Stock Taking

by Rabindra Bhattarai

Nepal Stock Exchange’s securities price index  (NEPSE Index), during the month of June, remained fluctuating. It remained bullish till June 10 reaching 216.75 and then it turned bearish continuously reaching the level of 211.31 on June 15. The rise was started with the appointment of new government, and the main leader was commercial banks group, a market dominating sector in the exchange. Understandably enough, the increase in the prices was fueled by the expectation for early end of the conflict between the government and political parties after the appointment of Deuba as the Prime Minister. But the publication of the third quarter financial results (which showed the operating profit increasing by more than 50 percent over the previous quarter despite the political unrest and throat cut competition among the banks) was no way less important factor for such positive impact on commercial bank sector as been in June 2004.

NEPSE index fell after reaching 216.75 on June 10 and plummeted to 211.31 over a short span of three days. This fall was however caused by notices published by some companies inviting application for their new issues (Paschimanchal Development Bank, and Kist Merchant Banking and Finance Ltd. both on June 10, call of NBL for applications to purchase its holding on SCBNL, issuance of right share by the NB Finance Ltd.) as well as the possible strike of the NEPSE’s employees and the wrangle among political parties that delayed the formation of coalition government.

Since June 16, the index turned bullish again till the end of the month. Despite the strike of the employees of NEPSE, the market increased on June 16, one day before the strike and continued to increase during and after the strike till the end of the month. There were no any major events to cause the prices of the share to go up. However, the expectation of the less disturbance after the four parties suspended the ongoing demonstration and the Maoist student union called off the educational strike, the coming budget and positive development reported for the formation of coalition government etc. increased the expectation of investors.

The NEPSE index seems sensitive to the political, economic and financial sector developments. It has risen after the disclosure of financial situation by the companies and when there were positive signs of the political stability. And it decreased at the time of bulk public offerings for some company shares. It shows that the investors are becoming aware about when to buy and sell the securities.

SCBNL's Share Price to Fall

The market price of SCBNL's shares is expected to fall after the shares held by Nepal Bank Ltd. (NBL) in SCBNL are sold as planned. Currently SCBNL's 624,113 shares held by the general public are available in the market. Under the present capital structure this comes to be 16.66% of total shares outstanding of the bank.

NBL had bought the undersubscribed  shares of SCBNL at the time of its initial public offering in the fiscal year 1993/94. NBL owned 12,49,089 shares (including bonus shares of the fiscal year 2003/04) of the bank and this comes to be a 33.34% ownership at the present capital structure.

The directives issued by Nepal Rastra Bank in the fiscal year 2001/02 prohibit commercial banks to invest in the securities issued by any other financial institutions. If a bank is already owing shares in another financial institution, the directive requires such investment to be brought down to 10% of the total paid up capital of the issuing company within the fiscal year 2003/04. 

NBL announced its offer to sell 25% of its total holding in SCBNL honouring the said directive of the NRB. After   the sale of this holding, the total number of shares of SCBNL available in the market for the trading will increase by 312,488 units. This increased supply of shares in the market will drag the price down from the present level.

As these 312,488 shares of SCBNL were blocked from trading in the market, it was one of the reasons for a high price of the SCBNL shares. Normally, the price of the shares less in supply and blocked by a particular group increases and remain constant for a long period of time, for example, the share prices of Bishal Bazaar Company Ltd, Salt Trading Corporation, Rastriya Beema Sansthan etc. are high and the fluctuations in their prices is very low.

On the other hand, if the number of shares traded in the market increases, the market price of such shares decreases and their price also fluctuates frequently. For example the price of the shares of Bank of Kathmandu Limited are highly fluctuating after the sale of the promoters' share to the general public. Also their price had decreased noticeably after such sale. 

NEPSE and Strike

If the securities market can be regarded as the measuring rod of economic pulse of the nation, the pulse stopped for two days in Nepal on June 17 and 18. These were not the days of public holiday but no transactions were made in the NEPSE. The office remained open but the floor remained closed due to a strike by the lower level employees of NEPSE demanding a pay rise.

This strike may benefit the employees if their demand is met, but it was not for the benefit to the millions of investors, NEPSE itself, brokers, government and the nation. The strike makes the securities illiquid. The NEPSE index was in a bullish trend until this strike and it can be said that the investors, lost millions of Rupees of capital gain as their holding was rendered illiquid. Brokers could not execute the orders of the investors and this caused their revenue from commission to go down. Not only the investors and the brokers, but NEPSE itself suffered from the strike. NEPSE receives 25% of the total commission that the brokers get from the investors. That revenue was lost due to the two-day long strike.

Moreover, this strike also caused a loss in the government revenue that is collected as capital gain tax and income tax. And finally the overall impact goes to the gross domestic product (GDP) of the nation.

NEPSE calls it as a protector of investors' rights and claims to be working for the benefit of the investors. But it failed in those very two counts during the two-day strike.

It could not forecast the situation under its very nose. The demand of the employees was not a sudden one, but years old.

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