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October, 2004 |
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Stock Taking |
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What
is not in Practice By
Rabindra Bhattarai Nepali
capital market lacks many practices prevalent in the world of
financial market. Insufficiency of laws about these practices is the
main reason for the absence of these practices. But some of the
practices are absent because of other unknown reasons though the law has
allowed such practices. Margin
Trading In
the secondary market an investor can purchase and sell securities listed
in the stock exchanges, with the help of a broker. Trading through stock
exchange is possible in two ways: cash trading and credit trading. In
the cash trading a buyer of securities pays cent percent cash to the
broker within the stipulated time (denoted as T+1, T+2 T+3 etc.). But
the transaction can also be done with the credit facilities from
brokerage firms. Such trading is known as margin trading. Under this,
the investor pays cash at specified percentage of total purchase price
and for the rest the broker will provide loan at a certain interest
rate. The amount which is paid by the investor is known as margin. This
practice of margin trading has not yet been initiated in the Nepali
capital market and investors have not raised voice for its initiation.
Margin trading facilitates the small investors to access the secondary
market as well as to maximize return through creation of leverage. It
also increases the activities of the market. The securities bought under
margin trading are kept in the brokerage firm as collateral for the loan
provided by the broker and in case the stock price falls, the broker can
recover his loan amount by selling the securities held as collateral. Short
Sale Short-selling
is an important way to gain from the stock market in case the market
price falls. An investor with expectation of price fall in the future
can maximize capital gain through short-selling. The law relating to the
short-selling has not been developed yet in Nepal. Under this, an
investor sells the securities today by borrowing from the second party
who is repaid later by purchasing the securities at lower rate from the
market. If the expectation of price fall is met (that is if it
decreases) then the short-seller buys the securities at decreased price
for the repayment and earns the differences of selling and buying price.
But in case of price appreciation, the short-seller bears loss. If there
is any benefit provided by the company to the security holder during the
period of short-sale, that must be given by the short-seller to the
securities lender. The countries, where short-selling is in practice,
have formulated other rules as well to regulate the details about it. Convertibles
Convertibles
are the securities that can be converted into specified number of shares
of the company concerned after specified period of time. Bonds and
preferred stocks can be the convertible securities. The practice of
convertible securities is not developed in the Nepali securities market
though a 14% convertible bond of Rs. 93 million was issued by Shree Ram
Sugar Mill Ltd. in the fiscal year 1997/98 and was heavily
undersubscribed. Convertible securities can be less costly source of
financing to the company as compared to the nonconvertible bond and
preferred stock. The interest and dividend rates are kept less in
convertible securities than in the nonconvertible ones because of the
conversion features attached to them. Also the flotation cost of these
securities will be less than that of the nonconvertibles because the
conversion feature plays an important role for sweetening the issue. The
issue manager and underwriter do not need to do much exercise for
selling such securities. Though provision about conversion of bond and
preferred stock has been made in the Company Act 1996, the companies are
not practicing it. Options
Options
too are securities. They are the better investment alternatives for the
investors in the volatile market environment. Options are the contract
between two people wherein one person gives the other person the right,
but not the obligation, to buy or sell specified assets at predetermined
price on or before expiration date. The contracts are made in two ways:
one is giving the right to buy the underlying securities and another is
giving the right to sell the underlying securities. Contract made giving
right to buy the securities at specified price is known as “call
option” and the next type is known as “put option”. The options on
the basis of exercise time can further be divided into two types:
American and European option. The American option can be exercised at
any time before the expiration whereas the European option can be
exercised only on the date of expiration. The options are negotiable
instruments and their values depend upon the underlying securities.
Options in the world of investment are popular investment alternatives
but the Nepali capital market does not have this practice because the
Securities Exchange Act 1983 has not provisioned about any type of
option trading. Warrants Warrant
is an option attached to a bond that gives the right to the bondholder
to purchase a specified number of shares at prespecified price. These
warrants are used to attract the investors toward the bond investment
and used as sweetener to minimize the cost of issuing, to reduce
interest cost etc. Generally a company having poor financial strength
uses warrants. Warrants are negotiable and nonnegotiable (they are
detachable and non-detachable) but in the Nepali capital market use of
warrants has not been initiated yet, again because of the lack of legal
provisions. Renouncing
Rights Right
is an instrument issued at the time of right offering of the shares.
These “rights” are negotiable instruments and can be bought and sold
(or renounced) but the renouncement of “right” is not in practice in
the Nepali capital market. The law does not allow it. Commercial
paper Commercial
paper is a short-term unsecured debt instrument used by the private
sector or government sponsored financial and nonfinancial companies.
This instrument is used to raise the short-term fund to meet the
short-term financing needs at lower rates than obtaining the fund
directly from bank. Commercial papers are issued by the highly
creditworthy companies but till date no government or private sector
bodies in Nepal have used commercial papers to raise the short-term
fund. The reason is that there is no law in Nepal to regulate this. Over-the-counter
(OTC) market Securities
initially offered to the public are traded in the primary market.
Secondary market is the place where already issued securities are
traded. Organized stock exchanges and over-the-counter-market are the
examples of secondary market. In the organized stock exchange formal
listing of securities for trading is required, i.e. without listing the
securities are not considered eligible for trading. A set of rules and
regulation are followed to list the securities, and the listing should
be frequently renewed by paying renewal fee. Nepal Stock Exchange is the
organized stock exchange. But Nepali capital market lacks the
over-the-counter-market where no formal listing of securities is
required for the trading. Since the securities once de-listed from the
organized stock exchange can be traded in the over-the-counter-market,
the investors do not have to lose liquidity when the stock exchange
de-lists the securities. But this too lacks a legal framework in Nepal. Electronic
Trading System Trading
in the Nepali secondary market is based on the open-out-cry system. All
the brokers and market makers need to gather in the Nepse floor to buy
and sell the securities. Investors who want to sell and buy the
securities should come to Kathmandu. The alternative way is trading of
securities electronically (i.e. through the Internet). The existing law
does not allow electronic trading as yet. Central
depository system (CDS) CDS
is more advanced and efficient system of clearing and settlement of
securities traded in the stock exchange. In this system settlements are
made electronically on the basis of debit and credit system. The Nepal
Stock Exchange is following paper based system of clearing and
settlement. Many studies have been made to implement the CDS but the law
relating to this system has not been formulated yet. With
so many practices yet to be followed, it is not a surprise that the
capital market in Nepal is stunted. Nepse
in September Nepali
secondary market for the month of September remained unsatisfactory to
the investors. True to the saying 'morning shows the day' the initiation
of the market for the month was bad and remained so for the whole month.
The first transaction for the month was made only on September 7 because
of the public outrage of September 1 and its aftermath. The
market at the end of the August had turned bullish after the call-off of
the indefinite blockade of the valley by the Maoist but the
bullish trend could not continue in the month of the September and in
the first day of the transaction the market fell by 1.82 points. This
trend continued and the Nepse index dropped to 229.99 points on
September 14. The index rose suddenly on the 15th September when the
market sensed that the Maoist were calling off the indefinite closure of
some 50 industries very soon. This bullish trend continued on the
following two days as the industries opened on September 16 and the
index reached 237.22 on September 17. But from September 18 onwards
the index declined continuously until September 28 due to political
demonstration of four parties and two-days Maoist called strike in
September end. The market gained marginally in the last two days of the
month. Block
share trading During
the month a block shares - 499126 shares - of Harisiddhi Bricks and Tile
Factory was traded at Rs. 1.50 per share on September 8. The par value
per share of the company is Rs. 10. Because of the poor financial
performance of the company the share price decreased so much whereas the
same par value share of Soaltee Hotel Ltd. is above Rs. 60. (Bhattarai
teaches Finance in Shanker Dev Campus) |
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