Debentures are Welcome

by Rabindra Bhattarai

Nepal's capital market is very lean in providing investment alternatives to the investors. Among possible various investment alternatives like common stocks, government bond, corporate bond, preference share, right, option, warrants, convertible etc, very few are available for Nepali investors. It can be said that the present capital market is almost monopolized by the equity shares. For those investors, who are risk seeker and want to invest in the variable income securities, the present capital market offers sufficient alternatives but for those investors who are risk averse and want to invest in the fixed income securities, there are very few avenues available.

The record of the Securities Board of Nepal (SEBO) for the last nine years shows that 81.48 percent of total issue (including that for right shares) approved by the Board was for the equity shares.

Another feature of the existing secondary market is that it is operating only in the corporate securities. No government securities are listed in Nepse despite many announcements from the side of the government promising to list the government securities.

Out of the total issued amount of Rs.4532.89 million during the period, Rs 1502.42 million is raised through right issue accounting for 33.15 percent of the total issue. This is the second largest issue during the period. The largest issue is that of ordinary shares which amounted to Rs.2190.97 million in total issue  of Rs 4532.89 million and thus accounts for 48.33 percent.

There seems to be an increasing trend to issue ordinary shares and right shares, but the market of derivative securities like option, right, warrants etc. has not been developed. Neither does there exist any provision in the present laws about selling and buying these securities. Also the investors are silent about it.

During this period the issuance of the preference share occupied the fourth position - i.e. 5.22 percent of total issue. It is very nominal and does not provide sufficient investment opportunities to the investor who wants to invest in the fixed income securities. Only four companies have issued such security during this nine years period. Also the transaction in these securities in the secondary market is very rare.

Preference share is a type of hybrid security having the characteristics of both debt and equity. Other such hybrid securities are convertible preference shares and convertible bonds which are available in the world of financial market, but not in Nepal. Some of the companies are issuing the preference shares but they lack the conversion feature, i.e. they are not made convertible into ordinary shares. In fiscal year 1997/98, Shree Ram Sugar Mills Ltd. (SSML) issued 14% convertible debenture but unfortunately it was heavily under subscribed and there was no conversion ratio (e.g. how many shares can a bond be converted?). This under-subscription may also be the result of the poor performance of the company as well as the unawareness of the investor about convertible securities. Now the investors are aware to some extent than when the convertible debentures of SSML were issued. Therefore, to expand the capital market and to provide various alternative investment avenues having different characteristics, appropriate legislative provision should be made.

Bond is the other instrument providing fixed income to the investors and involves lower risk than the securities that yield variable income. Also the bond market in Nepal is very lean. Very few companies have issued bond in the market. The first instance of bond issue was by Bottlers Nepal Ltd. when it issued 18 percent coupon rate bond in 1986/87. During the nine-year period between 1993/94 and 2001/02 bond issue occupied the third largest share portion in the total issue amount approved by SEBO (5.99 percent). Only two companies have issued bond though the time gap between the issues of corporate bonds is as high as five years. However, since last year, some positive signals can be observed in the Nepali capital market. Though the government bonds are not available in the stock exchange floor, corporate bonds are being made available. The issuance of the 8.7% Himalayan Bank Limited 2009 bond and its listing in the secondary market with separate trading system became a milestone in this regard. Before the listing of HBL's bond, SSML's convertible bond was also listed in the exchange but no separate trading system was followed. Very few of these debentures were traded. However, SSML bond was delisted (and redeemed) in fiscal year 2001-02.

Out of 360,000 units of bonds issued by HBL, 100,000 were issued to the general public and the rest were privately placed which were heavily oversubscribed.

Now, nearly one and a half year after HBL bond, another big Nepali bank, Nepal Investment Bank Ltd. (NIBL) has issued Rs. 300 million Nepal Investment Bank Bond 2010 (with 7.5% coupon interest with semi annual payment) providing the ordinary investors a good opportunity in the context of bearish interest rate market and the increasing dissatisfaction from the stock market. Out of 300,000 units of issue, 100,000 are issued to the general public and the rest are privately placed.

Though the interest rate offered by NIBL is 1 percent lower than that in HBL's bond (where it was 8.5% with semiannual payment arrangement), it has good chances of being oversubscribed.

This means, more of such bond issues can be expected in the future, particularly from the banks to meet their higher capital requirement under Nepal Rastra Bank directives.