Stock  Taking

Split Shares, Earn Money

by Rabindra Bhattarai

Investment in the capital market now has become very uncertain, sending the investors in search of avenues of more certain returns. The equity investment is considered riskier than investment in bond, preferred stock etc. The secondary market is not performing well. The Nepse index is hovering around 208 and 215 since long. After the great slump in Nepali stock market in fiscal year 2000/01, dissatisfaction has increased in the minds of investors. The Nepse index on 23rd November 2000 had reached the peak of 545.82 and after that it is continuously on the decline.

Maximizing return in the equity investment has two parts: Capital gain from the price appreciation in the secondary market and ordinary gain from the dividend income. Investors in Nepal’s stock exchange are not getting either of these. The bearish stock market is causing capital loss to the investors. Very few companies are providing nominal dividend while those providing handsome dividend are exceptional.

Those providing nominal dividend are from the banking and finance sector. Companies in trading, manufacturing, hotel and other sectors can rarely be found providing dividend and very few transactions are executed in the stock exchange on their stocks.

In this situation, investors have struck a new idea to maximize return and it is through maximizing travel allowance receipt from participation in the annual general meeting (AGM) of their companies. Companies are distributing money as travelling allowance to those shareholders who register presence  at the AGM. The allowance as distributed by the companies ranges between Rs. 100 and Rs. 300 for each shareholder. Banking sector is providing maximum such allowance as compared to other sectors.

Some companies are distributing allowance only to those who are present in the AGM with their share certificates. While some companies require share certificate with physical presence of the shareholder and certificate of identity (for example, Nepal Merchant Banking and Finance Company Ltd.), some companies are providing this allowance for every certificate, irrespective of who produces it. If one person submits three share certificates, he gets allowances of all three persons.

Therefore, to maximize the allowance, investors have started to split their shares. If one has 20 shares in a company, he transfers 10 shares on the name of another family member. They have also started to put the buying order in lots of 10 shares.

This helps to maximize returns. For example, suppose Mr. A and B had small saving of Rs. 12,000 each and they invested it in equity shares of Life Insurance Corporation of Nepal (LICN). Suppose Mr. A bought the shares only in his name and got one share certificate, while Mr. B bought 100 shares in such a way that each of the ten members of his family – his wife, sons, daughters, and the like – got one share certificate each. Then he got ten certificates in total.

LICN did not pay any dividend to the shareholders from the profit earned during the fiscal year 2002/03. But it provided travelling allowance of Rs.100 to each shareholder present in its 2nd AGM. For this purpose, it counted share certificates disregarding the physical presence of shareholder. In this regard Mr. A, who had only one share certificate for his 100 shares got Rs. 100 as the travel allowance and earned 0.833 percent return on his investment, disregarding his actual travelling expenses to attend the AGM. On the other hand, Mr. B, who had invested the same amount in 100 shares splitting it into 10 shares on ten different names, got Rs. 1,000 producing ten share certificates and earned 8.33 percent on his investment.

Now, Mr. B earned 900 percent more return as compared to Mr. A from the equal amount invested in the shares of the same company. It was due to wise allocation of fund by Mr. B.

Therefore, one addition has been made to the list of factors to be considered while investing fund in the stock market of Nepal. If investors want to maximize benefit from shares, they have to select companies which are listed in the stock exchange and have been regularly conducting AGMs and which provide traveling allowance to shareholders who come to attend AGM. They also should consider whether the company provides such allowance by counting certificates or by verifying the physical presence of the shareholders.

Only recently, the banker’s association had decided to stop distributing such allowance, but as the Development Credit Bank Ltd. provided Rs. 100 as allowance to its shareholders in its recently held AGM, this decision is no more holding.

This practice seems to be causing many disputes between the management and the shareholders present in the AGM. And this is caused by a legal provision which may need to be amended.

Any AGM to be held requires presence of shareholders representing at least 67 percent of total shares, as stated in the Company Act 1996. If the companies do not distribute the allowance, the presence of shareholders in the AGM will be nominal. For example, LIC Nepal’s second AGM had shareholders in a large number collecting the allowance, but when the proceeding of the AGM started in the meeting hall there were hardly 50 shareholders present.

The distribution of traveling allowance has become a compulsion to the companies to attract the shareholders to the AGM and this allowance has become more certain return to the shareholders as compared to capital gain and dividend.

But when looking at it from another angle, it looks ludicrous that the companies provide such allowance to attract shareholders to AGMs. As practically 60-70% of the shares are held by the promoters in virtually all the Nepali companies (with very rare exceptions of two or three), they need not spend this money just for the quorum’s sake.

Therefore, one more plausible explanation is that by distributing money this way, rather than as dividend, the companies are saving on the dividend tax.

(Bhattarai teaches Finance to the MBS students in Shanker Dev Campus)

Corporate Scorecard

#  Premier Insurance Co. Ltd. held its 10th AGM reporting a net profit of Rs. 5.97 million for the fiscal year 2002/03. The company in the year collected Rs. 99.8 million as gross insurance premium.

#  Royal Merchant Banking and Finance Ltd. concluded its second AGM. In the last fiscal year 2002/03 the company earned a net profit of Rs. 0.91 million. In the first six month of the current fiscal year 2003/04, the company has earned Rs. 2 million operating profit, says the company.

#  Ace Finance Co. Ltd. has reported an operating profit of Rs. 15.6 million for the first six month of the current fiscal year 2003-04. The company had earned operating profit of Rs 32.4 million during the 12 month of previous fiscal year 2002-03.

#  Recently published semi annual unaudited financial report of the United Finance Ltd. has showed operating profit of Rs 4.5 million. This figure comes to be 800% more as compare to the operating profit in the same period previous fiscal year 2002-03. The operating profit in the first six months of the previous fiscal year was Rs. 0.5 million.

#  Lalitpur Finance Co. Ltd. has reported unaudited operating profit of Rs. 2 million for the first six month of the current fiscal year 2003-04. The company had earned operating profit of Rs. 17 million during fiscal year 2003-04.

#  Nepal Finance and Saving Co. Ltd., the first private sector finance company of Nepal, reported an unaudited operating profit of Rs. 1 million for the first six month of the current fiscal year 2003-04. The company had earned Rs. 10 million operating profit during the previous fiscal year 2002-03.

#  Om Finance Co. Ltd., in its semi annual unaudited financial report for the first six month of the current fiscal year, has showed an operating profit of Rs. 3 million. In the previous fiscal year 2002-03, the company has succeeded to earn Rs. 10 million operating profit.

#  National Finance Co. Ltd. has showed an operating profit of Rs. 10 million for the first six months of the current fiscal year 2003-04.

#  Pokhara Finance Ltd. has reported an unaudited operating profit of Rs. 13.5 million for the first six months of the current fiscal year 2003-04. The company, in the previous fiscal year, had earned audited annual operating profit of Rs. 24.4 million.

#  Crystal Finance Ltd. has showed an unaudited operating profit of Rs. 192,000 for the first six months of the current fiscal year 2003-04.

#  Central Finance Co. Ltd. has reported an unaudited operating profit of Rs. 3.05 million for the first six months of the current fiscal year 2003-04.

#  Premier Finance Co. Ltd. has reported an unaudited operating profit of Rs. 2.99 million for the first six months of the current fiscal year 2003-04.

#  Universal Finance Ltd. has showed an unaudited operating profit of Rs. 4 million during the first six months of the current fiscal year 2003-04. The company had reported a net annual profit of Rs. 12.2 million for the fiscal year 2002-03 in the 8th AGM held on 13th January.

#  Annapurna Finance Co. Ltd. has reported an unaudited operating profit of Rs. 15 million for the first six months of the current fiscal year 2003-04. The company had reported a net profit of Rs. 25.3 million during previous fiscal year 2002-03 in its 10th AGM held in current fiscal year.

#  Nepal Sri Lanka Merchant Bank Ltd. earned an unaudited operating profit of Rs. 9.76 million during the first six months of the fiscal year 2003-04. In the previous fiscal year, the operating profit was of Rs. 4.9 million.

#  Goodwill Finance Co. Ltd. has earned an unaudited operating profit of Rs. 4.78 million during the first six months of the current fiscal year 2003-04.

#  Nepal Housing and Merchant Finance Ltd. has brought out an unaudited financial report showing an operating profit of Rs. 3.96 million for the first six months of current fiscal year 2003-04. The company had earned a net profit of Rs. 13.4 million during the previous fiscal year 2002-03.

#  Shree Investment and Finance Co. Ltd. has reported an unaudited operating profit of Rs. 4.22 million for the first six months of the current fiscal year 2003-04. The company in the previous fiscal year 2002-03 had earned a net profit of Rs. 8.5 million.

#  Lumbini Finance and Leasing Co. Ltd. has reported an unaudited operating profit of Rs. 5 million for the first six months of current fiscal year 2003-04. The company, in the previous fiscal year, had earned operating profit of Rs. 20 million.

#  Cosmic Merchant Banking and Finance Ltd., in the semi annual financial report of current fiscal year 2003-04, has showed an unaudited operating profit of Rs. 8.84 million. The company in the previous fiscal year (12 months) had earned an operating profit of Rs. 15.93 million.

#  NIDC Capital Markets Ltd. has reported an unaudited operating profit of Rs. 10.5 million for the first six months of current fiscal year 2003-04. The company had shown an operating profit of Rs. 24.14 million in the fiscal year 2002-03.

#  Union Finance Co. Ltd. has shown an unaudited operating profit of Rs. 3 million for the first six months of the current fiscal year 2003-04. During the fiscal year 2002-03, the company had earned a net profit of Rs. 13.3 million and this was 62% higher than that of the previous fiscal year.

#  Everest Finance Ltd. has shown an operating profit of Rs. 0.5 million for the first six months of the fiscal year 2003-04. The company had started its operation on June 1, 2003.

#  Nava Durga Finance Co. Ltd. has reported Rs. 0.9 million unaudited operating profit for the first six months of the current fiscal year 2003-04. The company, in the recently held AGM, had approved to distribute 10% cash dividend to its shareholders.

#  Nepal Merchant Banking and Finance Ltd. has earned an operating profit of Rs. 25 million during the first six months of the current fiscal year 2003-04. The company, during the previous fiscal year, had earned Rs. 49.6 million operating profit.

#  Siddhartha Finance Ltd. has shown an operating profit of Rs. 5 million for the first six months of the current fiscal year 2003-04. The company, in the previous fiscal year 2002-03, had earned a operating profit of Rs. 9 million.

#  NB Finance and Leasing Co. Ltd. has reported an unaudited operating profit of Rs. 245,000 for the first six months of the current fiscal year 2003-04. In the six months of the same period of previous year, the company had earned an operating profit of Rs. 2.89 million. During the period of the current fiscal year the operating profit has slumped by 91.53% as compared to the same period of previous year.

#   Paschimanchal Finance Co. Ltd. has shown an unaudited operating profit of Rs. 7.59 million for the first six months of the current fiscal year 2003-04. The company in the previous fiscal year had earned a net profit of Rs. 21.27 million.

#  Butwal Finance Ltd. earned an unaudited operating profit of Rs. 5.77 million during the first six months of the current fiscal year 2003-04. The company had earned audited operating profit of Rs. 7.14 million during the previous fiscal year 2002-03.

#  Birgunj Finance Ltd. has disclosed its unaudited financial report showing an operating profit of Rs. 619,000 for the first six months of the current fiscal year 2003-04. The company started its operation in September 2003.

#  Capital Merchant Banking and Finance Ltd has reported an unaudited operating profit of Rs. 3 million for the first six months of the current fiscal year 2003-04. The company in the previous fiscal year had earned an audited net profit of Rs. 61,501.

#  Hisef Finance Ltd. concluded its 9th AGM reporting a net profit of Rs. 30 million in the fiscal year 2002-03. The AGM approved the proposal to merge the company into Laxmi Bank Ltd.

#  Nabil Bank Ltd. recently held its 19th AGM reporting a net profit of Rs. 416.24 million for the fiscal year 2002-03. This profit is 53.23 percent more than that of the previous fiscal year 2001-02. The AGM also approved to distribute 50 percent cash dividend to the shareholders out of the profit earned during the year. This dividend is 66.66% more than that of the previous year. Moreover, the bank has reduced its non performing assets (NPA) to 5.54% of total lending from 7.14% in previous fiscal year.

#  Kist Merchant Banking and Finance Ltd. has concluded its 2nd AGM reporting a net profit of Rs. 1.6 million for the fiscal year 2002-03. The company currently has Rs. 30 million as paid up capital and 30.35% liquidity. Moreover the company had earned an unaudited operating profit of Rs. 34 million during the first six months of the current fiscal year.

#  Patan Finance Co. Ltd. has reported an unaudited operating profit of Rs. 1.6 million for the first six months of the current fiscal year 2003-04.

#  Mahalaxmi Finance Ltd. has disclosed its unaudited financial report for the first six months of the current fiscal year 2003-04. In this period the company has earned Rs. 6.44 million operating profit.

#  Kathmandu Finance Ltd. has reported an unaudited operating profit of Rs. 125,500 for the first six months of the current fiscal year 2003-04.

#  Fewa Finance Ltd. has disclosed an unaudited financial report for the first six months of the current fiscal year 2003-04. During the period the company has earned an operating profit of Rs. 1.67 million.

#  Siddhartha Development Bank Ltd. held its 4th AGM reporting a net profit of Rs. 1.20 million for the fiscal year 2002-03. The bank in the previous fiscal year has earned a net profit of Rs. 467,196. Almost doubled interest income and a decrease in loan loss provision by Rs. 0.44 million has pushed up the profit of the bank. Furthermore, the bank in the first six months of the current fiscal year has earned an unaudited operating profit of Rs. 20.98 million.

#  Alpic Everest Finance Ltd. has disclosed its unaudited financial report for the first six months of the current fiscal year 2003-04. During the period the company has earned an operating profit of 9 million.

#  World Merchant Banking and Finance Ltd. has reported an operating profit of Rs. 2.5 million for the first six months of the current fiscal year 2003-04. This is an unaudited figure disclosed by the company as semi annual disclosure under the directive of NRB.

#  Standard Finance Ltd. has reported an unaudited operating profit of Rs. 3 million for the first six months of the current fiscal year 2003-04. The company in the 12 months of previous fiscal year had earned an audited operating profit of Rs. 8.8 million.

#  Nepal Oil Corporation Ltd. (NOC) concluded its 24th AGM approving its annual financial report for the fiscal year 2000-01. The corporation during the year earned a net profit of Rs. 766.8 million and this is 63 percent less as compared to the previous fiscal year 1999-00. Failure to adjust the selling price while the buying price of the petroleum in the international market was increasing, is attributed for the decreased profit.