs. 610 million to play with. If the money is deposited in the treasury bill, a clear profit of over Rs. 4.26 million at an interest rate of 3.4%, can be obtained. Other instruments may fetch even higher.

Nepal Industrial & Commercial Bank Ltd.
(Actual VS Projected Net worth)

The bank – in its prospectus – has projected a net profit of Rs. 9.87 million in the first year (1999-2000), Rs. 50.87 million in the second year and Rs. 115.27 million in the third year. The actual profits may or may not be equal to what the bank has projected, but commercial banking has proved a lucrative business in Nepal, compared to other businesses. According to the Rural Credit Survey conducted by Nepal Rastra Bank in 1992, there is an annual credit demand of Rs. 10 billion, of which only a tenth is fulfilled. From this viewpoint, it seems that like NICB, few more banks will be able to make successful operation in Nepal. Strong management is, of course, a prerequisite. However, it is not yet disclosed in which sectors NIC bank is going to utilize this huge sum of money that it is raising by public issue of the shares.

Despite already having a capital of Rs. 325 million that the promoters have paid up, the bank has floated these shares to make an entry into the capital city, because the requirement of NRB for a commercial bank to have nation-wide operation is a paid up capital to Rs. 500 million. In fact, the bank is now already outside the perimeter of the Regional Bank imposed by Nepal Rastra Bank. The executive director of the Bank has already shifted his office to the valley. Like Bank of Ceylon, NICB too has started operating its Kathmandu branch as the virtual central office and has begun competing with other commercial banks. All that remains is to see how much return the public will get from the investment that it has so eagerly made. Meanwhile, looking at the tremendous response that NICB received from the general investors, remaining commercial banks also may be encouraged to float their shares in the near future.

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